It's a no brainer for me to invest in SURGE right now. With Hive price going down, the discount on SURGE increases. The effective yield increases, it's almost 18% right now .
That 18% effective yield on SURGE does look tempting with Hive's price dip. Discounts like this can be a great entry point, though timing the bottom is always tricky. In my experience, focusing on long-term value over short-term swings pays off
Agreed, 15% is already a strong return in most markets. SURGE pushing past that with the current discount makes it hard to ignore for yield seekers. Long-term holding could really compound nicely here
Absolutely, DCA smooths out the volatility and takes the guesswork out of timing. It's a solid strategy for building positions over time, especially in markets like this
I usually just go by gut feel and check if the chatter online has died down a bit. Volume drops help too, but I'm no pro at reading the charts. How do you spot those moments?
Absolutely, small consistent investments compound over time. Starting early with whatever you can afford often beats waiting for a big sum. Market cycles show that time in the market usually trumps timing the market
Exchanges don't need to worry about Dash transactions being reversed. Thanks to InstantSend and ChainLocks, all transactions are deterministically final, instantly.
The age of exchanges worrying about reorgs should be over. It can, if we want it to be.
I firmly believe that LEO is going to hit $1 by the end of the year, and will probably go to $3-$5 next year. Both of those could happen sooner, but that's my thinking. With that in mind, I'm happy to keep scooping chips under 20 cents rather than paying 25, 30, even 50 cents. Still a 5x to $1 from here. Gets less and less the higher it goes. Simple math. I'm not selling below $1 so might as well get them as cheaply as possible.
Focus on your integrity and future work, not the drama. Build strong ties with supportive mentors, document your contributions, and let results speak louder than gossip. Protect your reputation by moving forward, not looking back.
Academic dismissal from your programme isn’t the end. After time away, you can often reapply or transfer credits. Focus on finishing strong, not past setbacks. Persistence counts.
And after 9-11 we did. And certainly after the reforms that Congress enacted. And the problem the Bush people had is that no matter what you do, the focus is going to be on them because they had the power. They're in office. And it can be uncomfortable. It can inhibit their capacity to plan and do additional things. And one of the maybe the most important contributions I made in 9-11 commission was to argue that we should not have minority reports, that we need to be unanimous. Because if we weren't unanimous, the public could- Was there a minority report? No. I was. But one of the few times in my life where I successfully argued for something and got it. So we didn't have minority reports. There were five Democrats and five Republicans. And they were selected in an extremely partisan environment. And thanks to Tom Cain and Lee Hamilton, it wasn't partisan. We didn't attack Bill Clinton. We didn't attack George Bush. Many of the criticism came from Republicans that thought we ought to (23/31)
2004 they said, oh my god, we better be a part of trying to beat back radical Islam or we're not going to survive. But I'm talking about 1991 where the United States came into the defense of Kuwait and station troops in Saudi Arabia. But the Saudis were concerned that Saddam Hussein would invade into Saudi Arabia. And they were grateful to have American troops in Saudi Arabia, weren't they? And they paid for it. Yeah, but what I'm saying is that they- Were they grateful? Yes. Yes, they were grateful and they didn't trust that bin Laden- and bin Laden wanted to do it himself. And he regarded it as an offense to Islam that we were on the holy soil where Mecca Medina are and that we invited a posthit. So what you're saying basically is that the Saudi regime is so unpopular and so corrupt that on the one hand they needed the United States to protect them against a state actor in Saddam Hussein with his army, but at the same time had to appease the radical Wahhabis. And so they were doing (26/31)
What's up everybody? I'm taking the next couple of weeks off and my release schedule for the end of August and the beginning of September is going to be a little irregular. I've already recorded another episode that I hope to release sometime in the next two weeks and I've got recordings lined up with all sorts of super interesting people including the former chairman of North America for Louis Vuitton, the co-founder of Kickstarter. John Meerschmeier is also coming on the show, which is great because I'm a huge fan of John's and it's always great to have a brainiac on foreign policy on the podcast. Who else? Michael Casey of Crypto Acclaim is coming on as is my good friend Mike Maloney who is long overdue for his hidden forces christening. It's going to be a baptism by fire. We're going to talk about gold, crypto, economic philosophy, and Tesla I'm sure because Mike and I have some friendly disagreements on Mr Musk. So that's going to be a lot of fun and there are a bunch of other (1/31)
great guests who I can't even recall off the top of my head but it's going to be awesome and it's a lot to look forward to. So what you're about to hear now is the overtime to my episode with Senator Bob Carey that was recorded in December of 2018 and it was the very first overtime segment that I released to our subscribers. I've chosen it for a number of reasons. First of all, I really liked it. I also really like Bob Carey. He's a really nice guy. It was a jovial conversation. He's a charming person. He's good-natured and I think that it is the type of conversation that's missing in politics today. I don't think every conversation should be like this but I think it would be nice if we had more of them where we could talk about politics in a way that was also just not necessary adversarial because I don't think that Bob Carey and I agree about everything. So it was fun. He's so funny and I think in that sense it'll be a joy to listen to but I also think it's informative. Bob Carey was (2/31)
one of the 10 9-11 commissioners and he actually gives his opinion about what he thinks the role of the Saudi government was in the 9-11 attacks which I think is a really big deal. It's something that Senator Bob Graham has spoken about. In fact, I asked him specifically about Bob Graham's work in this area. So in some sense the most remarkable thing about Bob Carey's admissions is how unremarkable they are. But of course if we had heard these statements back in 2001, 2002, the world may be a very different place today and certainly Saudi Arabia would have lost its single biggest ally and protector in the United States. So before I toss it to the episode guys, it is the end of August. I am going to take a little bit of time off. Don't expect anything next week. If there is something it'll be a surprise but we're going to pick back up in the beginning of September. I hope you all have a great end to your August and that you have some fun plans and in the meanwhile please enjoy My (3/31)
Overtime with Senator Bob Carey. All right, we're back. That was a nice break. That was a great break. So the one thing I want to ask you before we get to this at your experience in the commission, I asked you about Khashoggi and all this stuff now with the Saudis, we were talking about Elizabeth Warren 2020. What do you think is going to happen in 2020? Now we have now Donald Trump who's a phenomenon. I've never seen anything like him. Certainly Andrew Jackson could qualify maybe, right? But he was also at a different time. No, no, my God Andrew Jackson. Well they had to resuscitate him in the White House so he drank out his enigaration. He was pretty bad. Yeah, he drank big deal but he didn't lie every five minutes. But don't politicians all lie. It's just the way he... No, no, no, no, no. He's taking offense to that. Well, no, first of all, all of us lie. You find me a human being lying and he's the guy in the street corner saying the world's going to come to an end. So there isn't (4/31)
anybody that it's true that politicians probably lied 20% more than everybody else but we've never seen anything like Donald Trump. We've never seen anybody that covers his observations of what's going on in the world with things that are factually incorrect. So it's way beyond anything we've seen before. Well is it just about his lying or his facts or is it more about, to me, like... It's not just lying. It's taking credit for everything. There's a boastfulness that I find to be offensive because I don't think it's the way you get things done. I don't think you get things done by saying, I, I, I all the time. I agree. But for me now, it's not about the lying. What makes him so unique in that sense is the temperament. It's his temperament. Yeah, two reports that came out yesterday that were ordered by the Senate Select Committee on Intelligence, run by a Republican. It's a bipartisan group. He nanops vote to authorize those two reports. They provided these two organizations with all (5/31)
the stuff they had from Facebook, Google, all the other social media stuff that they had been provided, Twitter. Tell us what happened. That's what they said. First of all, they said what happened is these companies came before you and they didn't tell you the truth. But the most important thing is Vladimir Putin made a decision. He wanted Donald Trump to win the Republican primary. He wanted Donald Trump to win the general election and he contributed to that victory. And he's continuing through social media, through trolls, to try to deliver supporting messages that are consistent with what Trump is saying. Mueller's bad and Trump is good. It's fake news. It's big witch hunt and hoax. So I think overwhelmingly persuasive argument that he won because of Vladimir Putin. That doesn't mean he colluded with him. That doesn't mean he violated the law. But what it means is a foreign power decided to have a major impact and use our own... You think you had that big of an impact? Absolutely. (6/31)
Really? Oh my God. All you have to do is suppress the voters of 70,000 people in Wisconsin, Michigan and Pennsylvania and you've got 270 electoral votes. Okay. So let's say that's true. Let's say... Well, it is true. We've got two lengthy reports that draw absolute positive conclusion that it's true and that it continues. Well, what I'm saying is we don't know whether ultimately it swung the election or not. But what I'm saying is... We do know that it swung the election. We know that... Absolutely know it swung the election. Okay. Hi, look, I don't know enough. Why are you laughing? You yielded so quickly. You're so funny. You didn't want to. You didn't want to. I figured this out. Look, I don't know enough to argue with you on that. It's funny that I told you this is what I saw when I watched you with Mira Carusa, Cabrera and CNBC. This is why I could tell that there are a lot of things, probably debates, that you... You probably enjoyed debates. Did you enjoy debating in politics? (7/31)
Were you just enjoying debating people like me who didn't know what they were talking about? No, no. I like a good argument. You do. Okay. So where I was going with that was... I'm going to use the word shit again. Was it because Hillary Clinton was such a shitty candidate for the Democratic Party and so many people didn't like her. She ran against Barack Obama in 2008, lost. If she had gotten 270 electoral votes, she'd be a genius. And were it not for Comey's two press conferences and the Russians, she would have got 270 electoral votes. Did she make a mistake? She didn't wow anybody though. Couldn't the Democrats have found a better candidate? I don't know. I mean... You don't have to say. A lot of people didn't like the Clintons and she lost in 2008 to Barack Obama and she still got the nomination and she railed out Bernie Sanders. She didn't rail Bernie Sanders? My God. Look at the facts and answer this question. Who has done more for the Democratic Party? Hillary Clinton or Bernie (8/31)
Sanders declares he's not even a Democrat. He wasn't independent up until now. Hillary and Bill Clinton have been out helping Democrats for the last 40 years. It's not surprising that people who they helped are saying, yes, we'll help you win. That means that the Democratic Party was representing itself, its own interest, and not the interests of the American people. No. First of all, it means that there's a human side to politics. I'm not doing something bad if I help somebody who helped me. We typically think that's a good thing for somebody to help somebody else who's been helpful to them. That's what Hillary was. She was a very good thing. But I think it's a little different when it comes to politics for the American people. Political parties are hard. Among the reasons I've burned it, probably pretty smart not joining the Democratic Party because you don't have to go to the conventions. You don't have to argue the policies. You don't have to put together a platform. You don't have (9/31)
to walk out with people mad at me because you supported a woman's right to choose and you had an argument with somebody who don't and you won and they didn't or vice versa. These arguments, you can end a friendship as a consequence of working in either the Republican Party or the Democratic Party. They're hard work. That's an interesting point you brought up. It's a rough thing. I've actually definitely lost two friendships as a result of this recent electoral cycle. I find myself, and the reason why is because I've become really aversive to ideological extremism. I often find myself getting in trouble with people who I'm friendly with or friends with or even the audience on the right. I've had people in the audience criticize me for sounding bias, being biased against the right wing and also the same thing, bias towards the left wing. I feel like people are so ideological and not willing to meet somewhere down the middle. To see the other side as a human being. I completely agree with (10/31)
that. It's hard. By the way, you asked me earlier, I like getting arguments. There are times I get in ferocious arguments that people get up and walk out of the dinner. It happens. Then you got to apologize and move on. When was the last time that happened to you? Last night. That actually happened to me a few months ago. It doesn't happen to me often. I didn't walk out. I didn't mind it. My sister, who was in the legislature for a while in Nebraska, and she's at least as good as I am, but people that know both of us, she thinks she's better. We once went to a restaurant, we're having dinner with our families and it's crowded and it was like, you know what a Petri dish is? In a Petri dish, you can see the bacteria is spreading. In our case, we're sitting there and also we look around and everybody had been close to us and left because we're screaming at each other. That's how my family is. That's very funny that you guys are like that. I'm also a Greek family. We yell. Let me ask you (11/31)
one more question before we get to the 9-11 commission. Do you have any guesses about what's going to happen in 2020? Who the Democrats are going to run? What's going to happen with Trump? Is he going to be impeached? What's going to come out of the Russian investigation? Any predictions? Well, I don't know if I could keep it short enough to be done by midnight. The 20 election, I think the odds favor whoever is the Democratic nominee winning the general election. There are way too many people who are Republicans who are saying, I'll vote for anybody other than Donald Trump. Do you think the Democrats have it in the bag? No, I don't think anything is in the bag. That's the thing with politics. If you get it in the bag, then you don't. It's a shit show. No, you just don't know. I mean, I think the likelihood of President Trump winning Michigan, Pennsylvania, and Wisconsin, and he's got to win all three of those. The election comes down to that. If you win all three of those, you're (12/31)
going to have two and a seven electoral votes. Either candidate. I think it's much more likely this time around that all three of those states wear, by the way, we now have three Democratic governors. So I think it's much more likely that happens, and it certainly is going to be true that who of the Democratic nominee is, they know that that's the case. They know they cannot afford to lose those three states. Oh my God. Do you think he'll be impeached? Do you think there's any chance of that? What do you think will come out of this investigation, and why has it taken so long? Relative to every other special prosecutor. It's a fast-moving operation. How long did the Nixon Watergate stuff take? Like two years ago? Almost three years. Yeah. I mean, Clinton's went on from just after he came into, I mean, like seven years or something like that. So they take a while. Mueller's actually moving relatively fast. He's an extraordinary guy. I mean, Washington is a town where everything leaks, (13/31)
and he hasn't leaked anything. No one's been here. Trump's scared? Oh my God. He's terrified. He's going to send Cohen to jail. Yeah, he's going to jail. He's got three years. Right. For lying. Not for lying, but for violent. And Trump is a part of that transaction. It's not persuasive. Just say, well, he's my lawyer. He's going to do it. No, you tell your lawyer what to do, especially Trump. That's his whole modus operandi. Sue him. He tells the lawyer. But that's the thing that's so crazy about Trump. No. What I mean is the fact that he'd be on Air Force One, and he would tell people, no, I didn't know about it. And the next day, yeah, I did know about it. That's crazy. You can sue another human being and intimidate him. You can't sue the Department of Justice and intimidate him. So the big question is, if he doesn't win in 2020, will the Southern District bring a charge against him? And I think it's way better than 50-50 that they will. Yeah. Well, that's for sure. I think it's way (14/31)
better than 50-50 if they go into a court of law, he's going to have to have a pretty serious plea bargain to avoid jail time. He's in trouble if he's not president, that's for sure. It is challenging to impeach him if he's president. These two reports that came out of the Senate Select Committee on Intelligence, those two reports are devastating. And because they provide a background that if, and I don't know what Mueller's going to have, I mean, whether Mueller, he actually is finishing his work as he goes. This is in a situation where he gets all the way done, like Ken Starr, here's the report, and you got to do something with it. But he's got 17 people, he's already indicted or sent to jail, and he's seriously going through this thing. That's scary. And the next one is probably Donald Jr. And then he's going to take the question as the president himself. Do you think Donald Jr. is going to jail? I don't know. I don't know. But I... You don't have the answers? I don't. I don't. I (15/31)
mean, that's a really good thing about Mueller's done is he's kept it very, very confidential. I actually don't know. But I do know is he's been very successful. So sticking on conundrums, on Trump conundrums, let's use the case of Khashoggi and Muhammad bin Salman. By the way, is it just me or are we obsessed with using acronyms for everything today? Now, everyone calls Muhammad bin Salman MBS. And this is like a thing. Have you noticed this? Everyone refers to people by acronyms. They used to call people by their real names. Now, they call them by their initials. It's easier. It's more... Sure, it's easier, but you know... It's certainly a lot easier with an Arab name. So... Yeah, for sure. Anyway, so Trump has... And by the way, that's what he likes. He prefers being called MBS. So it's not... Does he really? That's interesting. So this is a peculiar case, peculiar beginning with Trump and the fact that he has been so adamant about not holding MBS accountable. Why do you think that (16/31)
is? Well, I think I've got a lot of stake. Financially and... No, no, I mean... In Saudi Arabia. No, I wouldn't be surprised... Politically. I wouldn't be surprised if they come in as partners in a real estate deal after he's out of office. But no, I think Jared Kushner was given the responsibility for coming up with a plan from the Middle East. I think rationally thought, well, if I can get UAE and Saudi together with Israel, we ought to be able to come up with something... How big is an Israel in this, in other words? Like, an Idaho in Israel. I do think the Palestinian issue is a big deal. And I think if you can get something that is coming out of Saudi Arabia and UAE with Israel on board, I think it's going to be easier to sell. I mean, I think it kind of makes sense on that level. So they have a lot of stake there. And I think they have a lot of stake in the military. I mean, Trump is... You've got to give them credit for being honest on that. He said, I'm doing it for oil. I'm (17/31)
doing it for weapons contracts. So I think they've made a big bet on Saudi. And they're not the only ones. I mean, a lot of people getting money from the Vision Fund right now. That's 75% of that is Saudi money. And by the way, I think it is important that we help Saudi make this transition from, you know, basically an autocratic kingdom to something that has a more liberal foundation. I am not confident that MBS is the guy to get it done. And what Khashoggi has done, the Khashoggi case has done, has done, for me, a couple of things. It's shown how massively incompetent these guys are. I mean, 12 guys with a bone saw flying in and then flying back out. How hard was that to figure out? 100 and nothing vote in the Senate saying Khashoggi did it. But the president continued to say, well, we're not sure about it. But I think it's going to lead to a significant change in our policy towards the war in Yemen. I think that's going to be a good thing. But I'm not confident that MBS is going to (18/31)
pull this off. I mean, he announces women can drive cars. And what else does he do? He puts the women who are advocating for women drive cars in jail. So don't put me down on the camp of people that are optimistic about the transition to a more modern society and a more modern economy in Saudi Arabia. 15 years ago, we never would have heard any negative comments about Saudi Arabia. The criticism of Saudi Arabia began really with the Barack Obama administration. And I think a big part of that ultimately was about oil, right? And fracking and energy. 15 and 19 hijackers were Saudis. Right. So well, they were, you're right, they were. And you know a lot about that. And we put one of the 10, 9, 11, 11. Yeah, the first two planes that left the United States were carrying Saudis out of the United States. So exactly. The bin Laden family. Right. But that was totally swept under the rub by the media. That was not discussed. That wasn't something that we weren't told. I don't think I'm correct (19/31)
and say it was not totally swept under the rub. But you're right. It wasn't the major media story. Why wasn't it? Was it because the Bush family was so connected to the Saudis? No, I think it's genuinely a complicated story. I mean, one of the problems that the 9, 11 Commission had in addition to the running on a limited time frame, which limited our capacity to do all the things that you'd like to be able to do. And why was that? Because they just wanted to get it over with? Republican Congress would extend our timeline and the Republican administration didn't want to extend the timeline. Why? It was such an important investigation. It was an important investigation. And part of it is it's impossible for any but myself, including because I was there in the 1990s as well. I was there when the first attack, the 93 attack on the World Trade Center. Yeah, the 93 attack. Right. I mean, that was the same guys. And we were making fun of them. We called them nose here in Salami, you know, (20/31)
because they would try to get their deposit back on the right or truck. And we didn't size it correctly. We had supported the Mujahideen in Afghanistan all the way through the 1980s. The Russians leave in December of 1988. And what do we do? We basically say, well, that's done. And well, it wasn't done. Right. And you said you were on the Intelligence Committee when we were in the Senate, right? So you were getting a lot of these reports. Getting a lot of the reports. And so you were not caught by surprise that Ben Laden was involved. No, I was not surprised at all. I mean, we were first the 93 attack. We didn't put him on the 93 attack, but we knew it was coming from a group of Islamic individuals who believe that we're a threat to their vision for the world. So they regarded us as an enemy. And they guarded us as apostates. And they regarded us as a good thing if they could kill Americans. So that's what they were doing with the World Trade Center. And then the big one was the 98 (21/31)
attacks on our embassy in Dar es Salaam and Nairobi. And the coal. Well, the coal was 2000. But the Nairobi attack was a really sophisticated operation. That wasn't just a couple of guys, you know, lighting up a room with automatic weapons. I mean, that was a very sophisticated operation and a very successful operation. And we were 98 percent certain it was al-Qaeda that did it. And we were 100 percent certain that it was a coal. We just didn't respond. We let them keep their sanctuary in Afghanistan. We threw a couple of cruise missiles in there right after Bill Clinton said I did have sex with that woman after all. That was a wagged-a-dog accusation he's made against him. And we didn't do enough. We just didn't. We didn't warn the airports after we had information. The walls that were created between the FBI and the CIA were made it difficult. It is true the leadership was concerned about it. But we just didn't have a coordinated effort. And we certainly didn't have a global effort. (22/31)
attack Bill Clinton. And a lot of Democrats that thought we ought to attack President Bush. And that was among the reasons why it was difficult to extend the timeline. But the central problem was it was a conspiracy. It was a conspiracy going back. You've heard you say 30 years. Yeah. I mean, quite a long time. I mean- But when you say it was a conspiracy, you mean it was a conspiracy by the Mujahideen and by Al Qaeda. By factions. Yes. Yes. Yes. There wasn't a- What about factions of the Saudi government? At the highest levels of- That's quoting Bob Graham. He said that this goes up to the highest levels of the Saudi government. And he refers to the 28 pages that I referred to at the beginning of our interview that 60 Minutes has published a piece on. I think we're part of a joint congressional inquiry into the 9-11 attack that happened right after you guys released your- Yeah. Look at it. The world on looking at 9-11 oftentimes divides into different camps. And this camp, I can't (24/31)
imagine. I don't think it's credible that 15 Saudis could participate in an attack on the United States of America without somebody at the senior level knowing about it. So what does that mean? What does that mean in a word? They've got blood on their hands. But why would they do that? Why would senior members of the Saudi government want to be involved in an attack against the United States? Because the family made a decision. We're going to support the Wahhabis. We're going to support people who are- have really seriously radical beliefs about the world and that everybody ought to be like completely pure and follow our rules and we get to decide what the rules are. It's a radical form of Islam. But the family owed their existence to the Bush family. Their existence to HW Bush. No. They owed their survival. To the- That's what I mean. No. They owed their survival to the support of the Wahhabis. And it wasn't until they got to attack until Al Qaeda starts going after them in 2003 or (25/31)
this balancing act. Right. And that their involvement in 9-11 was a result of their need to appease these terrorists that were- That's correct. That's correct. Threatening their own regime. That's correct. Now, I need to be clear about something that I wasn't clear about. The 9-11 commission did not conclude that the Saudis were responsible for 9-11. On the other hand, it did not conclude, as the Saudis have been saying in court, that we vindicated them. We did not vindicate them. We did not say they didn't do it and we didn't say that they did. So what I expressed earlier was my own opinion based upon my own reading of the- both of the documents that we had as well as some of the documents that we didn't have. What I find confusing in this is how this would sit with George W. Bush and the Bush administration, knowing this as I'm sure they did, how that sat with them and why they would ship the family members out. Was that- Do you think something just had a blind loyalty? I don't (27/31)
really have any answer to the question. I don't- I don't know. All I know is that they were allowed to leave and I think part of it was they were afraid for their lives. They wanted to get out of here because they knew- Well, they were. The families were, but why would the Bush administration allow them out? You can take a benign point of view. My benign point of view would be I'd give them the benefit of the doubt and say, look, they knew with 15 Saudi hijackers on there that Americans might be saying, we want to punish anybody who's still here because I don't have any evidence that there was any other motivation behind that. Okay. So then why then did the Bush administration not call out the Saudis? Given what we're talking about here, I mean if Bush- I mean he was on the rubble in 9-11. He bombed Afghanistan, invaded Iraq. Why wouldn't he have put the Saudis on notice? What do you think? I mean, you've been in politics- Well, I think the Saudis were put on notice. I mean, they (28/31)
certainly knew that they- They fucked up. Well, yeah, when 15-year-old people were on those planes, they could hardly say that the Saudis weren't involved. So they were put on notice, but they didn't really, I would say, get religion until all of a sudden radical Islamic groups started to attack them. But they knew it. I mean, they had to know what the Wahhabis were doing. The Wahhabis were moving all over the world, the worst and relatively close area for them to go. They were in Mumbai, setting up schools and- Right. I do understand why the Kings did that, why the royal family did it, but I think it created major problems both for them and for us. Well, I think it raises questions that will never be answered for the American public because the Bush administration was Machiavellian in the extreme. We're living now in a time where the- What's his name? Is playing- Christian Bales playing Dick Cheney. Looks pretty good. Looks pretty good. It reminds me, I forgot how scary Dick Cheney (29/31)
was. Look, here's the thing. When you start off with the presumption that it's a conspiracy. Of course. Alternatives conspiracies are relatively easy to put in the storyline. It just is. I mean, I still get people to come up and say those Jews did it. The government did it. It was an inside job. Couldn't possibly have knocked those planes down. They were holograms. Yeah, they couldn't possibly have knocked those buildings down to the plane. I mean, there are alternative storylines that go on about 9-11, but I don't have any doubt about who organized it. I don't have any doubt it began with Ben Laden's desire to attack the United States. It was a series of events that led up to the attack on us on our own ground. I don't have any doubt about that at all. I know what Kaili Sheikh Mohammed's role was in this thing. I know- 93. Yeah, but not only 93, but again in 2001. It doesn't have anyone. Right. So I don't have any doubt about that. That's where it came from, but there's a lot of (30/31)
moving parts beyond that that you're right. We probably never will know. Yeah. Senator Kerry, thank you for spending so much time with me between two bathroom breaks. Yeah. Thank you for putting the bathroom so close. I had a great time having you on the program. Thank you. You're welcome. Nice to be with you. (31/31)
differently, reach a different conclusion than the consensus, feel that the price should be much higher or much lower, take action on that. This is the way to be a serious outperformer. You have to see things a little differently. You have to see what you believe is the error in the consensus. So you have to see things differently. But there's another requirement. You have to be right. And most of the time, the consensus does a pretty good job of being right, and you can't habitually have a non-consensus view and expect it to be consistently right. So the requirements are, you have to think differently and better. It's not easy. And this is a lot of what Charlie Munger meant when he said that investing is not easy. And yet this is the requirement. How else can you be a superior performer unless you see things different from the crowd and better? Do you come to your investment insights or your contrarian views gradually? Or have there been instances in your life where you have this (16/32)
What's up, everybody? Merry Christmas. Happy holidays. This show is coming out on Christmas Eve for our American listeners and Christmas Day for everybody else. As the title of this episode suggests, there will be a segment from my interview with Howard Marks. It's between 20 and 30 minutes. Let's leave it at that. So that'll come at the end of this, but I have an important announcement to tell you all about beforehand, which is that finally, after a year of promising you, my listeners, a Hidden Forces subscription, I've finally done it. It's a long story as to why it took so long, and I'm not going to get into it. But one of the benefits that it took so long is that now anyone who subscribes gets immediate access to the transcripts of every episode we've ever done and to over 50 rundowns, starting with episode 19, which are these beautiful show outlines with reference materials, charts, pictures, quotes, all the rest of it. So anyone who's a regular listener has heard me reference (1/32)
these documents. They're the outlines that I put on Twitter and my personal feed and pictures and photo shots. It's like the nerd porn that I put out on social media. It's great. It's what I create before every single episode. So going forward, I'm going to be incorporating subscriber feedback and input into how I construct these, and I'm going to make a bigger effort to include links and documents and things like that related to the show. So that's all going to be made available through our website. And my intention in making these materials available is so that they can serve as educational compendiums to the subjects that we cover every week. And the same goes with the transcripts, which I'm happy to improve upon with user feedback. Again, if people want links or notes incorporated into them, I went through a couple of companies in order to find the right ones for these. So if you find errors in the archive, email me so that I can get them fixed. But this is going to be an (2/32)
evolutionary process with the goal of always being able to help you get more out of every single episode. But again, like I said, the archive of the transcripts is going to go all the way back to the very first episode. So when you get the subscription, you have access to everything. But wait, wait for it. There's more. And the more is that the baseline subscription is actually an entirely new podcast feed that you can add to your podcast application and get overtime segments, afterthoughts by me about the show, special one-off episodes that I put together for subscribers. So basically, I've already done two of these that I'm going to release with my episode on modern portfolio theory and the evolution of financial theory with Daniel Parris, as well as my episode with Bob Kerry, Senator Bob Kerry, the former 9-11 commissioner, Medal of Honor recipient, former governor and senator from Nebraska, which I actually completed right before I'm recording this. In both of those cases, a huge (3/32)
chunk of that interview, even longer than the 20 to 30 minutes that I'm releasing with Howard Marks today, which was originally meant for the purpose of being an overtime segment for the subscription, are going to be made available for subscribers. So that's what's going to come with the subscription feed. And I'm going to be releasing at least one of these every other week, but I may just end up doing it weekly or maybe even more often. It depends on what feedback I get from all of you. Most importantly though, I don't want any of you to think of these things, the rundowns, the transcripts, the audio or any future additional notes or educational materials that I put together around the podcast. I don't want you to think of these things in transactional terms. This is not a transaction. I've been doing this show for almost two years and I haven't asked for anything or taken any sponsors. I've done this and I continue to do it because I love doing it, but that doesn't mean that I can do (4/32)
it indefinitely without finding a way to cover the costs of production and I don't want to rely on advertising. I don't want to be interrupting these conversations with product or service announcements or pitches or anything like that. And I think that this is totally doable because I'm not looking to use this as a way of generating income for myself. I just want to make sure that I'm not covering the costs of this show out of my own pocket so that it's sustainable as a long-term project, which is what I want it to be. So when I say this isn't transactional, what I mean is that almost all of the value of what I do is the show itself, which is free, has been free, and always will be free. The vast majority of people on earth will continue to listen to it without ever making the choice to contribute a cent to making it possible, which is totally fine. But a small percentage of you are going to make the choice to support the show. And it's you that all of us, most of all me, are going to (5/32)
be immensely grateful for. So let me cap this off with some specific actionable information about how this is going to work. I looked at e-commerce platforms and subscription services that I could deploy myself through my site and decided that the best way to do this was actually to integrate Patreon into the Hidden Forces website, which I've never seen done before. So we're going to be using Patreon, which makes this way easier for those of you who already have Patreon accounts, but you're going to be able to access all of this material directly through the Hidden Forces website. So right now, as I'm talking, if you can go to hiddenforces.io, when you open up any individual episode, you'll still see the tabs that you saw before, info, related, bio. And to the right of those, you're going to see tabs for transcript, notes, overtime, or whatever else. And if you go into those, you're going to see that you can sign up and subscribe to them by going through Patreon. And that stuff's (6/32)
eventually going to be made available through the site. So if you subscribe, Patreon will know that you're logged in and it'll be able to make that stuff available to you. And each of those is part of a different bundle. So for $10 per month, you can access the overtime, which is all the stuff I was just telling you about, the extra bit with Bob Kerry, where we talk about 9-11, the 9-11 commission, and I get his opinion on what the role of the Saudi government was, the highest levels of government, and what the Bush administration knew or didn't know. And then with Daniel Parris, same thing, we go into a lot of really awesome stuff that deals specifically with investment options around the conversation that we have. So in both cases, this is really high quality material that you cannot get on the normal shelf. So that's for $10 a month. For an additional $5 a month, you can have access to all of the transcripts. And then for an additional $10, you can get access to everything, (7/32)
including the rundowns. So I thought a lot about this pricing. It's not fixed in stone, but I feel very comfortable with it. And let me tell you why. I looked at what all the other shows were doing, and besides making extra audio feeds available, and in those cases, a lot of times, the audio will come out once a month, I haven't seen much in the way of what we're providing. This is a huge archive of material, and there's no commitment. You can cancel the subscription at any time. You can also support separate from the subscription. If you want to just give a dollar a month, you can do that. And you know what? I'll love you for it. That will mean a lot to me and to everyone else, that you took the time to support the show and what we're doing. Of course, you can also provide more, and then I'd really love you. So here's my promise to you. If we get to a place where all the costs of producing the show, including the rental of my studio, the payments to my editor, web hosting, and all the (8/32)
other costs associated with putting this thing together, if we get to a place where all of these costs are covered, I will make an announcement and we'll figure out how we can use any additional income to create new and better content and grow the show. Like I said, I'm not interested in using hidden forces to generate income for myself. The most important thing that money can buy from you right now is time. And that means time to focus only on creating new content and generating ideas for new shows or newsletters or whatever else. Okay. So before we get to Howard Marks, I also want to say that for anyone who travels on British Airways, you can now expect to find hidden forces listed on BA's in-flight entertainment. We just finished onboarding our episodes with them, so that makes two airlines, the other one being United, that feature our show, which is super exciting. Okay. So Howard Marks, this segment lasts for about 25 minutes or so, I think. It rivals the episode itself for (9/32)
quality of content, in my view. In fact, I think it might very well be better. I asked Howard Marks about the role of intuition, how he relies on it in the management of his portfolio, contrarianism in investing. This moved from active to passive, the transformation in American capitalism after World War II with professional managers and professional management at companies. And if this trend has kind of run its course. I also asked him for what he would do if he was getting out of college today and how he continues to motivate himself every morning to go to work at Oak Tree for free, as it turns out. But finally, before I throw it to Howard Marks, I want to say in all likelihood, I'm going to release an episode for New Year's. I'm going to be in Greece when this episode comes out, visiting my family, but I'm going to find a studio there, hopefully to be able to record an intro to that episode. Look for that on New Year's Day, but if you don't get it, it will just skip straight to the (10/32)
second week of January, since this is the holidays and it's tough to publish through that. So, Merry Christmas, happy holidays. Hopefully, I won't have to give you happy New Year until next week, but if I do, happy New Year and enjoy the Howard Marks overtime. Howard, thank you for staying for this overtime segment. This is the first time I'm actually doing it, so I'm looking forward to see how it goes. There are a few questions that I had in our regular rundown that I wanted to ask you, and then I've got a few special questions that I have just for this segment. One has to do with intuition, which is something that you write about in the book, and it came up a lot in our conversation where you sort of danced around it, but I didn't ask you about it directly, which is, what role does intuition play for you when you're managing your portfolio? I think a lot of it depends on your definition of the word intuition. I'm not talking about voodoo, I'm not talking about guessing, I'm not (11/32)
talking about throwing darts or deciding on the basis of which foot I put on the floor first in the morning, but I think that we have to make judgments, subjective, personal, qualitative judgments. One of my favorite quotes is from Einstein, who said, not everything that counts can be counted and not everything that can be counted counts. Not everything can be quantified, nothing about the future can be proved, so I think it all comes down to judgment. If you think about it, just about everybody has access to all the same numbers. Just about everybody has the intelligence to process those numbers equally well. The margin of superiority comes from people who understand better than others the import of those numbers, the inferences that should be drawn and the actions that should be taken. I think that these kinds of judgments are extremely important. Somebody I can't remember right now said, I'd rather be approximately right than precisely wrong. You can't attain that much precision in (12/32)
your life when you're making judgments about the future, but you talked before about the importance of experience. Observation, emotional control, insight, hopefully second level insight. These are the things that can permit you to do a superior job. Is that just also a necessity or a feature of how our brains work that we can only ... There are theories in neuroscience, specifically one I'm thinking about called cognitive load theory, which is why a lot of high performers wear the same stuff, Barack Obama, Steve Jobs, et cetera. So much power to make decisions and that allocating more of that to the unconscious is the way to maximize performance. Is that one way to think about it? The importance of it, that is. Yeah. I don't know if I would use the word the unconscious, but I guess I would say the non-quantitative. The most important questions about a given company are not what it's going to earn this year or next. The most important questions are what kind of business it's going to (13/32)
have in 10 years and what kind of success and what kind of market share. And so I think that those things, as I say, anybody can reach the quantitative conclusions. The qualitative subjective conclusions are what separates the winners from the losers. Another question I had for you that we danced around in the interview had to do with contrarianism. And you have this great quote in the book. I'm going to butcher it if I try to say it, wing it. But your point is that it's not just enough to be right. If you're right and you're part of the consensus and everyone else is right, then you're not going to make any money. You have to be right and you have to have a view that's different than the consensus, which is what contrarianism is. And you also make this great point about the difference between contrarianism and pessimism, which can often be conflated. Talk to us a little bit about this notion of contrarianism and the role it plays in superior investing. We've talked a couple of times (14/32)
about second level thinking. And it seems clear to me that if you think the same as others, you will reach the same conclusions. If you'll reach the same conclusions, you'll take the same actions. If you take the same actions, you'll have the same performance. And yet success in the investing business is performing better than others. So that process can't be the one that leads to success. You have to, at some point, diverge from the crowd. You have to develop a knowledge advantage. You have to see things differently. You know, one of the important phrases in investing is variant perception. You have to see things at some point differently from others. The way that everybody, the massive investors, sees a given company is what determines its stock price on a given day. It is a voting booth, as Ben Graham said, and everybody cast their vote on a given day for the value of Apple. And the consensus becomes the price. That's what a market is. And the big wins come when you see things (15/32)
revelation or this contrarian idea and you see something in that moment that you hadn't seen before and that no one else is seeing and it's a really great opportunity and you have to move on it? I mean, I wouldn't accuse myself of having many epiphanies. I try to be rather level in my views toward the markets. And then as the market changes, as the price of an asset changes relative to the asset's fundamentals, if the price rises relative to the fundamentals, I should gradually like it less until eventually if the price gets high enough relative to the fundamentals, I should absolutely dislike it. But that's a process of gradual accretion and not epiphany. The only time I think things change radically is when the world changes radically. September 14th of 08, most things were pretty much okay, people thought. September 15th, Lehman Brothers declared bankruptcy and everybody thought that the financial world was going to end. So when the world changes radically, it makes sense that your (17/32)
view on the proper behaviors should change radically and we did. There's something else comes out of that question, which is that after 2008, we've seen this major shift away from active management towards passive. Right. A lot more people... In the stock market. In the stock market. More people have been moving to index funds, ETFs, et cetera. Is that a trend that you expect to continue? And the other question I have is if most investors are, as you say, on average, average, and in most cases, it may very well be a rational decision to put your money in an ETF or in an index fund as opposed to giving it to an average manager who will either do average or below average. And charge high fees. And charge high fees. The question is, well, where are the great managers and how does someone find one and then how do they give them their money? Well, this is the great dilemma and this is something that's really not easily answered. The trend toward passive investment really has... I mean, when (18/32)
I was at University of Chicago more than 50 years ago, this is when they first told me that on average, most people do average before fees and below average after fees. So you shouldn't pay somebody high fees to give you average performance. You should only pay people who are exceptional. We went through a period when pretty much everybody could charge fees commensurate with success when they weren't producing success. We have the Morningstar system, which gives mutual funds ratings, not on some absolute standard of whether they did a good job or whether they beat the stock market, but on whether they beat others. You can have a five-star rating and still have not done as well as a stock market, in theory. The point is that the first real index fund was formed around 1974. It gradually started to raise money. Nobody took it that seriously because somebody in the mutual fund industry that I won't name said, well, who's going to accept average performance? The answer turned out to be a (19/32)
lot of people will accept average performance if the alternative is below average performance. As the world has gotten smarter through the process that I described before, as people look at things more objectively, I mean that argument, who would settle for average? That's a great argument until you look deeply into what's really going on. When you do, a lot of people would say, I will. The average is pretty good. If I can get the average certainly and with low fees, I'm in. Now the trend towards passive has strengthened. Now something like 38% of all the mutual fund equity money is managed passively. Our next question is when will it stop? I think it makes sense to think that the trend will continue as long as the passives do better than the actives. We've been going through a long period here when the passives have been doing better than the actives. This year started off weak, which means that the actives who might have had less than full representation in the leading stocks (20/32)
outperformed, but then the market has turned strong in the last few months and now the active managers are behind again. I think that trend towards passive will not stop until passive underperforms for a while. I don't know when that'll be or what would make it happen, but it may happen at some point in time. The other question that's interesting, I wrote this last memo called Investing Without People, which started off with the discussion of passive investing. Passively as more and more money is managed passively and fewer and fewer people are out there looking for bargains, then we can assume I think that the level of so-called efficiency will decline and that it will become possible once again to get some bargains. That's my hope. That speaks to, in fact, you took the words out of my mouth, the move towards passive investing is not independent of this move towards market efficiency that we've been discussing during the interview and the financial markets and the size of the (21/32)
financial sector growing. Well, market efficiency makes it really hard to outperform. I think that in the last 40 years, people have concluded that markets are much more efficient than they used to think. There's another trend that we've seen over the decades and that has been this move since I think primarily after World War II of separating management from ownership. It's been a financial innovation that's really generated a lot of wealth and it's allowed the principles of specialization to work wonders in many cases. What we've also seen in more recent years is perversions of that. I think one perfect example is tying executive compensations to stock value and then stock buybacks and trying to game your income in that way. Do you feel that the benefits of that model have run their course or that there needs to be some sort of rejiggering of that? I think this is an important topic. I learned about this when I was in college, which was a long time ago. What I was taught was that one (22/32)
of the reasons that the free market system, capitalist system, the US economic system had produced good results was that whereas 100 years ago or maybe 150, companies were pretty much run by their owners. Eventually, we developed this thing called professional management. At an appropriate point in time, the professional managers took over from the founders and owners and brought skills that the founders and owners or certainly their children or their children's children didn't have. Managing companies was turned over from the owners and founders to professional managers who maybe had skills that the others didn't have and that this was a great source of our economic success. Makes sense. However, nothing's perfect. That's one of the bottom lines on life. Through this process, we developed basically two classes of people, the company owners and the company managers. It gets dangerous, as you say, when the managers are not responsive to the owners. If they paid themselves too well, if (23/32)
What's up, everybody? Merry Christmas. Happy holidays. This show is coming out on Christmas Eve for our American listeners and Christmas Day for everybody else. As the title of this episode suggests, there will be a segment from my interview with Howard Marks. It's between 20 and 30 minutes. Let's leave it at that. So that'll come at the end of this, but I have an important announcement to tell you all about beforehand, which is that finally, after a year of promising you, my listeners, a Hidden Forces subscription, I've finally done it. It's a long story as to why it took so long, and I'm not going to get into it. But one of the benefits that it took so long is that now anyone who subscribes gets immediate access to the transcripts of every episode we've ever done and to over 50 rundowns, starting with episode 19, which are these beautiful show outlines with reference materials, charts, pictures, quotes, all the rest of it. So anyone who's a regular listener has heard me reference (1/32)
these documents. They're the outlines that I put on Twitter and my personal feed and pictures and photo shots. It's like the nerd porn that I put out on social media. It's great. It's what I create before every single episode. So going forward, I'm going to be incorporating subscriber feedback and input into how I construct these, and I'm going to make a bigger effort to include links and documents and things like that related to the show. So that's all going to be made available through our website. And my intention in making these materials available is so that they can serve as educational compendiums to the subjects that we cover every week. And the same goes with the transcripts, which I'm happy to improve upon with user feedback. Again, if people want links or notes incorporated into them, I went through a couple of companies in order to find the right ones for these. So if you find errors in the archive, email me so that I can get them fixed. But this is going to be an (2/32)
evolutionary process with the goal of always being able to help you get more out of every single episode. But again, like I said, the archive of the transcripts is going to go all the way back to the very first episode. So when you get the subscription, you have access to everything. But wait, wait for it. There's more. And the more is that the baseline subscription is actually an entirely new podcast feed that you can add to your podcast application and get overtime segments, afterthoughts by me about the show, special one-off episodes that I put together for subscribers. So basically, I've already done two of these that I'm going to release with my episode on modern portfolio theory and the evolution of financial theory with Daniel Parris, as well as my episode with Bob Kerry, Senator Bob Kerry, the former 9-11 commissioner, Medal of Honor recipient, former governor and senator from Nebraska, which I actually completed right before I'm recording this. In both of those cases, a huge (3/32)
chunk of that interview, even longer than the 20 to 30 minutes that I'm releasing with Howard Marks today, which was originally meant for the purpose of being an overtime segment for the subscription, are going to be made available for subscribers. So that's what's going to come with the subscription feed. And I'm going to be releasing at least one of these every other week, but I may just end up doing it weekly or maybe even more often. It depends on what feedback I get from all of you. Most importantly though, I don't want any of you to think of these things, the rundowns, the transcripts, the audio or any future additional notes or educational materials that I put together around the podcast. I don't want you to think of these things in transactional terms. This is not a transaction. I've been doing this show for almost two years and I haven't asked for anything or taken any sponsors. I've done this and I continue to do it because I love doing it, but that doesn't mean that I can do (4/32)
it indefinitely without finding a way to cover the costs of production and I don't want to rely on advertising. I don't want to be interrupting these conversations with product or service announcements or pitches or anything like that. And I think that this is totally doable because I'm not looking to use this as a way of generating income for myself. I just want to make sure that I'm not covering the costs of this show out of my own pocket so that it's sustainable as a long-term project, which is what I want it to be. So when I say this isn't transactional, what I mean is that almost all of the value of what I do is the show itself, which is free, has been free, and always will be free. The vast majority of people on earth will continue to listen to it without ever making the choice to contribute a cent to making it possible, which is totally fine. But a small percentage of you are going to make the choice to support the show. And it's you that all of us, most of all me, are going to (5/32)
be immensely grateful for. So let me cap this off with some specific actionable information about how this is going to work. I looked at e-commerce platforms and subscription services that I could deploy myself through my site and decided that the best way to do this was actually to integrate Patreon into the Hidden Forces website, which I've never seen done before. So we're going to be using Patreon, which makes this way easier for those of you who already have Patreon accounts, but you're going to be able to access all of this material directly through the Hidden Forces website. So right now, as I'm talking, if you can go to hiddenforces.io, when you open up any individual episode, you'll still see the tabs that you saw before, info, related, bio. And to the right of those, you're going to see tabs for transcript, notes, overtime, or whatever else. And if you go into those, you're going to see that you can sign up and subscribe to them by going through Patreon. And that stuff's (6/32)
eventually going to be made available through the site. So if you subscribe, Patreon will know that you're logged in and it'll be able to make that stuff available to you. And each of those is part of a different bundle. So for $10 per month, you can access the overtime, which is all the stuff I was just telling you about, the extra bit with Bob Kerry, where we talk about 9-11, the 9-11 commission, and I get his opinion on what the role of the Saudi government was, the highest levels of government, and what the Bush administration knew or didn't know. And then with Daniel Parris, same thing, we go into a lot of really awesome stuff that deals specifically with investment options around the conversation that we have. So in both cases, this is really high quality material that you cannot get on the normal shelf. So that's for $10 a month. For an additional $5 a month, you can have access to all of the transcripts. And then for an additional $10, you can get access to everything, (7/32)
including the rundowns. So I thought a lot about this pricing. It's not fixed in stone, but I feel very comfortable with it. And let me tell you why. I looked at what all the other shows were doing, and besides making extra audio feeds available, and in those cases, a lot of times, the audio will come out once a month, I haven't seen much in the way of what we're providing. This is a huge archive of material, and there's no commitment. You can cancel the subscription at any time. You can also support separate from the subscription. If you want to just give a dollar a month, you can do that. And you know what? I'll love you for it. That will mean a lot to me and to everyone else, that you took the time to support the show and what we're doing. Of course, you can also provide more, and then I'd really love you. So here's my promise to you. If we get to a place where all the costs of producing the show, including the rental of my studio, the payments to my editor, web hosting, and all the (8/32)
other costs associated with putting this thing together, if we get to a place where all of these costs are covered, I will make an announcement and we'll figure out how we can use any additional income to create new and better content and grow the show. Like I said, I'm not interested in using hidden forces to generate income for myself. The most important thing that money can buy from you right now is time. And that means time to focus only on creating new content and generating ideas for new shows or newsletters or whatever else. Okay. So before we get to Howard Marks, I also want to say that for anyone who travels on British Airways, you can now expect to find hidden forces listed on BA's in-flight entertainment. We just finished onboarding our episodes with them, so that makes two airlines, the other one being United, that feature our show, which is super exciting. Okay. So Howard Marks, this segment lasts for about 25 minutes or so, I think. It rivals the episode itself for (9/32)
quality of content, in my view. In fact, I think it might very well be better. I asked Howard Marks about the role of intuition, how he relies on it in the management of his portfolio, contrarianism in investing. This moved from active to passive, the transformation in American capitalism after World War II with professional managers and professional management at companies. And if this trend has kind of run its course. I also asked him for what he would do if he was getting out of college today and how he continues to motivate himself every morning to go to work at Oak Tree for free, as it turns out. But finally, before I throw it to Howard Marks, I want to say in all likelihood, I'm going to release an episode for New Year's. I'm going to be in Greece when this episode comes out, visiting my family, but I'm going to find a studio there, hopefully to be able to record an intro to that episode. Look for that on New Year's Day, but if you don't get it, it will just skip straight to the (10/32)
second week of January, since this is the holidays and it's tough to publish through that. So, Merry Christmas, happy holidays. Hopefully, I won't have to give you happy New Year until next week, but if I do, happy New Year and enjoy the Howard Marks overtime. Howard, thank you for staying for this overtime segment. This is the first time I'm actually doing it, so I'm looking forward to see how it goes. There are a few questions that I had in our regular rundown that I wanted to ask you, and then I've got a few special questions that I have just for this segment. One has to do with intuition, which is something that you write about in the book, and it came up a lot in our conversation where you sort of danced around it, but I didn't ask you about it directly, which is, what role does intuition play for you when you're managing your portfolio? I think a lot of it depends on your definition of the word intuition. I'm not talking about voodoo, I'm not talking about guessing, I'm not (11/32)
talking about throwing darts or deciding on the basis of which foot I put on the floor first in the morning, but I think that we have to make judgments, subjective, personal, qualitative judgments. One of my favorite quotes is from Einstein, who said, not everything that counts can be counted and not everything that can be counted counts. Not everything can be quantified, nothing about the future can be proved, so I think it all comes down to judgment. If you think about it, just about everybody has access to all the same numbers. Just about everybody has the intelligence to process those numbers equally well. The margin of superiority comes from people who understand better than others the import of those numbers, the inferences that should be drawn and the actions that should be taken. I think that these kinds of judgments are extremely important. Somebody I can't remember right now said, I'd rather be approximately right than precisely wrong. You can't attain that much precision in (12/32)
your life when you're making judgments about the future, but you talked before about the importance of experience. Observation, emotional control, insight, hopefully second level insight. These are the things that can permit you to do a superior job. Is that just also a necessity or a feature of how our brains work that we can only ... There are theories in neuroscience, specifically one I'm thinking about called cognitive load theory, which is why a lot of high performers wear the same stuff, Barack Obama, Steve Jobs, et cetera. So much power to make decisions and that allocating more of that to the unconscious is the way to maximize performance. Is that one way to think about it? The importance of it, that is. Yeah. I don't know if I would use the word the unconscious, but I guess I would say the non-quantitative. The most important questions about a given company are not what it's going to earn this year or next. The most important questions are what kind of business it's going to (13/32)
have in 10 years and what kind of success and what kind of market share. And so I think that those things, as I say, anybody can reach the quantitative conclusions. The qualitative subjective conclusions are what separates the winners from the losers. Another question I had for you that we danced around in the interview had to do with contrarianism. And you have this great quote in the book. I'm going to butcher it if I try to say it, wing it. But your point is that it's not just enough to be right. If you're right and you're part of the consensus and everyone else is right, then you're not going to make any money. You have to be right and you have to have a view that's different than the consensus, which is what contrarianism is. And you also make this great point about the difference between contrarianism and pessimism, which can often be conflated. Talk to us a little bit about this notion of contrarianism and the role it plays in superior investing. We've talked a couple of times (14/32)
about second level thinking. And it seems clear to me that if you think the same as others, you will reach the same conclusions. If you'll reach the same conclusions, you'll take the same actions. If you take the same actions, you'll have the same performance. And yet success in the investing business is performing better than others. So that process can't be the one that leads to success. You have to, at some point, diverge from the crowd. You have to develop a knowledge advantage. You have to see things differently. You know, one of the important phrases in investing is variant perception. You have to see things at some point differently from others. The way that everybody, the massive investors, sees a given company is what determines its stock price on a given day. It is a voting booth, as Ben Graham said, and everybody cast their vote on a given day for the value of Apple. And the consensus becomes the price. That's what a market is. And the big wins come when you see things (15/32)
differently, reach a different conclusion than the consensus, feel that the price should be much higher or much lower, take action on that. This is the way to be a serious outperformer. You have to see things a little differently. You have to see what you believe is the error in the consensus. So you have to see things differently. But there's another requirement. You have to be right. And most of the time, the consensus does a pretty good job of being right, and you can't habitually have a non-consensus view and expect it to be consistently right. So the requirements are, you have to think differently and better. It's not easy. And this is a lot of what Charlie Munger meant when he said that investing is not easy. And yet this is the requirement. How else can you be a superior performer unless you see things different from the crowd and better? Do you come to your investment insights or your contrarian views gradually? Or have there been instances in your life where you have this (16/32)
revelation or this contrarian idea and you see something in that moment that you hadn't seen before and that no one else is seeing and it's a really great opportunity and you have to move on it? I mean, I wouldn't accuse myself of having many epiphanies. I try to be rather level in my views toward the markets. And then as the market changes, as the price of an asset changes relative to the asset's fundamentals, if the price rises relative to the fundamentals, I should gradually like it less until eventually if the price gets high enough relative to the fundamentals, I should absolutely dislike it. But that's a process of gradual accretion and not epiphany. The only time I think things change radically is when the world changes radically. September 14th of 08, most things were pretty much okay, people thought. September 15th, Lehman Brothers declared bankruptcy and everybody thought that the financial world was going to end. So when the world changes radically, it makes sense that your (17/32)
view on the proper behaviors should change radically and we did. There's something else comes out of that question, which is that after 2008, we've seen this major shift away from active management towards passive. Right. A lot more people... In the stock market. In the stock market. More people have been moving to index funds, ETFs, et cetera. Is that a trend that you expect to continue? And the other question I have is if most investors are, as you say, on average, average, and in most cases, it may very well be a rational decision to put your money in an ETF or in an index fund as opposed to giving it to an average manager who will either do average or below average. And charge high fees. And charge high fees. The question is, well, where are the great managers and how does someone find one and then how do they give them their money? Well, this is the great dilemma and this is something that's really not easily answered. The trend toward passive investment really has... I mean, when (18/32)
I was at University of Chicago more than 50 years ago, this is when they first told me that on average, most people do average before fees and below average after fees. So you shouldn't pay somebody high fees to give you average performance. You should only pay people who are exceptional. We went through a period when pretty much everybody could charge fees commensurate with success when they weren't producing success. We have the Morningstar system, which gives mutual funds ratings, not on some absolute standard of whether they did a good job or whether they beat the stock market, but on whether they beat others. You can have a five-star rating and still have not done as well as a stock market, in theory. The point is that the first real index fund was formed around 1974. It gradually started to raise money. Nobody took it that seriously because somebody in the mutual fund industry that I won't name said, well, who's going to accept average performance? The answer turned out to be a (19/32)
lot of people will accept average performance if the alternative is below average performance. As the world has gotten smarter through the process that I described before, as people look at things more objectively, I mean that argument, who would settle for average? That's a great argument until you look deeply into what's really going on. When you do, a lot of people would say, I will. The average is pretty good. If I can get the average certainly and with low fees, I'm in. Now the trend towards passive has strengthened. Now something like 38% of all the mutual fund equity money is managed passively. Our next question is when will it stop? I think it makes sense to think that the trend will continue as long as the passives do better than the actives. We've been going through a long period here when the passives have been doing better than the actives. This year started off weak, which means that the actives who might have had less than full representation in the leading stocks (20/32)
outperformed, but then the market has turned strong in the last few months and now the active managers are behind again. I think that trend towards passive will not stop until passive underperforms for a while. I don't know when that'll be or what would make it happen, but it may happen at some point in time. The other question that's interesting, I wrote this last memo called Investing Without People, which started off with the discussion of passive investing. Passively as more and more money is managed passively and fewer and fewer people are out there looking for bargains, then we can assume I think that the level of so-called efficiency will decline and that it will become possible once again to get some bargains. That's my hope. That speaks to, in fact, you took the words out of my mouth, the move towards passive investing is not independent of this move towards market efficiency that we've been discussing during the interview and the financial markets and the size of the (21/32)
financial sector growing. Well, market efficiency makes it really hard to outperform. I think that in the last 40 years, people have concluded that markets are much more efficient than they used to think. There's another trend that we've seen over the decades and that has been this move since I think primarily after World War II of separating management from ownership. It's been a financial innovation that's really generated a lot of wealth and it's allowed the principles of specialization to work wonders in many cases. What we've also seen in more recent years is perversions of that. I think one perfect example is tying executive compensations to stock value and then stock buybacks and trying to game your income in that way. Do you feel that the benefits of that model have run their course or that there needs to be some sort of rejiggering of that? I think this is an important topic. I learned about this when I was in college, which was a long time ago. What I was taught was that one (22/32)
of the reasons that the free market system, capitalist system, the US economic system had produced good results was that whereas 100 years ago or maybe 150, companies were pretty much run by their owners. Eventually, we developed this thing called professional management. At an appropriate point in time, the professional managers took over from the founders and owners and brought skills that the founders and owners or certainly their children or their children's children didn't have. Managing companies was turned over from the owners and founders to professional managers who maybe had skills that the others didn't have and that this was a great source of our economic success. Makes sense. However, nothing's perfect. That's one of the bottom lines on life. Through this process, we developed basically two classes of people, the company owners and the company managers. It gets dangerous, as you say, when the managers are not responsive to the owners. If they paid themselves too well, if (23/32)
they engage in protective rather than optimal behavior, then bad things can happen. Now, that doesn't mean that this division is a bad thing. It just means that it has some bad attributes and that makes perfect sense. Then we get the activist investors coming along, the green mailers and so forth. The activists say, I'm an owner. You're not running this company for the owners. You have to do this, this, this and this. You have to give me a seat on the board and so forth. I think that some activists have produced some success. Again, nothing's perfect. The trouble with activism is whether they produce genuine long-term improvement in the way the company has run or just a short-term blip in the stock price and take their profits and go home. By the way, you look at a drug company and if an activist forces them to close the R&D labs in order to increase next year's profits, you might argue that that's a bad thing. On the other hand, as I say, if they take actions which are beneficial in (24/32)
the long run, maybe it's a good thing. I have some personal questions I want to ask you now. I don't know how many we'll get to just considering the time. I'll probably start with maybe the ones that I think are most interesting. What has to do with if you were starting your career today because you've had such a long career and you've seen so much and the world is very different as anyone could understand from our conversations. Prices and profits itself transform. When you went into it, salaries were much smaller. Potential return was much smaller. That's obviously changed. If you were starting out today, if you were graduating today, you have a son, I believe, who's a money manager. He's graduated some time ago. He did just graduate. But perhaps when your son graduated, you saw that and you thought to yourself, what would I do if I were my son's age? Today, if you were graduating today and coming out into the workforce, what do you think the most interesting, exciting opportunities (25/32)
would be and what would excite you most about the future? Well, look, I use a lot of quotes. You use some of my quotes. My favorite quote on that subject is from a guy named Christopher Morley, who was a British writer, who said, there's only one success to be able to live your own life, your own way. I would, for myself and for everybody, I would try to figure out what my way is. It's not so easy to know what you're really good at as opposed to what you think you're good at and what you should do as opposed to what society thinks you should do. You should pursue your own definition of success, not society's definition of success. If you have the luxury, the ability to do it, you should do something you love, something you enjoy. Most people probably shouldn't making a lot of money first, but they tend to do so. That's our materialist society. But really, the questions are, what are you good at? What gives you pleasure? What can you excel at? I love the investment business. It's been (26/32)
fabulous. I think that our discussion is indicative of the fact that it's an intellectual topic where I think there's a payoff to being a deep thinker. It's like a big chess game where the best results go to the people who think the deepest and the best. That's been great for me. As I say, it shouldn't be just money. When I went into the business, when I was getting out of graduate school in 69, I applied for six different jobs in six different fields and they all paid the same. I happened to go into the money management business, but it paid $13.5 at that time and they all paid between $12 and $14. It happens that in 1982, God woke up one day and he said, you see that little group of people over there? I'm going to let them make 100 times what everybody else makes. I would say that I feel safe in saying that the investment management business has been generally overpaid. I'm not complaining, mind you, but I'm able to admit it. If I was giving people advice for the future, one thing I (27/32)
would try to discourage them from doing is making the decision based on a continuation of that earnings differential. It doesn't make much sense and my guess is it's not going to continue to the same extent. What motivates you and has that changed over the course of your life, not just with respect to your work, but more generally for your life? What motivates you when you wake up in the morning? I have the luxury now of being able to tackle difficult questions. I'm not managing money now anymore. I've turned that over to my colleagues and my successors. I think about big questions, both the macro and how we should position ourselves and then bigger intellectual questions like what is risk and how should we deal with it and cycles and things like that. This is what I've been doing for the last while and it gives me great pleasure. Before that, I spent some good period of decades building an investment organization, leading people, trying to inspire them, trying to come up with an (28/32)
investment philosophy and approach that was effective. I was an analyst, but these are different stages of my life and I'm very lucky to have stumbled upon some things that made me very happy. It may interest you and your listeners to know that I don't get paid to work at Oak Tree. Really? I don't get a salary. I don't get a bonus. I don't have an interest, a direct interest in the profits of any of our funds. I could say I would do it for nothing, but I kind of do. My only financial interest is my ownership of Oak Tree stock and I would own that if I worked there if I didn't. I believe that maybe if I worked there, maybe it'll be worth more than if I don't, but still, I can honestly say I don't do it for the money, but I love the people I work with. I love leading the team. I love the Oak Tree ideals. I love working with the clients. I love dealing with the intellectual issues that I describe. What a great life. Let me ask you one more question. If you could say that you learned one (29/32)
thing, it might be difficult to do. I mean, after all, your book was called the most important thing and it was about a lot of things. This might be a trick question, but if there was one thing that you would impart on people, you mentioned don't work for money, don't make money your objective, but is there one lesson that you have taken from life that you value and cherish to this day that you would want to pass on to your children or to your profanities? From somebody who went to Wharton in the University of Chicago and came out, was considered himself analytical and did numerical analysis all day, I would say that the most important revelation for me was the importance of people, family and friends. For me, there's nothing comparable. We get so much reward, potential reward, especially if we're good friends and good parents. That's really our highest calling. I concluded that in the last, well, since I've had children and I think I put a lot into it. My children seem pretty happy (30/32)
and well adjusted and they tell me I did a good job. It's a funny thing. My son just got married and he said there that I was always there. He said, he says my dad went to all my games and all my concerts and all my open school meetings. Now, I'm confident that's not true because I was building Oak Tree and I was traveling all the time, but if I was in town, I went. If I went, I was present. The rewards for doing that are enormous. Erickson, the psychologist, talked about the stages of man. When you get to be senior citizen, you have to look at your life and say, did I do okay? It's too late to make it what you want it to be if you haven't done the work already. You say, am I happy with the way I live my life? Also, do I have the respect of others? How do they feel about how I've lived my life? This is very important to me and very glad that that analytical guy of 50 or 60 years ago figured this stuff out. Those are words of wisdom. Again, Howard, I really appreciate you coming on the (31/32)
airtime on C-SPAN or wherever he was able to buy airtime and he was going through pie charts and explaining the debt, but the level, the concern that the country had at the time and that Bush, for example, would express in that famous question, of course, there was a young African American woman who had asked Bush about how the national debt affects him personally. And it was just another example. It was like him at the supermarket with not knowing how to check out of the supermarket, not being able to actually buy his own groceries. Actually, you know what? I'll say something else now. I'm going on a rant, but my guest, who I was going to have on the program, I was watching some footage from the 92 campaign and he was taking a shot at Bush and he also took a shot at Dan Quayle. And I don't know if how many of you remember or know that Dan Quayle was considered an idiot in American politics. That was the reputation he got. He couldn't spell potato. I don't remember that time obviously (5/32)
back, I think there are these huge challenges. And how do we face them if we don't have a common identity? We talked about this with Jonathan Haidt. Common identity politics is something that we need. Identity politics, social justice, these ideas are not helping the country. They're not helpful. I mean, maybe there are certain aspects of them that there is signal that says, hey, something's wrong here. We need to address it. I'm not disputing that. I'm not disputing it at all. Just that the way that we indulge the tribalism is not just bad. I find it so distasteful. But in any case, the point I was making, I think, was that Reagan, the Reagan revolution and the Obama wave, I think even Barack Obama will tell you that he took a lot from Ronald Reagan. I remember him talking about that in 2008. And that's why I found his campaign appealing. But so I got pulled off there on the 80s. But the comparison I was originally trying to make was between the 70s and the 90s. And it's remarkable. I (10/32)
Warren Commission. So anyway, that's something else that I had here in my notes that I wanted to discuss, which was 9-11, the Saudi connection, some facts for you guys so you know that I'm not just throwing stuff out there. If you want to look into this, the 28 pages, there's an article, The New York Times has covered this, Washington Post. There's video footage of Bob Graham speaking. In fact, let me actually quote for you something that I've written out here. This is from, so Bob Graham gave a speech at the National Press Club in August of 2016. And I've transcribed some of what he said that I thought was relevant. It is time for our government to release more documents from other investigations into September 11th that have remained secret all of these years. The recently released 28 pages were written in the fall of 2002 by a committee of which I was co-chairman. The government's possible suppression of evidence of Saudi support for the 19 hijackers would go beyond passive cover- (17/32)
What's up everybody? I am here in the Hidden Forces studio in New York City with my engineer who is facing the double mac trading screens. I don't know if he is trading back there. I don't think he is doing that. But I am sitting and in front of me is where my guest should be and my guest is missing in action. That is because he canceled on me an hour before the episode. We rescheduled it for later in January. I hope that it will work out then because I did spend many days as you all know, many days researching and preparing for this conversation. I read his memoir and watched a lot of political footage from when he ran for president and a number of other things. I'm not going to tell you his name, but he was a senator. He was a governor and he was also one of the 10, 9, 11 commissioners and a Medal of Honor recipient. There was a lot to talk about. My rundown starts with Vietnam where he fought and we kind of proceed through there, both historically, 70s and 80s. I've been kind of (1/32)
really in this interesting zone headspace, which I think was helped by taking a couple of weeks off where I've been really focused on the 70s. I haven't done much reading on them. It's just more that when I prepared, for example, for Bill Janeway and I was looking at that period or when I had Howard Marks on and we discussed the junk bond market and the sort of bear market of the nifty 50 stocks that had been doing so well in the 1960s. I just have been thinking about how little I've appreciated the impact of that period and the reverberation of the darkness of the 70s on the politics and policies of the 80s and 90s. Also the contrast, something that I've also been thinking about because we did the episode, of course, with Brian McCullough on the history of the 90s internet, the contrast and also, of course, with Janeway talking about the 90s. My guest was one of the front runners for the Democratic nomination in 1992. The contrast between the 90s and the 70s, right? The 70s were the (2/32)
decade of darkness. It was a decade of stagflation. It was a decade of, well, the political assassinations of 1968 were, of course, only two years before the beginning of the 70s, but they were part of that period. You, of course, had the attempted assassination of Gerald Ford. You had the attempted assassination of Reagan in 1981 by John Hinckley. You had the crime wave. 1981 in New York City was the most violent year in the city and generally crime was up. New York City almost went bankrupt in 1975. 1974, Nixon resigned. I mean, so much stuff. I mean, I can't imagine what it was like to live in that period. Like I said, this stagflation, the double-digit inflation, the unemployment, the broken Phillips curve, things weren't working. People thought America was in decline. It's funny also when you go back and you listen to the rhetoric of the 92 campaign, Ross Perot, the general election with Perot and Bush and Clinton, which by the way, guys, I don't know what kind of political (3/32)
junkies you are. I used to be quite a political junkie and I don't really have the taste for it so much anymore. I have no longer a carnivore or whatever. I'm not into that stuff. But if you look, I mean, C-SPAN is amazing because it has all this coverage, but you look at these debates and it's really amazing. You could just see what a brilliant campaigner, what a brilliant politician Bill Clinton was and how comfortable he was lying to the public, not just necessarily in those debates, but generally everything we know about Bill Clinton that's come out. Then you look also at Bush Sr., HW Bush, and how he couldn't hide his condescension for the public or for just the process. That was famously encapsulated in that iconic image of him looking at his watch during one of the debates. And Perot, just Perot had everything that I feel so much of the country found attractive. But ultimately, I think he got only like 20%. But I don't know how many of you remember his pie charts he took out (4/32)
very well. I was like a little kid, but stuff got handed down. So I'm familiar with some of it, but he had this great quote that he said and it was something along the lines of people say that George Bush was a man who was born on third base and thought he hit a triple. And then he said, well, Dan Quayle is a man who was born on third base and thought he kicked a field goal. Anyway, I don't know if it's funny when I say it, but it was hilarious listening to it. And it also struck me just compare that to modern politicians. Donald Trump obviously king of the hill when it comes to shit talking on the campaign trail. But everyone, the noise in general, has amplified the viciousness of the attacks have grown as has the partisan divide, I think. But anyway, yeah, I don't know where I was going. I think I was going off on this tangent talking about the 1970s and this fascinating difference in the 70s, which was this dark period. And I think very much contributed to the morning again in (6/32)
America campaign of Ronald Reagan, the appeal of that type of character, which I think actually Reagan had a lot in common with Barack Obama. The messaging, at least the tone was so uniting. We live in a time where the media and sort of the who are they, the guardians of political correctness celebrate this tribalism. If you want to say, hold on, let's not use all these tribal distinctions and stereotypes of white male privilege and women and African Americans. And they'll say, well, you're being racist. You're trying to deny the reality of racism and stereotyping. But what if you're not trying to do that? What if you're just trying to hold two ideas in your head at the same time, which is one, I accept that these things are the case. And in fact, I think they strengthen us. The diversity in the United States can be a strengthening quality. I mean, growing up in a metropolitan city like New York as a little kid, I moved around a lot in the country. In fact, that was also beneficial in (7/32)
some ways because I got to see, I lived in North Carolina as a kid for four years. I lived in Pennsylvania. I was born in Cincinnati, Ohio. I lived briefly in Greece. I lived in Italy, lived in Washington, D.C. But there's nothing like New York. New York's got so many different nationalities and ethnicities and backgrounds. So that diversity is a wonderful thing. But at the same time, if we don't have something to unify us, some kind of unifying superstructure, then how are we supposed to come together as a country and solve the big problems that we need to solve if we want to move forward, which I believe we need to solve. And I think climate change is one of those things. I think climate change is just one of those things, by the way. And it's sad that it's such a political issue because, and I understand why it is, by the way, I understand because the experts, the academics, lots of academics talk down to people. And if you go back to, I mentioned, when I had Bill Janemey on the (8/32)
show, I mentioned when I watched an interview that he did, or his father did, I apologize, with William F. Buckley. You go back in time and you watch the intellectuals that came on that show. Granted, I missed some of those intellectuals. There was value to those people. Now what we have is the thought leaders. The thought leaders are the ones who they've got a whole framework to give you. It's the whole package. They're going to sell the whole thing to you and you got to take it or leave it. Intellectuals provoke you. They're people like Christopher Hitchens or Gore Vidal. And those people are valuable. But what you also get when there's a bull market in intellectualism, you get a lot of blowhards who sit there and speak unchallenged and make assertions. And people are tired of that. They're tired of being talked down to. And I think it's a big part of what, of course, the Brits were reacting to when they said, we're done with the experts. We're tired of the experts. So to bring it (9/32)
mean, I studied the works of many of the 90s intellectuals in the foreign policy establishment when I was in college in the early 2000s because I double majored in economics and politics. It turned out that the economics was a negative impact on my education. I had to actually work for a number of years to deprogram my defragment to erase the hard drive of my brain associated with everything I learned at NYU around new classical economics, with the exception of maybe economic history. But the political science that I learned, a lot of that was actually very valuable. And the most valuable class was my class on American foreign policy. And there was, of course, the famous paper that Francis Fukuyama wrote after the fall of the Berlin Wall, which was the end of history. That was the name of the paper, which then became a book. And it's remarkable to read things like that from PhDs, right? From establishment thinkers that they could have been so caught up in the euphoria that they would (11/32)
make statements like, this is the end of history. The future now is American empire. They didn't use those terms. But the future is America and this global world and we're going to ride off to the sunset. It turned out that lasts for about a decade. The Democrats couldn't even put together universal healthcare. We had the end of the Cold War. The Democrats wanted to use the budget to turn it into socialize things in the country, socialize healthcare, along with, I don't know what else. And the right, what did the right want to do? Guys like Bill Kristol, those guys, they wanted to go to the other extreme and say, well, this is an opportunity to really double down on American empire. And that was the concept of full spectrum dominance. This idea that we're going to, we're going to pour in so much money that we're going to become such an overwhelming force that no one will challenge us. But in any case, in either of those cases, both the left and the right, they were aspirational. They (12/32)
were like, okay, now is our opportunity to really go for broke here. It's an opportunity to swing for the fences. And I don't think anyone who lived in the 90s, who grew up in the 90s like me, could have ever imagined that we would be where we are today. I mean, it was stock market was roaring, people were partying, everyone looked great, everyone felt great. It was one of the most incredible times that I remember in terms of just euphoria. So anyway, comparing those to the 70s and the 80s, that's been coming up a lot in my mind lately. And I would like to explore the 70s more. I mean, I think we've covered the 90s enough, maybe from a political standpoint from the both domestic politics and maybe even foreign policy would be interesting if we had the right guest on. I mentioned full spectrum dominance. Andrew Bacowicz wrote a book, American Empire, where he talked about that, but I'm sure there are a number of books that cover it. But especially the 70s, there's so much there to (13/32)
explore. I know much less about the 70s than I do about the 90s, because I wasn't alive in the 70s primarily. And I haven't studied it much. Most of the stuff that's been published is about the Great Depression that I've read. And of course, there are books that cover the whole swath of American history, but the 70s, there seems to be a dearth of material there. And a lot of the conspiracies around the globalism and America in decline, there's a common thread between some of the stuff that came out then and what we saw after 2008. And the conspiracies around 9-11 and the conspiracies around the financial crisis, just sort of the dark conspiratorial lens around which a larger percentage of the public viewed some of the events of our history with good reason, because the official narrative didn't make sense. And that's something I did want to talk about with my guest, and I hope I do want to talk about with him, which is really, what do you think happened on 9-11? I know it's one of (14/32)
those things when people talk about 9-11, everyone's scared to talk about it, because you don't want to get branded as some kind of kook, tinfoil wearing conspiracy theorist. But that's kind of silly, because we now know that what we were told happened on 9-11 isn't the whole truth. At the very least, we now know that the Saudis were involved, not just that there were 15 Saudi hijackers, but based on what these senators have said. Bob Graham is no radical, the guy's a normal person. And these 28 pages were just a few of the documents that have been released of the thousands or tens of thousands of documents that are marked confidential that he and others have asked for the United States government to make available to the public. It's come to light that the Saudis have been involved. The 60 minutes did a piece on this. So that was not something that we were ever told in the early 2000s. And it didn't make sense that the story was just too simple and the answers that the government had (15/32)
were too ready. And even at the time, it was so obvious that the adventure in Iraq was a horrific idea. So just certain things didn't make sense. And the process was rushed. And I think it's something that I'm not saying that I know what the hell happened, but it's something that a lot of people have reservations about. But again, it's one of those things where it's such a traumatic part of our history, 9-11, especially for those of us who lived in New York City. I was woken up by the explosion, not by the sound, but the actual vibration of my bed. I lived below canal. I lived right by the tower. So I remember it very clearly. It's not something that anyone wants to revisit. And it's one of those things where you're almost afraid about what you're going to find out. I've read some of the history of the Warren Commission. A lot of the people that were put on that commission didn't want to be on it. I think Gerald Ford was an example of that. He was not happy about being put on the (16/32)
up. Is the government releasing false information while continuing to classify documents containing the truth? As the presidential campaign is proving, appearances of government deception have contributed to wary Americans becoming more and more outraged with their elected officials. The United States government is protecting Saudi Arabia, and I think the reasons have carried on over the 15 years of that protection. And I think that one of the key reasons early on was that President Bush said at the site of the World Trade Center that we will follow these heinous people to the ends of the earth to bring justice to those who have lost their lives. We immediately decided that the ends of the earth were Iraq. It was rather embarrassing then to have information flowing into the intelligence agency that Iraq didn't have anything to do with 9-11 and that Saudi Arabia had a lot to do with it. So how do you square that difficult circle? I think the way in part was to submerge and suppress the (18/32)
information about the Saudi involvement. I think another factor is the long relationship with Saudi Arabia. Another reason more recently has been all the turmoil in the Middle East. So that was the relevant quote that I took out of it. And as you can see, that's not ambiguous. The idea that there was a Saudi connection, that the Saudis at the highest levels of government, whether I said it in that quote or in other quotes, it's been said. I think Max Cleveland also former senator from Georgia made a similar point along with the fact that I think he and others made the additional point that the Bush administration was making it difficult, didn't want an independent investigation. So there's a reason that people form conspiracy theories and it's because there's an absence of credibility by the state, which has the official story, right? That brings us back to 101 with what we were discussing with Bill Janeway, which is if you don't have credibility as a government, it makes the mission (19/32)
driven model of the state as an economic engine at the very early stage of the business cycle, the innovation cycle for new technologies, very difficult. We would not have managed to go to the moon in the 1960s if Americans didn't believe in the country and in the mission. I just don't see how we're going to address similar challenges when we're literally eating each other up, right? Social media is a great example. This is something else that I had to speak about today with my guest, which is a very recent story. It was an anecdote to get into this conversation, but there's a Senator, Republican Senator Cindy Hyde Smith. This I think came out yesterday or a few days ago. She made recent remarks in Mississippi. She was quoted as saying she was in front of a statue taking a picture with a local rancher. She said, if he invited me to a public hanging, I'd be on the front row. The media spun this story that she was basically talking about lynchings. It was some racist spinning of this (20/32)
story. I tried to figure out, just based on what she said, I went back and looked at it, read it, watched whatever I could find. There was video footage of it. There is absolutely nothing in that that any objective human being would call racist. You have to literally think that a public hanging, by the way, the last time we hanged someone in the United States was in 1996, and it was a white dude. We used to hang people in the US. There used to be hangings. Hanging is not synonymous with lynchings, right? But here's my point. This is what I want to get to. Maybe this woman's a giant racist, and she has a backstory, and that's it, right? But my point is that no one actually hears what this woman had to say. The only thing that matters is the articles that you saw splattered on your highly curated social feed. Lots of people live in total delusion. They think that there's this senator in Wyoming or in Nebraska who's a giant racist, and they have no clue what she said. They're just (21/32)
trusting something that they saw. Forget fake news. This was like Washington Post stuff or the opposite. There's so much crap, and I get this all the time because I go into these rabbit holes where I explore one side of the political spectrum or the other, and my news feed will become curated in a very quick period of time, depending on what I'm looking at. I've been in a Joe Rogan wormhole the last, I'd say, month. I love watching Joe Rogan clips before I go to bed. My news feed has gotten so curated for basically I am being segmented as a right wing Republican. You see all these thumbnails of women or the classic ones are Jordan Peterson destroys dumb liberal, whatever. People just sometimes don't even read the videos. They just see the title. My dad will do this to me. He'll be like, did you see what Hillary said? I was like, I don't even know if she said that. Who knows? That article that came out this last weekend that Hillary was going to run in 2020. The first thing I did when I (22/32)
saw that, I said, okay, now I looked into it, I read it, and I realized that she never said she was going to run in 2020. The writer put forward a case for her to run, but they made it sound like she was going to run. This is coming from her. Who knows what's true anymore? This is such a huge problem because you can't believe anything. The Chinese recently, this also some days ago, you could find this online, the Chinese government put out this incredible video of one of their newscasters, which looks 100% real, and it was actually an AI. They put this out to say that their news organization, that the central news organizations in China are going to be using this technology to cover events, that they don't have the staff to cover. Basically, they're going to have, let's say, you're going to have, I don't know, who's that woman on MSNBC, Rachel Maddow, or that guy, the equivalent guy on the right who's a big Trump supporter, Sean Hannity. They're going to replicate these people, and (23/32)
they're going to have robots covering stuff across the country. I mean, it's totally wild. It's totally insane. This brings us back to the value of cryptography and some of these platforms, right? Because you have to trust the source. No one's going to believe anything that they see anymore. Ironically, we went from having these island websites where people would go to the New York Times or go to CNN.com and get their news, and then we got to the point with Facebook and just all got dished through one river. We're going to go all the way back again, where people are going to have to go to trusted sites or somehow do some kind of authentication process where they're able to verify the source that they're getting information from. That was another thing I was basically talking about, and it was part of this larger point about the media and the bipolarization of the media and how everything is just so political today. There's no easy way to transition from that to some of the other things (24/32)
I want to talk about before I ended this impromptu conversation. To tie it off, I mentioned a lot of things, but the point about the 1970s and the 1990s, thinking about the 70s, thinking about the 90s, it got me to thinking about this last decade because we're getting close to 2019 now. We're almost a year away from closing this decade and moving into the 2020s. First of all, it's remarkable that the time has passed so quickly. It really is remarkable. It feels like yesterday that Barack Obama was elected. It feels like yesterday that the financial markets crashed. It really does. It's hard to believe that 12 years have passed since then, almost 12 years, 11 years. It's remarkable to realize that 17 years have passed since 9-11 or 15 since the Iraq War or 14 since Hurricane Katrina. It's absolutely remarkable. I think about what this decade has been like, I mean what it feels like now and maybe what it'll feel like when people look back on it. I feel like it's a confusing time. The 70s (25/32)
felt dark. The 90s felt extremely optimistic. The 80s felt a little surreal, I guess. There was some surreal quality to it. There was also cocaine was big in the 80s, money, finance, recklessness with respect to money that was captured in the movie Wall Street, Oliver Stone's movie Wall Street, but a number of other movies, the secret to my success with Michael J. Fox or Risky Business with Tom Cruise. The 2010s, the 2000s felt, I think, scary and there was a lot of darkness. The 2010s, I don't know. I mean there was a period of darkness after the financial crisis, but I think there's just a surreal quality to them and I think so much of that is driven by the technology. But there's of course the overhang of terrorism that's there. There is this confusion about America's place in the world. In the 2000s, after 9-11, there was no confusion about America's place in the world. We were top dog. We were number one. There was no question when Bush met with Putin who was the boss. I don't (26/32)
mean that as a slight for the Russia investigations at the Donald Trump. I don't even know if that shit's real. I don't even know how much of that is manufactured. There's been two years of Mueller investigation. I don't know what's going on with that. But there was no question that America was in charge of the world. That's how it was, right? But that's not the case today. We live in an increasingly multipolar world and you can see that. I mean, I brought up Saudi Arabia in the context of the 9-11 attacks, but you can see it with this situation with our relationship with Saudi Arabia and Iran and Israel and North Korea, South Korea, China, Japan, the Europeans. There was a World War I celebration this week. It'll be last week when this episode comes out where Trump was in Europe. Macron was there. Merkel was there. All the big leaders were there. Putin came up and shook Trump's hand. I mean, it's a super weird scene. Just a lot of confusion about the roles. Just changing roles. It's a (27/32)
time of change on the international scene. I think that's the least you can say. It's challenging notions of American exceptionalism. By the way, the hypocrisy of American foreign policy is being exposed badly by this administration because the Democrats, of course, became very comfortable with war once Obama became president. They were anti-war, being a Democrat in the early 2000s, being a dove, being anti-war, being a pacifist. But once Obama came into office, it just became another way of doing war. Drone strikes, extrajudicial killings, et cetera. Again, I'm not here to pass judgment on his decisions or to pass judgments, by the way, on Bush's decision. I don't doubt that George Bush went to war in Iraq because he thought he was doing the right thing. But he lied. That's what politicians do. They lie. But it was a big lie. Like I said, the overhang of terrorism, the challenge of American exceptionalism, technology, I got to say, I got to feel like technology plays the biggest, the (28/32)
loss of privacy, the normalization of this open relationship to the world, which not in a good way necessarily, and this hyperconnectivity, the challenge that parents have to be present with their kids because they're constantly being sucked away by their device. I think that's what the 2000s is. I think it'll be remembered for the first decade of real change in norms, the Me Too movement, this renewed attention around the disproportionate murder of black men versus white men, racial injustice, prison, drugs. I mean, there's a lot of change happening. And I think the optimist in me says, this is great. I mean, some of it sucks while it's happening, but it's great in that it's causing us to have to come to terms with these changing realities. I mean, the Me Too movement is a reflection of the empowerment of women. They're making more money. They're demanding more power in society. And I think that's fair. I mean, it's not for me to say it's fair, but makes sense to me. The issue is, how (29/32)
does that conversation happen in a way that doesn't throw the baby out with the bathwater? And so often, I think something feels off with that conversation, just like the white male privilege conversations. Same thing. There's much to be desired. And when you're a white man, you obviously are more sensitive to, you can feel it. But I feel like these things need to happen in order to bring about the type of change that I think, again, the optimist in me says, we'll look back and it'll all be fine. The pessimist in me, and maybe it's not so much the pessimist, maybe it's the realist, that understands that change, regardless, even if it's necessary and things will change, change is also about loss. And there is a sense of loss. I mean, there's a whole analog world that just feels like a distant past when I see brought up the 70s before I'll bring it up again. But in the 1970s, forget cell phones. I mean, it was so analog. I spend so much time researching and reading, and I will fall upon (30/32)
these periods, and I'll watch videos. I mean, watching buckly conversations on television. Imagine how much it costs to produce that. And what was it? Just a couple of cameras, right? I mean, the world is totally different. And I think this decade is a decade of change. And I imagine the next one will be much the same. And I think the scary thing is, to what extent will our environment change? We see these wildfires in California. We had Superstorm Sandy, which I think would have been a completely different storm. Were it not for the fact that ocean levels were already where they were at? But what happens if over the next 20 years, the likelihood of a random hurricane getting to a category five and just running right up the East Coast, right through New York with higher sea levels, what's that going to do? I mean, just all these things are scary, but they're, you know, I guess, what was it, Confucius that said, may you live in interesting times? I think that's kind of the constellation (31/32)
of all this, at least being able to think about it and cover it gives you some solace. Well, listen, everybody, I'm sorry for, I hate apologizing, but I am sorry that this happened. Of course, I did not want to be in the situation. I look forward to having this guest on in the future, but I hope that this recording that I did is appreciated and that it was valuable in some way for all of you to listen to. I appreciate all of you very much. And I look forward to a number of the upcoming episodes that are equally awesome with equally awesome guests. And as I said, I'm going to be focusing heavily on finance and maybe some tech, but really, I just want to cover a lot of market stuff. I'm really into it. So more stuff like Janeway coming ahead. Have a great week, everybody. (32/32)
What's up everybody? My guess for today cancelled unexpectedly last minute. We rescheduled it, but rather than try and fill the hole with another guest who I'd also have to book last minute, I've decided instead to release an overtime to an episode that was particularly popular with all of you. My episode from February of this year with Matt Taibbi. The overtime is roughly 30 minutes, maybe a little less. We talked about the Goldman 1MDB scandal. We also talked about Matt's experience on the campaign trail with Donald Trump back in 2016 and projections and predictions for the 2020 election. I thought besides the fact that this was a popular episode, it's also relevant to the news cycle with the recent Democratic debates, round two last week. So I think you're all going to enjoy it one way or the other. Matt's fantastic. And I also apologize for not having something new everyone. I try to do it every week. And as a result of trying to keep things timely, I also end up not having stuff (1/33)
in the tank ready to go in the event that something like this happens. So please enjoy this. And if you want to hear more over times, I always say this, the over times are often better than the full episodes. And this may well be true with Matt. I can't remember. It's been a long time since I heard it, but it's definitely true of a number of other guests. So if you're interested in hearing more of these over times from past episodes that you really enjoyed listening to or for future ones that haven't come out yet, I'd suggest going to patreon.com slash hidden forces and subscribing to the audio file subscription. You can also subscribe to the AutoDidact or the Super Nerd, which are the transcripts and rundowns. But that's up to you. The minimum subscription is the overtime. Also, before I hand it off everyone, this is a unique opportunity for me to make an ask that I normally only do as a pre-roll before every episode. And it's about Apple podcasts, specifically about ratings and (2/33)
reviews. Right now we have 239 people who have reviewed hidden forces with almost all of those at five stars. Our average rating is 4.9. But I know how many listeners we have and obviously that's not even a fraction of our listener base. And I know it takes some time. I get it. I know it takes some thought to write something. And I think many of you, if you're anything like me, feel like you're going to get to it at some point because you want to say the right thing and you want to choose the right words. Well, I want to encourage you not to even have to worry about that. You can rate the show without having to write a review. You can come back later and write the review. You can go into the Apple podcast app, click on hidden forces, scroll down past the episodes and you get to the ratings and reviews. And all you've got to do is tap on the star that you think we've earned with the work we do. And I say we because there are a number of people who help make this podcast possible, not (3/33)
the least of which is my editor, who makes me sound 10 times better, more coherent and more intelligent than I am in real life. So it's literally that simple, everyone. It literally will only take a second of your time and it would mean everything to me if you did that now before going into the episode with Matt Tyebe. All right? I appreciate all your support, your listenership and without further ado, here is my overtime to my episode with Matt Tyebe. Matt, welcome back. Thank you, Dimitri. That was an awesome episode that we just did on media. So it was fun. Yeah. So I want to talk to you about your experience on the campaign trail with Trump. Oh, yeah. And then I want to talk to you about your experience with the financial crisis. Let's start with Trump. I've loved hearing your take on this because Trump is a phenomenon. Yeah, yeah. So when did you first meet this guy? Have you met him in person? When did you sort of first follow him? And what was your experience on the campaign (4/33)
trail with him? I don't think I ever met Donald Trump personally. It's funny, my first job in journalism, I was an intern for Wayne Barrett, who was sort of a famed muck raker here in the Village Voice and he was Trump's first biographer. Couldn't stand Donald. So I heard things about Trump over the years. Trump was also sort of the main character in Spy Magazine, which was a huge influence on me growing up. It was the satirical magazine started off by Kurt Anderson and Graydon Carter. And so Trump was a central villain in that magazine. But I always thought of him as sort of a joke. I never thought of him as somebody who would be part of a real political movement. But then literally the instant I saw him on the campaign trail, I knew that it was serious. Just the instinct he had for it? Well, there were a couple of things going on. I think this is a really interesting topic because it's still totally unexplored. There were two parallel developments that were going on at the beginning (5/33)
of the Republican race. One was this thing that we talked about in the podcast, that there was all this discontent out there. And Trump, for all of his lack of book smartness, has a tremendous sense of crowd. He has this ability like a lot of comedians have to walk into a room and kind of feel where people are. And so he pretty quickly was able to create positions that molded to the discontent for the crowds that he was feeling. So he didn't start out really particularly against the wars in the Middle East, but he noticed there were lots of vets in the crowd. He's like an algorithm. Exactly. He's a machine learning algorithm. So I saw early on that he was sort of like this vacuum cleaner for discontent and he was dominating the conversation. He also had this incredible pullover media that was unique. But the parallel phenomenon that nobody talks about to this day was the total collapse in public confidence in the Republican Party. Because if you look back, you'll see people like in (6/33)
538.com, right? Like Nate Silver. Nate Silver. All those people. They were saying Donald Trump was a protest candidate. Here's how protest candidates work. They get an initial surge of support and then they fall back to the pack and then the real candidate emerges. So that actually happened. There was a moment in October of 2015 when Trump, his numbers just started to fall off a little bit. I remember that. Right? And what was happening was the Republican electorate was like, we can't do this. Let's look elsewhere. Electability. Right. This was the pattern that was normal. We saw candidates like this in the past. Who was the pizza guy last time? Oh yeah. I don't even remember his name. 9-9. Who was it? He had the plan? Yeah, whatever it was. See, we've forgotten him that quickly. Can't remember the guy's name. But when Trump fell back to the pack in that October, the people who rose were Carly Fiorina and Ben Carson. Right? There was nobody that voters, as many times ads were shoved (7/33)
under their nose, they refused, absolutely under gunpoint to vote for somebody who was part of the Republican Party. They just would not vote for a politician. And Jeb Bush, they spent $150 million. He got three delegates. This is what people don't get when they look at the Trump phenomenon. It's not just about Trump and about this rise of something. It's about the collapse of something, primarily. He stepped into a vacuum. It's not about what people want, it's about what people don't want. Exactly. Exactly. And first they didn't want the Republicans, and then after that they just barely didn't want the Democrats. Right? And, or depending on who you asked, they won the popular vote, but still it was close enough, right? It was a hate offer. It's crazy that these elections are so close. Right. Oh, they're always so close. And that's another thing that Chomsky said. He's like, you would only expect a 50-50 distribution in this huge of a situation normally if something was completely (8/33)
random. Like if you asked people to choose the president of Mars, you'd get 50-50, right? So only when nothing is at stake would you get something this even, which tells you something about our politics, right? Right. Like if they were rationally decided, if it was split along class lines, for instance, it would be 80-20 or something like that, right? Or if they felt there was a meaningful difference between the two candidates. Exactly, yeah. Yeah. Or if it wasn't stage managed in some way. So yeah, it was fascinating. And I, looking back, I'm proud of the fact that I called early that he was going to be the nominee, but then I let myself get talked out of him winning the general pretty early by a pollster. And that was a huge mistake. Looking back, I listened to somebody's spiel from Washington, and I'm never going to do that again. Well, you know, we've never had a president, well, I mean, the WW has only been around for so long, but to watch him shave Vince McMahon's head, right? To (9/33)
be on stage with professional wrestlers in the most just concocted environment. I mean, it's remarkable, you know? It's remarkable. Oh, yeah. But we've never really seen anything like this, truly. No, no. I mean, I'm trying to think of who would be even a close parallel. There's nobody. I mean, you know, Pat Buchanan hit some of those themes, but he was serious. Yeah, he was buttoned up, too. Yeah. I mean, Donald Trump, there's no way, I guarantee you, he didn't think he was going to win. He did this as a publicity stunt. You know what he reminded me of? Do you remember when Mike Tyson came out of retirement or came back? Of course. From prison. From prison. His first fight was against this guy, Peter McNeely. Yeah, the big white guy from like Boston or something. The mullet, right? Yeah, yeah, yeah. So Peter McNeely knew who was going to get killed, and when the bell rang, he like ran to the middle of the ring, like right into a Tyson right cross, right? He was like a guy in a frat (10/33)
there, basically, right? Like he psyched himself up to go charge into the middle, and you know, it was over in a second. Trump did the same thing. He like shot himself out of a cannon at the beginning of the race, and I'm sure he thought this was going to end at any minute. To his amazing surprise, like everything, the entire infrastructure of American stupidity just sort of catapulted him into the middle of this firestorm of controversy. It was an awesome thing to watch, and I say that in the truest sense of the term. I don't mean that it was great. Respectful. Yeah, I mean it was incredible. But you know, there is an appeal. He has an appeal, right? So what is it that voters, Trump voters, find so appealing? Because I've spoken to many people who, some of them are my friends, they're still on my friends. I don't not hang out with people based on who they vote for. But I was blown away by not the fact that they necessarily voted for him, but the fact that they liked him. There's a (11/33)
couple of things going on. One is that people see him as an iconoclast, right? There's a thing up there that they hate, that they think is phony, right? And they know that the worst thing in the world, the thing that whatever that is, thinks the vilest thing in the world is Donald Trump. And so what they decided to do was send Donald Trump into the middle of Washington. And it's the ultimate protest for it. It's not just we want to... It's like hurling bags of dog shit at the White House. Exactly. That's exactly what they were doing. That's a Matt Tyvee line. That should be some mute right there. Probably already written it. I've probably already... Yeah, there's something like that. But that's basically what it was. It was the whole like, you know, to set the dog shit on fire and the stoop thing. I mean, you know, even today, I know people, smart people, like people with multiple degrees who are praying for Trump to stay in power. And then people who work in Washington because they (12/33)
hate their co-workers so much. You know what I mean? So I feel you on that. This speaks to something. I know the business editor at Breitbart. I know him from his days working at CNBC and we're friends on Facebook. I don't know him well. I mean, but I remember after the election, I was shocked at the election all of Trump and I saw a status up that he put on Facebook and he said something along the lines of the sort of the liberal sort of hair on fire like your freak out is delicious. And I tell you something. I read that and I thought, it is delicious. I was like, I was like, I feel that and I felt bad about it, but I also couldn't deny that I was enjoying it. So Donald Trump's election has given me that satisfaction. And I say that even as someone that did not want Donald Trump in the White House, does not want him in the White House to this day, I think that he's the exact opposite of what the country needs. But maybe it's what the country wants exactly because he feeds that (13/33)
visceral, rowling up that has happened in our country as a result of many of the things that we've discussed today. Yeah, no, I mean, I couldn't be more opposed to basically everything that Trump stands for both personally and from a policy standpoint. But as somebody who has had to deal with, for instance, somebody like Robbie Mooc, right? Or not Robbie Mooc, but the Clinton campaign sort of infrastructure. Robbie Mooc was the campaign manager for the Hillary Clinton campaign. Yeah, actually, I never dealt with him exactly. I dealt with other people in their campaign. But you know that those people, there's nothing in the world that they would find more offensive than Donald Trump and losing to Donald Trump. Those are disgusting people. And so I get it. You know what I mean? But yeah. So this is the thing, right? I mean, I think that you make this really great point in hate, which has to do with how the news used to be blue collar. We said it, we talked about it as well. It used to be (14/33)
more blue collar and now it's more white collar. And there's a level of sick of fancy. People that don't want to follow the herd. I'm in that camp. I know you are in that camp. I think that this is distasteful, right? And I think that's kind of what you're touching on. There's a sense of an air of inevitability. We're the establishment. We're sort of the... Exactly. We know better. Yeah. We're the experts. Right, exactly. And there's a thing where you're just kind of like, you know what? And I don't care even if we're all going to go down in a flaming ship, I want to see you go down and play. You want to see them kicked in the face by a mule. And it's satisfying. Yeah, exactly. They're so pretentious. And I get it. You know what I mean? I think the messaging that comes from Washington is so condescending. And for Trump, for a lot of people, it was just a way to send a message to Washington, and it was extraordinarily effective. I think the Democratic Party, Democrats underestimate the (15/33)
extent to which that feeling can translate to votes. Oh, absolutely. You know, I think they underestimate that. They underestimate it because they don't know how few they are. You know what I mean? People don't like the moralizing thing. You know what I mean? When people try to moralize, and the right has done this as well in different periods of time, people don't like that. They respond negatively to it. Absolutely. They'd be responding negatively to being preached to. So Bernard Goldberg writes that book, Bias, right? The famed book about the liberal media, which I basically totally disagree with. But there's one line in there where he talks about how in 1972 he was having a discussion with a film critic from the New York Times who couldn't believe that George McGovern lost because she didn't know anyone who voted for Nixon. Now that is still a thing, right? And it's more of a thing now because there's been this radical change in the press. Back in the 60s and 70s, people who were (16/33)
journalists were very often the children of plumbers and construction workers and printers or whatever it was. Steel workers. Yeah, exactly. Automotive workers. It was not an upper class profession. Now it's 100% upper class. And almost everybody you meet on the campaign trail went to an Ivy League school and has a lot of money and lives in a big city and shops at urban outfitters and all that stuff. And they don't realize that they constitute maybe at best 10% of the country, right? Like the overwhelming majority of the country doesn't have money and doesn't have that lifestyle. It's frustrating. That's a problem. It's a problem. People was less diverse ethnically back in the day. But it's not more diverse now because even though they've diversified from ... They've homogenized on their opinions. They've homogenized the opinions and also almost everybody's upper class that they bring in to the press now. So they've replaced one problem with another and it's had drastic consequences. I (17/33)
couldn't agree with you more. It's something else we've discussed on the show. It has become a brand in general in American politics and intolerance has gone way up. There may be more tolerance, at least grandstanding tolerance about identity groups that are sanctioned based on skin color or based on gender or based on sexual orientation. But there is an intolerance for people whose views differ. And this is something that we talked about with Jonathan Haidt who of course wrote The Righteous Mind and talked exactly about this, which was a book I relied upon tremendously after the 2016 election to help me sort through the mess. Actually, I think it was right before the election. It was in the summer of 2016. Yeah, I think that book came out that summer. 2013, I think. That's when I read it, but I think it came out like 2014 or something like that. Yeah, I mean that's when I read it though. So what do you think is going to happen in 2020? You know, it's a crapshoot because a lot depends (18/33)
on what happens with the Democratic Party and this is a genuine contest of power, which is unusual. But for the most part, in the past, when you were covering a campaign, you were basically trying to figure out who was going to be the representative of the same kind of politics. So whether it was going to be John Kerry or Bob Graham or whoever it was, they were basically going to be an agent of the DNC and the big donors and whoever it was. Now, there's real stuff at play. Bernie Sanders becomes the nominee. That's a radical change for the party that then now all of a sudden you're kicking out all the people who are the donors, the think tanks don't have a say. You're replacing the people who are part of the traditional political infrastructure or potentially in Washington. So that's a massive contest. It's going to be bloody and angry and it's going to be vitriolic on all sides and very interesting. And you know, unless for some reason Sanders decides not to run. You think he's going (19/33)
to run? He's going to run. Yeah. You think he's going to win? Well, what's interesting about this is that the same thing that happened in 2016 with Trump is kind of lining up to happen with Sanders. The Republican Party made a massive error in not coordinating beforehand. There were too many candidates and by the time they got to New Hampshire, there were seven or eight viable candidates and they all took votes from each other. But Trump was the only person who had an insoluble base of support. So you could win with a small plurality. Yeah. Now Sanders won 42% of the Democratic vote last time. Right? So if he even gets half that going into the primaries, the initial primaries, and people are talking about having 20 candidates in this race, you know, 20%, 18% could be a winning amount in this race. So it's going to be really interesting. A lot of it's going to depend on whether Warren and Gabbard take and Sanders take votes from each other. If those candidates stay viable, then we have (20/33)
something going on. But if they don't and you have Biden and Harris and all these people, you know, in there, the Biden one sounds ridiculously stupid. Chris Christie, who you wrote about recently was on the Bill Marsh Show real time and he said that he thinks Biden has the best chance. I feel like Biden is like the classic Hillary Clinton running in 2008. Hillary Clinton ran on the platform of let's bring back the nineties. Let's go back to the Clinton years of 1999. And it feels like Joe Biden with the exact same thing. Let's go back to the Obama years. Yeah, that just shows you how completely clueless they are. Oh, let's give you more of the same. That went over so well last time, you know? Can't they tell that people are angry and also don't they understand how big of an issue the wealth gap is? They are completely clueless about that. How are they so clueless? Well, one of the things that Trump has helped them to a degree because he's been so inflammatory and he guarantees them a (21/33)
certain amount of votes because he's so off-putting and offensive and all of that. So you know, you had the midterm result that they had, which was in their eyes pretty good. You know, I look at any contest with Donald Trump in it and I think if you don't win in a landslide, you should be really worried, right? And you know, when it was close, the popular vote was 3 million votes and it should have been 30. They should have been panicking. They should have been running around with their hair on fire wondering what happened, but they haven't done that. They haven't gone through that process. So they still think that they're doing fine because they've just been in this paradigm where the Republicans always get somewhere between 47 and 52%. So as long as we get a couple more percent, we're doing okay. They don't realize that that whole model's been shattered and you know, I don't know. It's frustrating. I mean, look at how they're reacting to Ocasio-Cortez, the Democrats. Oh, they... (22/33)
Their sensibilities have been shocked. So they hate Ocasio-Cortez and Sanders and the Justice Democrats. They hate them more than they hate the Republicans and they're afraid of them more than they're afraid of the Republicans. And that vitriol is... It's amazing because the possibility exists that Sanders could be the nominee this time and Ocasio-Cortez could be the future of their party. 100% she's the future of the party. And they are doing everything in their power to, you know, antagonize her right now. Or I think what they're trying to do is they're trying to do a carrot and stick thing with her. They're trying to say, if you behave X-Way, you're going to get a lot of flak from us. We're going to bring you into the fold and we're going to make you the anointed one, but you got to change your tune on X, Y, and Z. But it's not going to work. She got there because she ran against the idiot traditional Democrat, you know, and she has absolutely no incentive to change and they don't (23/33)
get that. I think it's also fascinating because she is from the same wellspring, the same force that elected Trump is what is brought Ocasio-Cortez to the front, right? First of all, there's a populous quality, right? And there's a direct relationship to her base. She'd shoot right over Washington, the Washington establishment, the media, communicate directly through Twitter. She's fantastic at it. She knows she has camera presence. She has social media presence. She knows how to use all of this. She's good looking. She's young. She is absolutely the future. You know what I mean? It's her politics that are unacceptable, right? The wealth tax thing is unacceptable. That will never be agreed to. You know, the other politicians like Warren and Sanders also had proposals along that line. The people who traditionally support the Democratic Party financially will never let that happen. They will fight a pitch battle. It'll be antitum, you know, before they let that happen. I wonder how you (24/33)
feel about this. I think the idea of 70, well, it depends on what the income bracket is. In general, I always have a problem with taxes because I always know what they're talking about. They say we're going to raise income taxes, but what they end up doing is they create loopholes for certain people that are wealthy. But I think here's the thing, and I wonder how you feel about this. And then I want to ask you one more thing. We'll wrap it up. I just don't see how we can move forward without finding a resolution and without compromise because the wealth gap has grown enormously due to technological reasons, regulatory changes, globalization of our economy. Our political system isn't going to work. So either we compromise or we just get radical candidates that come in and just basically jump right over the media, jump right over the Washington establishment and get elected President of the United States. Yeah, I agree with you. I think the political establishment needs to find a way to (25/33)
be more invested in everybody's outcome. Right? Like they've got the point where they're financially supported by people who are not invested. Right? So if you're a billionaire in this country, you're a citizen, maybe only nominally. You know what I mean? You don't really care. In the old days, if you were Milton Hershey or something like that, the old school oligarchs sort of had this vision of sort of lifting up all of society. That's sort of gone now in the global economy. And I think that's one of the things that people are responding to. The voters, this is this idea that we've been abandoned by this sociopathic class that doesn't really care that we have no health insurance, that we're one illness away from being bankrupt, all that stuff. So the political class has to do something about that sentiment, that feeling of we've been left behind by people who have stuff. And if they don't... And they see it on their screens every day. Every day. On their social media accounts. It's (26/33)
rubbed into them. It's rubbed into their face. Yeah, exactly. And so there has to be some kind of movement towards something that gives people a little bit of a break and that moves us a little bit more in the direction of not having this plutocrat class that's just sort of hovering over everybody that's unaccountable in every way. So I think that's a big thing. The media and our politicians also stoke division and that division makes it difficult for us to unify, which is what we need in order to move something like this forward. Matt, you have written about the Goldman Sachs 1 MDB scandal. What can you tell us? I mean, this is not something I've read about pieces here and there from, you know, including stories of people getting murdered, which is crazy. Oh, no. Yeah, they're murderous. Yeah. What can you tell us about this? And I'd love to also see how this all fits into this larger area of Goldman and the financial system post-2008. It's an unbelievable story. All of these (27/33)
financial scandals are insane. This one is particularly crazy. It's basically the short version of it is a couple of bankers for Goldman who were in Malaysia, got in bed with the local dictator and they decided to have a sovereign wealth fund that they called 1 MDB and they went around the world raising money. So they pitched institutional investors in the idea that they were investing money in sort of Malaysian infrastructure projects. So they raised money from people all over the world, billions of dollars for people who thought they were building subways and agricultural drainage projects, all these things. In fact, the money just all went into a big account and turned into a party for this guy named Joe Lowe, who was like an aide to the president. Yeah, his short name is like J-Lowe or Joe Lowe, right? Yeah, it's J-H-O-Lowe. They stole, like, you know, upwards of four and a half billion dollars and part of that money went to funding the movie Wolf of Wall Street. They bought (28/33)
Picasso's. They had parties. They were still hiring Snoop Dogg. They had parties. They were going all over the world. So it's basically sovereign ripoff. So they created a fund, as I understand it. They used the sovereign bond market. They issued securities on the credit of Malaysia in order to liquefy the fund from which they then extracted money for their own purposes. Exactly. What was Goldman's participation in this? They issued the bonds. They issued the bonds. The bonds of the sovereign wealth fund. And they made $600 million. So the fees were something like 10 times what they would have been normally. Right, which is a giant red flag. Yeah, it's like a big... Because they knew they were doing something really, really bad. It's like getting a $5,000 massage. It's probably more than massage, right? Yeah. You're getting pay. You're getting pay for something more. Yeah, exactly. And so the problem with that, and this is why it's such a dangerous story for Goldman, is that the size (29/33)
of that fee, there's no way that somebody back in New York didn't say, hey, you know, what do we do to make all that money, right? And there's some evidence now that some of the participants in this scandal met with the highest ranking members of the bank, maybe at least once they actually met directly. There was a direct meeting between one with Lloyd Blankfein and the president of Malaysia, right? Yeah, no, with Joe Lowe. Joe Lowe, sorry. Yeah. They've charged a couple of people already, but if it snakes higher... There's talkstaking abeting. The stockstake... Because investors are concerned that they've laid out a certain amount of money, right, in preparation for having to pay fines that are larger than anything they've had to pay before. Yeah, this would be like the deep water horizon thing, but like twice that size. It's the only reason that they're even in danger of having to pay because this didn't happen to Americans. If this happened domestically, they would have gotten away (30/33)
with it. That's an interesting question. Yeah. That's an interesting angle. Yeah, I hadn't even thought about that. It was so brazen. Yeah, because the only reason that this is going forward is because the president actually got voted out in Malaysia, which allowed the investigation to go forward. You could kill it from the inside if you still had some political influence, but they don't need more. So now that Najib, the president, is gone, this thing is going forward and the traditional levers that they have of control over these scandals is the absence. So that's an interesting question, but they're looking at paying an amount of money that's mind blowing. Yeah. It's now 10 years since the crash. What's the verdict for you? Where is our economy today? Where are markets? Are we in danger of something similar again, or is just going to show up politically and electorally? I don't know. I mean, I think you probably know better than me, right? You're more of an expert than me. People I (31/33)
talked to from back in the day, they warn that a lot of the same things are going on. I have people who tell me things like the same kinds of behaviors we saw with mortgages back in the day you're seeing with CLOs now, right? Like small business loans, securitized loans, like that market's overheated. People think the stock market's overheated. I don't know. Corporate debt market also. Corporate debt market, like the debt levels are now as high as they were in 08, right? Total debt is higher. Is it higher? Yeah. So I don't know. You don't have an opinion, Matt? I mean, if I have to put money on it, catastrophes are where the bet is. What would Namchomsky say? That's enclosing to this. What would Namchomsky say? What would Namchomsky say? I'm sure he would predict disaster and more of the same than just as bad. Matt, thanks so much, Matt, for staying so long. I didn't expect it to be this long. I appreciate you. I know you didn't expect it to be this long. This is a marathon. We're here (32/33)
Today's episode of Hidden Forces is made possible by listeners like you. For more information about this week's episode or for easy access to related programming, visit our website at hiddenforces.io and subscribe to our free email list. If you listen to the show on your Apple Podcast app, remember you can give us a review. Each review helps more people find the show and join our amazing community. And with that, please enjoy this week's episode. What's up everybody? My guest on this episode of Hidden Forces is Charles Cuppchin, a senior fellow at the Council on Foreign Relations, a professor of international affairs at Georgetown University and served as special assistant to the president for national security affairs in the Obama White House and also served on the National Security Council under President Bill Clinton. He is here today to talk about the subject of his latest book, isolationism, a history of America's efforts to shield itself from the world. Professor Cuppchin, (1/33)
welcome to Hidden Forces. Very nice to be with you, Dimitri. It's great having you on. So, for those who haven't read your book, because I think, is it already officially out? Yes, it officially came out on the 1st of October. Okay. So, we're actually recording this today on the 7th. For those who haven't read your book, how would you describe it for our listeners and what was your objective in writing it? I would say it's the first book to tell the story of isolationism across US history. I start with the French and Indian wars in the 1760s and go right up to the Trump administration and the 2020 election that we were about to witness. So for starters, it's simply a historical overview of this impulse that has been with the country since the very beginning. And that is to avoid foreign entanglement, to operate on the principle that getting involved in the troubles of others only invites them to come mess around with us. Nobody interestingly enough had ever really told that story. (2/33)
There's a story about the founders. There's a book on isolationism in the 30s, actually many books. There's a book about Woodrow Wilson and the defeat of his effort to bring the country into the United Nations, but nobody kind of did the soup to nuts book. And my purpose was really to bring this history to Americans at a time when I think we all need to know more about the country's foreign policy before Pearl Harbor. I started this book almost a decade ago because I began to sense that there was an inward turn in the United States. It started after the end of the Cold War. I sensed it when I was in the Clinton White House. It was put into abeyance to some extent by 9-11, but then came back in spades once the wars in Iraq and Afghanistan didn't go so well to put it mildly. And I began to wonder, this robust internationalism, this willingness to run the world, this America with almost 800 military bases, is this more fragile than it looks like? And that's really the question that I (3/33)
wanted to explore. And I decided to do so by going back and trying to tell the story of the American experience through the lens of the isolationist impulse. That's what the book is really meant to do. Well, that was actually going to be my next question or one of my next questions, which was when did you first begin to see signs of a return of isolationist sentiments in the US? And the period for me that was where I saw it was really I put between 2004 and 2007 exactly to your point when the war in Iraq started not going so well or the public opinion began to turn a bit against the war and right up until the surge. And also in the early 90s, I think most notably with the popularity of Papua Canons message, those were kind of the two periods that I remember. But when did you first begin to see signs and what were those signs? I think that the biggest clonk on the head for me was Clinton's reluctance to engage in the Balkans. Also remember that not soon after the Cold War ended, (4/33)
Yugoslavia began to fall apart. And the George H.W. Bush administration basically said, we don't have a dog in this fight. We're going to stay out of the Balkan Peninsula. Clinton, when he was a candidate, said, we're not going to let that happen. We're going to do something about this. This is a humanitarian disaster. And then he gets into office and I was there at the beginning, so really the first couple of years, and he was quite reluctant to get involved. There was a lot of pushback from the Pentagon. And eventually he did get involved. We had the war for Bosnia and the Dayton Accords and eventually the intervention in Kosovo to push out the Yugoslav army and stop the ethnic violence between ethnic Serbs and ethnic Albanians. But that's when I began to say, something's going on here. And you're right, Dmitri, to point to Newt Gennrich as a turning point, because I think that it's in the 1994 midterms when the Republicans did well, that you really begin to see the collapse of what (5/33)
I call in the book the bipartisan compact between moderate Republicans and moderate Democrats behind liberal internationalism, behind a formula of combining American power with partnership, power plus partnership. That was the formula of liberal internationalism that really emerged under Roosevelt during World War II and was alive and well right through the Cold War up until the 1990s. That compact starts to come apart after the 94 midterms. And ever since then, I think Democrats and Republicans have really gone in different directions on foreign policy, which is one of the reasons that I think the country has been adrift. And one of the reasons that there is a isolationist comeback of a sort that is very important. And I think it's quite visible in Donald Trump's America First. After all, when he said America First, it's only America First in his inaugural address, he was going back to the mantra of interwar isolationism. The America First Committee was born in 1940 to stop Roosevelt (6/33)
from sending aid to the victims of Nazi aggression. They fought tooth and nail to keep the US out of World War II. And so Trump harkening back to the America First days was to me a strong sign that the isolationism, the turn inward that I saw in the 1990s was really gaining steam and in fact taking root in the White House. And in my mind, Trump is not the cause of it. He is more the symptom, the visible manifestations of a country that at least from his mind wants to step away from having bitten off more than it can chew. So isolationism has tended to have a bad name, certainly during this period of liberal internationalism. And I wonder, I guess one of my questions is, is that merited? One, two, where does that narrative come from? And that maybe three could open the door to really explore the history before the 1940s, which you document so well in all of these different stories, whether it's the Spanish-American war or the Monroe Doctrine, and maybe explore how isolationism actually (7/33)
served the nation well during that period. You're right to point out that isolationism is today a dirty word. And if someone calls someone else an isolationist, it's really an epithet. It's an attempt to denigrate them and isolate them politically. And one of the things I wanted to do in the book is to refurbish isolationism's reputation, not because I'm an isolationist. I'm not. I'm sure we'll get to that later. But because I think that the country needs to have a searching, open debate about the future of its role in the world, and that anybody who says, hey, let's lighten the load, let's step back. Let's let others do more. They shouldn't be called an isolationist. And so I think it does a disservice to the quality of debate in this country to continue to use the notion of pulling back, of lightening our load abroad as some sort of insult. But that's the way it's been since 1941. And that's because the isolationists were pushed to the margins of American politics during World War II (8/33)
and were seen as the fringe elements who made the big mistake of keeping the United States behind a moat, fortress America, while fascism and militarism and virulent nationalism and Nazism were sweeping Europe and Asia. And I agree with that. I think that the isolationism of the 1930s was a deluded bout of a search for strategic immunity that led to a disaster, the bloodiest, most costly war in the history of the world in which 400,000 Americans lost their lives. And I mean, it was a big mistake for the United States not to engage earlier. That having been said, I think if you go back to the 19th century, you see a brand of isolationism which served the country well. And the isolationist in calls goes right back to the founding days. And the guiding advice came from President George Washington in his farewell address of 1796 in which he said, the great rule of conduct for us is to have commercial relations with everybody and entangling alliances with no one. And for the rest of the (9/33)
19th century until the Spanish-American War, the United States stayed home. Now the U.S. was extremely expansive in North America, trampled on Native Americans, grabbed a whole lot of land from Mexico, tried several times to take over Canada, but it didn't go further. And that's because there was a consensus that the United States had no business expanding beyond North America. Actually, if I'm not mistaken, it was in your book as I do so much reading for this program. Sometimes I confuse different authors. But I think in your book you made the argument that those who argue that westward expansion was a form of internationalism were making a faulty argument. Is that correct? You know, it's a form of internationalism if internationalism is equated with expansion because we certainly engaged in territorial expansion. It's not internationalism if it means intermixing with foreign people because in general the United States' western boundary followed the extension of white settlement. And (10/33)
there was a racial quality to American identity. There still is for some Americans. And therefore the idea was that the union would expand in step with the frontier of white settlement. And then when it came to going beyond that, one of the reasons that the government and the public kept saying no was in part because they were not deemed to be part of the American experiment. Blacks, Latin Americans, Hawaiians, Asians, they were not American in the more ethnic sense of the word. And as a consequence, that was a break on expansion. There were also other motivations such as we don't want to entangle ourselves in great power politics. We want to be an exceptional nation and knock down the path of empire. But certainly the question of race and who participated in the American experiment was part of the explanation for why the US went to the Pacific coast but did not go further. So I mean that part of the history is actually very fascinating. The racial components because of America's (11/33)
history with racism, with slavery and the sorts of populations that existed in Latin America. And I have a lot of really great illustrations in the book from Puck and some from ... Are you familiar with these illustrations of Dr. Seuss that he did during the interwar period? No, I'm not. Do they have racial content? Well, those are not racial. Those are related to isolationism and they have these great images of ostriches putting their heads in the sand and Uncle Sam sleeping in a bed next to Europe as they're suffering under Nazi fever. But the racial component and xenophobia and the correlation between isolationist impulses and those qualities I think is interesting and something to explore. I want to actually drill in a bit more about this point about Western expansion and then that could maybe lead us into a definition of isolationism. How do we define isolationism? Because again, for me it's a bit complicated. Is it fair to say that the reason that the United States was (12/33)
fundamentally from the beginning isolationist was because it had more than enough to chew on in North America. If it wanted to expand territorially, which is one reason why countries engage internationally, at least during that period of time, they could do that. They had plenty of resources to extract from those territories and they were able to engage diplomatically with the Native American peoples in the territory. So there was some level of cohabitation with the external world and engagement. And obviously there was commercial engagement, which doesn't speak to the political component. But how do we define isolationism in a way that separates it from what I'm describing here? The term means different things to different people and there are historians out there who would say that the United States never was isolationist because number one, it was a trading state from the beginning. Number two, the US was never culturally isolated. Ideas from Europe, from Asia were coming and going (13/33)
and others would say that the US was expansionist in North America and that disqualifies it as isolationist. For me, isolationism is a lack of readiness to extend strategic commitments beyond the mothership. And it has an enduring geopolitical slash geographic logic to it, which is ever present during the founding era. And that is that the United States has to its east and west big flanking oceans. It has to its north and south smaller, relatively mild neighbors. And as a consequence, the United States should bank on that natural security. And yes, during the early decades, we didn't have natural security because we were surrounded by the British, the French, the Spanish, and also the Russians that had the territory up in the North Alaska. And so part of realizing isolationism was to gradually push one by one European powers out of the Western Hemisphere. And that to me was really the sort of double edged goal of America over the 19th century. One, to expand westward and become a (14/33)
formidable North American redoubt. And two, while that process moves forward to gradually unseat all European powers from their strategic presence in North America. And that generally worked. The French left early on. The Spanish stuck around until 1898, but then we booted them out in the Spanish-American war. And then the British left relatively early in the 20th century after Anglo-American Rup Rochement pulling out their last troops from Canada right around 1905, 1906. So what I actually, the part of the book that I found most illuminating and interesting is not the geographical or natural security conditions that would make isolationism a viable or intelligent or strategically advantageous strategy, but rather the way in which American political history and culture told stories about itself and its own relationship to the world that ultimately became self-fulfilling prophecy. First of all, do you, I mean, would you agree with that interpretation that this was the strongest source (15/33)
of the isolationist impulse in American life is actually a cultural one? I would agree with that. And, you know, culture is a slippery concept. And I think the geographic dimension ended up being part of our culture and our identity. And in my mind, it all can be wrapped up in the concept of American exceptionalism. And this is going to sound bizarre to most listeners because ever since 1941, American exceptionalism has basically been a justification for running the world. The U.S. sees further. The U.S. knows better. Everybody in the world in the end of the day wants to be a liberal Democrat. It's our responsibility to let them find that outcome. Before 1941, and certainly before 1898, American exceptionalism was exactly the opposite. It was a justification for running away from the world because Americans believed that even though they had an obligation to share their experiment with others, they would do so only through the power of their example. And the fear was that anything more (16/33)
ambitious than playing the role of exemplar would threaten that experiment itself. One because early Americans were terrified of domestic tyranny and they feared that if we aspired to be a great power, we'd have an overweening federal government, large military establishments, high taxation, and that our ambition abroad would come at the expense of our liberty at home. And that in many respects was one of the guiding lights. Another part of the narrative that's very important here, and again it is, I think, captured by the notion of exceptionalism, is that the United States is going to defend not just liberty at home but liberty abroad. Does not want to be entangled. Does not want to let other countries tell it what to do. And I'll just give you two quick historical examples to demonstrate the degree to which isolationism and this unilateralist impulse were very difficult to disentangle. In 1778, we were losing the Revolutionary War. And even though the founders were reluctant to look (17/33)
to others for help, they reached out to the French because they were afraid that if they didn't find an ally, the war would fail. And the States would remain under the tutelage of the British Empire. The French say yes, they come across and may help us defeat the British, and lo and behold the United States is born as an independent country. In 1793, Britain and France go to war again, and the French say to the United States, you are our ally. We took your chestnuts out of the fire in the Revolutionary War. Now it's your turn to come help us. What does George Washington do? He issues a proclamation of neutrality in which he basically says to the French, good night and good luck. You're on your own. This was a bald act of infidelity. That alliance was on the books. The French were right that they bailed us out and they expected us to do the same. When Washington reneged on the French alliance, it was the last alliance that the United States had until after World War II. That gives you (18/33)
some sense of how averse successive administrations were to tying American foreign policy to others. Do you think Washington would have terminated the alliance had the French monarch not been toppled? No, basically no. The issue was that Washington along with just about everyone else did not believe it was in the interests of the United States to get involved in another war with Britain, simply put. The other example is from Woodrow Wilson that we have in 1898 the turning point in which the narrative of American exceptionalism shifts and Admiral Mahon, Teddy Roosevelt, a historian named Frederick Jackson Turner. They all argue that the United States has made it to the Pacific, that the frontier has closed, and that if the United States is going to maintain its exceptional character, it must take manifest destiny abroad. It's time to go global. That leads to the Spanish-American war and also World War I, both of which the United States won. Interestingly, despite the success, Woodrow (19/33)
Wilson then tries to guide the United States into the League of Nations, a body that would commit the United States to play a role abroad moving forward. What happens? He goes down in flames. The Senate voted three times on the League of Nations, all three times it voted no. Then Wilson says, well, the problem is that there are unilateralists and isolationists in the Republican Party, so I'm going to take my case to the American people. He said the 1920 election is a referendum on American internationalism. The Democratic candidate, James Cox, was in the Wilsonian camp. The Republican candidate, Senator Warren Harding, said, make my day. I stand for the policies of George Washington. I stand against foreign entanglement. What happened in that election? Warren Harding won in one of the most lopsided elections in American history. So basically, you go through this interregnum of internationalism from 1898 to 1919, and then the American people say, hey, we need this like a hole in the (20/33)
head. That sets the stage for the stubborn isolationism that you see in the 20s and the 30s. One of the things that came to mind while you were talking about Woodrow Wilson and the League of Nations, which came after World War I, which is that certainly the experience of fighting two World Wars must have driven some percentage of the country towards being more isolationist. But then I also thought about the Vietnam War and that the reaction to that war was not so much isolationism, but rather an increased levels of pacifism. So how do we think about isolationism as it relates to things like pacifism, like the desire not to engage in foreign wars, but not a desire to pull away from the world? And why did, let's say, the reaction to Vietnam elicit one, but not the other? Well, pacifism was part of the isolationist narrative from the get-go, particularly in New England, where you had a lot of religious communities who did not believe in the use of force. And they opposed the Revolutionary (21/33)
War, they opposed the War of 1812, they opposed the Mexican-American War. Thoreau famously went to jail in opposition to the Mexican-American War because he said he wasn't going to pay taxes to support a bloody act of aggression. But I would say that over the course of American history of the various elements that we've been talking about, the exceptionalist narrative, manifest destiny, race, liberty and unilateralism, pacifism is probably the least influential. And that's part because even though there were large pacifist communities in New England, much of the country was not pacifist. And as a consequence, even though you had by the 1820s an American peace society, you didn't really see a strong movement. The one exception would be after the Spanish-American War, when the United States takes a whole lot of territories from Spain, including the Philippines, and we end up with a very difficult insurgency in the Philippines against the American occupation. Some 4,000 American soldiers (22/33)
died, hundreds of thousands of Filipinos died. That's when you begin to see a strong pacifist movement that digs in right up interwar period. And one of the factors that led to the defeat of the League of Nations as we were talking about is this unusual alliance between the pacifist left and the libertarian right. Interesting that we're beginning to see that kind of coalition come back today, but we can get to that later. In regard to the Vietnam War, there was a pacifist movement and there also was a stepping away, but I wouldn't call it isolationism, I would call it retrenchment. Richard Nixon put forth what was called the Guam Doctrine, which was, we will let our partners abroad do the fighting for themselves. And that led to the Vietnamization of the war and the US essentially ending the fighting. But I think it's safe to say that after the Cold War, isolationists were never really able to get a foothold. There was a push at the end of the 1950s because of the Korean War, because (23/33)
Truman decided that he was going to send several divisions, army divisions to Europe. There was a push to try to get isolationism back in the game, but that really died out by 1953 and 1954. And after that point, isolationism was essentially in the same place that internationalism had been before World War II. That is to say, it was really at the margins of American politics. Do you think that if the Soviet threat had not emerged after the end of the Second World War, that American politics would have allowed the sort of expansion of military power that we saw during the course of the Cold War? In other words, could the United States, from its place where it was culturally and politically in 1945, could it have seized a unipolar moment like it attempted to seize in 1991 in the absence of the Soviet Union? What Americans stood for that? It's an interesting counterfactual. And in some respects, the answer is that there was a sea change in American attitudes toward the world that took (24/33)
place during World War II that was irreversible. And I would point out that in 1945, before the Soviet threat emerged, the Senate passed the United Nations, the post-World War II order, the Bretton Woods institutions. And what you witness there is that the coming to life of the bipartisan center with Republicans and Democrats together buying into a large peacetime presence abroad to help keep the peace. And this was in part because this exceptionalist narrative had in fact gone global. And the Roosevelt era had basically taken the realest bent of the War of 1898, combined it with the Wilsonian idealism of World War I and created this amalgam of what we call liberal internationalism. Now that having been said, if you look at what was happening in the mid 1940s after the end of the war, there was a clear downsizing of the defense budget. There was demobilization. And then once the communist threat starts to emerge, Truman actually has to scare Americans into taking it seriously. This was (25/33)
the Truman doctrine when he was asking for assistance to Greece and Turkey to prevent the spread of communism. So yes, there are signs that the U.S. was settling back towards disengagement, but that was stopped in its tracks by the Soviet threat. And the Soviet threat also played an important role in silencing the libertarian right because the America first movement during the interwar period, a lot of those people were hardcore right wing libertarians, American nationalists. What happened once the Soviet threat came along was that anti-communism trumped anti-internationalism and it trumped this hard right libertarian sentiment. So that's when you get the John Birch Society and these other kind of libertarian leaning and I would say somewhat racist and anti-Semitic groups becoming internationalists. They weren't multilaterals. They didn't like the UN. They didn't like alliances, but they were ready to send American soldiers abroad because they thought that the real threat was (26/33)
communism. The communism became the unifying force. Here's another thought experiment. Do you believe that the United States could have entered either World War without a cataclysmic event like Pearl Harbor or the sinking of American ships by the Germans? Could we have entered either one of those wars without something like that? Is that how powerful the isolationist impulse is? Yes. Those are good examples in the sense that Wilson is remembered as this idealist World War I League of Nations, but from 1914 to 1917, he was a hardcore isolationist outside the Western Hemisphere. One of the interesting things about Wilson is that he was an imperialist and an interventionist in Latin America and the Caribbean. That started in 1898 and it continued right through the 1930s. Some would argue right through to today, but when it came to commitments outside the Western Hemisphere and in particular to inserting the United States into World War I, Wilson was, we don't have a dog in this fight. I (27/33)
see moral equivalents in the Germans and the French and the Brits. This is a garden variety war basically for money and greed. We're staying out of it. All the isolationist tropes that guided American statecraft in the 19th century, they were alive and well in the Wilson administration until 1917. When Imperial Germany starts sinking boats, American ships that are crossing the Atlantic to do business because the United States believed that neutrality meant the ability to continue to trade with belligerence, but Germany said, nope, we're not going to let that happen. That's when Wilson says, we're going to go to war. He does so very much as an idealist. I would urge your listeners to get on the internet and go read his request to Congress for a declaration of war in April 1917. It's remarkable. It is all about principles and rights and saving the world for democracy. There's not a word about the national interest and in part that's what got him into trouble. He was too idealist. He said (28/33)
this is a fight for American values. Ultimately, when your sons are dying in the trenches, you want to know that it's more than a fight for American values. The same would go for World War II, Demetrius. Especially when I began to dig into the 1930s, I was quite surprised by the public image of Roosevelt that exists today in the sense that, yes, he was a great wartime hero. He pulled off the new deal. Over the course of the 1930s, he was right in the midst of the isolationist mainstream, guiding one piece of neutrality law after another. This was real tight neutrality. This basically said that the United States could do no business with any belligerent because we don't want to run the risk that what took us into World War I would happen again. He then changes his mind in 1939 after the fall of most of Western Europe. He does so because he thinks that if the Nazis succeed in taking Britain, they will be powerful enough to come to the Western Hemisphere. That's when he convinces Congress (29/33)
to go ahead with what's called cash and carry, which is that belligerents could bring their own ships and pay in cash and buy goods from the United States. Then he goes ahead with the Lend-Lease program in 1941 where the United States starts giving ships and aircraft and other material to the victims of both Japanese and German aggression. This is important. When he sold cash and carry and when he sold Lend-Lease to the Congress and to the American people, he said, I am doing this to keep us out of the war. I am doing this so that we don't have to go fight, but we will empower those people who are fighting for themselves. Even though that was his position, the America First Committee fought him doggedly because they believed that if we were supplying those that were fighting on the Allied side, we would eventually find ourselves at war. That is in fact what happened. Had it not been for Pearl Harbor, it's really quite questionable whether the United States would have entered World War (30/33)
II. I want to move the second part of our conversation into the overtime, Professor. I'd like to actually spend most of that time applying the lessons of America's isolation as past to today. You write in the book that you make a case for what you call strategic retrenchment, which is I guess is a more thoughtful approach to isolationism. That's one way to maybe put it. I've been thinking, I mentioned to you before we turn on the microphone that I spent the morning rereading parts of Barbara Tuckman's book, The Guns of August. I've been thinking a lot more and more in the last few months about comparisons between the present time and both the pre-World War I era as well as the interwar period. I think there are commonalities and there are differences. Some of those came up for me when I was reading your book because, well, it speaks directly to the issue of internationalism or isolationism. I'd like to delve into that dimension as well and also given how close we are to the November (31/33)
election, I think a discussion about the candidates, their platforms and the implications of either a Biden or Trump presidency would also be worth discussing. For regular listeners, you know the drill. If you're new to the program, Hidden Forces is listener supported. If you want access to the second part of my conversation with Professor Kupchen as well as to the transcripts and rundowns to this episode and every other episode we've ever done, head over to patreon.com slash Hidden Forces. There's also a link in the summary page to this episode with instructions on how to connect the overtime feed to your phone so you can listen to these extra conversations just like you listen to the regular podcast. Professor, stick around. We're going to move the second part of our conversation into the overtime. This episode of Hidden Forces was recorded in New York City. For more information about this week's episode or if you want easy access to related programming, visit our website at (32/33)
hiddenforces.io and subscribe to our free email list. If you want access to overtime segments, episode transcripts and show rundowns full of links and detailed information related to each and every episode, check out our premium subscription available through the Hidden Forces website or through our Patreon page at patreon.com slash Hidden Forces. Today's episode was produced by me and edited by Stylianos Nicolaou. For more episodes, you can check out our website at hiddenforces.io. Join the conversation at Facebook, Twitter and Instagram at Hidden Forces Pod or send me an email at dk at hiddenforces.io. As always, thanks for listening. We'll see you next week. (33/33)
happens when you eviscerate a sector is they start to run down their deposits and they start to disappear. And when a bank loses deposits, they have to sell assets. And when the Fed is raising interest rates, your assets aren't worth as much as they used to be. So that's sort of the story. SVBs is similar, except they're much, much bigger. Top 20s bank by asset size in the US, they were banking the tech sector, they're banking Silicon Valley, as the name says. And so as venture capitalists have sort of seen their investment sour, cash burn goes up, they're basically forced into an asset sale. And the thing about banking crises is, and part of why they happen so fast is nobody, there's not really an incentive to be that concerned about banks failing most of the time. There's not an incentive to dig deep into their asset book. We don't even know what the asset book looks like most of the time. It's really the burn of deposits that caused us to look at their asset book and go, holy cow, (6/36)
What's up everybody? My name is Demetri Kofinas and you're listening to Hidden Forces, a podcast that inspires investors, entrepreneurs, and everyday citizens to challenge consensus narratives and to learn how to think critically about the systems of power shaping our world. My guest in this episode of Hidden Forces is Stephen Kelly. Stephen is a senior research associate at the Yale program on financial stability whose work focuses on financial crises and how to fight them. And he occasionally releases research notes on his sub-stack at withoutwarning.substack.com. This conversation was recorded on the morning of Monday, March 13th, less than 24 hours after the Federal Reserve, the Treasury Department, and the FDIC came out with a joint statement assuring depositors at Silicon Valley Bank and Signature Bank that all of their deposits would be fully protected irrespective of whether or not they exceeded the FDIC's $250,000 deposit limit. While this stems the immediate fears of a bank (1/36)
run, the manner in which this was done creates further complications for the Fed and raises more questions than it answers about the direction of monetary policy. My goal in today's conversation has been to recap what has happened thus far, why it happened, how it happened, what the government's response has been, and the implications of that response for monetary policy, financial markets, and the economy. You can find related podcasts to this one on this week's episode page at hiddenforces.io, where you can also access our premium content, including transcripts, intelligence reports, and key takeaway videos by joining one of our three content tiers. All subscribers gain access to our premium feed, which you can listen to using your favorite podcast app, just like you're listening to this episode right now. If you want to join in on the conversation and become a member of the Hidden Forces Genius Community, which includes Q&A calls with guests, access to special research and analysis, (2/36)
in-person events, and dinners, you can also do that on our subscriber page. And if you still have questions, feel free to send an email to info at hiddenforces.io, and I or someone from our team will get right back to you. And with that, please enjoy this incredibly timely conversation with my guest, Stephen Kelly. Stephen Kelly, welcome to Hidden Forces. Thanks, great to be here. It's great having you on, man. So before we get into today's conversation, I'd love for you to tell me a little bit about you, your background, and how you got interested in studying issues of bank regulation and financial stability. Yeah, so really cut my teeth on the global financial crisis working afterwards in capital management, and then moved over to the Yale Program on Financial Stability, where I am now inside the Yale School of Management. And we were born in the aftermath of 2008 to really focus on having a modern break the glass playbook to fight financial crises. You know, Tim Geithner was our (3/36)
founder, and he, of all people, knows how much cost there is to wander around in the dark in crisis time, how costly it can be to lose even an hour, let alone a day or a month, trying to figure things out. So we are focused primarily on crisis fighting, whereas a lot of the world is focused on crisis prevention. We sort of have the political freedom to focus on the fighting measures. So COVID obviously took up a lot of our time, and aside from that, we do a lot of historical research and things like that. So yeah, that's my background here, focused on financial crisis fighting, which unfortunately has become newly relevant. Yeah, exactly. We're told that we weren't going to have to worry about this. We had Dodd-Frank, we had Basel III, we went through a whole financial crisis in 2008, so we wouldn't get back here, and yet we're here. So what I would like to do is do a recap at the very top of what's happened thus far, why it happened, how it happened, and what the government response (4/36)
has been and the implications of that government response, because we're recording this on Monday morning, and so the government announced late Sunday evening that it would make depositors whole at both Signature Bank and Silicon Valley Bank. So what happened here, and what are the origins of what is now the second biggest bank failure in U.S. history after the collapse of Washington Mutual in 2008? Yeah, so these banks basically had business models that were focused on sort of bubbly industries, I guess. So as the Fed has moved us away from a world of zero interest rates to fight inflation, certain industries have come under more pressure than others, crypto being the first to go, obviously a very speculative sort of investment environment. So to the extent you can get interest rates in the real world, you sort of get less interested in what's going on in crypto. So Signature and Silvergate were big crypto banks, they sort of bet the house on banking the crypto sector. And what (5/36)
they have a bunch of unrealized losses. And then the run was on. So they lost $42 billion in deposits in one day last week, and then the FDIC shut them down on Friday. One of the things that's really interesting about the liquidity crunch that Silicon Valley experienced is that in some very important ways, it is very different from what we had in 2008, where we had a systemic crisis of confidence in the banking system, driven by illiquidity and what we're called collateralized debt obligations or CDOs made up primarily of risky mortgages that caused a run on investment banks and money market funds and in the case of AIG insurance companies. What we have in the case of Silicon Valley Bank is a situation where they loaded up on the most pristine high quality collateral like US Treasury securities, but they did so when rates were much lower. And because the duration on much of that portfolio was long, the valuation on those securities got crushed over the last year as the Fed embarked on (7/36)
this very steep tightening cycle. I think it would be extremely helpful if you could walk us through your understanding of how the bank got here and the role played not only by their portfolio management and this duration mismatch, but also what we know about how the run happened, which as I understand it, was driven by the bank's need to raise capital and because of the very concentrated deposit base, venture funds in the valley and their companies caught wind of this and they basically had a bank run. Sure. And a lot of this information is still coming out in real time. And that's another thing that made me to note up front is sort of the nature of when a bank fails and it becomes a crisis or the nature of banking crises is you do these ex post investigations and it looks like a lot of fraud, it looks like a lot of mismanagement. And those things are true, it's just worth noting that those things go on every day in the banking sector and they don't cause bank failures because we (8/36)
don't know about them because we're not investigating them. So, just something to keep in mind as the news drip keeps coming that not everything that this bank messed up doing is the reason it failed. There are simpler business model flaws that are the reason it failed, but we're going to find out more about all the management failures and who messed up where. But that being said, go back to the question. Yeah, the SVB had basically a bunch of interest rate risk that they had short term deposits, they have long term assets, it's sort of the core banking risk. They failed to hedge interest rates using derivatives or anything else like that relative to their competitors. And so basically, as the Fed starts raising interest rates, the valuations on those assets of lower interest rates start to go down and SVB had a bunch of unrealized losses, which again, weren't crucial until they started losing funding. And then you can think of the marginal funder of the bank who wants to fund a bank (9/36)
that's sitting on a bunch of losses they have yet to realize. So that's sort of the story there. That's sort of the sequence of events that it really was the liability book that started disappear and then the world kind of woke up to how bad their assets were. So you've raised an interesting point which has to do with hedging interest rate risk. One of the things that's come out is that there's this distinction between hold to maturity securities and available for sale securities. And the bank made a decision, I guess in 2021 to move a significant portion of their US Treasury and MBS positions into the hold to maturity part of the portfolio, which meant that they, from what I understand, were not able to hedge interest rate risk. In other words, the decision that put them in this situation happened a year or two years ago. Can you clarify that for our listeners, what that distinction is and why it's relevant? Yeah. So basically a bank can account for assets in three ways. One is (10/36)
trading. Two is what's sort of this middle ground that we call available for sale and three is held to maturity. And your accountants are going to make you hold assets for what you actually intend to do with them. So if you're running a trading book, you're going to be in and out in a day, your accountants are going to make you classify that as trading. Available for sale is sort of like a yellow light. We have these assets, if the price is right, we'll sell them, but we're not going to be out of them tomorrow just because. And then held to maturity is exactly what it sounds like. We're holding these assets until they pay off at maturity. And they're accounted for in different ways. Trading assets flow right into the income statement. They affect your capital directly. Available for sale securities, they don't have to be reflected in earnings, but you basically sit on unrealized losses. And held to maturity securities, you can value at cost and they sort of, they amortize over time. So (11/36)
the advantage is in theory, you don't have to report changes on your balance sheet to your held to maturity assets. So it sort of reduces volatility and what you report in your financial statements. You don't mark the assets to market. You certainly don't mark them to market and the changes don't affect your capital. They don't affect your earnings. It's like reverse depreciation over time. And if you say you have a bunch of treasuries in held to maturity, the market can see, okay, rates went up 5%. The market has a sense of how to value that. But it does, your accountants are going to limit what you can do. They can still be hedged. All this can be hedged, but it just, in theory, it affects the accounting. I don't know how much that was really at play because you can have unrealized losses in both categories. And the market's going to be aware of it, especially when it's treasuries. And you can sell stuff out of your held to maturity book, but then your accountants are going to make (12/36)
you reclassify it and you're going to have to book that unrealized loss. So I want to ask this question in a different way or a different aspect of the same overall phenomenon that we're dealing with here. Are we underestimating the risk of bank failures because we've defined risk based on liquidity coverage ratios that rely on, or see US treasuries and things like MBS as very safe collateral, but because the Fed has been hiking interest rates so quickly that there is this duration mismatch. And so this might also bring us into a question about what the government has done in its response and whether it resolves this problem. Yeah, I think that's right. We've sort of built up the post 2008 system on this precept that treasuries and MBS are, particularly treasuries, are rock solid, both from a credit and liquidity perspective. And that's sort of unavoidable. I mean, we wrote it into law in particular post 2008, but it was always the de facto case. I mean, it's just how banks manage (13/36)
liquidity is how the government thought about these markets. The Treasury market underwrites the whole global economy. Every interest rate is based off what's going on the Treasury market. There's just no way around it. So yeah, I think that does lead nicely into what we saw from the Federal Reserve response, which is basically to think about the losses on the, to basically underwrite losses in these markets. And this is a theme we see again and again, and started in a big way with quantitative easing in 2008, which is just mass purchases of Treasury securities. These markets are essential and they're all the more essential when you write a system of laws that sort of depends on their continued stability. So yeah, I don't think that we're necessarily overconfident or underconfident. It's the Fed's job to underwrite this system going forward. So what prompted this conversation, Stephen, was that you put out a thread over the weekend throwing cold water on the idea that the government (14/36)
can just bail out SVB, Silicon Valley Bank, without legislation from Congress. You wrote that crisis fighters authorities were curtailed following 2008. The Fed and Treasury almost certainly can't rescue SVB now. Maybe the FDIC can. How did the government justify this bailout? And what was it about the way that they did it that took you so by surprise? I would say not much of it took me by surprise, aside from maybe the fact that they did it. I mean, I was maybe on the edge of that, but that's exactly what happened is the FDIC stepped in and rescued the uninsured depositors. But SVB is still, you know, it's in receivership. It's on the way out. It's, you know, the FDIC is selling the assets. It's going to sell the business. So what I'm getting is that they identified it as a systemic risk. And your tweet thread, you made a point that you thought that they wouldn't do that because it didn't represent a systemic risk. And many other analysts have said the same thing, that it didn't (15/36)
represent a systemic risk, but they labeled it a systemic risk nonetheless. And what I'm actually interested in, well, there are a lot of things I'm interested in, but one of them is I want to understand how do they justify this? Because one of the things that I learned in the 2008 financial crisis was that when push comes to shove, the government can do anything. And one of the things that I've learned to try to understand is how do they justify the things that they do? So I'm curious to understand legally, how do they justify this? How did this fall within their regulatory purview? Yeah. And the first thing I'll say is maybe to push back on some of the critique that the Fed will bend its laws as necessary in a crisis. They do take this very seriously. And, you know, so I was thinking in advance of this, okay, if the Fed is willing to call this systemic, because the Fed has to sign off on the FDIC's use of the systemic risk exception. And so if the Fed signs off on that, then they (16/36)
really see this as systemic. And part of this decision, I think, is justified from a risk management perspective. As I noted, you know, Dodd-Frank took away a lot of crisis fighting and responsibilities. The crisis response, while largely successful in 2008, was really unpopular. And Dodd-Frank and Tarp, for that matter, took away a lot of crisis fighting authorities. And so authorities today are left with very few powers to intervene outside of banks that are already in receivership. So in 2008, we did mass bank debt guarantees. We did these huge interventions for Citigroup, for Bank of America, open bank assistance. And most of that is no longer legal. So for the Fed, the FDIC, the Treasury, to take over SVB and put in the systemic risk exception, write a new program, you know, for the Fed to backstop liquidity writ large, it's a smart risk management play to say, look, this thing isn't systemic. But once something is systemic, we no longer have the tools. It'll be too late. We no (17/36)
longer have the tools to stop this. We're not going to wait until the next bank, whether it's called US Bank, called PNC, some bigger bank, some more systemic bank is already in receivership. So what are the important details of the government's rescue that are relevant here, that we should focus on and try to understand? So the biggest thing is the FDIC is standing behind uninsured depositors in SVB and in signature, both banks that it took over. So it used to have authorities to stand behind to basically write such a program for the whole system. It's since lost that authority in the law. But it's taken over these two banks, it's standing behind the uninsured depositors. So that's a big piece. And I think that was the biggest concern. And that was probably their biggest motivation. Shareholders will be wiped out. Management has been removed from these banks. Unsecured bondholders will get some sort of share of their investment, but that remains to be seen in liquidation. So that's (18/36)
the big piece for the FDIC and the banks they took over. The Fed has also backstopped the banking system writ large with a new term lending program. So they're lending for up to a year against basically the face value of treasury securities and MBS. So they're sort of saying, okay, we know we've done a lot of interest rate increases, which have destroyed the value of treasury. I mean, anything, basically all financial assets are priced off interest rates, but we're going to at least stand behind agency debt, which is de facto guaranteed by the US government and treasuries. And we're going to value them at par, at face value, and we'll lend to you against those. So they've sort of underwritten this interest rate risk. They haven't underwritten what started at Silicon Valley Bank, which was problems in the tech sector and that kind of run. But they've said, look, if problems migrate to the asset book, we will stand behind it. That seems like, if not a big story, the big story here. (19/36)
Absolutely. Absolutely. I mean, not only a rebuke of, mark to market accounting or market value accounting, but also of just risk. I mean, this is risky, you know, on its face for the Fed. Like these securities are going to pay off. There's not credit risk to these securities that the Fed might take. But to have 0% haircuts on long-term assets to do a one-year program and basically ignore even the market value of these assets and lend against par, I mean, you could have a 30-year treasury trading at 80 cents on the dollar and get 100 cents from the Fed for it. That's new. That's different. I mean, that's a watershed. You know, in moments like this, I feel the impulse to say an unhedged, very non-nuance statement like the system is insolvent. You know, obviously the system is not insolvent, if you want to take that to the limit. But what we just seem to be doing is moving closer, more and more towards the government and the central banks taking more and more control of the financial (20/36)
system, because there's so much debt in the system and it's so levered that it cannot function in the way that our frameworks have tell us that it does. Because this isn't 1980 or 1970 or 1960 or 1990. It's 2023 and a lot of stuff is broken in the interim. And the Fed has come up with a lot of patchwork solutions in the process. And here we had, Dodd-Frank, we had years of re-regulation of the banking system post-2008 expressly for the purpose of avoiding this kind of ad hoc solution. And I'm curious, is it a kind of fool's errand to even wonder whether or not this crisis is going to lead to some kind of more formalized regulation? Or is this just an affirmation of the fact that we're in this, this is the world that we're going to live in until there's some kind of larger reset to the system? So I'm going to back up your unhedged statement and say, the banking system is always conditionally insolvent, which is that balance sheets are sort of like a bicycle and that they have to keep (21/36)
functioning, they have to, you have to keep peddling to keep them moving forward, they're going to tip over. And the minute that machine stops, we have these conversations over, oh, let's look and see if they're solvent or not. That doesn't matter. Whether a bank is balance sheet solvent, whether their assets are more their liabilities, is irrelevant if nobody's going to transact with them. That bank is over if it can't go to market and get funding and be there for its customers to do loans. So the system's always conditionally insolvent and that's why we have financial crises and it's why you can regulate these things to death and it's always going to be too much or never enough. Right? I mean, so we have way better regulation. We have stability at the core of the system versus 2008. But the pre-2008 banking model of let's leverage the system, to all hell, like let's run these things as lean as we can, is probably the right thing most of the time. Bank capital, bank equity is a scarce (22/36)
resource and what we want out of the banking system is deposits and loans. So there's an incentive to run the system as lean as possible with as little capital, little liquidity set aside as possible. That being said, you can increase the requirements and I'm sure that's the direction that Congress is going to go, whether that's the right lesson here or not. They're going to tighten the screws on capital and liquidity, particularly amongst big and big-ish banks. That's the last time though. Right. That's exactly the point, is you can turn the screws all the way up until you get to 100% and then you've just told banks they can't be banks anymore. I mean, you can be a place that takes dollar bills and puts them in a cookie jar and you have perfect liquidity and you don't need any capital, but you're no longer a bank. I mean, where are those dollars coming from? You're not creating the money, you're not creating deposits that run the economy. So I'm curious to know where we go from here. (23/36)
One, what are the implications of the Fed's response, not just for the banking system, but also for other parts of the economy? For example, mortgage rates, how are those affected? Silicon Valley Bank has, I think, an MBS portfolio of like $55 billion in the whole to maturity bucket. Do they unwind that? What happens when they do? That's just one example. I mean, I know commercial real estate and real estate in general is so upside down because of these massive rate hikes. The math doesn't work for a lot of these properties. Either rents need to go up or prices on properties need to go down. So I'm curious, again, one, what are the implications of the response? Two, what areas of the economy are most vulnerable that we might be keeping an eye out for? And three, what does this mean or portend for monetary policy? Does this actually enable the Fed to take rates even higher or maintain credit conditions as tight as they are for longer because they're putting one hand on the banking (24/36)
system and maintaining stability or trying to maintain stability while also using rates to contract economic growth and bring down inflation? Is that the strategy here? I think that's exactly right. And I'm going to answer the questions in reverse. I think this has implications for monetary policy to the extent this can effectively put a lid on financial instability. And that remains to be seen. The Fed gets a lot more room on monetary policy. So the Fed's strategy has explicitly been to tighten financial conditions. It wants to use its interest rates to tighten financial conditions, make credit scarcer, take some of the froth out of the system. That's Bennett's explicit goal. The Fed is in a unique position in that it's also responsible for the safety of the banking system. It's a bank supervisor. It's focused on financial stability. So it's in this weird position where it wants to tighten financial conditions and not hurt the safety of banks, basically the core of our financial (25/36)
system. So this really does put kind of a hand on both sides of the scale and is elegant from the Fed's perspective. In that sense, in that this gives them more room, they've underwritten the banking system, they can continue to tighten financial conditions surrounding the banking system. And that goes back to your question about where the vulnerabilities lie. To some extent, those vulnerabilities are what the Fed is trying to wash out of the system. It was trying to wash out the froth in tech. It was trying to wash out crypto. So thinking about where the weaknesses lie, part of this is a policy goal. Part of this is exactly what the Fed's trying to do when you see a bankruptcy at a thinly capitalized mortgage lender. That's not a policy failure from the Fed's view. But once you start talking about a bank failure, this gets a little dicey here and the Fed has sort of a mixed set of responsibilities. So I would encourage listeners to go back and listen to episode 243 with Russell Napier (26/36)
because I think Russell has nailed what I think is actually the path here. And this confirms that, which is to say that there's going to be credit rationing because there's just kind of no way around it. And that's what we're seeing here, because raising rates on the one hand and creating lending facilities on the other is a way of making choices about where money goes, at what price, who gets it, how. And like you said, the official mandates of the Fed are inflation fighting and maintaining, balancing inflation and employment. But there's also financial stability and actually financial stability, the unstated one is actually, I would say the priority. The second is inflation. The third is employment. And once we get down the stack to employment, now I'm opining here, but I'm curious to hear what you have to say. I think that we eventually get to a place where the government begins to enact fiscal transfers or fiscal subsidies, whether it's to particular parts of the economy, to labor, (27/36)
et cetera. And then we get into a really discombobulated place where the Fed is trying to run monetary policy at the same time maintaining credit facilities to prevent financial stability. And then you have the government, which is motivated, or the fiscal side of the government, which is motivated by stronger political pressures, trying to maintain political stability. Everything's kind of at each other at cross directions here. Yeah, no. And that's certainly a risk. And we sort of saw this where, especially when inflation started roaring, some countries were sending out checks to citizens to help them bear the cost of inflation. And you can imagine how that immediately would make inflation worse. So these things are always at crossroads. And this is sort of an evergreen problem, especially between the fiscal and monetary authority. I mean, there are other examples too, where the Fed goes out and buys long-term treasuries because it's engaging in QE, not currently, but that's a common (28/36)
recession response. And how does the treasury respond? It goes, oh, hey, look, why don't we issue a whole bunch of long-term debt because now we have a new buyer at that end of the curve. And our responsibility is to minimize interest rate costs. And so you sort of have the Fed and treasury, the fiscal authority, the monetary authority working at cross purposes. And we could see that. I mean, right now we're seeing the Fed battle with itself between financial stability and price stability, which is not without historical precedent. They've done this sort of thing before, maybe not as newsworthy of fashion, but these tensions come up and the Fed's financial stability tools are there for hawkish times too, not just dovish recession times. So we don't remember this as well because the playbook has been the same since 2008, cut rates by trillions of dollars of assets and then do these credit facilities. We did that in 2008. We did it in 2020. But we can do these things when rates are high (29/36)
too. I mean, we can think about inflation as very much akin to the Fed has hit the zero lower bound on interest rates. That's where we were in 2008 and 2020. The Fed couldn't cut rates. Now we're sort of in a world where the Fed won't cut rates. And so as stuff starts to break, the Fed needs to intervene and sort of target specific markets that it wants to maintain. In this case, it's the banking system. So we'll see these tensions go forward. I'm not as worried that we'll start to get fiscal transfers, but I'm not a political T. U. Lee Freider and that's certainly possible. They got to figure out the debt ceiling first, I guess, but after that. So I'm going to kind of further enunciate what I was talking about before and I'm curious to get your take on it. I feel like the government has two major problems right now. One is inflation, which falls within the Fed's mandate. And the other is this wealth gap problem, this long-term disequilibrium in society that's leaking into our politics (30/36)
and creating a lot of political instability. And I've always felt that one way or the other, the government's going to have to find a way to address that. And ironically, if you want to talk about cross purposes, the pandemic response began to address that, but it caused inflation. And so the Fed is responding to that inflation with higher rates, which causes higher levels of unemployment and instability. Now they're trying to get their hands on the instability portion, but that still doesn't solve the problem of employment. And that's where I feel like once employment gets out of control, assuming that it does, assuming that it's an assumption, but there's a good reason to make it, that these credit conditions are going to have a really serious effect on the economy and the long and variable lags aspect of monetary policy is going to show up at some point, maybe later this year. At that point, do you see, I mean, maybe I kind of asked this, but I'm trying to enunciate it more clearly, (31/36)
do you see that this is eventually where we go and how does that work from a policy perspective? I mean, have you considered that? I know it falls kind of, I don't think it's a conspiracy, I don't think it falls within the conspiracy bucket, but it does fall within the kind of creative, maybe you don't want to say this if you're like a professional working in academia type question. Well, that's the beauty of academia is, I can say the sky is green and get a promotion. But I mean, I just want to hedge this, you know, my work is financial stability, and this is a little bit of a long-term structural growth question. But yeah, I think one thing that maybe the Fed would be more comfortable with, and we sort of learned this lesson in 2008, is that if we really hit an employment rough patch and a financial stability rough patch down the line and inflation has not yet fallen, I think that would test the Fed to resolve. And the Fed, you know, I'm less confident that we would be stuck in a (32/36)
world where the financial system was breaking or fragile, unemployment was high, and inflation was continuing. I mean, that's certainly not impossible, but I think the Fed would see itself as sort of, you know, having gone too far, you can call it long and variable legs. And maybe just to go back to the genesis of this conversation, I think SVB is probably at the margin making the Fed think harder about the long and variable legs and sort of where things are breaking. You know, the Fed has had a sense, especially in recent weeks and months, that it's not as far along in the hiking processes as it thought it was. And to me, the Silicon Valley Bank situation says the opposite, that maybe the Fed is actually a little further along, and things are a little more fragile than they realize. So, you know, we're seeing some great resets in the market already, and the Fed has a meeting, we're recording this on the 13th, the Fed has a meeting in eight days, they'll make a decision in nine days. (33/36)
And so, you know, we'll see what comes from that. People were talking 50 basis points, and now a lot of banks are moving towards zero. So, again, we may already see. What do you think? I don't know, I don't think the Fed wants to ease off. 25 seems reasonable to me, but, you know, we'll get a sense of where the Fed is thinking about how financial stability is impacting employment and inflation longer term, even though we haven't seen it. And so, maybe these tensions will start to play slash ease out already next week. Yeah, maybe we should get Nick Timmerios back on the podcast, and he can spill the beans for us. So, major takeaways are deposits are safe at regional banks. I mean, I think that's a fair assumption out of May going forward, people have their deposits. That doesn't mean keep your deposits there, this is not financial advice. I'm just saying that's kind of the takeaway. And we're not out of the woods yet. And all eyes on the Fed to see how they respond to this and what the (34/36)
priorities are in terms of monetary policy. Stephen, thank you so much. This was wonderful. If people want to follow you, follow your work, how can they do that? Best thing would be to follow me on Twitter, Stephen Kelly 49. I have a sub stack called Without Warning, free research notes. And then follow the Yale Program on Financial Stability. We have a weekly newsletter. Fantastic. Thank you for this update, Stephen. I really appreciate it. Thanks. Great to be here. If you want to listen in on the rest of today's conversation, head over to hiddenforces.io slash subscribe and join our premium feed. If you want to join in on the conversation and become a member of the Hidden Forces Genius Community, you can also do that through our subscriber page. Today's episode was produced by me and edited by Stylianos Nicolaou. For more episodes, you can check out our website at hiddenforces.io. You can follow me on Twitter at cofinas, and you can email me at info at hiddenforces.io. As always, (35/36)
spent with him, we kind of drove around and he, we stopped at a coffee shop and he said, oh, let's play Scrabble, but he had never played the board game version of it. He had only ever played it on his phone. So he hadn't had to learn the rules. And so every turn he would say, how many letters in the tray? And I'd have to say seven. So, and yet he beat me. He has a much better vocabulary than I have. So that sort of shows you the specificity of this type of memory loss that you have your prior knowledge. You just don't have the ability to make new memories. So I have a question about this. One, how is he emotionally at this point in time? Has he accepted his condition? And is he more or less emotionally grounded in that? And the other question is, because this is something again, that I related with so many of the stories in the book, and Owens in particular. I mean, I did those cognitive tests. They were scary, frustrating. I had an appointment at NYU with a cognitive psychologist (23/37)
What's up, everybody? My name is Dimitri Gafinas, and you're listening to Hidden Forces, a podcast that inspires investors, entrepreneurs, and everyday citizens to challenge consensus narratives and to learn how to think critically about the systems of power shaping our world. My guest in this week's episode is Lauren Aguirre, an award-winning science journalist whose book The Mind Thief tells the story of a team of doctors who through years of investigation discover a surprising connection between the use of opioids, specifically fentanyl, and memory loss. This condition, first discovered in overdose victims with severe damage to their hippocampus, has since led to a series of discoveries about the nature of memory, as well as the mysteries that persist about how we remember, where memories live, how they're formed, and why we forget most of what happens to us in a day but can remember some events with stunning clarity, years, even decades later. Perhaps the greatest mystery that (1/37)
Lauren tackles in her book, however, is why Alzheimer's, a degenerative brain disease responsible for causing dementia and early death, has continued to evade scientific capture despite afflicting tens of millions of people around the world. It's one of the questions we explored during the episode over time, where Lauren also shares information about some of the more promising new strategies and developments that may finally lead to an effective treatment and perhaps even cure of this devastating disease. So without any further ado, please enjoy this week's highly informative and eye-opening conversation with my guest, journalist, and author, Lauren Aguirre. Lauren Aguirre, welcome to Hidden Forces. Hi, Dimitri. I'm happy to be here. It's great having you on, Lauren. So I'm very excited to talk about your book. The title of the book is The Memory Thief and the Secrets Behind How We Remember. What would you say the book is about and what is it about memory specifically that intrigues (2/37)
you so much? Okay, so I'll start with the subject of memory and why it intrigues me. Of course, it intrigues everyone. And as you go around and tell people, hey, I'm writing a book about memory, they say, oh, my memory is terrible. But in this case, I was particularly interested in memory because like you, I have a brain abnormality that I was completely unaware of until I started having these bizarre kind of deja vu moments more and more frequently where it seemed like I had done exactly that thing before, but obviously I hadn't. So that's a trick of memory. But then early one morning, it was much worse. And what happened was it's called ja me vu. So this feeling of dread crept over me. And at the same time, my memories just completely slipped away. So I no longer knew where I was, where in time or even history I was. And most of all, I didn't know who I was. So if you had walked into the room at that moment and said, hey, I'm Dimitri, who are you, I could not have told you. So that (3/37)
was so terrifying that I lay face down on the floor and close my eyes and just hoped it would pass. Unfortunately, it did after a few minutes. So I picked myself up, took myself to the doctor and she said, that sounds like a seizure. You might have a brain tumor. So lots and lots of tests and EEGs and MRIs and consultations. One neurosurgeon said, well, that could be cancerous, we should take it out. But I got a lot of second opinions, because as you can imagine, that that wasn't high on my list was to open up my brain right from the get go. So one of the people I asked for his opinion on it was someone I knew a neurologist named Jed Barish. And he came over to my house and looked at my brain scan. And I have a pretty gnarly looking right front to low, but he looked through it and he said, you know what, you're going to be fine. You should just take your medicine and I think everything's going to be okay. So that was the course I took and he was absolutely right. And the only thing it (4/37)
really left me with was, you know, a fascination for weird brains and a very deep respect for how frightening it is to lose your memory. How did that experience help you in writing this book and in the research that you did beyond simply just giving you an interest in the subject? Did it help that you knew intuitively how bizarre an experience it can be to lose your memory? I think it probably helped. Of course, I can't run the control experiment, but I was possibly much more sensitive to what it feels like to lose your memory in terms of talking to people to whom this happened or to their family members. And the other connection was that Jed Barish, the neurologist who looked at my scan, three years later, saw the first patient who had this strange new brain injury. And what this injury is is sort of like a chemically induced brain injury where people who overdose on fentanyl and only a tiny fraction of people who overdose on fentanyl, which is in and of itself mysterious, for them, (5/37)
fentanyl hones in on the hippocampus and causes severe, severe damage such that when they come to from the overdose, they have what you had, they had enterograde amnesia and they can't remember anything for more than 30 seconds. So, if they're in the hospital, they'll wake up, they'll say, why am I here? And the mother will say, you overdosed and they'll be sad and upset about it. And then they'll forget and 30 seconds later, they'll ask the same question. So, if I remember correctly, Jed Barish was not the first physician in your book to encounter this issue, documented at least. What is the first documented case that we have of patients presenting in hospitals with this type of brain injury? That actually was the first case, but I think what you're referring to is I opened the book with kind of a flash forward in 2018 of a patient who had this happen to him and woke up and none of his doctors knew what it was, even though these patients had been identified starting with that first (6/37)
one in 2012. Right, the patient who had been a heroin user, I think 15 or 20 years ago, is that the patient you're describing? The patient had been, I call him Owen Rivers in the book, just to protect his privacy. He had actually become addicted to drugs starting at the age of 11 when he found some Vicodin in his neighbor's medicine cabinet, sort of classic story that you hear about. And he progressed to more and more drugs and higher and higher, more potent opioids to ultimately to fentanyl. And all the while, he is a very, very unusual story because all the while he grew increasingly concerned about his memory loss to the point of spending hours every day writing down lists of things to do, things he mustn't forget, and also journaling just about his thoughts about the day. And this became really a debilitating obsession for him. He was also very, very intelligent. So despite this really frequent drug use, he went to a prestigious university, he studied the neurobiology of memory, he (7/37)
studied how drugs affect memory. But then finally, he succeeded in being sober for about 18 months. This was several years after he graduated, but it was always hard and the cravings were always there. And then he experienced a seizure, basically an aura. He started smelling things that no one else could smell. So he took himself to the doctor and the doctor said, I think you might have a tumor, let's get an MRI. So he was waiting for the results. There was a first MRI that was suggestive, so he had to go for a second. And he was ecstatic. I mean, I was terrified. But he was ecstatic because this was his ticket to go back to using fentanyl. If there wasn't any fear of letting people down, and that was what was keeping him sober, if he was going to die of cancer, he could go back to it. So he was happy for about two weeks. And then one night, he got an email from his doctor saying, great news, there's no tumor, you're actually fine. And that was such devastating news that he went on (8/37)
Craigslist, found some fentanyl, drove out to get it, came back, used it, and when he woke up, he had this same enterograde amnesia. I mean, obviously that's disturbing on so many levels, one emotionally to have that sort of reaction to what is ostensibly good news. But also to wake up with this kind of brain injury, can you describe for our listeners what we're talking about here, what it is that actually occurs both biologically and then also phenomenologically to individuals that experience this? So phenomenologically, like I said, he wakes up in the hospital, but he, having studied memory, it's much more salient to him. And the doctor knows this. So the doctor says, you overdosed and you damaged your hippocampus. And he says, what my hippocampus and, you know, immediately starts crying because he knows what that means. But then he gets distracted, you know, his doctor wore the same shoes that he wore, and he noticed that and he said, oh, hey, doc, you're wearing Doc Martens. And (9/37)
the doctor's like, yep, I'm wearing Doc Martens. And then he walks around the foot of the bed and comes back into view and, oh, and says, hey, doc, you're wearing Doc Martens. So, you know, that's sort of funny. And actually his family, they sort of laughed about it. But ultimately, it's just such a disassociation from your life. And for him, it becomes hard to maintain relationships because their lives have moved on. So he still remembers everything that happened to him before. But he can't lay down any new memories, because that's what the hippocampus does is it allows you to form new memories. So his best friend might have broken up with his girlfriend and told him that the night before. And he'll go out and have lunch with him and not know and sort of step in it. So he's sort of stuck in this permanent present and can't kind of piece things together. Now, he's still, it's interesting because he still remembers emotions, but he can't attach them to a specific episode or a specific (10/37)
event. And time is really difficult for him. Like on his birthday, he didn't remember how old he was. He had to do the math to figure it out. Yeah, that's, to that point, sort of flesh out for listeners, what you're saying in terms of emotionally is, for example, if someone attacks him on the street, if he were to meet that person again, he may very well feel the emotions associated with that experience and have negative feelings towards that individual, but not understand why or recall the event. That's exactly right. Yeah, he might have some vague sense of it, but he won't be able to put it together in a scene. And this is one of the ideas about what the hippocampus does is it's a scene constructor. So it pulls together the sights, the sounds, the smells, the emotions, the order of things and creates an episode. So there are two ways we can take this conversation. One is that we can take this opportunity to explore a bit more for listeners how it is that we understand that memory (11/37)
works, the role of the hippocampus, where memories are stored, how they're tagged, how they're used and stitched together in a timeline to create a narrative about a story about the past and how the role that all of this plays in our capacity for imagination, which is so powerful and oftentimes underlooked and something that you do discuss in the book. Otherwise, we could continue the conversation around the main story of the book, which is actually trying to figure out who or what the memory thief is, what's causing all of these injuries. So I leave that up to you. Okay. Well, I think we should continue with the memory thief, because if I go into memory, you'll forget where I started, not you, but my listeners. So it won't make as much sense. And I really did try from a narrative perspective, because the field of memory is so vast, to somewhat limit myself to the concepts that would make sense in light of this story. So throughout the book, I go back and forth between this (12/37)
investigation and what we know about how memory works and how we know it and what we know about Alzheimer's disease. So to go back to the investigation, it was 2012 when Jed Barish and other doctors saw this first patient, and they just didn't know what to make of it. They had never seen a brain scan that looked like that, where just the hippocampus showed up as being damaged. And what happens is, when neurons die, the blood flow changes and it can't move through that tissue as well. And so this particular type of MRI picks that up, that the water is not moving as it should. And then that bit of brain tissue will glow. It'll show up bright and the rest of the brain will be like a dark gray. So as Barish described it, it was almost like someone took a page out of his neuroanatomy textbook and outlined just the hippocampus, which is very unusual for just one part of a brain to be damaged. So that was 2012. And the doctors at Leahy in Burlington, where they saw this patient, didn't know (13/37)
what to make of it. And lots of neurologists will see such flukes and kind of filed them away in the back of their minds because they don't know what to make of it. And then a few years later, a construction worker from New Hampshire came in with his wife and mother for answers. He had two months earlier experienced the same sudden amnesia. His family had gone away for the weekend and he was fine when they left. And when they came back, he was just like Owen and just like Max, the 2012 patient. So Barish wasn't, he hadn't yet connected the dots with Max, but he found out that the patient did have a history of heroin use. And when, then when he put the scan in and looked at it, it was exactly the same pattern as Max. So then at that point, you say, okay, it's opioids are the connection, but people have been misusing heroin for many decades. And I'm not seeing cases like this when I go into the literature. So what has changed? And he has epidemiological training. So he thinks about it in (14/37)
that kind of big picture population way. Well, what had changed, especially in Massachusetts is that starting in 2012, fentanyl was making its way into the drug supply. And so people were often taking fentanyl without knowing it. That's still true today. And it's part of what's driving the opioid overdose deaths. So if there were two people, two people isn't a lot, but for him, he thought there's something important here. So he reached out to the CDC and said, you know, we have no way of knowing how many other people there are like this out there. You know, what about putting out a nationwide call for more cases? And they came back and said, you know, it's just two, it could be a coincidence, it could be amnestic shellfish poisoning. There's really not enough to go on here. So then he went to the Department of Public Health in Massachusetts, where the state epidemiologist, Aldi Maria said, wow, that's really interesting. If you find a few more cases, I'll put out a health alert in (15/37)
Massachusetts. So maybe nine or so months later, they did come across two more patients at Leahy, which makes you think it's got to be a fair bit more common because that's just one hospital in Massachusetts. So at that point, they did put out a call to all Massachusetts doctors, and within minutes started getting emails back. Oh, I've seen such a patient, 49 year old male, history of heroin use, complete enterograde amnesia. So they got about 25 reports. Not all of them met the criteria that they laid out, but an additional 10. So that got them an additional 10. So this was a cluster of 14 patients associated with opioid use with this image. All at Leahy. No. So the first four were at Leahy, and then the 10 others were from mostly from the Boston area. So this time the CDC took note and a report was published in the MMWR, Morbidity and Mortality Weekly Report. And that's when the media picked up on it. And that's when I said, hmm, this sounds really interesting. And is there more to (16/37)
it? And it turned out there's a lot more to it. So first of all, how do you find out if your hunch that it's fentanyl is correct? Because ironically enough, none of those 14 tested positive for fentanyl, but that's because they weren't tested for fentanyl, which seems surprising, but it's expensive to test for fentanyl. You have to send it out to another hospital. And many people are taking multiple drugs. They might be taking heroin mixed with fentanyl. So if you do a drug screen for an overdose patient in the hospital, and you get opiates and amphetamines, you're done. You understand why they overdosed, but you don't know if they took fentanyl. And you also don't know, in addition, whether it was one of the other drugs or whether it was some cocktail that led to that outcome. Right. You don't know that. And you also don't know, is it a toxic contaminant and not fentanyl or some other drug? So what they really needed was someone who took fentanyl, for sure, let's start there, and then (17/37)
someone who only took fentanyl. So that took a while to get to, but Barrish stumbled across a neuropsychologist in West Virginia who had seen one of these patients, but chalked it up to amphetamines, because he wasn't tested for fentanyl. So Barrish called him up and said, you know, if you see this again, can you test for fentanyl? So a short time later, in fact, that did happen, and the person was positive for fentanyl, but he was also positive for a handful of other drugs. So another option was to look at the chief medical examiner in Massachusetts at their office, because they do test for fentanyl when someone dies of an overdose. But for complicated reasons, that just didn't seem like an appropriate research project. But then the third option was go back to the Massachusetts doctor community with another alert from the Department of Public Health and say, if you see another such patient, it would be great if you could test for fentanyl. So very quickly, they got four such cases, (18/37)
three of them had other drugs, but one used fentanyl alone. So that was, okay, we know for sure that fentanyl alone can cause this damage, although there was still the lingering question of a toxic contaminant. Exactly. Because it's a street drug who knows what was in it. But then shortly thereafter, a woman in Canada, 63-year-old woman in Canada who was prescribed fentanyl patches for severe pain, used two one night instead of one, and she woke up with this exact same condition. So that pretty much rules out the idea of a contaminant. So I have a question there, which is two patches, I mean, I don't know how much more fentanyl that is than the prescribed dose. It doesn't sound like that much. I mean, certainly, when you compare it to Owen's case, for example, it sounded like in that case, he took way more fentanyl. So I mean, how are they able to distinguish, and let's say in this case, they have one patient, she was an older patient, if I remember correctly, she didn't take anywhere (19/37)
near as much, if I'm not mistaken, as let's say some of these other overdose patients. And granted, we know for sure that there weren't any contaminants, or at the very least, if it was contaminated, it was contaminated from a regulated laboratory. It's still just one patient. So where did the investigation lead from there? What conclusions could they draw, and what additional measures could they take in order to try and gain more confidence around this diagnosis? Right. So to answer your point about the dose, that depends a lot on the person. I don't actually know, you're probably right that Owen took more than she did, but the dose is affected by the person. So if she also hadn't used her fentanyl patches in a while, she then was not tolerant to it. She hadn't built up that tolerance. If I remember correctly, that might have been the case. But in order to dig deeper, obviously, they need more patients. And they are very hard to find for a number of reasons, not least of which is the (20/37)
stigma surrounding people who have substance use disorders, who we often just don't seem to care as much about. But they also, most of these patients had either passed away or disappeared. So you couldn't do follow-up and say, well, what exactly did the damage look like later on, once that initial injury had kind of healed? What was the permanent damage? How did it affect the hippocampus in different ways? How much did it shrink it? And what does their long-term memory impairment look like? So that's where the story of Owen Rivers becomes so important in the investigation. Because he had had an MRI before he overdosed, they knew exactly what his hippocampus looked like then. They had the MRI from the overdose. And he, because he really wanted to make some sort of meaning out of his tragedy, and if not find answers for himself, at least sort of help the investigation, he agreed to go to the Memory and Aging Center at the University of California in San Francisco and participate in (21/37)
research. So there they did these really advanced kind of volumetric studies of his hippocampus and found that it had shrunk by about 10%. It doesn't sound like a lot, but that's as much as a 60-year-old would lose in a decade. And it also sort of shrunk in a, not in a uniform way, which would lead you more to think that it's not something like hypoxia, which many doctors sort of initially, when I described the syndrome, would say, oh, well, they're deprived of oxygen and that's what it is. But that tends to be a more diffuse injury. It wouldn't have that specificity to it. It almost certainly does contribute to the injury. So they learned that about the imaging, and then they also did really advanced neuropsychological testing and found that his episodic memory, so his memory for new events and new information, was on par with someone with advanced Alzheimer's. But the rest of his cognitive function was pretty much intact. I mean, he is very intelligent, as I said, and one day that I (22/37)
there who ran me through a bunch of tests. And it was incredibly frustrating and scary to see just how awful my results were in real time. And I was deeply emotionally disturbed during this time. But the thing that I wanted to ask you also is in addition to how he felt, the thing that I never really understood for myself was I couldn't remember anything, but I could remember that I couldn't remember. So he's able to remember that. How are they able, has anyone been able to provide some answers as to how it is that Owen knows that he has a brain injury and yet can't remember anything after the brain injury, but he can remember that he has a brain injury? Yeah, that's really interesting. I'm not sure I have an answer for that. Maybe that requires an injury that is bigger than the hippocampus. The doctor, the neuropsychologist who found the West Virginia patient told me about a stroke patient that he had. And I think her damage was definitely to the hippocampus, but might have been (24/37)
broader. And for her, it was very, very difficult for him to teach her, why are you here? And that took massive repetition. But once she understood that she had a memory problem, then she was kind of available for, okay, I understand that I need some strategies to have some kind of independence. And so he harnessed a different memory system that does not involve the hippocampus, which is procedural memory, which is things like riding a bike. And through that, he was able to teach her sort of how to move through her house, how to move through the day and take her pills and make her coffee. So yeah, that's a really interesting question as to how he knew, but he definitely knew that he couldn't remember. So as to how he feels now, I asked five people who were prominent in the book to write an essay for the end of it, just to give their perspective on what did this mean to them. And he wrote the most beautiful essay I've reread it so many times, because he describes what it's like and the (25/37)
frustration, but also the irony of he is, he feels he has become sort of like the patient that he used to study, HM, the patient who had his hippocampus removed to treat epilepsy, and that's how they learned, oh, you need your hippocampus to make new memories. So he had studied this patient over and over again to the point where it was sort of annoying. And then he was like, wow, I'm like HM. And that's what he felt like when he got the news of how bad his memory was. But he's also, you know, he says, I wish there had been some sort of more kinder, more gentler way to impart this lesson of having gratitude for what you do have. And so he is just very grateful for his friends and his family and his support and everything that he learned before that he can still use. And strangely enough, the, you know, obsession of list writing and journaling that was so bothersome to him before are now the strategies that he needs to survive. Like if if he had not honed those skills, he would be in (26/37)
much worse shape right now. So he has a job, he takes classes at a community college, you know, and he has a life and it's very different from what he thought it would be, but he's mostly grateful. So you said he takes classes at community college. How does he retain that information? What are the systems that he's developed to be able to actually learn considering that his short term memory has been so badly impaired? Notetaking. So if he doesn't remember, he goes back and looks at his notes. And remember, his hippocampus isn't removed. So it's not like a complete inability to remember things. And it's also some things are harder than others. So like spatial information is completely gone. Like, does that also mean that in abstract terms, he can't distinguish positioning? For example, does he know that Boston is north of New York? Right. I remember you saying that was a problem for you. I never asked him that, but he did, you know, one of his jobs involved working at a senior center (27/37)
and going around on a little cart and collecting quarters from the laundromat. And there was no map. And it was a different route every day. But because of the tools that we have and Google maps and because he's really intelligent, he figured out a system to make that work. So in a way, it doesn't really matter to him whether, you know, Boston is north of New York or not. But he did feel like people at the senior center wondered why he was constantly taking notes. But that's what he needed to do to remember the rules, to remember who was who. Yeah. So I did ask you, and I am curious how he copes with this emotionally. You said he feels gratitude, but is there a heightened, would he say that he's more anxious or would he be described as being more anxious now post injury than he was prior? I don't think so. Because part of what really fed into his substance use disorder was obsessive compulsive disorder. So his, what he refers to as memory hoarding, his list writing and journaling was (28/37)
the manifestation of his OCD, which had been very resistant to treatment. And he also suffered from depression and anxiety. So mental illness is definitely a risk factor for substance use disorders. So after the overdose, he finally got into a program at UCLA, which really helped his symptoms. You know, it's not gone, but it's not kind of an obsession that feels overwhelming. So it seems to me that emotionally, he's in a better place. So where are these researchers currently with this? And what sort of help are they getting from the CDC and national institutions to try and garner a larger data set, a larger cohort of individuals so they can feel more confident about the source of this memory thief, as you call it. Right. So we have a lot of problems in this country to work on health problems. And this really seems sort of like paying a lot of attention to it would be worrying about the arrangement of the deck chairs while the Titanic is going down. So at this point, it's still bearish (29/37)
and a handful of other neurologists and anesthesiologists and radiologists kind of working on their own time saying, how can we investigate this further? How can we move this forward? So they have been in touch with the FDA. The FDA has this kind of listening system where people can go in and post reports about potential adverse reactions, but they're not going to do it about street drugs. That would only happen with pharmaceutical fentanyl. So that's not the best route. There is a surveillance system in Massachusetts that they're trying to look at to just get a sense of prevalence. And they are, you know, one of the ideas to come out of this investigation is, as I said, the dose makes the poison. So we know that fentanyl, which is an incredibly powerful opioid, does this severe damage to the hippocampus? And if you want, if we have time, I can talk about why. But what about lower dose opioids? Are they causing subtle memory impairments that are going under the radar in people who are (30/37)
taking their medicine as prescribed, their opioids, but high dose opioids for long periods for chronic pain? So I'm not talking about someone who, you know, has surgery and takes Vicodin for a few days. This is really ongoing use because there's a lot of anecdotal information and patients complaining like, my memory just isn't working right. So these researchers at UPenn are going to investigate this. Well, that was going to be my next question, which is that fentanyl is used, people might be familiar with this, is used in anesthesia. So the question is, why has that not shown up there? And what does that tell us about how fentanyl could theoretically be impacting people who show up with this like massive injury to their hippocampus? And then, yes, how does this relate to chronic opioid use, not just fentanyl? Right. So the theory about how this damage is caused is based on, so there's two classes of neurons in the brain. And the ones we think about are called excitatory neurons. And (31/37)
they're kind of dumb because they just take in information. And when they get enough, they pass it on to the next neuron. And those make up about 80% of your neurons. But the other 20% are called inhibitory neurons. And they're the real brains of the system because they control the timing and the flow of information. You can't just have signals passing on without any kind of breaks in the system. So they're kind of like the bouncers at the bar. And if you, you know, take them out of the picture, you have chaos. So fentanyl being a really powerful opioid, it binds onto these mu-opioid receptors, which in inhibitory neurons shuts them down. So they can no longer do their job. And also in the context of not having enough oxygen, the hippocampus just can't keep up with the metabolic demands and cells start to die. So, and this is known that fentanyl does this, that it interacts with the mu-opioid receptors in this way. So that's not really a question. Then you have to ask, well, is it (32/37)
purely the lack of oxygen? So an anesthesiologist, actually the same one who's going to do the lower dose opioids question, he did a whole series of experiments with rodents looking at what fentanyl does to the hippocampus. And he kept them intubated. So it wasn't a lack of oxygen. And they had this same damage to the hippocampus. So then you have the animal evidence really backing up what is seen in these amnestic patients. So that's enough of a basis to say, well, is this really relevant to humans? And is our opioids at lower doses and less potent opioids, are they not like removing the bartenders from the bar, but just giving them some drinks so that they're not doing their job as well, and then interfering in the function of the hippocampus. So do we know anything about how opioids interfere with inhibitory neurons? Yes. So they do the opposite of what normally you would think, oh, you put a drug in and it turns on a neuron. Well, it doesn't. It turns these guys off completely. So (33/37)
not just fentanyl. Not just fentanyl. All opioids have this effect, but most opioids are a lot less powerful. So they're not going to shut the whole system down and lead to widespread cell death. But they are going to impair the information processing. The hippocampus is extremely finely tuned. It has an incredibly difficult job to do of pulling together all this information at once. And so that's a tough information processing job. And if you don't have your gatekeepers and your neurons that are saying, turn off, turn on, don't go, the memory encoding just doesn't work as well. So Lauren, I'm going to move the second part of our conversation into the overtime. In your book, you mentioned Alzheimer's, which represents, I believe, roughly two-thirds of all dementia cases in the United States. So it's a devastating illness. And of course, everyone as they get older, they lose memory function over time. So this is something obviously that concerns everyone in one way or another. And I (34/37)
absolutely want to talk about that because I think it's interesting what you've written about and also how this study and this science and this story relates to that. I would also like to discuss strategies and tools and developments as they relate to memory and what we've learned about how we can actually strengthen memory, not just if we have memory problems preexisting, but also as we get older. Because what I've learned over the years is that we absolutely bearing extreme cases of lobotomies or cases where people have massive injuries to the brain, we can absolutely impact our memory and our memories can get better and they can also degrade. And something you don't talk about in the book, but I'd be curious to ask you as well in the overtime is if you've seen any studies that look at how technology, particularly the types of technologies that allow us to offload all sorts of daily tasks to computers, whether it is GPS, whether it is memory related tasks, degrade our memory and (35/37)
degrade certain aspects of how our brains work. So that's what I want to talk about. For anyone who is new to the program, Hidden Forces is listener supported. We don't accept advertisers or commercial sponsors. The entire show is funded from top to bottom by listeners like you. If you want access to the second part of today's conversation with Lauren, as well as the transcripts and rundowns to this episode and every other episode we've ever done, head over to hiddenforces.io and check out our episode library or subscribe directly through our Patreon page at patreon.com. There's also a link in the summary page to this episode with instructions on how to connect the overtime feed to your phone so that you can listen to these extra discussions just like you listen to the regular podcast. Lauren, stick around. We're going to move the second part of our conversation into the subscriber overtime. Okay. Today's episode of Hidden Forces was recorded in New York City. For more information (36/37)
about this week's episode or if you want easy access to related programming, visit our website at hiddenforces.io and subscribe to our free email list. If you want access to overtime segments, episode transcripts and show rundowns full of links and detailed information related to each and every episode, check out our premium subscription available through the Hidden Forces website or through our Patreon page at patreon.com slash hiddenforces. Today's episode was produced by me and edited by Stylianos Nicolaou. For more episodes, you can check out our website at hiddenforces.io. Join the conversation at Facebook, Twitter and Instagram at hiddenforcespod or send me an email at dk at hiddenforces.io. As always, thanks for listening. We'll see you next week. (37/37)
This is the full transcription of podcast 'Hidden Forces'.
Eugenia Zukerman Like Falling Through a Cloud a Conversation About Life, Music, and the Ethereality of Memory #Podcast #Transcription #ReadAlong #KnowledgeUnlocked
Today's episode of Hidden Forces is made possible by listeners like you. For more information about this week's episode or for easy access to related programming, visit our website at hiddenforces.io and subscribe to our free email list. If you listen to the show on your Apple Podcast app, remember you can give us a review. Each review helps more people find the show and join our amazing community. And with that, please enjoy this week's episode. What's up everybody? My guest today is Eugenia Zuckerman, an internationally renowned flutist, writer, and former television correspondent. She was the artistic director of the Bravo Vale Valley Music Festival in Colorado for 13 years and the arts correspondent on CBS Sunday morning for more than 25. She is the author of two novels, two works of nonfiction, and numerous screenplays, articles, and book reviews. Three years ago, Eugenia's family began to notice changes in her cognition. She was unusually forgetful and at times confused in ways (1/37)
that seemed unlike her. Pushed by her family to undergo testing, it was determined that she was suffering symptoms consistent with a diagnosis of Alzheimer's. It was around this time that Eugenia took pen to paper and began writing what turned into a lyrical memoir of her experience in real time, coping with the forgetfulness and confusion that come with such a difficult diagnosis. I was unsure how I wanted to approach this conversation. Not knowing Eugenia personally, I wasn't sure how her symptoms would impact her ability to have the type of discussion that I'm used to having and that you're all used to hearing on this program. On that front, I will say that I was impressed at how well Eugenia seemed to remember dates and recount stories when prodded. In fact, there were multiple moments during our conversation that I'd wished I'd been better prepared to discuss instances or anecdotes from her life and career, which is so rich and offers so much in terms of inspiration, wisdom, and (2/37)
just good old fashioned storytelling. In any case, I didn't want to put her on the spot or forget that I was speaking with someone who was exposing herself to me in the most vulnerable circumstances possible. I wanted to be present and open to what and who she was in the moment and less concerned with plumbing her brain for answers or fishing for stories that though interesting would have caused me to miss the larger opportunity to take in the tenderness of the moment. What Eugenia is going through is a variation of what we will all face at some point in our lives. It's something that is particularly hard to accept for those of us who have been blessed with bountiful lives and the capacities to shape them. We're used to getting our way, but when it comes to our mortality, we're all in the same boat. We all have a common fate to share, and in some odd way, I find this comforting. Maybe it's just me looking for a silver lining, but I don't think so. I'm moved by our humanity. It moves (3/37)
me. As we move into this new decade full of life, love, relationships, and opportunities, I want us all to focus a little bit more on the things that bring us together and less on the things that set us apart. With that, I'm honored to bring you my conversation with flutist, writer, and author of Like Falling Through a Cloud, Eugenia Zuckerman. Eugenia Zuckerman, welcome to Hidden Forces. It's a pleasure. It's my pleasure having you on. I spent the morning listening to your music. I downloaded a bunch of albums on iTunes. I started on YouTube listening to music of yours. I love classical music, but I don't know the names and stuff. There was one that was like some concerto flute major thing. It was beautiful. Well, I'm glad. Thank you. Yeah. How did you come to play the flute? How did that happen? When I was a child, my father was an inventor, and he loved to make music. He played the piano. My mother was a dancer, danced with Martha Graham, and it was a very musical household. I have (4/37)
to say that when I was in grammar school, there were teachers who taught the kids how to play music on instruments that were donated to the school. They also had members of an orchestra come to the school and play their instruments. I heard the flute for the first time, and I was absolutely bowled over. I ran home, and I said, I've just heard the flute, and I want to play the flute. Can I please? Can I please? And my parents were delighted about that. And as I said in those days, there were instruments that you could take out from the school, and there were teachers who loved to teach. I was very lucky because at the age of 10, I was already starting to play and play well, and all through my teenage years I played, and I had wonderful teachers. So by the time I was, I would say 10 to 15, those were the formative years for me because that's the time when you learn the quickest and you retain the best. And I just loved playing the flute. And for me, it was what I would say my other. I (5/37)
could come home from school, and I was never lonely because I would go up to my room and take out my flute, and it was my best friend. And it remained my best friend, and it still is my best friend. And I feel that I am very lucky that I had the kind of training that I had, and that I had the parents who really helped me keep going when I would say this is too hard, etc. It was parental help that really was the key. So I'm not an expert in music in any way, so this is a layman's opinion, but the flute seems to be uniquely ethereal. It's sort of magical. It's ancient also. It's been around forever. And it's also a light companion. You can take it with you. Like you said, were there any other instruments that you were drawn to? Not at all. That's so interesting. No. My parents played the piano, and my older sister played the piano. And it was just too ... I didn't like hitting things. That's so interesting. You don't just depress the key. You hit the key sometimes when you're playing the (6/37)
piano. The thing I think that was most of interest to me is that through my own breath, and by having my breath go into the flute, I could make sounds of my own. And for me, it was like coloring. And it became more like coloring. You color the sound, and you have to find your own way of how to do that. And again, I think for me, it was the fact that the flute became my best friend. Well there's a poem in the book. I don't have it off hand, but you talk about shaping the air. Shaping the sound. Shaping the sound. And you can shape the sound by how much energy you put into your blowing across the embouchure. The embouchure is means the place where you make the sound. So for me, that was just what I've always tried to do is to make sounds that carry meaning. How much of your training came from being taught, and how much of it was improvisational, just playing around with the instrument on your own? Both, I would say. I played around on the instrument, and I had a rigorous training with a (7/37)
private teacher, but also rigorous training at the schools that I went to, I went to public schools. And then by the time I went to college, I went to Barnard College. I had a teacher in New York who was one of the greats, and he was very encouraging to me. His name was Julius Baker, and he was amazing. And some of the greatest flutists have come from his studio. So I do want to talk more about this, and I think we will, but I want you to take us back if you can to the beginning of this journey that led to the book that you've written. I assume that would be around the time of your diagnosis. Well I was forced into a diagnosis because my daughters kept saying to me, what's the matter with you? You're speaking strangely, you're repeating yourself, and I kept saying I'm perfectly fine. And then they finally said, okay, it's time. You are going to go to the hospital and get tested. And my younger daughter came with me, and I went and everyone seemed so much older than I was, but it was a (8/37)
very nice and easy way to sit in a room and then be called in. My daughter came with me, the doctor who talked to me was very nice and very bright, and we talked about many things. And she decided that it would be the thing to do to be tested. And the first testing that I was taken to was CAT scan. They decided that they needed to have a CAT scan. And when at the end of my meeting with this woman, I went down for my CAT scan, I wasn't scared at all. I was kind of excited. And I must have been one of the very few people who got into the CAT scan and loved it. Because I loved hearing sounds that I had never heard in my life. I think most people are pretty frightened of a CAT scan. But I came here- MRI, baby. Yeah, I think it was an MRI. MRI, yeah, trust me, I know. Right. You said it in the book, but I've been in the same situation. And I remember in one of your poems, you were writing about this when you went to the doctor, and before you went down to get the MRI, she administered a (9/37)
test. You tested your cognition in the room. That was the other way around. That was the other way around. I went to the cognitive place the second time I came to the hospital. The college for physicians and surgeons. Yes, yeah. Up at Columbia. Up at Columbia, right. So the first time that I was tested, it was for an MRI. And then I was told that I had to come back to do some cognitive learning. No, I've taken those tests too. We talked about this. My audience brought this up many times now in different interviews for different reasons, but I had dementia. And it was very hard taking those tests. I mean, what you described, your feelings were the feelings I had, frustration, fear, and just a desire to just stop. There's something else that comes across in your work, which is interesting. And you're very successful, and maybe there's a correlation between being successful and maybe sometimes being hard on yourself. Well, I think that someone who's driven, who has a goal, a constant (10/37)
goal, you never really reach your goal. It's constant. And I think that I am hard on myself. I've always been hard on myself. As a kid, I remember hitting myself on the head when I couldn't do something. And I just wanted to be able to do something instantly. Give the right answers on that test. Oh yeah, all the time. So when the day was over, when the tests were over, when, what year was this? How far back? This is about three years. Three years ago. Three and a half years ago. And then at that point, you went home and they didn't give you a diagnosis yet. You were going to find out the results of the tests and everything else. And you talked about actually being relieved that you didn't have to think about it. But you began writing after you came back from the doctor. Was that when you started writing? After the very first time I went to the hospital and my daughter was with me, we took the subway downtown to where I lived and I went up to my apartment. And I sat down at my desk and (11/37)
I stared at the wall for a while. And for some reason, I picked up a pen and pencil and simply started writing. And I didn't have any goal. I just wrote. And it all came out in poetry. I don't really know why. I have written a lot of poetry, but I had not tried to write a sort of story. But this just all flowed. And I didn't tell anyone about it. For about, I would say a month. And I asked my younger daughter if I could send it to her because I seem to be writing something and I'm not sure it's worth it. And she came back to me almost instantly and she said, mom, this is really very special. Keep going. And that helped me. I realized maybe this is something. And even at that point, I hadn't realized this is poetry. This is something that is unusual for me to do, especially in the long version to keep going. And I found that every day it made me feel stronger, better. There's a certain clarification that happens. And you must find this too in your writing that by the very action of (12/37)
writing, because it's a movement forward, I think that helps you kind of figuring out at the same time that you're writing. Well, I think you're very courageous for having done this because to be honest with you, I did write about my experience, but only after, long after it was over. Well, that makes sense to me. I do not know why I was driven to do this every day. I think I had a humongous amount of fear. And I think perhaps by writing daily, it made me realize, okay, I am still someone who is able to connect to words and to express myself. What were you afraid of? What are you afraid of? Well, what I was afraid of was that I would lose all cognitive ability and lose my ability to connect to people because we need to be able to express ourselves. I knew that I never wanted to stop making music. And by that time, I was the artistic director of the Clarion Concerts in Columbia County. So I was already in a position of not only making music, but being someone who was in charge of a (13/37)
musical organization. So I had a lot on my mind. And I think by writing, it simply helped me organize myself. You said Clarion County, that's an upstate New York? Yes. Clarion Concerts in Columbia County is the actual name of this organization. And it's over 50 years old, started by someone who went to Europe and brought back a lot of wonderful music. And so that is how all of it happened. And the man who started Clarion Concerts now, 60 years ago, who is no longer on the planet, Newell Jenkins, started this. And it has always been an ongoing situation. And I'm very lucky to have met people who wanted me to continue working with them and to have concerts, which we do. You did a segment with CBS Sunday Morning. And you were actually for how many years, a curator of content there, a producer? No, I was always the artistic correspondent for them. So I was the person who got to do the wonderful stuff, like interview the famous people like Judy Collins, like Paul McCartney, so many people. (14/37)
And that was wonderful. What was that like? It was great. I found that all the people that I sat across from were interesting, wanted to be there, wanted to be known. And you say wanted to be known generally or they wanted to be known specifically and be there with you on CBS Sunday Morning? I can't speak for how they wanted to feel about me, but I can tell you that I wanted really to find out who's this guy sitting across me. Okay, so he's famous and let's talk. Who were some of the most interesting characters? I have to say every single one of them. Judy Collins seems like she'd be pretty interesting. Judy Collins was a friend of mine even before I was on CBS Sunday Morning, so I knew her very well. And she's one of the most wonderful people. And that I don't know if it's easiest to talk with someone who you know best or whether it's someone who you don't really know. But I am... That's interesting. I've had sometimes people on the show that I know rather well. And actually, I feel (15/37)
like it's easier for me to have people that I don't know that well. Maybe I get more excited because there's so much more to learn. Right. I think that that's the case too. I know that Judy Collins was just one of many people and I am sort of embarrassed that I don't remember as many people as names, et cetera. You call him a cartony, for example. Right. Well, I had never met him before and there I was sitting across from her. That had to be so cool. He was very cheeky and very, very adorable. And he was there because he had written a serious piece and he was terrific. And he talked a lot about his father and his father's interests in music. So to be across, right across from him was fun and thrilling. And I think anyone who says, yes, I will have an interview, they're not wanting you not to like them. So I think I got the best of most of the people I talked with. Did you have a certain strategy or way of coming to the interview in order to make it better? Or did you have, let's say, a (16/37)
way of putting yourself into a certain mindset before you sat down with, did you have a ritual or something like that? I didn't have a ritual. I did my work. I looked up everything I could about the person I was going to talk to. I wrote down questions that I would be asking and I didn't have a piece of paper. It was like, you know, meeting you and talking with you and finding out who you are. That's the way I approached it. It helped a great deal that Sunday morning was already an entity. No, that's not true. Here's the deal. Now I remember. I got a phone call quite early. I was still at Barnard. I got a phone call from Shad Northschild and he said, my name is Shad Northschild. I have a TV show and you're going to be on it and you're going to say- You're going to be on it. You're going to be on it. He didn't even ask you. No, he didn't tell me who he was or anything. He said, no, he did. He said, I am Shad Northschild and I have started a program called Sunday Morning and you're going (17/37)
to be on it and you're going to be talking to people in the arts and you'll have a salary and you're going to say yes. You're going to say yes. Yes. He was one of the great people. He was just so charismatic and when he was mad, I learned what mad was. Really? He really could tell you off, but he also really would tell you this was terrific. I have to say that Sunday Morning is still ongoing as you know because I was very thrilled that they wanted to do a piece about me and what has gone on. You were there from the beginning. CBS Sunday Morning, I think, began in 1979. I think their first episode was in 79. You were there around that time? Yes. I was maybe there for the second or third time. Amazing. I had no idea what I was doing. That was an amazing time still to be on television. I think television used to be more magical than it is now. Now it doesn't have that sense of inaccessibility. It used to be really, if you saw someone from television, it was like you were seeing a god or (18/37)
something. Right. Well, I have to say that Charles Carreld who was the executive producer and he was the person who had all of the ideas and the person who was sort of the face of CBS Sunday Morning. It was just wonderful to be able to do what I had not even in my mind thought I wanted to do and that was to be able to not only sit and talk to people but fly out to Minnesota to find out about such and such an artist. It was a great privilege to be on that show. What is the instrument that they begin the show with? There's a sound like ... It's a trumpet. It's a trumpet. Did you ever meet Don Hewitt? Yes. What was he like? I don't have much of a recollection. I know I met him but not as well as some of the others. That was amazing that a program like that could have been as successful as it was, both 60 minutes and Sunday morning. I think television has changed a lot, not necessarily for the better and it's wonderful that there are still programs like that that endure. I know so many (19/37)
people that watch CBS Sunday Morning because they like watching something that's pleasant and shows the brighter side of humanity. I remember that they had the brighter side of humanity but they also had pieces on things that were frightening and not so happy. That's one of the things I really appreciated about it. It was real life, real people, real things happening. I felt that as I traveled around, I can remember going to a holiday inn out somewhere and a man who was sweeping the floor came over to me and he said, aren't you Eugene Yuzukrim? I said, yes I am. He said, I loved that piece that you did about Tchaikovsky. I'm watching this guy who is sweeping the floor and Sunday morning had made inroads. How does that make you feel? It makes me feel that music and art is so important. I also remember being somewhere in Europe and having an outdoor meal somewhere and someone popped his head up and said, are you Eugene Yuzukrim? I said, yes. He said, I listen to you every Sunday and (20/37)
there we were in the middle of somewhere. That's so nice. I do think that it's changed and it has changed because everyone wants something faster and quicker. We used to have 12 minute segments and by the time I left it was down to six. One of the things for me was real learning experience was going with a group of people, a sound man, the photographer, others, etc. We would be together with people who didn't really know each other but we got to know each other and to make something together. You had a regular crew that you worked with? It wasn't always regular. We all mixed around. It depended on who needed what, etc. I was astounded to find out that I'd been there for more than 25 years and then I was told that people no longer wanted classical music. I love classical music, I must say. Again, I'm embarrassed at how little I know about music. It's interesting, when I was growing up it was even more the case. I was more into movies. In the last few years, it's like my ears have opened (21/37)
up like a car engine. It took some miles through the engine open and it's like now I can hear things. I really just loved listening to your music, to you playing the flute this morning. Thank you. That prods me. I want to ask you about this. I might as well ask about it. Now, your husband, how did the two of you meet? I think I had this idea in my head that you met at one of your concerts. How important was music to how you came together? Very important. I had already had two husbands before. The first one who was a famous musician, the second one who was a screenwriter and movie maker. That area felt very comfortable for me. I met my husband, Dick Novick, through a friend having decided that I wanted to spend time by myself in the woods up near Tanglewood for a summer just by myself. I got there and got a phone call from a friend of mine who said, I know this wonderful guy. He loves music. He does this. He does that. He wants to meet you. He's going to call you. I said, no, no, no. (22/37)
It's just way too soon. She said, get over it. I went to Tanglewood the next day. I think we spoke first and I had no idea what he looked like really. But he said, meet me at this place, et cetera. I went at intermission we met. I took one look at this just fabulous looking man. Swashbuckling. Swashbuckling, yes. With most beautiful blue eyes and a smile. He said to me, I've brought a beautiful young woman with me and I thought, oh my God, this guy is weird. But then he took me to the beautiful young woman who was his beautiful young daughter, one of his beautiful young daughters. That was funny. Then I knew we had to go back in after the first half was over. I saw where he was sitting and I listened to the music, but I watched him. I could see the back of his head and his foot was going exactly where it should have gone at the right moment. I sat there saying to myself, I'm going to marry this man. Really? I forced him into it. That reminds me a little bit of a story recounted by Jane (23/37)
Fonda about how she first met Ted Turner. Ted Turner had supposedly, according to Jane Fonda, called Jane right after her divorce. She does this impression of like, hello, hello, this is Bill. I heard you're getting divorced or whatever. She says, no, no, no, it's too soon. Call him back in six months. He called her back in six months on the dot and he took her out on a date and she was instant attraction from the very beginning. I wanted to ask you guys, you were on CBS Sunday morning. He filmed you up in this beautiful farm that you live at now full time, but tell me a little bit about this place. How long have you been going there? As soon as I met Dick. That was his house? Yes, it was his house. He introduced me to his house. It was winter time and I think you had two dogs at the time and it was snowy and we walked up an icy hill and I said, what's that? He said, what? I pointed and it was blood all over the snow and he said, take the dogs, go inside. Another bear. No, but he said, (24/37)
take the dogs, get them inside. I said, what are you going to do? You're not going to kill this creature. He said, I have to. Here I was this person from New York. We don't think about guns or anything and I have just met this man and I have his two dogs and he's going to shoot an animal on the snow. More than you bargained for. More than I bargained for. Was it a bear? No, it was a bobcat. A bobcat because the three of us were discussing in the green room earlier about the presence of bears on the property. I think there's a growing fascination among my generation and younger about the wilderness and hunting and things like this and I think that maybe it's just a cyclical thing. This always happens every so many generations or whatnot, I don't know. Or maybe it's also driven in part by the record level of people living in urban environments. Well, there's that, but I will tell you, this was a rabid bobcat and he knew my husband knew it was rabid and I didn't. I thought, poor little (25/37)
thing. It was an eye-opener to the world outside of New York for me. What was the first thing that you wrote when you sat down to write? Which one was the first poem? Was it straight from the beginning? It was absolutely from the beginning. I'd love for you to read Like Falling Through a Cloud because that is a beautiful. Is that the first thing you wrote? Yes. That's incredible. Yeah, but I also want to say that I had no idea what I was going to be writing, but I knew the title. I knew Like Falling Through a Cloud and the reason I knew the title was because my mother died at 103 and that was three years ago. It was just my, I knew that my mother was cloudy and I knew that sometimes she would wake up and be very bright. I always felt that her waking up was like, her head was a empty coconut. I used to think of it that way. For some reason, the way she was able to wake up was to let the insides drip down into the coconut until something came out. For some reason, I do not remember the (26/37)
exact moment, but I knew I was going to call it like falling through a cloud. That also resonates. I mean, the cloud metaphor, I thought of when I was going through this and forgetting and was getting harder and harder to remember things and recognize people. It felt very much like a fog, sort of a fog had descended and it was just growing thicker and thicker and it was hard to see through and I had to make all these different efforts to see more clearly, more coping mechanisms or way of doing it. This was one of many poems in the book that I found relatable. I'd love if you could read it. Like falling through a cloud, sometimes when I wake up it's dark. Where am I? Sometimes I know and sometimes I have no idea. So I let the night spirits wrap around me and they whisper to me, don't think. You will remember. I lie very still and then suddenly like falling through a cloud, I know I am here. What is that capture? What are you describing when you say that? I actually do think of falling (27/37)
through a cloud. I do think of floating and that probably comes from seeing my mother sort of float above her bed, that feeling sometimes when I would go in to see her it was as if she was somewhere else. But I think perhaps it's something that we all go through and that is that there's something going around in your brain and you're trying to grasp it and you have to fall through something to wake up. That's part of what I think I felt when I decided to call it like falling through a cloud. Part about night spirits wrapping you, I found it resonated with me. Is some of this about learning to let go? Is that part of that process of not, in the specific case of trying to remember something, not trying to force yourself into remembering it but just letting it be what it is and letting things come to you? Absolutely. This was something I became aware of right in the beginning of writing the book because I know that if you squeeze something too hard, you're going to hurt it and you won't (28/37)
be able to express yourself in the way that you can if you not make yourself but help yourself to relax. I think that every time I have tried to make something happen, I have failed because I have tried too hard or have pushed too hard. I guess this also goes back to something we mentioned earlier, which is that a lot of people that are successful, they tend to be type A personalities. They go getters, they know what they want, they chase it. If they want something, they make it happen. I think also just part of either getting older or confronting illness or challenges. Sometimes, in my experience at least, requires learning a new skill of acceptance or surrender to the moment or circumstances. Is that something that you've found to be true? Have you grown in that sense in terms of your own compassion for yourself and for being more understanding with let's say your shortcomings or whatever it is in the moment that you're dealing with? I'm not really sure about that but I can tell you (29/37)
that, can I read another poem that is involved in what we're talking about? Absolutely, yeah. This one is called Marbles. Or maybe they're rolling around in my head looking for a place to land. Or maybe not. My daughters tell me to get tested. Tested for what I ask, even though I know for what. But it's for what I don't want to know. So I let the marbles roll around in a swirl of distracting colors because I don't want to listen to them, the daughters, because if I hear them I will be very afraid. And this mother cannot be that mother, not ever, never. And I think that is a poem about my passion for my daughters. I don't think I was a very clingy mother and I adore my daughters and my granddaughters now. But I think that I just forced myself through feelings of inadequacy. And I think most mothers feel inadequate from time to time. But I wanted this feeling of marbles, et cetera. I like the feeling of how marbles roll and how the colors come, et cetera. For describing the way in which (30/37)
your mind feels and your memories? No, just I think more of, I don't even remember now. Because it does conjure something that I feel like I understand it. I mean, again, it's just like falling through a cloud, right? It's the marbles sort of just rolling around, just like falling through a cloud. It's just sort of almost effortless. I think effortless, but I also think purposeful. I think that when things are rolling around and you're trying either to stop it from rolling around or be fascinated with it, I think the whole period of when I was writing this book, I felt that things were in motion. And I think that, come to think of it, I think that every time I've written a book, I have wanted that sense of keep going, keep going. And I have had times when I've been writing a book and I have felt it's not working and it's not working. And once or twice, I actually have, after a lot of work on a book, I gave it up. So I guess the marbles is something that you want. When you're trying to (31/37)
do something, you have to let things roll until you're able to kind of control it. That's also relatable. We did an episode recently. We haven't released it. This will come out first with David Epstein, who's an author, who's written some great books. He was a journalist for Sports Illustrated. And I believe it was with him that we talked about this, but sometimes you can put an enormous amount of work into something and it just doesn't work out the way that you thought it would or that you wanted it to. But then it turns out that something more beautiful comes out of that. I think you can get stuck. You can get stuck on something that you really think is going to work. And for most of my writing life, I have always told myself it is not acceptable to give this up. You just have to keep going. And once or twice, I really have given up on something that I at first was really excited about. So that kind of brings up again something I mentioned earlier, which I want to see. Maybe I can (32/37)
ask it again, which is something in my own life that I realized as I got older and went through certain experiences is the difference between quitting or giving up and surrender or acceptance. How have you dealt with this at this stage in your life? What you're dealing with, what you're coping with? How have you navigated this? I think I've navigated it in the best way I have writing anything. And that is honesty. Everything I wrote is extremely honest. I didn't make anything up. Might have come from something in my background, et cetera. But I never gave it up. And I think that by being positive, particularly now that I have a diagnosis, it's a diagnosis of death. But we all have diagnosis of death. And I don't want to sort of get away from what we're saying. But I remain positive. And maybe I remain positive because this is the happiest time of my life. Talk to me about that. It doesn't seem as if it should be, but it is because I have a great love in my life. I have extraordinary (33/37)
children. I have friends and family. I have animals I adore. I have everything I need around me. Do you think you have a deeper appreciation now for those things than you did before? Far deeper. Far deeper. You think that's why? Maybe and also maybe because I know I'll have to leave them and that they will have to leave me. And I do wake up every morning and think to myself, thank you. It's really good to be here. Your sense of gratitude is huge. Huge. Huge sense of gratitude, except for my dog Lucy. I absolutely adore her. And she comes up to my room when I'm practicing. And if she doesn't like the piece, she puts her paws over her ears and shakes her head and walks off as if I have pooped in the room. Really? Seriously. So there are certain pieces that she likes and certain pieces she doesn't like. Exactly. That's so interesting. So for anyone that's listening who either is going through this or more likely who has a family member that they love, a mother, a father, a sister, a (34/37)
brother who is going through this, whether it's Alzheimer's, whether it's the natural process of aging and forgetting, what advice can you give or what would you hope that your work and your presence here today can convey? I would just say to everyone, live every day. And by live every day, I don't mean wake up and brush your teeth, but it is such a gift to be alive. And you as someone who has had similar problems that I have had, I would imagine you have that same feeling. It is just, whoa, my eyes are open. I am living. I have that sense every morning. Well, it was, who was the actress on Saturday Night Live? No. I think it was Gilda Radner who said, I'm forgetting who mentioned this on one of our episodes, but she said something like cancer is amazing except for the downside or something like that. I can't remember exactly how she said it, but it's true. I mean, there's so much gratitude and perspective that you gain from that type of experience. And I can imagine that there are (35/37)
many beautiful moments with your husband and the farm surrounded by nature or when your daughters come or when you see your grandchildren. Every day I wake up hoping that I will still be here so that I can connect with these people who mean so much to me. And I don't think every day about death, but I am aware. I am aware every day that I probably, if it's not going to be all that much longer, but I also tell myself every day you could step off a curb and get hit by a car probably faster than you. Probably faster than the time you're going to die. There's also something interesting that happens when you're present, which is that your life extends it in a sense because time, there's a yawn, there's a chasm that grows. And again, that's to the point of living in the moment. Eugenia, thank you so much for taking the time to speak with me today. It was such a pleasure to talk to you. Today's episode of Hidden Forces was recorded at Creative Media Design Studio in New York City. For more (36/37)
information about this week's episode or if you want easy access to related programming, visit our website at hiddenforces.io and subscribe to our free email list. If you want access to overtime segments, episode transcripts, and show rundowns full of links and detailed information related to each and every episode, check out our premium subscription available through the Hidden Forces website or through our Patreon page. At patreon.com slash Hidden Forces. Today's episode was produced by me and edited by Stylianos Nicolaou. For more episodes, you can check out our website at hiddenforces.io. Join the conversation at Facebook, Twitter, and Instagram at Hidden Forces Pod, or send me an email at dk at hiddenforces.io. As always, thanks for listening. We'll see you next week. (37/37)
what's happening on YouTube now on platforms like Vice. There is evidence that there is an appetite quite often for long form, for just immersing yourself in video at greater and greater length. Yes, there is a short attention span for some stuff, people dip in and out, but there is the possibility of long and absorbing online experiences. And that's happened as well in the sort of... You think about the documentary world, in fact, too much, too much. Quite often, the ninth series of this documentary that might well have been compressed into a 90-minute experience. So, I think it's fragmented. There are all sorts of incredibly fleeting short-term ephemeral experiences, and there are a lot of immersive long ones. I couldn't agree more with that, actually. And that, of course, is the reason why... One of the reasons why I created this podcast, and I created it the way that I did, that it's a long form, two-hour-long conversation. So, that actually speaks to podcasting, because you work (25/38)
What's up, everybody? My name is Demetri Kofinas, and you're listening to Hidden Forces, a podcast that inspires investors, entrepreneurs, and everyday citizens to challenge consensus narratives and to learn how to think critically about the systems of power shaping our world. My guest in this week's episode is Rory Kethlin-Jones. Rory is the BBC's principal technology correspondent, which means that he's responsible for reporting on the biggest developments in news stories and tech. From the dot-com bubble of the late 1990s to the rise of Google and Facebook, he's covered it all and interviewed some of the most influential tech luminaries and entrepreneurs from Steve Jobs to Mark Zuckerberg to Elon Musk. Stories from these interviews and more are part of his new book titled Always On that chronicles the rise of the smartphone era and how technology has altered our customs, our expectations, and our very lives in ways that are easy to forget only 15 years since the launch of the first (1/38)
iPhone. This is a conversation unlike most any other that you will have heard on this podcast, because there isn't one particular lesson that I want you to take away from it. Instead, I want you to use it as an opportunity to reflect on just how much change we've seen in our lives over the last 15 years and think about not only the causes of that change, but how different the world will be over the next 15 if current trends continue and what that's going to mean for our lives, for our businesses, and for our political systems. In the overtime, Rory shares his impressions of Silicon Valley culture and what he's learned from interviewing some of the most powerful people in tech. We also discussed the transformation of media, cultural differences between British and American journalists and the press, and the future of independent publishing and podcasting and what it means for the viability of traditional news outlets, especially those that depend on ever more sensationalism and (2/38)
controversy in order to eke out a profit in this hyper-competitive media landscape. Without any further ado, please enjoy yet another educational, entertaining, and engaging episode with my guest, Rory Kethlin-Jones. Rory Kethlin-Jones, welcome to Hidden Forces. Very excited to be here. That's my pleasure having you on the podcast, Rory. I loved reading your book. I really enjoyed it, and it was so different than what I'm used to doing, which is usually the kind of stuff that we have whenever we do technology-related so they're very technical and they're focused on some particular aspects of technology or maybe the effect of technology on society, which I do think is something that's relevant to your work and to your experience and your career, which I think you can help shed some light on. But I think what's also really fascinating about it having you on is that you're a big name in media and in journalism. The BBC has no comparable media outfit in the United States. PBS is a public (3/38)
broadcasting system in the way that the BBC is, but it doesn't have the same type of cultural significance or reach in the public. It'll be fascinating to also get your perspective as someone who's worked in the media since the early 1980s, I believe, or late 70s. That's true. 1981, I started. It may be amazing. Your father was a director at the BBC. I believe your mother also worked at the BBC. You have a podcast, you have a sub-stack account, so you've seen so much. You've seen so much transformation. You've embraced it, which also makes you really wonderful and unique. Instead of me droning on and on about your background, because especially we have so many, we do have many listeners in the UK who don't need to know who you are. They know who you are already, but for those of our listeners who are piping in from anywhere else in the world, in particular the US, where a lot of people don't know anything outside of American borders, tell us a little bit about who you are, what you do (4/38)
at the BBC, and how you got into journalism. Well I am a BBC lifer, and you're right. The BBC is an extraordinary organization, which is about next year to celebrate its centenary and dominates the media landscape in Britain in a way which Americans might find difficult to come to terms with. It's supported by a licence fee which everyone has to pay, which would be extremely controversial, I know in the United States, sometimes controversial in the UK, but somehow has survived my 40 years at the BBC. I joined the BBC in 1981 in a local newsroom working on local news. I spent some time in the national newsroom as a producer, always wanted to be on air, so went to a local station, BBC Wales, doing their evening news, and then came back, worked on the breakfast show, became a business correspondent, and then in the late 90s I was kind of bored with the standard business stories I was covering, but I was very excited by what I saw happening in terms of technology. The dot com era, if you (5/38)
think about the late 90s, what a time to be covering technology, or wanting to cover technology. The birth of Google, the dot com era, the dot com bubble. And eventually, because of those were the stories I was showing so much interest in, in 2007 the BBC said to me, hey, why don't we call you technology correspondent? And that's what I've been doing ever since. And it's interesting what you said about the book and so on. The book is written by someone whose job has always been not to be highly technical, but to translate the excitement and the importance of this extraordinary era to a very broad audience, not to be too specialist, quite a difficult tightrope to walk, because you're often in danger of kind of offending real specialists. There are a lot of very knowledgeable people out there, but at the same time, you've got to reach the people who will watch the Nightly News program, listen to the morning radio, even read the BBC website, who have a passing interest in technology, but (6/38)
no great knowledge of it. So that's been my mission, conveying the excitement of this era, which has been a fascinating era. I was appointed BBC technology correspondent in January 2007. My first big story was being at the launch of the iPhone, the unveiling of the iPhone. And that's the story the book tells how that era unfolded from that moment. Yeah, that's a I love that part of the book. The unveiling of the iPhone happened at the Moscone Center in San Francisco, as you say, in January of 2007. I only had an opportunity, like most people, to watch that from television. What was it like to actually be there? Well, let me give you the context here. So I'd been appointed technology correspondent, and we had decided that the BBC would go big time for the first time to see, yes, the annual great big gadget show in Las Vegas, which I've been to lots of times since. And we were spending quite a lot of money, the BBC is very careful about its money, because you know, it's always limited. (7/38)
But I said to my bosses, listen, I know we're spending on this money to go to Vegas, but I think it's going to be worth taking a day out, because Steve Jobs doesn't go to other people's events. He runs his own event, and it's called Mac World. And the rumor is that there's going to be something big there. So I landed in San Francisco from Vegas for just a day, pitched up at the Moscone Center. And it was my first experience as a kind of slightly cynical British journalist of that atmosphere that you got at Apple events and increasing at other events. Because I was used to going to press conferences where it's taboo for a British journalist to clap at a press conference, you would never dream of doing that. And suddenly I was in this hall where people were whooping and hollering. And of course, there were some journalists, there were a lot of bloggers. I think what one had to realize back then, and it's still the case, is that there was a kind of an audience of bloggers who made their (8/38)
money by being incredibly, uncritically enthusiastic about Apple products. So they were there. But it was what unfolded was the most extraordinary performance by Steve Jobs, because he took to the stage in his trademark jeans and black polo neck sweater and wireframe glasses. And he didn't say anything for a couple of seconds, he just strode head down and then stopped and said, we're going to make some history here today. And again, as a cynical British hack, I was go, Oh, please, here we go. And then he outlined the history of technology and in particular, groundbreaking Apple products from the first Mac to the iMac to more recently, the iPod. And then he said, he eventually built up to, we're going to unveil not one, but three groundbreaking products here today. And he kept on with his mantra. An internet device, a music player, and a phone, an internet device, a music player, and a phone. And eventually he said, Are you getting it yet? Because they all were beginning to get it. It (9/38)
was all one device. And it was the iPhone. And everybody went mad. And it was a brilliant performance. I don't know if you've seen the film about Steve Jobs, where what happens backstage at those keynotes, and it was which I thought was very believable is that the support team who'd get anything wrong, get absolutely crucified, but but nothing really went wrong that time. It all worked. And the reason I, I mean, I was really impressed. The reason I knew that this was going to be big was when I got out of the hall, running back because we were eight hours behind London. And that meant we were in a tearing hurry to get our item on the nightly news. And I took a call from the news desk saying, who'd seen the pictures, the agency pictures coming out of this phone. And bear in mind, my news desk full of wizened old hacks, not very impressed by technology. But this guy was saying, You've got to get your hands on that phone. It's amazing. And then there was a whole business of me saying, (10/38)
There's no way I'm going to get my hands on the phone. Apple doesn't do that. The phone's not actually coming out for another six months. They won't let me near it until I realized that I'd booked an interview with not Steve Jobs, but Phil Schiller, his marketing chief. And I'd rather sort of said to Apple, Yeah, yeah, we'll definitely come thinking, No, we won't, we won't be interested in Phil Schiller. And I changed my mind and reversed back, leaving the cameraman to go and edit and grabbing another little cameraman. I went and interviewed Phil Schiller, but first of all said to him, You don't happen to have the phone, do you? And of course he did. And I took the phone, grasped the phone from his hand and stood there and did my, what we call a piece to camera, what American crews call a stand up, grasping the phone. And that was a big moment. And I say in the book, it was, there were complaints about the piece that went out on TV, British viewers said, You're plugging a product, you (11/38)
shouldn't be plugging a product. And I went on a complaints program and said, Well, I think that was the kind of moment that Henry Ford launched the Model T Ford, would we have covered that? And this was a Henry Ford moment. And I think that proved to be the case. Well, didn't some other broadcasters claim that you look like you were holding the one true cross in your hand? Yeah, yeah, which of course, reflected the fact that it had been such a struggle to get hold of the thing. Well, I think it also reflects something else that I'd like to ask you about, which is, if consumerism has become sort of the new religion, and that these really perfected by Steve Jobs, these product reveal ceremonies are a form of ceremony, religious ceremony. And then subsequently, the purchasing and use of these products has become sort of ritualistic. And it's sort of, as part of that larger context, do you think that people, or how many people appreciate it at the time? How viscerally transformational (12/38)
this product was? Well, certainly the rest of the, I mean, the what it's an extraordinary, you know, business case story, you know, I'm sure books have already been written Harvard Business School has probably done endless studies. But certainly what happened was that the rivals didn't see it. They were very keen to downplay the significance of the iPhone. Steve Ballmer, leading Microsoft at the time, which would eventually launch Windows Phone and already had a big Windows offering, which he thought was going to be big, just poo pooed it and said, this is never going to be, it's going to be a tiny market share, which in a way was true. It's never had the dominant market share. But he refused to see what the significance would be Nokia, which was of course, the giant of the industry, Finland's Nokia, much loved company, slightly, you know, mourned. It didn't see this coming. It was completely destroyed by the iPhone. I tell a story of a British executive retailer who went to see Nokia (13/38)
and tell us his contacts there that this was going to be big and he might be buying iPhones rather than Nokia's and him telling his Nokia counterparts, it's the kind of phone my four year old child could play with. And the Nokia executives responding, we don't make phones for four year olds. So there was a lot of blindness, a lack of a willingness to see what an important moment this was. But it was also the kind of changing of the guard. Somebody described it as the era of the bellheads, the people who were from the telecoms industry, confronting the net heads, the Googles, the apples, the software people, because of course, you know, it was the software that ended up being key in many ways, despite the beauty of the device. And the net heads obviously won. Well, one of the things that I was thinking about when I was reading the book and you were describing this is that we really haven't had a jobsy and like figure. I mean, Elon Musk has tried to fill his shoes, but I really don't (14/38)
think we've had anyone like him. What was it about Steve Jobs and the iPhone that people found so compelling? And what was it about Apple that people loved so much? I mean, Apple was the kind of indie band that went mainstream, wasn't it? Because for years, there was a sort of cachet in having an Apple device, an Apple computer. You knew it was more expensive and it was a failing company, but you were the fan of this indie band. And Microsoft was the hated dominant organization. And, you know, I don't know if you remember, but people used to write the word Microsoft with a dollar replacing the S, as if Microsoft is only about money. And obviously, Apple wasn't about money because it was not making any. And then the roles were reversed. I mean, what was compelling about Steve Jobs? That from my point of view was that he was a communicator in a way that an awful lot of tech chief executives were not. He could speak without the jargon. Well, he created his own, you know, special Apple (15/38)
speak. He was a performer. He presented a compelling vision. And he put on a show. I mean, these keynotes were great shows. I do think, you know, 14 years later, that kind of magic has faded and would have faded even if he'd still been alive because there's a sort of law of diminishing marginal returns. You can change the world once, but, you know, when you come up with the 12th version of a slab, a rectangular slab of black glass, it is, it is a lot more difficult to get people excited. But what Apple did was give people a sense of excitement about the magic of the technology and the beauty of it. I mean, it wasn't technically as good as quite a lot of existing phones. Don't forget the first iPhone didn't even have 3G. It had a lot missing from it, but it was captivating in a way that others were not. Well, I also remember how many people were pessimistic on the phone. One of the common complaints was that it didn't have a touchpad. It didn't have a keypad. Blackberry users would (16/38)
never use it. And I do think there is something true to the fact that, like you said, there was a changing of the guard. There was also a generational component to this, which is this was embraced by younger people and non-professionals in a way that, you know, let's say finance people who had their blackberry did not. Yeah, but it was also, it wasn't just younger people. It was democratizing the phone. I mean, the real aficionados of phones before then had been, you know, to use a cliche geeks, the people who really wanted to understand how the technology worked, worked, were wedded to a certain way of doing things. And Apple reached out way beyond that. I mean, just by making things easy. Apple launches products often years after others have tried them out. Think of the iPad. I remember when the iPad came out looking back at a picture of Bill Gates in 2001 with a Windows tablet PC, which was a very ugly piece of kit. It just did not communicate to people. Apple had the ability to (17/38)
democratize technology in a way that some didn't. How do you think, do you ever think about how Apple and the iPhone would be different products and different companies if Steve Jobs were still around? I mean, one of the things I noticed, and again, you're probably the perfect person to ask this to, I noticed that the phone became increasingly more complicated. One of the things that Jobs really preached was simplicity, that people wanted not just simple products, but they also wanted direction. They wanted to be educated on how to use it. And they didn't want to have too many options. And the phone has actually moved more towards the Android side and away from what iPhone used to be so unique about the iPhone, which was its simplicity. Does that resonate with you at all? And has Apple also become much more of a sort of, just almost like a Sony in terms of its consumer products? Yeah, I know what you mean. There is not the excitement that there was under Steve Jobs, but I'll tell you (18/38)
two points here. First of all, it's difficult to say that under Tim Cook, Apple has not done well with the iPhone. From 2011 to now, the iPhone has just gone on to reinforce its position as the single most profitable product in history. And it keeps, every time it seems to be on the wane, it comes charging back. And the other thing I would say is there's no guarantee that Steve Jobs would have gone on to produce more iPhone moments. And he got some things wrong. He, not only was, so 2007 was a great key moment, perhaps more important in the success of the iPhone and the way it transformed the world, was 2008 and the launch of the App Store. And that was something that Steve Jobs had to be persuaded into because of his extraordinary controlling nature. He had not wanted any old app to end up on his beloved iPhone. You got what Apple produced, you know, with its particular design skills. And then people started side loading apps onto it. And eventually Apple said, right, they still (19/38)
obviously exerting a lot of control, but they opened the App Store and it was the app economy, the ecosystem that really cemented Apple's victory. So Steve Jobs didn't always get everything right. And, you know, there's no guarantee that, I'm sure, in fact, he would probably have got bored with the iPhone. He would have been, I've done that. I will let other people carry on changing that. But I will move on to something else. Right. Which actually, what I was thinking was that, and this kind of reminded me of a case study from a book called Moonshots written by Safi Bacall, who had been on the program, the case of Pan Am and American Airlines. And Pan Am was founded by a sort of Jobs-in type figure, similar to Polaroid, an innovator who was product driven, whereas American Airlines was at the time led by an incremental innovation business model type guy, similar to Tim Cook. An logistics kind of guy. Right, exactly. And if I remember correctly, American Airlines was able to really take (20/38)
advantage of the deregulation of the airline industry with some of these really important incremental innovations, whereas what happened was Pan Am over-innovated, so to speak. Pan Am went along the jumbo jet, and it ultimately cost the company, I think it went bankrupt in 1991, it was bought out. I remember how it resolved. And that could have been ultimately where things would have gone for Steve, whereas he might have created another incredible product like an Apple back in the 1980s or next and just be priced out of the market. He could have created another Newton. Another Newton, exactly, way ahead of its time, speaking of being ahead of their time. So I want to bring it back again to what I think interests me most about this opportunity to speak with you, which is your experience in media and also, generally speaking, in technology and covering this, because you've covered at the very least two technological revolutions. One is with the iPhone and mobile, actually arguably three, (21/38)
internet and also the personal computer. That's one. And then the other one is the parallel track of media. Now, there's also the difference between the British version of the British ecosystem and even the larger European media ecosystem and how that is culturally distinct from the American one. So there's that. But then there's also just the fact that technology has transformed this entire space. And you are, I think, rare in that you have embraced that. You have a podcast, which is very successful. You have a sub-stack. You're a prolific Twitterer. So maybe we can talk about that first. How has the media changed? I haven't yet managed TikTok. That's my shame. What do you think of TikTok? How much have you engaged with that platform? I've kind of watched and admired, really. It kind of sums up the good and the bad of this extraordinary media age. You were talking about the two revolutions I've particularly focused on in this book. One, the smartphone and two, these extraordinarily (22/38)
powerful social media networks and how those two came together to transform the way we live. And TikTok, the great of it is that it is the explosion of creativity that Tim Berners-Lee, for example, had always wanted from the web, which didn't happen in the early days of the web. I mean, when he created the web, Tim Berners-Lee talked about it as a read-write space, you know, so different from broadcasting. I started in broadcasting. I grew up in the TV age, where we all sat mesmerized in front of this magic box, and it was a very one-way experience. Tim Berners-Lee wanted the web to be a two-way experience, a read-write experience. Yet until it went mobile and until, in many ways, the social media chance came along, for most people, it was still mostly a broadcast experience. TikTok is the ultimate creative experience. But with all that, and we don't see it as much reported with TikTok as with other social media platforms, comes all the damaging impacts of social media and the (23/38)
unregulated kind of nightmare world of trolling and abuse. Well, also, there's something else that's interesting about TikTok, which is that what we've seen with media, with hyperconnected, ubiquitous connectivity through mobile and broadband and social media, has been the condensing of time. Everything becomes shorter and shorter as people's attention spans narrow and narrow. How real is that? I mean, how have you experienced that as a broadcaster and as a creator of content in your career? Well, I think that's an interesting theory, and I think I might begin to challenge it. So, in my career as a broadcaster, certainly that is... Well, here's one example. When I began in broadcasting, the average sound of a duration of a soundbite was maybe 30 to 40 seconds, and it's come down and down and down and down and down over the years to... Well, we look at American TV news sometimes and go, God, where somebody goes, yes, and somebody else goes, no, and that's a soundbite. But just look at (24/38)
in podcasting. It's a fascinating medium. Actually, in general, I'm just someone who's endlessly fascinated by the role that media plays in shaping culture, in taking cues from culture, but then also telling us about who we are. And obviously, each technology comes with its own set of business models, its own distribution, and its own particulars in terms of how it shapes the content. What are your thoughts on podcasting, this phenomenon of podcasting? It's not as popular in the UK as it is in the US. It's pretty popular. It's become more popular. Well, here's the situation. It's very dominated in the UK by the BBC, which some people might possibly rightly say was distorting the market, because so many BBC programs are put out, frankly, as podcasts. Mine included. There are some that are now specially crafted just for podcast, but there are a lot of programs that are just put out there for people who've always liked, and now basically get on demand. My feeling about the podcast, boom, (26/38)
is I hope it continues, but I have slight concerns that it may be built on sand, that we may be going through a bubble. I think the economics of it are really interesting. I don't see an awful lot of evidence that many podcasts are sustainable. I think many of them are supported by kind of vanity corporate money. It's the latest thing. Companies used to buy full page adverts in the Financial Times or the Wall Street Journal, which were kind of, the return on the investment was always very hazy. They were brand building. I think the great thing from podcasting right now is that it's getting some of that money. You're getting support for podcasts made feasible by that kind of money. Whether there is enough actual consumer demand to support a continued expansion that we've seen of podcasting, I'm not so sure. That's interesting. I would actually agree that there's going to be a huge culling of the field, certainly during a recession, because so much is dependent on sponsorships. But (27/38)
you're saying is that the entire industry would be wiped out eventually because it's not? No. What I'm saying is, well, I mean, there are so many different business models on there. I've done quite a few podcasts, lately been a guest on quite a few podcasts. I was spoke on one British media podcast the other day from a guy who runs a great gadget blog. I said, what's the point of the podcast? He had no sponsors, no advertising. He said, oh, it's just part of our brand. That's one model. I was on another cybersecurity podcast, which was much longer, less edited, quite fun, like Rambly. It had a sponsor. I would bet that that sponsor probably has no idea how many people actually listen to it and probably doesn't care that much. That kind of support mechanism may be ephemeral. When a new platform emerges, that money may move to that or may go back to just straightforward social media advertising or disappear altogether. Yeah, no. I mean, that's a really interesting take. I will tell you (28/38)
for this podcast, I turned down sponsorship money early on because for a number of reasons, I wanted to try and build a subscription model. This podcast is supported with 2,000 paid subscribers currently paying between $10,000 and $1,000 a month. That is fantastic. It is. I'm very happy about it. It required extra work to do it, but it shows you that there really is a market out there. What's also, I think, encouraging about this podcast's success is that while I do depend on a large cohort of financially minded investors and tech people, the content isn't focused on just tech and finance. There's philosophy, religion, science, medicine, art. I've found a way to do it. I think there are, but I will grant you that it's very difficult to monetize podcasts if you don't have a large enough audience. The problem with sponsorships, again, is that it leaves you vulnerable. Another thing I should say is that what I have found to be true is that authors love to go on podcasts. It's like the one (29/38)
place where you can really sell books. Yeah. Well, no, I'm just that author, but I think there are interesting parallels with the publishing world here. Anyone who's ever written a book will know that it's a lovely thing to have done, but it is not the way to make a living. Publishing is a bit like venture capital out of every 10 books. One will be a blockbuster, a couple will break even, and the rest will lose money. The problem is of supply. There are endless numbers of people wanting to be authors, whether or not they make a living out of it. I think that's the same with podcasting. There are endless numbers. It is not that expensive. It's easier, frankly, to start a podcast than to get a book published. That means there's an awful lot of supply, which is frankly, uneconomic supply. Well, it's also 100%. That also speaks to something else, which is that, and I'm curious what your thoughts are on this and if it resonates. I have noticed, and it's not just true in podcasting and (30/38)
media, across the board, people have become increasingly branded, or they self-brand. They see the entire scope of their existence as a commercial operation. I think that's one way in which podcasting has fit into things. That actually speaks to something else. There's that one phenomenon of commercial branding and the branding of oneself. That, again, is part of this larger commercialization and seeping of capitalism to everything, which speaks to the point about religion and ritual. Is it about capitalism, though? Is it not about identity and democratization? People used to, well, I mean, on a sort of micro scale, I think about journalists who used to working for big organizations. Quite often, there would have been a few-star journalists, but most people would have been fairly anonymous, just cogs in the machine. Now they all want to, and I put my hand up, they want to have their own substack, they want to strike out on their own, they want their own brand. That probably applies (31/38)
more broadly to all sorts of people who were just cogs in giant machines and see the internet as an opportunity to break free from that. 100%. That's definitely true. I agree with that, and we can explore that all day, every day. I think it's absolutely true. What I mean about capitalism or commercialization is that so many otherwise intimate moments or things that previously were not monetizable have become monetizable today. Reality TV, the phenomenon of reality TV is a big part of that. You see that with influencers, people that basically use the same medium that you and I might use to share moments of our personal lives. They use those to monetize their lives. In a variety of ways, which again, I think there is a connection there, the same connection that speaks to why we fulfill so many of our ritualistic desires through commercial technologies and products. In terms of the personality-driven media, this is also something that fascinates me, because of course in the United States (32/38)
we have Joe Rogan. Joe Rogan is the ultimate manifestation of the modern media age and media ecosystem. He has more viewers, more downloads, more streams than anyone else in media. No one knows exactly. Well, some people do, but most people who listen to him have no idea of just how popular he is. I don't think there's anyone like that in the UK, for example. Do you think one that, well first, what is driving this empowerment of the individual through technology? We also see this, for example, in sports, not to go too far afield, but athletes today have much more power than they used to have, relative to the ownership, relative to the leagues that they play in. I think media and their ability to distribute their message is part of that. What is driving that, the power of the individual? How much of it is changing people's relationship to news and to information? Is this ultimately a good thing? Where do you see this going? Wow, that's a whole lot of big questions. I mean, obviously the (33/38)
technology has made a huge difference. What I was talking about earlier, we've gone from the very simple broadcast model and a very hierarchical model where a few major media organizations controlled the flow of information. We say it's more democratized, but then it's also a winner takes all situation. Both in sports and in wider celebrity culture, that one person can reach a massive audience very quickly without much intermediation. People have got the ability to connect with those personalities in a way they never had before and are finding that attractive. I think it'll be interesting to see how long those personalities last. Will Joe Rogan be as big a thing in five, 10 years time as he was? Celebrities historically have had very long careers. They've gone on until they die. I think they may be more ephemeral these days, but it speaks to a desire to connect, to admire, to feel ownership of a celebrity that maybe didn't exist to that extent before. How much of that is authenticity, (34/38)
that people crave authenticity in a world that feels increasingly phony? Yeah, well, that was the old phrase, if you can fake authenticity, you've really got it made. Yeah, well, there's a culture now. I'm going to actually move this part of the conversation to the overtime Rory because you mentioned early on, you talked about this cynical British approach to media when you were at the Moscone Center in 2007. Something that I've always noticed, I've never actually understood why there is that distinction. If you go, let's say, on hard talk of the BBC versus if you're on some equivalent program in the United States, why there is that sort of cynical culture in British journalism. However, I found that cynicism actually quite refreshing in your book because- Yeah, I've got a couple of stories to tell about that. Well, exactly. We'll do that. I'll move us into the overtime for that. But the reason I found it refreshing just to tease it to listeners is because I, and I know many other (35/38)
people have become sort of have reached our limit with this fake it till you make it, sanctimonious culture and tech. It was really refreshing for me to have you interview some of the biggest names in the industry like Elon Musk or Mark Zuckerberg and to actually have you give a much more raw, honest impression of their messaging, their products, their pitches, etc. And I want to ask you about what your experience of some of those people was like. But I'm going to hold those questions off for the second half of our conversation, Rory. For anyone who is new to the program, Hidden Forces is listener supported. We don't accept advertisers or commercial sponsors. The entire show is funded from top to bottom by listeners like you. If you want access to the second part of today's conversation with Rory, as well as the transcripts and rundowns to this episode and every other episode we've ever done, head over to hiddenforces.io and check out our episode library or subscribe directly through (36/38)
our Patreon page at patreon.com slash Hidden Forces. There's also a link in the summary page to this episode with instructions on how to connect the overtime feed to your phone so you can listen to these extra discussions just like you listen to the regular podcast. Rory, stick around. We're going to move the second half of our conversation into the subscriber overtime. For more information about this week's episode of Hidden Forces or if you want easy access to related programming, visit our website at hiddenforces.io and subscribe to our free email list. If you want access to overtime segments, episode transcripts and show rundowns full of links and detailed information related to each and every episode, check out our premium subscription available through the Hidden Forces website or through our Patreon page at patreon.com slash Hidden Forces. Today's episode was produced by me and edited by Stylianos Nicolaou. For more episodes you can check out our website at hiddenforces.io. Join (37/38)
the conversation at Facebook, Twitter and Instagram at Hidden Forces Pod or send me an email at dk at hiddenforces.io. As always, thanks for listening. We'll see you next week. (38/38)
What's up everybody? My name is Demetri Kofinas and you're listening to Hidden Forces, a podcast that inspires investors, entrepreneurs, and everyday citizens to challenge consensus narratives and to learn how to think critically about the systems of power shaping our world. My guest in this week's episode is Kai Fu Li. Dr. Li currently serves as CEO of Sinovation Ventures, a leading Chinese technology venture firm and was formerly the president of Google China and a senior executive at Microsoft, SGI, and Apple. He's the New York Times best-selling author of AI Superpowers and is out with a new book titled AI2041, 10 Visions for Our Future, which provides the foundation for today's conversation about the future of our world, what it's going to look like, and the challenges and opportunities that such a world will create. In the first part of today's episode, Kai and I discuss a number of key technologies that he believes will play a pivotal role in transforming our lives over the (1/38)
next 20 years, such as artificial intelligence and quantum computing, how these technologies work, and their application in fields such as autonomous driving and predictive analytics. Most of the first half, however, is spent on the subject of deep learning, which is a subset of machine learning, which itself is fundamental to many of the transformative technologies that we speak about today. In the second half, which is available to our premium subscribers, our conversation turns to the subjects of deep fakes and autonomous weapons, job displacement, as well as digital currency, and how to think about money and the type of post-scarcity world that Kai Fu believes we're progressively moving towards as the technologies we discuss today are increasingly integrated into our applications, devices, and systems. Again, a fascinating discussion that fits right in with the type of content that you have come to expect from this podcast. If you enjoy the first half of today's conversation, I (2/38)
encourage you to take the leap and become a premium subscriber. If you aren't already, there's no commitment, you can cancel at any time, and the entire library of premium content going all the way back to episode one becomes instantly available to you, including the overtimes, transcripts, and rundowns, depending on your tier. So without any further ado, please enjoy yet another incredibly informative and engaging episode of Hidden Forces with my guest Kai Fu Li. Kai Fu Li, welcome to Hidden Forces. Well, thank you. Thanks for having me. It's great having you on. I thought we started this recording 15 minutes ago, and I forgot to press the record button. It's funny, we're talking about the most advanced suite of technologies, and this is a clearly an example of both a very rudimentary technology and one which works fine, if not for the mistakes of the operator. So congratulations on your, what is your second book? Your first book was AI Superpowers. I would describe this book as (3/38)
primarily a nonfiction book that uses fictional stories as thought experiments meant to both help readers understand the most important technologies that you expect to play a role in our lives over the next 20 years, and to convey how these technologies could change our lives, our identities, and our conceptions of the world in ways that are very difficult for us to imagine. Do you think that's a fair description of the book and how would you describe it? Yeah, actually, I couldn't describe it better myself. That's exactly right. What I would add is that the reason I wanted to use the fictional stories is to make technologies more understandable and even entertaining to people who might otherwise find high tech like AI to be intimidating. And because AI is so important, people should understand it and telling stories is the best way for people to understand. And that's why I have a co-author who is a well-known science fiction writer and he writes the stories and I create the what (4/38)
technologies are doable map and he writes stories from that and that hopefully delivers the goal. How did you go about choosing the scenarios for the book and were there any scenarios that you had to leave off the table? Well, choosing the scenarios is really brainstorming that considers the many technologies I wanted to cover and they needed to be covered in a sequence from easy to hard. And I also wanted to connect the technologies to different industries like healthcare, education, and so on. And my partner, he wanted to place it in 10 different countries. So it was a fun puzzle where we try to play with these pieces until everything fits. I think we managed to get everything in because I think some of the things we left out are really just didn't have space for it because it can't just be about AI, right? Because many other things are also important. Quantum computing, blockchain, drug discovery, and energy, materials, climate are all important. So we included all of that in the (5/38)
book. One technology we just couldn't get in that I thought was quite important are related to gene editing and CRISPR. And we just couldn't fit that in the story because that had to be a major part of the story, our ability to edit our own genes. It couldn't just play some secondary role. And we just went out of space and we had to leave that off the table. It's really not AI per se, but it is related to AI. Yeah, I noticed that I was going to ask you about it. You did get to fit in autonomous weapons, which is something I do want to ask you about. And you did cover the medical applications of artificial intelligence and precision medicine. So that's something that we'll also discuss as well. What are some of the misconceptions that you think people have around what AI is and how do you think most people think about what it is and what is it? How would you describe it? Right. So I think the first misunderstanding is that people think programmers program AI, the way that people think (6/38)
if then else kind of rules. And it's true that once upon a time, 40 years ago or so, 30 years perhaps for some people, this type of rule-based approach was predominant in AI. But it was around 30 years ago, but really was not became dominant until the last five or 10 years. A new subfield of AI called machine learning became the dominant subsector of AI. And machine learning does not work at all with human micromanaging decisions. The way machine learning works is that it takes a large amount of data and figures out how to make decisions from the data. And the human doesn't really have an opportunity to micromanage and set the rules. The human just says, here's the goal. Here's a bunch of data and let AI figure it all out. The advantage of taking such an approach is that as you have more data, the decision making it becomes more accurate. And that's why we see AI beating people as more and more data are gathered running on powerful computers, training these smart machine learning (7/38)
models that eventually outperform people when trained on enough data. Yeah, that's super interesting. And that's something I want to discuss too, because it has implications for the social implications of AI, which is for example, while there's a model for learning in these systems, the systems don't necessarily generate or certainly they don't generate models that we can inspect and understand. And so they arrive at decisions in a way that almost feels like oracular, magical. And how do we incorporate such systems in our existing frameworks and regulatory models that rely on accountability and the ability to extrapolate from an event an explanation? That's something that I definitely want to discuss with you at some point. So there are 10 stories in the book, as we discussed. When I was preparing for this conversation, there were certain ones that really resonated with me that I wanted to cover. But as I started going through them, I realized, okay, well, these are actually (8/38)
structurally in order on purpose, because they sort of lead the reader by the hand. And there's a lot of aspects of AI that are the sort of AI complex, let's so to speak, not necessarily deep learning that are present in all these different stories. So it isn't that just one covers one aspect. The opening story, I think is the one that is most maybe relatable isn't the right word, it certainly is relatable in a way, but it's also the most believable because it's the most proximate to the world we live in today. And it revolves around a family in Mumbai who is signed up for this deep learning enabled insurance program. And as part of that, the family uses a series of applications intended to improve their lives in a way that is ostensibly concordant with the objective function of reducing their insurance premium. What was your goal in telling this story? And what did you want readers to take away from it? Right, while people are concerned about large companies with a lot of data. And (9/38)
the example in this story is a company that is even larger than the likes of Google and Facebook, because they produce social networks and e-commerce as well as insurance. So it's combining several internet giants into one. And that allows it to learn from much more data from each individual, thereby providing excellent results on the AI, meaning they can optimize insurance premiums for individuals. They can help people pay less premium, which means for health insurance is help people get sick, not as much, or don't get very sick, because those cost a lot of money for the insurance company and a lot of pain for the individual. So the second point related to that that I wanted to get across is that even when the owner of AI appears to be highly interest aligned with the individual who buys the policy, things can go wrong. Because when people look at why does Facebook or YouTube show me things that make me angry or frustrated or violent or waste so much time, and people can explain as (10/38)
the documentary social dilemma has very well done, is that, hey, YouTube and Facebook want you to spend more minutes, and that helps them make money, but they don't care the quality of the content you see. So they keep showing you things that you'll keep clicking, and that's what causes the addictive behavior and the regret after you watch so much. But I wanted to present in the Golden Elephant a story where the insurance company and you want the same thing, which is don't get sick as much, be healthy, so you don't have to get insurance company to pay for your illnesses. And yet, when it appears to be so interest aligned and well-meaning, still things could go wrong. So I wanted to get that point across. So this is really awesome. I read the first book that I had ever read on AI was a number of years ago. It was called Super Intelligence. And I learned quite a bit about all the things that could go wrong with AI, some of them very heady, sort of out there theoretical, but some of them (11/38)
very concrete related to the objective function in this case. What are some of the ethical and technical challenges associated with implementation, with implementing this type of learning function, or this kind of targeted outcome to more and more of the machines and applications that we interact with every day? Well, first, it's just the awareness. Many often the engineers aren't aware that they're building in technologies that essentially brainwashes us or causes us to see things and think in certain ways. And that's how powerful these algorithms are. That's right, because the engineer is thinking, hey, I work for a large internet company that want to program the content so that users click more. Seems completely reasonable, because, you know, we people for offline grocery stores want people to come in the store and buy more and hang around more and they give people coupons and whatever enticements. So it seems like a completely normal and commercial thing to do. But what is also (12/38)
people are missing is that AI is so powerful that when you tell it, go do one thing maniacally focused on that, it will do so to such a degree of optimality and perfection that it can cause other bad things to happen. So to fix this, I think first the engineers and the product managers and CEOs have to realize what a powerful weapon they've got. And they have to build it carefully considering multiple factors, not just how much money they make, how much we click. But also, is it showing quality content? Is it showing bias content and how to control the quality of content, reduce fake news, etc. So I think the awareness and then building in the processes and the tools that will help the products not to have some of the negative side effects. Well, this is the part of AI that I find have always found the most interesting and fascinating, because it grapples with philosophical questions and concepts that people have been dealing with for millennia. And there are no good answers to these (13/38)
questions. Or rather, there are good answers, but there aren't any answers that we can definitively point to and say, aha, that's the right answer. And so what is the ethical dimension of this, which is that there are no universal ethics that we can empirically point to and say, these are the correct ethics for society. So one, how do we as a society go about deciding? Or first of all, do we have to make decisions about who we can entrust with making these decisions? And then second, how do these individuals make the right decisions? Then how do they go about constructing the right objective function? And then how, and now I'm reminded of an episode we did on philosophical mathematics, where we looked at Wittgenstein and the challenge of logical clarification of thought. How do you translate? How do you take what your intention is and properly instantiate that in code so that you actually get the effect that you want? Understanding that these are, this is very complex. I mean, this is, (14/38)
I certainly can't appreciate how complex it is. I can only imagine. Yeah, there are many things we can do. There's no way there can be a perfect answer. Even prior to AI, even humans, we make lots of errors in bias and unfair decisions, and we don't explain ourselves well. And people do things to cause other people to get addicted to. So let's take a step back and not assume without AI, anything's perfect. I think we should at least deliver a decent experience. So often, there are, I think, awareness, education of the engineers and CEOs who work on these projects. Secondly, I think there should be regulations, you know, just like there are regulations against certain child pornography, there's regulations against sending out pyramid schemes and chain letters. So things like that should be used to prevent extremely bad behavior for the companies that own all this data. They have to be responsible. Third, I think there can be tools that will catch problems. So if an AI researcher is (15/38)
trying to train a new model for, you know, Facebook or something, and then the person didn't use enough women training data, so the algorithm may become biased against women, then, well, AI should be able to detect that and say, you can't launch that unless you fix the data fairness problem or the data distribution problem. So technology can be used. And then lastly, I think there can be social and market mechanisms that are essentially working to become a watchdog for companies that misbehave. So for example, maybe there can be a metric of how much fake news is in every social media or how much deepfakes are they let through their software and scores are published on a monthly basis. So that forces the companies to behave well. And if they don't do a good job, there could be regulations, there could be fines, there could be audits, just like their financial audits. So these things could take a decade to all be figured out. But I think once there's awareness, then there are people in (16/38)
public and private sector who will try to fix these problems. Yeah, I mean, I think that's a great point, which is that this is a work in progress and you would be working alongside researchers and developers and engineers, we're working alongside the evolution of these systems. I think where concerns around the initial setting of conditions are, how would I describe it, our most dystopian is when you think about the long-term trajectory of AI and do we end up creating something that ends up either for malevolent or benevolent reasons or benevolent reasons replace humanity. You mentioned deepfakes, I want to talk about that because that's the next story in the book. Before we go there, I have one last question and maybe we'll get into more details on this in the overtime. And it has to do with attacking these systems. Do you envision ways in which attackers would attempt to either attack the objective function itself, trying to mess with the objective function, or the input data in (17/38)
order to, as another way, mess up with the output? How do you see ways in which these systems could be vulnerable to attack? Yeah, AI security is yet another new field that's different. Just like when we had PC, the malware usually mess with our Windows registry and the things to our computer, disabled it. When mobile often is in there to steal the money. And then with AI, there are a number of ways that the bad people can get in. One is just by poisoning. So it feeds the wrong training data so that you train something that ends up doing something you don't want, unable to recognize something that you should, or always let these bad people go through in facial recognition or something. So that's one possibility. Another is when is AI being run, you find this fragility, and then you do something with the inputs that is being tested to trick it because it's never seen anything like that before. So we've seen people who've put some tapes on a stop sign causing autonomous vehicles to no (18/38)
longer recognize it as a traffic sign. Yet all human drivers would recognize it. So because AI is only as good as all the training data it's ever seen, so most training AI have seen stop signs that are far or near with paint coming off, maybe with some snow on it, but they've never seen stop signs with cross tapes on it. So it could get confused. So that's another approach. I'm sure there will be others. So I think we have to really be careful and start the research ahead of time before the bad guys take advantage of all these AI holes. So you actually have a chapter in the book called The Holy Driver, which is about autonomous vehicles. And it's actually super interesting because it adds a dimension to the implementation of such technologies that I hadn't considered, which is the Holy Driver, which is human intervention. So how advanced is autonomous vehicle technology today? Because I think some people, well, I think for a few years ago people were surprised at how advanced it was. (19/38)
Maybe they didn't realize just how far we'd come. But maybe today, I think today there are a lot of people that might have the opposite point of view, which is they think it's more advanced than it actually is. So how advanced is it at present? And if you could sort of summarize how autonomous vehicles work, given without having to repeat everything we've already talked about, about how AI works or how deep learning works. Sure. So autonomous vehicles take a bunch of inputs and uses that to decide how to manipulate the steering wheel, the brake and the accelerator and so on. And the input it gets are input from the many cameras that they put in an autonomous vehicle and also a number of other sensors, such as LIDARs and other types of sensors that sense the condition around you. It tries to make out is that the shape of the thing coming at you. And then on top of that, it has deep learning, trying to recognize from all these subjects, which are pedestrians, which are cars or trucks, (20/38)
and which are stop signs and traffic lights and sky and cloud. And then based on that, it's further trained on how to continue to follow the road and the brake when the car in front of you stops. So it's a lot of complex issues. It takes a human some 40, 50 hours to learn how to drive. So this is not something trivial. Some people never learn. That's right. That's right. So AI may not see all the data of all the permutations. So that's why today in constrained environments, AI already drives extremely well. So environments like a inside the warehouse, drive a forklift, that is AI can do so much better than people. In fact, if there aren't people around, they can drive really fast. And even with lights off, they can often do still run in the warehouse. We actually have invested in such a company. And then as you go to more complex scenarios in buses, AI can still do a decent job because that's in a fixed route and fixed stops. Trucks on highways, AI can do a great job because highways (21/38)
are natural for AI because there aren't a lot of strange things happening with crossroads and and pedestrians and all that doesn't have to worry as much about them. AI can also do better in well lit conditions without a big storm or snow or something like that. So AI already drives better than people in the scenarios I told you about, some of which people think is hard, you know, driving on the highway. Some people are scared of that. But AI is actually quite good at it because it's a relatively constrained environment. But then when we get to, you know, driving in the night with heavy snow in a downtown with pedestrians walking about, in that case, I would not ride in any autonomous vehicle today, because there's just too many long tail things that will take much longer for AI to collect enough data or do simulations to train on. So the approach that the industry is taking is gather a lot of data, start from simpler environments. For example, when you drive a Tesla, all the pilot is (22/38)
used with humans still supposedly watching over and stopping when the AI makes a mistake. And it's doing things like summoning when you park the car. And it's all at the same time, it's gathering data to make it work better and better. And when it improves, Tesla will update your software, then it gets better. So that I think is generally how autonomous vehicles will work. Start with constrained environments, gather a lot of data, improve, then go to the less constrained environments and eventually reach a complete replacement for humans. Yeah, two interesting conceptual observations. One has to do with something you said very early on when we were talking about how most people conceptualize AI, which is a lot of people still, probably older people, think of AI in very atomic terms. They might think of it in terms of the interface, the robot, the entity. When people think about in this context, in terms of autonomous vehicles, maybe the old way of thinking about it was kit from Knight (23/38)
Rider, the car itself. But of course, in this case, the lessons learned by individual cars are not learned by that car, it's learned by the entire computational system that informs each of those individual pieces of hardware. Number one, I just wanted to reemphasize that point. But then I have a question, which is is one way of thinking about intelligence or defining intelligence, the ability to work well in environments of uncertainty or environments that are unpredictable, is that how one way we can think about what an intelligent machine is? Well, I think that's one of the expectations of intelligence. And there are many other aspects, right? Being able to analyze chess moves seems like a perfectly reasonable measure of intelligence until computers learn to do that. So what you just described is something that humans can do and AI cannot yet do, dealing with unseen environments. But someday AI may be able to do that. So I think we can probably list 30 or 40 things that we used to (24/38)
think made humans intelligent. And for the past 10 years, AI has been overtaking humans in some of these tasks. And yet others are still quite a ways to go. So one last question on autonomous vehicles, because this raises a lot of the social, ethical, political considerations that we touched on earlier. But in perhaps more immediate ways, one thing we didn't talk about, we talked a little bit about the black box problem, which exists also here, right? Which is in terms of how do you manage liability? Who's to blame? And also, how do you determine how a decision was made? And if you can't determine that, well, then how do you assign blame or how do you just go about thinking about that problem? That's one. And then there's the so-called trolley problem, which brings us back to the issue of ethics and the designing of objective functions. So one, maybe you can let our listeners know what the trolley problem is. And then more to the point, again, how is this an example of, for a (25/38)
technology that's right, we're dealing with it right now, how do we go about regulating the space? How do we go about managing this problem? Which is that these systems are going to result in casualties specifically. Right. And bad outcomes. And something I didn't ask you before is, should the metric of success simply be that the outcomes result in fewer bad outcomes than they would under the conditions of a human operator? If so, how much better should the outcomes be? In other words, how much value do we assign to the ability to simply understand why something happened, as opposed to simply getting a better outcome? If that makes sense. Yeah, absolutely does. These are very complex issues. I think from a, first, the trolley problem is the case where the trolley moves by default in a particular direction. The driver has to push it in order to move it to another direction. So the trolley problem describes the dilemma that the driver faces when it's inevitable the trolley would hit, (26/38)
let's say, two people if the car were to kept going straight. And then, but if the driver pulls the lever and moves it to another track, it would only hit one person. So is it morally right or wrong to pull the lever? Because if the driver doesn't pull anything, it's not his or her responsibility, but two people will die. If you pull the lever, you save a life, but then you're deliberately killing that person who would otherwise not have to die. And that person may be crossing the tracks thinking is perfectly safe because the trolley car wasn't supposed to go that way. That's the ethical moral problem. And I think the autonomous vehicle problem is akin to that because computers AI will be making decisions on left turn, right turn fast, slow that will have lives that ride on that decision. So I think the programming per se is not by rules. So you don't really say if there are two younger people, one older people, then do this and do that. It's no human will ever have to have to program (27/38)
that. Think of it as more like programming, get people from place A to place B, and on the average have the fewer lives lost. That's probably more or less the direction humans would give it. So because these systems aren't deterministic or because the deterministic function is so complex that it isn't open to our understanding, do you foresee us getting to a point with these systems where you start getting really bad outcomes, people panic, they don't understand why they're getting the bad outcomes, they can't really investigate them and understand why they're happening. And so how do we as a society and as governments wrap our arms around those eventualities? Yeah, this is a really tough one. First of all, there are going to be some people who will think it's totally unacceptable for machines to ever make decisions that cause human casualty. And if the majority of people think that, then AI will never get off the ground, then we should stop all the work. So assuming that we as a human (28/38)
race accept that sometimes, not intentionally, because intentionally it would be an autonomous weapon. But in order to deliver a goal that is proper and helps humans overall, there are lives lost anyway, but under what conditions can you allow a AI product to launch even though it leads to, let's call it unintentional, basically casualties. So I think as a society, we do have to detect, debug and try to fix each casualty, but it won't be if then else rules, did you break the law, if you did go to jail kind of situation, but rather programmers will have to go back and see if they have to gather more data and things like that. And as far as the level of explainability, I think it will be possible with some more research for AI to approximate human description of why something happened, because humans aren't perfect explainers either. So the AI decision is certainly way too complex for us to understand, but it can tell us the most prominent five reasons are ABCDE enough for people to (29/38)
understand and assess whether this is a horrendous mistake or not. Yeah, humans are horrendously bad at providing honest explanations. They're very good at coming up with explanations for why they did something after the fact. That's right. It reminds me of an episode we did with Jonathan Haidt where he wrote the book, The Righteous Mind. And I think he said in that book that decisions come first or something to that effect, decisions come first, strategic reasoning second. So we reason after the fact, which is kind of scary when you think about it. So you mentioned autonomous weapons. Those are wrapped or rolled into a story called quantum genocide dealing with quantum computing as well. And the story is kind of this Unabomber-esque, Ted Kaczynski-esque character. First of all, tell us a little bit about the story and then use that as an opportunity to explain what quantum computing is because I did one episode on quantum mechanics. I took a class, an online class of Leonard Suskinds (30/38)
from Stanford and I still don't understand quantum mechanics. And so quantum computing is like one step removed. And I think it's so intimidating for people. So how maybe you can help bridge that divide for most of us today? Sure. The story of quantum genocide really has covers two important technologies. One is quantum computing. And this mad scientist used quantum computing to break the security Bitcoin wallets and stole money from all the Bitcoins around the world. And he used this Bitcoin that he stole, tens of billions of dollars to create autonomous weapons, which are these very tiny drones that we can hold on our palm. And these drones will recognize any face from a list of faces and attempt to assassinate them. And then this Unabomber-like terrorist believes the world has gotten to a terrible state that it's in because of all the elites. So the elites are the political figures and business leaders, etc. So he proceeds to eliminate them through assassination. So that's the two (31/38)
sets of technologies. Quantum computing is different from what's called classical computers in the sense that it is not binary, but it holds all possibilities open. So instead of programming a computer to be everything is yes or no and make decisions or run code, quantum computing has many so-called qubits, which could take on any value. And they're all tried simultaneously. So when you have a 4,000 qubit computer, you actually essentially have a super smart computer that can try all the permutations of 4,000 things. So imagine you're trying to still run an AI algorithm, or you're trying to in the case of stealing Bitcoins, you're trying to guess the password. So think of it as you're trying to guess the password, but you're trying all the permutations of all the possible bits of a password at the same time and outcomes the answer. So that's the power of quantum computing. And every time you add a bit, the computer doubles in its capabilities. So it's something we couldn't imagine (32/38)
before. And it's also very suitable to model things in the real world because of the relationship with quantum mechanics. So you can use it to simulate your body and what happens to your body when a drug is introduced to your body. And then you can test the efficacy of drugs potentially one day without having to do much clinical trials anymore because you're simulating the human body. And you can similarly simulate the world, simulate the effect of different types of climate control. So it's really directly simulating the world while a classical computer is an arbitrary tool that is much more limited. So that's the power of quantum computing. Let me stop here if you want to go to autonomous weapons. Sure. Before we go to autonomous weapons, I'm curious, how difficult is it to actually get quantum processing to a place where it has a meaningful impact on all these other technologies, including AI? What are the bottlenecks to doing that? How realistic is it that we get to such a place in (33/38)
the next 20 years, which is the scope of your book, or even 40 years or 50 years? Yeah, this is one of the most uncertain predictions in the book, which is when will a 4000 qubits quantum computer work? And the reason I picked 4000 is that's approximately what it would take to break a Bitcoin wallet. And because that's arguably one of the first highly lucrative applications, even though it's a malevolent one. And the road to 4000 qubits, you can project based on the progress of the scientists in the last few years. We've gone from a few qubits to tens of qubits. Now we're in the low 100. I think we're about 200 qubits or so. So we've have seen improvement. So some optimists would say, hey, we're an IBM is saying, you know, they think they can improve, they can add quite a bit a year based on the IBM roadmap, they'll be at 4000 qubits in probably, you know, 10 to 15 years. So that's where the estimate comes from. But they also acknowledge, though, that the difficulty of adding more (34/38)
qubits is it's all about managing stability because these qubits are, you know, superconducting material that is highly unstable. So building a large quantum computer is really scientists figuring out engineering ways to maintain stability. So based on the best of my research, because this is not my area of expertise, most people who work in quantum believe that 20 years is a reasonable time frame in which to build a 4000 qubit system. So I rely on the expert estimates. I wouldn't say it's a 100% accurate prediction, but it's their rough estimate seeing how much progress has been made, how much time it would take to stabilize 4000 qubits. So Dr. Lee, I'm going to move the second half of our conversation into the overtime. Like I said, there are 10 stories in the book. I think we covered maybe four so far. We'll do our best to cover the rest, but there are certain ones that I absolutely want to cover. As I said, autonomous weapons folds into this chapter on quantum genocide, which we're (35/38)
going to cover right when we get back to the other side of this conversation. Your last chapter is also fascinating. I think it's titled Post-Scarcity or no, something along those lines, but it deals with the post-scarcity world. That's right. Yeah. And that also touches on money. And how do we think about money in such a world, which I found fascinating and very relevant to our listeners. There's also a chapter on happiness optimization, which will allow us to dig deeper and cover some areas that maybe we didn't get around objective function and data privacy. Also applies to issues of blockchain technology. We didn't really cover job displacement. I think that's super important, and that's something I would really like to discuss. And also deepfakes and VRAR as well, because these are all technologies that while quantum computing is something that most people, it hasn't really pervaded our lives yet. Deepfakes and in general, fake news, so to speak, is a problem that we're all dealing (36/38)
with now. A lot of people have used VR headsets, AR, incredible mind blowing technologies that really show you just how far we've come. So these are the kind of the where I'm focusing my attention. For anyone who is new to the program, Hidden Forces is listener supported. We don't accept advertisers or commercial sponsors. The entire show is funded from top to bottom by listeners like you. If you want access to the second hour of today's conversation with Kaifu, as well as the transcripts and rundowns to this episode and every other episode we've ever done, head over to hiddenforces.io and check out our episode library or subscribe directly through our Patreon page at patreon.com slash hiddenforces. There's also a link in the summary page to this episode with instructions on how to connect the overtime feed to your phone so that you can listen to these extra discussions just like you listen to the regular podcast. Dr. Lee, stick around. We're going to move the second part of our (37/38)
conversation into the subscriber overtime. For more information about this week's episode of Hidden Forces or if you want easy access to related programming, visit our website at hiddenforces.io and subscribe to our free email list. If you want access to overtime segments, episode transcripts and show rundowns full of links and detailed information related to each and every episode, check out our premium subscription available through the Hidden Forces website or through our Patreon page at patreon.com slash hiddenforces. Today's episode was produced by me and edited by Stylianos Nicolaou. For more episodes you can check out our website at hiddenforces.io. Join the conversation at Facebook, Twitter and Instagram at HiddenForces.pod or send me an email at dk at hiddenforces.io. As always, thanks for listening. We'll see you next week. (38/38)
Brad Setzer at the Council on Foreign Relations has connected the continued dominance of the dollar in international reserves to the fact that the main current account surplus economies, China and the oil exporters of the Middle East, Saudi Arabia in short, are running current account surpluses. The United States is the large economy that is running current account deficits. So the only way to make those surpluses and our deficits add up is if those economies continue to accumulate dollars in payment, in settlement for our purchases of Chinese merchandise and Middle East oil, if you will. On the other hand, those current account and capital flows do not obligate anyone to use a particular currency in settlement, invoicing of transactions. So I think China can continue to build up its Renminbi based cross-border interbank payment system to settle some of its bilateral transactions even as its central bank is continuing to accumulate dollars. Let's talk about this a little bit because we (23/38)
but banks and firms make more strictly commercial decisions about what currency to use. They look at the cost of getting in and out of a currency and they see the cost of getting in and out of the dollar as low, so they stick with it for their private commercial and financial transactions. Can these two aspects seriously decouple from one another? Could central banks and governments move away from the dollar big time while banks and firms stick with it? I don't think so. I think there has to be a broad parallelism in the trends in the two dimensions because if banks and firms are borrowing dollars offshore and then they get into trouble, their central banks are going to have to be able to lend them those dollars. Part of what we're seeing may be that currency swaps have become more important that foreign central banks don't have to hold dollars if they can swap their currencies with the vet and obtain dollars that they can then turn around and lend to their banks and firms. But broadly (16/38)
no traffic and just burden the government with more debt that it can't repay. Do you think that we're seeing the emergence of a bifurcated global economy? I worry that we're seeing the emergence of a bifurcated global economy. China and the United States are still one another's number one or number two most important trading partners, but bilateral foreign investment has fallen off. The Chinese are investing abroad, but not so much anymore in the United States. US companies are investing abroad, but no longer in China. There are important economies aligned with the United States like South Korea that depend importantly on trade with China and non-aligned countries like India that continue to deal with both economies. I think a bifurcated global economy where economic relations between the US and China broke down and there were more trade restrictions and retaliation and bilateral financial flows dried up entirely would be disastrous for the global economy. As you and I speak later this (27/38)
What's up, everybody? My name is Demetri Kaffinas, and you're listening to Hidden Forces, a podcast that inspires investors, entrepreneurs, and everyday citizens to challenge consensus narratives and to learn how to think critically about the systems of power shaping our world. My guest in today's episode is distinguished professor of economics and political science at the University of California, Berkeley, Dr. Barry Eikengreen. Dr. Eikengreen is a prolific author and a highly regarded historian of monetary economics and political economy. In his first appearance on this podcast nearly five years ago, he joined me to discuss the legacy of the Great Moderation, a multi-decade Goldilocks period of low inflation and positive economic growth that lasted somewhere between the mid-1980s and the onset of the great financial crisis. The period that we've been living in up until very recently and that some have called secular stagnation was characterized by historically low interest rates, (1/38)
sluggish economic growth, persistently low inflation, and growing levels of social and political instability. One of the main questions that Dr. Eikengreen and I wrestle with in this conversation is the current period of higher inflation and rising interest rates, a temporary phenomenon soon to be followed by a return to secular stagnation. Or are we entering a new economic paradigm where sovereign debt levels in the developed world become unmanageable, multilateral cooperation breaks down, and state power grows at the expense of capital and labor. Our conversation includes a discussion about the future of the US dollar, the potential internationalization of the Chinese Yuan, and the role of gold and other commodities as potential reserve assets in a world where fiat-based collateral comes increasingly under stress. This episode is part of a series that I've been putting together on the future of the US dollar, the move from unipolarity to multipolarity, and the evolving impact of (2/38)
great power competition on global trade and finance. You can find other such related podcasts on this week's episode page at hiddenforces.io, where you can also access the second part of today's conversation by joining one of our three content tiers. This gives you access to our premium feed, which you can use to listen to the second part of today's conversation on your phone using your favorite podcast app, just like you're listening to this episode right now. If you want to join in on the conversation and become a member of the Hidden Forces Genius community, which includes Q&A calls with guests, access to special research and analysis, in-person events and dinners, you can also do that on our subscriber page. And if you still have questions, feel free to send an email to info at hiddenforces.io, and I, or someone from our team, will get right back to you. And with that, please enjoy this excellent conversation with my guest, Dr. Barry Eichengrin. Dr. Barry Eichengrin, welcome back (3/38)
to Hidden Forces. Demetrius, it's been a while. It has been. You were on the podcast in the early summer of 2018 to talk about primarily the evolution of populism in the United States. And we also got into a conversation about the Euro, the future of the Euro, the future of the Yuan, and also some geopolitics, because you had written a paper a year before that on the geopolitical premium in a reserve currency. So before we start, for anyone who's not familiar with your work, Dr. Eichengrin, can you tell us a little bit about who you are and how you got involved in economics? I'm a professor of economics and an amateur political scientist as well at the University of California at Berkeley, where I've been for like three decades. I got into economics because of an early life interest in the social sciences, what was going on in the political sphere, in the economic sphere, et cetera. And I found economics really for two reasons, an inspiring teacher that affects the direction in which (4/38)
many of us go. And because economics had a structure, it had models that I found comforting, congenial, if you will. Some of the other social science disciplines were a little touchy-feely for me, so I gravitated toward economics. At that point, I discovered that there were other people with more serious mathematical chops than me doing economics. So I ended up working on the border between economics and political science on the border between economics and history, where I could carve out my own terrain a little bit rather than competing with the advanced mathematicians. Was Golden Federer's your first book? Golden Federer's was my first book other than some edited collections and the like. So yes, it's risky to write a book in economics where one's peers judge you on the basis of journal articles. So I got tenure back in the day in 1987, at which point I embarked on the book, which came out about five years later. Very nice. So I was telling you before we started the conversation (5/38)
that I've been really interested in the intersection of geopolitics and global macro. For years, it's been something that we've talked about on this podcast, but it's become increasingly newsworthy as, for lack of a better word, the financial and political hemisphere has developed narratives around it. And it's a lot easier in those circumstances to speak to something because people are looking for it. One of the ways that I think about this is I try to think about what the period we're living through today will be remembered for. When I look back at like the 1990s, and for me the 1990s will be remembered primarily for the end of the Cold War and the commercialization of the internet. Those are the two big forces of the 90s. The first decade of the 2000s was Iraq and 9-11. And I actually don't even think of the 2008, 2009 financial crisis as part of that decade. I think of it as the 2010s, in which I also include the public revolt against the prevailing structures of power in society, (6/38)
manifest as political populism and in movements like Occupy Wall Street and Wall Street Bets, and social media, which has transformed our society in ways that I think we're only just beginning to really grapple with and understand. And this decade is already shaping up to be as explosive at the very least as the early 2000s with a pandemic of COVID-19 and with the war in Ukraine. But the big backdrop in all of this is this larger conversation of the global order. And are we currently living through a reorganization of the global order that is something analogous to what we saw during the interwar period or during the post-World War II period? What do you think, let's say if we were doing this conversation in 2030, what do you think this decade will have been remembered for? I think the decade will be remembered first for the backlash against globalization, the populist politicians and pressures, disaffection with the elites, identity politics, and problems around the management of (7/38)
immigration, that number one and number two, geopolitical tensions between the US and China. What's going on in Russia is a very, very unfortunate, deadly sideshow. I think the important geopolitical tensions are those between the US and China. And we're seeing that in the fact that contrary to widespread expectation, the Biden administration did not roll back the measures taken by the Trump administration vis-Ã -vis China trade policies and so forth. To the contrary, it escalated and broadened the economic measures designed to at least loosen the coupling between the two economies. So I think it will be backlash against globalization and US-China tensions that will be at the center of those future histories. Just to comment briefly on the connections between geopolitics and the international economy, there is a long tradition of scholarship focusing on those connections. I would go back to the work of Charles Kindleberger, the late great MIT economist and economic historian who wrote (8/38)
about how the changing of the guard between the US and the UK in the 1920s and 1930s brought down the gold standard, which in turn brought down the global economy. So he made those connections long before I did in that book you mentioned, Golden Fedders. But that emphasis kind of died away with the end of history, with the end of the Cold War. And now we have the end of the end of history. The new Cold War is back and people are rediscovering that geopolitics and international economics, geopolitics and international monetary and financial affairs are connected at the hip. Yeah, we actually, I want to point listeners to our episode with Perry Merling on the rise of the global dollar system and his book Money and Empire, which chronicles the life and times of Charlie Kindleberger, who I actually discovered coincidentally, grew up before he moved to Queens, grew up right across the courtyard from my apartment in New York. Which I think that building has been since demolished. So to go (9/38)
back to this thing about geopolitics and the changing order, it seems that what is clear today is that there is a large contingent of economies in the world, including the second largest economy, China, that are dissatisfied with the American led international order. In some cases, like in the case of Iran, or now Russia, it feels like these countries have permanently broke. Well, maybe Iran's a, it's too much to say that Iran is permanently outside the order, because maybe Iran doesn't have the kind of ambitions to ever lead the order. So maybe it could always swing in either direction, depending on whether or not it was actually brought into the fold. But certainly Russia feels like it's out of the order. Now whether or not Russia wants to collaborate or whether there's an opportunity for some kind of buying back into its commercial relationship with Europe, that's a separate question. But it's not clear what that future order is going to be. And part of that conversation also (10/38)
involves what the nature of the international dollar system will be. Let's start maybe with a question about the existing role of the dollar and what some people call dollar dominance. What do you attribute dollar dominance to? And how do we define that? Let me start with the definition that dollar plays an outsized role in cross-border transactions globally, depending on how you measure the size of economies. The United States is maybe 20%, 25% of the global economy. But the dollar accounts for 60% of the foreign exchange reserves of central banks and governments around the world. The dollar is the vehicle for the majority of cross-border transactions globally, including transactions between countries other than the United States. What do I attribute the dollars dominance globally to the long shadow of history? Basically, after World War II, the US was far and away, the dominant economy globally dominated the so-called free world. The US was the only country with deep and liquid (11/38)
financial markets open to the rest of the world. European countries had regulatory restrictions, capital controls on cross-border flows. Japan had regulatory restrictions, capital controls as well, and actively resisted wider global use of the N on the grounds that this would interfere with its industrial policies. So it was, you had to use the dollar and the US banking system if you were an importer or exporter or an investor seeking to do cross-border transactions virtually anywhere in the world. And there are complementarities between the different functions of the dollar because companies need and use dollars when they import and export merchandise. They sometimes have to borrow dollars from their banks. So their banks in turn try to obtain dollars from US banks and central banks in other countries, hold dollars because they may have to lend them to domestic banks in the last resort. So these different parts are interlocking and they kind of lock in dollar dominance or at least (12/38)
make it difficult to move away to alternatives. Europeans were long unhappy with this state of affairs. Charles de Gaulle and his finance minister, Valerie Giscard d'Estaing, were unhappy about this in the 1960s. And with the passage of 35 years, the Europeans created the euro in the hope that they would, with the expectation that they could create an alternative to the dollar that would be equally dominant on the global stage. It didn't happen. The Chinese are trying to promote international use of their currency, the renminbi, but their currency remains far behind the dollar and on most measures, they're making only slow progress. So there's an interesting conversation now about whether those alternatives will gain ground more quickly on the dollar. Now that the US is weaponized its currency, now that we have used Russia's dependence on the dollar in the US banking system against it, will other countries, not only Russia, but other countries in effect move away from having all their (13/38)
eggs in the dollar basket by seeking alternatives? Yeah, I want to let listeners know that we just recorded an episode and published it with Agathe Mare, who has written a book on sanctions policy and export controls. And we did one episode with Julia Friedlander shortly after the invasion of Ukraine on this same subject of the weaponization of the dollar if people are interested. I've seen analysts make the case for the dollar having become stronger over the course of its rise and arguments to the opposite effect, that it's become weaker. The weaker arguments or the less dominant arguments, I think, rely mostly on what you've put forward, that it's become a smaller share of international reserves, central bank reserves. I think it was 71% to begin the 2000s, and it's like you said, 60%, 59%, something like that today. The opposite arguments, I think, rest on what is more of a commercial argument, that the dollar has become more valuable, let's say, as a medium of exchange to use a (14/38)
maybe more modern term, though that goes back a while, but all the crypto stuff. Do I have that generally correct? And what accounts for those distinctions? Can a currency continue to function as a widely used medium of exchange, but become disfavored as a reserve asset for central banks? Yeah, I think you have the broad picture correct that central banks have been diversifying their reserve portfolios slowly, but surely, very slowly, but surely away from the dollar and mainly toward the currencies of smaller economies like Canada, Australia, Singapore, South Korea, Norway, Sweden. I would include Switzerland, a traditional reserve currency under that heading as well. At the same time, the dollar has not lost ground in the foreign exchange market and is invoicing and settlement currency for banks and non-financial firms around the world. The difference may be attributable to those geopolitics that we were talking about before, that central banks and governments are sensitive to them, (15/38)
speaking, I think there has to be conformance between the currencies that central banks and governments hold on the one hand and the currencies that their domestic banks and firms use on the other hand. So when you talked about the changing nature of the composition of international currency reserves, you highlighted that it hasn't been a move towards the euro, which maybe a lot of people would have thought if you were... In fact, I think even you may have said that early in the 2000s that if there was going to be a move, it would have been a move towards the euro. But instead it's been a move towards a larger number of smaller currencies. What has driven that reallocation in your estimation? First, there has not been movement toward the euro because there is a very limited supply of safe and liquid public label, meaning government issued bonds. Last time I looked, there were only four euro area governments with AAA ratings and its AAA rated bonds that central banks prefer to hold (17/38)
other things equal. There were hopes that next generation EU, this 850 billion euro European Union bond taken in 2020 in response to the pandemic, would change that. But next generation EU has been very slow to roll out. It looks like a one-off. They didn't do something similar in response to the energy shock last year. So it's been hard to move toward the euro because of a shortage of safe and liquid euro-denominated government bonds. On the other hand, Canadian dollars and Australian dollars and the like have looked relatively safe. Some of those bonds of smaller economies have had positive interest rates, which look attractive relative to the negative interest rates that have prevailed in Europe until recently. It's become easier to trade currencies even of smaller economies because of electronic trading platforms with automated liquidity provision and currency matching. Algorithms, bid-ask spreads have come down toward the bid-ask spreads on the currencies of big economies. If you (18/38)
want a China play, you want a currency that moves along with the prospects of the Chinese economy as opposed to the US economy. Until recently, there was an argument for holding Australian dollars, for example. Australia-China is another example of recent decoupling, but until recently, Australia's fortunes have been closely tied to China's. So I'm an economist. I can't give you one answer to a question, but I can give you two or three. Is that a movement that you expect to continue? Do the network effects and lower costs associated with transacting in dollars become less appealing in a world where you have alternative settlement solutions and possibly, let's say, stable coins or CBDCs? Yes. I do expect the trend to continue because I expect the cost of trading currencies moving in and out of them to continue to go down with advances in the digital sphere, maybe including central bank digital currencies. Don't see why not. And the second, remind me now, the second part of your question (19/38)
was... If that would make the commercial use case for the dollar, the argument for the dollar strength less compelling because there are alternatives for being able to move between two pairs since you've got an intermediary currency that you can use rather than having one dominant currency that everyone's using. Yes. So I made that argument in a book that came out in 2018 called How Global Currencies Work with two co-authors, Arno Mel and Olivia Cheetu. We argued that the network affects the complementarities between the different functions of a currency and the pressure, the advantages of using the same currency and cross-border transactions that everybody else is using. That's what we mean by network effects in this context, that in a high-tech digital world where it becomes easy to pull up an app on your smartphone and trade a currency at relatively low cost, those network effects and complementarities will weaken and we will see more diversification away from the dollar in all of (20/38)
these different international domains. So we made that argument now five years ago. I think that trend is ongoing, but recent events have reminded us that movement away from the dollar is still relatively slow. I might even call it glacial, so I've been surprised given all this action in the digital sphere and weaponization of the dollar that such movement hasn't been faster. It can always accelerate going forward, but there has been a lot of political and economic turbulence. We had Donald Trump for four years, the unpredictable President Trump and his unpredictable trade policies and that did not precipitate the fast movement away from the dollar that some people had expected. So how much of that glaciality, if that's even a word, is a result of all the effort that's been invested in and the network effects that result from the use of the dollar after so many decades and how much of it results from balance of payments and the way in which the underlying economies have been structured (21/38)
so that it's not so easy. This is the thing that I think is interesting, at least how I frame this and look at it. The Chinese absolutely want financial, economic independence from the United States because they want political independence. They want to be able to have complete autonomy. They don't for sure want to have happened to them, what happened to Russia. But at the same time, so much of their economy has grown up around the US dollar based international trading and financial system and has resulted from trade and engagement with the rest of the world and the persistent running of structural current account deficits by the United States. So how do we separate those two? The fact that yes, there are network effects associated with dollar and US dollar based financial infrastructure, but there's also an economic reality that has depended on various economies playing various different roles. I think we can separate those things by looking at the different uses of the dollar. So (22/38)
touched on the rise of the international dollar system post World War II at the beginning of this conversation. And part of what facilitated the dollar's rise was the Marshall Plan and the recycling of dollars. And the Marshall Plan, as it was structured, was less of a loan, more of a grant than what, let's say, China seems to be doing with BRI. One, do you agree with that? And two, how important was the Marshall Plan and what China, do you think, need to do something similar in order to get countries to adopt the yuan and to further internationalize it? After World War II, trade flows, current account balances were the main thing that drove the balance of payments. There was a dollar shortage in Europe because European countries had basically used up their dollar reserves to finance their war effort. They found it difficult to get their economies going because they needed imported merchandise, cotton imported from the United States and elsewhere in order to get their textile exporting (24/38)
industries up and running, and they needed other imported equipment. So the Marshall Plan was important for getting European economies on their feet, again, restoring their capacity to export and earn dollars. More generally, I think the Marshall Plan did play a critical role in the golden age of economic growth in Europe and Japan, getting it started in the third quarter of the 20th century. Do I think the Marshall Plan was critical for solidifying the dollar's international role? Not so much. I think the dollar would have been dominant had the European economy been robust, as it was, or had it limped along in the third quarter of the 20th century, because, again, only the United States had deep and liquid markets open to the rest of the world. I think China now is in a different situation because not only are there trade flows as there were after World War II, but we live in a world of capital flows as well, until recently anyway, other countries have been investing in China. China (25/38)
has been investing abroad via Belt and Road and in other ways as well. I think Belt and Road probably has not been critically important for China's Ren-Men-B internationalization drive. The data that I've seen from the folks at the College of William and Mary who've done the best work on this suggests that the majority of China's Belt and Road loans have been denominated in dollars, not in its own currency, because dollars have been what foreign construction companies and the like want and use. That could be changing as we speak, but I don't see that Belt and Road has been either important for Ren-Men-B internationalization or that it has played a positive role in economic recovery and development in the recipient countries in the same way that the Marshall Plan did after World War II. We all know the stories of Sri Lanka and Pakistan and elsewhere where Belt and Road has probably unbalanced played a negative role. The stories of railways in Kenya financed by Belt and Road that carry (26/38)
week, Secretary Yellen is supposed to meet with her Chinese counterpart in Zurich, I believe, and try to begin to reach understandings that will prevent the emergence of that bifurcated world economy. I hope that my former, my old UC Berkeley colleague succeeds in making some progress there. I want to get your take on a thesis that's gotten a lot of attention in the financial community recently. It's been put forward by the managing director and global head of short-term interest rate strategy at Credit Suisse, Zoltan Posar, as part of his war dispatches, which are like a subset of email notes that he sends out to people on his mailing list. I would call it the commodity encumbrance thesis though. I'm not sure that this is what he would call it though that is a term that he uses in a number of his recent notes. The basic argument as I've understood it is that in a bifurcated global economy where 40% of the world's proven oil reserves and where a large share of industrial commodities (28/38)
are produced in countries that may end up decoupling from the American-led international order and where fiat-based reserve assets are seen as less desirable forms of collateral, that we should expect to see certain industrial commodities like oil, copper, lithium, et cetera, begin to trade at a structural premium in Western countries and that we can expect to see alternatives to the US dollar like gold, for example, play a more important role as reserve assets. Are you familiar with this thesis and do you think that something like this can emerge without a larger kinetic geopolitical conflict? In other words, can we see a real break of such magnitude that would impact the global economy and growth, which have been driven by more internationalization and interdependence without a war? You should have Pozaran on your podcast to speak for yourself. I've spoken with him about it and it may or may not happen. We'll have to see he's limited in terms of how many interviews he can give from (29/38)
what I understand, but I would love to have him on to talk about it. I'm sure he can represent his views better than I can. He tends to extrapolate current events, right, that tensions between China and commodity exporters on the one hand in the US and the G7 on the other hand have been rising. Is it insightful to extrapolate current events or to think about how there may be an inflection point that turns matters back to the status quo, toward the status quo if China and India and others get the representation in multilateral organizations like the International Monetary Fund and the World Bank and the World Trade Organization that they deserve? I think there is concern about the possibility of this kind of rake in the White House and the US Treasury and in Europe and the resistance that G7 countries have put up to giving the rising powers a louder voice may diminish in order to try to bring them back into the fold and give them more say in the governance of a globalized economy. What (30/38)
would the alternative where we do see this bifurcation occur? What would that alternative monetary and financial architecture or broader global economic architecture look like? I don't see a clear description of that in the writings of the folks who extrapolate current events and say that bifurcation is coming. Maybe what we should do is go back to the post-1945, the post-1948 global order when there was a Soviet bloc, an Eastern bloc centered on the Soviet Union and a Western bloc centered on the United States and they hardly interacted with one another. I think one can imagine the coexistence of two largely disconnected blocs where the Western bloc utilized mainly the dollar and was centered on the US banking system and the economies that were involved traded amongst themselves and China slash commodity exporter bloc centered on China that utilized the renminbi that would look like the Cold War world. I can imagine its existence but it's like the old New Hampshire joke. How do I get (31/38)
to the following address? Well, you can't get there from here. I cannot imagine the transition. I think the transition from our present globalized, highly interconnected world to that bifurcated world would be- An event horizon. Yeah, it would be immensely more disruptive than the fallout we've seen from Russia's invasion of Ukraine. It would be a disaster for the global economy. At some point we would recover from, said, disaster. But it would be a wrenching change that we have to hold will be avoided. We have to hope will be avoided and we have to hope that those who simply extrapolate current events are looking forward to the wrong future. What do you think about the argument that sovereign debt has become an increasingly unattractive form of collateral and material to serve as a reserve asset for central banks and that there's some increased role for commodities and in particular for gold in the mix? I have a research paper on that that is working its way through the clearance (32/38)
process of an international financial institution, but should see the lot of day really soon within days where my co-authors and I looked at past instances of sanctions and asked specifically whether their imposition or expectations of their possible imposition led central banks to move away from currencies toward gold in particular. And we do find an effect. There is a significant tendency of countries that experience sanctions in the last 40 years and there have been a bunch of them to shift the composition of their reserve portfolios away from currencies and toward gold, which can be warehoused, vaulted safely at home. But that significant effect is very small. So if you hold your reserves in gold at home, those reserves are safe. But they're basically useless. They can't be used in financial transactions. They can't be swapped for currencies. They can't be lent out in order to earn interest. If a central bank wants to hold and do those things, it has to hold the gold in London at (33/38)
the London Metal Exchange or the Bank of England or in New York at the Federal Reserve Bank of New York. And if you want to use that gold for merchandise transactions, you have to commission jumbo jets and ship that gold around very carefully. So there are costs as well as benefits of holding your reserves in the form of commodities, gold or platinum or something else as well as benefits from doing that if you are a rogue state or worry about regarded by the United States in the future potentially as being a rogue state. So we do see that movement on the part of the various countries, Iran, Belarus, you name it, who've been subject to various sanctions in the past. But that effect is very small. We do not expect commodities to displace the dollar despite steps in toward weaponizing the latter. Do you think it also would be... I'm familiar with a paper by Michael Pettis who's also been a guest on this podcast where he argues that using commodities as reserve assets would run counter to (34/38)
many of the existing frameworks that bankers have for thinking about how to manage the boom bus cycle, how to manage the business cycle in a counter cyclical way because of the fact that commodities correlated with periods of economic excess and when commodity prices fall, that tends to be when markets are declining and the economies are contracting. Are you familiar with that argument and what are your thoughts about that? So I haven't heard that argument. My colleague Brad DeLong says, never argue against Paul Krugman because Paul is so often right. I never argue against Michael Pettis because his views are original and I often come around before long to realizing even though they differ from the status quo, they are right. But I'm going to have to think more about that one. Yeah. Yeah, let me leave it at that. I can send you that paper if we're done. But you're like the biggest econ sleuth. You probably find it in seconds. So you'll remember and find it. So I'm going to move the (35/38)
rest of our conversation onto the premium feed, Dr. Eichengreen. We're having this conversation while the Bank of Japan is meeting to discuss monetary policy and whether or not they are going to increase the band around which they allow JGB yields to trade. There have been huge dislocations in the Japanese bond market and one of the interesting things that's happened recently, which I think I understand, but which at first made no sense to me, is that both yields and the yen have been rising concurrently, which I'm guessing is in anticipation of the central bank of Japan raising interest rates, the expectation being that the yen would therefore become more valuable. Anyway, I'd like to try to untangle that a little bit because I've struggled to understand the story there and I haven't really seen any podcasts do a dedicated segment to it. I would also like to discuss with you something else and this kind of speaks to the work that you did in your book, The Populous Temptation, which (36/38)
has to do with the reorganization of power. Let's start with it America. Let's just focus there and we can expand outward to let's say Europe or other countries, but what we saw in the beginning of the late, I guess late 19th century through the first half of the 20th century was a reorganization of power away from capital towards labor. And we spent the last 50 years moving in the opposite direction away from labor towards capital. I'm curious to ask you in the second part of this conversation what you think the next 50 years or the next 40 years or whatever is going to be characterized by. And if that dichotomy isn't actually the right framing, but rather that the beneficiary of the next 50 years is going to be governments and nation states, which are going to accumulate more power, that it isn't going to be capital, it isn't going to be labor, but it's actually going to be nation states. And that economic opportunities in some cases will actually manifest around the things that (37/38)
governments choose to support, deem important and which they regulate accordingly. Now, for those of you who are new to the program, Hidden Forces is listener supported. We don't accept advertisers or commercial sponsors. The entire show is funded from top to bottom by listeners like you. If you want access to the second part of today's conversation with Dr. Eichen Green, head over to hiddenforces.io. And sign up to one of our three content tiers. All subscribers gain access to our premium feed, which you can use to listen to the rest of today's conversation on your mobile device using your favorite podcast app, just like you're listening to this episode right now. Dr. Eichen Green, stick around. We're going to move the second half of our conversation onto the premium feed. Very good. Thanks for listening. We'll see you next time. (38/38)
hardship for a while. Absolutely. And I think, again, that brings us back to the point of change. We're in a world that is changing and in certain measures, changing faster than it ever has before. I couldn't agree with you more. Dr. Faber, thank you so much for taking the time to speak with me this evening. And thank you, all of you out there, for taking the time to listen in on my conversation with Dr. Faber. If you enjoyed this segment and you want to learn more about the show, the segments, the episodes, then visit our website at hiddenforcespod.com. Lastly, if you are listening to this show on iTunes or Android, make sure to subscribe. If you like the show, write us a review. And if you want to sneak peek into how the sausage is made over special storylines told through pictures and questions, then like us on Facebook and follow us on Twitter and Instagram at HiddenForcesPod. (38/38)
going to be very dramatic. Well, one of the other things that sort of comes to my mind when I'm hearing you speak about this is the difficulty of identifying safe assets. Of course, years ago, the normal strategy one would implement if one was feeling risk averse would be to buy government bonds. But of course, you can't do that today. How does someone go about creating synthetically safe assets? Stratically, when I grew up, and for a long time, safe was a deposit in the bank. Safe was, as you said, government bonds. Riskier were corporate bonds. And the riskier were equities. And then people kept a little bit of gold under the mattress or wherever it is. And nowadays, to be honest with you, nothing is safe. You buy bonds. As you know, the yield on the 10 years in the US is 2.5%. That's the maximum you can earn. And that may be also what you earn. And maybe bond yields will go down from 2.3% at the present time to 1%. Who knows? Maybe, could be. I don't know. You buy equities. Equities (21/38)
What's up everyone? Welcome to this Market Forces segment of the Hidden Forces podcast. My guest for this segment is Dr. Mark Fawber, editor and publisher of the Gloom, Boom and Doom Report. Mark had been a frequent guest on my old television program, Capital Account, but it has been sometimes since the two of us spoke. He is needless to say a very unique guy, and we cover a wide variety of topics in this conversation from cryptocurrencies to issues of structural demographics, foreign exchange and central banking. But what I really wanted to try and do, and you'll all have to be the judges of whether I succeeded in this or not, but what I was trying to do was to integrate a number of seemingly disparate ideas like central bank, low interest rate policies, these ridiculous private valuations in some of these Silicon Valley tech companies, the search for yield, the disappearance of safety and financial assets, the rise in systemic instability and so on and so forth. But to integrate (1/38)
these ideas under this larger umbrella of income and wealth disparity and how it is driving structural, cultural and behavioral changes in the economy that are making it fundamentally incompatible with capitalism. To me, Uber's $70 billion valuation and its practice of subsidizing its consumers with billions of dollars of investor money in the hope that they might achieve a successful exit at some point or profitability at some point has many similarities to the Asian model of development, where the Chinese banking system, for example, would recycle domestic savings into the U.S. in order to make the goods of Chinese companies affordable to American consumers. These types of dynamics are not sustainable, and it's my hope when doing segments like this one that I can begin to bring to the surface some of these parallels for all of you to see. So I begin this discussion by asking Dr. Farber what he thinks some of the driving forces are in the global economy today and how they may drive (2/38)
changes in the future. We get into Bitcoin, I get his views on the rise of populism and how it might upset the apple cart. Mark has some strong opinions around war and what the prospects for that might be, particularly in Asia. Of course, Mark being Mark, we discussed gold. We also discussed stocks, specifically the new blue chip tech stocks and what his views are on those and on the broader market. We end with Mark giving his advice on what he thinks is the single best investment anyone can make in today's market. So please enjoy. So Dr. Mark Farber, editor and publisher of the Gloom Boom and Doom Report, joins us for this Market Forces segment of the Hidden Forces podcast. Dr. Farber, welcome to the show. Thank you very much for having me on. So let's get right to it. What do you think, well, what would you say are the driving forces in the global economy today and how will we see these forces manifest themselves in financial markets going forward? Given that, I should say we are (3/38)
living in a world defined by the failures, some realize some yet to be realized of the last boom. Well, I think that we live in a very complex world in the sense that the western world is declining relative to emerging economies and certainly relative to Asia, including China and India. At the same time, we have in the western world for the first time a generation of people, the millennials who earn less and have less money when they are 35 years old than the parents had. In Europe, we have specific problems, including immigration, which will eventually be a huge problem. And then we have also huge changes in the way business is conducted as a result of automation and as a result of new disrupting technologies and disrupting companies such as Amazon and Uber and Airborne. So it's not a clear cut case. We also have a world where asset prices have been driven up very dramatically by central banks, asset purchases. So you're touching on a number of things actually. When I was sort of (4/38)
thinking about this interview in this discussion today, I sort of wrote out a number of things that I feel are forces with which we must contend going forward. One of them, of course, is the higher levels of wealth and income inequality in part driven by central banking and the changes that we've seen in the banking system. Populism and potential changes in government policy, again, those things are interrelated. You're also talking about technology and disruption, which is interesting. And you mentioned Uber. And I actually want to ask you something about that because in your most recent newsletter, you made an interesting point about Uber, which is that Uber, putting aside its valuations, you made that point to recognize that you're not endorsing the valuations of 70 billion for Uber. But that Uber's business represents an attempt to resolve the need by consumers for lower priced services in order to compensate for their higher living costs. And what I think is very fascinating about (5/38)
that idea that really resonates with sort of some larger issues you've mentioned is that one of the things I see in Uber's valuation is sort of inherent this income and wealth disparity and the rising asset prices, the hunt for yield and sort of where we are today. Because the fact that investors have been willing to subsidize the rides of Uber customers as has come out from recent news of the company that they've been losing billions of dollars a year and so much of that money goes towards subsidizing their riders, it seems to me very interesting and parallels in many ways the ways in which the Chinese saver was willing to subsidize the American consumer during the mortgage refinancing bubble. And it represents sort of the perversions in capital markets that have come about in large part due to many of the things that you've described. This is correct. And I'd like to say that it's not just the Chinese that subsidize the American consumer and the overconsumption in the US. Every (6/38)
country that has a current account surplus and the fact is also Europe has a large current account surplus with the US, subsidizes consumption in the US. And if you print money in Europe and in Japan, some of that money is flowing to the US because in a period of strengthening US dollar institutions and individuals shift some of their assets into US dollars. So your observation is absolutely correct and this continues up to this very date. Speaking of the US dollar and speaking of central banks, which is one of those things I mentioned there, what is your outlook for the dollar given the tightening path that the Fed is supposedly on and it's supposed to sort of intention to lighten its balance sheet? Well, I think we have to distinguish in markets between short-term noise and shorter-term fluctuations and long-term trends. I believe that the long-term trend for the US dollar is down. Now, can the US dollar strengthen against the euro to 105 or 108? Who knows? Possible. Everyone I know (7/38)
in the forex market has been horribly wrong with predicting forex movements. So I just don't know. But long term, I think the US dollar is a doomed currency. That's also very... Yes, and that's part of the name of your report. It's interesting that you say that. I'm curious, two questions. When you say that many of your friends and associates in the foreign exchange markets have been horribly wrong betting against the dollar, it sounds like you're saying, A, do you see that as something that is more acute today than at other times? And if so, does that speak to something else, which is that we have seen, of course, with any type of prolonged economic structure, any kind of prolonged economic conditions, a certain congealing of the financial structure and behavior begins to take notice. We've seen that, of course, in the movement of investors out of active and into passive. What do you see as being some of the effects upon the investment class with these current market conditions as (8/38)
we've had them looking forward? Do you see any kind of impact in the mentality of traders and in the investment class that will negatively impact their capacity to react to adverse market conditions going forward? What I'd like to say is this about markets. Say you have the wheat market, the corn market, the soybeans market, the copper market, the gold market, whatever it is. The futures positions are a multiple of what the physical market is. And so when a market move gets on the way, the people or investors who are either short or long have to scramble to cover their positions. Let's put it this way. At the beginning of the year and at the end of the last year, investors were heavily short the euro and heavily long the dollar. And what happened, the dollar fell and the euro rose. And so these people who were short the euro had to cover right now. The euro has bias to its long positions. Investors are heavily long the euro. And if the euro starts to go down against the dollar, they (9/38)
will again have to reposition themselves. And so while the market seems to say that there is low volatility, I disagree. There is a lot of volatility in individual commodities, stocks, bonds, etc. And these market moves are then very strong. Say up to four days ago, the grains market was very weak. Within just three days, the grains market has soared. For no obvious reason. And so all I'm saying is the money printing of central banks has made markets much more volatile. And you will see, if one day stocks go down, there'll be an avalanche of selling. But until that happens, we don't know. You're saying essentially there's greater amounts of instability and a lot of pent up volatility that is bound to unleash itself in the market. There's a huge amount of instability. And that will have a huge impact on markets in due course, in everything, not just stocks or bonds or commodities in just about everything. Well, it's interesting. Another sort of theme that I was thinking about before (10/38)
this interview is one of change. And change is omnipresent in life. And we are in certain moments, in certain places, more able to embrace change and go with the flow, so to speak. In other cases, we are resistant to change. And I do see one great example is the crisis of 2008 and the way in which the global central banks and governments reacted to the change in market valuations. They resisted it dramatically, intervened. And so we're living in the aftermath of that. I wonder, what do you see going forward that could instigate the type of change that would result in a dramatic repricing of risk, of assets, of everything, inequities and bonds and commodities, etc.? Well, I suppose that if I were able to tell you exactly what will reprice asset prices down, other people would also know about it. And asset prices fluctuate. That is inevitable, whether they are interventions or not, but they fluctuate. And we are at a very high level of asset prices. Now, what will reprice them down? I (11/38)
don't know precisely. But what about the war with North Korea? What about confrontation in Syria with Russia? What about rising interest rates that are more pronounced than is expected by the market? I'm not expecting it, but it could happen. What about a weak economy? So there are many factors, many things that could lead to reprising of equities. And the most important, in my opinion, is when asset markets will start to go down. This will trigger selling. And in my opinion, rather massive selling. And your reason being for that, are you talking about some of the changes that we've seen in terms of investment strategies and protocols? I'm talking about essentially the factors I've just mentioned from wars in Southeast Asia or North Asia and war in Eastern Ukraine and in Syria. And I'm talking about simply asset prices no longer going up. Why in the last 10 days have the fang stocks performed poorly? Give me one reason. They performed poorly because they started to go down. And the (12/38)
institutions who are overweight, these fang stocks started to liquidate. And this liquidation could go on and likely to go on. So all I'm saying is you don't need to ask what will trigger the decline of asset prices. You just have to watch asset prices and if they decline, they can decline a lot. And that speaks, of course, to the momentum aspect of this equation. And that brings up another question that I have for you. Is to what extent do you feel that this move out of active into passive investment strategies, in large part due to the fact that interest rate policy and government policy have made it very challenging for active investors to make returns in this market? Do you see that as being an unusually inflammatory feature of a downturn this time around? Not necessarily. And I have to clarify one point. In my opinion, the shift from active to passive is mostly induced by active managers and their consultants. The consultants will go to an active manager and they will say, well, (13/38)
your benchmark is say the S&P 500. So the active managers invest money similar to the S&P 500. He doesn't digress a lot because if he doesn't and something goes wrong, say if you have in the S&P are waiting of one sector of 10% and you waited with 20 or 30% and you're wrong since the client told you to benchmark it to the S&P 500, he may sue you. So the active managers have been kind of forced to invest like the S&P 500. And of course, because they have to charge fees, unlike ETFs and unlike index funds, their performance will lag. But this is because they're prevented from going far away from the index. And that is a relatively new feature that relates to a particular regulation that was passed in recent years, correct? Correct. Look, I started to work in 1970 on Wall Street. Until just about five years ago, nobody ever talked of indexing. There were some funds that invested according to an index because they claim that the index will perform better than the active managers. But it (14/38)
was not a widely accepted principle. Nowadays, everything is indexed. And so because everything is indexed, it's very difficult for a manager who manages pension fund money and large institutional money to outperform the index. Because if it doesn't perform similarly to the index, say the index is up 20% and is down 20%, it's going to get the lawsuit, I guarantee you. You mentioned technologies, well, in your writings, and I should also mention for our audience who may not know this, do I remember correctly having seen and read a number of your quotes in March of 2009 calling the bottom not just in equities, but also the imminent intermediate decline of the dollar. You had really nailed that in March of 2009, correct? Yes, I've been relatively positive about equities starting the end of 2008, especially for Asian equities. And I was interviewed on March 6, 2009 by Bloomberg and I said, the market is grossly oversold and it's based on sentiment indicators. It's at the buying level. At (15/38)
the time, many observers and famous forecasters predicted that the S&P would go down to 400. On March 6, 2009, it was at 666. So yes, I caught the bottom very well. What worries me now is that we've gone up a long way and that actually the economy hasn't improved very much. Well, that's the thing that's also very interesting. Every cycle is obviously different, but this cycle, it's hard to sort of compare to anything else. In the 2000s, we had a credit fueled bubble driven by the housing market and mortgage refinancing and a consumption boom. In the late 90s, we had a technology boom, but the technology boom that we had in the late 90s did not feel like what we have today, which feels much more sort of niche and isolated to certain parts of the economy. And I wonder also to what extent that really comes down to a very different level of participation, the fact that fewer people are participating in this cycle. How does that factor into your thinking around the next wave down for (16/38)
prices? Difficult to tell. It is clear to me that a lot of investors lost a lot of money in 2000 to 2003 when the NASDAQ broke because at that time, if you bought Newmont mining or BHP or any stock, you were old fashioned. You had to buy the new economy type of securities. And when they went down by, in some cases, 90%, a lot of investors lost money. Then came the housing bubble. Most people have a significant portion of their money in housing, in homes. And when it collapsed, because they all leveraged, you understand, it's not that they buy your house and pay cash for it. They buy a house and at that time, they borrow 90% of the house. And even today, there's a lot of leverage in real estate. And when it went down, lots of people lost a lot of money. So if you go today to a retail brokerage firm in the US, the business from individuals is very small. The business really comes from financial institutions, mutual funds, passive funds, and high frequency traders. But the individual is (17/38)
not in the market. And of course, that is reflected in these very high pre-IPO valuations for companies like Uber. Where do you stand on the issue of structural demographics? When I say where do you stand, what I mean is how significant of a force do you think that is a drag, for example, on future consumption, of course, from the baby boomers. But also, the fact that these baby boomers are looking to consume off of the interest that they're gaining from, in part, the debt that is weighing down the future productive earners in the society. In other words, it also speaks to this imbalance of debt in society. Yes, some people say the overall level of debt doesn't matter because it's owed to other people. But the fact is, wealthy people are very wealthy, extremely wealthy, and they have no problem with that. But the people that owe the debt, they're highly leveraged, and they have to wait for a paycheck until the end of the month to meet their credit card debt payments. And so it's (18/38)
unequally distributed. And I think that according to various sources and various what I would consider reliable statistics, 50% of Americans have practically no savings, practically no savings. Now, this is happening at the very inopportune time in the sense that the unfunded pension fund liabilities keep on going up. They're huge. And you ask yourself, so here you have a population where most people have no savings. They rely maybe for their retirements on their pensions or on social security. But both the pension funds and social security have no money. And so who's going to pay for it? Now you may say, well, the government will bail them out. Yeah, but the government has also huge debt. So the debt will go up. So what will happen is that the Federal Reserve and other central banks, this is not endemic to the US in Europe, we have the same problem with unfunded pension fund liabilities, but maybe to a lower extent. But nevertheless, we have the problem. So the money printing, in my (19/38)
opinion, will continue. And so what you're saying is essentially the suggestion by the Federal Reserve in this case to shrink its balance sheet will actually be something that they will have to reverse or renegon and in fact go the path of Japan. And I was actually looking at some recent numbers from looks like the BOJ and the Investment Trust Association of Japan that approximately 67% of the nation's ETFs as of February of this year of 2017 are owned by the BOJ, which is a pretty remarkable number. Correct. And you ask yourself, where do we go with this kind of central banks, essentially financing the whole government? It may work for a while, but it's not going to work for the long term. And so I'm very negative about the global economy, which has recovered because of a huge debt buildup financed by central banks. But who knows how long it will last? Maybe it can last another three years, maybe another 10 years, but it's not going to last forever. And when we hit the wall, it's (20/38)
can go up and they can go down. Then you buy real estate. As we know, it can go up and it can go down. And some real estate has actually already declined. High end luxury and say, if you adjust the weakness for the British pound for the US dollar, then London properties have already dropped, say 30%, 40%. So please explain to me what is safe. Precious metals can move up. They can move down. And they can also be confiscated. I think precious metals are relatively safe under one condition. And the condition is that the governments, I have to say, the wise governments of our Western world don't take it away from you. That is an option that is available to them. And I think that it's not unlikely that this will happen. I know that you're not someone who invests in or has any knowledge of Bitcoin or the blockchain protocol. But do you think that the reaction in that market is partly due to of concerns around property rights? And for example, the way in which a lot of money has left China to (22/38)
go in. I mean, when I say a lot of money, let's be clear, we're not talking about huge sums here, but Bitcoin's a very small market still. But that this small market reflects in some way the concerns around property rights and being able to protect one's savings in this extremely uncertain world. Look, I believe that the people who buy Frank's stocks, and we have statistics from the website Robinhood.com, what the millennials buy. They buy Snap, Amazon, Netflix, Apple, and Google and so forth, Micron technology, all the speculative stocks they buy. These are the same buyers of Bitcoins. Now, I'm not an expert on Bitcoins, but is a Bitcoin worth $2,000, $3,000, or $10,000, or a million? Or is it worth nothing? That we don't know. I know so many people who for living trade Bitcoins. And in my opinion, when this happens, usually big setback can also happen. So I'm not interested in Bitcoins for the simple reason that if I believe in, say, a crisis, how can a crisis happen? Someone may (23/38)
switch off your electricity. Someone may switch off your internet. Someone may switch off your wall, all at the same time. If the internet is switched off, please go to a department store or grocery store and buy some fruits or food. You think they will accept your credit card? Well, certainly. You understand. That's the difference between having physical gold and these other items that are dependent on the internet functioning. And that's why I also strongly oppose cryptocurrencies or the elimination of cash. If I have a $100 bank bill in my hand, I can give it to a taxi driver if my credit card doesn't work. And sometimes, even today, when everything is functioning, my credit card doesn't work because it's been blocked by the credit card company for whatever reason. It's not the reason that I didn't pay my bills, but it may be another reason. So all I want to say is, if you want to be safe, don't put the insurance policy for safety into something that is dependent on high technology. (24/38)
Sure. We're in deep trouble if we lose internet connectivity. I think what's interesting with respect to Bitcoin is the larger tension between centrally organized and decentralized systems and societies and et cetera. So I think that's interesting. And I think also its demand represents some type of relationship between the forces we were describing before and the flight to safety. I also think conceptually... Actually, the Bitcoins are not bought by people by and large for safety. People buy them and sell them for speculation. That's 90% of the Bitcoin trading. No, correct. Absolutely. I didn't mean to suggest that way. I meant really actually, my point with that had to do with using Bitcoins to take money out. So let me ask you this. How do you see populism? I mean, we've seen, of course, these changing forces of populism with respect to elections in Europe and in the United States. How significant of a role do you think that will play going forward? Because in so many ways, I feel (25/38)
the... I mean, thinking about things just in terms of asset pricing and what financial markets represent and reflect can miss some of the ways in which the costs are shifted to other areas of society. And I think one of the steam valves for that is elections and populism. What role do you see that playing going forward in financial markets and in society? Well, I think that's a very good question. And you asked me before what will trigger a downturn. Personally, I believe that I mean, my friend Albert Edwards at Societe Generale, he wrote a report that the people will turn their anger at central banks. I don't believe that they will make the connection between the wealth inequality and their poverty and central banks. You understand? Sure. And money pricks them. But I believe a politician who is clever can one day tell the majority of people who are, as I said, 50% of Americans have no money. They can tell the people easily, look, the reason you are poor and have difficulties in (26/38)
meeting your expenses every month is that the rich have taken too much money from you. And let's go after the rich. And so when you ask me what is a safe asset, I tell you there's nothing that is 100% safe. They will go after the rich people. And I see this. They claim, yeah, we're going to cut taxes. Yeah, they may cut federal taxes, but local taxes. I've never seen local taxes going down. They go up every year. So people end up paying large taxes. And if the direct taxes, income taxes, in other words, don't go up, the GSD, the sales taxes go up. So this is an additional reason why the economy is soft. People don't pay less tax. They pay more tax than before. On this issue of technology, Dr. Fiber, I wonder if you think at all about the relationship between capital and labor and how it's changed over the decades from when you got into banking and even from before that, from as far as you can remember in study. In my estimation, it seems that one of the driving forces for change in the (27/38)
economy is the increasing value of capital relative to labor. And that is part of the driving element for the inequality in incomes or the wealth disparity and income disparity in the economy. How do you view that as a person who's been in this industry and someone who has sort of made it his business to think about and review society and social trends and financial trends? How do you see that? Do you think about that at all? Yes, of course. I'd say until the late 60s, labor in the US was very highly paid relative to corporate profits. And labor in the US in the late 60s before the dollar devaluation began in 1971 against the European currencies, labor, if they traveled to Europe, they lived like kings because Europe was very cheap compared to the US. Nowadays, labor is really stuffed. If you look at the labor percentage of GDP and you look at corporate profits as a percent of GDP, they went in different directions. Labor as a percent of GDP declined massively, not a little massively, (28/38)
and corporate profits went up massively. Now, I want to ask you something. Let's say you have a factory and you have 20 machines and a thousand workers and interest rates are at zero. Don't you think that maybe it's a good idea to buy another 20 or 50 machines and cut your labor force? Interest rates are zero. Your capital cost is zero. So in my opinion, central banks have actually accelerated this decline in the standards of living and earnings of working people and have favored entrepreneurs who are installing the capital goods. And this is only going to continue with the emergence of robots. With a robot, I can produce goods. I don't have to pay them Social Security. I don't have to pay them health care and so forth. And I think a lot of labor will find that they are obsolete. I'm sorry to say that, and it's painful. That's why I said at the beginning we are in the midst of huge changes in the relative decline of the Western world against the emerging economies, particularly in (29/38)
Asia, and also changes in technology. No, I agree. And I think all of these things actually work in unison. The other thing I was thinking about as you were speaking, and we spoke about this, we touched on it with respect to Uber and the valuations of Uber and the way in which the wealthy investors of Uber are effectively subsidizing the very customers who they're looking to profit from in some way. That reflects the search for yield, which is in part a reflection of many of wealth being concentrated in few hands, not just the low interest rates, but certainly something that was fueled by and benefited from bailouts and interest rate policy. But I think also what's very interesting is the flip side of that equation, Dr. Fauber, which is the same force that drives the search for yield, drives the deflation in a turning market psychology. Do you feel that, in other words, do you feel that we are more primed for larger declines in asset prices as a result of the fact that, of course, (30/38)
absent central bank full intervention, and we have to take that into account, but that we are more inclined for a decline due to the fact that the normal sort of middle class distribution of wealth has changed, that people would then result to just looking for safety in a way that they wouldn't have in a different market? As I mentioned to you, basically, in the Western world, the standards of living of the median household has gone down because wage growth has been inferior to the cost of living increases, including insurance premiums, taxes, rentals, and so forth, health care. And as a result of that, some smart entrepreneurs came along and said, okay, these people have no purchasing power. We have to supply them with something that is cheaper. Uber is by and large cheaper than a taxi, by and large, not always, but by and large. And Amazon is more efficient at delivering products than Sears and JCPenney. So these companies, they essentially destroy, in the case of medallion prices in (31/38)
New York, they destroy the value of a medallion by, say, 70%, maybe 80, maybe 60, but they destroy the value of medallion. That's an asset. Okay? In the case of retailing, Amazon destroys entire retail centers, shopping centers, and so forth. So what you just pointed out, the Fed's policies, it's not only the Fed, they're also fiscal policies to consider. But basically, the Fed has contributed massively to the average household's wealth going down in real terms. And then some companies come in, and they take advantage of that, and they actually reaccelerate, or accelerate the trend to lower prices. And so retailers close down what happens to real estate prices in that area, they'll go down. So yes, the Fed has created a trap where their policies have led to deflationary forces. And of course, with what you're describing there with Amazon and Uber, there's a sort of cannibalization of your customer base. In a way, you're relying on a business model that relies on people who are becoming (32/38)
increasingly irrelevant in the equation. With self-checkout, we see that as well, just as one small example in retail and supermarkets, et cetera. Dr. Farber, you've been very gracious with your time. I don't want to take up any more of it, but I do have one question, even a question, or a conversation around the subject of gold is taken very differently in Asia. I wonder, how do you see the opportunities for Asia, both the near-term effects of what we're describing, even the effects on emerging markets of potential dollar liquidity with this balance sheet unwind. How do you see sort of the short and then more the long-term prospects for Asia, and where do you find the best investment opportunities there going forward? Well, correct. I lived in Asia since 1973. And obviously, we had huge market fluctuations in 1973, 1974 in the global bear market for equities. The Hong Kong stock market dropped precisely by 90%. And the low on the Hang Seng index was 150, 150. The Hang Seng index is (33/38)
now over 20,000. So if you look at the long-term chart of the Hang Seng index, the Hong Kong index, the 90% decline in 1973 doesn't even show up, hardly shows up. Asia is a region, in my opinion, that will continue to grow at a higher rate than Europe or the US, provided, and I repeat, provided there is peace. China is becoming the center of Asian economic activity. It wasn't that way in 1970. It wasn't that way in 1980. When the saying was, if the US catches or if the US sneezes, Asia catches a cold. You understand? Everything depended on the US at that time. Nowadays, everything depends on the Chinese economy. And in my view, the US doesn't like the rise of China. And the Chinese want to have more say in global affairs. And in particular, and from an Asian perspective, everybody understands that they want to control the supply chains to Asia. In other words, they feel threatened by the US military and naval presence in Southeast Asia. China doesn't have any overseas basis, but the (34/38)
US, just in Asia, only in Asia, has maybe 15. So the Chinese and the US are developing rising tensions. And if there is a conflict in Asia, then stocks, in my opinion, will tumble. It may not happen. Maybe there is no conflict and through negotiations and diplomacy, problems can be solved. But with the current administration in the US, I don't think that there is a lot of diplomacy in place. And so I'm saying Asia will grow. Undoubtedly, it will happen, even with the Western world not growing much, but they can grow internally by saying four to five percent easily. But if there is war, then all bets are off. Now, if you ask me about the valuations in Asia, since I'm a large investor in Asian securities, I can tell you I don't see anything that is particularly cheap. I don't see anything that is in the bubble either. You understand? We're at median valuations at reasonable valuations, but it's not cheap and it's not terribly expensive. But if I had to take a bet, I would say most global (35/38)
markets depend on the S&P. If the S&P is tonight up 50 points, the Asian markets will open up. If the S&P is down 20 points, then Asian markets will react on the downside. Everything is to some extent correlated. Now, in the last few years, both Europe and Asia has grossly underperformed the US. That underperformance has, in my opinion, come to an end at the end of last year. And from here on, Asia and Europe will outperform the US. But with interruptions, and if everything goes down, everything will go down, then maybe in the US you lose 40% and in Asia only 35%. Who knows? But in general, I feel quite comfortable with Asia, with the concern I just expressed that there could be war. Well, I think what our conversation has touched on in many different ways is that there is a great degree of instability in the world and a lot of potential volatility. And navigating that is not something that one can do with a formulaic approach. It's just something that you would have to feel your way (36/38)
through as it begins to occur, because everything is uncertain. There is no standard safe asset class. There is no standard strategy. And of course, it's very difficult, even though there are many opportunities, as you say, in Asia, for someone who's not living in Asia, those opportunities can be very difficult to identify. Today's world is money-driven, is materialistic. I would say a great asset is your knowledge. Absolutely. Is what you can do yourself in life. Can you fix the house? Can you work somewhere? Your skills. That is an asset. But if you ask people about assets, they only think about real estate, stocks, phones, anything. But they never think about their own value. I couldn't agree with you more. I think that that's an absolutely salient point. Yes, I think people measure their wealth according to the Caledax they have at home and the Rolls-Royces and whatnot. But in a really emergency situation, your survival skills are very important. Also, your skills to adapt to (37/38)
himself into a corner. This is something else we've heard with his posture in Ukraine and he wants to use this as an excuse to walk his way out of Ukraine, to say the things have gotten crazy here in Kazakhstan, we need to send troops, we need to focus here, and diffuse the situation. That's the first kind of conspiracy that I've heard, those three explanations for it, but it involves Russian involvement. Then the other one is the one that you hear pushed by both Kazakhstan and Russia, which is that the US or US allies are somehow behind these protests, US intelligence services, Western intelligence services, and that they played a major or meaningful role in stoking dissent in an attempt to destabilize the government in Kazakhstan and to what end, I don't quite know, but that's sort of what I have come away with. Does that capture what you feel is the range of possible stories that are out there? Not quite, because I think the government's on President Tokayev's key narrative, if you (24/39)
What's up, everybody? My name is Demetri Kofinas, and you're listening to Hidden Forces, a podcast that inspires investors, entrepreneurs, and everyday citizens to challenge consensus narratives and to learn how to think critically about the systems of power shaping our world. My guest in this week's episode is Kazakhstan-based journalist Joanna Lillis. Joanna is also the author of Dark Shadows inside the secret world of Kazakhstan, which paints a compelling and very human, I would say, portrait of the former Soviet Republic that is little known in the West but which is strategically central to both Russia and China. For anyone who hasn't been following the recent events in Kazakhstan, there were a series of protests that erupted in the country two weeks before this episode is scheduled to air, sparked by what appears to have been a rise in gas prices that affected an overwhelming majority of the population, but especially those living in cities like Zenoizhyn, where the protests (1/39)
first began. They quickly spread across the country, turning violent, and within just a few days we learned that there had been some kind of coup attempt perhaps initiated by the former president Nurzultan Nazarbayev, which is why it seems that the current president of Kazakhstan, Kasim Tkoyev, reached out for help to Vladimir Putin, who in turn sent forces into Kazakhstan to secure the government and to overcome what Tkoyev and Putin have both suggested is not entirely a domestic operation, hinting in other words that maybe Kazakhstan is next on the list of countries being targeted for Western inspired so-called color revolutions. There is a lot to unpack here, but by all credible accounts this does seem to have been a domestic attempted power grab by Nazarbayev, that if anything, Putin seized the pawn in order to promote the Russian state narrative about Western expansion, either for the purposes of strengthening his negotiating position in talks over Ukraine, or as a way of walking (2/39)
back his position on the Ukrainian border, or possibly something else. What I want all of you, however, to take away from this conversation and why I think it's important, how I think, in other words, it fits into the larger geopolitical chess match that we're seeing playing out in Eastern Europe and possibly across the Taiwan Strait, is that this is what a multipolar world looks like. It's not some theoretical thing that we've been reading about or that we're moving towards. We are in it. This is the world we live in and in this world everything is up for grabs, every crisis, every border skirmish, every negotiation is an opportunity for any and all of the major powers to change the status quo, to change the rules of the game to their advantage. And that starts with taking control of the story and telling a narrative about events before the facts emerge and before people have had a chance to even begin to form an educated opinion about whatever it is that's happening. And that's the (3/39)
reason why conversations like this one with Joanna are so important, because the world is becoming ever more complex. And if you want to exercise the level of agency over your own sense of reality and be anything other than a spectator in someone else's story, you need to be able to step back from all the noise and all the hustles and exercise a level of informed skepticism without simply resorting to questioning everything and therefore believing in nothing. Today's conversation is meant to help give you a sense of where and how the events in Kazakhstan fit into this new global disorder of nation states, non-state actors, mercenaries, agitators, hackers, pretty much everyone interested in exercising influence on an international stage that is fluid and where power is constantly up for grabs. If you're interested in delving further into today's story and are subscribed to our Super Nerd Tier, you will find lots of important information in the rundown, including quotes from and links to (4/39)
relevant articles that I relied on in preparation for today's discussion, as well as a timeline of events and key people to follow. And if you're interested in getting early access to our new premium feed on Supercast, before we fully take it public at the end of the month, just send an email to info at hiddenforces.io and someone from my team will get back to you with instructions on how to make the transition so you can be set up and ready to go right away. And with all of that out of the way, please enjoy this extremely timely and educational episode with my guest, Joanna Lillis. Joanna Lillis, welcome to Hidden Forces. Hi. Thank you so much for being on the program. I know it's so late over there and I'm just really appreciative. I and my listeners are so fortunate to get a chance to speak with you right now. Where are you at this moment? Well, I'm actually in the capital of Kyrgyzstan, a neighboring country to Kazakhstan. It's called Bishkek. And I'm sitting here in Bishkek (5/39)
because I've had some trouble getting back into Kazakhstan. I was just out of country for a few days when all this trouble kicked off. And my flight was cancelled. I came down here to Kyrgyzstan to cross over by land, but I was denied entry. And now I'm trying to get my way back all the way back via a securities route via the Kazakh capital of Nusratan. OK, so we're going to start our conversation giving listeners a sense of your background and how you came to live in Kazakhstan, what your relationship to the country is, etc. I want listeners to know that the larger picture I really want to capture here is I want people to gain a sense of why this country is relevant. It feels from my perspective, having followed this story the last week. It just kind of blew up on my radar. I saw mentions of it on Twitter. It took a few days for me to care because there's so many other things going on in the world. And because we were just dealing with Ukraine, you know, and we still are dealing with (6/39)
this standoff between the US and Russia, NATO and Russia over Ukraine. And Kazakhstan just kind of, it's another stand. It's further out East. You know, I have only so much attention. And now it seems to be resolving itself almost as quickly as it came onto the scene. So one of the things that I really want listeners to be able to take away from this conversation is how not only why is this relevant and how does this affect my life, but also given the fact that this seems to be perhaps resolving, at least ephemerally, what are the important things that I and my listeners want to take away from this? Well, how is this relevant going forward? How does this connect to the broader geopolitical picture in Eastern Europe and in the stands? But before we get to those details, what is your origin story? How did you end up living in Kazakhstan for the last, I think, what, 10 or 15 years? Well, I've been living in Kazakhstan for it'll be 17 years this year. So it's been quite a long time. And I (7/39)
sort of came to Kazakhstan. While going back a bit, I studied Russian at university. That was in the late 80s, during really interesting times in the Soviet Union. You know, when the reformer Mikhail Gorbachev came to power and embrace all kinds of different changes that that ultimately, of course, accidentally led to the collapse of the Soviet Union. So I started studying Russian at that time. And I was sent as a language student to the Soviet Union, it was a fascinating place. And then the Soviet Union collapsed in the same year that I graduated in 1991. And it became possible to kind of just go, well, it was a little bit more complicated than that. But I did move to Moscow, find a job and then ended up living in Russia in the 90s, for five years, or six, six years, maybe. And from Russia, when I was in Russia, I got a job at one BBC department called BBC Monitoring, which translates and monitors and looks at the local media and tries to make sense of it. So in other words, the (8/39)
Russian media in this case, and uses that for for news reporting and various other things. So we got a job there. And then with them, I later moved to Uzbekistan in Central Asia in 2001, just before 9 11, actually, really, just a few days before. And 9 11 put Central Asia on the map, of course, because of the invasion of Afghanistan, opening of US military bases in Uzbekistan and Kyrgyzstan, also very interesting times. And I was there in Uzbekistan till 2005. And I left purely because my contract was finished. And I had a job in in the UK, but I didn't want to go to the UK. And then I moved to to neighbouring Kazakhstan, to freelance as a journalist. And I've been there, in fact, ever since since 2005. So that's my story. What drew you to this region? But you obviously, there's something that you must have liked about it that you would have moved over to Kazakhstan from Uzbekistan. Yeah, absolutely. Because it's a fascinating region. And I think it's a very poorly understood region. (9/39)
And, you know, I think it's a really very interesting region. And I wanted to, you know, report on some of the stories that I see there that were not covered enough in the Western media. And that's what drew me partly what drew me to stay in Kazakhstan and continue reporting from Central Asia. Because I think, you know, when I moved to Central Asia, I noticed that often in Russia, some of the media reporting on Russia, the Western media reporting is quite cliched and broad brush and so on. But when you go to Central Asia, and you know, the media reporting is really much more so, because people understand the region so little. So I wanted to, you know, tell some of the stories and not just, you know, a lot of the reporting we do see on Central Asia tends to be geopolitical. But I wanted to also tell the human stories. And you find a lot of that in my book Dark Shadows, because I did there is a section on politics, of course, and there's also sections on history and culture, which are (10/39)
also human stories. And there's also sort of a section on quirky stories of just the different kinds of people who live in Kazakhstan from a sort of a boutique wine maker to an ostrich farmer out on the step. So I wanted to really portray the variety, the sheer variety of life in Kazakhstan. So what would you say, because Westerners in general have, there are many countries, Americans especially, there are many countries about which we have a comically wrong understanding. In the case of Kazakhstan, there is, of course, the comical Borat character, but I don't know how many people actually take that seriously as a depiction of what Kazakhstan is like or what people living in Kazakhstan are like. So I think that most Americans actually have no idea and kind of know they have no idea about the country. What do you think that we least understand or get most wrong about Kazakhstan? Well, that's a good question. I mean, yeah, you mentioned the Borat figure, of course, Kazakhs, of course, (11/39)
hate it, but they laugh about it. But they just find it quite funny that every time they go abroad, someone will always, at least one person will always bring up Borat. And I think they find a surprising number of people who think that Kazakhstan is like that. So I think what's most misunderstood, I think what's probably most misunderstood is the idea that I think there's a very much an idea in some parts of the world that are more distant from Central Asia, more remote from Central Asia. I think there's an idea that Central Asia must be very different to people in the West. And in actual fact, it is, of course, very different. And it is, of course, exotic and fascinating and interesting. But I think probably what's most misunderstood that lifestyles in many parts of Central Asia are in many and mentalities in some cases are often similar to Western ones. So I asked you what was, what do we least understand or most get wrong about Kazakhstan? What do you feel is important for us in (12/39)
particular, given what our conversation is about today, for us to understand about the country, about its culture, and about its political economy? Well, I think one of the most important and also interesting things for foreigners to understand about Kazakhstan is its incredibly traumatic and complex and also fascinating history that has had an incredible impact on society that is really reverberates to this day. And what I'm really talking about here specifically is the Stalin era in the 1930s and 1940s, when the Soviet Union was ruled by Joseph Stalin, sort of reign of terror. And he implemented all kinds of policies that affected people horrendously across the Soviet Union, but nowhere more so than in Kazakhstan. I mean, many people have probably heard of the famine in Ukraine in the 1930s, but fewer people know that there was an equally devastating famine in Kazakhstan caused by exactly the same policies a man made famine, because by sort of collectivization of agriculture, forcing (13/39)
in Kazakhstan's case, nomadic herders onto collective farms where they were very ill-equipped for that kind of life, where they were used to their herding lifestyle, and also requisitioning their meat. So this devastating famine killed a lot of Kazakhs. I mean, by some estimates, a third of the pre-famine population were killed, and another 600,000 fled to other countries looking for food. And that also had an effect because as an effect to this day, because many Kazakhs, there are many foreign-born Kazakhs as a result, and Kazakhs live in countries as obviously in former Soviet countries, neighbors Uzbekistan, Russia, Kyrgyzstan, but there were Kazakhs also in China, but there were also Kazakhs in places like Iran, Afghanistan, Mongolia. So some of them blown abroad by the winds of history, if you like. And so this effected Kazakhstan very greatly in terms of its obviously mental psyche, but also its demographics, and also affecting its demographics and something that really (14/39)
reverberates to this day was Stalin's forced deportations of entire peoples from the other parts of the Soviet Union in the 1930s and the 1940s. As a kind of collective punishment, he would uproot peoples and send them to Central Asia. That includes Chechens, Crimeans, Germans, different peoples from other parts of the Soviet Union. And I write about this in Dark Shadows, and indeed, I went to track down some of the survivors of these deportations. And when I did so, I regretted that I hadn't done it earlier because it was rather hard to find anybody who had first-hand memories. And the closest I came was to track down an old lady, she was 79 at the time, Chechen lady, living in a village in northern Kazakhstan, almost entirely Chechens living there. And she had been deported to Kazakhstan from Chichnya at the age of three months when the whole of the Chechen people, along with the English people, all of them were just taken and sort of dumped, most of them in Kazakhstan, some of them (15/39)
further in Uzbekistan. So, and this kind of recording, these kind of memories for posterity, I think that was important in Dark Shadows, for me anyway, to try and record some of these memories before, you know, these people pass away, they're very old. But I also, getting back to the point of your question, why is this important? Why is this interesting? Well, because all of these things reverberate in Kazakhstan today is a complex society. It's, you know, complex demographically because it has lots of minorities. In fact, it was the only former Soviet country when the Soviet Union collapsed, where the people of the country were in the minority in their own country. So nowadays, Kazakhs make up 70% of the population, but back in 1991, they only made up 40%. So that's, you know, lots of different kinds of people you encounter, different kinds of ethnicities when you travel around Kazakhstan. Let me ask you this. How does this history inform the core public concerns and political (16/39)
grievances that constitute the sort of foundational political chemistry in the country? And how does that factor into what transpired in Kazakhstan over the last several weeks or week or so? Well, I don't think we can say that demographics were hugely at play here. I mean, one thing notable really is that Kazakhs tend to go out and protest, whereas other minorities tend not to. Perhaps they don't feel secure, perhaps they, you know, Kazakhs feel that they have perhaps there's an unspoken feeling that Kazakhs have more right if you like to demand a political voice. But I don't think, I think what we should single out about the protests, the spontaneous and peaceful protests that began this week before they were hijacked and turned violent. What we should single out about that is that we're looking at a lot of festering socioeconomic grievances. And some of these have been festering for years, maybe sometimes Kazakhs feel that they are an underclass in their own country. And so, you (17/39)
know, I think we need to see it from that point of view that it's not maybe so much about that demographic. Well, my understanding, so the superficial story that we've been presented here with is that the protests began actually outside of the capital in a smaller city, which itself has in some ways higher prices for certain basic commodities that people need to live from what I understand that has something to do with transport prices, etc. But gas prices spiked in general across the country and there in particular. And that spike in gas prices, which are extremely low in Kazakhstan, I think it's like, what is it, like 12 cents a liter or something? Traditionally, it's something like that. 14 at the moment. 14, there you go. So, and for Americans, that's like 50 cents a gallon or something like that. So, gas prices spiked, that was the initial reason for the protests. Give me a sense of what was that sort of spark, and why was the government held responsible for that? And then how did (18/39)
that, from what you understand, translate into the more violent outburst that we saw? And that can get us into a conversation about the official story that has been pushed by the state of Kazakhstan, and what may actually be at foot here. Well, the gas prices spiked in the new year after the government put an end to subsidies on these particular prices. I mean, it was subsidizing them. The spike came on a particular form of gas called liquefied petroleum gas, which many Kazakhs use to power their cars. And the government had phased in the ending of the subsidies because it thought people needed time to get used to them. And it had actually done it over three years. But on January the first, when they completely ended prices spiked. Now, the government had said, this sector is unprofitable for the producers because they often have to sell at a loss because the prices are subsidized or they're forced to hold them down, put it that way. So they said, we need investment. We have constant (19/39)
shortages of fuel. The reason is investors don't come to this sector because it's not profitable because of the subsidies, the false suppression of prices. And so we need to end this. And then this led to a spike. And in fact, in the region where the prices just doubled overnight. And that's a huge impact on people who often are struggling to get by. And even if they're not struggling, they would be after prices for fuel doubled. And this would obviously have a huge impact on inflation. Now, let's go back to where this started. So it started in a western region that is oil rich. And it started in a particular town called Zeng, which is famously, I would describe it as Kazakhstan's most troubled town. In 2011, the security forces opened fire on striking oil workers. And there were at least 15 fatalities after months of oil strikes and terrible deterioration in relations between the oil workers and the local authorities and the oil companies. There's a lot of disaffection in that town, (20/39)
not surprisingly, since the townspeople were killed. But there had already been disaffection in that town because there was a strong feeling that the oil workers do not read the benefits of the oil that powers Kazakhstan's economy. And so there's a lot of disaffection. That's why, and also the townspeople have always felt like many people in Kazakhstan, that they live in pretty poor conditions, pretty shabby conditions. Whereas in the capital, which is called Nusultan nowadays after the first president, they've got all these glitzy vanity projects. And they see this on their television screens and then they online. And then they see how they live and they don't like that contrast. And they also feel that money is being stolen. Corruption is rife and that's why they have to live in poor conditions. So we've got a real lot of festering disaffection in that town and that's why people came out onto the streets immediately. The price is spiked and then this snowballed. And one of the (21/39)
reasons it snowballed was because other people around Kazakhstan were feeling the effect of that price rise. But when the people of Shanghuzen came out onto the streets, they felt solidarity because these people were from the town where the oil workers have been shot dead 10 years before. So that's the sort of background to the spontaneous protests over socioeconomic issues. I mean, these protests soon snowballed into complaints over inflation generally and over joblessness and poor rich, poor divide and inequality. And then they snowballed into political demands, into demands for the authorities to go basically. And so we really saw a rapid snowballing of that situation before the projects were hijacked by violent forces. So I've seen a number of different explanations for what has transpired in Kazakhstan. I tried myself to write them down and I came up with three different sort of threads. One is that there's no conspiracy, there's no one behind the protests, there's no one behind (22/39)
the violent outbreaks that followed. They emerged organically because of years of discontent, sparked by the spike in LPG prices. And the removal, the subsequent arrest of Karim Masimov and by the president, Tokayev, and the removal of Nazarbayev from his role as chair of the National Security Council, all of that was an entirely domestic affair. That's sort of the no conspiracy explanation. The other one, a second one that I've heard and it has different explanations as part of it is that, yes, the protests were organic, but then they were hijacked by their story, so to speak, or even the violence was hijacked by the Russian state, which used them to promote a narrative that Russia and its strategic neighbors are under attack. Maybe this was because Russia is committed to an invasion in Ukraine and it wanted to use that in order to build public support back home in Moscow. Maybe it was because actually Putin wants to use it as grounds for negotiation, or maybe because Putin has backed (23/39)
like, is not that the Americans fermented this, but that internal elements fermented this, but involved, drew in some foreign militants and so on. It's a bit hazy to be honest, because they're not expressing it very clearly. There are really contradictory theories going on here, so let's unpack them one by one. The idea that this was not to organize that there was no element of organization and that really the protests were peaceful and did turn violent just because people were so frustrated simply does not stack up. There was a lot of organization, there were a lot of weapons being brought in, there were a lot of organized mobs certainly storming down to Almaty and to other places too. Also, you don't usually see people protesting over inflation sort of going to occupy airports. That requires an incredible amount of planning and also overrunning police stations. It simply does not stack up the idea that violent elements definitely made plans and it's almost certain that this was pre- (25/39)
planned, but they were just waiting for an opportunity to launch their scenario. The second theory, what was the second theory? So what you're describing, if I'm just to be clear, you're describing the theory that there were foreign elements involved, correct? But you're saying they weren't necessarily foreign intelligence services? I guess give me what the official story of the government is because I'm still confused as to what that is. And then I'll tell you the one I was describing, which is what I feel like some think tanks and other professionals here in the West are suggesting. Okay, well no, I was unpacking the first theory, which was you said that this was simply spontaneous and duty violence. The no conspiracy theory. What I was saying was it's not possible because as I explained, I've just explained about all the weapons and the plans. You don't spontaneously seize an airport. Right, so that is a no. And as for moving on to what you mentioned about the second, yeah, just to (26/39)
restate it, the second option I was putting forward was that essentially, yes, the protests themselves were more or less spontaneous. Yes, the supposed sort of coup is also largely a domestic affair, but that the Russian state seized upon these events in order to promote a narrative that suited it. And that it suited it for a variety of possible reasons. One, because it actually intends in this larger strategic objective to invade Ukraine. And it wanted to use this to further bolster public support in Russia around the idea that NATO and the West cannot be trusted. They are marching on their way to Moscow and that we need to deal with them now sooner than later. That was one. Another one is that actually Russia doesn't intend to invade Ukraine, but it wants to bolster its negotiating position in Geneva. And so it wanted to use this situation to further do that also by building public support. And then the third was that actually Putin, it's not even about bolstering his negotiating (27/39)
position. Sure, he would like to do that. But actually, he's bitten off more than he can chew in Ukraine. He has to find a way to reduce his forced posture on Ukraine's eastern border. And so he wants to use this situation in Kazakhstan and sending the CSTO into Kazakhstan as a way to kind of tell his domestic audience that let's focus on this story because things are getting too hot. I'm not sure. That's kind of how I've interpreted it. That's the second sort of conspiracy. Okay. Well, I think we should row back on the conspiracy theories. And I think they're very much telling, I think in Central Asia, people often feel frustrated that they're not seen as independent actors, but everything is about what Russia is doing or China is doing or America is doing. But people in Central Asia are capable of acting by themselves. They don't need Russia to instigate things necessarily. Now, having said that, I'm saying row back on the conspiracy theories in the sense of it doesn't seem that (28/39)
Russia organized this in a deliberate bid to influence its Ukraine policy in either way, whichever way you want to look at it, the ones you mentioned. It doesn't seem that it actually organized it. But of course, Russia being Russia would always then seize the moment to make use of this for whatever it wants to achieve from it. And one of the things it seized on is to say that this is an attempt to ferment a color revolution, in other words, pro-Western. In other words, they're basically meaning American, pro-American. There's no evidence of that at all because there is no evidence of Americans fermenting a color revolution. And Putin has probably just seized on that to, you know, as part of his propaganda war because he's adept at just seizing on things and using them for what he wants. And one of the most interesting things about that is that it completely contradicts the official Kazakh version of events. And this is kind of funny because these two are allies and they have the same (29/39)
goal, which is to establish stability and restore order in Kazakhstan. And, you know, I think they were both pursuing that goal and are both pursuing that goal. But at the same time, their narratives differ. Now, Putin wants it to be anti-Western, but they've also, Russian officials have also talked about Middle Eastern militants' involvement, whereas the Kazakh authorities have no interest in depicting this as something anti-Western and have been talking about foreign involvement, foreign militants from mostly from Central Asia and Afghanistan, but also Middle East. But this is not the primary factor that they are talking about. They are saying that these people were involved. They are not explaining why or how, but they are saying they were involved. But they are also quite clear, really, that these are internal forces. I mean, I think one of the difficulties is that the President Tokayev may not want to name names. And I think all authoritative commentators in Kazakhstan do not (30/39)
believe that it was foreign instigated. All the people I've spoke to, all the comments I've read about people, you know, from Kazakhstan, people who really know what they're talking about. But, you know, there may be an interest of President Tokayev in saying, in overstressing this element simply to muddy the waters a little bit, he doesn't want to name names. I mean, there are many, many rumors going around Kazakhstan that appear to be rather well-founded that the elements of the Nazarbay family, members of the Nazarbay family were involved in fermenting this trouble. And, you know, two names are being mentioned indeed, including in the media, on social media, people are talking about Nazarbay's nephews, ones called Samat Abish and another Kairat Satybaldi. Samat Abish is in the security services as the Deputy Chief, as one of the deputies. At least we believe he is. There's contradictory reports of his arrest, of his dismissal. So far, they've been denied by the security services. (31/39)
But really, in this case, we're talking about rogue elements of the security service. And we're talking about members of the Nazarbay family, possibly, you know, having a revanchist sort of move against Tokayev, because they don't like what he's doing. And they're afraid of losing their positions and their wealth and their assets and their organized crime networks when Nazarbayev dies. So this, to me, is the very much the most likely scenario. And that any outside forces are just incidental. Let's put it that way. And that Russia is simply just just seizing on events and using them to promote a certain narrative, but certainly not fermenting trouble in Kazakhstan, I don't think, at this point. So for people who don't know Nazarbayev was the president of Kazakhstan up until 2019, he led the country during its transition from the USSR to independence. We discussed him a bit in our episode with Tom Bergus on the sort of global money laundering network. Kazakhstan was a big part of that (32/39)
story. And I know that he, in part, relied on your book in order to fill in some details of his own reporting, or I think he did. Maybe I'm speaking out of turn. So given the fact that it does seem that Russia has seized upon the events in Kazakhstan to promote a particular narrative, it's clear that they're taking advantage of it one way or the other. What should Western audiences take away from the events in Kazakhstan that are actually relevant to them and to the sort of geopolitical situation unfolding in Ukraine and with talks in Geneva? Let's separate out the things that are domestic affairs that aren't necessarily relevant and those that have knock-on effects. Do you see any lasting impact of what's happening in Kazakhstan to the broader geopolitical picture? Certainly there'll be a lasting impact on the geopolitical picture. I mean, one of the, geopolitically, Russia emerges as the victor here. Because for two reasons, really, it's been able to do a massive projection of hard (33/39)
power by managing to deploy troops so quickly into Kazakhstan and helping to restore order. And we've never really seen the collective security treaty organization, the regional body, the region's answer to NATO in action. So I like this before, as so-called peacekeepers anyway. But we've certainly seen it. It appeared to be successful. So that's a good projection of hard power, military power, at a time when Putin wants to show himself as the strongman as he saber rattles over Ukraine. But also, I think it's important to note that Russia also managed to project it soft power. It might seem paradoxical while it was marching around the streets of Almaty with the troops. But really, we've got Kazakhstan inviting Russia in and expressing great gratitude to Russia as being the sort of leader of this security treaty. And so we've seen that Russia can sort of project itself. Look, it's not just us aggressive towards our neighbors in the region. We have a neighbor here who likes us, who loves (34/39)
us, who invited us in. We came to help and we all achieved the goal we set out to achieve, which was to keep the president in power and sort of fight off the insurgents such as they were. Does Takayev come out of this situation with more power and with his position more firmly entrenched? And what does this mean for Kazakhstan going forward? Yes, I would say Takayev comes out very much with more power since he successfully fought off the challenge, what really did look like an attempted coup. Before I just talk about those domestic implications, it's also worth mentioning, of course, that he does now owe Russia one. He owes Putin one. So let's see when Putin calls that in. From that point of view, he's weaker, I would say, weaker, certainly in his relationship with Russia. And of course, it's already a very unequal relationship. The domestic implications are absolutely kind of earth-shattering, actually. And these are very interesting times in Kazakhstan. Because the first president, (35/39)
Nersultan Nazarbayev, 30 years in power, and even when he resigned, he remained at the helm really, sort of pulling Takayev's strings. He had a lot of official positions, and it was genuinely believed that Takayev's the puppet and he's the puppet master. But now we're really seeing the sidelining of Nazarbayev. And I think what we could say is this is the real end of the Nazarbayev era now, not when he resigned in 2019, but now. Because we've seen Takayev pushing him out of the Security Council. This is a job that Nazarbayev, the first president, has the right to hold for life, but he's pushed him out and taken over. Already, in fact, Nazarbayev had already stepped back from various other roles last year, including chairing the ruling party, handed that himself to Takayev. But in this case, clearly, Takayev took the security role away from him. We've also seen Takayev already, just today, moving against Nazarbayev's family. Now, the family are hugely powerful and hugely wealthy and (36/39)
hugely resented by ordinary people in Kazakhstan. So it's a win for Takayev, if you can rein them in, because ordinary people will be grateful. And also, Takayev, in order to secure his own power, needs to rein them in, especially if rogue elements of the family have tried to topple him. That's an if. So I'm not saying they did, but especially if. So Takayev has only today, given all that he has on his agenda, it's amazing that he decided to announce in parliament that he was closing down a company run by Nazarbayev's daughter, or at least, let's say, closely linked to Nazarbayev's daughter, which has caused huge anger in Kazakhstan over imposing massive recycling fees on cars. It's a kind of marginal issue. But Takayev has got so much on his plate, he's emerging from an attempted coup. He's got foreign troops on the ground, but he has time and energy in parliament today to say that company's going. So he's trying to show people of Kazakhstan that he is moving against the Nazarbayevs, (37/39)
who are really, really very unpopular. It's worth remembering that the main slogan of the protesters, and this is not just this round of protest, but for years, is old man out in Kazakhstan. That's a shalket, and it's a shouted a protest about, and it means Nazarbayev should get out of politics even after he's resigned. But it also means that it also refers to the wider political establishment and how fed up people are with it. You know, Joanna, there are so many different theories and different parties pushing different narratives, serving different agendas that it's really helpful and quite a privilege really for me and my listeners to be able to hear from someone like you on the ground so early on. It really helps me understand where to focus my attention so that I don't end up wasting time chasing dead ends or connecting the wrong dots, so to speak. So I thank you again so much for coming on the program and for being willing to stay up so late to speak with me. Thank you very much (38/39)
for having me. It's been an absolute pleasure, and I will urge people to come and visit Kazakhstan. For more information about this week's episode or if you want easy access to related programming, visit our website at hiddenforces.io and subscribe to our free email list. If you want access to overtime segments, episode transcripts and show rundowns full of links and detailed information related to each and every episode, check out our premium subscription available through the Hidden Forces website or through our Patreon page at patreon.com slash hiddenforces. Today's episode was produced by me and edited by Stylianos Nicolaou. For more episodes you can check out our website at hiddenforces.io. Join the conversation at Facebook, Twitter and Instagram at HiddenForcesPod or send me an email at dk at hiddenforces.io. As always, thanks for listening. We'll see you next week. (39/39)
western media, western companies based in Hong Kong even though they have business in China so they rely on the Hong Kong legal system and if this extradition bill amendment is passed then people doing business in China might worry that they can be arrested by Hong Kong police and transfer to mainland China easily even if they are journalists or they are activists or they are businessmen who do something or say something that the Chinese government don't like and with this extradition bill and this possibility of being transferred to the mainland Chinese legal system then many business people or many companies that are headquartered in Hong Kong and even journalists organization headquartered in Hong Kong they might have doubt about the safety of being in Hong Kong and they might move to other places and it is already happening as some journalistic reports show that some wealthy people because of the extradition bill and worry about this possibility of their safety being jeopardized (9/39)
show. Ho, thank you so much for coming on and stick around. Thanks. Today's episode of Hidden Forces was recorded at Creative Media Design Studio in New York City. For more information about this week's episode or if you want easy access to related programming, visit our website at hiddenforces.io and subscribe to our free email list. If you want access to overtime segments, episode transcripts and show rundowns full of links and detailed information related to each and every episode, check out our premium subscription available through the Hidden Forces website or through our Patreon page at patreon.com slash Hidden Forces. Today's episode was produced by me and edited by Stylianos Nicolaou. For more episodes, you can check out our website at hiddenforces.io. Join the conversation at Facebook, Twitter and Instagram at Hidden Forces Pod or send me an email at dk at hiddenforces.io. As always, thanks for listening. We'll see you next week. (39/39)
Today's episode of Hidden Forces is made possible by listeners like you. For more information about this week's episode or for easy access to related programming, visit our website at hiddenforces.io and subscribe to our free email list. If you listen to the show on your Apple Podcast app, remember you can give us a review. Each review helps more people find the show and join our amazing community. And with that, please enjoy this week's episode. Ho-Fang Hung, welcome to Hidden Forces. My pleasure to be here. It's great having you on. You are the Henry M. and Elizabeth P. Weisenfeld Professor in Political Economy at Johns Hopkins. It's great having you here. Normally, we do intros after the episode is done, but in light of the fact that I want to get this episode out immediately, given the G20 Summit, I'm introing you right now. You're also the author of Protests with Chinese Characteristics, which was an award-winning book that came out in 2011. And you're also the author of The (1/39)
China Boom, Why China Will Not Rule the World. It's wonderful having you here. I don't know if you know this, but it was actually Anne Stevenson Yang who recommended you to me. Yes, she's the China whisperer. She's my China whisperer. And she's in China right now? Sometimes she'd go back and forth between these two. I think she's had to come back now because of the relationship between the US and China, some stuff like that. Also, I think some of her writings on some of these Chinese companies. The finance of vulnerability and things like that. So it's great having you on. You come, of course, like I said, highly recommended from Anne. The reason I asked you to come on the program was because I wanted to talk about Hong Kong, the recent protests, and then to dig deeper really, what is this really about? What are the protests really about? Heading into the G20. And that also gives us an opportunity to talk about US-China relations, China, China's economy, things that we've talked about (2/39)
often on this program because this is really the area of your research. So starting off, I mean, you mentioned this to me. I think I had actually read this in the newspaper recently. That Hong Kong, the citizens of our group are going to be putting an ad out in the Wall Street Journal tomorrow. Is that right? It is a New York Times, as far as I remember, and also financial times and a dozen plus major news paper around the world because they get a very rapid and amazingly effective fundraising online together, more than $6 million Hong Kong dollar, which is about close to $1 million US dollar in a day to buy ads in major news paper around the world. Basically is to try to voice the concern of the Hong Kong people to urge the lighting countries besides China that is going to be in the G20 to urge them to raise the issues of Hong Kong to see Jingping when they see him. And also drive fundraising back to the organization's site. Is that what you said? They basically use the money as far (3/39)
as I know, and it is reported that they use the money to buy ads. Oh right, they raised money and they used it to buy the ads. That's what you're saying, right? So let's take a step back. We're getting talk about the G20, but can you give us an introduction to these protests? Because a lot of listeners are going to know, some people are only going to know that there were protests in Hong Kong. Other people will know that there were protests in Hong Kong about some extradition amendment. That's it. What's going on? Yeah, the short answer is that the Hong Kong government tried to amend an extradition bill because Hong Kong used to have this extradition arrangement with a lot of countries, including the US, but it doesn't have an extradition arrangement with mainland China. It is by design because when Hong Kong's sovereignty is reverted to China in 1997, many people in Hong Kong worry about the China legal system. They trust that the legal system in Hong Kong is fair. It is a common law (4/39)
system and it's transparent. Now the legal system in China is more in a kind of a black box and it is unfair. There's a lot of corruption going on. So they resist the extradition arrangement with mainland China. So now they want to do it so that if China say that there's a fugitive I want, then they can tell the Hong Kong government to arrest that person and transfer to China, mainland China. So Hong Kong was a territory of the British Empire? Yes. For how long? The transfer happened in 1997, but when the British took Hong Kong bit by bit first, that is the 1840s after the OPM war and they took the nowadays along as Hong Kong Island and Kaolun and later with another treaty with the Chinese government at that time they took what is now the rural area, the new territories in the 1890s. So 1997 was the time when US and the British and China has an agreement that the British hand over Hong Kong back to China. So and that agreement, the conditions of that agreement were for 50 years and (5/39)
they're scheduled to end in 2047 and I think that's part of the backdrop of this larger discussion. As far as the amendment is concerned, I think the issue, it came out of a case of a supposed murder of a woman in Hong Kong, a Taiwanese woman. In Taiwan is a murder of Hong Kong women by her boyfriend, allegedly. Who was from Taiwan? That happened in Taiwan. That happened in Taiwan. That happened in Taiwan. Right. Okay. So it was supposed to face trial in Taiwan but because the current extradition arrangement didn't include mainland China, Taiwan and also Macau. So now they... So he fled to Hong Kong and they wanted to extradite him back to Taiwan. And the idea here was that it was presented to the Hong Kong people by Ms. Lam, what's her full name? Kerry Lam. By Kerry Lam as something that was strictly between Hong Kong and Taiwan or thought for that reason but the suspicion always was that it was actually Beijing behind it, right? Yes. And actually the Taiwan government already issued (6/39)
a statement saying that even without the extradition amendment, there will be way for Hong Kong to hand over the person to Taiwan so you don't need that amendment to do that. And of course that many Hong Kong people are suspecting that the Hong Kong government is using this case to put in mainland China, the extradition arrangement of mainland China and Beijing is behind it. And actually in late May that because in the beginning many business, even the establishment business elite has questioned about this because a lot of Hong Kong business elite had experienced with the legal system in mainland China so they also fear that being arrested by Hong Kong police and transferred to mainland China for some fabricated charge or something like that. And then in late May, there is a kind of a Hong Kong business group visit Beijing and then some very high rank Beijing official including the standing committee, the Politburo standing committee member Han Zheng met with this group of business (7/39)
people and saying that Beijing is behind this extradition bill amendment so business people don't need to worry about it, you should be behind it. So basically Beijing has put a lot of political capital in making sure that the business elite despite the doubt will support the bill and then get it passed in a legislative country in Hong Kong. So Hong Kong enjoys a very unique special trading relationship with western countries, right? It's also I think the biggest financial hub in the east, is that right? So how would this amendment impact from a practical standpoint economically, how would it impact Hong Kong? Yes, it is very interesting because this extradition bill that the amendment is really putting Hong Kong special status as a financial center in China in jeopardy because Hong Kong special financial center status is given by its independent jurisdiction system, by its independent legal system and freedom of speech and also freedom of assembly and also western countries and (8/39)
they start to move their money to Singapore, a safer place and they will worry that Hong Kong might no longer be a safe place for their money and for their own safety if that extradition bill is passed. So Hong Kong operates under common law which is different than what they have in the mainland also its democratic culture clearly on display with approximately 2 million people in these protests right with 90% humidity something in the 90s in terms of temperature incredible its significantly different as I said culturally and legally from China for those who don't aren't familiar with Hong Kong have never been there or lack a deeper appreciation for those differences can you help us get a sense of just how different the culture and the system is in Hong Kong versus the mainland and they speak two different languages also right. They are Cantonese and many of them also speak Mandarin and English and in terms of the system Hong Kong is very different because you don't need to feel worried (10/39)
when you criticize the Hong Kong government and Chinese government and journalists who report about corruption of Chinese officials and financial vulnerability of Chinese state-owned company they feel safe to say that which is a lot of cases in mainland China if you report some corrupt officials report about vulnerability of some well-connected state companies that the journalist concern might be arrested that actually it happened and if you have financial dispute with some powerful people behind in mainland China you can be arrested because the court system is very murky I would say and it's run by the Communist Party so it is not the case in Hong Kong so right now until now then Hong Kong people still feel they are protected by relatively fair ecosystem and relatively free media. And this goes back to the point now it's been 20 years since the handoff they've got another 30. These anxieties were expressed I think as early in terms of protests as early as 2003 right over basic law (11/39)
article 23 so this is an ongoing anxiety among the people in Hong Kong what is the general expectation by the people there do they feel has the hobo always been that as they get closer they'll be able to renegotiate it whereas the leadership in China has always felt that they're simply going to be reintegrated and there is a misalignment of objectives and perception and is that right? Yes that is true that over the last few years we see a lot of cases that Beijing tried to tighten its control of Hong Kong for example the very famous or infamous case of disappearing books seller that they published books that talk about scandals of Chinese leaders then they published in Hong Kong and they disappear. Was that in 2009? When was that? It happened in there's a number of cases that it happened in the last few years and is raised by the US State Department and the international community and also there's a wealthy Chinese Taikun by the name of Xiao Jianhua he's regarded as a fugitive from (12/39)
mainland China but he's in Hong Kong and then there's a cross-border kidnapping by China public security personnel to kidnap him in the hotel and then he showed up in the Chinese official TV and then and also the same happened to this book seller. So they succeeded in kidnapping? They succeeded but it is illegal because in current law in Hong Kong there's no way that the Chinese law enforcement personnel can do that duty in Hong Kong because of the one country two systems so they have been doing it and illegally and it raised ice brow and it raised the international community's concern so it is what Beijing has been doing now they do this extradition bill amendment that people are thinking that now they finally try to legalize the whole process of these arresting people in Hong Kong and transferring to mainland China so it is why it hit the button of many Hong Kong people because in the past that they have to do it under the dark and do it carefully lot to be discovered because it is (13/39)
not legal and if that extradition bill can happen is passed then they can do it under a formal legal channel just requesting Hong Kong police to arrest the people and then transfer it to mainland China. So help me understand the circumstances in which this amendment was attempted to be passed was there any willingness by the government in Hong Kong to engage in a fact-based debate with the public over its proposed amendment prior to the protests? The general feeling that make the people angry is that the consultation period is very hasty, very rushy and they keep talking about the Taiwan case to justify it but everybody point out that it is just an excuse and because the main concern is about mainland China the extradition to mainland China so the discussion is very hasty and the government is very much want to rush it through even after the one million strong protests in June 9th and the government still want to go ahead to pass it in the legislative council and then the conflict in (14/39)
the June 12th erupted that protestor basically paralyzed MOT district where the legislative council and the government is located so they have to postpone cancel the meeting and then in the end the government back down and indefinitely postpone the bill. So let's talk about the protest because one of the interesting things that I read of yours as you described these protests as quote more gorilla this time around what did you mean by that? That is interesting that in the last time that Hong Kong protests got attention internationally is the 2014 occupied movement at that time the umbrella movement. The umbrella movement. Why was it called the umbrella movement? It was originally called occupied central, occupied movement but in the end when the Hong Kong police force used tear gas and the young people don't have much to defend themselves against the tear gas so they just raised the umbrella to block the it's not very useful but many people just use umbrella so it is not quite a scene (15/39)
so it's called the umbrella movement in 2014. So the main action of that time is that they occupied several areas in Hong Kong one on the Hong Kong island side near the government headquarters one is Kaolong side so they occupy the area for more than 70 days and the Chinese government is angry about it and the Hong Kong government eventually managed to clear them up after they were out by themselves in November 2014 so this time around that apparently the protestor learned the lesson that they think that is unwise to whole territory and occupied it for a long time it is difficult to sustain so it this time they were taking the less so just to clarify here yeah was the notion of occupying was that in any way related to what was going on in the west with Occupy Wall Street? In the beginning that one of the professor who devised the idea of occupied he benetized who is a law professor in the University of Hong Kong now he's behind bars. He's behind bars he's in prison. In prison because (16/39)
of his action of inciting Kuang Ku, inciting other people to perfect this order and he explicitly talked about the inspiration from Occupy Wall Street and all this occupy square. That's interesting because that was one of the things I wanted to ask you about but it was more dealing with the leaderless nature of this protest and just thinking about it in terms of the different cultural systems between the east and the west and how protests may differ and how important it might be in the east to have leaders versus in the west but it's interesting so what you're saying is that at first they tried to apply some of these principles like occupying a territory but it turned out they couldn't do that effectively in Hong Kong so they went underground. After 2014 after the occupation ended then there is the arrest and many people continue to be activists and there's a kind of a 2016 there's a Mong Kok they call it uprising or they some call it the riot that is some of the young activists who (17/39)
were in the 2014 occupation that they throw bricks at the police when they tried to clear up some street foods renewal so after that as well that there's a mass arrest of activists and leaders and so that this is what year you said? 2016 is the Mong Kok one and then the mass arrest happened after 2016 and after 2014 and then the trial and the imprisonment of the leaders of the occupy happened just a few months ago right before this 2019 movement. Did this catch Beijing by surprise given the way that they dealt with 2014 did they feel that they had effectively crushed these protests and that this was not going to be an issue going forward? I think it definitely caught Beijing and it basically caught everybody by surprise and I think original calculation of Beijing and Hong Kong government about why they tried to pass this extradition bill in such a kind of a hasty manner because I think the judgment is that the leaders the co-activists of the opposition has been arrested behind bar and (18/39)
two are actually in exile in Germany right now so the resistance has been broken it I think it is their original calculation so the resistance from the society will be minimal when they pass the bill so no matter what they can pass it with the major incidents and in the end even without all this leader and without all these famous activists like Josiah Wong who was behind bar when the thing erupted. He's now out right? He's just out. He's that young gentleman how old is he 21? He looks very young. I haven't kept track of it but he's he's the person who's been all over the international press and all these kind of iconic figures behind bar and so even without them then the people just organized themselves spontaneous in this guerrilla battle with the government on June 12th so I think the reaction is so strong and so self-organized that I think definitely it caught Beijing by surprise. It caught them by surprise. Another really fascinating thing about not just these protests but (19/39)
generally we saw this of course in the Arab Spring in Egypt how many years back is the role of technology but I think what's interesting in the east is that the tools of suppression by the state are much stronger than they are anywhere else particularly specifically speaking in China. I don't know how powerful the technology is in Hong Kong it may be very similar but the institutional practices are not as Orwellian or suppressive in Hong Kong. How important was technology one on the suppression side and then how important was it on the side of the protesters and like encrypted messaging and things like this to help them organize. Yes and it's very important and it's one another key difference between Hong Kong and mainland China. In mainland China you don't have access to Facebook, Telegram, Google and all these social media that homegrown social media in China available to Chinese people in the mainland are tightly controlled by the government while in Hong Kong that people still have (20/39)
relatively free access to all these kind of social media that we are familiar with and reportedly and and actually there are some activists who wrote the article in Financial Times to talk about it and actually that it is this social media and social media group discussion group that help organize the whole thing then the young people really tag-saving and very aware of the power of this social media and then to organize themselves even without a hierarchical organization to do the organizing. So Kerry Lam is the fourth chief executive that may end up not serving out a second term in Hong Kong that's four for four right? Oh for four. Yeah and it is just a speculation but I think it is the right best speculation that she might have lost the trust of Beijing that when her term is up and she might not have a second term depending on the remaining two three years whether she make a special... But none of the prior chief executives served full terms right? Or second terms. Donald Zhang has (21/39)
a second term but his first term is a kind of... But he ended up in jail didn't he? He ended up in jail. He ended up in jail right after that so that is there. So basically what kind of commentary is this on the adequacy of these institutions in Hong Kong? Yeah it is the irony that the Hong Kong chief executive as people find out that the salary is much higher than a US president. The salary of a US president of many world leaders. What is the salary of the US president? I don't have the exact figure but it is widely reported that they have the second highest salary behind Singapore prime minister that the Singapore leader and so they're high salary but the problem is that they always cannot serve the second term and don't end up well because they always use as escape goal for failed policy of Beijing. Said that whenever there is a policy like the article 23 in 2003 obviously this Beijing... What was that about? What was that about? Because the article 23 is an article in the basic law (22/39)
of Hong Kong saying that the Hong Kong government need to legislate against action that is a threat to Chinese national security. So anything deemed subversive to Chinese national interests can be indictable and things like that. So in 2003 they tried to legislate... They got ambitious. They had like six years. Six years after the transfer they got pretty ambitious. Yeah and it led to a huge protests and also international outcry and then the government shelved it and there is a failure of Beijing in pushing it and then Dong Qi Hua became the escape goal of course and then he could not finish his term. So the same happened for this time around that's Kery Lam. It is basically this Beijing miscalculation and Beijing failure for this back down on this extradition bill but it is going to be Kery Lam who will take all the hit and then if she cannot finish the current term or she cannot have a second term then it means that it's happened again that Beijing make her escape goal of the (23/39)
failure of Beijing to introducing this legislation. So what are the other big issues besides this amendment that have people worried? Because this has been the thing that the press has focused on, the international press. But of course we know the international English speaking press captures only a fraction of reality in foreign countries. The Hong Kong people are worrying about a lot of stuff that besides this extradition bill, Hong Kong people have been worrying about this slow tightening of the screw on Hong Kong liberty and freedom that Hong Kong used to enjoy. Is that what it feels like to the Hong Kong citizen that there is a tightening of the screw? And is that also just built out of the cynicism and the expectation that Beijing has designs on Hong Kong in the long term that don't align with what the citizens of Hong Kong want? They've always been suspicious of Beijing. And there's suspicion on one part, the other part and Beijing has been quite courageous to openly talk about (24/39)
it. For example, the liberty and freedom of Hong Kong is guaranteed by the sign of British joint declaration that lay out the terms of the one country, two system and 50 years unchanging system. And also the basic freedom, basic right of Hong Kong people. And now the Beijing government and high-ranked officials keep saying that this kind of treaty with the UK is no longer valid because it serves its purpose. And now it is totally the internal affair of China and the foreign press and foreign government shouldn't say anything about it. So Beijing has been saying out loud that and they have been saying that one country is bigger than two systems. And to Hong Kong people see that it is not what we expect when we have to deal and we accept the sovereignty handover in 1997. So it has been happening for a while before this broke up. So are you optimistic or pessimistic about how this is going to work out? Because you know, I think what I've seen oftentimes with these types of situations is (25/39)
that there's a lot of energy and passion and excitement and optimism early on among the protesters, regardless of whether it's in China, Hong Kong, Greece, Spain, the United States. But the government has unlimited resources or seeming unlimited to press down and can wait it out. And eventually they'll slip it back in. In fact, I want to ask you, one of the demands of the protesters is that they withdraw that Kerry Lam withdraw the amendment entirely, right? Because they're afraid she's going to reintroduce it next year or two years or three years from now. Yes, then I have been pessimistic. Now I'm generally still pessimistic, but become a bit more optimistic now because before this protest, everybody, including myself, many people, not everybody expected that the resistance of Hong Kong to this tightening of the screw on Hong Kong has been broken and the civil society is paralyzed in this resistance. But now that this resistance came up out from nowhere, that so it seems that the (26/39)
civil society in Hong Kong is much more resilient than we thought. And also in this time of debate, it comes to the forefront is that there's some huge constraint on what Beijing can do in cracking down on Hong Kong. That is the Hong Kong special trading status as recognized by the US and international community that serve China very well. Patukin, this current trade war situation that if China crackdown harder on Hong Kong to trigger a kind of withdrawal of international recognition of Hong Kong as a special trading territory and a special custom territory separate from mainland China, then Chinese financial interest is going to be hurt. Well, that's the thing because China has capital controls. Hong Kong is very important as a financial center for the Chinese elite in particular who look to get their money out. And also Hong Kong's special status as a custom territory separate from mainland China. For example, Chinese company, if they want to invest in infrastructure in Australia, in (27/39)
US, in other Western countries, it's very difficult. And this Western country is going to cite the national security concern to ban this investment. But if that Chinese company somehow can set up a subsidiary in Hong Kong and invest in this Western company as a Hong Kong company, it face much less scrutiny. They can invest in port facilities along the Panama Canal pipeline in Australia and port facility in the US. So it has been the status quo that Chinese companies using Hong Kong identity to do is and also Chinese wealthy people, they will move their money to Hong Kong first and then move the money out as a part of the capital flight going on. And at the same time, there's a lot of high tech products and equipment that is deemed sensitive and can be used for military purpose. They have export control. For example, US have law, explicit law to exporting this kind of equipment to mainland China. But Hong Kong as a special custom territory, they can import this equipment. So Chinese (28/39)
company like Huawei is just setting up shops in Hong Kong to import this equipment. This idea, this notion of, again, you said it earlier, it comes from 1997 or when it was first started, I can't remember of one country, two systems. This system in Hong Kong benefits China. It benefits it tremendously because of how closed and controlled China's system is. Hong Kong is more open and that allows them to do business internationally in ways that they would otherwise not be able to while still maintaining their capital controls while still maintaining XYZ relations. So it's why it put a constraint on China that if China like for example, crackdown on Hong Kong, harder standing in the People's Liberation Army to shoot the people, for example, or they no longer allow Facebook, Instagram and all these social media to operate freely in Hong Kong, it will trigger a backlash in West England and the US. You're saying that so I'm not familiar with the legal relationship. Under the current (29/39)
agreement is Beijing able to send the People's Liberation Army into Hong Kong? They cannot. They cannot. So if they would break the agreement, I mean that would be. They would break the agreement. And how would the international community understand what that would mean? Because again, it's one country, two systems. It's not exactly a break of sovereignty. Hong Kong is part of China. Yeah. It's a separate system. So how would we think about that? How would the international community react? In the case of US, there's explicit law called the US Hong Kong Policy Act. It was introduced in 1992 that regulate US policy toward Hong Kong after 1997. Now, according to this law, the US State Department periodically has published reports about the state of autonomy of Hong Kong. And according to this report, if it is verified that Hong Kong is sufficiently autonomous from mainland China, then US can apply its law to Hong Kong separate to its application to mainland China, like export control, (30/39)
immigration control, and regulation of mail, and investment from Hong Kong, visa-vis investment from mainland China. So it is established in the law in the US. So many other countries have similar law and regulation separating Hong Kong from mainland China. So if countries, Western countries, and US find that actually Hong Kong is no longer sufficiently autonomous, they can withdraw this recognition and start to regard, for example, a company from Hong Kong as the same as a company from mainland China and so on and so forth. So what do the Taiwanese think about what's happening? We mentioned Taiwan early on because they were the excuse for the law. But of course, Taiwan, the moment they realized what was going on, they didn't want the amendment because for them, Hong Kong, it's even closer to China. That's a bulwark to their relationship. That is a very interesting thing to observe because there's a presidential election coming up in Taiwan in January 2020. And before this extradition (31/39)
bill thing, that the current incumbent government, which is a pro independence and government led by Chai Ing-wen has a low rating because of many administrative mistakes. And so that there's a popularity is not high. Many people would expect that she might lose the election and relatively pro Beijing and friend with Beijing. There's one, there's a more pro Beijing government in Taiwan traditionally and also a more, not necessarily anti-Beijing, but more independent oriented. Both of them came out against the amendment. Both of them came out against the amendment and the latest tooling because she's showing that incumbent government, chance of reelection substantially increased. And then definitely the debate and the conflict in Hong Kong helped. To let people see it is what one kind of system is. Now what do you think that's so currently the party that is out of power is the more pro-Beijing government? Yes, they have a chance to win the election in 2020. They had a chance. Now those (32/39)
chances are diminished because of what's going on in Hong Kong. According to pool and people speculate that Hong Kong is one factor. So that's obviously got to raise alarm bells in Beijing. Yes, they don't like that. Right? Yeah. So it's actually, that's very interesting. So what you're saying is that the reaction to the protests in Hong Kong, to this amendment in particular, which represents tightening of the screws, as you said, of Beijing on Hong Kong or potentially version in Taiwan, the reaction was so strong against that, that it has actually destabilized the politics in the region such that Beijing actually wants to pull back. Yeah. Right? I mean, it's pretty remarkable. Also the police brutality that is shown that of course the police is using tear gas and rubber bullets. And it is quite dramatic measure by Hong Kong standard because in Hong Kong protesters used to be very peaceful that they built barricades. They didn't throw bottle top cocktail and anything like that. They (33/39)
never did that. So I got to ask you something. I got to ask you something. What if this ever happened on the mainland? Right? If this is what we're seeing in Hong Kong, right? Two million protesters. What's the population in Hong Kong? A bit more than seven million. Seven million. Seven million. So it is two million out of seven million people. Okay. So that's a huge number, right? It's a huge proportion. Right. But seven million is only a fraction of a billion. Yes. Right. So this of course is the fear of the Chinese Communist Party, right? Yes. Ultimately it's that they would lose control. The fear that is built over to mainland China to protest. Yeah. Their fear is that they will lose control of the country somehow. Not necessarily that it's going to happen now, but this is the underlying feel of everything. Right? This was the part of the piece that Deng Xiaoping made in 1989 with the Hanaman protests. Right? Yeah. So I mean, how realistic is it that this could ever happen in (34/39)
China? I think it already happened in many places in like in Tibet and Xinjiang. We have a lot of this kind of larger scale and more violent protests happening. That's the Islamic part of the north. The Islamic part of the western part. Yeah. So it is why they have this concentration camp as a solution to kind of a put down the unrest in Xinjiang. The problem is that in mainland China, including in Tibet and Xinjiang, they can resort to these extreme measures. Right. Because it's the mainland. Because the main camp is in Hong Kong. They cannot stand in the PLA to stand. They cannot stand in the army. They cannot actually, they are not should people and kill some people. Your point is that they would be able to get away with much, much, much greater measures on the mainland and the international reaction would be minimal. Yes. Intellectual reaction is still big at what happened in Tibet and Xinjiang, but it is mostly moral acquisition. Right. There's been a largely blackout of this. And (35/39)
people don't know about it. And in Hong Kong, there's a presence of international press and also there's this international recognition of Hong Kong's best trading status. If they really crack down hard on Hong Kong and shoot people and establish education camp, things like that, then immediately the international community will withdraw its recognition of Hong Kong as a separate entity in trading or other matter and it will hurt China financially. So it is why they have this constraint that they cannot crack down hard on Hong Kong. They don't see this protest to grow. So the only thing that they can do is to back down. How much of this is generational? In other words, the many of the protesters were too young to meaningfully remember Tiananmen, right? Yes. The memories are still alive. And in the Tiananmen is part of the collective memory that is transmitted from generation to generation because we can see that in Hong Kong, June 4th, they have these videos and ready to commemorate (36/39)
the killing in 1989. So the memory is still alive. And it's not like in mainland China that people don't talk about it, don't say about it, don't write about it. So, Ho, I want you to stick around. I want to take us to overtime for our subscribers. I want to talk to you about Chinese leadership. That's something that you've written a lot about. I also want to talk about the One Belt, One Road initiative and the significance of that for safeguarding foreign direct investment in China, particularly after 2008 with the financial crisis and the drop in exports and that obviously had a knock on effect on foreign exchange reserves, which is something we've talked about on the show and it's something that you've talked about, the importance of that and the importance of that for the remnant B dollar peg. And also this really fascinating thing that we haven't spent much time talking about, which you've done a lot of research on, which is the transformation of the population from being a labor (37/39)
input to being a source of consumption. And this is also very fascinating. It's something that Michael Pettis has written a bit about when it comes to savings. So for regular listeners, you know the drill, you know where to go. If you're new to the program or if you haven't subscribed yet to the Hidden Forces Overtime or Autodidact Super Nerd subscriptions, you can do so at patreon.com slash hiddenforces where you can get access to the overtime audio to this episode, as well as the transcript, which will probably take a few days extra to come through because it's going to take some time to get it transcribed since we're going to be releasing this right away and the rundown is going to be available immediately. So again, patreon.com slash Hidden Forces and you can also learn how to integrate the Patreon subscription straight into the Hidden Forces website at hiddenforces.io slash subscribe where you can get access to over 70 rundowns and close to 90 transcripts from the beginning of the (38/39)
point says to him, what can I do to assuage the feelings of people I've offended, namely black people? At which point, Tim Scott, who was ready for this says, you can support my Opportunity Zone bill. The next day on Air Force One, President Trump is asked about his meeting with Tim Scott, which was close to the press. And Trump said, we had a good conversation or whatever that thing is he wants to get in the tax bill. I hope it's there. That led the White House to energize and be endorsed this provision, which was already percolating on the Hill. And interestingly, once the bill passes, the people in the White House who the White House picks to promote Opportunity Zones are black. Jerome Smith, who had worked for Koch related organizations before coming to the White House, who's a White House aide. He becomes very influential. And they set up this White House Opportunity Council, the spokesman for which is Scott Turner, who's a former professional football player and motivational (18/40)
even though they have no chance of ever being rich enough to benefit from the estate tax. So let me ask you something else with respect to appearances, because while in normal times it can be very beneficial to have the support of the executive branch, at the same time, in many ways, having Trump support was a kind of a toxic emblem for anyone trying to operate and push any kind of agenda in Congress. How true was that in this case? And how important was it that this bill had bipartisan support? And again, to the point I made at the very early on of the question I had, how important is that period when trying to build a strategy for passing a bill through Congress? So proponents of Opportunity Zones built a bipartisan coalition initially to build support for this bill, but for the idea. And that is definitely a fact. But when you look at how it became law, that was irrelevant. What happened was a key Republican senator got it into a tax bill that passed Congress without any Democratic (21/40)
What's up, everybody? My name is Demetrius Cofinas, and you're listening to Hidden Forces, a podcast that inspires investors, entrepreneurs, and everyday citizens to challenge consensus narratives and to learn how to think critically about the systems of power shaping our world. My guest in this week's episode is David Wessel, a senior fellow in economic studies at the Brookings Institution and director of the Hutchins Center on Fiscal and Monetary Policy. He is also the author of a new book out tomorrow titled Only the Rich Can Play, How Washington Works in the New Gilded Age. The book tells the story of the creation of what are known as Opportunity Zones, which supposedly incentivize people to invest in distressed areas in the United States with the official purpose of spurring economic growth and job creation in low-income communities, but which in practice seem to serve primarily as yet another tax loophole in an already convoluted code full of them. We spend the first part of our (1/40)
conversation discussing the bill itself, the story of its creation and implementation into law, and what this tells us about how financial and political power are wielded in Washington. The second part includes a discussion about political corruption, corporate concentration, the infrastructure bill that recently failed to make its way through Congress and its associated tax provisions, as well as the upcoming elections and Trump's chances in 2024. If you enjoy the first half of today's conversation, I encourage you to take the leap and become a premium subscriber. There's no commitment. You can cancel at any time and the entire library of subscriber content going all the way back to episode one becomes instantly available to you, including the overtimes, transcripts and rundowns, depending on your tier. So without any further ado, please enjoy yet another educational and enlightening episode of Hidden Forces with my guest David Wessel. David Wessel, welcome to Hidden Forces. Good to (2/40)
be with you. It's great having you on the podcast, David. You've written now, what is this, your fourth book that you've come out with recently? Yes, my fourth book. You know, someone must have sent me, when I had my old TV show, someone must have sent me Red Ink, which was, I think, well, not necessarily your last book. It was the book right before your book on the Fed, I think. And we never got around. It was right around the time we must have ended the show. We didn't get around to having you on. So this is a belated invitation. And I have to say this book, like when your publicist sent it to me, it was right up my alley. And it is a fascinating look into a system and a process that I've struggled to understand, you know? And I think one of the reasons why it's so hard, obviously, is because those who benefit from it and are in a position to actually explain it don't want people to understand how the, quote, sausage is made. But before we get into that, it's a fascinating book and (3/40)
we're going to discuss all of it. For those who don't know you, what is your background? How would you describe who you are and what you do? So I think of myself as a newspaper reporter. I spent 30 years at the Wall Street Journal as a reporter, editor and columnist, mostly writing about economic policy matters. I left that when I turned 60 and 30 years and I got the catalog from the company, say, I could pick golf clubs or a wristwatch. I thought, geez, if I'm ever going to do anything else, this is the time. And I lucked into a really good job at the Brookings Institution where I direct a program in our economic studies unit called the Hutchins Center on Fiscal and Monetary Policy. And our mission is to improve the quality of fiscal and monetary policy and public understanding of it. Well, that's great because I have many monetary and fiscal questions to ask you in the overtime. So are those the things that interest you most and how did you become proficient in the workings of (4/40)
Washington? Well, there's no better way to learn Washington than to be a reporter covering it. I had been in the Boston Bureau of the Wall Street Journal. I came to Washington in 1987. The stock market had just crashed. It was the very end of the Reagan presidency. And I majored in economics in college and I did spend a year at Columbia and go to school and get paid for a program called the Badget Fellowship, which is for reporters interested in economics and business. But one thing I learned is that if you work for the Wall Street Journal, there are a lot of really smart people who are willing to be your teachers because they want the Wall Street Journal to get it right. So I think what happened was that the more I wrote about economic policy, the more I found it interesting and the more I enjoyed it and the more people respected me so they're willing to take time explaining it. There's different ways in journalism. Some people go from one beat to another. I didn't choose that and I (5/40)
think it paid off handsomely for me. What did you like about economic policy so much? The ability to translate what was happening in Washington at the Federal Reserve in Congress and how it affects the ordinary people who read the newspaper or listen to NPR or something like that. One of the things I discovered is that there's a kind of high priest language in economics that excludes many people from participating. I mean, the Federal Reserve has gotten a lot better, but in the old days you basically needed a decoder ring to know what they were talking about. And I discovered that I enjoyed being the translator and that there was actually a market for that. So for instance, during the financial crisis of 2007, 8, 9, I was on NPR's Morning Edition frequently trying to talk about really complex things in three minutes and 45 seconds. I discovered that I enjoyed doing that and a lot of people don't. That's fascinating. That must have been quite an experience. But to that point about the (6/40)
complexity, I never ceased to be surprised at how many otherwise brilliant people struggle to understand financial markets and economics. And I wonder how much that has to do with language. A perfect example was a recent appearance that you made on Al Hunt and James Carville's podcast. And James, who I think is one of the people who's famously quoted as saying that if he could come back, if he could be reincarnated, he would come back as the bond market. And he still seems to be traumatized by that experience and he still seems to be sort of intimidated by that language. And it's just something I find fascinating. So as I mentioned, David, your book is titled Only the Rich Can Play, How Washington Works and the New Gilded Age. How would you describe what the book is about and what did you mean by only the rich can play? The book is about a provision that was slipped into the 2017 tax bill that created or led to the creation of 8,764 tax havens across the country called Opportunity (7/40)
Zones. And the idea was, the marketing slogan was, we're going to give a big capital gains tax break to rich people and they will put money into poor neighborhoods and the poor neighborhoods will be better off. The reason that title is only the rich can play is that the tax break is only available to people who have large unrealized capital gains. It's not like, say, an IRA where anybody can put their money in and get the tax break. And that was by design because after all rich people have the money. I think that what intrigued me about it was, first of all, how did this happen? Secondly, it's a really important issue. How do we get money to poor neighborhoods? But two things really turned me onto the story. One was when I discovered it was not thought up by some Washington think tank, but came from Sean Parker, the guy of Napster and Facebook fame. And secondly, as I was thinking about doing the book, I heard there was an Opportunity Zone Expo at the Mandalay Bay Hotel and Resort in (8/40)
Las Vegas. And with images of the big short movie in the back of my mind, I went to that Expo. And that really convinced me that this was a fascinating story. It was like a modern gold rush. Yeah, that totally reminded me of that scene in the big short where Steve Isman and the guys at Front Point Partners went to the American Securitization Forum at Seizures Palace in Las Vegas and had a series of aha moments. And you have some similar examples like that in the book, whether it was the guy in the cowboy hat or the former model turned real estate developer with the Andy Warhol painting to sell. I guess one of the questions that comes to mind is how did all of these people become educated on this opportunity? Like what networks were they plugged into where they could learn about Opportunity Zones so early? I also want to ask you about Sean Parker because you mentioned him. I'm curious how an otherwise political novice like Parker could go from having this idea to actually getting it (9/40)
implemented into law. And that's actually the larger sort of context that I want to flesh out to begin with before we even begin to describe what Opportunity Zones are and how they work, which is how Washington works in the New Gilded Age. And to that point, the Gilded Age was a period I think between 1870 and 1900. It was kind of the Baroneal period where a lot of the wealth of the industrial revolution, primarily the first industrial revolution was beginning to become cemented into political power. And this was the period right before the beginning of the trust-busting era and not a time that we associate with robust regulatory oversight. So is it fair to say that you think we're living through a similar period today and that we might be on the cusp of a new regulatory regime that could begin to try and reign in large concentrations of private and corporate power? All right. So what did I mean about how Washington works in the New Gilded Age? One guy who's very rich spent several (10/40)
million dollars, not a lot by Washington lobbying standards, created a think tank called the Economic Innovation Group. And that think tank very successfully built the case that we needed to do something to the tax code to help left behind communities. They didn't spend a lot of time talking about how they were going to give a capital gains tax pay to the really rich. He managed to hire some really good veterans of Capitol Hill, effectively as lobbyists, but also some technicians that would help them structure the thing. So it's particularly attractive to rich people. And he also became a significant campaign donor. Originally, he only gave to Democrats, but as this thing took off, he started giving to Republicans. And so it's kind of like not the way policy gets made in the textbooks. Although there was a very public effort to build support for opportunity zones well before the tax bill came up. It was very superficial and at the talking point level. It wasn't on the details about how (11/40)
do you make sure this isn't abused. And because they were good at this and had the resources and energy and skill and time, they managed to get a provision into the bill without a lot of scrutiny. And I personally don't think that I'm no problem with billionaires who have good ideas about how to improve our society, but I don't think they should be able to basically maneuver without a lot of scrutiny by the rest of us about a provision in the tax bill, particularly one that is so valuable to people who have unrealized capital gains. Now, your second question is how do people find out about it? Well, there is an industry of people, tax lawyers, accountants, real estate, investment funds, and others who, once they discover a tax break, propagate it through the system. So some people knew this was cooking. Most of the people in the industry didn't. And once they found out about it, they send emails to their clients and then these organizations which exist to have conferences where people (12/40)
who have money encounter people who want their money like the one I went to in Las Vegas. They start to have these big conferences. There were dozens of them in the first couple of years after the law passed. And so word gets around when, and I suspect some of it also happens at the golf course or cocktail parties. Like I found this great way to avoid paying capital gains taxes. Tell me about it. So that's the way things get sold. There are people who make money by telling other people how they can cut their tax bills. And that's what happened this time. But how did Sean Parker get this provision to pass without even holding a single congressional hearing? And how atypical was that for how something like this happens? I think it's not atypical. I think things pop in. The smart people who want to get something into a tax bill know that sometimes public scrutiny causes a problem. So if you can get something slipped into a tax bill, the reconciliation bill that the House of (13/40)
Representatives reported recently is 2,500 pages. So it's not that hard for a determined member of Congress to get a provision in that other people don't really pay attention to. It turns out to have big implications. In this case, Sean Parker and the Economic Innovation Group were really clever. They enlisted two allies in the Senate, a Democrat, Cory Booker of New Jersey, and importantly a Republican, Tim Scott of South Carolina. Both happened to be African American men. Tim Scott was really convinced that this was a good idea. He is an economically conservative Republican who seems to believe that giving tax breaks and having less regulation is the way to get prosperity. And he turned out to be particularly important in the shaping of that 2017 tax bill, the Tax Cuts and Jobs bill. So with an ally like that, they didn't need to have lots of ads in the New York Times or going on Meet the Press or doing grassroots lobbying because he really wanted this in the bill. And he made sure it (14/40)
was there. And when you're in the center of the action, he's one of four senators who were instrumental in that bill, you can basically get your way, especially if it's something that appears to be non-controversial and who could be against helping poor neighborhoods. So this actually touches on a few things I wanted to ask you about. Number one, how important is that finding a champion or multiple champions within the power structure? And to your point, you said they happened to be African American. Is that true that they happened to be? Or were the people lobbying for this provision explicitly looking to avoid having to rely on white men or old white men in this environment? And so they were looking for bipartisan support and support by people that would align with the current zeitgeist around racial equity, gender. Well, they were both men, but you catch my drift. How important was that as well, the sort of optics of this? Okay, to answer your first question, yes, it's really (15/40)
important to have a champion. You don't get anything done without having a champion on Capitol Hill, and you got to pick your champions wisely. The people at EIG, John Latterian, Steve Glickman explained to me, one of the tricks is you get people who are respected to endorse your bill, then other people figure they know what they're talking about. And so they come alongside as well. But you make a really good point, and it's not just that they happen to be African American. By having two black senators, both of whom had experience in local government, Booker had been the mayor of Newark, and Scott had been on the county council in his hometown of Charleston, South Carolina. It made it almost impervious to the criticism that this was a stop for rich people, and it made it easier for them to sell it because, after all, if you got the two of the only black male Republicans in the Senate, the other one, of course, was Kamala Harris at the time, endorsing something, it must be good because (16/40)
these guys don't agree on a lot of stuff. So I think it was very clever. And actually, race plays an interesting part later on in the story, if you don't mind me rushing ahead. No, please. Originally, the Trump administration, the White House, was not interested in this provision. In fact, some of the people in the White House didn't like it. When President Trump made those unfortunate remarks about how there were good people on both sides in Charlottesville during that confrontation between white nationalists and racists and people who wanted to take down that statue in the park, Tim Scott was offended, and he was very public about how offended he was. And he criticized the president pretty shrilly on TV and in a podcast. The White House invited him to meet with Trump. He thought about not going, but he said, you know, the president calls you can't. He expected a confrontation. And when he met with the president, the president was very, very conciliatory and listened. And at some (17/40)
speaker who's also black. And the president himself, a number of times, when asked about what is he doing to close the gap between blacks and whites in America. He says, look at my opportunities on things. That's fascinating. It's almost like race, gender, and other sort of minority markers are like loopholes that people in politics use to divert the public's attention away from what is an even deeper, more universal and arguably consequential force, which is money and power. Do you feel like that's an accurate representation of how race was used in this particular case? And do you agree that this speaks to a broader phenomenon that we're seeing in society and possibly more specifically in the Democratic Party? Okay, so I mostly agree with what you said, but I want to be clear on one thing. After substantial reflection, I conclude that Sean Parker was not an evil guy who wanted to cut his own taxes and those of his peers. I conclude that he actually was well intentioned, but was so (19/40)
arrogant as Silicon Valley people often are that he allowed something to happen that is being exploited by the tax loophole seekers. But I do think you're absolutely right that these days, it's sometimes hard to get something through if your frontman is a well known billionaire. And it's a lot easier to get something through if you can say, look, these two African American senators, one of whom grew up poor, Tim Scott, one of whom was the mayor of a poor city, Cory Booker, are for this. And then people are much less likely to challenge your motives. So people in power who have power and who are smart know how to shape the public image of their proposals so they look better than they are. And this is why often big businesses send up small businesses to lobby Congress about some particular provision when the small business won't benefit as much as the big one will. Or in the most unbelievable and hard to understand thing, how ordinary people lobby Congress not to toughen the estate tax, (20/40)
votes. That's the big tax cut bill of 2017. In this case, the White House was really just a grace note on how this bill became law. But what happened afterwards is it got branded a Trump tax cut, and then it got really controversial because clearly a lot of people in the real estate industry who were close to Trump were taking advantage of it, and that led people to be really suspicious. So the New York Times did a series of stories which suggested that somehow, well, it suggested maybe it was strong, that you could draw the conclusion that they thought that this was one of a real estate deal Trump and his cronies cooked up. I don't think that's what happened here. I think this was a tax break that was particularly valuable to real estate people. A lot of Trump cronies are in real estate, including Jared Kushner, and they took advantage of it. But they actually didn't have very much to do with its origins. In fact, many of them didn't know about it until months after the bill was (22/40)
signed. Okay, so let's talk about what opportunity zones are, like specifically how they work and how the tax benefits work, because there are several ways in which investors can benefit from putting their money into these things, both on the way in and on the way out. So how do they work? Okay, so the law created some criteria for what census tracts could be eligible to be opportunity zones. The Treasury turned that into a list of census tracts, and every governor was allowed to choose up to 25% of the eligible tracts as to be opportunity zones. In an opportunity zone, here's how it works. You have to have an unrealized capital gain. That is, you have to have bought something, stock property, or something that went up in value that you haven't yet sold. You sell it, and you would normally owe capital gains tax on that profit. If you put it into an opportunity zone fund, then A, you don't have to pay capital gains taxes right away. You can put them off until 2026, and paying taxes (23/40)
later is always better than paying them sooner. And secondly, depending on how soon you move, you can reduce your tax on that original investment by 15%. So that's the first benefit. When you say you can reduce your taxes on that original investment, what do you mean? Do you mean that you can pay 15% fewer taxes on the investment that you just invested in upon the time that you sell it? Let's say you bought something for $100, and you sell it for $200. You have a $100 capital gain. You would owe, roughly speaking, $28 in capital gains taxes on that. If you're putting it into an opportunity fund, you don't have to pay that $28 tax on day one. You can put it off until 2026. And secondly, you won't owe $28. You only owe $20. So you put that $100 gain into a building or a business in an opportunity zone. And if you hold onto it for 10 years, and it appreciates in value, you can sell it, and you don't have to pay any capital gains on that profit. So the first stage is you get a delay and a (24/40)
break on your original capital gain. Your second stage is if you put it into a property in an opportunity zone or a business in an opportunity zone, and you hold onto it for 10 years, when you unload it, you will owe zero capital gains. Okay, so let me see if I got this right. So you do pay some reduced percentage of capital gains tax on the asset that you sold in order to fund the next investment, but when you sell that investment, you don't have to pay capital gains on those returns. Correct. Okay. Let me add one little bit of context here. If you're in the real estate business, there are other tax breaks. One of them is called 1031, where if you sell a building, and you put them all the proceeds of that building into another building, you can delay paying capital gains taxes. But that means if you have a building that's worth $10 million, you sell it for $10 million, you have to put the whole $10 million into another property to delay paying capital gains taxes. The people who wrote (25/40)
the Opportunity Zone legislation saw an interesting way to make this even more juicy. If you put your money in an opportunity zone, you don't have to put all the proceeds of the sale, only your profits into the Opportunity Zone. It's complicated, but it makes a big difference if you're in the real estate business. Yeah, and what you were describing there is a like kind exchange. So is this still in effect today, or have any of the provisions expired? The like kind 1031 exchanges were narrowed in the 2017 tax bill to cover only real estate. So you no longer can sell your dental practice and use it to put into something or farmers can no longer use it when they sell a cow. There are proposals underway to narrow it further. And one of the ironies of what's going on now is a lot of the things that Congress is discussing to raise taxes on the rich, eliminating the 1031 like kind exchange program or raising the tax on capital gains are going to make Opportunity Zones look even more (26/40)
attractive to rich people because it'll be one of the remaining ways that you can cut your capital gains tax bill. So what has been the effect of these zones? First of all, how much money has gone into them? And what effect has it had on the local property markets? Have you seen like what kind of data do we have on this? One of the unfortunate things is the way this became law is that was through this process in Congress, known as reconciliation, which is actually getting a lot of attention right now. And the rules of the Senate mean that something can't be in a reconciliation bill unless it explicitly involves taxes and spending. As a result, the clause in this proposal that would have required reporting to the Treasury and the Treasury reporting to the public was stripped out. So we actually don't have very much hard data. Clearly, from what public announcements and what we can see in SEC filings, tens of millions of dollars have gone into Opportunity Zone funds, most of which has (27/40)
been invested in real estate. The best data I've seen is by an economist at the Joint Committee on Taxes in the Congress, which he got access to 2019 tax returns filed by these Opportunity Zone funds. And he found that 84% of the zones got no money at all and that half the money went to just 1% of the zones. And when you think about it, that's not surprising. There are 8,764 census tracts that are Opportunity Zones. Some of them are really down and out neighborhoods. Some of them the governors chose foolishly or were influenced and they're more attractive. They're in neighborhoods that are already gentrifying or there's something else going on. And so a bunch of people who are looking for a way to save money on their taxes but not take big risks naturally gravitated to the best off of the Opportunity Zone. And that's the problem. And that is a flaw in the law that governors were allowed to pick places that personally I don't think should have been picked. And there was nothing that (28/40)
investors or their agents had to do to make sure the people in the communities benefited. It was all about, am I going to get my money back? Which is why there's a Ritz-Carlton hotel and condo going up in Portland, Oregon with Opportunity Zone money. Yeah. So I'd love for you to explain how that works technically, how the language defines what constitutes or doesn't constitute a potential Opportunity Zone and what some of the political incentives were for governors to pick them. Because in New York State, for example, I was looking at the map. It looks like parts of Dumbo, Williamsburg, what looks like Soho or the East Village, Long Island City are covered in the city. And I think that's the reason why the Spill or not in the bill but actually are actually Opportunity Zones, lots of areas in Brooklyn. So how did that work technically? And I believe also was it the case in California that students or parts of areas around certain universities were also Opportunity Zones precisely (29/40)
because even though the students themselves came from wealthy families because they have no income, the entire real estate area there would be considered an opportunity or could be an Opportunity Zone. Right. So there are two stages to this. One is the criteria that the law set and the law basically borrowed from previous laws and it said you have to have a certain poverty rate or something like that in order to make the list. Then the Treasury had to decide what data to use to comply with that definition. And because sometimes there's a lag in getting the data, they ended up using data that was a little out of date. And that was a problem because a lot had changed since 2008 after the financial crisis. So you start with kind of a flawed list of eligible tracks, technically, legally eligible. And in fact, the law had a very strange provision which said that you didn't really need to be a poor neighborhood. You could be next to a poor neighborhood. Contiguous is the word they used. And (30/40)
so there's this list of eligible tracks, some of which are really down and out and some of which are like already getting better or are, as you point out, show up as low income, but only because they have a lot of college students or actually not very many people live there and the only people who show up in the census are the people who live in a housing project or homeless people, like in a downtown where nobody lives except the poor people. So you have this list that on average they show up as poor, but then the governors get to pick from that list. And as I said, some governors picked foolishly and some picked wisely. In California, the original list that Jerry Browns off has put out included the Stanford campus. And that's ridiculous. And that's the one place where the Economic Innovation Group, the Sean Parker think tank went public and said this is crazy and they took it off the list. In New York, Governor Cuomo was hostile to the opportunity zones, because it was a Trump thing (31/40)
he thought. And so they didn't take it very seriously. I understand that they thought about not designating any census tracts as opportunity zones, but that would have been politically foolish and probably economically foolish as well. But in the end, and I don't know whether there was politics or just clumsiness, 25% of New York state's opportunity zones are in Brooklyn, which as you know, doesn't really need much help. And Long Island City, where Amazon was going to put its headquarters until there was a political opposition that killed it, that was an opportunity zone and they said they weren't going to use opportunity zone money. So there were a lot of really bad choices. The Trump Treasury maybe could have done something more to tell people don't pick this. This isn't the spirit of the law. The law didn't force them to do that and they chose not to go any further. So they basically rubber stamped every opportunity zone that a governor picked, wise or not. And the law also required (32/40)
all this to be done in a matter of months. So I spent some time in Portland, Oregon, as I mentioned earlier. And there are a lot of now publicly available records from Freedom of Information Act requests by the local newspaper where you can see the dialogue among the state officials. And they were actually, first of all, what the hell is this? Then secondly, what do we do? And they ran sort of a process to get local communities to nominate zones. But they had a really difficult strategic decision, which is if you pick the very poorest communities in your state as an opportunity zone, you might look good in the headlines, but the neighboring state will pick the places that are already gentrifying and you won't get very much money. On the other hand, if you pick places as they did like downtown Portland, you might actually get some people taking advantage of it, whether it's marginal investment or not is another question, but you'll get bad headlines. They tried to split the baby. They (33/40)
did about half of each. But as best I can tell, all the money went, or nearly all the money went to the best off communities, and very little went to the poor communities that got to designation. So one of the things that's, if you're on the ground looking at this from the point of view of people who live in these communities, as opposed to the rich people are getting the tax break, there was a lot of noise about who got designated as an opportunity zone. But if you didn't get any money, it doesn't matter. And that's true for most opportunity zones. A lot of talk about how the zones got selected, but the money seems to have gone to the ones that didn't really need it, in my opinion. Right. So, I mean, again, the data on this isn't perfect, but if you had to take a guess at it based on everything you've seen, do you think that the vast majority of the projects that have seen funding in these areas would have received funding otherwise? That even, in other words, that even the loophole (34/40)
itself hasn't been the primary driver of investments. It's simply just been the coincidence of that additional opportunity. I believe that's the case. Yes. I think in some cases it may have speeded up a project. That is, it might have been done a year or two earlier than it would have otherwise, because it opened up a new set of potential investors. And I have no doubt that there are some projects for which opportunity zone funding was the make or break thing. But from what I've seen, and it's largely anecdotal, the majority of the projects are projects that either would have been done otherwise, or that they were already in the works, and they were just financed differently. So, for instance, in the book I tell the story of a particularly outrageous loophole. There's a building in Portland, Oregon, which is the headquarters of the local natural gas utility. And long before opportunity zones were on the table, the utility was looking for new headquarters, did a search, agreed to move (35/40)
into and lease almost entirely this building that was under construction. And it was all leased up, so it's a pretty safe investment. But it turns out that because of, I think, a flaw in the law and the regulations, if you don't yet have a certificate of occupancy for your building, it can count as a new investment. And so, after the building was done, but before it got their formal certificate of occupancy and the natural gas utility moved into it, Chicago Opportunity Fund bought it with Opportunity Zone money. So people are getting a tax break for investing in a new office building in Portland, Oregon, that when they put their money in was fully leased to a public utility, and they're getting a capital gains tax break. That serves no social purpose other than to cut rich people's taxes. And it's very hard to find lots of examples of those, because you don't have to disclose this stuff. This just happens to be one that, frankly, I heard about because people in the real estate industry (36/40)
are incredible gossips, and they love to dish on their competitors. And so I was told about this by a real estate guy in Portland, Oregon, and because of the, what was disclosed by the utility and their public filings, and the city records, you could find out that this had actually happened. And also the fund that put money into it, it called itself an Opportunity Zone Fund, so I knew that that's where the money came from. It's like a needle in the haystack thing, but I suspect there's a lot of that and that over time we'll learn a lot more about things like that, where it actually only provided a tax break for rich people and didn't do anything to improve a community. And in that case, you got an office building in downtown Portland, Oregon, which until the recent troubles there was doing pretty darn well on its own. So David, I'm going to move the rest of our conversation into the overtime. I want to ask you, again, what this experience has taught you that you didn't already know (37/40)
about how Washington works, but also I want to ask some more timely and relevant questions related to the reforming of the tax code and some of the proposals that have been put forward in the infrastructure bill, how likely it is to pass, as well as your thoughts on fiscal and monetary policy, and whether both parties have embraced a sort of new consensus around permanent deficit spending. For anyone who is new to the program, Hidden Forces is listener supported. We don't accept advertisers or commercial sponsors. The entire show is funded from top to bottom by listeners like you. If you want access to the second part of today's conversation with David, as well as the transcripts and rundowns to this episode and every other episode we've ever done, head over to hiddenforces.io and check out our episode library or subscribe directly through our Patreon page at patreon.com slash Hidden Forces. There's also a link in the summary page to this episode with instructions on how to connect the (38/40)
overtime feed to your phone so that you can listen to these extra discussions just like you listen to the regular podcast. David, stick around and we're going to move the rest of our conversation into the subscriber overtime. For more information about this week's episode or if you want easy access to related programming, visit our website at hiddenforces.io and subscribe to our free email list. If you want access to overtime segments, episode transcripts and show rundowns full of links and detailed information related to each and every episode, check out our premium subscription available through the Hidden Forces website or through our Patreon page. At patreon.com slash Hidden Forces. Today's episode was produced by me and edited by Stylianos Nicolaou. For more episodes, you can check out our website at hiddenforces.io. Join the conversation at Facebook, Twitter and Instagram at Hidden Forces Pod or send me an email at dk at hiddenforces.io. As always, thanks for listening. We'll see (39/40)
you're interested in joining the conversation on our Hidden Forces Genius community, head over to hiddenforces.io and check out our episode library, where you can also become a premium subscriber today. Guys, stick around. We're going to move the second part of our conversation onto the premium feed. For more information about this week's episode, or if you want easy access to related programming, visit our website at hiddenforces.io and subscribe to our free email list. If you want access to full episodes, transcripts, and intelligence reports, which include additional notes, resources, links, and other material that will help you get the most out of each and every episode, check out our premium subscription available through the Hidden Forces website at hiddenforces.io. Today's episode was produced by me and edited by Stylianos Nicolaou. For more episodes, you can check out our website at hiddenforces.io. Join the conversation on Twitter at HiddenForcesPod or send me an email at info (39/40)
What's up, everybody? My name is Dmitriy Kofinas, and you're listening to Hidden Forces, a podcast that inspires investors, entrepreneurs, and everyday citizens to challenge consensus narratives and to learn how to think critically about the systems of power shaping our world. My guests in this episode are Diana Shoileva and Denny McMahon, the co-authors of a comprehensive new report that examines China's plans to decouple from the dollar-based global trading and financial system. In our conversation today, Denny and Diana discussed Beijing's rationale for wanting to transform the Renminbi into an international currency, how the Chinese Communist Party is striving to make that transformation, why it might prove unattainable, and what progress we make over the coming decade. Regardless of whether the yuan proves capable of challenging dollar hegemony, the changes that Beijing is pursuing will have a profound impact on the functioning of trade and financial markets around the world. (1/40)
These changes will create new challenges for governments, businesses, and investors. Understanding what these challenges are, the steps that Beijing will take in pursuing its objectives, and how policymakers in the US and Europe will respond is crucial to making any reliable forecast about the future of the international political economy. If you want access to the second part of our conversation, which includes a discussion about the digital Renminbi, and how Beijing is trying to institutionalize yuan outflows and increase international demand for the currency, as well as policy prescriptions for Western governments, head over to hiddenforces.io slash subscribe and sign up to one of our three content tiers. All subscribers get access to our premium feed, which you can listen to on your phone using your favorite podcast app, just like you're listening to this episode right now. If you want to join in on the conversation and become a member of the Hidden Forces Genius Community, which (2/40)
includes Q&A calls with guests, access to special research and analysis in-person events and dinners, you can learn more about that on our subscriber page. And if you still have questions, feel free to send an email to info at hiddenforces.io, and I or someone from our team will get right back to you. And with that, please enjoy this incredibly informative episode with my guests, Diana Shoyleva and Dini McMahon. Dini McMahon and Diana Shoyleva. Welcome to Hidden Forces. Thank you. Thanks for having us, Dimitri. So, Dini, you've been on the podcast before. Diana, this is your first time on the show. I want both of you to introduce yourselves to our listeners. So, why don't, Diana, why don't you actually go first? Well, I'm chief economist and founder at Enodo Economics, which is a macroeconomic and political forecasting company that focuses on China and its impact on the rest of the world. But actually, when I was a child, I wanted to be a detective. I grew up in Communist Bulgaria, and (3/40)
in those days, you couldn't read any book you like, and crime books were neutral ground, so I devoured them, and I really wanted to be a detective. But then the Berlin Wall fell, and the opportunities in front of me were endless. So, I ended up being an economist, which is actually quite like being a detective. The aim of the game is to collect as many pieces of raw information that you can, know exactly what they are, and then you're trying to put them together into the same coherent picture. And the more pieces you manage to fit, the more confident you get that you have the right story. It's not a precise science, it requires judgment, and I've been looking at China for more than two decades now. Fantastic. And Dini, what about you? So, my story is I spent 10 years as a financial journalist in China, first in Shanghai, and then in Beijing. And then when I wrapped up then, there I moved to the US and spent a couple of years writing a book about China's political economy, which is how (4/40)
we first came in contact, and I was asked on the show a few years ago, talking about that, which was China's Great Wall of Debt. And since then, I've been working on issues relating to China's financial system, so issues of financial reform, financial stability, and this remanded internationalization kind of fell pretty neatly inside of that wheelhouse. Awesome. So, I feel like this discussion point about a Chinese digital yuan and China's desires or ambitions to either decouple from the dollar-based global trading and financial system or to displace it entirely and become the dominant global currency has been a discussion point that many people have been circling around for years now. And I'm actually so excited to have both of you on to dig deep into this because while many people talk about it, I don't often find that there's a lot of detailed analysis of how exactly it would happen, what would be required, etc. And you guys recently published a report that does exactly that titled, (5/40)
China's Quest for Financial Self-Reliance, How Beijing Plans to Decouple from the Dollar-Based Global Trading and Financial System. So, you're the perfect people to do this. Let's start at the very top. How do we know that Beijing wants to decouple from the dollar-based system? And what do we mean when we say that? Well, China actually is trying to decouple in all areas, even if you look through its history. It has been a country that has always been quite closed off with respect to the rest of the world. And actually, the aberration is the years, the past 40 years of opening up. The reason for that was because they fell behind and didn't take advantage of the Industrial Revolution and they had a lot of soul searching, sort of came on the bandwagon of communism and that being the answer, of course, economically, that was a disaster originally. But then, Deng Xiaoping initiated the era of opening up and China learning from the rest of the world. And actually, they learned pretty fast. (6/40)
They probably surprised themselves as well at the extent to which they were learning and China managed to become the global manufacturing hub of the world. And then they had their own stated policies, which are very much ones of self-reliance in any aspect of their economy. But it started a lot with the industrial supply chain. And if you remember, they made in China 2025 program. And what they also did post the global financial crisis was get very disappointed, whether that was warranted or not, with the economic leadership of the US and in general, the type of economic and financial system that they were trying to emulate. And originally, they looked at internationalizing the U1 because they wanted to have a lot more, not to be dependent on the economic decisions of the US as much. But then Xi Jinping came to power and that changed fundamentally the direction of travel in China. Or you could argue, accelerated a process that the Communist Party would have got to at some other point (7/40)
in the future. But without debating that, right now, Xi came to power, turned China's development 180 degrees and threw out of the window most of Deng Xiaoping's ideas and redoubled China's efforts on achieving self-sufficiency. Meanwhile, while they were trying to internationalize the RMB, that wasn't working for a variety of reasons. But then Donald Trump came to power. And that really introduced a sense of urgency in Beijing that they have to become less and less reliant on the US economy in particular, but more generally the Western world and create their own financial sphere of influence, not just because of economic reasons, but a lot because of geopolitical reasons. And of course, throughout that period, the US was increasingly using its financial system or the dominance of the dollar in its financial system to penalize economies like Iran. And then really, the big turning point as well, again, in terms of the urgency with which they were speeding up to achieve this self- (8/40)
reliance across the board, including the financial side of things, was the war in Ukraine. And when Beijing was confronted with the very harsh and sweeping sanctions, financial sanctions, that the US, but in coordination with other Western countries imposed on Russia, that cemented in the mind of the Chinese that they needed to find a way not to be dependent so profoundly on the US dollar-based financial system. But they also had realized in the last few years that the strategy of the past didn't work. And they have come to devise and think of a new way of how to achieve their goals, which this report is all about. That was a wonderful summary. I have a few questions to ask you, Diana. But before I do, Dinit, do you have anything that you want to add to that? No, I think Diana summed that up really well. I think what really happened over the last few years is there's become a real urgency in Beijing in the sense that they need to start asserting that the way that they need to assert (9/40)
their own internal security requires them to decouple. And a big way, a big part of that is decoupling from the financial system. And I think Ukraine as much as anything has brought that home. I think at the moment, the degree of volatility globally with the dollar and the impact that the Federal Reserve's monetary policy is happening on the world is kind of just, you know, again, bringing home to Beijing, kind of the need to be independent of US monetary policy. And so I think, yeah, particularly over the last few years more than anything, I think what Diana said was right. I mean, this has been sort of the movement towards decoupling is sort of a very long-term project, but the urgency has really ratcheted up a few notches over the last few years. Do you guys think this is driven by a general desire to have strategic autonomy? Or is it driven by certain strategic objectives that would be made difficult or impossible operating within the constraints of the dollar-based international (10/40)
trading system? Both actually, because you know, the immediate thing that springs to mind with respect to the second is the fact that one of the things Xi Jinping changed was the timeline for unification of the mainland with Taiwan. The Chinese Communist Party had put kind of a deadline of 2049 and a lot of people and sort of the status quo seem to be working and a lot of people had really forgotten about this issue. But Xi, in everything that he said and most importantly, done, our assessment is that he wants to be the leader who achieves this unification and the history books as the leader to do so. And so that changed the timeline and, you know, at the most given his age, you could see that being 2035. So then that's where Ukraine played such a key role, because of course, if China is to invade Taiwan as part of this unification effort, because the carrot and stick approach that they have had over the years is really not hasn't worked. They haven't completely abandoned as yet, but (11/40)
they're very close to the idea that they can peacefully unify. But certainly all their military preparations are with the assumption that, you know, they'll have to at some point use the military and that the US will get itself involved. And so if that is the case, then one key vulnerability in terms of them achieving the more pressing and they would argue internal issues that Taiwan is, is this dependence on the dollar. But actually the first is also important because fundamentally, China does want to return to its previous greatness and being at the center of the world and the most important economy. And for no one to be able to challenge its way of being or its ideology, it doesn't necessarily want to replicate the US model, if you'd like, or imperialistic Britain's model of controlling and being the world's policeman. It sort of looked at the 800 bases, military bases around the world and decides it was too costly and wants to do this with technology. Most likely it will find out (12/40)
that that's not going to suffice. But at this stage, when they say we would let anyone or all other countries to develop as they wish, they mean it. But within that, it's included as long as you do exactly what we want and what we need from you. So it is both. It is a very long-term strategic vision, but also a very short-term strategic need brought about by what China's leader, who now post the 20th party Congress, has become so all powerful, wants to achieve in his lifetime. So just to supplement some of what Diana was saying, I mean, what China is also trying to do here from a big strategic point of view is to develop its own economic sphere of influence. And I think really that's at the heart of what the Belt and Road Initiative was about from the very beginning. But I think they've also found that the Belt and Road Initiative, BRI, hasn't really allowed them to do that. I mean, building infrastructure in other countries is clearly something that's welcomed by other countries, but (13/40)
doesn't necessarily permanently bring other countries into their orbit. And this is kind of what Diana was getting about when she was saying that China wants to be able to build up those relationships using technology. I mean, bringing countries into its orbit with submarine cables and satellite networks, letting developing countries use China's technology and communications and bring them in that way. But a really big part of this picture, a really essential way to bring countries closer and tie them more closely to China's economy is by using its financial system. And the key tool here is via the currency. So if you can get other nations to anchor their currency to the Renmenbi or start borrowing in Renmenbi or relying more heavily on Renmenbi as a reserve currency investing in Renmenbi reserve assets, that's a way to more closely tie other countries into a China-led sphere of influence. So of course, it's a long-term project, but it's a very important part of that project. So this (14/40)
is where this conversation gets really interesting for me. Because I feel like the models that people have in their heads, most people, when trying to understand this issue, don't really integrate the economics, the trading, the global trade, the global economy with the financial, with the political. But they all go together. And one of the things that I find somewhat confusing when thinking about sort of the future of the Yuan is it seems in some ways that China's objectives, and maybe you guys can help clarify this for me, in some ways seems at odds. Because if they want a greater role for the Chinese Yuan, doesn't that also run in opposition to their economic growth model? And I know that they want to change their economic growth model and create a lot more endogenous demand for Chinese products. But still, much of what their geopolitical aims are require having a strong industrial base. So I guess there's this, from me, looking at how China has evolved to become the country it is (15/40)
today, it seems like they want to transition and have geopolitical power and influence. But it's hard to understand how they would do that without being a more open economy and becoming a more demand-driven economy. And doing that, it seems also somewhat at odds with their political models. So I'm just curious, one, can you help maybe more probably frame my question if you understood it? And then help me understand where I'm somewhat confused here. Maybe, Diana, you want to start? I understand where your confusion is coming from, because there is the question of what they would like to do and how they're going about it is not the same, or the answer to this question is not the same as the answer to will they succeed. And you're absolutely right. That's the only way to get things right is to think comprehensively through the economic, political, and geopolitical angle, and how do all of these come together? And you are putting your finger on the nub of the issue here. One of the ways (16/40)
that we argue in our report, they're trying to change the way supply chains work and as a result promote the use of the yuan is to have China being the center of its geopolitical sphere of influence as the main final consumer. That's one of the lessons they learned from Japan's experience of internationalizing the yen, though Japan never had a plan, but why the yen never became a big global currency was because Japan was a transition point and all the final demand was coming from the west. So for China to become the consumer anchor of its currency sphere of influence, it does need to change the way its economy is run. And they do realize that they have been talking about rebalancing their economy towards consumer spending for a number of years. They also realize that now they've achieved so much industrial development where they really lag behind is in financial sector development, in particular, the capital markets are very rudimentary, but also their banking system. And so as kind of (17/40)
their long term idea is to professionalize and improve their capital markets and financial market more generally, and they're putting efforts on both of those fronts, but then asking the question of will they be successful currently? What is going on with respect to common prosperity, which is a key part of the way Xi Jinping views the economy and economic development as well as dual circulation. Our assessment at the Nord economics is that the Chinese consumer is already in the doldrums and will not be the engine of growth that they would like it to be, but also desperately needed to be. So no wonder currently, again, Chinese throwing money at that fueled investment state led investment because the consumers are not there and it's not purely all the lockdowns and COVID restrictions, which of course are also currently part of the story. I want to also just say something else that comes to mind when I'm thinking about this, which is that currently China is dependent on the rest of the (18/40)
world for exports and for certain key technologies. This is what has allowed the country to experience the greatest level of economic growth, certainly in absolute terms in human history. At the same time, there are politically insulated society or country, the Chinese Communist Party certainly is. And so what it seems, and this is actually a great example of this, is in their China BRI closed loop, where you guys have that in your report. I don't know if that's a term that they use or they you use, which is what you see is they want to kind of replicate what currently exists for them economically and what exists in the global economy. What they want to do it in a way which is very Chinese or Chinese in the Chinese Communist sense, which is to have full control over all of it. And what I genuinely wonder is if many people out there who have felt that we're going to live in a Chinese century and that the yuan is going to be the future global currency have dramatically underestimated the (19/40)
complexity of doing this and not appreciated that the reason why Britain and the United States were able to do it in their respective periods is because they were maritime powers, they were open societies, and so much of what became the global sterling system or the global dollar system was really an organic process that was driven by people naturally wanting to use it. And also, in the case of the US, the Marshall plans and the Dodge plans, which were not loans to other countries, but actually aid to other countries, which then planted the seed for the dollar to be used and then to recycle back into the US and out of it. So I'm describing one very open model and one very controlling model. And it seems like maybe a lot of people are underestimating just how challenging it would be to succeed, to replicate what we have today using a more controlling system. Denny, maybe you want to jump in here and then Diane, I'd love to hear what you have to say about that as well. Well, it's spot on (20/40)
and actually there's a lot to unpack there because if you look at this strategy for trying to promote the more international use of the remmb. Some aspects of it are exactly as you talked about, they were incredibly controlled. And then some aspects of it, there is clearly an innate understanding that China has to relax control over the currency and over the way that its financial markets work in order for this to be a success. So take for example, what you talked about before, the whole closed loop idea. So this is one of the ways that they're trying to encourage the use of the remmb outside of their border. The idea is, okay, well, you know, we always thought that maybe we'd be able to build road initiative loans in remmb for infrastructure, but that never really happened. What we should start doing is start making loans for the construction of industrial plant outside of China, but for industrial plants that ultimately serve the Chinese economy. So to give you one of the few ideas (21/40)
that one of the few cases that has actually happened, you know, China Development Bank and Export-Import Bank provided billions of remmb's worth of loans to a Russian company to build an LNG extraction facility in the Arctic. Now the Russian company then used those loans to pay Chinese manufacturers to build the facilities for that factory. Okay, so far so good, the loans in remmb and the loan has been used to pay Chinese suppliers. Then what happens is that the Russian company said, okay, we will sell some of this LNG to China in remmb. And so it's you have this perfect closed loop, this perfect closed cycle where the debts in remmb, the debt is used to buy Chinese goods, and then they pay off the debt using remmb income. So that's one of the visions. But at the same time, there's also this recognition that that model can only go so far. So a big part of the long-term project is trying to get the center of gravity for pricing of global commodities to migrate from the United States to (22/40)
China. So at the moment, even though China is the biggest consumer of almost any commodity that you can think of, the place that those commodities are priced are invariably US commodity futures exchanges and invariably it's in dollars. And so China is like, okay, if we can get these things priced in remmb, in Chinese based exchanges, then we can start to get companies actually trading commodities, whether it be iron ore or oil or cobalt or soybeans in remmb and that'll create a huge demand for remmb outside of China's borders. But there's a recognition that they can't do this by fiat. I mean, they're dealing with tens of thousands of farmers and trading companies and miners and financial institutions around the world who are not going to be subject to the whims of the Chinese central bank or the China Standing Committee. And so what they're trying to do is gradually open up its markets. They're trying to create new commodities markets for commodities that don't yet have futures (23/40)
contracts, but stand to be important commodities in the future as we move into new technologies and less carbon intensive technologies. That's kind of the vision to kind of leverage the size of China's markets, but at the same time to kind of relinquish control so that foreigners will be kind of more willing to engage in the market. So there is this real understanding that on one hand, there's this real sort of contradiction that on one hand, there is an inclination to maintain as much control as possible where they can, but they also recognize for this project to be a success. It's not something they can control because it's completely dependent on the wants and needs of foreigners. Daniel, do you have any thoughts about that? Yes, because actually sort of even I think my thoughts are kind of sitting on the moon and looking at the earth type of thoughts. Because the first thing to note here is that China is the first country which has a plan and trying a strategy and is trying to (24/40)
internationalize that and MIMBY. None of the other currencies became global currencies because those countries had a coherent plan and strategy of how to achieve that over the years. So in that sense, the question of are they likely to be able to do this their own way is an extremely valid question. The answer is very difficult to give for two reasons. One is that you look at how their economy developed. When the Soviet Union collapsed, I'm sure a lot of and we had this, the end of history, the communist model is there, the capitalist model won the competition and actually China had its own way. It combined its rigid political system with a more open economic system and achieved tremendous development and improvement. So their experience already is suggesting and they certainly are trying to push that they believe it genuinely and they're trying to push that across those countries that they're trying to bring into their sphere of influence that following the Chinese model of governance (25/40)
and economic development is an alternative to the Western led capitalist model and one that is more successful. Now again, we can ask the question who's likely to buy this narrative, but this is very much part of what they're trying to achieve to push forward this control based system as a way of governance, if not globally, then regionally within their sphere of influence here as well. It's important to note that at this point in time, they do not want the RMB to become a global currency, one that supplants the dollar completely. Their aim at this point is for the Yuan to be a regional currency and the economy that you have to keep in mind as kind of the blueprint for what they want to achieve is Germany of all economies out there and the economy they managed to hollow out completely was Germany in terms of its industrial expertise that China is now leading in a lot of those traditional areas for Germany and funnily enough, Germany runs its economy and the way China runs its economy (26/40)
have a lot of similarities and it was then the Deutsche Mark becoming the key and currency of trade within Europe and that being the mechanism through which then the euro was created, if you'd like. I mean, obviously, the Chinese are not thinking of creating a euro-like currency, but really being the Deutsche Mark of a economic and financial sphere of influence. And that's the first stage of this development. And then, you know, can they achieve this with the types of closed system that they have and one that is becoming even more closed under Xi Jinping? Is the key question that one has to ask on a 10 to 20 year horizon? But what we also try to do in this report is to say that them trying to achieve it without having to answer that question conclusively, because I think it's very early to be able to do so, is going to have fundamental impact across the way the global financial system works. And so for anyone out there using global payments systems, which is pretty much anyone, whether (27/40)
you're in the financial industry or simply trading in the global trading system, you need to understand what China is trying to do because it's attempt to do so, given its size and importance, will have ripple effects across the board. And if you had asked me the question of success shortly after the fall of the Berlin Wall, I would have told you that the answer is probably no, they won't succeed. But now why I'm pausing, and I'm saying it is a bit too early to make a judgment with conviction is because of technology. And we don't spend too much time in the report looking at the digital yuan. Originally, when we started writing it, we thought we'll spend a lot of time on that and on the payment system. But actually, over the course of the research, which has been a year long project, we realized that this is if you'd like the necessary condition to have the system of global payments established, but it's not the sufficient condition to increase the use of the yuan. But what's really (28/40)
important with respect to the digital yuan and one of the points we make, which is very different to the point made by other analysts who have looked into this issue, and certainly the perception in the US, a lot of people say, oh, well, it doesn't matter if it's a digital yuan or if it is a paper yuan, as long as it's a close capital account and the yuan doesn't circulate freely, they won't be able to internationalize it. But actually, we are flipping this argument the other way around that if they manage and Dini explained to you the ways they're trying to internationalize the R&B dealing with the current constraints that they've imposed, if they manage to get the yuan to be used more for cross-border trade and create a new system of cross-border payments based on digital currencies, which is still in its infancy, but they are the most progressed and that system will be much more efficient than the existing system for a variety of reasons, then those flows will be visible to them to (29/40)
such granularity that they will have the visibility to feel in control, to feel preemptive and be able to intervene when they don't like something. So rather than saying that as long as they keep the capital account closed, they won't be able to internationalize the yuan, new technology may enable them to get the sense of control that they would like to have in order to have a more open movement, if that makes sense to you. It does and that was one of the things that I really appreciated in the report. Again, it brings us back to the importance of control. I also think that the example of Germany, the Deutschmark is instructive because actually I want you to clarify for this for me because this is how I understand it in terms of what is so attractive about the German model. Germany in some ways has, well, I guess no because it's within the European Union. So here's what I wanted to say. Germany has had this export driven growth model, not dissimilar to what's worked so well for China. (30/40)
And they've also benefited from being part of this larger free trade area, which is the European single market and which sits inside of the larger global trading and financial system, upheld and fostered by the US in its capacity as a champion of free trade and as a purveyor of international security, which it's important to note, we haven't discussed yet whether or not China is prepared to play that role. And if that's a requirement for the yuan to become a global currency, but in terms of Germany, is the ideal Chinese model here one where Germany, if we're comparing China to Germany, would have kept the Deutschmark but still managed to create a free economic zone that it would use to export high end manufactured goods and which would be something analogous to the BRI while giving Berlin the kind of political control that currently exists in Brussels and where everyone ends up using the Deutschmark. Does that kind of make sense as an analog for what the ideal system would look like? (31/40)
The comparison with Germany is only really relevant when it comes to the economic developments. They do not envisage the plurality of views, political views and the way Germany conducts itself on the international scene at all to be part of the strategy. This is just looking at a mercantilist economy like Germany and China has been very much a mercantilist economy and that's how it managed to grow so fast. Of course, actually, if they weren't included into the World Trade Organization as they were, they probably wouldn't be where they are right now. They don't necessarily acknowledge that properly. And Germany was very good at sort of the small and medium sized or middle stand and creating these significant expertise at that time in its industrial development and then being able to take advantage of its geographical role in the region as well, which is another difference between China and Germany because China is geographically a lot more challenged if you'd like. And also, it seems to (32/40)
want to have parts that are very far away from its immediate surroundings. I'm talking about Africa as part of its sphere of influence. So, the German comparison is much more economic than it is political and it's not one for one for sure. So, Denny, I want you to share any last thoughts you have and then I'm going to move us to the second part of the conversation where we're going to get much more granular and focus in on how the Chinese Communist Party really wants to try and achieve this. You began answering this earlier. We're going to look at not just the supply side, which is how to build up the infrastructure, which I think most people think of naturally or intuitively when trying to think about how the Chinese would accomplish this, but also the demand side. How to get people to actually use the Chinese you want and what would be required to do that. Denny, any last thoughts before we move to the premium feed? Yeah, you briefly brought up the question of military, whether China (33/40)
needs to be able to replicate in some way the security umbrella that the United States has provided since the end of the Second World War. I thought I might just briefly touch on that because we really know we near China being able to do that or even wanting to do that. In fact, the place that we are at the moment, I think this is really potentially one of the biggest barriers towards China achieving its goals, is that in many ways China is an economic security threat to a lot of the nations who fall within, that it counts as close trading partners and would potentially fall within what China might deem as an ideal Rememby zone. What I mean by that is that at the moment China is inclined to throw its muscle around, its economic weight around to punish countries for what seem to be reasonably small diplomatic or international relations slights. What I'm talking about here is China imposed a moratorium on imports of bananas from the Philippines over issues relating to islands in the (34/40)
South China Sea. With South Korea, when the South Koreans were looking to install a new radar system from the United States specifically for dealing with North Korea, but China was concerned that it would allow the United States and South Korea to monitor China as well. It imposed a wave of economic sanctions on South Korea as well, specifically on limiting Chinese tourists to go to South Korea. Australia has been the biggest recipient of Chinese economic sanctions in the form of a wave of embargoes on imports of Australian coal and wine and various other goods. At the moment we are so far away from China being a provider of regional security because in fact China almost is part of its toolbox of measures that it used to conduct international relations. It uses economic weapons and sanctions on nations which should be ultimately fall within one day of the economic sphere of influence. That's potentially a barrier. Kind of like racketeering. Kind of like... Let me provide you security (35/40)
to protect you from me. There is an element of that, obviously. Absolutely. Actually, one more question before I move to the premium feed. Is this economic model that they're looking to put forward or impose a much more classically imperial model or colonial model? Is that a good way of thinking about it? I think there are elements of that because let's say China does achieve its vision of common prosperity, that it is able to better distribute the nation's wealth towards population and Chinese people consume far more than they actually do at the moment and consumption becomes a driver of growth. Now, as Diana pointed out, there are a lot of reasons to think that might not happen, but that is the direction of travel. That's what Beijing normally says it wants to achieve. Well, if China is then consuming more, by extension it means it'll be ultimately importing more as well. But then there's a question of what does it want to import? Ultimately, China isn't that interested in importing (36/40)
manufactured goods, certainly manufactured goods that have a reasonable technology content. What it primarily wants to import is natural resources, perhaps processed natural resources, and probably at a pinch, low-end manufacturers. Perhaps there is that element of imperial economic model there. I don't think necessarily the Chinese are explicit about it, but in terms of what an economic division of labor would look like in a world in which China consumes far more and by extension imports far more, then China, the economic relationship and visions is not necessarily particularly equal. So, Diana, you wanted to add to that, and then we'll move to the premium feed. I just wanted to add what I actually said earlier, that no, at this point, they do not at all envision to be the provider of global security goods and the global policemen, and in that sense have an imperialistic model like the US or the UK. And what they're trying to achieve or how they're trying to achieve their (37/40)
imperialistic vision is through technology, through new technology and having control and visibility in that way. But they hadn't progressed far enough on that front before the US finally woke up to the challenge that China presents to its position, but also to its way of life. All right, great. So, I'm really excited to get into the details here, guys, because I think that's where the real value is for people. Understanding, in other words, how Beijing would strategically execute on this, the role that technology would play, and the sorts of challenges that they would run into, especially when we consider what the US would do and is doing in response. For anyone new to the program, Hidden Forces is listener supported. We don't accept advertisers or commercial sponsors. The entire show is funded from top to bottom by listeners like you. If you want access to the second part of today's conversation with Diana and Denny, as well as the episode transcripts, intelligence reports, and if (38/40)
nationalists from who he's gotten these ideas over the last several decades? Putin's argument about what the title of his essay says, the historical unity of Russians and Ukrainians is not original. He's not a historian, he's not a thinker, he's a political figure. But he spent a lot of time during the COVID pandemic in isolation, having time to read Andrew Reid books, and the books that he was reading were mostly coming from the either Russian imperial thinkers and historians of the pre-revolutionary era of 1917, or from the writers that ended up to be in immigration after the Bolshevik Revolution, but who continued to develop the imperial views and imperial ideas. And in the Russian empire of the 19th century, the dominant view was that there existed a big Russian nation which consisted of three tribes, great Russians for today's Russians, little Russians or Ukrainians, and white Russians or Belarusians. They could maybe speak a little bit different languages, but all of them were (18/40)
because I want to parse out Putin's claims about Lenin's role in giving rise to what we think of as an independent Ukraine and the blame that he puts on Lenin. And that question has to do with really what the value is of investigating these historical origins to begin with. Because from my perspective, power is the most important thing that really matters to define what is a national boundary or not when it comes to a state's ability to impose its will. But insofar as history is important, it seems that the only importance of history, and it's not a small thing, is in the population's sense of legitimacy over the ruling order. So how much of this is really about claiming a sense of national legitimacy and aligning state policy with that view and getting the public's support to believe it? So how much of this was already in the Russian public's mind, the theories that President Putin has put forward, and how much of this has been actively cultivated by him and more importantly, other (17/40)
does influence their sense of legitimacy over the ruling order. And in that sense, the rewriting of history, whether you want to call that revanchism or nationalist propaganda, does serve an important function insofar as it provides a legitimizing narrative for the aggressor state that's looking to change the status quo by making itself the true victim of a historical process that goes back much further than any immediate conflict. And the power of these sorts of narratives is also important for the defenders who are encouraged to fight for their country, which obviously has been an important part of what's motivated the Ukrainians and helped them form their sense of nationhood, which I'm sure we'll have a chance to get into. But I have another question here because what you're referring to is this tripartite view of a greater Russia. And you said, quote, big Russians are the people that we call today Russians, little Russians are Ukrainians and white Russians are Belarusians. What I (21/40)
What's up everybody? My name is Dmitriy Kafinas and you're listening to Hidden Forces, a podcast that inspires investors, entrepreneurs, and everyday citizens to challenge consensus narratives and to learn how to think critically about the systems of power shaping our world. My guest in today's episode is Professor Sergei Plohji, the director of the Ukrainian Research Institute at Harvard University and a leading authority on Ukraine, Russia, and Eastern Europe. He's published extensively on the international history of World War II and the Cold War, and he joins me today to discuss the subject of his latest book on the war in Ukraine and the return of history. This is a conversation about national identity, the disintegration of empires, and what will follow from the largest European land war since World War II. How will the outcome of the war in Ukraine inform the evolution of the international order? And what are the most compelling theories that explain Putin's decision to invade (1/40)
in the first place? Was it to build a greater Russia, as some of his detractors have claimed, or did Moscow face legitimate security concerns from NATO enlargement that on their own can explain the course of events? The answer to this last question holds important lessons about the future of European security and US policy towards China, which is what we spent part of the second hour discussing. If you want access to that part of the conversation and you're not already subscribed to Hidden Forces, you can join our premium feed and listen to the second hour of today's episode by going to hiddenforces.io. All of our content tiers give you access to our premium feed, which you can listen to on your mobile device using your favorite podcast app just like you're listening to this episode right now. If you want to join in on the conversation and become a member of the Hidden Forces Genius Community, which includes Q&A calls with guests, access to special research and analysis, in-person (2/40)
events and dinners, you can also do that on our subscriber page. And if you still have questions, feel free to send an email to infoathiddenforces.io and I or someone from our team will get right back to you. And with that, please enjoy this incredibly informative conversation with my guest, Professor Serhii Blokhi. Professor Serhii Blokhi, welcome to Hidden Forces. It's a pleasure. Thank you for having me. The pleasure is all mine, Professor. So before we get into the subject of today's conversation, which is going to build off your latest book, The Russo Ukrainian War, The Return of History, I'd love if you could take a moment to tell me in my audience a little bit about you, your background and your interest areas and focus in the field of history. I am Professor of Ukrainian and European History at Harvard University. And this is more or less what I have been doing for my entire life, my professional life. I was educated in Ukraine, which was at that time part of the Soviet Union. (3/40)
I started my academic career at the University of Dnipro, which is now relatively close to the front lines of this war. I continue it in Canada, University of Alberta in Western Canada. And I am Professor of Ukrainian History at Harvard since 2007, Director of the Ukrainian Research Institute at Harvard. And my field is Ukrainian and European History, but also Global History. One of the courses that I teach at Harvard is on the Yalta Conference. I teach course also on the Cold War, that on the top of course, of course is on Ukrainian and European history. And in that sense, the book that we are discussing today, it brings together different fields, my different interests, but also my connection to the region, connection to Ukraine, connection to the things that are happening today on the battleground. So while I was reading the book, I came to the view that it dealt with two, if not maybe three topics. One was the origin of the war in Ukraine. And folded within that was also a (4/40)
conversation, a big part of it was really a conversation about Russian and Ukrainian identity and the sense of Russian nationhood and how that has evolved both up until the end of the Cold War and then subsequently with the fall of the Soviet Union. And the other part of the book is really a look forward into what the consequences of this war will be for the future and how the global order is evolving. Would you say that that's pretty much an accurate description? Yes, I would say it is an accurate description and the origins of the war, the issues of identity. This is the focus of the first chapters, few chapters, and then the future is the focus of the concluding two chapters. What is also in between, I try to look at the actual developments on the front lines in the course of the last year. So the book was written between March of 2022 and February of 2023. So what certainly the reader will get out of that book will be not just the origins and consequences of the war, but there will (5/40)
be a lot of war itself. Yeah, there's, you devote many chapters to describing actually the progression of the war in the last year. So that was extremely useful as well. And I'm sure it'll be a really good history for people who are maybe in the future and learning about the war later. So when did you begin writing this book? I started writing it really in late March, so it would be more or less one month into the war. And by that time, the shock that came with the war, I was able to overcome it on some level. But also for me, it became clear already in March, in late March, the overall outcome of that war. So we still don't know when it will end and exactly how it will end. But already in late March, it was clear for me that Ukraine would survive as an independent state. And that would be certainly mean defeat for Russia and for Russian aspirations as it was and plans it was going to the war. So from that point of view, at least I thought that I knew what I was talking about in (6/40)
historical perspective. In historical perspective, I mean, I could talk about the origins, I could discuss the developments, and I could also talk in my opinion quite confidently about the future, not the immediate future. I don't know what will happen tomorrow. I don't know exactly what will happen one year from now. But historical frame gives you understanding of the ultimate outcome, long-term outcome of those processes. Because I look at this war as the war of the Soviet succession or Russian succession, one of the wars of the history, story of the disintegration of the Russian Empire, one of the biggest world empires. And we know where the wars end of that sort. They end up with ultimately the victory of the national movements, the formation of the states. And another thing that the first months of the war made me confident of was the ultimate Ukrainian victory. So the victory meaning survival. In the after World War II, in now almost 80 years since then of World War II, there was (7/40)
no one single example of major power, great power, winning a war against a rising nation and a rising state. So none. And we didn't know whether the Russian aggression against Ukraine would be different or not by late March at least. I saw that it would probably not be different and that gave me some foundations again, moral historical in terms of standards of my profession to write that book. One more question for you about process before we get into the book itself. How do you feel that your identity and background as a Ukrainian impacted your writing of this book and impacted your objectivity of the war itself? I was thinking about that more than once, but this is the case where I think me coming from Ukraine, really an asset because I certainly now understand many things that anyone who didn't grow up there, didn't go to school there, probably it would be difficult for people to grasp that. I am clearly on the side of Ukraine, but I don't think about my position as being a partisan (8/40)
position. I think about myself and about my book as being part of this really broad community of people in the United States, in Europe that pose this war, oppose aggression, who are supporting Ukraine because this is one of the very few wars, at least in the last again, 80 years when the moral dimensions of the war are so clear. It's very clear who is the aggressor. It's very clear who is the victim. It's very clear who is right, who is wrong, where is the right side of history, where is wrong side of history. It's also a clash between democracy and autocracy. In the United States, there was a very interesting book written about the Second World War, it's the title Good War. What that meant was that the World War II was one, the probably most horrible war in the history of the world, but it was also the war where from the American perspective it was very clear the moral dimension of that war. The United States was on the right side of history. The Russian-Ukrainian war is the largest (9/40)
war in Europe since World War II, but it also comes with that sort of a moral clarity. I was proud to be on the side of millions, millions of other Americans who really considered this Russian aggression against Ukraine to be a crime. How far back do we need to go in order to understand the origins of this conflict? This war is quite unique, at least in my experience, of studying wars, writing about the wars, unique in a sense of how much history has been used and often abused to justify it. Vladimir Putin, who is certainly the primary culprit in all that story, published an essay on the historical unity of Russians and Ukrainians, and certainly he starts there with medieval times with Kiev and Rus. His speech that was de facto declaration of the war was dubbed by some as a history lecture. There was a lot of history in articulation of the goals of the war and justification of it. The major point was that Ukrainians don't exist and shouldn't exist as a nation. The argument was put a (10/40)
little bit differently, saying that Russians and Ukrainians are one and the same people. History was misused to make that argument. I felt that in my book, I had to take seriously those claims. I had to deal with them as a professional. My first chapter of the book is called Imperial Implosion or Imperial Collapse. This is where I engaged again the Putin's argumentation from time to time. But also I'm trying to tell what, at least from the perspective of the professional historical field, what the Russian Empire was about, what were the relations between Russia and Ukraine within that empire. This is very important because Putin and many in Russia today still trace their origins to the Kievan Rus, to the city of Kiev, when after annexation of the Crimea in 2014 Putin erected a monument to Prince Volodymyr of Vladimir, his namesake. That was the prince who ruled in Kiev. Now the monument to that prince is at the very center of Moscow. There is a lot of confusion about the origins of the (11/40)
Russian state, about the origins of the Russian nation, which led to this war on the one hand. But on the other hand also is responsible to a degree for miscalculations, Russian miscalculations in the war. Putin now it is very clear, really believed what he was writing, that Russians and Ukrainians were one and the same people, that allegedly Ukrainians were captured by the evil forces, by Nazis and nationalists, led by the only Jewish president outside of Israel, Volodymyr Zelensky, Jewish by background. And that led him, I mean President Putin, to think that Ukrainians would welcome Russian troops with flowers. And we know that they welcomed them with javelins and stingers. So what is the basis of Putin's claim beyond the fact that there was a founding prince? I think Vladimir, the prince that he erected a statue of, was a Viking. I mean, I'm a little confused because you went back to at least, I think the 15th century in the book, recounting the history of the peoples that sort of (12/40)
populated that region. So what is the exact basis of his claim and what is the justification for an alternative history or the more definitive history that let's say other historians agree about? Kievan Rus was a medieval empire, with its capital, with its center being based in Kiev. And from that point of view, the comparisons can be made, let's say, with the more ancient, of course, Roman Empire or Charlemagne Empire. And imagine today that, let's say, someone in Britain or in France or in Germany goes and takes over Rome, claiming that they're the real descendants of the Roman Empire. So the same we see with thinking in today's Russia. Today's Russia, its central part was part of this Kievan Rus of this medieval empire. And the myth of origins, one of the sections in my book is called myth of origins tells them that they come from Kiev, which is also the foundation for thinking about not just political history, not just history of the state, not just history of dynasty, but also (13/40)
about history of nations. And this is one of indications that really Russia today has difficulty divorcing itself, not only from Russian Empire or the Soviet Union, but also from medieval, medieval history and medieval imperial history and so on and so forth. Vladimir Vladimir himself, yes, he was a Viking. The Kievan Rus was one of those states, principalities, empires that was created or reformated by Vikings all over Europe. So from that point of view, Ukrainian history and to a degree, Russian history is very, very European in a sense. This is the same phenomenon. This is more or less the same Vikings. But they, as it happened in all other places, they didn't create Sweden or Norway in France, right? Eventually they were acculturated. They became part of the local elites. We see the emergence of different states and eventually nation states. So the story of Eastern Europe, the story of Ukraine is pretty much the same. So you have an influx of Vikings that they take over militarily. (14/40)
They create their own principality, but eventually they go native. They speak Slavic language, they write Slavic or Old Ukrainian or Old Ruthenian, Church Slavonic, the Slavonic language of the literature of the Church is there. We don't hear about Vikings per se after the first to second generation. You know, reading your book made me realize that not only do I not know anything about Viking history, but it sure seems fascinating. I had no real appreciation for how much Vikings were using the river systems in Europe to come down into the continent and conquer territories. Yes, this is fascinating story and history in its own right. It is also very interesting that today archaeologists can tell you who the Viking is and who not is the Viking in places like Ukraine. Because the Vikings have, they were traveling on the boats, right? So they were rowing. One theory is that rowers, that's the meaning of the term also Rus, the term Rus and eventually Russia comes from the Finnic or Swedish (15/40)
term rowers. And you can see the formations to the skeletons that come with spending the life on the boat. And when you look at the population of the Ukrainian steppes, there would be different deformations coming from the lifespan on the back of the horse. Right? Because they're Mongolians. Right. So today you don't really even, for archaeology, you can identify who was who by looking at the skeleton. So yes, it is interesting and fascinating story. And Ukraine was exactly the place where the horse riding cultures met with the boat people. So this is also an important point to mention. And you alluded to it earlier when you talked about imperial disintegration. But so much of what we consider to be European history, particularly in the Eastern side, is the result of the coming apart of empires, the Ottoman Empire, certainly in the case of Greece. And now you're drawing a similar parallel in the case of Russia and Ukraine. I have one more question before we go to the Bolshevik era (16/40)
Russians, and that was the big political Russian nation. The revolution of 1917 really ended that because that was a social revolution, of course, there was a lot about the working class and so on and so forth, but it was also the revolution of nations. It is called Russian revolution, which is a little bit ironic. The right term for that is the revolution in the Russian empire, and any revolution in the empire at the beginning of the 20th century, even in the 19th century, would be about also national self-determination. So the revolution really ends the old Russian empire and ends with the view of the Russian empire that there existed such thing as big Russian nation. Ukrainians and Belarusians are recognized as separate nations and parvies Russians. They get their republics in the Soviet Union and so on and so forth. And Putin has been very vocal in showing how unhappy he is, what Lenin's transformations and reforms were, and even Joseph Stalin's. He was talking about that in this (19/40)
speech on the eve of the war. So his ideas is going back to the empire, bringing back the imperial modes of thinking and thinking not just about the future, but also about the past. And you're absolutely right that history is being used here as a political tool for justification, something that has to come, but really he tries to move forward in his mind by looking back at the glory of the Russian empire rather than the glory of the Soviet Union. Yeah. I brought up the Greek case because a history that we all grew up thinking was settled, both in scholarship and in international law, is now being challenged by Turkish nationalists as part of this larger, revisionist set of claims over the Eastern Mediterranean. And I can't help but go back to my earlier point about history being constantly rewritten because history doesn't have any adjudicative power in and of itself. People make history, might makes right. And yet, even as I say that, I recognize that people's historical understanding (20/40)
didn't understand in the book was the distinction between the tripartite view of a greater Russia and the Eurasianist view. What's the distinction between these two perspectives? First, a short comment on the Greek story because the war in Ukraine is a continuation of the story that really starts with the Greek revolution of the beginning of the 19th century, because that was one of the first cases of the revolt against empire, one of Eurasian empires, in this case, the Ottoman Empire. And it really, the fight, the heroic fight of the Greeks, was supported by the entire Europe. So there was this mobilization, Lord Byron was involved in that and so on and so forth. And Ukrainian war is also a war against against the empire or post-imperial state. And we see the same sort of maybe comparable sort of the mobilization. People are on what I referred to before, that right side of history. But this are the pages from the same book, the book of the disintegration of the big empire, the Ottoman (22/40)
Empire, the Russian Empire, the Austrian-Hungarian Empire. What the Greek case reminds us about is that the story of the disintegration of the empires, this is not an event. This is a process. And unfortunately, this is a process that can take not just decades, but even centuries. And that's, again, a useful case, but also an important perspective to have. In terms of the vision of the one big Russian nation and ideas of Eurasianism, Eurasianism, it's a bigger umbrella that is used by many Russian thinkers to a degree by Putin as well to extend the imperial tent, Russian imperial tent. Because what's the concept of the three-part type Russian nation doesn't allow for, it doesn't allow to provide justification for keeping under the Russian control Chechens, for example, right? Or to keeping under the Russian control Buryats, Tatars, and so on and so forth. So this is another step of the imperial project. It's not just you form a big imperial nation out of a number of nations, but also (23/40)
then you may claim for someone who is not Slavic at all, who can't consider it to be Slavic, but you still provide philosophical and historical justification for the continuation of the imperial rule. And it turned out in this war that the entire undertaking of the continuation of the Russian rule over non-Slavic groups in the Russian Federation is extremely important for a billy to offer Russia to fight the war. The Chechens, the Buryats, the Yakuts, the people from Tuva were disproportionately recruited into the Russian army and sent to die in the fields of Ukraine. So you can imagine that as concentric circles at the center would be Russians or great Russians, the next circle would include Ukrainians and Belarusians as allegedly Russians, and then there would be non-Slavic and non-Orthodox non-Eastern groups that by idea of Eurasianism would provide some form of justification of the continuation of the Russian rule. So the Eurasianist view encompasses the perspective of Greater (24/40)
Russia. Yes. It's within the Eurasianist perspective. So how did these ideas evolve or factor into what became notions of Russia's sphere of influence after the Bolshoi Revolution and then subsequently after the beginning of the Cold War? The ideas of a big Russian nation and Eurasianism went into immigration after the victory of the Bolshoi. The Eurasianist movement really was fully formulated and articulated during the interwar period. You mean people who left Russia after the Bolshoi Revolution continued some of these ideas? Yes, exactly. And now they serve as a reservoir of ideas for Putin, who rejects the Soviet model of dealing with the nationality question in the empire. And the Soviet model was that they recognized the existence of Ukraine, they recognized the existence of Belarus, they created a number of national republics, 15, they were all together at the end of the Soviet Union, and they provided especially immediately after the revolution. They provided some concessions (25/40)
to the nationalities. Concessions were mostly in the form of endowing them with formal institutions that didn't have much power, local governments or local parliaments that didn't function because there was no elections per se. Concessions in the arm or in the field of language and culture. But all of that was done in the situation where the political control over those peripheries was really strengthened, strengthened especially during Stalin and his dictatorial rule and his dictatorial power. The official ideology was not Russian nationalism or was not Eurasianism, the official ideology was internationalism, the communist internationalism. The movement, the communist movement. Yes, yes, the communist movement certainly was something that took over the government in the former Russian empire, but also something that the Bolsheviks like Lenin and 30 degrees Stalin were trying to exploit. Lenin for the purpose of the world revolution. The Soviet Union was formed with an eye that one day (26/40)
the United States of America would become one of the republics of the global union of the Soviet Socialist Republics. If you look at the court of warms of the Soviet Union, you will see that there is the sun, the sun of communism rising over the globe. So the aspirations were from the very beginning global. But by the early 1930s, Stalin realizes that the world revolution is not happening. The Britain is not Russian with the socialist revolution and the United States as well are not doing that. Whatever attempts were they in the early 20s were crushed and they start thinking about building socialism in one country. But World War II and spectacular successes of the Soviet Union in that war produces such phenomenon as Eastern Europe. Poland and Hungary and Czechoslovakia, Romania, all of these countries were overrun by the Red Army and Stalin introduced communist regimes in all those places. And that's where you see it. He didn't integrate, he didn't incorporate them into the Soviet (27/40)
Union, but that would be a classic sphere of influence model, which was also combined with the ideological uniformity and the imposition of the so-called small Stalin's or small dictators in East Germany, in Poland, in Romania, and other places. So what you see is that the imperial instinct is the same in the Russian imperial thinkers and the communist leaders. But the way how they go over this imperial project of establishing and maintaining control over a number of nations and politics, their approach differs, at least ideologically, historically and otherwise. So I'm fascinated by how the Russian elite, the Russian people, the institutions of government in Russia came to grips with the collapse of the Soviet Union and attempted to internalize that as a working model of influence over the new Russian Federation, as well as the former Soviet Republics and even Eastern Bloc countries. How long did it take for Russian elites to begin to formulate an idea of what Russia's place in the (28/40)
world should be? And did that really begin to solidify after Putin came into power? Yes, it did. It started to solidify. But the basic ideas were already there back in 1991 at the time of the disintegration of the Soviet Union. People around Boris Yeltsin, in particular his economic advisor and prime minister for some period of time, Yegor Gahidar, were saying that in the conditions of the disintegration of the USSR and economic collapse, Russia really didn't have resources to maintain its control over the post-Soviet space in the way how it was doing that during the Soviet times, which meant a lot of expenses, also subsidies, coming from the process that Russia was getting from selling oil and gas. And the argument was, okay, we need this money for ourselves. We need this money to rebuild Russia. And 20 years from now, the Republics would come back one way or another, not in the form of the former Soviet arrangement, where it would be a burden, continuing burden on the economic loan (29/40)
Russia, but in a different form, in a different way. But the model was that the sovereignty of those other republics was conditional, was recognized as conditional on being allied with Russia, not joining the West. So really, that's where the thinking about the post-Soviet space as Russian sphere of influence had started. So the borders of the Russian sphere of influence, what was the Soviet spheres of influence and cover Eastern Europe, now shrunk and were moved inside of the borders of the former Soviet Union. So the former republics like Ukraine, like Belarus, even Baltic states, Kazakhstan, were imagined as part of that sphere of influence. And there was a formal organization created for those purposes, which was called the Commonwealth of Independent States. And what you see is from the very beginning, the tensions are growing between Russia and Ukraine, which were the largest Soviet republics in terms of population, in terms of the economic output, because Ukraine looked at the (30/40)
Commonwealth of Independent States as an institution that was supposed to assure what in Kiev they called the civilized divorce. So an institution where we can negotiate how we divide the common property, how we arrange our relations for the future. In Russia, from the very beginning, the Commonwealth of Independent States was viewed as an instrument for maintaining Russian influence and Russian geopolitical control over the post-Soviet space. And all of that is happening before Putin. All of that is happening in the 1990s. So what Putin's innovation is, is that he realizes that the Commonwealth of Independent States, it's not a working mechanism to assure those goals. He comes up with the number of projects of creating different forms of what would be called the Eurasian Union, a much closer connection between the former post-Soviet republics under the Russian control than was the Commonwealth. And he's prepared to use the army to achieve that goal outside of the borders of the (31/40)
Russian Federation. So in 2008, we have a war in Georgia. In 2014, we have the annexation of the Crimea and start of the hybrid warfare in Donbass. And in 2022, we have the all-out aggression against Ukraine. But the goal is still the same. The goal didn't change from the times of Boris Yeltsin. It's reassuring Russian control over this post-Soviet space. And it would be impossible to achieve that without Ukraine, the second largest Soviet and then post-Soviet republic being part of that project. So there are a couple of places I want to go now. It's going to get a little difficult because there are a few threats to follow. But let's start with this one, which has to do with the evolution of institutional and state power in Russia versus in Ukraine. And why was it that these two nations diverged so significantly? Even though Ukraine's economic crisis post the fall of the Soviet Union was arguably worse than in Russia, but there was more optimism around sovereignty in Ukraine and also (32/40)
Ukraine took a more democratic direction. So what explains those differences and how have those contributed to where we find ourselves today? From the start, what you see within big segments of elites in Russia is a really a shock from the fall of the Soviet Union. So the overall idea is that Russia lost its geopolitical position, lost territory in the minds of a big part of the elite who didn't distinguish between Russia proper and the Soviet Union. And you see much more optimism on the Ukrainian side where Ukrainian elites gained. They gained statehood. They gained independence, at least a declaration of independence and working hard to make it a reality. But despite these differences, there was also a feeling among the Ukrainian elites that they should follow a Russian model in terms of the political changes and transformations that Yeltsin was going through in the 1990s. But the reasons are different, but one of them was that Ukraine as a republic of the Soviet Union really didn't (33/40)
have an independent elite. Those were mostly the yes man, the thinking was happening in Moscow, the institutions were there, the decisions were made there. Then the orders were going to the republics and there were the people who were implementing those orders. So for them it was difficult to think about themselves fully independently in terms of what do you do with this country. So they were trying to follow in the 1990s Yeltsin's models and Yeltsin's model was really creating a strong presidential system. He orders the Russian tanks to shoot at the Russian parliament in 1993. He rewrites constitution and he has a referendum on strengthening of the presidential powers. And the Ukrainian elite, post-communist elite, was actually trying to emulate it. And then by the beginning of 2000s, they realized that whatever political, quote-unquote, solutions or models or policies worked in Russia, they didn't work in Ukraine. It was a different country, it was a different population, it was a (34/40)
different level of tolerance towards the possibility of state violence. So in Ukraine, in response to the rise in authoritarian tendencies, there were two uprisings, popular revolutions called Maidan. The first one became known as Orange Revolution in 2004. The second one is Revolution of Dignity in 2013-2014. And already around the time of the first of those revolutions, the Orange Revolution, president of Ukraine at that time, Leonid Kuchma wrote, or at least co-wrote a book which had a very, very talent title, Ukraine is not Russian. And the book first appeared not in Ukrainian but in Russian and it was first presented not in Kiev but in Moscow. That was clearly, we know where the main reader of that book in mind of Kuchma was supposed to be, it was supposed to be in Kremlin. But that was the lesson that the Ukrainian elites learned over the period of the 1990s and the beginning of the new century, that Ukrainian population is different. It's not prepared to allow the state to take (35/40)
away the democratic practices, the democracy that was given to Ukraine with the fall of the Soviet Union. At the end, by the time we have the start of the war in 2014 and then in 2022, you see that this war is also can very easily and justifiably characterized also as the war between authority and democracy, between authoritarian state and another state that became democratic, one of very few states in the post-Soviet space that maintained democratic institutions and functional democracy. There's another important framing here and I think this is the opportune moment to bring it up, which is that of Russia versus the quote West or more specifically Russia versus the United States. A framing that is omnipresent in the formulation of Russian foreign policy and in the country's domestic political discourse and which looms much larger in the minds of Russian elites and in the Russian public than I think most Americans and Europeans realize. In part because the reverse isn't true, even with (36/40)
Union, but that would be a classic sphere of influence model, which was also combined with the ideological uniformity and the imposition of the so-called small Stalin's or small dictators in East Germany, in Poland, in Romania, and other places. So what you see is that the imperial instinct is the same in the Russian imperial thinkers and the communist leaders. But the way how they go over this imperial project of establishing and maintaining control over a number of nations and politics, their approach differs, at least ideologically, historically and otherwise. So I'm fascinated by how the Russian elite, the Russian people, the institutions of government in Russia came to grips with the collapse of the Soviet Union and attempted to internalize that as a working model of influence over the new Russian Federation, as well as the former Soviet Republics and even Eastern Bloc countries. How long did it take for Russian elites to begin to formulate an idea of what Russia's place in the (28/40)
historical perspective. In historical perspective, I mean, I could talk about the origins, I could discuss the developments, and I could also talk in my opinion quite confidently about the future, not the immediate future. I don't know what will happen tomorrow. I don't know exactly what will happen one year from now. But historical frame gives you understanding of the ultimate outcome, long-term outcome of those processes. Because I look at this war as the war of the Soviet succession or Russian succession, one of the wars of the history, story of the disintegration of the Russian Empire, one of the biggest world empires. And we know where the wars end of that sort. They end up with ultimately the victory of the national movements, the formation of the states. And another thing that the first months of the war made me confident of was the ultimate Ukrainian victory. So the victory meaning survival. In the after World War II, in now almost 80 years since then of World War II, there was (7/40)
does influence their sense of legitimacy over the ruling order. And in that sense, the rewriting of history, whether you want to call that revanchism or nationalist propaganda, does serve an important function insofar as it provides a legitimizing narrative for the aggressor state that's looking to change the status quo by making itself the true victim of a historical process that goes back much further than any immediate conflict. And the power of these sorts of narratives is also important for the defenders who are encouraged to fight for their country, which obviously has been an important part of what's motivated the Ukrainians and helped them form their sense of nationhood, which I'm sure we'll have a chance to get into. But I have another question here because what you're referring to is this tripartite view of a greater Russia. And you said, quote, big Russians are the people that we call today Russians, little Russians are Ukrainians and white Russians are Belarusians. What I (21/40)
Ukraine took a more democratic direction. So what explains those differences and how have those contributed to where we find ourselves today? From the start, what you see within big segments of elites in Russia is a really a shock from the fall of the Soviet Union. So the overall idea is that Russia lost its geopolitical position, lost territory in the minds of a big part of the elite who didn't distinguish between Russia proper and the Soviet Union. And you see much more optimism on the Ukrainian side where Ukrainian elites gained. They gained statehood. They gained independence, at least a declaration of independence and working hard to make it a reality. But despite these differences, there was also a feeling among the Ukrainian elites that they should follow a Russian model in terms of the political changes and transformations that Yeltsin was going through in the 1990s. But the reasons are different, but one of them was that Ukraine as a republic of the Soviet Union really didn't (33/40)
Russia, but in a different form, in a different way. But the model was that the sovereignty of those other republics was conditional, was recognized as conditional on being allied with Russia, not joining the West. So really, that's where the thinking about the post-Soviet space as Russian sphere of influence had started. So the borders of the Russian sphere of influence, what was the Soviet spheres of influence and cover Eastern Europe, now shrunk and were moved inside of the borders of the former Soviet Union. So the former republics like Ukraine, like Belarus, even Baltic states, Kazakhstan, were imagined as part of that sphere of influence. And there was a formal organization created for those purposes, which was called the Commonwealth of Independent States. And what you see is from the very beginning, the tensions are growing between Russia and Ukraine, which were the largest Soviet republics in terms of population, in terms of the economic output, because Ukraine looked at the (30/40)
What's up everybody? My name is Dmitriy Kafinas and you're listening to Hidden Forces, a podcast that inspires investors, entrepreneurs, and everyday citizens to challenge consensus narratives and to learn how to think critically about the systems of power shaping our world. My guest in today's episode is Professor Sergei Plohji, the director of the Ukrainian Research Institute at Harvard University and a leading authority on Ukraine, Russia, and Eastern Europe. He's published extensively on the international history of World War II and the Cold War, and he joins me today to discuss the subject of his latest book on the war in Ukraine and the return of history. This is a conversation about national identity, the disintegration of empires, and what will follow from the largest European land war since World War II. How will the outcome of the war in Ukraine inform the evolution of the international order? And what are the most compelling theories that explain Putin's decision to invade (1/40)
in the first place? Was it to build a greater Russia, as some of his detractors have claimed, or did Moscow face legitimate security concerns from NATO enlargement that on their own can explain the course of events? The answer to this last question holds important lessons about the future of European security and US policy towards China, which is what we spent part of the second hour discussing. If you want access to that part of the conversation and you're not already subscribed to Hidden Forces, you can join our premium feed and listen to the second hour of today's episode by going to hiddenforces.io. All of our content tiers give you access to our premium feed, which you can listen to on your mobile device using your favorite podcast app just like you're listening to this episode right now. If you want to join in on the conversation and become a member of the Hidden Forces Genius Community, which includes Q&A calls with guests, access to special research and analysis, in-person (2/40)
events and dinners, you can also do that on our subscriber page. And if you still have questions, feel free to send an email to infoathiddenforces.io and I or someone from our team will get right back to you. And with that, please enjoy this incredibly informative conversation with my guest, Professor Serhii Blokhi. Professor Serhii Blokhi, welcome to Hidden Forces. It's a pleasure. Thank you for having me. The pleasure is all mine, Professor. So before we get into the subject of today's conversation, which is going to build off your latest book, The Russo Ukrainian War, The Return of History, I'd love if you could take a moment to tell me in my audience a little bit about you, your background and your interest areas and focus in the field of history. I am Professor of Ukrainian and European History at Harvard University. And this is more or less what I have been doing for my entire life, my professional life. I was educated in Ukraine, which was at that time part of the Soviet Union. (3/40)
I started my academic career at the University of Dnipro, which is now relatively close to the front lines of this war. I continue it in Canada, University of Alberta in Western Canada. And I am Professor of Ukrainian History at Harvard since 2007, Director of the Ukrainian Research Institute at Harvard. And my field is Ukrainian and European History, but also Global History. One of the courses that I teach at Harvard is on the Yalta Conference. I teach course also on the Cold War, that on the top of course, of course is on Ukrainian and European history. And in that sense, the book that we are discussing today, it brings together different fields, my different interests, but also my connection to the region, connection to Ukraine, connection to the things that are happening today on the battleground. So while I was reading the book, I came to the view that it dealt with two, if not maybe three topics. One was the origin of the war in Ukraine. And folded within that was also a (4/40)
conversation, a big part of it was really a conversation about Russian and Ukrainian identity and the sense of Russian nationhood and how that has evolved both up until the end of the Cold War and then subsequently with the fall of the Soviet Union. And the other part of the book is really a look forward into what the consequences of this war will be for the future and how the global order is evolving. Would you say that that's pretty much an accurate description? Yes, I would say it is an accurate description and the origins of the war, the issues of identity. This is the focus of the first chapters, few chapters, and then the future is the focus of the concluding two chapters. What is also in between, I try to look at the actual developments on the front lines in the course of the last year. So the book was written between March of 2022 and February of 2023. So what certainly the reader will get out of that book will be not just the origins and consequences of the war, but there will (5/40)
be a lot of war itself. Yeah, there's, you devote many chapters to describing actually the progression of the war in the last year. So that was extremely useful as well. And I'm sure it'll be a really good history for people who are maybe in the future and learning about the war later. So when did you begin writing this book? I started writing it really in late March, so it would be more or less one month into the war. And by that time, the shock that came with the war, I was able to overcome it on some level. But also for me, it became clear already in March, in late March, the overall outcome of that war. So we still don't know when it will end and exactly how it will end. But already in late March, it was clear for me that Ukraine would survive as an independent state. And that would be certainly mean defeat for Russia and for Russian aspirations as it was and plans it was going to the war. So from that point of view, at least I thought that I knew what I was talking about in (6/40)
no one single example of major power, great power, winning a war against a rising nation and a rising state. So none. And we didn't know whether the Russian aggression against Ukraine would be different or not by late March at least. I saw that it would probably not be different and that gave me some foundations again, moral historical in terms of standards of my profession to write that book. One more question for you about process before we get into the book itself. How do you feel that your identity and background as a Ukrainian impacted your writing of this book and impacted your objectivity of the war itself? I was thinking about that more than once, but this is the case where I think me coming from Ukraine, really an asset because I certainly now understand many things that anyone who didn't grow up there, didn't go to school there, probably it would be difficult for people to grasp that. I am clearly on the side of Ukraine, but I don't think about my position as being a partisan (8/40)
position. I think about myself and about my book as being part of this really broad community of people in the United States, in Europe that pose this war, oppose aggression, who are supporting Ukraine because this is one of the very few wars, at least in the last again, 80 years when the moral dimensions of the war are so clear. It's very clear who is the aggressor. It's very clear who is the victim. It's very clear who is right, who is wrong, where is the right side of history, where is wrong side of history. It's also a clash between democracy and autocracy. In the United States, there was a very interesting book written about the Second World War, it's the title Good War. What that meant was that the World War II was one, the probably most horrible war in the history of the world, but it was also the war where from the American perspective it was very clear the moral dimension of that war. The United States was on the right side of history. The Russian-Ukrainian war is the largest (9/40)
war in Europe since World War II, but it also comes with that sort of a moral clarity. I was proud to be on the side of millions, millions of other Americans who really considered this Russian aggression against Ukraine to be a crime. How far back do we need to go in order to understand the origins of this conflict? This war is quite unique, at least in my experience, of studying wars, writing about the wars, unique in a sense of how much history has been used and often abused to justify it. Vladimir Putin, who is certainly the primary culprit in all that story, published an essay on the historical unity of Russians and Ukrainians, and certainly he starts there with medieval times with Kiev and Rus. His speech that was de facto declaration of the war was dubbed by some as a history lecture. There was a lot of history in articulation of the goals of the war and justification of it. The major point was that Ukrainians don't exist and shouldn't exist as a nation. The argument was put a (10/40)
little bit differently, saying that Russians and Ukrainians are one and the same people. History was misused to make that argument. I felt that in my book, I had to take seriously those claims. I had to deal with them as a professional. My first chapter of the book is called Imperial Implosion or Imperial Collapse. This is where I engaged again the Putin's argumentation from time to time. But also I'm trying to tell what, at least from the perspective of the professional historical field, what the Russian Empire was about, what were the relations between Russia and Ukraine within that empire. This is very important because Putin and many in Russia today still trace their origins to the Kievan Rus, to the city of Kiev, when after annexation of the Crimea in 2014 Putin erected a monument to Prince Volodymyr of Vladimir, his namesake. That was the prince who ruled in Kiev. Now the monument to that prince is at the very center of Moscow. There is a lot of confusion about the origins of the (11/40)
Russian state, about the origins of the Russian nation, which led to this war on the one hand. But on the other hand also is responsible to a degree for miscalculations, Russian miscalculations in the war. Putin now it is very clear, really believed what he was writing, that Russians and Ukrainians were one and the same people, that allegedly Ukrainians were captured by the evil forces, by Nazis and nationalists, led by the only Jewish president outside of Israel, Volodymyr Zelensky, Jewish by background. And that led him, I mean President Putin, to think that Ukrainians would welcome Russian troops with flowers. And we know that they welcomed them with javelins and stingers. So what is the basis of Putin's claim beyond the fact that there was a founding prince? I think Vladimir, the prince that he erected a statue of, was a Viking. I mean, I'm a little confused because you went back to at least, I think the 15th century in the book, recounting the history of the peoples that sort of (12/40)
populated that region. So what is the exact basis of his claim and what is the justification for an alternative history or the more definitive history that let's say other historians agree about? Kievan Rus was a medieval empire, with its capital, with its center being based in Kiev. And from that point of view, the comparisons can be made, let's say, with the more ancient, of course, Roman Empire or Charlemagne Empire. And imagine today that, let's say, someone in Britain or in France or in Germany goes and takes over Rome, claiming that they're the real descendants of the Roman Empire. So the same we see with thinking in today's Russia. Today's Russia, its central part was part of this Kievan Rus of this medieval empire. And the myth of origins, one of the sections in my book is called myth of origins tells them that they come from Kiev, which is also the foundation for thinking about not just political history, not just history of the state, not just history of dynasty, but also (13/40)
about history of nations. And this is one of indications that really Russia today has difficulty divorcing itself, not only from Russian Empire or the Soviet Union, but also from medieval, medieval history and medieval imperial history and so on and so forth. Vladimir Vladimir himself, yes, he was a Viking. The Kievan Rus was one of those states, principalities, empires that was created or reformated by Vikings all over Europe. So from that point of view, Ukrainian history and to a degree, Russian history is very, very European in a sense. This is the same phenomenon. This is more or less the same Vikings. But they, as it happened in all other places, they didn't create Sweden or Norway in France, right? Eventually they were acculturated. They became part of the local elites. We see the emergence of different states and eventually nation states. So the story of Eastern Europe, the story of Ukraine is pretty much the same. So you have an influx of Vikings that they take over militarily. (14/40)
They create their own principality, but eventually they go native. They speak Slavic language, they write Slavic or Old Ukrainian or Old Ruthenian, Church Slavonic, the Slavonic language of the literature of the Church is there. We don't hear about Vikings per se after the first to second generation. You know, reading your book made me realize that not only do I not know anything about Viking history, but it sure seems fascinating. I had no real appreciation for how much Vikings were using the river systems in Europe to come down into the continent and conquer territories. Yes, this is fascinating story and history in its own right. It is also very interesting that today archaeologists can tell you who the Viking is and who not is the Viking in places like Ukraine. Because the Vikings have, they were traveling on the boats, right? So they were rowing. One theory is that rowers, that's the meaning of the term also Rus, the term Rus and eventually Russia comes from the Finnic or Swedish (15/40)
term rowers. And you can see the formations to the skeletons that come with spending the life on the boat. And when you look at the population of the Ukrainian steppes, there would be different deformations coming from the lifespan on the back of the horse. Right? Because they're Mongolians. Right. So today you don't really even, for archaeology, you can identify who was who by looking at the skeleton. So yes, it is interesting and fascinating story. And Ukraine was exactly the place where the horse riding cultures met with the boat people. So this is also an important point to mention. And you alluded to it earlier when you talked about imperial disintegration. But so much of what we consider to be European history, particularly in the Eastern side, is the result of the coming apart of empires, the Ottoman Empire, certainly in the case of Greece. And now you're drawing a similar parallel in the case of Russia and Ukraine. I have one more question before we go to the Bolshevik era (16/40)
because I want to parse out Putin's claims about Lenin's role in giving rise to what we think of as an independent Ukraine and the blame that he puts on Lenin. And that question has to do with really what the value is of investigating these historical origins to begin with. Because from my perspective, power is the most important thing that really matters to define what is a national boundary or not when it comes to a state's ability to impose its will. But insofar as history is important, it seems that the only importance of history, and it's not a small thing, is in the population's sense of legitimacy over the ruling order. So how much of this is really about claiming a sense of national legitimacy and aligning state policy with that view and getting the public's support to believe it? So how much of this was already in the Russian public's mind, the theories that President Putin has put forward, and how much of this has been actively cultivated by him and more importantly, other (17/40)
nationalists from who he's gotten these ideas over the last several decades? Putin's argument about what the title of his essay says, the historical unity of Russians and Ukrainians is not original. He's not a historian, he's not a thinker, he's a political figure. But he spent a lot of time during the COVID pandemic in isolation, having time to read Andrew Reid books, and the books that he was reading were mostly coming from the either Russian imperial thinkers and historians of the pre-revolutionary era of 1917, or from the writers that ended up to be in immigration after the Bolshevik Revolution, but who continued to develop the imperial views and imperial ideas. And in the Russian empire of the 19th century, the dominant view was that there existed a big Russian nation which consisted of three tribes, great Russians for today's Russians, little Russians or Ukrainians, and white Russians or Belarusians. They could maybe speak a little bit different languages, but all of them were (18/40)
Russians, and that was the big political Russian nation. The revolution of 1917 really ended that because that was a social revolution, of course, there was a lot about the working class and so on and so forth, but it was also the revolution of nations. It is called Russian revolution, which is a little bit ironic. The right term for that is the revolution in the Russian empire, and any revolution in the empire at the beginning of the 20th century, even in the 19th century, would be about also national self-determination. So the revolution really ends the old Russian empire and ends with the view of the Russian empire that there existed such thing as big Russian nation. Ukrainians and Belarusians are recognized as separate nations and parvies Russians. They get their republics in the Soviet Union and so on and so forth. And Putin has been very vocal in showing how unhappy he is, what Lenin's transformations and reforms were, and even Joseph Stalin's. He was talking about that in this (19/40)
speech on the eve of the war. So his ideas is going back to the empire, bringing back the imperial modes of thinking and thinking not just about the future, but also about the past. And you're absolutely right that history is being used here as a political tool for justification, something that has to come, but really he tries to move forward in his mind by looking back at the glory of the Russian empire rather than the glory of the Soviet Union. Yeah. I brought up the Greek case because a history that we all grew up thinking was settled, both in scholarship and in international law, is now being challenged by Turkish nationalists as part of this larger, revisionist set of claims over the Eastern Mediterranean. And I can't help but go back to my earlier point about history being constantly rewritten because history doesn't have any adjudicative power in and of itself. People make history, might makes right. And yet, even as I say that, I recognize that people's historical understanding (20/40)
didn't understand in the book was the distinction between the tripartite view of a greater Russia and the Eurasianist view. What's the distinction between these two perspectives? First, a short comment on the Greek story because the war in Ukraine is a continuation of the story that really starts with the Greek revolution of the beginning of the 19th century, because that was one of the first cases of the revolt against empire, one of Eurasian empires, in this case, the Ottoman Empire. And it really, the fight, the heroic fight of the Greeks, was supported by the entire Europe. So there was this mobilization, Lord Byron was involved in that and so on and so forth. And Ukrainian war is also a war against against the empire or post-imperial state. And we see the same sort of maybe comparable sort of the mobilization. People are on what I referred to before, that right side of history. But this are the pages from the same book, the book of the disintegration of the big empire, the Ottoman (22/40)
Empire, the Russian Empire, the Austrian-Hungarian Empire. What the Greek case reminds us about is that the story of the disintegration of the empires, this is not an event. This is a process. And unfortunately, this is a process that can take not just decades, but even centuries. And that's, again, a useful case, but also an important perspective to have. In terms of the vision of the one big Russian nation and ideas of Eurasianism, Eurasianism, it's a bigger umbrella that is used by many Russian thinkers to a degree by Putin as well to extend the imperial tent, Russian imperial tent. Because what's the concept of the three-part type Russian nation doesn't allow for, it doesn't allow to provide justification for keeping under the Russian control Chechens, for example, right? Or to keeping under the Russian control Buryats, Tatars, and so on and so forth. So this is another step of the imperial project. It's not just you form a big imperial nation out of a number of nations, but also (23/40)
then you may claim for someone who is not Slavic at all, who can't consider it to be Slavic, but you still provide philosophical and historical justification for the continuation of the imperial rule. And it turned out in this war that the entire undertaking of the continuation of the Russian rule over non-Slavic groups in the Russian Federation is extremely important for a billy to offer Russia to fight the war. The Chechens, the Buryats, the Yakuts, the people from Tuva were disproportionately recruited into the Russian army and sent to die in the fields of Ukraine. So you can imagine that as concentric circles at the center would be Russians or great Russians, the next circle would include Ukrainians and Belarusians as allegedly Russians, and then there would be non-Slavic and non-Orthodox non-Eastern groups that by idea of Eurasianism would provide some form of justification of the continuation of the Russian rule. So the Eurasianist view encompasses the perspective of Greater (24/40)
Russia. Yes. It's within the Eurasianist perspective. So how did these ideas evolve or factor into what became notions of Russia's sphere of influence after the Bolshoi Revolution and then subsequently after the beginning of the Cold War? The ideas of a big Russian nation and Eurasianism went into immigration after the victory of the Bolshoi. The Eurasianist movement really was fully formulated and articulated during the interwar period. You mean people who left Russia after the Bolshoi Revolution continued some of these ideas? Yes, exactly. And now they serve as a reservoir of ideas for Putin, who rejects the Soviet model of dealing with the nationality question in the empire. And the Soviet model was that they recognized the existence of Ukraine, they recognized the existence of Belarus, they created a number of national republics, 15, they were all together at the end of the Soviet Union, and they provided especially immediately after the revolution. They provided some concessions (25/40)
to the nationalities. Concessions were mostly in the form of endowing them with formal institutions that didn't have much power, local governments or local parliaments that didn't function because there was no elections per se. Concessions in the arm or in the field of language and culture. But all of that was done in the situation where the political control over those peripheries was really strengthened, strengthened especially during Stalin and his dictatorial rule and his dictatorial power. The official ideology was not Russian nationalism or was not Eurasianism, the official ideology was internationalism, the communist internationalism. The movement, the communist movement. Yes, yes, the communist movement certainly was something that took over the government in the former Russian empire, but also something that the Bolsheviks like Lenin and 30 degrees Stalin were trying to exploit. Lenin for the purpose of the world revolution. The Soviet Union was formed with an eye that one day (26/40)
the United States of America would become one of the republics of the global union of the Soviet Socialist Republics. If you look at the court of warms of the Soviet Union, you will see that there is the sun, the sun of communism rising over the globe. So the aspirations were from the very beginning global. But by the early 1930s, Stalin realizes that the world revolution is not happening. The Britain is not Russian with the socialist revolution and the United States as well are not doing that. Whatever attempts were they in the early 20s were crushed and they start thinking about building socialism in one country. But World War II and spectacular successes of the Soviet Union in that war produces such phenomenon as Eastern Europe. Poland and Hungary and Czechoslovakia, Romania, all of these countries were overrun by the Red Army and Stalin introduced communist regimes in all those places. And that's where you see it. He didn't integrate, he didn't incorporate them into the Soviet (27/40)
world should be? And did that really begin to solidify after Putin came into power? Yes, it did. It started to solidify. But the basic ideas were already there back in 1991 at the time of the disintegration of the Soviet Union. People around Boris Yeltsin, in particular his economic advisor and prime minister for some period of time, Yegor Gahidar, were saying that in the conditions of the disintegration of the USSR and economic collapse, Russia really didn't have resources to maintain its control over the post-Soviet space in the way how it was doing that during the Soviet times, which meant a lot of expenses, also subsidies, coming from the process that Russia was getting from selling oil and gas. And the argument was, okay, we need this money for ourselves. We need this money to rebuild Russia. And 20 years from now, the Republics would come back one way or another, not in the form of the former Soviet arrangement, where it would be a burden, continuing burden on the economic loan (29/40)
Commonwealth of Independent States as an institution that was supposed to assure what in Kiev they called the civilized divorce. So an institution where we can negotiate how we divide the common property, how we arrange our relations for the future. In Russia, from the very beginning, the Commonwealth of Independent States was viewed as an instrument for maintaining Russian influence and Russian geopolitical control over the post-Soviet space. And all of that is happening before Putin. All of that is happening in the 1990s. So what Putin's innovation is, is that he realizes that the Commonwealth of Independent States, it's not a working mechanism to assure those goals. He comes up with the number of projects of creating different forms of what would be called the Eurasian Union, a much closer connection between the former post-Soviet republics under the Russian control than was the Commonwealth. And he's prepared to use the army to achieve that goal outside of the borders of the (31/40)
Russian Federation. So in 2008, we have a war in Georgia. In 2014, we have the annexation of the Crimea and start of the hybrid warfare in Donbass. And in 2022, we have the all-out aggression against Ukraine. But the goal is still the same. The goal didn't change from the times of Boris Yeltsin. It's reassuring Russian control over this post-Soviet space. And it would be impossible to achieve that without Ukraine, the second largest Soviet and then post-Soviet republic being part of that project. So there are a couple of places I want to go now. It's going to get a little difficult because there are a few threats to follow. But let's start with this one, which has to do with the evolution of institutional and state power in Russia versus in Ukraine. And why was it that these two nations diverged so significantly? Even though Ukraine's economic crisis post the fall of the Soviet Union was arguably worse than in Russia, but there was more optimism around sovereignty in Ukraine and also (32/40)
have an independent elite. Those were mostly the yes man, the thinking was happening in Moscow, the institutions were there, the decisions were made there. Then the orders were going to the republics and there were the people who were implementing those orders. So for them it was difficult to think about themselves fully independently in terms of what do you do with this country. So they were trying to follow in the 1990s Yeltsin's models and Yeltsin's model was really creating a strong presidential system. He orders the Russian tanks to shoot at the Russian parliament in 1993. He rewrites constitution and he has a referendum on strengthening of the presidential powers. And the Ukrainian elite, post-communist elite, was actually trying to emulate it. And then by the beginning of 2000s, they realized that whatever political, quote-unquote, solutions or models or policies worked in Russia, they didn't work in Ukraine. It was a different country, it was a different population, it was a (34/40)
different level of tolerance towards the possibility of state violence. So in Ukraine, in response to the rise in authoritarian tendencies, there were two uprisings, popular revolutions called Maidan. The first one became known as Orange Revolution in 2004. The second one is Revolution of Dignity in 2013-2014. And already around the time of the first of those revolutions, the Orange Revolution, president of Ukraine at that time, Leonid Kuchma wrote, or at least co-wrote a book which had a very, very talent title, Ukraine is not Russian. And the book first appeared not in Ukrainian but in Russian and it was first presented not in Kiev but in Moscow. That was clearly, we know where the main reader of that book in mind of Kuchma was supposed to be, it was supposed to be in Kremlin. But that was the lesson that the Ukrainian elites learned over the period of the 1990s and the beginning of the new century, that Ukrainian population is different. It's not prepared to allow the state to take (35/40)
away the democratic practices, the democracy that was given to Ukraine with the fall of the Soviet Union. At the end, by the time we have the start of the war in 2014 and then in 2022, you see that this war is also can very easily and justifiably characterized also as the war between authority and democracy, between authoritarian state and another state that became democratic, one of very few states in the post-Soviet space that maintained democratic institutions and functional democracy. There's another important framing here and I think this is the opportune moment to bring it up, which is that of Russia versus the quote West or more specifically Russia versus the United States. A framing that is omnipresent in the formulation of Russian foreign policy and in the country's domestic political discourse and which looms much larger in the minds of Russian elites and in the Russian public than I think most Americans and Europeans realize. In part because the reverse isn't true, even with (36/40)
all the Russia collusion hysteria during the Trump administration, Americans never really saw their national power as being constrained or defined by Russian power. So what I'd like to do in the second hour professor is to try and reconcile and compare two adjacent theories for the outbreak of the war in Ukraine, each of which pull from some of the themes that we've explored today. The first theory is based on the imperial argument for Russian aggression, that in other words, Russia's invasion of Ukraine in both 2014 and again in 2022 stemmed from imperial ambitions and desires for territorial expansion informed by this disputed history that we've discussed today and which incidentally would have also explained the expansion of NATO in terms of legitimate security concerns on the part of Russia's neighbors. That in other words, it wasn't so much the US and Europe moving east as it was Eastern Europe and some of these former Soviet republics moving west. The second theory is one that (37/40)
takes a much more sympathetic view of Russian behavior, seeing it as an understandable and predictable response to the enlargement of NATO and to Western military encroachments on Russia's border structural realists like John Meersheimer who's been on the show before, are prominent proponents of this view, but he's not alone. I think both of these perspectives have merit and like I said, I'd like to devote the second hour of our conversation to exploring them in detail and that will I think ultimately bring us to a conversation about China because unlike in the case of the US and Russia, the policy towards China was one of accommodation and I think most of us can agree at this point at least that this policy didn't work. So if it didn't work for China, why would it have worked for Russia? You know, just some food for thought there. So for those of you who are new to the program, Hidden Forces is listener supported. We don't accept advertisers or commercial sponsors. The entire show is (38/40)
funded from top to bottom by listeners like you. If you want access to the second hour of today's conversation with Professor Plohe, head over to hiddenforces.io slash subscribe and sign up to one of our three content tiers. All subscribers gain access to our premium feed, which you can use to listen to the rest of today's conversation on your mobile device using your favorite podcast app, just like you're listening to this episode right now. Professor, stick around, we're going to move the second hour of our conversation onto the premium feed. If you want to listen in on the rest of today's conversation, head over to hiddenforces.io slash subscribe and join our premium feed. If you want to join in on the conversation and become a member of the Hidden Forces Genius community, you can also do that through our subscriber page. Today's episode was produced by me and edited by Stylianos Nicolaou. For more episodes, you can check out our website at hiddenforces.io. You can follow me on (39/40)
either by choice or by being pushed. And Tesla really needed to build up its kind of leadership ranks and engineering and ranks. And Elon had gone through a series of people, but hadn't quite found the kind of the engineered oversee the car development that could put his vision on the road. And a very important thing happened in early 2009. And that was the hiring of a man named Peter Rawlinson. And Peter was a car engineer from the UK who had worked at Jaguar and Lotus and hadn't had a traditional automotive career path, but was very interested in what was possible and how to do things quicker from a development standpoint. And Elon kind of latched onto him early on in 2009 and hired him. And he became the guy to put on the street the vision for what the Model S was going to be. Elon had hired a young kind of up and coming car designer to put the vision of what it would look like. And JB Straubel had figured out how to do the propulsion. And Peter Rawlinson was going to be the guy (32/40)
And in that period of time, we saw a really rather remarkable story and probably a historic turnaround in a very short period. At least this generation's most dramatic comeback, if you will, from the depths of near bankruptcy to becoming the world's most valuable automaker. And so I wanted to tell that story. How did that happen? Now, you can argue that the company is overvalued. You can argue that all sorts of things, but it's still a dramatic story of what has occurred in that period of time. So one, staying out to tell that story and also really wanting to tell the story of how the Model 3 came to be. And it just didn't just happen in 2017 and 2018 and 2019. It was really a multi-year process starting with the Roadster through the Model S, through the Model X, and into the Model 3. Everything built on it, the drama was really throughout all of those years. Right. And I do totally want to get into that. The last question I had before we do is because of the nature of the story, (7/40)
but also generating interest in the investor community as well. He was at that point in 2009, when they revealed it, selling the future of the automobile. And, you know, it was very exciting for some of those early people. Yeah, I think that Elon, first of all, he has a great sense of what people want and how to sell it. And I think at this time, this was 2012, the car came out in the summer of 2012, right around the time that Mario Draghi gave his famous, whatever it takes, speech, right around the time that the global economy was beginning to turn the corner from the great financial crisis. And I think the zeitgeist was one where people really wanted something to believe in again, around the economy and our ability to innovate. There was this sense that, you know, America's best days economically were behind it. And here was this guy creating the first American car company, successful, seemingly car, American car company in like a generation, like a hundred years. And it rekindled (36/40)
a car. You've got this great space inside the car. And then you're sitting in the driver's seat and the dashboard looks crazy. It looks like something out of an Apple store. In the center screen, you've got this giant, essentially a TV screen in the middle. It's up and down. This is prior to the iPad coming out, but the iPhone was there. And so it was a touchscreen, like with a giant iPhone. Instead of having all these different gauges, you had a kind of you had a screen behind the steering wheel. And then what they're telling, what Elon is telling is the performance is going to be like, you know, among the best sports cars in the world. And that's pretty amazing. And the other thing is he's promising the price. It was going to be $50,000. So, you know, look at all this for what you could get is a boring Ford sedan. It was a pretty good proposition. And that helped generate a lot of interest, a lot of interest from people with a lot of money who started, you know, putting down orders, (35/40)
What's up, everybody? My name is Demetri Kofinas, and you're listening to Hidden Forces, a podcast that inspires investors, entrepreneurs, and everyday citizens to challenge consensus narratives and to learn how to think critically about the systems of power shaping our world. My guest in this week's episode is Wall Street Journal Automotive and Tech Reporter Tim Higgins, who is out with a brand new book this week that provides an inside look into the remarkable and more often than not chaotic story of Tesla and its polarizing CEO, Elon Musk. Now, many of you already know that I've done my fair share of episodes on Tesla, and given how much research I do ahead of these conversations, combined with the conversations themselves, I've had the opportunity to form a fairly educated opinion on the company and on Musk that isn't particularly flattering. And my conversation today has not disabused me of any of those preconceptions. If anything, Tim's book confirms much of what I already knew, (1/40)
and in some instances raises even more questions about ethics and illegality at the company. And more often than not, at the company is really just a stand-in for Elon, who for better or worse, cannot be separated from Tesla in any final analysis of the company's financials, its operations, and its prospects as an automaker. We spent the first part of our conversation discussing the origin story of Tesla all the way up until the successful launch of the Model S, which truly was a remarkable achievement. I mean, I had the opportunity to drive one when it first came out, and I was just blown away by how futuristic it felt, and how it opened my eyes to possibilities that I hadn't really imagined up until that point in time. And it don't just mean in electric cars, it's easy to forget where we were in the summer of 2012, in terms of coming out of the financial crisis and people's desires to find something in our economy to feel hopeful about. And Elon and the Model S absolutely delivered (2/40)
on that. Unfortunately, the success that Tesla enjoyed during that period was not something that the company would be able to replicate going forward. And this is what we spend most of the second half of our conversation discussing. Specifically, what challenges Tesla faced, primarily after the deployment of the Model S, why it faced those challenges, how management and the board dealt with them, and the stunning disconnect between the public's perception of Musk as this Tony Starkian innovator and planetary savior, and the reality of who he is, what he knows, and what he's willing to do whenever he finds himself backed into a corner. At the end of the day, it's up to you to decide where you fall on this story. If you believe the hype around the man and the company, and if you believe Musk will ultimately deliver on the promises that he's made, despite a long track record of making promises that he consistently fails to deliver on, which have nonetheless substantially improved his (3/40)
personal financials and helped grow the equity value of his companies. So without any further ado, please enjoy this week's conversation with my guest, Tim Higgins. Tim Higgins, welcome to Hidden Forces. Thank you. It's great having you on, Tim. So where are you located? I'm out of San Francisco. Oh, so that's where you write out of? San Francisco? Yep. I'm based in San Francisco for the Wall Street Journal. I've been here for many years. Previously, it was in Detroit where I covered the car business there. I saw that, which is very interesting. I mean, it makes you uniquely positioned and sort of knowledgeable to cover Tesla, because most people just don't have that kind of background. Like, they might have a financial background, but they don't actually have experience covering the automotive industry. How long were you doing that for? Yeah, I spent almost a decade in Detroit covering the automotive industry. I covered the breakup of Daimler Chrysler, covered the bankruptcy of (4/40)
General Motors, and then covered really the resurgence of the US auto industry. Post Great Recession saw Mary Barra become CEO and thought, wow, what's left to cover in the auto industry? So I came out to Silicon Valley to cover Apple years ago and then had the opportunity later to write about Tesla and really became surprised when I got to Silicon Valley that there was a lot more going on in car tech than I had previously understood being in Detroit. And that really got me kind of excited to write about cars again. So you moved at the San Fran when? I came out in 2014. So they had already launched the Model S by that time. Were you familiar with the company at all? Oh, absolutely. I mean, it was one of those companies that was on the fringe when you're in Detroit. The big players, of course, are the dominant automakers at that point in time. General Motors was the big story. You remember this would have been post bankruptcy, Mary Barra's the new CEO, what's going to be her vision? And (5/40)
then they had all of the troubles they had with the ignition recall and the questions about, was Mary going to be able to get beyond that and that sort of thing. So Tesla was this kind of creature on the peripheral. And I would have to say that a lot of people in Detroit at that time, maybe were interested in it, but maybe not taking it so seriously. Well, I also want to mention the name of your book. It's called Power Play. And this is your first book, if I understand correctly. A number of books have been written on Elon Musk and Tesla. What were you hoping to achieve with this book? How do you feel that it complements or differs from what's out there already? Yeah, a lot's been written about Tesla over the years. I think Ashley Vance's book on Elon, the biography of Elon, really covered that ground. I saw a swimway for myself trying to tell the definitive history of the company. When I began in 2018 working on the book, I thought the book was going to be about the collapse of Tesla. (6/40)
because Tesla, Elon, is such a polarizing character. And there have been so many enemies of the company created over the course of many years. And of course, also the company is very good. And Elon is very good at pushing a particular narrative. How did you sort through all of that? How did you vet your sources? How were you able to decide who can I trust? Or how did you manage all of that? That's always the challenge. For a journalist's life is never easy, right? Because information is coming in all different directions. And you've got to sort through that and figure that out. And I would say in the age of social media, it is just even more complicated trying to vet truth and get to facts. And that's the reporter's life. You spend a lot of years trying to do that. The key to me is always documents, direct sources, understanding why people are talking, understanding their motivations, understanding where they're coming from, and then trying to verify through other methods. This book (8/40)
required talking to an army of people to understand because to your point, everybody's coming from a different direction. And so trying to get at that center of truth is very hard. And I think why a book like this could be valuable to the greater debate of what has happened and what is happening. Yeah. So let's begin with that story, the origin story of Tesla. I mean, most people don't actually realize that Elon Musk didn't found the company. The company was founded in 2003. And this other thing that's amazing, it's an almost 20-year-old company. That's also hard to believe that it's been around this long. Time flies. Yeah, even though the Roadster was developed back in 2008. So what is the origin of Tesla and who founded the company and how did Elon get involved? I mean, you're hitting on this thing that you just mentioned how there's so many different versions of the world through different people's eyes. Even the origin story is a complicated story. It's not a clean cut story for (9/40)
Tesla. I mean, supporters of Elon Musk would like to tell one story and it's complicated. And so let me begin. There's two ways to look at what was going on at that period of time. 2002 period, 2001 period, the world, in particular, California is thinking about electric cars, but they don't seem like they're very viable at that point. And a gentleman named Martin Eberhardt is thinking that he would really liked to have an electric sports car. And there's no such thing on the market. He can't find one. He'd like to drive a Porsche, but he's worried about the gas, becoming concerned about the planet, these sorts of things. And so he starts kind of looking into electric cars and getting really excited about this idea. And he comes across another company called AC Propulsion, which is out of the LA area. It's kind of a garage that does work for automakers. The founder of that company helped out with General Motors EV1 project, which was an attempt years earlier to make a mainstream (10/40)
electric car, which wasn't very successful because of a lot of reasons we could talk about. Martin became very excited. And Martin Eberhardt's experience was in personal electronics. He'd come up with a digital book reader and e-reader. And so we had an idea about kind of where technology was and where batteries were. And he thought that lithium ion batteries were going to be the key to electric cars. And that really starts the wheels in the early days of Tesla. Because before lithium, you simply wouldn't be able to get neither the type of sustained acceleration or sustained speed and also range. It was kind of a trade-off. Batteries were pricey and heavy and the range was short and it took a long time to charge them. And the problem with electric cars was that you were just so many trade-offs. It was expensive and really what were you're getting. The EV1, which I've been in, it's like being in a little spaceship. It had all these crazy buttons in the middle. Are you talking about the (11/40)
T-Zero? No, I'm talking about the EV1. This is General Motors attempt at bringing electric cars mainstream. Is that from the 60s? Was that in the 1960s? No, no, this came out early 2000 period, late 1990s. This was a Rick Wagner, who was the GM CEO at the time. It unveiled the concept of the LA Auto Show and got really huge kind of excitement among California regulators who were very concerned about emissions at the time. And this was the attempt to kind of put the toe in the water for electric cars. And people that got the EV1 loved it. They were early adopters. They could see the future. The interior looks like something out of RoboCop or like Demolition Man. Exactly. It's as if designers got into a room and said, what does the future look like? And you're just like right out of a science fiction movie. And I've been in it. I've ridden around GM's Warren Campus on it. It's like a piece of history. But at the time, it was just a little too ahead of its day. And GM wasn't making money (12/40)
on it and pulled it back. And the early supporters were really unhappy that GM got rid of it. There was candlelight visuals, protests. And guys like Martin Everhart were looking at that saying, I think there might be demand for a real electric car. And he would drive around Palo Alto. And he would see on people's driveways, here's a guy with a Prius and a Porsche. That's the customer that I want to get. Because he was a guy that likes sports cars. And he knew that if you buy an expensive sports car, you're attracted, A, probably to the performance, the looks, the sex appeal. And you might be willing to overlook some of the quality issues. How many people, I don't know if you're a sports car person, but some of these sports cars, the dependability and reliability isn't always there. How many stories do you have of being in the shop or breaking down? That's not an unheard of thing. But if it's cool, you're going to maybe overlook that. And so he thought there could be a potential there. (13/40)
And so, and you look at some of the dynamics of an electric car, it's just the torque is amazing. And so for the listener out there that does torque is it kind of sounds like a scientific term, but that's the, you know, zero, you're at the stoplight and you hit the gas and your head hits the back of the seat because you're going fast. That's torque. That's the fun thing in a car. And he thought that he could kind of bottle that in a way in a sports car that would be accessible to sports car buyers. And the price point would allow him to afford the batteries for it. And this could be the Montre and to the electric car business. Yeah, it was a brilliant realization. I mean, in that moment, and I've heard that story before, the sort of driving around Palo Alto, seeing the Prius and the Porsche and recognizing that there was an intersection market there. It was a brilliant realization. And in that moment, he created sort of the market for EVs. It hadn't existed prior to Tesla. I mean, the (14/40)
hybrid Prius had come out in like 2000 or 2001, I think. Right. It's around this period. Right. So where and when and how did Elon enter this picture? Right. So Martin had been an entrepreneur, but he hadn't been, you know, I have to remember, in Silicon Valley at the day, that period of time, we're talking about 2003, just wasn't like it is today. You know, there wasn't as many billionaires running around, if you will. And so he had had some successes as an entrepreneur, but wasn't like loaded. And so he needed to raise capital and he was taking around his idea. It was him and a couple other guys. And they had this idea. They had a business plan. They had a little office. But that's about all they had. And they had the potential for a contract with AC Propulsion to use some of their technology. And so here's this guy, Elon Musk, who was bouncing around California. He was down living in LA at the period of time. But he had gained a reputation for having kind of a, you know, it's not (15/40)
crazy idea, wild idea to try to go to space to create a rocket company that would get commercialized space with SpaceX. And so Martin Everhart was big into the Mars Society as well. And so new of Elon had heard him speak and through some connections, they were connected. And so Martin goes down to LA area that to make the pitch. And Elon, who was interested in electric cars, was interested in sports cars, who had also thought about the electric car business as well. He was very excited to have that conversation. And how early did he get involved? Because I know he was the biggest backer of the company, no? Yeah, he was 2004. He put his money in. And that's really when things started getting going for Tesla. His money got it going. What was it that excited Elon about this opportunity? What did he see? You could see the potential. So this is where the story gets a little complicated on the founding. So, you know, at this period of time, after the EV1 in California, there was a growing (16/40)
community, you know, especially in Silicon Valley, of people who thought electric cars were the future. It was kind of like the early days of the personal computer with the Homebrew Club, where people were doing these side projects. And one young man named JB Straubel was very active in this community. He had gone to Stanford and had converted an old Porsche into an electric vehicle and was taking it out and drag racing it and really kind of, you know, doing exciting things with it. And he had also got connected with AC Propulsion because they were kind of one of the big leaders in talking about and developing electric cars at the time, is hanging out at the shop down there in the LA area. And he became kind of aware of the lithium ion battery solution as well. And so he thought, well, you know, lithium ion batteries could really show that the electric car is the future as well. And so he came up with this idea for a car that would be able to go from California to the East Coast on a (17/40)
single charge. And he wanted to raise money for this kind of car that he thought would generate a lot of publicity for the idea. And he was going to work with the Stanford Solar Car team. And so he had had an occasion to meet Elon as well and pitched Elon on this idea and said, hey, you should go check out AC Propulsion. They're doing some stuff. And so Elon had conversations with AC Propulsion. But the thing about AC Propulsion was they were a lot of ways like a tinkerers shop, you know, they had ideas, they were in there doing things, but they weren't quite at the point in life where they were ready to become a car company. And Elon's vision was not the same as AC Propulsion. AC Propulsion was thinking, let's do kind of a mainstream electric car for people. You know, let's change the world. And Elon was thinking, let's put this electric car thing in a super car and have a lot of fun with it. That will be the way to get this technology out. So he had a very similar idea as to Martin, (18/40)
start at the top and then come down to mainstream. And so, you know, that's how that Martin and Elon got together was, you know, they had gone through all these different hoops. And they finally, you know, they were very kind of aligned in what they thought the future potential was. So they, exactly. So they were both aligned on the idea of developing the Roadster because the Roadster was this sexy, sleek, exciting, fast car. It also wasn't very heavy. So at the time, they would be able to get the best performance possible off of the car. I mean, if they had tried, I imagine, to build a Model S at that time, they wouldn't have been able to, right? It wouldn't have been as performative. The idea of them, I think at the time, if they had been going around trying to sell the idea of a luxury sedan that would compete against Mercedes, people would have laughed at them. The idea that they were talking about this two-seater was hard to believe. But the thing that they had going for them was (19/40)
that they had a prototype. They could show this two-seat Roadster that AC Propulsion had put together out of a kit car that, you know, didn't look like, you know, the Roadster would look, but kind of, you know, looked like a car, at least, and Martin Everhart could drive it around Silicon Valley and give investors demonstrations. I mean, you could feel that torque and, you know, you kind of, you know, if you squinted, maybe you could see what the future would be like. Yeah, that's one of the things I enjoyed about the book in particular, because I had a similar experience. I drove my first electric car in 2012. It was the Model S, right when the Model S came out. I hadn't driven the Roadster before that, but I had a good friend who was one of the very early owners of these cars, and he would just rave about it. And I totally understand what people's experience was and the descriptions of those experiences in the book, because I had a similar one. You really felt like you were getting a (20/40)
glimpse of the future. I mean, it was such a radically different experience driving an electric car from driving one with an internal combustion engine. What was the process like to actually build the Roadster? And how long did that take from conception to the first delivery of the car? Well, the process was, in the civil word, messy. None of these guys had ever built a car. They weren't car guys. I mean, they would think they were car guys. I mean, Elon had a taste for expensive sports cars. Martin Everhart had a Mustang when he was a young man and worked on restoring it. And one of their early people, he was an amateur racer. So they thought they knew cars. They thought they understood the buyer's mentality. So that helped them. But they had never worked at a car company or designed or developed a car, which was a plus and minus. So they immediately began out and working on it. They hired JB Straubel joined. And this would be key because here's the guy probably had the most (21/40)
experience tinkering with electric cars probably in California. I mean, he was among the most experienced because it was still kind of a new world. And they set out to do this. And one of the really big problems that they got in immediately came upon was these batteries. So let's maybe this is a good time to talk about kind of the batteries. So lithium ion batteries really first became popular camcorders and laptops. And these batteries at that point were thinking about finger size tubes. And the idea for Tesla was that they were going to use thousands of these strung together to create what we call a battery pack. And that would provide the amount of energy needed to propel the car. And the bet was that by buying thousands of these cells per car for hundreds of thousands of cars, this would give us the great buying power and be able to bring the price down. And on top of that, this was a proven kind of technology already. And, you know, that they didn't have to go out and invent (22/40)
something. One of the problems that automakers had had with electric cars is they're always looking for the next thing in battery technology. And it was just expensive. So here was something that was proven, they could essentially get off the shelf, and they thought they could get down cheap enough. All of those things would prove harder than they believed they would be the case. That's always the story of Tesla's. It's never as easy as they think it's going to be. And so they get into working on the roadster. And at the same time, in the news, you start to see laptops with lithium ion batteries have fires. There was Apple and other companies were doing recalls. Because the issue with lithium ion batteries is they can catch on fire. And so they go to, you know, they see this and JB Strabo takes some battery pack out to the parking lot to see, well, what are we talking about? If we got a bunch of these batteries tied together, you know, one goes off, what happens? Well, it's like 4th of (23/40)
July. And so they realize they might have a problem. They go to an expert and say, what's the issue? And they say, well, you know, don't worry, you know, essentially, you know, most of these cells are going to be okay. But, you know, maybe one in a million is going to have a problem. You're just not going to even know it has a defect. And it's just going to potentially just light on fire. And so they start to do the math. And that's maybe one, you know, one in a hundred, one in a thousand. I mean, because they're going to have thousands of cells. And the likelihood of one of those cells being defective and just catching on fire is great. So this is a really life or death moment for the company. Because the whole plan is based upon having these cells in the car, thousands of them, and by the very nature of how they're built, one of those is probably going to have problems. So they immediately have to pivot to try to figure out how to contain that energy to keep these cells from getting (24/40)
too hot, then catching on fire. That's essentially how it happens. And so this is really where one of the big developments, really new innovation happens at Tesla is figuring out how to manage the heat in the battery pack. And they race to do it. And they come up with a solution. It's pretty innovative. And that's really a defining moment in the early days of the company. They come up with a way to string these cells together so they don't become a bomb and they can provide the performance they need. And that's a huge thing that JB Strouble and Tesla were able to figure out. What was the initial estimate for the cost of the build of the car? Much smaller than it actually was. You know, we're talking, they were thinking it was going to be in the 50s to $60,000 range. And the initial business plan that Martin Everhart came out with would ultimately prove to be very naive and very ambitious. The idea was right that there was a market for electric sports cars, but the math was wrong. So (25/40)
the book covers an enormous amount of interpersonal conflict throughout the timeline of the company. And I think this is the period where you begin to see it most prominently in his relationship with Everhart. Musk, in other words, becoming more and more involved in the company. Talk to me about that process and how Elon got involved and how that eventually led to Everhart's ousting and Elon becoming CEO of the company. And I think 2008, is that when he took over? That's correct. The way Elon's involvement at Tesla at the early days has been described by people over there is he would fly in for a board meeting. You know, he wasn't seeing a lot around the garage at that time, but he had an interest. He was chairman of the board, the biggest investor. And he and Martin at early days, by many accounts, had a good relationship. They were very similar interests. They were both interested in space, both interested in electric cars. Clearly, Wolf had been entrepreneurs, but the scale of (26/40)
success clearly was different. And the one thing you start to see early on is Elon taking specific interest in certain parts of the car. So when they got to the point where there are roadsters to drive, he didn't like certain things. He thought the dashboard looked cheap for what they were going to be charging. He thought the getting into the car was hard. His wife at the time was kind of like a Britney Spears kind of situation where it's really hard to get both your legs in in a ladylike way. The roadster is very low to the ground and there was a kind of a lip on the door and so you had to get one foot in and the next foot in. And it's kind of cumbersome and not easy to do if you're wearing a skirt. Heck, it's not easy to do if you're a big dude like Elon trying to get in. And he didn't like the seats. He thought they were uncomfortable. So there was all these tweaks. Thoughts about the materials that should be used. And Martin Eberhardt would say that Elon wasn't necessarily wrong. (27/40)
He had good instincts. But the challenge was that the premise of what they were doing was to save money, they were going to use a Lotus sports car and make modifications to it so it looked like a roadster. The thinking was that that would be much cheaper. Well, everything you changed was an added cost. And so the cost started to grow. And all of the expectations for what the car was going to, how long it was going to take and how much it was going to cost were wrong. And so just the things started to mount and they needed more money and more time. And the pressure just started to build there over time. And what did that lead to? In other words, how did that lead to the ousting of Eberhardt and then Musk taking over? And then I want to understand how the company changed because it really is, I mean, again, it wasn't founded by Elon Musk, but it is Musk's company through and through. And I can't think of any other public company which is more inextricably tied to its CEO. Sure, (28/40)
absolutely. So essentially, it becomes clear that Martin is in over his skis. And Martin and Elon start talking about the need to bring in an experienced CEO. And the idea is that Martin would become the product guru and he would work on next generation car and he would have this kind of role. In the meantime, Elon is starting to get pulled into the operations of the business more and he's starting to see that what things are supposed to cost and what they are costing, there's just a disconnect. And he brings in some help to kind of get to the brute of that and through the help of one of the investors in Tesla and they do kind of a deep dive into finances and they've got some bad news. The car is going to cost way more than they think to build and it's pretty grim. And Elon is pretty upset and pushes Eberhardt to the side, puts him, kind of demotes him and they bring in an interim CEO and that lasts for a few months to kind of write the ship. But it's still clear that Elon's vision for (29/40)
the company and that person's vision is different. They bring in another CEO and things are getting pretty bleak for the company. They've burned through a lot of money in 2000. They were in 2008 now and the great recession is occurring and Tesla's having a hard time raising capital and Elon's doing everything to try to figure out how to put more money in. And he takes over at that point. He becomes chairman and CEO and gets through that period of 2008 and gets the company kind of capitalized so that in 2009, this is the period where the roadster is out, they're starting to get some money in, they've started raising some money and he can really start to focus on what the company is going to become. And his vision has been laid out that the roadster would lead to the Model S, which would be kind of a mid-sized sedan, which would show the world that electric car is possible for day-to-day use, can be the world's greatest car maybe, that would then lead to the third generation car that we (30/40)
call the Model 3 today and that would be an electric car for the everyday man. And that's essentially Tesla's vision through that Elon Musk kind of created. And that's where you start to see him put the pieces together really into 2009. He's figuring out ways to raise the money for that, but also he's building the team internally that can carry out his vision. You have to remember that up until that point, the company had been largely Martin Everhart and friends of Martin Everhart. Early hires had been kind of of two camps. They had been JB Straubel friends from Stanford, so they were all these kind of electric battery kind of people and very important to the company. And then you had Martin Everhart's people who were just entrepreneurs who had done interesting things, but really maybe no car experience. And so when Martin left, Martin would eventually get pushed out of the company in 2008 as well because of tensions with Elon. So when Martin left, a lot of the Martin people left (31/40)
that put those two things together and put them on the street. So this is a very interesting period of time where they are then building the engineering team that's going to make Tesla. So this brings us to the Model S, which was, again, I have to say it because I had the opportunity to drive one in 2012. It really was like nothing else. And even today, when you look at a Model S out in the wild, it remains ahead of its time or it was ahead of its time. I mean, it fits perfectly with cars today and in many ways still looks even more advanced. How big of a feat was the development of that car? And how much did it take the industry by surprise when it hit the market? It was a big change. Just a few of the things. A, the roominess. Here's a sedan, it was to be a mid-sized sedan, so roomy because you don't have an engine, you don't have all that kind of stuff. So the cabin space is bigger. So you just feel roomy when you're in it. Totally. I remember that as well. And it had the front, you (33/40)
could put bags in the front and in the back. I mean, it was wild to be in that car for the first time. And then externally, it looked like maybe like a Aston Martin, like James Bond would be driving it. I mean, it just looked like a sports car. It looked like something you could see driving down your street on any given day. And you kind of like, wow, look at that. So that was a huge departure from what people thought of as electric cars. You have to remember, most people's experience with a kind of an electric car was the Prius. The Prius had been designed to look like it was a tech kind of vehicle. It was in some ways, the design was marketing to look like something that was the future. Whereas Tesla didn't want to do that. They wanted it to be the now. And it wasn't about making it stand out because it was electric. The idea of the Model S was that it was supposed to be the best car out there that just happened to be electric as well. So that was the idea. So you've got the looks of (34/40)
the hopes that American capitalism could move away, I think, from the kind of financial capitalism that had become such a dominant force for the last few decades into something more along the lines of what we used to read about, the captains of industry and the robber baron period. I think also it tapped into a relationship that the public already had with technology and its disruptive abilities. And it applied that template to the legacy sector. And that's actually, I think, something that we've seen, continued to see. I just did an episode recently with Maureen Williams, she, your colleague at The Wall Street Journal, who's published a book on WeWork. WeWork similarly branded itself as a technology company, which I think it had even less merit to do than Tesla. But even Tesla is ultimately a car company. They have to scale the manufacturing of automobiles. And so this became a problem, the scaling issues and the confronting the reality of being a car company became really an issue (37/40)
after the Model S, in earnest, with the attempt to build the Model 3. Would you agree with that? Scales, execution, they're Tesla's problems. Even the Roadster getting it from the idea onto the road was a challenge. The Model S, when they show it in 2009 and bring it out in 2012, then building it was the problem. I mean, they developed the idea, sold everybody on it, but then actually putting it on the street was a huge challenge. Yeah. And I want to ask you about why that is. I also want to, and that's going to be an opportunity to really get into Elon and all the troubles that the company found itself in in the ensuing years. And also the remarkable rise in its stock price, which has, in many ways, befuddled investors, certainly short sellers who have been very negative embarrassed on the company. And a number of other things. For anyone who is new to the program, Hidden Forces is listener supported. We don't accept advertisers or commercial sponsors. The entire show is funded from (38/40)
top to bottom by listeners like you. If you want access to the second half of today's conversation with Tim, as well as the transcripts and rundown to this episode and every other episode you've ever done, head over to hiddenforces.io and check out our episode library or subscribe directly through our Patreon page at patreon.com slash hiddenforces. There's also a link in the summary page to this episode with instructions on how to connect the overtime feed to your phone so that you can listen to these extra discussions just like you listen to the regular podcast. Tim, stick around. We're going to move the second half of our conversation into the subscriber overtime. Great. For more information about this week's episode of Hidden Forces or if you want easy access to related programming, visit our website at hiddenforces.io and subscribe to our free email list. If you want access to overtime segments, episode transcripts, and show rundowns full of links and detailed information related (39/40)
to each and every episode, check out our premium subscription available through the Hidden Forces website or through our Patreon page at patreon.com slash hiddenforces. Today's episode was produced by me and edited by Stylianos Nicolaou. For more episodes, you can check out our website at hiddenforces.io. Join the conversation at Facebook, Twitter, and Instagram at HiddenForcesPod or send me an email at dk at hiddenforces.io. As always, thanks for listening. We'll see you next week. (40/40)
the portfolio into shorter duration securities, rather than to longer duration, and also that they should have conducted outright sales. What exactly has been your criticism of the Fed's balance sheet management? And again, this is part of the larger argument that you've made that we need to get back to some kind of normal conditions, because if we don't, the market will impose them on us and it'll be much worse. Right. So when quantitative tightening was announced in December of 2021, I said that this was kryptonite for markets and that we are going to experience a significant sell-off in financial assets. And actually, I was a little slow to adjust, but ultimately that is in fact what happened in the next nine months. But at the same moment that I said all those things, I also said that what had happened is that the Fed was going to use what is called runoff to do quantitative tightening versus what the UK does, in which instead of letting, well, let me explain both what those things (31/40)
What's up, everybody? My name is Demetri Kofinas, and you're listening to Hidden Forces, a podcast that inspires investors, entrepreneurs, and everyday citizens to challenge consensus narratives and learn how to think critically about the systems of power shaping our world. My guest in this episode of Hidden Forces is Andy Constant, the founder and proprietor of Damp Spring Advisors, who previously worked at Bridgewater Associates as an idea generator, more recently at Brevin Howard, as chief strategist, and spent 17 years at Salomon Brothers, where he served as head of global equity derivatives. Andy and I spent the first hour of our conversation discussing the subject of a recent letter he published, in which he warned that the Federal Reserve, by continuing to lower interest rates and ease monetary policy, is at risk of losing the long end of the bond market, and paradoxically tightening financial conditions in the process. Taking us from what could be a soft landing or no landing (1/40)
scenario, to a re-acceleration of inflation, and a very hard landing for the economy. We discussed treasury issuance, management of the Fed's balance sheet, the weighted average maturity of assets in its portfolio, and how conditions in the U.S. economy measure against the Fed's summary of economic projections. In the second hour, we dig into the government's finances, its fiscal picture, and how the election may exacerbate or alleviate trends that have been in place for decades. We also discuss equity markets, the broadening of the equity rally beyond the Magnificent Seven that's been underway this year, earnings expectations for these companies, whether they're elevated or conservative, and how we should go about valuing them. If you want access to that part of the conversation, and you're not already subscribed to Hidden Forces, you can join our premium feed and listen to the second hour of today's episode by going to hiddenforces.io. All of our content tiers give you access to our (2/40)
premium feed, which you can listen to on your mobile device, using your favorite podcast app, just like you're listening to this episode right now. If you want to join in on the conversation and become a member of the Hidden Forces' Genius Community, which includes Q&A calls with guests, access to special research and analysis, in-person events, and dinners, you can also do that on our subscriber page. And if you still have questions, feel free to send an email to info at hiddenforces.io, and I or someone from our team will get right back to you. Lastly, because this conversation deals with investing, nothing we say on this podcast can or should be viewed as financial advice. All opinions expressed by me and my guests are solely our own opinions and should not be relied upon as the basis for financial decisions. And with that, please enjoy this timely and thoughtful conversation with my guest, Andy Constan. Andy Constan, welcome back to Hidden Forces. Thanks, Dimitri. Good to be here. (3/40)
It's great having you on. How you doing? I'm doing well. Got my Santa beard started. Do you normally shave in the summertime? No, I'm always one of the two gray beards, but now it's getting a little out of control. Right, exactly. That's your other show. So one of them is the two gray beards. That's the name of it, which is videos mainly of you and your business partner. Once a week videos and investment portfolio that we use to create a long-only beta, the smart beta portfolio that is really designed for people who are not super active traders, but are long-term investors. Yes. And you also are the proprietor and author of Dam Spring and the Dam Spring reports. And what prompted this conversation was actually the most recent report that you put out, which was titled Warning. And I think you published it on November 3rd, a few days before the election and before the FOMC meeting. And in that letter, you wrote that, quote, the risks are high that the consequences of next week's FOMC (4/40)
will be the Fed losing the long end of the bond market. Yeah. What did you mean when you wrote that? Why did you write it? And do you still feel this way? So again, when one creates a warning, I was very careful in that report to not say that it's a prediction. There's a difference between a prediction and a risk. And so coming from that standpoint, let's start there. I think there is a risk that the Fed will be too easy relative to conditions such that the economy heats up and the long-term bond market starts to sell off. And once the long-term bond market sells off, it's harder to manage the financial conditions, which I've been saying for many, many months, really the whole period of the tightening cycle and now the current easing cycle, that the federal funds rate is not what the economy is driven by anymore. And the Fed seems to be very focused on the federal funds rate. That's their main lever and not at all focused on the impact of financial conditions on the market. And so what (5/40)
I'm hoping for from the Fed, I imagine everyone is hoping for from the Fed, is for them to nail the soft landing. And to do that, you need to avoid a meaningful disruption in any of the markets, but particularly the markets that long-term investors hold. Because since the COVID inflationary period, where prior to that, most homeowners, corporations, and anyone who needs to borrow borrowed at extremely low rates for term. And that allowed balance sheets of both corporations and households who own assets to really strengthen over the last few years as asset prices rallied. And so that has allowed corporations to continue to raise wages, to maintain employment, and so on. And also, anyone who needs to spend can dissafe by selling assets or borrowing against assets. So I look at financial conditions as being, they vary, but easy. So to achieve a soft landing in the real economy, which is GDP growth that is consistent with trend growth and inflation that's at target, I believe it's also (6/40)
important that to have that soft landing hold is for the financial markets to achieve a soft landing. And while there's some debate on whether the economy has soft landed or the summer it looked like it was heading for a harder landing, and now since then it's looking like it may be a no landing. And obviously, we have the election and all of those things that influence the economy. Let's assume it's heading or at a soft landing, for that to be maintained, financial markets have to return to normal. And they can return to normal rapidly and disruptively, or they can return to normal gradually. And that's what the warning was about. It was financial markets are not normal at all right now. Doesn't mean they're going to go down or crash or do anything like that, but they're not normal. They need some meaningful adjustment in order to return to a normal financial market, regardless of what the real economy is doing. And so I can tell you why I think that, but in order for the soft landing (7/40)
of the real economy to occur, I think we need to move toward a normal financial market. I don't want that to be a rapid descent, because a rapid descent can have a secondary effect that can cause a hard landing in the real economy. And that's what I'd like to avoid. So the warning was to tell the Fed, you were very, very dovish. You've been very, very dovish all year because you felt that the financial conditions were restrictive. Every presser financial conditions are restrictive, including the most recent one. When they're not, they're just not restrictive. The economy is going between 2.5 and 3% real GDP, while very short dated PCE inflation is near target, longer term, one year. And certainly most recently, a tilting up of the one year shows inflation above target, CPI is, of course, CPI is still well above 3%. And jobs are historically strong, if not slightly less hot than they were in the midst of COVID. And so that's not restrictive financial conditions. That's financial (8/40)
conditions that can manage through at current levels and deliver warm, if not hot, economic activity. And so my point to listeners is that if you remain easy, conditions will continue to warm up and you have the potential of having the bond market steepen aggressively. And if the bond market steepens aggressively, it's fairly likely that risky assets will correct in a more rapid way than they need to. And that could create an economic hard landing. So what I'm hoping for is the Fed stays a little hawkish longer, instead of being resolutely dovish. All right, so let's dissect this, let's clarify some points and bring the clarity that you bring to your reports, which are really excellent. I want to say that I don't just say that in general, actually, I get a lot of value out of your writing. And I love how reflective it is too, by the way, Andy, I love that you reflect on the process that created the results that you put forward in your projection. So let's do that. And let's also create (9/40)
structure around your response. First of all, I just want to clarify something when you talk about a steepening, what you're describing is a steepening of the yield curve. And you're describing a bare steepening, a potential bare steepening, which is the long rates rise, not the short rates drop. But let's actually start from first principle. So first of all, you talked about financial conditions coming back to normal. First of all, how do we measure financial conditions? And then what are normal financial conditions? Right. So many people measure it in many different ways. I think one of the best ways to do it is to see its works, as Powell regularly says. And to see its works, you see whether the economy is contracting in a disinflationary, slowing growth way. And clearly, we've been in a transitory, supply chain driven inflation period. And now we're in a disinflation period that has made a lot of progress. And maybe it will continue to go on and reach target, or maybe it won't. But (10/40)
it's heading in the right direction. While real growth and employment are just, you know, gangbusters, not gangbusters. I mean, we've had hotter growth and we've had tighter employment, but there's no sign of it in its works. So that's one thing. And then the other thing is the conditions of those who want to borrow and the conditions of those who are able to lend. That's another sort of what I would call fundamental analysis that one would do. It's not market-based. And it's not results-based, which was the first category. So again, the framework is results-based conditions of those who want to borrow and lend and market-based. So when you look at conditions for those who want to borrow and lend, while there's always a bank that's struggling and there's likely banks that will fail, the by and large is the banking system has almost never been as able to lend as they are right now. And they're not lending much. They're lending a little bit lately, but not much, which tells you something (11/40)
about financial conditions. They're able and willing, but they're not lending. So why is that? That must be a demand issue. People don't want to borrow. And we know that to be true because housing activity is slow, mortgage refinancings are non-existent, relocations are being impacted by homeowners who have low mortgages, unwilling to pass up and to move. And job activity is mostly stable. There still are trends in the economy in terms of where people want to live that's having some impact. But corporations don't need to borrow. The biggest corporations in particular are flush with money. They don't know what to do with the money, so they're not borrowing. And small businesses, they're struggling. We do have a K-shaped economy going on, so there's always some that are struggling and have too much debt. But by and large, there's no demand for borrowing and there's plenty of supply. And you see that with credit spreads. Credit spreads have been going in one direction and that indicates (12/40)
very little demand to borrow and lots of supply to lend. Now, that's a market-based thing. So now let's jump into market based things that determine financial conditions. And so the simple thing is, if you look at all the people who want to borrow or lend, what are the rates they're getting? What's pricing? So the government is able to borrow at, I don't know, 430 on 10-year notes, whatever the rate is, it might be 425 today, whatever it is. They can borrow municipalities, mortgages, creditors, corporates. Pretty much everyone who wants to borrow in the debt market is seeing both relatively low long-term rates and very tight spreads. So that tells me that people who want to borrow to either consume or invest in the real economy have cheap cost of funds. Add that extremely high equity prices relative to where they've been. And I don't mean particularly high in, like, oh my God, equities are incredibly rich. I mean, they were a lot cheaper six months ago or a year ago than they are now. (13/40)
So the ability, if somebody wanted to raise money and Michael Saylor is a great example of that, he's getting paid three times the price of the thing he's going to invest the proceeds in. So there are places where you can raise money. Now, the funny thing is no one needs it. No one needs the money. So that tells me that people don't need to borrow, people don't need to finance to do capital investment. And that tells me that conditions are easy from a market pricing, from a supply and demand of lending and borrowing, and from a work, how it works, what's happening in the real economy. While the Fed appears to think that the Taylor rule is a judgment of financial conditions, and the Taylor rule suggests that financial conditions are tight because real Fed funds rates are higher and getting higher as disinflation occurs. So the Taylor rule, the data upon which the Taylor rule depends is what GDP, unemployment rate, what are the key metrics? There are two metrics. There's output gap and (14/40)
there's also a secondary way that people look at that, which is the labor gap, but also inflation, the desired inflation target, the actual inflation that's being experienced, and the employment rate fits into that version where you have the labor gap. So it's all in there. And in the most recent SEP in September, the Fed projected a 4.4% unemployment rate. It's currently 4.1, but was 4.3 after that bad NFP in August, which seems to have panicked the Fed a bit. And PC inflation, based on, we'll get a lot of information this weekend, this week with the CPI, PC inflation is going to really, really struggle to come in anywhere close to 2.6% on an annualized basis, and probably will be 2.8 to 3%, where they had a 2.6% target. And GDP growth, they had a 2% target and it's going to be hotter than that for sure. So pretty much every factor, what I call the three legs of the Taylor rule are suggesting the Fed shouldn't cut, but they probably will. Well, haven't they, sorry, didn't they, you (15/40)
mean cut again? They just basically cut. If I'm going to say continue on their cutting cycle. So let's, again, let's, I want to, what I want to do here is also create structure for listeners. I thought they would have cut, I thought they were going to cut in November, they did. I think they're going to cut in December. They shouldn't, but you know, that's, I'm not the Fed. So great. So we're going to do a number of things here. First of all, I just want to clarify some acronyms you threw out in case people aren't, SEP is the Summary of Economic Projections and NFP is the non-farm payroll number. I think I want to clarify something for listeners who might be confused here because what you're basically saying is financial conditions are loose. We need to slightly tighten them so that they don't become much tighter themselves on account of the bond market significantly increasing term premiums, which is to say demanding a higher return for duration risk on long bonds. And counter- (16/40)
intuitively, your way of achieving looser financial conditions is by raising the short-term interest rate or your suggestion for the Fed is to raise, not raise, sorry, or is to not lower short-term interest rates, which again counter-intuitive for someone listening is saying, wait, so Andy wants to loosen financial conditions slightly by keeping a higher short-term interest rate. How does that work? Explain for listeners what they might be missing in that concept. Right. So firstly, the way I want to describe it is I don't want the Fed to be as loose as they are planning, to ease as much as they are planning. I'm not suggesting they tighten. I'm saying yes, less. Ease less using the Fed funds rate as the proxy and forward guidance. And forward guidance, which was what the Summary of Economic Projections provides and their rhetoric. So I'd want them to ease less, if at all. Now, if they ease less, let's just say, that means tighten, right? Okay, you're right. It means tighten. Aising (17/40)
less means be more tight. So one would think that if you're saying keep short-term interest rates higher, that should tighten the economy and risk a harder landing. Well, that's true. That I am suggesting that because the alternative of staying loose for longer is that the long-term interest rate, which as I said, the Fed is very focused on the Fed funds rate. And I am very focused on what is actually happening and impacts the economy, which is the longer-term interest rate and financial conditions as I've defined. Because the credit complex takes its cue more from the long end than it does in the short end. Mortgages, car financing, stuff like that. It's interesting. You have to look through history about when, like, the short-term rate was the only thing they ever used in the past. Until 2007, that's all they used, the money supply and the short-term rate. There was no QE. What was the weighted average maturity of the Fed's portfolio pre-2008? They didn't have one. It was all short- (18/40)
term. Yeah, they didn't purchase financial assets. The only way they created money or had money supply is by doing repo or reverse repo, depending on whether they wanted to increase. That is an asset purchase program. They had no asset purchase program prior to 2007. Some people like to go back to the 40s. They had an asset purchase program in the 40s. They had yield curve control in the 40s, but we're, I think, getting distracted. The point being that cutting interest rates does not necessarily cause long-term bond yields to fall. Cutting the Fed funds rate, which is the overnight interest rate, does not necessarily cause long-term rates to fall. You can see that pretty clearly. It doesn't necessarily even mean two-year rates fall when you cut the short-term interest rate. They cut 50 basis points in September on the overnight interest rate, and two-year interest rates rose by 80 basis points and 60 basis points. Ten-year interest rates rose by 80 basis points. There's your counter- (19/40)
intuitive point. I just urge people to differentiate raising and lowering the overnight interest rate, meaning the rate people get on money markets, versus changing the long-term rate, which the Fed doesn't control the market does, unless they're pursuing QE, and then they have an influence. The point being, we already saw the reaction in long-term interest rates, which rose 80 to 100 basis points since the Fed cut 50 basis points. I'm suggesting that if they keep doing that, cutting more than the market needs, long-term interest rates will go up even more, which will be a aggressive tightening in financial conditions and threaten the real economy, which is actually borrowing at the long-term rate. Yeah. This, I think, is a really important concept, and I hope that people got it. It's another way of saying that you think that the bond vengelantes are not dead, and that the market still has a say in terms of what the price of credit should or could be, and that financial conditions can (20/40)
be tightened outside of the Fed's control. Yeah. There's this term bond vengelantes. I don't know who those guys were, what they were doing, but if you look at bonds, do you want to own them here or don't own them here? There's not a lot of people that are active managers of money that think the 10-year bond is a great value relative. I mean, it could rally in the next two, three weeks, who knows, but is it a great value relative to cash right now? There's very little. Now, that said, who's buying it all? There are buyers, and I think they tend to be some of the long-only money managers who are allocating to risk parity, 60-40, anything that has a bond component, pension funds, insurance companies, all are consistent buyers of treasuries, and they are the buyer. And there isn't been what I would call a buyer strike. And so it means that there's probably not much value in bonds right here, but is somebody going to step up and challenge that? I think the data and the Fed will determine (21/40)
whether somebody steps up and starts selling those bonds. Let me clarify something. So first of all, is your presumption that the Fed believes that inflation is beat and it's returning to target? Absolutely. Okay. Well, I don't know about that. Powell certainly does. I don't know if the whole committee is of that mind, but Powell, in his press conference this week, last week, was so certain in describing the components of inflation and how they were going to target. So if he's right and inflation is returning to target, would that be sufficient for you to change your mind? Or would concerns about financial stability resulting from easy financial conditions still be a concern? Because we had low inflation in the early 2000s, and you can make the argument that the Fed's myopic focus on CPI and PCI blinded it to the inflation of asset prices and the party that was happening in the real estate market and in structured products and derivatives? I think if we continue to see data that (22/40)
supports a economy that is having real growth at trend, not above, that has employment that is not getting tighter and has inflation that continues to return to target, that the financial markets will normalize. So let's dig into a little bit more into the macroeconomic picture that would determine some of this. I mean, you touched on a number of these points in your initial answer to my first question of the interview, but let's again create some more structure around them and let's especially dig into the government's finances, which is an important part of this. What is the story that you would tell the macro picture you would draw about the economy inflation and especially the government's finances, including quantity and duration of issuance and the effect that these variables have on the financial conditions and on Fed policy? Right. So again, I think the economy is doing very well. Real growth is above trend, boosted on because population growth might have been modestly improved (23/40)
by immigration policies of the last four years and productivity appears to be a productivity miracle in place. That's generating trend growth that might be to an 1.25%, but we're still higher than that. Inflation is in my view, sticky and still above target, but is going in the right direction. And labor is in great shape, historically great shape, but not as hot as it was in mid COVID and post. And assuming also this latest NFP print is also very noisy and doesn't, let's say, suggest a deeper trend because it wasn't a good print. Yeah, no doubt. I'm not a big believer in over analyzing individual prints and I look at the panoply of data that represents the job market and I don't see a reason to be extremely concerned. So, okay, so let's dig in on the government's finances. What is the state of the government's finances? How has the yield on long-term debt been suppressed in your view? Because I think that's an argument you've made with respect to how the Treasury has managed its (24/40)
issuance, as well as how the Fed has managed runoff and reinvestment of its portfolio. And how should we think about that long-term? Let's take a snapshot. So, taking a snapshot today, approximately 25% of the outstanding U.S. debt is composed of bills and floating rate notes. And so, they have very short-term maturities or they have essentially three-month duration in the case of the floating rate note. So, they are, for all intents, bills. And so, they're very subject to the changes in interest rates because once you finance a 10-year bond, you have 10 years before you're exposed to a change in yields. And so, that's the current distribution of existing U.S. debt. And that's on the high side of the amount of bills outstanding. Typically, what the government does is it keeps its issuance of coupon bonds, which are two years and longer, out to 30 years, relatively stable and predictable over time. They typically grow because the deficit and the national debt grows, but stable and (25/40)
consistent. And in times when there's high demand for government spending or the economy falls apart and there's low tax revenue and to maintain spending, they need to borrow more aggressively. They borrow with bills. And so, the bills percentage goes up. Typically, that happens and it has consistently happened during recessions, where the tax revenues go down because of lower economic activity and the spending goes up because of people out of work and the need for a safety net. And you get more financing, which is done with bills. And also, in the recent recessions, short-term interest rates have fallen dramatically. Is that also a reason why? It doesn't typically have to do with market timing of interest rates. What it typically has to do with is, because if that were the case, locking in 10-year notes, which a number of people, I think Druckenmiller mentioned, criticized for not doing it during the pandemic. Not doing it during the pandemic when they could have financed 10 years at (26/40)
1% and now they're financing bills at 4.5%. The problem is that during a period of time in which interest rates are at 1%, selling a bunch of risky bonds to the market at 1% and financing in the 10-year space is a major tightening of financial conditions. It forces people to shift from assets that they already own into these 10-year bonds, which locks them in. Also, just risky, they're volatile. Forget that they're low interest rate. This could have happened at 5% interest rate. We saw this with regional banks that owned US treasuries at lower interest rates after the Fed began to raise interest rates and they had to set up the bank term funding program. Is that an example? Right. Yes. The point being that if you want to borrow money fast, you borrow it at the part of the yield curve that has the most demand. The part that has the most demand is the part that's most cash-like because people will pretty much all day long give up their bank account or their cash to buy a one-month bill. (27/40)
But asking them to give up their cash for a 30-year treasury is much less likely to get large amounts of supply. We're talking about massive issuance that happens during recessions. Now, let's just move forward. We haven't had a recession here. We're issued over the last two years since quantitative tightening started. And by the way, since that happened, things have been pretty damn good. In the last two years, 50% of the debt that was issued that is now outstanding was bills, instead of 25%, which is where they were. But the treasury debt issued by the treasury. That's outstanding by the treasury. So they significantly issued bills relative to coupon bonds during a period when things were pretty good. And so what does that mean? So what it means to the financing of the country is that over time, getting back to a more normal, again, this is about normalization, a more normal level of treasury bills relative to total issuance, total outstanding of treasuries, below 20% is a target. (28/40)
And to get there, you need to issue a trillion dollars of coupon bonds and retire a trillion dollars of bills. And so that's the snapshot. That's what the current status of the portfolio of the US Treasury and the direction it needs to go. Now, in order to normalize, what is the role that needs to be played by treasury? And what is the role that needs to be played by Fed? And in the absence of cooperation by treasury, in other words, if the treasury wants to continue issuing short-term paper, what can and should the central bank do in this case? Okay. So the impact of not extending issuance, meaning not issuing on the longer end of the yield curve, coupon bonds, twos, threes, fives, sevens, tens, and thirties, is that that eases financial conditions because people who would otherwise have bought those bonds can buy something else, like corporate bonds, which would give corporates the ability to buy shares, or they might actually buy shares, or they might buy crypto, or they might buy (29/40)
something with the money that they would otherwise buy those bonds with. And so it's an easing of financial conditions. It means that savers have a narrower amount of things to save, and that means that there is cheaper borrowing. So that's the impact that would happen. Now, the Fed could say, fine, we think financial conditions need to ease. That's what they're saying now. They think they're restrictive. So they may play along. And in fact, I think they have played along with that all the last few years. As the treasury definitely did what it did, and the Fed definitely has been saying for over a year now that their policy is restrictive. So will they continue to play around? I don't know, maybe. So just to clarify something here, because again, this is the other side of the conversation. This is a compendium to the conversation about the Fed's policy on short term interest rates, which is balance sheet management. Your criticism has been that they should have reinvested runoff from (30/40)
are, since I sometimes assume that everybody knows all this stuff at this stage. So let's start with what is runoff? That means that the Fed has a bunch of bonds, and when they mature, they let them mature, and that's all that happens. And so their balance sheet is reduced by having their bonds mature and turn back into cash. So that's what runoff is. Outright sales are saying, I've got a bond, I'm going to sell it to the market. And it may have two years to maturity, it may have 30 years to maturity, but I'm going to sell it to the market. And so those are the two ways that quantitative tightening can be done. The Fed shows the runoff way. Now, that doesn't mean that one is outright selling of bonds and the other is this sort of silly thing that just, because the money that the Fed gets when a bond matures has to come from somewhere, and it has to be funded in some way. And the way it's funded is by the treasury issuing bonds. So what quantitative tightening done via runoff does is it (32/40)
takes the choice of what bonds to sell for optimal monetary policy reasons from the Fed, who could have sold the bonds outright, but chose to runoff to the treasury, and they get to choose what bonds are sold to the market, what bonds the market has to absorb, and thus what bonds impact monetary conditions. And so that's been my whole view from the get-go, which is what I call the original sin of the Fed is choosing to use runoff instead of outright its sales. But here we are, they've done that. So how has it played out? Well, as I said, since quantitative tightening started, the treasury has made the choice to issue 50% bills to fund their obligations, including paying the Fed back, which is a historically high amount of bills. And so to me, that has muted all of the QT impact. And what it has done is it has created the impact of QT as something that may or may not happen in the future. And it's flattened the yield curve as a result of long-term interest rates. And more the important (33/40)
thing about that is it's kept financial conditions easy. But Janet Yellen, whether intentional or not, by selling 50% bills over the period of time when QT was in play, has eased financial conditions by keeping long-term interest rates lower than they would otherwise have been if she had just issued that extra trillion dollars in long-term coupons instead of bills. Now she's handed herself in a corner where she's financed so many bills that the next treasury secretary is going to have, oh my God, I've got all these bills to roll every year. I need to term out my debt. And it also leaves the treasury vulnerable to a sudden shift upwards in interest rates and financing costs. Right. They have some confidence that the Fed's on their side, though. The Fed's not hiking rates. So you wrote in another DSR report that you published, I think, two weeks ago that, quote, the market has not fully priced anticipated increases in treasury supply. The expected benign report next week, and this (34/40)
report, I think, was, I don't remember what you reported. Quarterly refunding announcement. Quarterly refunding announcement, the QRA. This benign report next week will likely be met by markets with a sign of relief. However, one day the market will awaken to the reality that a tsunami of supply is gathering offshore. With yield curves flat and term premiums quite low, markets will eventually feel the obvious headwinds and hunker down for a multi-year storm. So this is what we're talking about right now. Right. What is a multi-year storming? What are you concerned about happening? Because you just said a second ago that the Fed can be cooperative. Is it that the Fed will be caught between having to fund the deficit and rising levels of inflation? What is your concern? What would that storm look like? It's so funny. Compared to the conditions today, what I'm talking about looks like a storm. I'm talking about a 50 to 100 basis point increase in long-term interest rates. I'm talking (35/40)
about a yield curve where two-year rates are about where they are today, and 10-year rates are five, five and a quarter, 30-year rates maybe five and a half. I'm talking about a world in which the P.E. multiple is 18 versus 22. Yeah. We're also in a world though where debt and deficits are very high and interest payments are extremely high. So those relatively small moves on a historical basis can have huge impact and ripple effects. Well, we can discuss the cost of funding the government and what such a thing, a storm like I've just described, would actually cost. And to be honest, it wouldn't cost anything because a higher long-term interest rate is only modestly going to increase the treasury's cost of debt. If you get that normalization and bills rates fall from 5% to 4% on what is now $6 trillion of issuance, you're going to save 100 basis points on $6 trillion, which is a lot, $60 billion. So I don't want to go off into the proportion of our budget that is interest. It's a red (36/40)
herring in my view. People talk about debt sustainability. That is a potential issue in the future, but it's not relevant in the short term. The government can operate at a 4% interest rate, a 5% interest rate, a 6% interest rate. They might struggle at a 10%, 11%, 12% interest rate. That might be a big issue, but that's not what I'm talking about. That's not the storm. I'm just talking about we've been operating in an environment in which the yield curve has been extremely supportive of assets and not normal. What is normal is a positively sloped yield curve. You look at the average slope of the yield curve through all periods in which we're not in the midst of a recession or emerging from a recession, or you just look at every piece of data. The average slope of the two's tens curve is between 75 and 125 basis points, and that's all I'm talking about. The reason why, my concern is there's a trillion dollars of duration that needs to be sold to the private sector that is currently (37/40)
being warehoused on the balance sheets of the government. There's a lot of demand in a positively sloped yield curve for treasury bonds. People like to borrow short and lend long. People like to borrow at 4% and buy a 5.5% treasury bond. What they don't like to do is borrow at 5% and buy a 4% treasury bond. It's just a very normal and healthy yield curve to be positively sloped. I'm not talking about some sort of doomer scenario. I'm talking about the market over time, not in a violent, bare, steepening, bond vingelante, inflationary, positive growth, all that sort of stuff, crushing the bond market suddenly and taking the legs out of equities in a violent way. I'm just talking about let's head toward normal. Let's get a positively slope yield curve. Let's get the multiples of equities down, even if it takes three, four years of just caution in terms of financial conditions instead of aggressive easing that the Fed seems to be on a path to. I want to dig a little bit more into the (38/40)
fiscal picture and how Trump's agenda on immigration, tariffs, tax cuts, and potentially fiscal spending impacts things. I also want to discuss equity markets, the broadening of the equity rally beyond the Magnificent Seven that's been underway this year, earnings expectations for these companies, whether they're elevated or conservative, how we should go about valuing them, et cetera. We're going to do that in the second hour, Andy. For anyone who is new to the program, Hidden Forces is listener-supported. We don't accept advertisers or commercial sponsors. The entire show is funded from top to bottom by listeners like you. If you want to access the second hour of today's conversation with Andy, head over to hiddenforces.io slash subscribe and sign up to one of our three content tiers. All subscribers gain access to our premium feed, which you can use to listen to the rest of this conversation on your mobile device using your favorite podcast app, just like you're listening to this (39/40)
episode right now. Andy, stick around. We're going to move the rest of our conversation onto the premium feed. If you want to listen in on the rest of today's conversation, head over to hiddenforces.io slash subscribe and join our premium feed. If you want to join in on the conversation and become a member of the Hidden Forces genius community, you can also do that through our subscriber page. Today's episode was produced by me and edited by Stylianos Nicolau. For more episodes, you can check out our website at hiddenforces.io. You can follow me on Twitter at cofinas and you can email me at info at hiddenforces.io. As always, thanks for listening. We'll see you next time. (40/40)
that out. I want to find a way to talk about this subject from a human standpoint because it's like I'm sitting here and I'm recording this and I'm like, okay, how do I do this professionally? While at the same time, not dehumanizing what's happening because this is unnerving. It's especially unnerving if you have been following it for months like I have. I think a lot of people have who are on Twitter and many of you will already know who heard my episode with Kyle Bass that I think came out in November. We talked about this. Kyle talked about it. He talked about it in a different context. Talked about it in terms of bioweapons from China. But bioweapons aside, this is a virus that came from China which is now disrupting our lives and our economies. I have friends that have already gotten laid off. I was just speaking with a radiologist friend of mine today who has seen 12 scans of COVID-19 patients in the last 24 hours. If I remember correctly, 11 of those 12 were people between the (4/41)
Today's episode of Hidden Forces is made possible by listeners like you. For more information about this week's episode or for easy access to related programming, visit our website at hiddenforces.io and subscribe to our free email list. If you listen to the show on your Apple Podcast app, remember you can give us a review. Each review helps more people find the show and join our amazing community. And with that, please enjoy this week's episode. What's up everybody? This is another special episode. I keep calling this episode special because I've gotten so used to putting out weekly content with a lot of prep and time to think about the subject to prepare for the guest. And I've decided that that's really not feasible anymore. Just given what's going on, we're living in the most radical period that I've experienced since 9-11. It feels surreal in much the same way that 9-11 did. It also feels hopeful, I think, in a way because there's a lot of camaraderie. Maybe hopeful is the wrong (1/41)
word. You get this sense of camaraderie that you had after 9-11. Whenever I speak with anyone, and I'm not talking about friends, I mean in a professional way, there's a level of compassion and empathy and concern for the other person that I remember was prevalent after 9-11. This is a lot what this feels like, but it's a difficult thing to try and cover because I like to always feel like I'm providing reliable information. It's difficult for me to vet what's out there because there is so much information. So I've decided to just go with it. My guest for this episode is Professor Yannir Barhyam. I came across Professor Barhyam's work on YouTube. He was actually introduced to me through a friend who had been following his lectures or had been to one of his lectures because he's very close with Naseem Taleb. They actually do lectures together and have been releasing videos on YouTube that you can actually watch dealing with COVID-19. Professor Barhyam has also created a website. He's (2/41)
also the president in case I didn't mention this. He's the president of the New England Complex Systems Institute. So that was a cool thing. We've long time listeners know my affiliation, informal affiliation with the Santa Fe Institute. I was invited to stay there for a period of time in the beginning of Hidden Forces in the first six months or so. I've had on a number of people from SFI, Brian Arthur, Sam Bowles, Geoffrey West, people like that. And complexity science has played a major role in the progression of Hidden Forces. And it's something that I've incorporated into my own models and ways of thinking. So that made me feel comfortable. He also has a website called endcoronavirus.org where he puts out a lot of information about coronavirus, what it is, how businesses should deal with it, guidelines for self-isolation, recommendations for policymakers and stuff like that. You can sign up to his newsletter or to get updates from him and his team. So you should definitely go check (3/41)
ages of 30 and 45. I am not a radiologist, but based on what he said, the scans look pretty bad. The idea, he told me that this is just old people is just not true. I also know from another physician friend of mine who sent a patient of his to get tested for COVID-19 at a Northwell clinic in New York City. Northwell is the largest healthcare provider in New York State. They told her that she should expect the results back in eight days. It's really hard to know where we stand with the numbers, with the number of infected, with the number of deaths and how to reconcile those numbers to get some type of mortality rate that actually reflects reality. Case mortality is one thing. The mortality rate among confirmed cases is one thing, but what is the overall mortality rate? Those numbers are still coming in. Someone like Professor Yannir would say that it doesn't matter. It's really bad and we should be doing something about it. I'm not disputing that, but I'm just trying to get a grip on (5/41)
the facts to try and help all of you navigate them. That's my objective now. I've decided to get into this. I've reorganized my schedule. I've canceled a lot of guests that I had booked. I still have an episode tomorrow with Ben Hubbard, the Middle East correspondent for the New York Times, to discuss the Saudi price war and do a deep dive into the kingdom and the rise of Muhammad bin Salman. I think that's relevant, especially for those of you out there who are interested in what's going on in the oil market. The markets have been decimated. It has been a bloodbath. It's actually more acute than 2008. At least that's how I remember it. I mean, what were we down yesterday? 12% I'm recording this on Wednesday, March 18th. I think yesterday we were down 12% or was it the day before? I can't remember. I mean, it's wild and the price of oil has collapsed in part because of Saudi Arabia's commitment to flooding the market, but obviously it's in the face of a giant demand shock and bond (6/41)
yields have been up and down. I mean, I think they were all the way down below 0.4%. And last I checked, they were something like 1.3, 1.2. I mean, don't quote me. I don't spend a lot of time looking at the markets. And that's the other thing. It's kind of... Part of me wants to be on top of everything that's happening, but if I'm on top of everything that's happening, I can't really prepare for any type of conversation. So anyway, I've said enough. This is going to be a work in progress guys trying to figure this out. Right now, I'm committed to the weekly release schedule and the idea is to release extra episodes like this one when I can. I may change that and just start releasing stuff as soon as it gets recorded, but we're all going to kind of figure this out together. So my conversation with Professor Yannir lasts for about 30 or 35 minutes or so. I just recorded it, haven't listened to it yet, and just recording this intro now. So I hope that it's informative. I hope that it (7/41)
provides some type of value for you. And as we move forward, I hope to be able to do more of this, not necessarily or exclusively dealing with the actual virus or the biology of this situation. Dealing with the entire scope of what people are experiencing emotionally, what people are experiencing with work. You know, I think there are really interesting opportunities to do episodes about companies that are thriving in this environment. So we'll see. But I hope all of you stay safe. I hope all of you stay calm and we will get through this one way or the other and it's going to be okay in the end. So please enjoy and always feel free to reach me at DK at hiddenforces.io if you have any thoughts you want to share. I get many emails these days. I can't respond to anywhere near enough of them, but I read all of them. I love hearing from you. And those of you who are interested in supporting the program, you can go to patreon.com slash hiddenforces and you can subscribe to one of our three (8/41)
content tiers or even just support the show with a lower donation if you want. And also please subscribe to our mailing list. I haven't made much use of it in recent years, but I'm going to be doing that in the near future. I can promise you that. So please enjoy everyone and you'll hear from me again soon. Professor Yannir Bariam, welcome to Hidden Forces. Thank you for having me. Well, thank you for coming on the program. So maybe you can give our listeners who may not know you or be familiar with your work. Give us your background, how you got involved in studying COVID-19 and what you want listeners to understand about this virus. So I'm a physicist and I started about 30 years ago working on understanding complex systems. So systems that have many interacting components and the fundamental tool for dealing with this requires kind of mathematics that goes beyond traditional calculus and statistics and is not widely used. And that enables us to think about sudden sharp transitions (9/41)
like boiling water or things like that really require a different kind of mathematics. And that's important for thinking about various real world systems because dependencies actually matter and statistics and correlations are not adequate. So about 15 years ago, one of the topics I started working on over the last number of years was the issue of pandemics. And it started from a very simple model of the effect of long range transportation on pathogen dynamics. And the result of our analysis was that there was a transition like boiling of water that happens as you add more and more transportation. What happens is you go from a situation where you have local extinctions because the pathogen spreads locally to global extinctions as the pathogen is able to spread globally. And that transition is a sharp transition, which means that you're going along adding more flights around the world and you are getting close to that transition and all of a sudden instead of having small local events (10/41)
happening, you have massive global events. And that was a big concern to me. So we started raising the alarm and unfortunately people didn't pay much attention. In 2014, there was the Ebola outbreak in West Africa, which was eventually 10 times as large as a previous Ebola outbreaks. But actually other people were predicting that it was going to be much, much larger. They thought it would go to burnout with 10 million people dead. But I was thinking how one could stop outbreaks. And the idea which comes from complex system science is that you can go to a larger scale. So instead of thinking about individuals as transmitting the disease, you can think about communities as transmitting the disease and you can treat communities as infected. And the trick is then you go into the communities and you detect people that are in the early stages of symptoms and you stop them from transmitting, you isolate them and that's actually what was done. So in West Africa, people created teams in (11/41)
neighborhoods of neighborhood people and they went door to door and they used forehead thermometers to find out when symptoms were present and those people were isolated and that stopped the outbreak. So it went from an exponentially growing, every week, doubling epidemic to dropping like a rock, again, exponentially declining and it disappeared within a few months. So I've since worked on Ebola outbreaks in the Congo, working with the World Health Organization. And again, the strategy of doing community empowerment, really, having the communities be responsible for outbreak response was successful there as well. Or beta important contribution, surely wasn't the only thing, but it was really key to the success. So that brought us to the present. I mean, the Ebola outbreak just stopped. It was going on for a year and a half before eventually this approach was used aggressively and it was stopped. So how does this idea of transportation dynamics relate to network connectivity and how can (12/41)
listeners think about that? So the main thing is that disease transmits through these contacts between people. So people touch each other. They breathe the same air. They touch surfaces that other people touch. Those are all relevant to the coronavirus transmission. Each disease has its own network because of the way it transmits. But that network connects people and the disease transmits through it. If you imagine one person is infected, they infect a few others and then it spreads out across the network and jumps to different places through long range contacts, people traveling. And then the question is, how do you know to evaluate its propagation? And the answer is people characterizing using the multiplier. They characterize it by number, R0, which is the number of people that are infected by a particular person who's infected in that. If it's a mild disease, you can say, hey, we don't care, but if it's a severe disease, you want to stop it. And coronavirus are severe diseases and (13/41)
the social cost is unacceptable. And because it's unacceptable, the stopping of it requires radically pruning the network. And radically pruning the network has two parts. One is the local part because people are strongly connected to each other locally. And one is the long range part that got us in trouble because we connected communities around the world and now we're vulnerable to the outbreak. So if you cut the long range links aggressively, then you can work on killing the outbreak locally by isolating people. This is what was done in China and in South Korea in order to stop it by locking down communities, which basically means having people stay at home so that they can infect each other. But once you do that, you can really smash the outbreak because people don't transmit. So you know you have a solution. You just have to aggressively do it and China did it. They cut transportation around the country and they locked down the area of Wuhan, the Hubei province, in order to (14/41)
prevent any local transmission. And there's an incubation period of a couple of weeks. So after a couple of weeks, basically, they had the outbreak under control and then it's really beyond that. It's just a question of transmission to family members and a little bit of leakage because at the beginning they allowed people to go and get groceries every few days. Later on they stopped that and they went door to door to find all the cases. So they really focused on stopping all possible transmissions. And again, the door to door process, just like we had in West Africa, was an essential part of it and the outbreak stopped. And it was gone within four to five weeks. And basically two of those weeks in most of the country were just waiting until you were really sure that you had no cases. So I definitely want to ask you about a symptomatic transmission and what was done in China and some other countries as well, as well as many other questions. Just to clarify one more point there, when you (15/41)
talk about transportation, is this simply a question of volume and availability of travel and transportation? So more flights, more trains, more cars, is that how we're measuring this? And how does the interconnectivity of the world today measure to where it was, let's say, a hundred years ago with the Spanish flu? So several things. First of all, yes, it's kind of the amount of travel. It's the amount of global travel as opposed to local travel. But the more travel you have, the more connected you are, the more vulnerable to large events. The Spanish flu, even though it was a global event, it spreads comparatively slowly. Here we have the coronavirus over weeks, basically spreading globally. And that affects which diseases are able to travel worldwide. So there is this disease dependence that does matter. But the point is that as you increase the transportation, this transition shifts in terms of the qualities of the disease. If there is a disease that has an incubation period of a (16/41)
year and people are not aware that they have it and they walk around and they transmit it and eventually it gets around the world, then we're all dead. But there are not that many diseases like that. It's very hard for the diseases to sustain themselves. So the point is that within the cataclysm of disease we have, we are now in the domain of risk. And that's key. How unusual is that feature of this novel coronavirus that it is contagious, that it can be transmitted from person to person during this window of possibly up to 14 days without symptoms? Ebola does not transmit before the symptoms start. And the coronavirus is actually not even clear that it does. The parameters of the disease transmission early in the infection are not so clear. And part of the challenge of saying, hey, it transmits before symptoms or doesn't is that symptoms are very mild often in cases. So people can be walking around with a little bit of a sniffle or something or sore throat, whatever it is, a little (17/41)
bit of shortness of breath. And sore throat is not one of the symptoms actually. So I shouldn't have said that. But you know... Is that right? Because that's been reported. The primary symptoms of the coronavirus are fever, cough, and shortness of breath. So sore throat is not actually one of them. And I don't know that that means that it's never a symptoms, but it's not surely one of the primary symptoms. Now the point is that the way the disease works is that there's mild symptoms that can extend for a fairly long time. So you have kind of up to two weeks where you start showing symptoms and then you can have two to three weeks of mild symptoms. And then all of a sudden you have severe symptoms and require ventilation and an ICU. So there are these different stages and the boundary between the no symptoms and the mild symptoms is surely not very sharp. So it's hard to tell whether people are just not noticing or purposefully ignoring or whether there's actual transmission before (18/41)
symptoms start. And that's kind of hard to tell. But regardless, even if there are, you know, whichever it is, it creates some stress on different kinds of approaches. But each of the approaches has some utility. And lockdowns don't care, right? Because if you lock everyone down, regardless of whether they transmit before symptoms or not, they can't transmit to people that they're not near. So that's the advantage of the lockdown. The lockdown is kind of the action of last resort that really guarantees you that you will be able to stop an outbreak. And that's why we need it because we're in that kind of state. The transmission rate is high and people bandy around all kinds of numbers. But it's around three, three to four. Some people say we're at any range for two to five, but the lower numbers are based upon the early part of the transmission in China. And the early part of the transmission in China is based upon just a really few cases that are not sampling the distribution of what's (19/41)
going on. So that's the R not number. That's the R not number, right? That means the number of people that one person can infect when they come in contact with them. That's right. We're going about daily life. The problem is that there is no typical person, right? Someone goes to an event with hundreds of people like in South Korea and all of a sudden you have hundreds of people that have been infected by one person. That's a super spreader event. And hundreds of people being infected compared to a typical number of people that are infected, which is probably in the range of one to two to three, is just a totally different ball game. So that brings us back to this point about exponential growth versus linear growth and... Well, exponential growth can happen without super spreader events. The exponential growth is just this multiplier that, you know, and the easiest way to think about it is not with R not, but just with a multiplier from day to day to day. How many more new cases do you (20/41)
have in the next day than in the previous day? And the number there, people can estimate it variously, but it's at least over 1.3, which means there... And in the US, it's been going up by 32%, 1.32. So every day, you have 32% more new cases. And that has to sink in. It's much faster than Ebola. And the reason for that is because... So this is another question I have for you again, because there's been so many different things thrown out there. How does this get transmitted? Is it through the air? Is it from people touching their face and having touched something that someone else with the virus had touched? How are people getting this virus? Well, let me focus on one thing at a time. Okay, let's talk about the exponential growth. The point is that if you have 1.32, you have seven times as many cases a week from now as today. And you know, it's actually maybe a little bit higher. So let's say it's 10, just for easy numbers. And if you go to 10, it's 10-fold, right? I mean, even 7 is (21/41)
huge, right? So if we have 100 cases today in a week, we have 700 cases. In two weeks, we have 4,900 cases. So 5,000 cases. And that's so fast. People think that it's a small number today. But the point is that all those people have already been infected that are going to show up as infected in a few days. And so if you react today to what's happening today, it's not going to do anything because the reality is much more serious. It's a tip of the iceberg kind of situation. And it's a dynamic tip of the iceberg. So basically every day, the iceberg has gotten bigger in a way that you're seeing more of the iceberg, but then the iceberg has already extended further. So we have this ongoing dynamic where it's getting worse and worse and worse, very fast. So from what I understand, we were at about 10,000 cases or so outside of China around two weeks ago. Well, let's look at China first. China did a lockdown when they had 800 cases. 800 cases. And because when they locked down, there were (22/41)
already so many people that were infected. And there's also the course of the disease, right? So people are becoming infected over time. They're infected with their family members. Maybe there are a few other people that are infected in hospital systems and someone might go into the supermarket even though they were locked down. The number of cases they had eventually altogether was 80,000 cases. Right. These are reported cases to be clear, especially the initial ones, which were probably drastically under measured. Right. But the 80,000 cases that they eventually had led to such hospital overcrowding with 10% of people end up on ventilators. So you had about 8,000 people on ventilators and you had an additional 8,000 people that had to be hospitalized. So 20,000 total were hospitalized. And then they built hospitals. They had 14 temporary hospitals, 14 for different stages, you know, mild, moderate, severe and on ventilators. And they sent 42,000 healthcare workers from all parts of (23/41)
China. And they were overwhelmed, overwhelmed. And yesterday, after, you know, now they're down to one case that wasn't, you know, an imported traveler. And they sent all of those people home. And you have to understand that many of the cases that are in hospitals take a long time to resolve, weeks to resolve. So even though they don't have any new cases, there are still thousands of people that are in hospitals being treated now. But today or yesterday, we already had about 2,400 cases in New York state. Well, I know from speaking with physicians at ER rooms here in New York and New York Presbyterian and other hospitals, they've started to see those numbers begin to move up in a very noticeable way in the ER. And a lot of, I was actually just speaking with a radiologist about an hour ago who has seen, I think, in the last day, an additional 12 scans of people coming in with coronavirus. And one of the interesting things that he had to say was that all of these were between the age of (24/41)
30 and 45, with the exception of one patient who was 63. And all of them had significant signs of pneumonia in the lungs. Yeah. So it isn't even something that's just for old people. No. People think that this is just old people. But over 50, you have a much higher chance of dying. And young people get it too and die too. It's not going to let people, people don't have a free pass. It's a very severe disease. People are just not getting it. So imagine that we have 2,400 cases in New York state. The population of New York state is one in 75 of China. We're China has 1.4 billion people. How many people are in New York state? I think it's 20 million the number. Yeah, that sounds about right. 20 million people. So we have 2,400 cases in New York state for a population of 20 million. 2,400 cases means that we're going to go to 240,000 cases. So that was one of the things I wanted to ask you. There are a couple of things that come up. Again, to your point about these are complex systems. (25/41)
China is a very dense country. It's a densely populated country. New York state is also very densely populated. And New York city is particularly densely populated. Both China and the United States did a poor job in the beginning of really monitoring this. I don't know who was worse. I would imagine China was worse. No. China did a poor job until they had 800 cases. And the US had all of this time. We saw what happened in China. We saw what happened in South Korea. We had a month, at least, more like two months to prepare for this. And we did nothing. We waited until we had local transmission before we did testing for this. We don't have the capacity to even test enough in order to see where the cases are. Worse than that, we waited until after we had 800 cases. I mean, even if we had 800 cases in the whole country, I mean, this country only has 350 million people compared to China. It's one quarter of China. Why would you wait until you're going to have 80,000 cases? And now we're (26/41)
going to have over 200,000 cases in New York state. And we have over 6,000 cases in the US. Now, today, it's going to be over 7,000, because we still haven't done anything. Well, to your point, I spoke with a physician yesterday whose patient went to the New York state's largest healthcare provider, Northwell, and was told that she wouldn't get her test results for eight days. Now, maybe this is also a good sign in the sense that they're getting backed up because people are actually doing testing. No, no, no, it's crazy. You don't understand. This is insane. The situation, and I mean, you can look for discussions of this online. The fact that we can't do testing is crazy. South Korea set it up so that they could do a lot of testing, and they used it to identify who was sick and isolated them. We don't have that possibility in this country. We're so far behind in terms of testing. So I want to ask you about both South Korea and Italy, maybe compare those two countries. Before I do, I (27/41)
was going to mention that from the numbers I've seen, and again, it's hard to get. I've relied mainly on Johns Hopkins and the World Health Organization. We were at roughly 10,000 cases outside China about two weeks ago. We're over 100,000 today. What do you think that we should see in the next two weeks? Because based on your numbers, it would sound like over a million. Why are you worried about that? Well, no, I'm not worried. So the reason I'm asking about this is because I think that one of the things that is very challenging for people is to understand how the growth happens. I think a lot of people look around. Right, so I think for people, it's hard to get that around their head. And so maybe giving people a sense of where the official numbers would be in two weeks from now, just based on the current growth trajectory. Well, the problem is that we don't yet know how people are going to act. If today, we lock down everybody in the country, and I really mean it. I'm not joking. So (28/41)
what does that mean, a lockdown? If we lock down everyone in the country, then we will have in this country over half a million cases, over half a million cases. And the hospital system will be over flooded. It will be indeed like Italy and much worse. We will have half a million cases if we lock everyone down now. And what lockdown looks like is everyone stays at home. They're not in contact with anybody else. The only thing that we're going to be able to do is do essential services, getting people food and medicines and basic necessities. So people can't even go out to get their own food in this type of scenario. It has to be delivered. Well, the way it was done in China early on is that people were allowed once every three days to go to the supermarket to pick up groceries. Later on, they didn't even allow that because they enabled delivery to take place. And the best thing is, again, to take every precaution. So the point is that we have to go to extreme. We have to go to the not (29/41)
normal. We have to figure out how to stop the outbreak by action because we're in no position to identify who's sick and who's not. The people around who have been identified as being sick, it's only about one in a hundred, maybe one in 30 of the people who are actually sick because we're not testing. I mean, there are these people, of course, that won't test positive because they're early in the infectious period. They're just been infected. So they don't have symptoms. They won't test positive yet. So that's a factor of about 10, let's say. And then there's another factor of about three or 10 because we're not doing enough testing. So somewhere between 30 and 100 more cases than what we see. And that's what's going to happen. I think that's one of the most unnerving things about this virus. The number of people that are asymptomatic that haven't developed symptoms yet, but will develop them who are infected. I think that's one of the most unnerving things. The basic thing is that we (30/41)
have this wrecking ball that's headed towards us. And as long as people are saying, hey, it's not that bad. And maybe if we wash hands, it'll be all right. It's like putting a tissue in front of you in order to stop the wrecking ball. And Italy did that. Italy showed us by example. And honestly, the fact that we waited for Italy to show it to us after China did what they did is pretty crazy. But Italy was in a situation in Italy. Italy, what they did is at first they started to shut down the north. But then they kind of said, well, hey, you know, maybe if we don't test, we won't notice that the cases are there and everything will be OK. And they waited until the hospitals got overloaded before they did anything. So now every day there are 3,000 new cases and they're out of hospital beds. So all of those hospital beds are taken. And remember that it takes a few weeks for people to heal, to cure, even if they do cure. Some of them, many of them will die. So what do you do when you run (31/41)
out of hospital beds and you have 3,000 new cases? Now, not all of those cases are severe, but say 20% of them are, 600. So you have 600 people showing up to hospital and you have zero new hospital beds. And that's going to happen today. It's going to happen tomorrow. It's going to happen the next day. It's going to happen the next day. So I mean, this is not a fantasy. This is not a joke. People are dying because there aren't any ventilators in Italy. So let's talk about that also because in terms of information, on your website I pulled some information. I've also heard you talk about this. You've said, and your organization has put out that about 20% of coronavirus cases. This is not a number that we invented. The number is, I mean, you can look in articles, some people say it's as much as 30%. This is just a medical piece of information. Well, okay. I guess my point is that, again, there's all this different information out there and I'm just trying to get a picture. No, no, this (32/41)
is not ambiguous. I mean, you have to understand why does anybody think that the fact that the Chinese locked down Wuhan and had to build 14 hospitals is somehow something that is not going to happen here. The fact that Italy is having all of these hospitals overloaded and the doctors are reporting, hey, you guys don't know what's going to hit you. It's going to hit you. This is not a make-believe situation. So I guess two questions. One, what is the best resource for people who want to become informed on what we're dealing with with respect to this virus? And two, what does your organization suggest? Well, how do you propose that governments, because again, going back to this point about complexity and systems thinking, this is not something that individuals can resolve on their own. Yes, individuals can take individual measures, but this has to be a collective response. So how do you think that people should respond and government should respond? And where can people find the best (33/41)
information on this? So first of all, so we have been trying to put out solid information two and a half weeks ago, when people clearly didn't get it in the West, in Europe, in the US about what was coming. I send out a call for volunteers and we now have about 3,000 volunteers. And the face of the organization that was created is on a website called EndCoronavirus. That's ENDcoronavirus.org. And there's a possibility of volunteering there for those who want to join. But the main thing is it has information and you can go and look at it. I mean, there are many other sources of good information, but obviously there's a lot of confusion because there are many sources of bad information as well. But people are beginning to get it. And in terms of action, yes, government should act great, but we don't have to wait for them. Everyone can protect themselves. They can protect their families. They can help their friends to protect themselves. And in a few days, when the hospitals become (34/41)
overloaded, the government is going to act. It should have acted two weeks ago or maybe a month ago, but they didn't. But it doesn't mean that you have to wait for them in order to act. And if you protect yourself for a few days and the government acts, then you'll be safe. You'll reduce the transmission so fewer people will get sick, including perhaps you. And when they do act, when the hospitals become overloaded, you'll be able to sit back and say, I did it first. And then everyone else will have a higher probability of being sick. But eventually it'll be taken care of. I do believe that once the hospital become overloaded, people will act. That's what happened in Italy. And I do think that that's what will happen here. And what does an overloaded hospital look like? Again, I really described it. There's only so many ventilators. I mean, we just don't have the capacity to deal with a huge number of patients that need their lungs, you know, the pump of air in order to survive. It's a (35/41)
terrible horrendous situation because the death rate is going to go from about 4% to about 10%. And the doctors, and this is what they're doing in Italy, they're doing military triage. Yeah. Well, I think for listeners who are curious, the New York Times Daily did an excellent interview with the physician from Bergamo, Italy, a hospital there with approximately a thousand patient beds. And they converted the surgery wards into areas for coronavirus patients. And they now have 50% of their hospital beds allocated towards coronavirus. They've had to send 650 nurses home who are sick, either with corona or something else, or just exhaustion. They're treating their own physicians as well at the hospital. And they have exactly, I just had to make choices about who to save and who not to save. And it's become very clear that that is where we're headed. And I guess the question is, at what point will governments, local, federal, state, how will they coordinate? And at what point will they put (36/41)
in these types of lockdown procedures that you're describing? And you think it's simply an inevitability in your point of view. And the answer is, the more we act, whether it's to save ourselves or to tell other people that action is needed, the more likely it is that people will act. So that's what we're doing. So in closing, Professor, what advice would you like to give listeners who are either individuals or people who are in positions to actually do something at the state, local, or federal level? And also businesses. Every business has the ability to safeguard their employees, their customers by taking action. We have put out guides on the website, the endcoronavirus.org website, trying to explain to people how to create safety for themselves, their families, improve the safety of other people around them, as well as guides for government, for business, and so on. And the main thing to understand, and this goes back to your question about transmission that we didn't quite talk (37/41)
about, is that the disease transmits basically in two ways. The first is by breathing in or by sharing air with people who have the disease. You have to be over six feet away from others in order not to catch the disease. And even then, you don't want to do that for a long time. And the other thing is that that breathing out or sneezing or whatever happens, that even just breathing out of the virus from your lungs, it falls onto every surface around. So if you touch a surface where other people have either touched or breathed on, the virus there will go onto your hands. And so it's a good idea to wash it, but one way or another, you touch it and you're likely to get sick from it. So you have to be careful about surfaces that are public or shared surfaces. So don't go or don't touch, use gloves and don't touch the gloves to yourself. But bottom line, don't touch things that are in public spaces, surfaces in public spaces or in shared spaces. And don't be near anybody that has any (38/41)
possibility of being infected. So what you want to do is you want to self isolate as if you're in a quarantine. You self isolate you and whoever you choose to be with during this period of time. And everyone who is together has to agree that they will follow the rules about, you know, not being in touch with anybody else except for the people who are in the group. Physical touch. You can always do FaceTime and phone calls and text people, but the physical contact is where you can't go. Professor, I appreciate you taking the time to speak with me today. And again, you want to give our listeners your website so they can check it out if they're interested and maybe subscribe to your mailing list. Sure. It's end-en-d-coronavirus.org. And there is a sign up. We have a few thousand people on a technical channel called Slack channel where people can collaborate and work together on all kinds of projects. And they're working on both on trying to influence decisions. But they're also working on (39/41)
ways to mitigate, you know, to help with the shortages that are going to happen in hospitals and all kinds of other things. So we're doing what we can. And it would be great if you join us. And aside from that, soon we'll have other ways people can collaborate that are in addition to the Slack channel. So look forward to people helping and making this work. All right. Well, thank you very much for being on the program. Take care. Today's episode of Hidden Forces was recorded at Creative Media Design Studio in New York City. For more information about this week's episode or if you want easy access to related programming, visit our website at hiddenforces.io and subscribe to our free email list. If you want access to overtime segments, episode transcripts and show rundowns full of links and detailed information related to each and every episode, check out our premium subscription available through the Hidden Forces website or through our Patreon page at patreon.com. Today's episode was (40/41)
produced by me and edited by Stylianos Nicolaou. For more episodes, you can check out our website at hiddenforces.io. Join the conversation at Facebook, Twitter and Instagram at Hidden Forces Pod or send me an email at dk at hiddenforces.io. As always, thanks for listening. We'll see you next week. (41/41)
And they spend money and resources to ask people this question on a monthly basis. And once they get the response, then they have a formula that converts the selling price into what you would rent it for if you were going to rent it. Well, that's ridiculous. They don't need to survey what the selling price is. The selling price is known in every major market in the United States. In fact, where footage of each home is being sold as well. So this surveying to try to determine what people would sell their homes if they were going to sell them is a very foolish and expensive way to go. Just use the existing home price sales data. The formula that then converts the home price sales data into rent is not, and I don't have any problem with that. Now, that would be okay. But we have this horrendous component in the meantime, in real terms, money the way I measure it. And I like to take him to excluding currency. I think it's a more modernized concept currency is still a medium exchange and (37/41)
to the trend line. But because of the Federal Reserve's operation, it produced all of this excessive inflation, which had a devastating impact. And so the economy has been left in a very difficult position. If you look at the real average weekly earnings over the full time hourly and salary people, which is about 120 million people in the last 14 quarters of the expansion, there's been a decline in the one and a half percent annual rate. That's the average. But within that average, you've got some skew at the very high end. There was excellent performance. And so the high inflation has just really had a terribly debilitating effect on the vast majority of our people, which it always does. In fact, there was a pre-Adam Smith economist by the name of Richard Camelot that understood that when you have rapid monetary growth, you get excessive inflation, a damaging impact on more moderate income people, which exacerbate the income and wealth of us, which is what the pandemic did. And we're (28/41)
What's up, everybody? My name is Demetri Kofinas, and you're listening to Hidden Forces, a podcast that inspires investors, entrepreneurs, and everyday citizens to challenge consensus narratives and learn how to think critically about the systems of power shaping our world. My guest in this episode of Hidden Forces is economist Lacey Hunt. Dr. Hunt is the executive vice president and chief economist of Hoisington Investment Management Company. He previously served as chief U.S. economist for the HSBC Group, as executive vice president and chief economist at Fidelity Bank, and as senior economist for the Federal Reserve Bank of Dallas during the course of a 55-year career studying markets and the economy. In the first hour, I asked Dr. Hunt for his broad assessment of how he thinks the global economy is doing today and what monetary and cyclical economic indicators he relies on to make that assessment. We discussed the increased role of the U.S. Treasury as an economic policy actor in (1/41)
the post-pandemic period, the concerning decline in the net national savings rate, and whether the neutral rate of interest, a hotly debated topic among economists, is actually moving lower in what this means for trend growth, interest rates, and inflation. In the second hour, I asked Dr. Hunt why he believes that the Fed has been able to raise interest rates by more than 500 basis points in less than two years without inducing a recession. Is this because other causal factors have remained more accommodative, or have the lags just grown longer and more variable? And if so, why? What does this tell us about the business cycle and the effectiveness of monetary policy? We also discussed the chronically high fiscal deficits and the implications of trying to reduce them in an environment where the economy is becoming more dependent on government spending to boost economic growth, support critical national investments in energy and defense, and contribute to the private savings of the (2/41)
economy. If you want access to that part of the conversation and you're not already subscribed to Hidden Forces, you can join our premium feed and listen to the second hour of today's episode by going to hiddenforces.io. All of our content tiers give you access to our premium feed, which you can listen to on your mobile device using your favorite podcast app just like you're listening to this episode right now. If you want to join in on the conversation and become a member of the Hidden Forces genius community, which includes Q&A calls with guests, access to special research and analysis, in-person events and dinners, you can also do that on our subscriber page. And if you still have questions, feel free to send an email to info at hiddenforces.io and I or someone from our team will get right back to you. Lastly, because this conversation deals with investing, nothing that we say on this podcast can or should be viewed as financial advice. All opinions expressed by me and my guests are (3/41)
solely our own opinions and should not be relied upon as the basis for financial decisions. And with that, please enjoy this highly informative and long overdue conversation with my guest Dr. Lacey Hunt. Dr. Lacey Hunt, welcome back to Hidden Forces. I'm glad to be back after seven years. Seven years, yeah, something like that. You were on in 2017 and you were an in-studio guest at that time because this was everything before the pandemic was in studio and people still love that conversation. In fact, I was actually speaking recently with someone that you know, Eric Besmajian, who has been on the podcast as well, and he was telling me how much he loved that conversation and how much he was looking forward to us talking to again today. And he's a good guy, Eric. We all need to pray for him. He's fine. Yeah. Yes, he's been public about what he's going through and he's a wonderful guy. Wonderful. Wonderful guy, brilliant guy. So, well, like I said, I'm very excited to have you on the (4/41)
podcast today. We didn't have a chance in our first conversation to talk about your biography, your history, your background. Are you a native Texan? I am, yes. Did you grow up in Austin? My family originally settled in Nacodotus back in the 1840s and I spent some early years in Nacodotus, but my main junior and senior high school years were in Houston. I had a great grandfather, it's insatiable to say who would be a great grandfather, who received a land grant from the Republic of Texas in 1843. And the Republic of Texas was only in business from 1836 to 1846. So, we've been in Texas for a long time. Wow. What did your parents do? They were very learned people. My father was a PhD psychologist. He earned his PhD in 1941, the year before I was born, in the University of Texas. I guess you could say that I was a behaviorist before I was an economist. My dad was always teaching and instructing. I didn't pay as close of attention as I should, but it was quite of an experience growing up (5/41)
with him. My mother was an educator, but she was very learned as well. She had received a scholarship to Occidental College because her father was a very poor president and minister, but his chief parishioner was chairman and chief executive of Union Oil of California. He was also on the board of Occidental College. And he arranged for my mother as well as her four siblings to go to Occidental. And my mother later earned a master's degree in speech and drama from USC. And my father was there one summer taking a sabbatical from a renowned psychologist at USC. This was off the books. It apparently would have been arranged by a professor at UT with a professor at USC. But my mother was in charge of the summer play and she had put signs up over the USC campus needed someone with a Southern accent. And dad applied. He got the job and shortly thereafter or a year or two later he married my mother. So he got a part in the play with his father? Yes. He had the Southern accent that she needed. (6/41)
He was a Texan. That's how your parents met. That's an amazing story. Yeah, it is. And when dad was a child psychologist he was more aligned with Carl Jung than Freud. And my mother was a role plays musicals for elementary school. When she retired she was principal of the largest elementary school in Houston. So you had the example of your parents who were both in academics. Did you know at a young age that you wanted to be an economist or was there some other general sense of what you wanted to do and that sort of realization of your interest in economics came later? No. When I went to Sweeney in 1960 I wanted to be a doctor, medical doctor. And for the first year and a half I was taking all the pre-med courses. And then in the spring of 1962 I had time for my first elective and I took the principles of economics. And at the end of the spring semester I switched my major. I found my true law of economics. What attracted you to economics? Just fascinated me. I read a book by Hal (7/41)
Brenner on the worldly philosophers in my very first course. It's a great little book and I was just drawn to it because it sort of combined institutional understanding, history and quantitative analysis. And I thought that that was a good use of some of the abilities that I have. I'm not the strongest in anyone but when you work them all together I think I have a little bit of an edge. And so when I left Sweeney I got an MBA thinking business world was for me. Went to Wharton. I was a finance major. And after my MBA at Wharton I was offered a full fellowship. I had a university fellowship at Temple University in economics. And that fellowship in today's dollars it was tax free. It would be about close to $50,000 even though at the time it was $300 a month. But it was tax free and I had no duties. And I finished in two and a half years later. I had a parent of my PhD in January of 1609, defended the dissertation in December of the year before and then went to the Dallas Fed. So that (8/41)
was your next job after getting your PhD going directly to the Dallas Fed? I went to the Dallas Fed, yes. So what did that experience working for the Dallas Fed teach you? And how long were you there? When did you go again? You went during the end of McKinsey Martin's administration. I went in 69 and I left in 73. And it was very, very fortuitous because when I went to the Dallas Fed in 69 I was really the most conversant in monetary theory and history and macroeconomics. And I had built an econometric model of the euro dollar market. I knew Internet. My fields were macroeconomics and international economics and finance and mathematical and statistical techniques. And I was in a position to work pretty closely with the director of research at Dallas and the president of the bank. The president of the bank is a very distinguished agricultural economist, Dr. Phillip Coldwell. And Ralph Green was director of research. It was in due course I started advising them for the FOMC meetings. (9/41)
They did something for me that was very valuable. They sent me to do the training program for fed regional economists at the Fed of New York. And in fact, I made two trips, lengthy trips, to study the operations of the FOMC and its execution. I doubt that if I had been at the board of governors or if I had been at one of the larger Federal Reserve banks, I would have never been tapped, I don't think, to have that kind of exposure. But at the Dallas Fed I did. And that was very beneficial to me. And I had time to do my own research. And I'm very fortunate I started getting published in some of the lesser academic journals. Before the time I had left the Dallas Fed, I was published in the journal Finance, which is a rather significant feat at the time. And it was co-authored. But nevertheless, I made it in a few times. And I was able to get some recognition from my dissertation by writing a comment on someone else's very extensive work. So I was starting to get published. My econometric (10/41)
work was noticed by Dr. Michael K. Evans, a Brown-aid educated econometrician who was co-developer of the Wharton model with Larry Klein. And Mike Evans asked me to come to Chase Econometrics to build the first large-scale econometric model of the financial markets. At that time, the Chase model, which Evans had spun off and had broken with Klein. But there was just one financial equation in the entire Chase econometrics model. And the same was true for the Wharton model at the time. And that was that the Treasury bill rate was a function of the Federal Reserve discount rate. There were no money supply equations alone. There were no other financial variables, no long-term rates, intermediate-term rates. So I built that model. It was a monthly-based model. And the J.I. Press in Greenwich, Connecticut published that as a book in 1976 called Dynamics of Forecasting Financial Cycles. I've always looked at the financial cycle as leading the business cycle. Keep in 1976, at that point in (11/41)
time, Minsky had not developed his financial instability hypothesis. Narr had Kendallberger written his great book, Mania's Panics and Crashes. But I was thinking in terms of financial cycle, I didn't define it as well, I don't think, as Minsky and Kendallberger did. But I was inclined in that direction before their great work. Of course, I took advantage of their work and other work to greatly amplify what I had started to do. But that's how it all got started. Did you have an opportunity to get to know David Rockefeller while you were at Chase Bank? I did. I did. Michael Evans called me and he said, you're going to get a call from Mr. Rockefeller's secretary and he's going to give you a project to do. And I know you're busy because you're putting out... I was putting out the, every month, the Chase Econometrics monthly financial model and existing mic to some extent on the regular macro model and talking to clients, traveling around. I was pretty busy. The secretary, his secretary (12/41)
asked me to come up to Siem in New York. Chase Econometrics was in Balaken with Pennsylvania, the first Western suburb out of Philadelphia. So I took the old bankrupt, Femme Central Railroad in New York and went up to the top floor of Chase Manhattan Plaza. And I saw David Rockefeller and he gave me an assignment and he said, this is what I want you to do. Do you think you can do it? And I said, I can. He said, can you get it to me in a certain and gave me a deadline? So I went back and I worked on it very, very diligently. And I sent it to his office. And a few days later, I got a call from Mr. Rockefeller's secretary, asking me to return to New York. And I was pretty proud of the project. I thought that it was a great effort. I had done exactly what was wanted. And I went to see Mr. Rockefeller and he started out saying something to the effect. Well, this is a great first effort. Wow, that must have been a very cool experience for someone at your level and your age at that time, (13/41)
getting that kind of compliment. You know, I was still in my twenties. I'd earned my PhD when I was 26. So I was crestfallen when he said it's a good first effort. And he then suggested several different avenues to me. And my crestfallen condition, I took the train back to Philadelphia, worked on it. I don't think I slept for days while I was trying to complete the undertaking and sent it back to New York. And a few days later, David's secretary called and said, Mr. Rockefeller wishes to thank you for your excellent effort. And I did another great project for them. What are butcher who was number two in command today? It was very interested in productivity and how I that helped the inflation at the time. And they undertook an extensive study of productivity, which they wanted to be able to document with solid research. And Michael Evans assigned me that job. I was a major undertaking because the Chase published double page editorials in Wall Street Journal and other leading (14/41)
publications at the time about the findings of the productivity study. My name wasn't mentioned, but I knew I had done it and I kept those records. But I got to do that. And David also asked me to attend the asset liability committee meeting, which sort of changed my whole life because I knew at that point in time I wanted to move from research into the financial investment. I interviewed someone named Roger W. Robinson, who was senior director of international economic affairs at the Reagan NSC and was one of the architects of the economic warfare against the Soviet Union in the 1980s. And he was, coincidentally, David Rockefeller's personal staff assistant in the 1970s. And I remember him telling me what that experience was like. He would fly with David on his private plane to Europe and to meet everywhere, wherever he went, people wanted to meet him, the local politicians, the presidents, the prime ministers, et cetera. And I just think when I hear you tell this story, I have that (15/41)
additional context of understanding that in the 1970s, there weren't many people in the world who were more powerful than the Rockefellers. They were at the very top. And to know David and to have that kind of relationship must have felt extremely special. I never got to travel on the plane, but I did get invited to the asset liability meeting. And I did keep in mind that they had a large economics department headed by John Wilson. And David could have used many economists or multiple of their economists for some of the projects which I did. And that was a very good feeling for me. It was one of those great privileges because when I went from the Dallas Fed to the econometrics unit of Chase Manhattan, I had no idea who was running Chase Manhattan and had any idea whatsoever that I might actually come in contact. But David was an exceptional man. He was a very good economist. He had a PhD in economics from the University of Chicago. It was one of those great pleasures in life that you (16/41)
just sort of stumbled into. So you've done many other things besides that. We can't get into everything, but most notably, perhaps you were chief U.S. economist for HSBC Group, which is one of the largest banks in the world, or at least it used to be. I don't know where it still ranks today. It was number one when I left them. When they bought Carol McIntyne and McGinley, they were still the British colonial bank, 18th largest in the world. William Purvis took them from the British colonial bank to the largest bank in the world, which is where they were when I left in 1996. William Purvis was another one of those exceptional people, knighted by Queen Elizabeth, great banker. It was a privilege for me to get to know him a little bit. I would travel to Hong Kong or London and the scene. From time to time, I would be given projects to do for him. And that was also a wonderful experience. And I also survived quite a few mergers, I think a total of five in that process, which was a very (17/41)
pleasing demand. I don't know how I did it, but I did. And you were also EVP, executive vice president and chief economist at Fidelity Bank. So let's use the totality of your experience, your academic experience, your experience at the Federal Reserve, and your experience working in the private sector as an economist. The 50, I think 55 years you've been in the business or so. Let's use that to paint an economic picture of where we are today and then go about doing some analysis on it. First of all, when you look across the global economy today, what is your assessment of how it's doing? Poorly, very poorly. Take for example, if you look at real per capita GDP, or the average of real per capita GDP and GDP, which is really the more appropriate thing to do because they diverge and they're equivalent. And so to get the best understanding, I think it's appropriate to average GDI and GDP. That's what the... Gross domestic income and gross domestic product. Yes. That's what the National (18/41)
Bureau of Economic Research, which is our business cycle dating authority, and probably don't preeminent research organization in economics. That's what they do in assessing changes in the business cycle. They take the average of GDI and GDP. So in the 20 year moving average to 1970, it was growing at 2.2% per annum. And in the last 20 years, ending 2023, we're growing 0.9% per annum. We've lost 1.3% per annum in the 20 year growth rate. And by the way, if you look historically from 1870 to 1970, and we have data, pretty good data, not perfect, for that 100 years, the real per capita growth rate was also 2.2%. The last 20 years, we're down to 0.9% per annum. If we had stayed at the 2.2% just in the last 20 years, the average real economic activity per person would be $78,000 or so. Whereas in actuality, it's only 66,000. So we're really losing a lot versus trend. And this is even worse in Europe and the UK and Japan. All of us are not performing in the way in which we did. And I (19/41)
believe it's a reflection of the harmful effects of too much debt, very, very high levels. I think it triggers a law of diminishing returns, which is derived from the production function, one of the main concepts in economics. Economic output is technology interacting with the factors of production, land labor and capital. Overuse, one of the factors of production, initially output rises, continuing to do so, output flattens and still increase that factor. It turns down, mathematicians call that a parabolic function, falls out of partial differentiation of the production function. That explains why we have the growth that performance is the standard of living has been slowing. Now, however, we have an even more serious situation because we have negative national saving. If you'll make sure you remember that the circular flow, which says GDI equals GDP equals production of goods and services, they're interchangeable. So you can move parts of one side to the other back and forth out of (20/41)
the circular flow. We know that net physical investment, plant and equipment must equal net national saving. And we now have a condition of negative net national saving. Without net national saving, we cannot have net physical investment. Without net physical investment, we cannot increase the capital stock, which means that the production function is not going to be able to develop. It's going to develop as long as we have negative net national saving. So when you say negative net national savings, can you define what net national savings is for listeners? Okay, so saving has three components. It's private saving. Private saving actually has two components, household and corporate. So there's private saving, foreign saving, which of course is the inverse of the capital account, and then government saving, which in this case is dissaving. So what we have a situation today is that the federal budget deficit is greater than the sum of private saving and foreign saving. So we have a net (21/41)
negative national saving. The production function is not operative. You know, to make labor and natural resource extraction more productive, they have to be given increased capital stock to work with. And the physical investment is equal to the change in the capital stock. So we've really dug a deep hole for ourselves. The problems are basically worse. Everywhere else, there's some minor differences, perhaps, but the budget deficits are just simply too large. And you say, well, we can have the Federal Reserve, Accelerator Central Banks accelerate monetary growth. However, additional monetary growth does not correct the problem of negative net national savings. You can increase the money supply, but that will just have an inflationary impact. There's no way to inflate our way out of the problem. Inflation just has a devastating impact on the modest and moderate income households, which then means that inflationary policies increase the income and wealth divides. We're seeing that big (22/41)
time in all the major economies of the world. So you could conceivably use fiscal policy to reverse negative net national saving, but there is no one that has that agenda. No one whatsoever. And it would require a great deal of political goodwill and shared sacrifice. And there's just no pathway to achieve it. So we're stuck with it now unless something for two of us happens. It's going to be very hard to alter this downward trend in the standard of living, which means that the income and wealth divides are going to get worse. And it's not a wholesome development at all. So is this dynamic analogous to burning the furniture to heat the house? What you're basically doing is you're using your depreciation to live on. There's a classic story in American history about the pilgrims. They embarked just before Christmas in 1620, and they didn't get a chance to plant their crops. They were starving or scatting about to find whatever they could. And they came upon a large store of corn that was (23/41)
buried there somewhere near the ocean. And they ate it, which infuriated the Indians because it was their seed corn. And so basically we're sustaining consumption and daily living by eating our depreciation. That's what it means when you have negative net national savings, you ultimately get negative net national investment. And you're not going to be able to grow your capital stock. It's a very difficult situation. And I don't think that this is well understood at all because it blocks the normal production function. The production function goes back to the original work of David Ricardo. He only took into consideration two factors of production. And then a lot of additional work, much of a much improvement and understanding is traceable to the work of Robert Solo. Nobel Laureate taught at MIT and he had the exogenous growth market. He relied on the production function and he developed the marginal revenue product of capital, natural resources and labor. But the exogenous variable in (24/41)
his model was saving. You have to have saving. You may recall, having read Keynes, Keynes talked about the fallacy of thrift. And his idea here was that if people do what's right in their own interest to try to prepare for a rainy day, they will have to take retirement or education or unexpected needs and they say that this will leave the economy with an insufficient level of saving. And so by doing the right thing on the individual level, we have this adverse macroeconomic impact. The problem is now Keynes is concerned about too much saving doesn't apply because we have negative net will save, which is a very, very serious problem. And it will become more evident and it's going to be difficult because this concept is complex. And frankly, I don't think that the American economy has much of an understanding of economic theory or economic history. So the relationship of savings to interest rates is inverted, right? So as savings decline, interest rates, all things being equal go up. All (25/41)
things being equal. And there is an effect there. I think though that the main thing ultimately is what happens to inflationary expectations and the main ingredient inflationary expectations. It depends upon whether there's too much money chasing too few goods or whether we have the reversal of that situation. So now, you're putting aside the national savings rate. I just know that the personal savings rate throughout the 90s and early 2000s continue to decline. And yet this is a period of declining interest rates. Is that because we were importing foreign savings? It was declining. And at that point in time, the debt levels were deleterious. They were triggering the law of diminishing returns. So the increased indebtedness was pulling the growth rate down. But you still had positive saving. The budget deficit were not so large that they were greater than the private and the foreign savings. So in that time period, generally speaking, the debt was when you're operating with the (26/41)
production function and you're overusing debt, you generate the law of diminishing returns, which is deleterious effect. And the increases in money that the place in that time period were not excessive. In fact, that you would call them generally normal and they were more than offset by a downturn in velocity. And so the net effect was that the inflation rate came down and so did inflationary expectations and interest rates. During the pandemic, what we basically did is we pushed money growth far outside the bounds of normality. And it led to, you know, 9 to 10 percent inflation rate there in 21 parts of 22. And the economy did better for a little bit. But ultimately, inflation is so hurtful to so many people that the Federal Reserve had to reverse themselves, which is what they're now doing. And even with the six trillion dollars of debt that was taken on during the pandemic, that did not bring the rate of growth in real per capita income back to the trend line, just brought it back (27/41)
seeing that today very, very evidently. So I want to talk about inflation and why it seems somewhat stuck, at least as a measure of CPI at around 3% or so. Before we do that, one of the topics that's been more hotly debated in the last year or so among economists, especially, has been the neutral rate. What is the neutral rate of interest? And there's a lot of speculation about whether it's higher or lower. I think you fall on the camp that it's lower. First of all, explain to our listeners what the neutral rate is, which also known as R-star. And what is the relationship between the neutral rate of interest and the net national savings rate? Well, the first of all, I think that the key relationship is what's happening to the real per capita growth rate in the average of GDI and GDP. And so in 1970, it was 2.2% and we're now 0.9%. So I think that that kind of gives us a bit of an approximation. It has to be moving in alignment with the standard of living. So the standard of living (29/41)
growth rate is coming down and the natural rate is coming with it. What was the first part of your question? Well, my first question was, what is the neutral rate of interest for people that don't know? And then what is the relationship between the neutral rate and the savings rate? How does savings, in other words, impact the natural rate of interest? Up until now, the impact has not been that important because you see, 2023 was only the eighth year in which we had negative national savings since 1929. And the other seven years, they were all when we were in serious economic contractions. Well, four of the negative national savings occurred in the 1930s. And then we had three negative national savings in 2008, time 10. Very, very rare, but it was not a persistent condition. But now we have a very, very difficult problem and one that at least to me appears very difficult to resolve. Before now, we had an excessive debt in this problem using the production function, which indicated the (30/41)
debt was bringing the growth rate down the law of diminishing returns. But now, however, when you have negative national savings, what it means is that we collectively are living beyond our means. But we don't have the resources to increase the capital stock. So if savings are so low, does that mean that we should expect to reach a bottom in the savings rate at some point and for that trend to reverse itself? And if it reverses itself, does that mean that we're going to be in a period of lower natural rates of interest for the foreseeable future? Because I think that's where you fall in. You expect a lower neutral rate of interest, but is the reason because people are going to have to start to save more? Is that the reason why? Well, the question is they don't have the income to save more. So I don't think that redressing the negative net national saving rate can be really done in any significant way by the private sector, nor by the current account, which then determines the foreign (31/41)
save. I think the problem is in the governmental sector. The things can be done to private saving, but I think that they're minute in comparison to what needs to be done to fix the federal budget deficit. Fed Chairman Powell recently said that the budget now is unsustainable. And I think he's correct. And the reason he's correct is we have negative national saving. We cannot have an increasing level of prosperity in this environment. So the economy has really held hostage to the federal fiscal situation. Do you think that the Treasury has become a bigger or more important economic actor today relative to the Fed, relative to what the Fed was, say, 15 or even five years ago? We've had two major coordinations of monetary and fiscal policy. The most recent, of course, is the pandemic where the Fed became a partner with fiscal policy. But this was done one time before in the 1970s. Nixon was president. I was a young economist at the Federal Reserve Bank of Dallas and wage and price (32/41)
controls were put on by Nixon. He had legal authority to do so. He asked the Fed to accelerate monetary growth and they were forced to do so because Burns quite unfortunately agreed to be part of the wage and price structure. He was chairman of the interest rate and dividend control committee. And he was also serving as chairman of the Federal Reserve Board. And so to placate those that wanted to be able to raise prices but they could not or wages, the Fed, he had to try to hold down the interest rates and the dividends. And so doing the accelerated monetary growth. When the inflation, however, surged out of control, Burns discovered that the fiscal policy partners were no longer there. And so guess who had to clean up the inflation of the early 1970s? Burns and he didn't do a very good job of it. It was only partially done. And we suffered for suffered rising inflation all the way until Paul Woker came in and it took him two years to finally get the job done two or three years to get (33/41)
the job done. So now we go into the pandemic. And there's no recollection of major path policy mistakes. That's just the character of the way things are. So no one remembers that the last coordination entered in disaster of too much inflation. And a decade of rising inflation and this worsening of the income and wealth of it. So the power fed cooperates with fiscal policy. And to do so he coordinated engineers and unprecedented increase in money supply, which was even greater than what Burns had done during the early 70s. But the same thing happened to Powell, which happened to Burns. When the inflation problem arose, the fiscal policy partners were no longer present. And that left the Federal Reserve to clean up the problem by itself. And so one of the great challenges that the economy faces is for the Federal Reserve to operate independently. And those that tell you that we can somehow solve our problems of this declining rate of growth in the standard of living by adopting some sort (34/41)
of inflationary outcome. And my view are gravely wrong. If accelerations and monetary growth only produce very transitory gains in economic activity. When people realize the inflationary impact of monetary policy, then the system becomes unanchored. And you have this devastating impact that worsens the income wealth distribution. And so the best thing for the Federal Reserve is to maintain its independence and not give up its ability to do the right thing. And I don't know to what extent this played a role, but the Federal Reserve moved very, very slowly to deal with the monetary increase that they put into the economy in 2021 and the inflation got out of control. Now, the inflation has come down. But last year's decline is what I call a contra normal cyclical development. That was the largest decline in inflation for any year in which GDP was rising inflation. Has declined by more than it did in 2024 on several occasions, but they were all in recessions. So we got a response, but it (35/41)
was an abnormal response. Normally inflation is a lagging economic indicator. And I think it's not surprising that the inflation rate is kind of stuck where it is. That's its nature. But as time goes by and as the monetary restraint moves further and further into the economy, which it's doing right now, there will come a point in which the inflation rate will fall. The sickality of it is that inflation is a lagging indicator. And I'm just going to give you one contrary indicator, which I think indicates this. The CPI, as you said, is stuck up above at 3% or slightly more. But the real problem here is the so-called shelter component, very controversial component. If you exclude shelter, the CPI has been under 2% for the last eight months. It is 1.8%. Now, the shelter component is a very badly conceived sector. What the Bureau of Labor Statistics does is they ask folks, what is the value of your home if you were going to sell it? Well, people always have an inflated value of their home. (36/41)
store value and unit of account, but it's fading importance. If you look at money in real terms, in that basis, we have record declines for the last 12 months, 24 months and 34 months. And we're also getting a very large decline in real terms of bank credit and bank loans. And in fact, CNI loans and nominal dollars, even in mid-March or 80 billion where they blow where they were at their peak back in the fall of 2022. Monetary policy is extremely tight and monetary policy will work with long legs and the inflation rate will come down. The unemployment rate, which the Fed is also focused on is another lagging indicator. So the cyclicity of the situation, the cyclicality, I mean, suggests that the inflation rate will actually fall to the Fed's target. But at the same time, the unemployment rate will rise more than where they're expecting it to go. So Dr. Hunt, I'm going to move us to the second hour of this conversation. And some of the questions I have for you are, one, a follow on the (38/41)
comments that you've ended the first hour with, which is why have the lags been so long this time? Why have the hikes of short-term interest rates by the Fed taken so long to materialize in a slowdown of the economy? I'm also curious to understand and sort of follow up on our conversation about the savings rate and interest rates and economic growth. To understand how we get out of the situation, because if the United States government needs to, quote, get its fiscal house in Northern, in other words, rely less on debt financing to pay fiscal obligations, that would also lead to an economic contraction. And so like we seem to be caught in this impossible situation where the solution to the problems of too much debt result in an economic contraction, which raises the relative carry burden of that debt. So that's something I want to talk to you about. I also want to understand more specifically how far out you see interest rates remaining depressed, because if you do believe that the (39/41)
neutral rate of interest is actually lower than it was going into the pandemic, which I think is your position, but you can clarify it in the second hour. If that's the case, how long is that going to continue in your view, or what are going to be the factors that are going to be contributing to it? And the same thing goes for inflation. And I also, of course, want to ask you what asset classes or industries or sectors you're most bullish on. What are the things that you think are going to do well in this environment? For anyone who is new to the program, Hidden Forces is listener supported. We don't accept advertisers or commercial sponsors. The entire show is funded from top to bottom by listeners like you. If you want to access the second hour of today's conversation with Dr. Hunt, head over to hiddenforces.io. And sign up to one of our three content tiers. All subscribers gain access to our premium feed, which you can use to listen to the rest of today's conversation on your mobile (40/41)
device using your favorite podcast app, just like you're listening to this episode right now. Dr. Hunt, stick around. We're going to move the rest of our conversation onto the premium feed. If you want to listen in on the rest of today's conversation, head over to hiddenforces.io. And join our premium feed. If you want to join in on the conversation and become a member of the Hidden Forces Genius community, you can also do that through our subscriber page. Today's episode was produced by me and edited by Stylianos Nicolau. For more episodes, you can check out our website at hiddenforces.io. You can follow me on Twitter at cofinas and you can email me at info at hiddenforces.io. As always, thanks for listening. We'll see you next time. (41/41)
What's up everybody? My name is Dmitriy Kafinas and you're listening to Hidden Forces, a podcast that inspires investors, entrepreneurs, and everyday citizens to challenge consensus narratives and to learn how to think critically about the systems of power shaping our world. My guest in today's episode is Professor Sergei Plohji, the director of the Ukrainian Research Institute at Harvard University and a leading authority on Ukraine, Russia, and Eastern Europe. He's published extensively on the international history of World War II and the Cold War, and he joins me today to discuss the subject of his latest book on the war in Ukraine and the return of history. This is a conversation about national identity, the disintegration of empires, and what will follow from the largest European land war since World War II. How will the outcome of the war in Ukraine inform the evolution of the international order? And what are the most compelling theories that explain Putin's decision to invade (1/40)
in the first place? Was it to build a greater Russia, as some of his detractors have claimed, or did Moscow face legitimate security concerns from NATO enlargement that on their own can explain the course of events? The answer to this last question holds important lessons about the future of European security and US policy towards China, which is what we spent part of the second hour discussing. If you want access to that part of the conversation and you're not already subscribed to Hidden Forces, you can join our premium feed and listen to the second hour of today's episode by going to hiddenforces.io. All of our content tiers give you access to our premium feed, which you can listen to on your mobile device using your favorite podcast app just like you're listening to this episode right now. If you want to join in on the conversation and become a member of the Hidden Forces Genius Community, which includes Q&A calls with guests, access to special research and analysis, in-person (2/40)
events and dinners, you can also do that on our subscriber page. And if you still have questions, feel free to send an email to infoathiddenforces.io and I or someone from our team will get right back to you. And with that, please enjoy this incredibly informative conversation with my guest, Professor Serhii Blokhi. Professor Serhii Blokhi, welcome to Hidden Forces. It's a pleasure. Thank you for having me. The pleasure is all mine, Professor. So before we get into the subject of today's conversation, which is going to build off your latest book, The Russo Ukrainian War, The Return of History, I'd love if you could take a moment to tell me in my audience a little bit about you, your background and your interest areas and focus in the field of history. I am Professor of Ukrainian and European History at Harvard University. And this is more or less what I have been doing for my entire life, my professional life. I was educated in Ukraine, which was at that time part of the Soviet Union. (3/40)
I started my academic career at the University of Dnipro, which is now relatively close to the front lines of this war. I continue it in Canada, University of Alberta in Western Canada. And I am Professor of Ukrainian History at Harvard since 2007, Director of the Ukrainian Research Institute at Harvard. And my field is Ukrainian and European History, but also Global History. One of the courses that I teach at Harvard is on the Yalta Conference. I teach course also on the Cold War, that on the top of course, of course is on Ukrainian and European history. And in that sense, the book that we are discussing today, it brings together different fields, my different interests, but also my connection to the region, connection to Ukraine, connection to the things that are happening today on the battleground. So while I was reading the book, I came to the view that it dealt with two, if not maybe three topics. One was the origin of the war in Ukraine. And folded within that was also a (4/40)
conversation, a big part of it was really a conversation about Russian and Ukrainian identity and the sense of Russian nationhood and how that has evolved both up until the end of the Cold War and then subsequently with the fall of the Soviet Union. And the other part of the book is really a look forward into what the consequences of this war will be for the future and how the global order is evolving. Would you say that that's pretty much an accurate description? Yes, I would say it is an accurate description and the origins of the war, the issues of identity. This is the focus of the first chapters, few chapters, and then the future is the focus of the concluding two chapters. What is also in between, I try to look at the actual developments on the front lines in the course of the last year. So the book was written between March of 2022 and February of 2023. So what certainly the reader will get out of that book will be not just the origins and consequences of the war, but there will (5/40)
be a lot of war itself. Yeah, there's, you devote many chapters to describing actually the progression of the war in the last year. So that was extremely useful as well. And I'm sure it'll be a really good history for people who are maybe in the future and learning about the war later. So when did you begin writing this book? I started writing it really in late March, so it would be more or less one month into the war. And by that time, the shock that came with the war, I was able to overcome it on some level. But also for me, it became clear already in March, in late March, the overall outcome of that war. So we still don't know when it will end and exactly how it will end. But already in late March, it was clear for me that Ukraine would survive as an independent state. And that would be certainly mean defeat for Russia and for Russian aspirations as it was and plans it was going to the war. So from that point of view, at least I thought that I knew what I was talking about in (6/40)
historical perspective. In historical perspective, I mean, I could talk about the origins, I could discuss the developments, and I could also talk in my opinion quite confidently about the future, not the immediate future. I don't know what will happen tomorrow. I don't know exactly what will happen one year from now. But historical frame gives you understanding of the ultimate outcome, long-term outcome of those processes. Because I look at this war as the war of the Soviet succession or Russian succession, one of the wars of the history, story of the disintegration of the Russian Empire, one of the biggest world empires. And we know where the wars end of that sort. They end up with ultimately the victory of the national movements, the formation of the states. And another thing that the first months of the war made me confident of was the ultimate Ukrainian victory. So the victory meaning survival. In the after World War II, in now almost 80 years since then of World War II, there was (7/40)
huge, right? So if we have 100 cases today in a week, we have 700 cases. In two weeks, we have 4,900 cases. So 5,000 cases. And that's so fast. People think that it's a small number today. But the point is that all those people have already been infected that are going to show up as infected in a few days. And so if you react today to what's happening today, it's not going to do anything because the reality is much more serious. It's a tip of the iceberg kind of situation. And it's a dynamic tip of the iceberg. So basically every day, the iceberg has gotten bigger in a way that you're seeing more of the iceberg, but then the iceberg has already extended further. So we have this ongoing dynamic where it's getting worse and worse and worse, very fast. So from what I understand, we were at about 10,000 cases or so outside of China around two weeks ago. Well, let's look at China first. China did a lockdown when they had 800 cases. 800 cases. And because when they locked down, there were (22/41)
content tiers or even just support the show with a lower donation if you want. And also please subscribe to our mailing list. I haven't made much use of it in recent years, but I'm going to be doing that in the near future. I can promise you that. So please enjoy everyone and you'll hear from me again soon. Professor Yannir Bariam, welcome to Hidden Forces. Thank you for having me. Well, thank you for coming on the program. So maybe you can give our listeners who may not know you or be familiar with your work. Give us your background, how you got involved in studying COVID-19 and what you want listeners to understand about this virus. So I'm a physicist and I started about 30 years ago working on understanding complex systems. So systems that have many interacting components and the fundamental tool for dealing with this requires kind of mathematics that goes beyond traditional calculus and statistics and is not widely used. And that enables us to think about sudden sharp transitions (9/41)
Today's episode of Hidden Forces is made possible by listeners like you. For more information about this week's episode or for easy access to related programming, visit our website at hiddenforces.io and subscribe to our free email list. If you listen to the show on your Apple Podcast app, remember you can give us a review. Each review helps more people find the show and join our amazing community. And with that, please enjoy this week's episode. What's up everybody? This is another special episode. I keep calling this episode special because I've gotten so used to putting out weekly content with a lot of prep and time to think about the subject to prepare for the guest. And I've decided that that's really not feasible anymore. Just given what's going on, we're living in the most radical period that I've experienced since 9-11. It feels surreal in much the same way that 9-11 did. It also feels hopeful, I think, in a way because there's a lot of camaraderie. Maybe hopeful is the wrong (1/41)
word. You get this sense of camaraderie that you had after 9-11. Whenever I speak with anyone, and I'm not talking about friends, I mean in a professional way, there's a level of compassion and empathy and concern for the other person that I remember was prevalent after 9-11. This is a lot what this feels like, but it's a difficult thing to try and cover because I like to always feel like I'm providing reliable information. It's difficult for me to vet what's out there because there is so much information. So I've decided to just go with it. My guest for this episode is Professor Yannir Barhyam. I came across Professor Barhyam's work on YouTube. He was actually introduced to me through a friend who had been following his lectures or had been to one of his lectures because he's very close with Naseem Taleb. They actually do lectures together and have been releasing videos on YouTube that you can actually watch dealing with COVID-19. Professor Barhyam has also created a website. He's (2/41)
also the president in case I didn't mention this. He's the president of the New England Complex Systems Institute. So that was a cool thing. We've long time listeners know my affiliation, informal affiliation with the Santa Fe Institute. I was invited to stay there for a period of time in the beginning of Hidden Forces in the first six months or so. I've had on a number of people from SFI, Brian Arthur, Sam Bowles, Geoffrey West, people like that. And complexity science has played a major role in the progression of Hidden Forces. And it's something that I've incorporated into my own models and ways of thinking. So that made me feel comfortable. He also has a website called endcoronavirus.org where he puts out a lot of information about coronavirus, what it is, how businesses should deal with it, guidelines for self-isolation, recommendations for policymakers and stuff like that. You can sign up to his newsletter or to get updates from him and his team. So you should definitely go check (3/41)
that out. I want to find a way to talk about this subject from a human standpoint because it's like I'm sitting here and I'm recording this and I'm like, okay, how do I do this professionally? While at the same time, not dehumanizing what's happening because this is unnerving. It's especially unnerving if you have been following it for months like I have. I think a lot of people have who are on Twitter and many of you will already know who heard my episode with Kyle Bass that I think came out in November. We talked about this. Kyle talked about it. He talked about it in a different context. Talked about it in terms of bioweapons from China. But bioweapons aside, this is a virus that came from China which is now disrupting our lives and our economies. I have friends that have already gotten laid off. I was just speaking with a radiologist friend of mine today who has seen 12 scans of COVID-19 patients in the last 24 hours. If I remember correctly, 11 of those 12 were people between the (4/41)
ages of 30 and 45. I am not a radiologist, but based on what he said, the scans look pretty bad. The idea, he told me that this is just old people is just not true. I also know from another physician friend of mine who sent a patient of his to get tested for COVID-19 at a Northwell clinic in New York City. Northwell is the largest healthcare provider in New York State. They told her that she should expect the results back in eight days. It's really hard to know where we stand with the numbers, with the number of infected, with the number of deaths and how to reconcile those numbers to get some type of mortality rate that actually reflects reality. Case mortality is one thing. The mortality rate among confirmed cases is one thing, but what is the overall mortality rate? Those numbers are still coming in. Someone like Professor Yannir would say that it doesn't matter. It's really bad and we should be doing something about it. I'm not disputing that, but I'm just trying to get a grip on (5/41)
the facts to try and help all of you navigate them. That's my objective now. I've decided to get into this. I've reorganized my schedule. I've canceled a lot of guests that I had booked. I still have an episode tomorrow with Ben Hubbard, the Middle East correspondent for the New York Times, to discuss the Saudi price war and do a deep dive into the kingdom and the rise of Muhammad bin Salman. I think that's relevant, especially for those of you out there who are interested in what's going on in the oil market. The markets have been decimated. It has been a bloodbath. It's actually more acute than 2008. At least that's how I remember it. I mean, what were we down yesterday? 12% I'm recording this on Wednesday, March 18th. I think yesterday we were down 12% or was it the day before? I can't remember. I mean, it's wild and the price of oil has collapsed in part because of Saudi Arabia's commitment to flooding the market, but obviously it's in the face of a giant demand shock and bond (6/41)
yields have been up and down. I mean, I think they were all the way down below 0.4%. And last I checked, they were something like 1.3, 1.2. I mean, don't quote me. I don't spend a lot of time looking at the markets. And that's the other thing. It's kind of... Part of me wants to be on top of everything that's happening, but if I'm on top of everything that's happening, I can't really prepare for any type of conversation. So anyway, I've said enough. This is going to be a work in progress guys trying to figure this out. Right now, I'm committed to the weekly release schedule and the idea is to release extra episodes like this one when I can. I may change that and just start releasing stuff as soon as it gets recorded, but we're all going to kind of figure this out together. So my conversation with Professor Yannir lasts for about 30 or 35 minutes or so. I just recorded it, haven't listened to it yet, and just recording this intro now. So I hope that it's informative. I hope that it (7/41)
provides some type of value for you. And as we move forward, I hope to be able to do more of this, not necessarily or exclusively dealing with the actual virus or the biology of this situation. Dealing with the entire scope of what people are experiencing emotionally, what people are experiencing with work. You know, I think there are really interesting opportunities to do episodes about companies that are thriving in this environment. So we'll see. But I hope all of you stay safe. I hope all of you stay calm and we will get through this one way or the other and it's going to be okay in the end. So please enjoy and always feel free to reach me at DK at hiddenforces.io if you have any thoughts you want to share. I get many emails these days. I can't respond to anywhere near enough of them, but I read all of them. I love hearing from you. And those of you who are interested in supporting the program, you can go to patreon.com slash hiddenforces and you can subscribe to one of our three (8/41)
like boiling water or things like that really require a different kind of mathematics. And that's important for thinking about various real world systems because dependencies actually matter and statistics and correlations are not adequate. So about 15 years ago, one of the topics I started working on over the last number of years was the issue of pandemics. And it started from a very simple model of the effect of long range transportation on pathogen dynamics. And the result of our analysis was that there was a transition like boiling of water that happens as you add more and more transportation. What happens is you go from a situation where you have local extinctions because the pathogen spreads locally to global extinctions as the pathogen is able to spread globally. And that transition is a sharp transition, which means that you're going along adding more flights around the world and you are getting close to that transition and all of a sudden instead of having small local events (10/41)
happening, you have massive global events. And that was a big concern to me. So we started raising the alarm and unfortunately people didn't pay much attention. In 2014, there was the Ebola outbreak in West Africa, which was eventually 10 times as large as a previous Ebola outbreaks. But actually other people were predicting that it was going to be much, much larger. They thought it would go to burnout with 10 million people dead. But I was thinking how one could stop outbreaks. And the idea which comes from complex system science is that you can go to a larger scale. So instead of thinking about individuals as transmitting the disease, you can think about communities as transmitting the disease and you can treat communities as infected. And the trick is then you go into the communities and you detect people that are in the early stages of symptoms and you stop them from transmitting, you isolate them and that's actually what was done. So in West Africa, people created teams in (11/41)
neighborhoods of neighborhood people and they went door to door and they used forehead thermometers to find out when symptoms were present and those people were isolated and that stopped the outbreak. So it went from an exponentially growing, every week, doubling epidemic to dropping like a rock, again, exponentially declining and it disappeared within a few months. So I've since worked on Ebola outbreaks in the Congo, working with the World Health Organization. And again, the strategy of doing community empowerment, really, having the communities be responsible for outbreak response was successful there as well. Or beta important contribution, surely wasn't the only thing, but it was really key to the success. So that brought us to the present. I mean, the Ebola outbreak just stopped. It was going on for a year and a half before eventually this approach was used aggressively and it was stopped. So how does this idea of transportation dynamics relate to network connectivity and how can (12/41)
listeners think about that? So the main thing is that disease transmits through these contacts between people. So people touch each other. They breathe the same air. They touch surfaces that other people touch. Those are all relevant to the coronavirus transmission. Each disease has its own network because of the way it transmits. But that network connects people and the disease transmits through it. If you imagine one person is infected, they infect a few others and then it spreads out across the network and jumps to different places through long range contacts, people traveling. And then the question is, how do you know to evaluate its propagation? And the answer is people characterizing using the multiplier. They characterize it by number, R0, which is the number of people that are infected by a particular person who's infected in that. If it's a mild disease, you can say, hey, we don't care, but if it's a severe disease, you want to stop it. And coronavirus are severe diseases and (13/41)
the social cost is unacceptable. And because it's unacceptable, the stopping of it requires radically pruning the network. And radically pruning the network has two parts. One is the local part because people are strongly connected to each other locally. And one is the long range part that got us in trouble because we connected communities around the world and now we're vulnerable to the outbreak. So if you cut the long range links aggressively, then you can work on killing the outbreak locally by isolating people. This is what was done in China and in South Korea in order to stop it by locking down communities, which basically means having people stay at home so that they can infect each other. But once you do that, you can really smash the outbreak because people don't transmit. So you know you have a solution. You just have to aggressively do it and China did it. They cut transportation around the country and they locked down the area of Wuhan, the Hubei province, in order to (14/41)
prevent any local transmission. And there's an incubation period of a couple of weeks. So after a couple of weeks, basically, they had the outbreak under control and then it's really beyond that. It's just a question of transmission to family members and a little bit of leakage because at the beginning they allowed people to go and get groceries every few days. Later on they stopped that and they went door to door to find all the cases. So they really focused on stopping all possible transmissions. And again, the door to door process, just like we had in West Africa, was an essential part of it and the outbreak stopped. And it was gone within four to five weeks. And basically two of those weeks in most of the country were just waiting until you were really sure that you had no cases. So I definitely want to ask you about a symptomatic transmission and what was done in China and some other countries as well, as well as many other questions. Just to clarify one more point there, when you (15/41)
talk about transportation, is this simply a question of volume and availability of travel and transportation? So more flights, more trains, more cars, is that how we're measuring this? And how does the interconnectivity of the world today measure to where it was, let's say, a hundred years ago with the Spanish flu? So several things. First of all, yes, it's kind of the amount of travel. It's the amount of global travel as opposed to local travel. But the more travel you have, the more connected you are, the more vulnerable to large events. The Spanish flu, even though it was a global event, it spreads comparatively slowly. Here we have the coronavirus over weeks, basically spreading globally. And that affects which diseases are able to travel worldwide. So there is this disease dependence that does matter. But the point is that as you increase the transportation, this transition shifts in terms of the qualities of the disease. If there is a disease that has an incubation period of a (16/41)
year and people are not aware that they have it and they walk around and they transmit it and eventually it gets around the world, then we're all dead. But there are not that many diseases like that. It's very hard for the diseases to sustain themselves. So the point is that within the cataclysm of disease we have, we are now in the domain of risk. And that's key. How unusual is that feature of this novel coronavirus that it is contagious, that it can be transmitted from person to person during this window of possibly up to 14 days without symptoms? Ebola does not transmit before the symptoms start. And the coronavirus is actually not even clear that it does. The parameters of the disease transmission early in the infection are not so clear. And part of the challenge of saying, hey, it transmits before symptoms or doesn't is that symptoms are very mild often in cases. So people can be walking around with a little bit of a sniffle or something or sore throat, whatever it is, a little (17/41)
bit of shortness of breath. And sore throat is not one of the symptoms actually. So I shouldn't have said that. But you know... Is that right? Because that's been reported. The primary symptoms of the coronavirus are fever, cough, and shortness of breath. So sore throat is not actually one of them. And I don't know that that means that it's never a symptoms, but it's not surely one of the primary symptoms. Now the point is that the way the disease works is that there's mild symptoms that can extend for a fairly long time. So you have kind of up to two weeks where you start showing symptoms and then you can have two to three weeks of mild symptoms. And then all of a sudden you have severe symptoms and require ventilation and an ICU. So there are these different stages and the boundary between the no symptoms and the mild symptoms is surely not very sharp. So it's hard to tell whether people are just not noticing or purposefully ignoring or whether there's actual transmission before (18/41)
symptoms start. And that's kind of hard to tell. But regardless, even if there are, you know, whichever it is, it creates some stress on different kinds of approaches. But each of the approaches has some utility. And lockdowns don't care, right? Because if you lock everyone down, regardless of whether they transmit before symptoms or not, they can't transmit to people that they're not near. So that's the advantage of the lockdown. The lockdown is kind of the action of last resort that really guarantees you that you will be able to stop an outbreak. And that's why we need it because we're in that kind of state. The transmission rate is high and people bandy around all kinds of numbers. But it's around three, three to four. Some people say we're at any range for two to five, but the lower numbers are based upon the early part of the transmission in China. And the early part of the transmission in China is based upon just a really few cases that are not sampling the distribution of what's (19/41)
going on. So that's the R not number. That's the R not number, right? That means the number of people that one person can infect when they come in contact with them. That's right. We're going about daily life. The problem is that there is no typical person, right? Someone goes to an event with hundreds of people like in South Korea and all of a sudden you have hundreds of people that have been infected by one person. That's a super spreader event. And hundreds of people being infected compared to a typical number of people that are infected, which is probably in the range of one to two to three, is just a totally different ball game. So that brings us back to this point about exponential growth versus linear growth and... Well, exponential growth can happen without super spreader events. The exponential growth is just this multiplier that, you know, and the easiest way to think about it is not with R not, but just with a multiplier from day to day to day. How many more new cases do you (20/41)
have in the next day than in the previous day? And the number there, people can estimate it variously, but it's at least over 1.3, which means there... And in the US, it's been going up by 32%, 1.32. So every day, you have 32% more new cases. And that has to sink in. It's much faster than Ebola. And the reason for that is because... So this is another question I have for you again, because there's been so many different things thrown out there. How does this get transmitted? Is it through the air? Is it from people touching their face and having touched something that someone else with the virus had touched? How are people getting this virus? Well, let me focus on one thing at a time. Okay, let's talk about the exponential growth. The point is that if you have 1.32, you have seven times as many cases a week from now as today. And you know, it's actually maybe a little bit higher. So let's say it's 10, just for easy numbers. And if you go to 10, it's 10-fold, right? I mean, even 7 is (21/41)
already so many people that were infected. And there's also the course of the disease, right? So people are becoming infected over time. They're infected with their family members. Maybe there are a few other people that are infected in hospital systems and someone might go into the supermarket even though they were locked down. The number of cases they had eventually altogether was 80,000 cases. Right. These are reported cases to be clear, especially the initial ones, which were probably drastically under measured. Right. But the 80,000 cases that they eventually had led to such hospital overcrowding with 10% of people end up on ventilators. So you had about 8,000 people on ventilators and you had an additional 8,000 people that had to be hospitalized. So 20,000 total were hospitalized. And then they built hospitals. They had 14 temporary hospitals, 14 for different stages, you know, mild, moderate, severe and on ventilators. And they sent 42,000 healthcare workers from all parts of (23/41)
China. And they were overwhelmed, overwhelmed. And yesterday, after, you know, now they're down to one case that wasn't, you know, an imported traveler. And they sent all of those people home. And you have to understand that many of the cases that are in hospitals take a long time to resolve, weeks to resolve. So even though they don't have any new cases, there are still thousands of people that are in hospitals being treated now. But today or yesterday, we already had about 2,400 cases in New York state. Well, I know from speaking with physicians at ER rooms here in New York and New York Presbyterian and other hospitals, they've started to see those numbers begin to move up in a very noticeable way in the ER. And a lot of, I was actually just speaking with a radiologist about an hour ago who has seen, I think, in the last day, an additional 12 scans of people coming in with coronavirus. And one of the interesting things that he had to say was that all of these were between the age of (24/41)
30 and 45, with the exception of one patient who was 63. And all of them had significant signs of pneumonia in the lungs. Yeah. So it isn't even something that's just for old people. No. People think that this is just old people. But over 50, you have a much higher chance of dying. And young people get it too and die too. It's not going to let people, people don't have a free pass. It's a very severe disease. People are just not getting it. So imagine that we have 2,400 cases in New York state. The population of New York state is one in 75 of China. We're China has 1.4 billion people. How many people are in New York state? I think it's 20 million the number. Yeah, that sounds about right. 20 million people. So we have 2,400 cases in New York state for a population of 20 million. 2,400 cases means that we're going to go to 240,000 cases. So that was one of the things I wanted to ask you. There are a couple of things that come up. Again, to your point about these are complex systems. (25/41)
China is a very dense country. It's a densely populated country. New York state is also very densely populated. And New York city is particularly densely populated. Both China and the United States did a poor job in the beginning of really monitoring this. I don't know who was worse. I would imagine China was worse. No. China did a poor job until they had 800 cases. And the US had all of this time. We saw what happened in China. We saw what happened in South Korea. We had a month, at least, more like two months to prepare for this. And we did nothing. We waited until we had local transmission before we did testing for this. We don't have the capacity to even test enough in order to see where the cases are. Worse than that, we waited until after we had 800 cases. I mean, even if we had 800 cases in the whole country, I mean, this country only has 350 million people compared to China. It's one quarter of China. Why would you wait until you're going to have 80,000 cases? And now we're (26/41)
going to have over 200,000 cases in New York state. And we have over 6,000 cases in the US. Now, today, it's going to be over 7,000, because we still haven't done anything. Well, to your point, I spoke with a physician yesterday whose patient went to the New York state's largest healthcare provider, Northwell, and was told that she wouldn't get her test results for eight days. Now, maybe this is also a good sign in the sense that they're getting backed up because people are actually doing testing. No, no, no, it's crazy. You don't understand. This is insane. The situation, and I mean, you can look for discussions of this online. The fact that we can't do testing is crazy. South Korea set it up so that they could do a lot of testing, and they used it to identify who was sick and isolated them. We don't have that possibility in this country. We're so far behind in terms of testing. So I want to ask you about both South Korea and Italy, maybe compare those two countries. Before I do, I (27/41)
was going to mention that from the numbers I've seen, and again, it's hard to get. I've relied mainly on Johns Hopkins and the World Health Organization. We were at roughly 10,000 cases outside China about two weeks ago. We're over 100,000 today. What do you think that we should see in the next two weeks? Because based on your numbers, it would sound like over a million. Why are you worried about that? Well, no, I'm not worried. So the reason I'm asking about this is because I think that one of the things that is very challenging for people is to understand how the growth happens. I think a lot of people look around. Right, so I think for people, it's hard to get that around their head. And so maybe giving people a sense of where the official numbers would be in two weeks from now, just based on the current growth trajectory. Well, the problem is that we don't yet know how people are going to act. If today, we lock down everybody in the country, and I really mean it. I'm not joking. So (28/41)
what does that mean, a lockdown? If we lock down everyone in the country, then we will have in this country over half a million cases, over half a million cases. And the hospital system will be over flooded. It will be indeed like Italy and much worse. We will have half a million cases if we lock everyone down now. And what lockdown looks like is everyone stays at home. They're not in contact with anybody else. The only thing that we're going to be able to do is do essential services, getting people food and medicines and basic necessities. So people can't even go out to get their own food in this type of scenario. It has to be delivered. Well, the way it was done in China early on is that people were allowed once every three days to go to the supermarket to pick up groceries. Later on, they didn't even allow that because they enabled delivery to take place. And the best thing is, again, to take every precaution. So the point is that we have to go to extreme. We have to go to the not (29/41)
normal. We have to figure out how to stop the outbreak by action because we're in no position to identify who's sick and who's not. The people around who have been identified as being sick, it's only about one in a hundred, maybe one in 30 of the people who are actually sick because we're not testing. I mean, there are these people, of course, that won't test positive because they're early in the infectious period. They're just been infected. So they don't have symptoms. They won't test positive yet. So that's a factor of about 10, let's say. And then there's another factor of about three or 10 because we're not doing enough testing. So somewhere between 30 and 100 more cases than what we see. And that's what's going to happen. I think that's one of the most unnerving things about this virus. The number of people that are asymptomatic that haven't developed symptoms yet, but will develop them who are infected. I think that's one of the most unnerving things. The basic thing is that we (30/41)
have this wrecking ball that's headed towards us. And as long as people are saying, hey, it's not that bad. And maybe if we wash hands, it'll be all right. It's like putting a tissue in front of you in order to stop the wrecking ball. And Italy did that. Italy showed us by example. And honestly, the fact that we waited for Italy to show it to us after China did what they did is pretty crazy. But Italy was in a situation in Italy. Italy, what they did is at first they started to shut down the north. But then they kind of said, well, hey, you know, maybe if we don't test, we won't notice that the cases are there and everything will be OK. And they waited until the hospitals got overloaded before they did anything. So now every day there are 3,000 new cases and they're out of hospital beds. So all of those hospital beds are taken. And remember that it takes a few weeks for people to heal, to cure, even if they do cure. Some of them, many of them will die. So what do you do when you run (31/41)
out of hospital beds and you have 3,000 new cases? Now, not all of those cases are severe, but say 20% of them are, 600. So you have 600 people showing up to hospital and you have zero new hospital beds. And that's going to happen today. It's going to happen tomorrow. It's going to happen the next day. It's going to happen the next day. So I mean, this is not a fantasy. This is not a joke. People are dying because there aren't any ventilators in Italy. So let's talk about that also because in terms of information, on your website I pulled some information. I've also heard you talk about this. You've said, and your organization has put out that about 20% of coronavirus cases. This is not a number that we invented. The number is, I mean, you can look in articles, some people say it's as much as 30%. This is just a medical piece of information. Well, okay. I guess my point is that, again, there's all this different information out there and I'm just trying to get a picture. No, no, this (32/41)
is not ambiguous. I mean, you have to understand why does anybody think that the fact that the Chinese locked down Wuhan and had to build 14 hospitals is somehow something that is not going to happen here. The fact that Italy is having all of these hospitals overloaded and the doctors are reporting, hey, you guys don't know what's going to hit you. It's going to hit you. This is not a make-believe situation. So I guess two questions. One, what is the best resource for people who want to become informed on what we're dealing with with respect to this virus? And two, what does your organization suggest? Well, how do you propose that governments, because again, going back to this point about complexity and systems thinking, this is not something that individuals can resolve on their own. Yes, individuals can take individual measures, but this has to be a collective response. So how do you think that people should respond and government should respond? And where can people find the best (33/41)
information on this? So first of all, so we have been trying to put out solid information two and a half weeks ago, when people clearly didn't get it in the West, in Europe, in the US about what was coming. I send out a call for volunteers and we now have about 3,000 volunteers. And the face of the organization that was created is on a website called EndCoronavirus. That's ENDcoronavirus.org. And there's a possibility of volunteering there for those who want to join. But the main thing is it has information and you can go and look at it. I mean, there are many other sources of good information, but obviously there's a lot of confusion because there are many sources of bad information as well. But people are beginning to get it. And in terms of action, yes, government should act great, but we don't have to wait for them. Everyone can protect themselves. They can protect their families. They can help their friends to protect themselves. And in a few days, when the hospitals become (34/41)
overloaded, the government is going to act. It should have acted two weeks ago or maybe a month ago, but they didn't. But it doesn't mean that you have to wait for them in order to act. And if you protect yourself for a few days and the government acts, then you'll be safe. You'll reduce the transmission so fewer people will get sick, including perhaps you. And when they do act, when the hospitals become overloaded, you'll be able to sit back and say, I did it first. And then everyone else will have a higher probability of being sick. But eventually it'll be taken care of. I do believe that once the hospital become overloaded, people will act. That's what happened in Italy. And I do think that that's what will happen here. And what does an overloaded hospital look like? Again, I really described it. There's only so many ventilators. I mean, we just don't have the capacity to deal with a huge number of patients that need their lungs, you know, the pump of air in order to survive. It's a (35/41)
terrible horrendous situation because the death rate is going to go from about 4% to about 10%. And the doctors, and this is what they're doing in Italy, they're doing military triage. Yeah. Well, I think for listeners who are curious, the New York Times Daily did an excellent interview with the physician from Bergamo, Italy, a hospital there with approximately a thousand patient beds. And they converted the surgery wards into areas for coronavirus patients. And they now have 50% of their hospital beds allocated towards coronavirus. They've had to send 650 nurses home who are sick, either with corona or something else, or just exhaustion. They're treating their own physicians as well at the hospital. And they have exactly, I just had to make choices about who to save and who not to save. And it's become very clear that that is where we're headed. And I guess the question is, at what point will governments, local, federal, state, how will they coordinate? And at what point will they put (36/41)
in these types of lockdown procedures that you're describing? And you think it's simply an inevitability in your point of view. And the answer is, the more we act, whether it's to save ourselves or to tell other people that action is needed, the more likely it is that people will act. So that's what we're doing. So in closing, Professor, what advice would you like to give listeners who are either individuals or people who are in positions to actually do something at the state, local, or federal level? And also businesses. Every business has the ability to safeguard their employees, their customers by taking action. We have put out guides on the website, the endcoronavirus.org website, trying to explain to people how to create safety for themselves, their families, improve the safety of other people around them, as well as guides for government, for business, and so on. And the main thing to understand, and this goes back to your question about transmission that we didn't quite talk (37/41)
about, is that the disease transmits basically in two ways. The first is by breathing in or by sharing air with people who have the disease. You have to be over six feet away from others in order not to catch the disease. And even then, you don't want to do that for a long time. And the other thing is that that breathing out or sneezing or whatever happens, that even just breathing out of the virus from your lungs, it falls onto every surface around. So if you touch a surface where other people have either touched or breathed on, the virus there will go onto your hands. And so it's a good idea to wash it, but one way or another, you touch it and you're likely to get sick from it. So you have to be careful about surfaces that are public or shared surfaces. So don't go or don't touch, use gloves and don't touch the gloves to yourself. But bottom line, don't touch things that are in public spaces, surfaces in public spaces or in shared spaces. And don't be near anybody that has any (38/41)
possibility of being infected. So what you want to do is you want to self isolate as if you're in a quarantine. You self isolate you and whoever you choose to be with during this period of time. And everyone who is together has to agree that they will follow the rules about, you know, not being in touch with anybody else except for the people who are in the group. Physical touch. You can always do FaceTime and phone calls and text people, but the physical contact is where you can't go. Professor, I appreciate you taking the time to speak with me today. And again, you want to give our listeners your website so they can check it out if they're interested and maybe subscribe to your mailing list. Sure. It's end-en-d-coronavirus.org. And there is a sign up. We have a few thousand people on a technical channel called Slack channel where people can collaborate and work together on all kinds of projects. And they're working on both on trying to influence decisions. But they're also working on (39/41)
ways to mitigate, you know, to help with the shortages that are going to happen in hospitals and all kinds of other things. So we're doing what we can. And it would be great if you join us. And aside from that, soon we'll have other ways people can collaborate that are in addition to the Slack channel. So look forward to people helping and making this work. All right. Well, thank you very much for being on the program. Take care. Today's episode of Hidden Forces was recorded at Creative Media Design Studio in New York City. For more information about this week's episode or if you want easy access to related programming, visit our website at hiddenforces.io and subscribe to our free email list. If you want access to overtime segments, episode transcripts and show rundowns full of links and detailed information related to each and every episode, check out our premium subscription available through the Hidden Forces website or through our Patreon page at patreon.com. Today's episode was (40/41)
produced by me and edited by Stylianos Nicolaou. For more episodes, you can check out our website at hiddenforces.io. Join the conversation at Facebook, Twitter and Instagram at Hidden Forces Pod or send me an email at dk at hiddenforces.io. As always, thanks for listening. We'll see you next week. (41/41)
growth rate is coming down and the natural rate is coming with it. What was the first part of your question? Well, my first question was, what is the neutral rate of interest for people that don't know? And then what is the relationship between the neutral rate and the savings rate? How does savings, in other words, impact the natural rate of interest? Up until now, the impact has not been that important because you see, 2023 was only the eighth year in which we had negative national savings since 1929. And the other seven years, they were all when we were in serious economic contractions. Well, four of the negative national savings occurred in the 1930s. And then we had three negative national savings in 2008, time 10. Very, very rare, but it was not a persistent condition. But now we have a very, very difficult problem and one that at least to me appears very difficult to resolve. Before now, we had an excessive debt in this problem using the production function, which indicated the (30/41)
What's up, everybody? My name is Demetri Kofinas, and you're listening to Hidden Forces, a podcast that inspires investors, entrepreneurs, and everyday citizens to challenge consensus narratives and learn how to think critically about the systems of power shaping our world. My guest in this episode of Hidden Forces is economist Lacey Hunt. Dr. Hunt is the executive vice president and chief economist of Hoisington Investment Management Company. He previously served as chief U.S. economist for the HSBC Group, as executive vice president and chief economist at Fidelity Bank, and as senior economist for the Federal Reserve Bank of Dallas during the course of a 55-year career studying markets and the economy. In the first hour, I asked Dr. Hunt for his broad assessment of how he thinks the global economy is doing today and what monetary and cyclical economic indicators he relies on to make that assessment. We discussed the increased role of the U.S. Treasury as an economic policy actor in (1/41)
the post-pandemic period, the concerning decline in the net national savings rate, and whether the neutral rate of interest, a hotly debated topic among economists, is actually moving lower in what this means for trend growth, interest rates, and inflation. In the second hour, I asked Dr. Hunt why he believes that the Fed has been able to raise interest rates by more than 500 basis points in less than two years without inducing a recession. Is this because other causal factors have remained more accommodative, or have the lags just grown longer and more variable? And if so, why? What does this tell us about the business cycle and the effectiveness of monetary policy? We also discussed the chronically high fiscal deficits and the implications of trying to reduce them in an environment where the economy is becoming more dependent on government spending to boost economic growth, support critical national investments in energy and defense, and contribute to the private savings of the (2/41)
economy. If you want access to that part of the conversation and you're not already subscribed to Hidden Forces, you can join our premium feed and listen to the second hour of today's episode by going to hiddenforces.io. All of our content tiers give you access to our premium feed, which you can listen to on your mobile device using your favorite podcast app just like you're listening to this episode right now. If you want to join in on the conversation and become a member of the Hidden Forces genius community, which includes Q&A calls with guests, access to special research and analysis, in-person events and dinners, you can also do that on our subscriber page. And if you still have questions, feel free to send an email to info at hiddenforces.io and I or someone from our team will get right back to you. Lastly, because this conversation deals with investing, nothing that we say on this podcast can or should be viewed as financial advice. All opinions expressed by me and my guests are (3/41)
solely our own opinions and should not be relied upon as the basis for financial decisions. And with that, please enjoy this highly informative and long overdue conversation with my guest Dr. Lacey Hunt. Dr. Lacey Hunt, welcome back to Hidden Forces. I'm glad to be back after seven years. Seven years, yeah, something like that. You were on in 2017 and you were an in-studio guest at that time because this was everything before the pandemic was in studio and people still love that conversation. In fact, I was actually speaking recently with someone that you know, Eric Besmajian, who has been on the podcast as well, and he was telling me how much he loved that conversation and how much he was looking forward to us talking to again today. And he's a good guy, Eric. We all need to pray for him. He's fine. Yeah. Yes, he's been public about what he's going through and he's a wonderful guy. Wonderful. Wonderful guy, brilliant guy. So, well, like I said, I'm very excited to have you on the (4/41)
podcast today. We didn't have a chance in our first conversation to talk about your biography, your history, your background. Are you a native Texan? I am, yes. Did you grow up in Austin? My family originally settled in Nacodotus back in the 1840s and I spent some early years in Nacodotus, but my main junior and senior high school years were in Houston. I had a great grandfather, it's insatiable to say who would be a great grandfather, who received a land grant from the Republic of Texas in 1843. And the Republic of Texas was only in business from 1836 to 1846. So, we've been in Texas for a long time. Wow. What did your parents do? They were very learned people. My father was a PhD psychologist. He earned his PhD in 1941, the year before I was born, in the University of Texas. I guess you could say that I was a behaviorist before I was an economist. My dad was always teaching and instructing. I didn't pay as close of attention as I should, but it was quite of an experience growing up (5/41)
with him. My mother was an educator, but she was very learned as well. She had received a scholarship to Occidental College because her father was a very poor president and minister, but his chief parishioner was chairman and chief executive of Union Oil of California. He was also on the board of Occidental College. And he arranged for my mother as well as her four siblings to go to Occidental. And my mother later earned a master's degree in speech and drama from USC. And my father was there one summer taking a sabbatical from a renowned psychologist at USC. This was off the books. It apparently would have been arranged by a professor at UT with a professor at USC. But my mother was in charge of the summer play and she had put signs up over the USC campus needed someone with a Southern accent. And dad applied. He got the job and shortly thereafter or a year or two later he married my mother. So he got a part in the play with his father? Yes. He had the Southern accent that she needed. (6/41)
He was a Texan. That's how your parents met. That's an amazing story. Yeah, it is. And when dad was a child psychologist he was more aligned with Carl Jung than Freud. And my mother was a role plays musicals for elementary school. When she retired she was principal of the largest elementary school in Houston. So you had the example of your parents who were both in academics. Did you know at a young age that you wanted to be an economist or was there some other general sense of what you wanted to do and that sort of realization of your interest in economics came later? No. When I went to Sweeney in 1960 I wanted to be a doctor, medical doctor. And for the first year and a half I was taking all the pre-med courses. And then in the spring of 1962 I had time for my first elective and I took the principles of economics. And at the end of the spring semester I switched my major. I found my true law of economics. What attracted you to economics? Just fascinated me. I read a book by Hal (7/41)
Brenner on the worldly philosophers in my very first course. It's a great little book and I was just drawn to it because it sort of combined institutional understanding, history and quantitative analysis. And I thought that that was a good use of some of the abilities that I have. I'm not the strongest in anyone but when you work them all together I think I have a little bit of an edge. And so when I left Sweeney I got an MBA thinking business world was for me. Went to Wharton. I was a finance major. And after my MBA at Wharton I was offered a full fellowship. I had a university fellowship at Temple University in economics. And that fellowship in today's dollars it was tax free. It would be about close to $50,000 even though at the time it was $300 a month. But it was tax free and I had no duties. And I finished in two and a half years later. I had a parent of my PhD in January of 1609, defended the dissertation in December of the year before and then went to the Dallas Fed. So that (8/41)
was your next job after getting your PhD going directly to the Dallas Fed? I went to the Dallas Fed, yes. So what did that experience working for the Dallas Fed teach you? And how long were you there? When did you go again? You went during the end of McKinsey Martin's administration. I went in 69 and I left in 73. And it was very, very fortuitous because when I went to the Dallas Fed in 69 I was really the most conversant in monetary theory and history and macroeconomics. And I had built an econometric model of the euro dollar market. I knew Internet. My fields were macroeconomics and international economics and finance and mathematical and statistical techniques. And I was in a position to work pretty closely with the director of research at Dallas and the president of the bank. The president of the bank is a very distinguished agricultural economist, Dr. Phillip Coldwell. And Ralph Green was director of research. It was in due course I started advising them for the FOMC meetings. (9/41)
They did something for me that was very valuable. They sent me to do the training program for fed regional economists at the Fed of New York. And in fact, I made two trips, lengthy trips, to study the operations of the FOMC and its execution. I doubt that if I had been at the board of governors or if I had been at one of the larger Federal Reserve banks, I would have never been tapped, I don't think, to have that kind of exposure. But at the Dallas Fed I did. And that was very beneficial to me. And I had time to do my own research. And I'm very fortunate I started getting published in some of the lesser academic journals. Before the time I had left the Dallas Fed, I was published in the journal Finance, which is a rather significant feat at the time. And it was co-authored. But nevertheless, I made it in a few times. And I was able to get some recognition from my dissertation by writing a comment on someone else's very extensive work. So I was starting to get published. My econometric (10/41)
work was noticed by Dr. Michael K. Evans, a Brown-aid educated econometrician who was co-developer of the Wharton model with Larry Klein. And Mike Evans asked me to come to Chase Econometrics to build the first large-scale econometric model of the financial markets. At that time, the Chase model, which Evans had spun off and had broken with Klein. But there was just one financial equation in the entire Chase econometrics model. And the same was true for the Wharton model at the time. And that was that the Treasury bill rate was a function of the Federal Reserve discount rate. There were no money supply equations alone. There were no other financial variables, no long-term rates, intermediate-term rates. So I built that model. It was a monthly-based model. And the J.I. Press in Greenwich, Connecticut published that as a book in 1976 called Dynamics of Forecasting Financial Cycles. I've always looked at the financial cycle as leading the business cycle. Keep in 1976, at that point in (11/41)
time, Minsky had not developed his financial instability hypothesis. Narr had Kendallberger written his great book, Mania's Panics and Crashes. But I was thinking in terms of financial cycle, I didn't define it as well, I don't think, as Minsky and Kendallberger did. But I was inclined in that direction before their great work. Of course, I took advantage of their work and other work to greatly amplify what I had started to do. But that's how it all got started. Did you have an opportunity to get to know David Rockefeller while you were at Chase Bank? I did. I did. Michael Evans called me and he said, you're going to get a call from Mr. Rockefeller's secretary and he's going to give you a project to do. And I know you're busy because you're putting out... I was putting out the, every month, the Chase Econometrics monthly financial model and existing mic to some extent on the regular macro model and talking to clients, traveling around. I was pretty busy. The secretary, his secretary (12/41)
asked me to come up to Siem in New York. Chase Econometrics was in Balaken with Pennsylvania, the first Western suburb out of Philadelphia. So I took the old bankrupt, Femme Central Railroad in New York and went up to the top floor of Chase Manhattan Plaza. And I saw David Rockefeller and he gave me an assignment and he said, this is what I want you to do. Do you think you can do it? And I said, I can. He said, can you get it to me in a certain and gave me a deadline? So I went back and I worked on it very, very diligently. And I sent it to his office. And a few days later, I got a call from Mr. Rockefeller's secretary, asking me to return to New York. And I was pretty proud of the project. I thought that it was a great effort. I had done exactly what was wanted. And I went to see Mr. Rockefeller and he started out saying something to the effect. Well, this is a great first effort. Wow, that must have been a very cool experience for someone at your level and your age at that time, (13/41)
getting that kind of compliment. You know, I was still in my twenties. I'd earned my PhD when I was 26. So I was crestfallen when he said it's a good first effort. And he then suggested several different avenues to me. And my crestfallen condition, I took the train back to Philadelphia, worked on it. I don't think I slept for days while I was trying to complete the undertaking and sent it back to New York. And a few days later, David's secretary called and said, Mr. Rockefeller wishes to thank you for your excellent effort. And I did another great project for them. What are butcher who was number two in command today? It was very interested in productivity and how I that helped the inflation at the time. And they undertook an extensive study of productivity, which they wanted to be able to document with solid research. And Michael Evans assigned me that job. I was a major undertaking because the Chase published double page editorials in Wall Street Journal and other leading (14/41)
publications at the time about the findings of the productivity study. My name wasn't mentioned, but I knew I had done it and I kept those records. But I got to do that. And David also asked me to attend the asset liability committee meeting, which sort of changed my whole life because I knew at that point in time I wanted to move from research into the financial investment. I interviewed someone named Roger W. Robinson, who was senior director of international economic affairs at the Reagan NSC and was one of the architects of the economic warfare against the Soviet Union in the 1980s. And he was, coincidentally, David Rockefeller's personal staff assistant in the 1970s. And I remember him telling me what that experience was like. He would fly with David on his private plane to Europe and to meet everywhere, wherever he went, people wanted to meet him, the local politicians, the presidents, the prime ministers, et cetera. And I just think when I hear you tell this story, I have that (15/41)
additional context of understanding that in the 1970s, there weren't many people in the world who were more powerful than the Rockefellers. They were at the very top. And to know David and to have that kind of relationship must have felt extremely special. I never got to travel on the plane, but I did get invited to the asset liability meeting. And I did keep in mind that they had a large economics department headed by John Wilson. And David could have used many economists or multiple of their economists for some of the projects which I did. And that was a very good feeling for me. It was one of those great privileges because when I went from the Dallas Fed to the econometrics unit of Chase Manhattan, I had no idea who was running Chase Manhattan and had any idea whatsoever that I might actually come in contact. But David was an exceptional man. He was a very good economist. He had a PhD in economics from the University of Chicago. It was one of those great pleasures in life that you (16/41)
just sort of stumbled into. So you've done many other things besides that. We can't get into everything, but most notably, perhaps you were chief U.S. economist for HSBC Group, which is one of the largest banks in the world, or at least it used to be. I don't know where it still ranks today. It was number one when I left them. When they bought Carol McIntyne and McGinley, they were still the British colonial bank, 18th largest in the world. William Purvis took them from the British colonial bank to the largest bank in the world, which is where they were when I left in 1996. William Purvis was another one of those exceptional people, knighted by Queen Elizabeth, great banker. It was a privilege for me to get to know him a little bit. I would travel to Hong Kong or London and the scene. From time to time, I would be given projects to do for him. And that was also a wonderful experience. And I also survived quite a few mergers, I think a total of five in that process, which was a very (17/41)
pleasing demand. I don't know how I did it, but I did. And you were also EVP, executive vice president and chief economist at Fidelity Bank. So let's use the totality of your experience, your academic experience, your experience at the Federal Reserve, and your experience working in the private sector as an economist. The 50, I think 55 years you've been in the business or so. Let's use that to paint an economic picture of where we are today and then go about doing some analysis on it. First of all, when you look across the global economy today, what is your assessment of how it's doing? Poorly, very poorly. Take for example, if you look at real per capita GDP, or the average of real per capita GDP and GDP, which is really the more appropriate thing to do because they diverge and they're equivalent. And so to get the best understanding, I think it's appropriate to average GDI and GDP. That's what the... Gross domestic income and gross domestic product. Yes. That's what the National (18/41)
Bureau of Economic Research, which is our business cycle dating authority, and probably don't preeminent research organization in economics. That's what they do in assessing changes in the business cycle. They take the average of GDI and GDP. So in the 20 year moving average to 1970, it was growing at 2.2% per annum. And in the last 20 years, ending 2023, we're growing 0.9% per annum. We've lost 1.3% per annum in the 20 year growth rate. And by the way, if you look historically from 1870 to 1970, and we have data, pretty good data, not perfect, for that 100 years, the real per capita growth rate was also 2.2%. The last 20 years, we're down to 0.9% per annum. If we had stayed at the 2.2% just in the last 20 years, the average real economic activity per person would be $78,000 or so. Whereas in actuality, it's only 66,000. So we're really losing a lot versus trend. And this is even worse in Europe and the UK and Japan. All of us are not performing in the way in which we did. And I (19/41)
believe it's a reflection of the harmful effects of too much debt, very, very high levels. I think it triggers a law of diminishing returns, which is derived from the production function, one of the main concepts in economics. Economic output is technology interacting with the factors of production, land labor and capital. Overuse, one of the factors of production, initially output rises, continuing to do so, output flattens and still increase that factor. It turns down, mathematicians call that a parabolic function, falls out of partial differentiation of the production function. That explains why we have the growth that performance is the standard of living has been slowing. Now, however, we have an even more serious situation because we have negative national saving. If you'll make sure you remember that the circular flow, which says GDI equals GDP equals production of goods and services, they're interchangeable. So you can move parts of one side to the other back and forth out of (20/41)
the circular flow. We know that net physical investment, plant and equipment must equal net national saving. And we now have a condition of negative net national saving. Without net national saving, we cannot have net physical investment. Without net physical investment, we cannot increase the capital stock, which means that the production function is not going to be able to develop. It's going to develop as long as we have negative net national saving. So when you say negative net national savings, can you define what net national savings is for listeners? Okay, so saving has three components. It's private saving. Private saving actually has two components, household and corporate. So there's private saving, foreign saving, which of course is the inverse of the capital account, and then government saving, which in this case is dissaving. So what we have a situation today is that the federal budget deficit is greater than the sum of private saving and foreign saving. So we have a net (21/41)
negative national saving. The production function is not operative. You know, to make labor and natural resource extraction more productive, they have to be given increased capital stock to work with. And the physical investment is equal to the change in the capital stock. So we've really dug a deep hole for ourselves. The problems are basically worse. Everywhere else, there's some minor differences, perhaps, but the budget deficits are just simply too large. And you say, well, we can have the Federal Reserve, Accelerator Central Banks accelerate monetary growth. However, additional monetary growth does not correct the problem of negative net national savings. You can increase the money supply, but that will just have an inflationary impact. There's no way to inflate our way out of the problem. Inflation just has a devastating impact on the modest and moderate income households, which then means that inflationary policies increase the income and wealth divides. We're seeing that big (22/41)
time in all the major economies of the world. So you could conceivably use fiscal policy to reverse negative net national saving, but there is no one that has that agenda. No one whatsoever. And it would require a great deal of political goodwill and shared sacrifice. And there's just no pathway to achieve it. So we're stuck with it now unless something for two of us happens. It's going to be very hard to alter this downward trend in the standard of living, which means that the income and wealth divides are going to get worse. And it's not a wholesome development at all. So is this dynamic analogous to burning the furniture to heat the house? What you're basically doing is you're using your depreciation to live on. There's a classic story in American history about the pilgrims. They embarked just before Christmas in 1620, and they didn't get a chance to plant their crops. They were starving or scatting about to find whatever they could. And they came upon a large store of corn that was (23/41)
buried there somewhere near the ocean. And they ate it, which infuriated the Indians because it was their seed corn. And so basically we're sustaining consumption and daily living by eating our depreciation. That's what it means when you have negative net national savings, you ultimately get negative net national investment. And you're not going to be able to grow your capital stock. It's a very difficult situation. And I don't think that this is well understood at all because it blocks the normal production function. The production function goes back to the original work of David Ricardo. He only took into consideration two factors of production. And then a lot of additional work, much of a much improvement and understanding is traceable to the work of Robert Solo. Nobel Laureate taught at MIT and he had the exogenous growth market. He relied on the production function and he developed the marginal revenue product of capital, natural resources and labor. But the exogenous variable in (24/41)
his model was saving. You have to have saving. You may recall, having read Keynes, Keynes talked about the fallacy of thrift. And his idea here was that if people do what's right in their own interest to try to prepare for a rainy day, they will have to take retirement or education or unexpected needs and they say that this will leave the economy with an insufficient level of saving. And so by doing the right thing on the individual level, we have this adverse macroeconomic impact. The problem is now Keynes is concerned about too much saving doesn't apply because we have negative net will save, which is a very, very serious problem. And it will become more evident and it's going to be difficult because this concept is complex. And frankly, I don't think that the American economy has much of an understanding of economic theory or economic history. So the relationship of savings to interest rates is inverted, right? So as savings decline, interest rates, all things being equal go up. All (25/41)
things being equal. And there is an effect there. I think though that the main thing ultimately is what happens to inflationary expectations and the main ingredient inflationary expectations. It depends upon whether there's too much money chasing too few goods or whether we have the reversal of that situation. So now, you're putting aside the national savings rate. I just know that the personal savings rate throughout the 90s and early 2000s continue to decline. And yet this is a period of declining interest rates. Is that because we were importing foreign savings? It was declining. And at that point in time, the debt levels were deleterious. They were triggering the law of diminishing returns. So the increased indebtedness was pulling the growth rate down. But you still had positive saving. The budget deficit were not so large that they were greater than the private and the foreign savings. So in that time period, generally speaking, the debt was when you're operating with the (26/41)
production function and you're overusing debt, you generate the law of diminishing returns, which is deleterious effect. And the increases in money that the place in that time period were not excessive. In fact, that you would call them generally normal and they were more than offset by a downturn in velocity. And so the net effect was that the inflation rate came down and so did inflationary expectations and interest rates. During the pandemic, what we basically did is we pushed money growth far outside the bounds of normality. And it led to, you know, 9 to 10 percent inflation rate there in 21 parts of 22. And the economy did better for a little bit. But ultimately, inflation is so hurtful to so many people that the Federal Reserve had to reverse themselves, which is what they're now doing. And even with the six trillion dollars of debt that was taken on during the pandemic, that did not bring the rate of growth in real per capita income back to the trend line, just brought it back (27/41)
to the trend line. But because of the Federal Reserve's operation, it produced all of this excessive inflation, which had a devastating impact. And so the economy has been left in a very difficult position. If you look at the real average weekly earnings over the full time hourly and salary people, which is about 120 million people in the last 14 quarters of the expansion, there's been a decline in the one and a half percent annual rate. That's the average. But within that average, you've got some skew at the very high end. There was excellent performance. And so the high inflation has just really had a terribly debilitating effect on the vast majority of our people, which it always does. In fact, there was a pre-Adam Smith economist by the name of Richard Camelot that understood that when you have rapid monetary growth, you get excessive inflation, a damaging impact on more moderate income people, which exacerbate the income and wealth of us, which is what the pandemic did. And we're (28/41)
seeing that today very, very evidently. So I want to talk about inflation and why it seems somewhat stuck, at least as a measure of CPI at around 3% or so. Before we do that, one of the topics that's been more hotly debated in the last year or so among economists, especially, has been the neutral rate. What is the neutral rate of interest? And there's a lot of speculation about whether it's higher or lower. I think you fall on the camp that it's lower. First of all, explain to our listeners what the neutral rate is, which also known as R-star. And what is the relationship between the neutral rate of interest and the net national savings rate? Well, the first of all, I think that the key relationship is what's happening to the real per capita growth rate in the average of GDI and GDP. And so in 1970, it was 2.2% and we're now 0.9%. So I think that that kind of gives us a bit of an approximation. It has to be moving in alignment with the standard of living. So the standard of living (29/41)
debt was bringing the growth rate down the law of diminishing returns. But now, however, when you have negative national savings, what it means is that we collectively are living beyond our means. But we don't have the resources to increase the capital stock. So if savings are so low, does that mean that we should expect to reach a bottom in the savings rate at some point and for that trend to reverse itself? And if it reverses itself, does that mean that we're going to be in a period of lower natural rates of interest for the foreseeable future? Because I think that's where you fall in. You expect a lower neutral rate of interest, but is the reason because people are going to have to start to save more? Is that the reason why? Well, the question is they don't have the income to save more. So I don't think that redressing the negative net national saving rate can be really done in any significant way by the private sector, nor by the current account, which then determines the foreign (31/41)
save. I think the problem is in the governmental sector. The things can be done to private saving, but I think that they're minute in comparison to what needs to be done to fix the federal budget deficit. Fed Chairman Powell recently said that the budget now is unsustainable. And I think he's correct. And the reason he's correct is we have negative national saving. We cannot have an increasing level of prosperity in this environment. So the economy has really held hostage to the federal fiscal situation. Do you think that the Treasury has become a bigger or more important economic actor today relative to the Fed, relative to what the Fed was, say, 15 or even five years ago? We've had two major coordinations of monetary and fiscal policy. The most recent, of course, is the pandemic where the Fed became a partner with fiscal policy. But this was done one time before in the 1970s. Nixon was president. I was a young economist at the Federal Reserve Bank of Dallas and wage and price (32/41)
controls were put on by Nixon. He had legal authority to do so. He asked the Fed to accelerate monetary growth and they were forced to do so because Burns quite unfortunately agreed to be part of the wage and price structure. He was chairman of the interest rate and dividend control committee. And he was also serving as chairman of the Federal Reserve Board. And so to placate those that wanted to be able to raise prices but they could not or wages, the Fed, he had to try to hold down the interest rates and the dividends. And so doing the accelerated monetary growth. When the inflation, however, surged out of control, Burns discovered that the fiscal policy partners were no longer there. And so guess who had to clean up the inflation of the early 1970s? Burns and he didn't do a very good job of it. It was only partially done. And we suffered for suffered rising inflation all the way until Paul Woker came in and it took him two years to finally get the job done two or three years to get (33/41)
the job done. So now we go into the pandemic. And there's no recollection of major path policy mistakes. That's just the character of the way things are. So no one remembers that the last coordination entered in disaster of too much inflation. And a decade of rising inflation and this worsening of the income and wealth of it. So the power fed cooperates with fiscal policy. And to do so he coordinated engineers and unprecedented increase in money supply, which was even greater than what Burns had done during the early 70s. But the same thing happened to Powell, which happened to Burns. When the inflation problem arose, the fiscal policy partners were no longer present. And that left the Federal Reserve to clean up the problem by itself. And so one of the great challenges that the economy faces is for the Federal Reserve to operate independently. And those that tell you that we can somehow solve our problems of this declining rate of growth in the standard of living by adopting some sort (34/41)
of inflationary outcome. And my view are gravely wrong. If accelerations and monetary growth only produce very transitory gains in economic activity. When people realize the inflationary impact of monetary policy, then the system becomes unanchored. And you have this devastating impact that worsens the income wealth distribution. And so the best thing for the Federal Reserve is to maintain its independence and not give up its ability to do the right thing. And I don't know to what extent this played a role, but the Federal Reserve moved very, very slowly to deal with the monetary increase that they put into the economy in 2021 and the inflation got out of control. Now, the inflation has come down. But last year's decline is what I call a contra normal cyclical development. That was the largest decline in inflation for any year in which GDP was rising inflation. Has declined by more than it did in 2024 on several occasions, but they were all in recessions. So we got a response, but it (35/41)
was an abnormal response. Normally inflation is a lagging economic indicator. And I think it's not surprising that the inflation rate is kind of stuck where it is. That's its nature. But as time goes by and as the monetary restraint moves further and further into the economy, which it's doing right now, there will come a point in which the inflation rate will fall. The sickality of it is that inflation is a lagging indicator. And I'm just going to give you one contrary indicator, which I think indicates this. The CPI, as you said, is stuck up above at 3% or slightly more. But the real problem here is the so-called shelter component, very controversial component. If you exclude shelter, the CPI has been under 2% for the last eight months. It is 1.8%. Now, the shelter component is a very badly conceived sector. What the Bureau of Labor Statistics does is they ask folks, what is the value of your home if you were going to sell it? Well, people always have an inflated value of their home. (36/41)
And they spend money and resources to ask people this question on a monthly basis. And once they get the response, then they have a formula that converts the selling price into what you would rent it for if you were going to rent it. Well, that's ridiculous. They don't need to survey what the selling price is. The selling price is known in every major market in the United States. In fact, where footage of each home is being sold as well. So this surveying to try to determine what people would sell their homes if they were going to sell them is a very foolish and expensive way to go. Just use the existing home price sales data. The formula that then converts the home price sales data into rent is not, and I don't have any problem with that. Now, that would be okay. But we have this horrendous component in the meantime, in real terms, money the way I measure it. And I like to take him to excluding currency. I think it's a more modernized concept currency is still a medium exchange and (37/41)
store value and unit of account, but it's fading importance. If you look at money in real terms, in that basis, we have record declines for the last 12 months, 24 months and 34 months. And we're also getting a very large decline in real terms of bank credit and bank loans. And in fact, CNI loans and nominal dollars, even in mid-March or 80 billion where they blow where they were at their peak back in the fall of 2022. Monetary policy is extremely tight and monetary policy will work with long legs and the inflation rate will come down. The unemployment rate, which the Fed is also focused on is another lagging indicator. So the cyclicity of the situation, the cyclicality, I mean, suggests that the inflation rate will actually fall to the Fed's target. But at the same time, the unemployment rate will rise more than where they're expecting it to go. So Dr. Hunt, I'm going to move us to the second hour of this conversation. And some of the questions I have for you are, one, a follow on the (38/41)
comments that you've ended the first hour with, which is why have the lags been so long this time? Why have the hikes of short-term interest rates by the Fed taken so long to materialize in a slowdown of the economy? I'm also curious to understand and sort of follow up on our conversation about the savings rate and interest rates and economic growth. To understand how we get out of the situation, because if the United States government needs to, quote, get its fiscal house in Northern, in other words, rely less on debt financing to pay fiscal obligations, that would also lead to an economic contraction. And so like we seem to be caught in this impossible situation where the solution to the problems of too much debt result in an economic contraction, which raises the relative carry burden of that debt. So that's something I want to talk to you about. I also want to understand more specifically how far out you see interest rates remaining depressed, because if you do believe that the (39/41)
neutral rate of interest is actually lower than it was going into the pandemic, which I think is your position, but you can clarify it in the second hour. If that's the case, how long is that going to continue in your view, or what are going to be the factors that are going to be contributing to it? And the same thing goes for inflation. And I also, of course, want to ask you what asset classes or industries or sectors you're most bullish on. What are the things that you think are going to do well in this environment? For anyone who is new to the program, Hidden Forces is listener supported. We don't accept advertisers or commercial sponsors. The entire show is funded from top to bottom by listeners like you. If you want to access the second hour of today's conversation with Dr. Hunt, head over to hiddenforces.io. And sign up to one of our three content tiers. All subscribers gain access to our premium feed, which you can use to listen to the rest of today's conversation on your mobile (40/41)
device using your favorite podcast app, just like you're listening to this episode right now. Dr. Hunt, stick around. We're going to move the rest of our conversation onto the premium feed. If you want to listen in on the rest of today's conversation, head over to hiddenforces.io. And join our premium feed. If you want to join in on the conversation and become a member of the Hidden Forces Genius community, you can also do that through our subscriber page. Today's episode was produced by me and edited by Stylianos Nicolau. For more episodes, you can check out our website at hiddenforces.io. You can follow me on Twitter at cofinas and you can email me at info at hiddenforces.io. As always, thanks for listening. We'll see you next time. (41/41)
small farms, maybe subsidies for some small farms? I haven't read that anywhere and I don't even know if it's a good idea, but I'm just kind of throwing it out there. What do you think about that, about making the system more resilient? Yeah, so we definitely do want to try to learn as many lessons as we can from the pandemic and the response. And I think one of the things that comes to mind is this concept of just-in-time inventories. I think gets to the point that you're making about efficiency versus resiliency. And I think you're going to see companies look at their inventory strategies and assess how did they perform in this situation and how can we make them more nimble when hopefully we never go through a situation like this again in our lifetimes. But to the point, we can fully expect that we will. Certainly possibly a pandemic, but there are all sorts of ways in which economies and supply systems get shocked, whether it's a cyber attack, whether it's an extraordinary weather (36/41)
institutions largely are closed. So a lot of those producers that were faced with that decision, it was because they were growing to provide their product into those chains and those chains were moving so slow that they weren't able to accommodate that product. So that's interesting. The point about suppliers having longstanding relationships and recurring orders from key sources of demand. Let's break this down. First of all, what percentage roughly of agricultural and livestock production goes towards fulfilling recurring orders made by regular customers with whom farms have longstanding relationships like restaurants and school cafeterias, which I know have also been impacted by all of this? Yeah, it's hard to put a percentage on it because every producer's situation is a little bit different. Some work through. But for the industry as a whole. Industry as a whole. Industry as a whole. What I'm going to tell you is that we were looking at about a 50-50 split across all food. And (25/41)
few local areas where because of COVID-19 positive cases in their workforces, there have been a few significant closings of meat or poultry facilities in different parts of the country. But when those plants close, then the farmers are put in a very difficult position. Where are they going to market those chickens or those hogs or cattle as examples? And it's a unique situation when you're dealing with animals because they get to a certain weight and a certain age and it's time for them to be harvested. And if there's no outlet for them to be harvested, that producer faces really difficult decisions. And unfortunately, in some cases, we know that producers have had to use that last resort of euthanizing animals. And I think everyone wants to avoid that if at all possible. But as we see the capacity for processing be disrupted, then that impacts things at the production level. In other words, it's unaffordable for them to continue to feed the animals and house them. And so they're (22/41)
Today's episode of Hidden Forces is made possible by listeners like you. For more information about this week's episode or for easy access to related programming, visit our website at hiddenforces.io and subscribe to our free email list. If you listen to the show on your Apple Podcast app, remember you can give us a review. Each review helps more people find the show and join our amazing community. And with that, please enjoy this week's episode. What's up everybody? My guest on this episode of Hidden Forces is Lole Randall, Vice President of Government and Legal Affairs for the Global Cold Chain Alliance, which serves as the voice of the cold chain industry representing 1,300 member companies in over 85 countries around the world. The food supply chain is breaking, according to the Chairman of Tyson Foods, the second largest meat processor in the world. As the coronavirus pandemic disrupts supply chains across the country, farmers are being forced to destroy their crops, dump their (1/41)
milk and euthanize their livestock, despite shortages at food banks and empty shelves at supermarkets. If you're like me, you see headlines like this and you wonder, are we running out of food? The problem is a bit more complicated. Partly, the shortages we're experiencing at our local Costco or Walgreens result from the sorts of disruptions to processing facilities like those referred to by John Tyson. In other cases, they reflect the challenges that come with trying to quickly transition from servicing restaurants and cafeterias to stocking grocery stores and supermarkets. Just as with our financial markets, industrial supply networks and hospitals, our global food industry is built with efficiency in mind. Crises like the one we're experiencing today, by virtue of the stresses they place on our markets and political economies, reveal their inner workings, bottlenecks and centers of power in ways that even the most adept operators of these systems could seldom hope to understand. (2/41)
They offer us unique opportunities to learn about the structural dynamics that govern such systems, forces that normally remain hidden until times of urgency and stress. This conversation reflects my attempt to learn about how these systems operate, why they're under strain and what this tells us about whether or not we, as consumers and customers of this multi-trillion dollar industry, are making the right choices, asking the right questions and prioritizing the right problems when thinking about the security of something as crucial and basic to our survival as food. For subscribers to the Hidden Forces Premium content available through our Patreon page at patreon.com slash hiddenforces, I've included a near hour long discussion between me, Tesla Charts and Georgia Orwell that we recorded late Friday evening after a bizarre series of tweets by Tesla CEO Elon Musk prompted a sell-off in the company's stock raising serious questions about whether his behavior violates previous (3/41)
securities fraud settlements with the SEC. This on the heels of an earnings call Wednesday that left believers in the company and even Elon's strongest supporters baffled. And with that, please enjoy this timely episode on food security and supply chains with my guest, Lowell Randall. Lowell, welcome to Hidden Forces. Thanks Dimitri, happy to be here. It's great having you on, how are you doing? Yeah, doing well. It has been a very interesting six or eight weeks to say the least, particularly for the food industry. So we're working hard to keep food going to consumers. When did things start getting challenging for you guys? When did the disruptions begin to emerge in the food chain industry? Well, it really started to build when the WHO declared the COVID-19 as a pandemic and we started to see grocery demand start to surge. And that really amplified when President Trump made the National Emergency Declaration and then you started to see empty shelves. And that really created some (4/41)
disruption in trying to get that supply chain to catch up. How soon before the national emergency was announced did the food industry begin to suspect that they would need to make provisions? In other words, I assume they weren't totally caught off guard. No, absolutely not. And in fact, one of the things that has been really rewarding and helpful is how the food industry has banded together. So I'm a part of food industry coalition that represents everyone from the food logistics industry, which is our membership to the agricultural producers, grocery stores, food service, and really everything across that food supply chain. And we began talking about this when we started to see the pandemic emerging. So we did have those conversations starting before the national emergency was declared and those efforts have been redoubled now over the last six or eight weeks as this pandemic has really taken hold. So I promised those listening that we're going to do a deep dive into this. It's a (5/41)
super fascinating industry and it's relevant and timely given all the news headlines around some of the disruptions and things that we're going to get into. Before we do that, Lull, give our audience a sense of who you are and your background. How did you get your start in this business? Yeah, absolutely. So I grew up in a small town in East Texas and grew up around agriculture. So I was exposed to, I raised chickens and pigs and cattle and sheep and always knew that I had a close connection to agriculture and food. And so when I went to school at Texas A&M, I studied agricultural economics, master's degree in agricultural development. And so really was finding ways to support that connection that I have with agriculture and food production. And my dad's actually an animal scientist. And so I grew up around that application of science in solving food and agriculture problems. But I knew early on I didn't want to be the one conducting the science. So I was trying to find ways to support (6/41)
that without having to be the one actually in the lab doing the science. And I found agriculture and food policy to be really that avenue for me to support food and agriculture in a way that fit my interests and skill set. And so then I found myself in Washington, D.C., did a congressional internship for my hometown member of Congress and really fell in love with the policy making aspect of Washington, D.C. and working with partners in industry, partners in government, whether that be a Department of Agriculture, Food and Drug Administration, or with folks in Congress. And so I've been doing that in Washington, D.C. for almost 25 years now and actually spent some time working for the federal government, the Department of Agriculture as well, and a couple of years working for the Texas Department of Agriculture. So really have grown up around agriculture and turned that into a career of supporting the food industry and been working with the Global Cold Chain Alliance since, well, it was (7/41)
11 years in February. And I came to GCCA after serving at the Department of Agriculture as the Deputy Assistant Secretary for Congressional Relations where in that role I really got to work with the breadth of the Department of Agriculture. And it is really a wide-ranging department that touches all aspects of food, nutrition, animal production, crop production, really the whole gambit. And that prepared me to come into the Global Cold Chain Alliance, which is that connector of food production to consumption. You hear people say farm to fork or gate to plate and the cold chain plays such a critical role in making sure that that food arrives at high quality and safety. So I think from early on, knew I wanted to be involved in supporting the industry and this is a great place for me to be to share my experiences and support that critical function of the food supply chain. Well, the Department of Agriculture is one of the oldest departments. It was founded by, I think, Abraham Lincoln, (8/41)
wasn't it? Yeah, yeah, that's absolutely right. Abraham Lincoln founded it and it was established when he was president and it was called the People's Department. And I think that's actually true because it's the one thing that we all have to do. We all have to eat and not everybody appreciates what it takes to get that food on their dinner table. You hear the adage that chocolate milk comes from brown cows and so it's a challenge at times to make sure that the public really appreciates what goes into the food supply chain. It's funny because I don't know where I heard this or how I remember this, but I could swear there was a poll taken at some point where they asked kids in school where chicken nuggets come from and they didn't actually know. They thought they actually came from something called the chicken nugget or something. It's an interesting anecdote. I want to move into a conversation about the cold chain because this is obviously so central to our conversation. So what is the (9/41)
cold chain and how does the global cold chain alliance fit into this? Yeah, so the global cold chain is everywhere that you have the need for temperature control to preserve the safety and quality of a perishable commodity. So you can harvest a berry, for example, and if you can freeze it very near the time of harvest, when it's thawed, it retains that same level of freshness as when it was harvested. And so it's kind of that nature's pause button that preserves that quality, preserves that safety of food. And it can begin right there at the harvest point when you're talking about fruits and vegetables. When you're looking at other kinds of commodities like meat or dairy or poultry, again, you'll very soon after harvesting. So if you have a meat or poultry processing plant, once that animal is harvested, it will go into temperature control immediately. And again, that's to preserve safety, but as well as quality. So when did ... Because this also kind of gets us into a conversation (10/41)
about the evolution of the food industry. Because for a long time, the way that you preserved meats was through salt treatments and other things. I don't know what all the different terminology was, but eventually we got to the place where we had these cold chains. Maybe you can also kind of use this as an opportunity to walk us through to however, to whatever degree you feel comfortable. The evolution of the food chain, when it moved beyond just kind of locally sourced products where farmers had relationships with local restaurants or people would go to farm stands and buy the food they needed. Yeah, absolutely. So the food industry definitely has evolved quite a bit. And we did start as very local, much like politics is all local. Food production used to all be local. And these days, food is absolutely global. When you go into a grocery store and you look at the shelves, some of that product may have been produced right down the road. And other of that product was produced on the (11/41)
whole other side of the globe. New Zealand or something. Exactly. And one of the linchpins of that evolution is the cold chain. Because if you don't have the ability to pause that process for those commodities and ensure that safety and quality, you don't have the time that it would take for a product from New Zealand to get to the United States or vice versa. US exports a lot of food. And without the ability for temperature control, you couldn't make that long marine voyage from New Zealand to the US and come out on the other end with commodity that anybody is going to want to consume. So our industry, the global cold chain industry, refrigerated warehouses, many of them started as ice companies. And they would actually harvest ice from rivers. And I don't know if you ever saw the movie Frozen, but at the very beginning of that movie, they actually show one of the characters taking ice out of a river. And that really happened. And it happened here in the US. So how would that work? I (12/41)
didn't actually see the movie. Yeah. But basically... But they would take the ice and then they would gather up huge amounts of ice and then package fish with it and transport it through the country or something like that? Yeah. And they'd put ice in there or they would put it into their warehouses and then they would preserve the product for as long as that ice would hold. So that was usually... They had to source the ice right at the origin of whatever the product was that they were transporting because they didn't have refrigeration. So they had to have insulated like coolers and a place to get the ice. Is that how it worked? Yeah. Basically, that's right. And this is over 100 years ago. So this is... We're talking about 19th century. Yeah, 19th century. And then what one of the big breakthroughs for the cold chain was the advent of refrigeration systems. And that really began with the use of chemical called anhydrous ammonia. So you probably would recognize the smell of ammonia, (13/41)
bitter smell that you might get if you open a bottle of Clorox or something like that or some cleaners have ammonia in them. But the ammonia is an extremely efficient refrigerant. And so they're back in the 1800s, scientists determined that they could remove the heat from a room basically and refrigerate that space, refrigerate that product by utilizing ammonia in a closed loop system. Now I'm not an engineer, so I can't tell you all the technical ins and outs, but basically that development of that technology and that use of, in this case, ammonia to allow for the mechanical refrigeration helped us evolve from harvesting ice out of a river to now being able to make our own ice through these refrigeration technologies. And then the evolution of those technologies enabled people like Clarence Birdseye. You may think about Birdseye frozen vegetables, and he was really a pioneer in the process of taking a vegetable and freezing it and being able to package that up. And then you could (14/41)
distribute that far and wide as long as you maintained the cold chain. That's remarkable. And one of the things I didn't even know until I prepared for this conversation was how long ago refrigeration was actually invented. It was before even the 1850, which was like 1834 or something like that. Yep. I'd have to go back to the history books to give you the exact date, but yes, well over 100 years ago. Yes, it's remarkable. So this has been a process that's evolved over time, but now the cold chain is central to how we get so much of our food. Paint this picture for me. Help me and my listeners understand just how vital this chain is before we get into a conversation about how it's been disrupted and the sources of that disruption and what that means going forward for us. Yeah. So just think about the food that you consume every day and what percentage of that food is shelf stable in a box in your pantry versus what you pull out of a refrigerator or a freezer. And that should give you (15/41)
an indicator how critical the cold chain is. But when you look at what we as consumers are eating every day, the percentage of that that needs the cold chain is really, really high. So what is that percentage? So maybe about five or so years ago, we started to see a little bit of a dip in frozen food consumption. And some of that was driven by, you know, consumer preferences change, right? So some people might say, okay, we're going to go more with the fresh produce or other non-frozen items. But there's so much value in the ability to have that frozen food where, again, you kind of use that nature's pause button and then you can get those fruits and vegetables, you know, at any time you want them or that meat and poultry that will stay good for extended periods of time in storage. So you're talking about just frozen, but the cold chain includes refrigerated products as well, right? Yes. So, I mean, so like when we talk about beef, when we talk about pig, turkeys, chickens, eggs, (16/41)
lettuce, all of these things have to be transported on the cold chain because they have to be refrigerated at the very least, right? Yeah, absolutely. Yeah, no, it's a great distinction. And whenever I talk about the cold chain, that is absolutely not just frozen. That is really anything that requires temperature control. So, and you... Which is the vast majority of what people eat, right? Without a doubt. Without a doubt, you hit the nail on the head. Again, really, you think about what you consume that's not temperature controlled and it's things like, okay, boxed cereal, yes, canned soup, and you know, there's certainly things in the middle of the grocery store, so to speak, that don't require refrigeration, but the perimeter of your grocery store is your temperature controlled items largely, and that's a huge percentage of what we consume every day as Americans and really globally as well. Right, and also to your point though, we're not going to talk about that pharmaceuticals. So (17/41)
I'm going to throw out a few statistics here that I gathered, and if I made any mistakes, please let me know. But from what I've looked into, from what I've seen, in the United States alone, we consume over 600,000 head of cattle per week, 2.4 million hogs per week, 4.7 million turkeys per week, and 173 million chickens per week, which amounts to roughly 100 billion pounds of meat and poultry that go through roughly 800 federally inspected plants each year. Does that sound about right? Yeah, I don't have those numbers in front of me, but that does sound like you're in the right ballpark there. And that's just meat. We're not even talking about all the produce. I don't even have those numbers. So this is an enormous amount of food that's dependent on this very specific and highly integrated supply chain that relies on scientific methods, advanced technologies, and advanced processes. So what I would love to understand is where and how have we seen this process get disrupted in recent (18/41)
weeks? Because we've seen reports, first of all, we've seen what's happened at supermarkets. I've been to the supermarket the last month. I saw empty store shelves. I heard from different people that this was not a reflection of the lack of food. The food is there, but this was an issue with the supply chain. This was confirmed also by what I continued to read. What's been happening and how much of what people are experiencing in terms of shortages is a result of what's going on in the supply chain itself and not on the farm? Yeah, it's a great question. And I liken it in some ways if we're preparing for a big storm, right? A big winter storm in the Northeast or a hurricane in the Gulf Coast. You have that kind of surge in buying at a grocery store. And so really what happened is it was not a lack of food in the country. You're absolutely correct about that. It's just that the food itself was not in those grocery stores at that moment in time. So let's look at our member facilities, (19/41)
for example. So our member facilities have been full. They were full of food before the pandemic. And it's a question I ask my members every time I'm on the phone with them, how are your inventories? And they continue to be full. So when you say just to clarify, I want to interject in moments to clarify for myself and for our listeners. Yep. When you talk about inventories, are you talking about just frozen warehousing or are you also including animals that are ready to be processed? And vegetables and produce and everything else? Yep. So it's a good point to clarify. So there's a couple of pieces to this. So there's food that's already been produced. And that would be what is in our member's facilities currently. And that level of volume of food in our member's facilities really has not gone down throughout this pandemic. But having said that, that doesn't mean that there aren't impacts to production as well. So you kind of have impacts on both sides of the supply chain. We've talked (20/41)
about the demand impacts at the grocery store level and how those created disruptions of kind of needing to catch up and get inventories from warehouses to the grocery store. The other side of that is, do we see disruptions on the production side? And now we are starting to see disruptions in production. At the very start of the chain. Correct. And so you probably have seen some of the high profile discussion and reporting on the impacts that are happening in the meat and poultry industry. And that is a good example of where we're seeing some disruption on the production side. Tell our listeners a little bit, what is it that we're seeing? What is it that you're referring to? Yep. Let's just take either pigs or chickens and you've got producers of pigs that are going to go into a slaughter facility. Well, if that slaughter facility is shut down for some reason, then that hog farmer may not have an alternative place to send those pigs. And that actually has unfortunately happened in a (21/41)
actually better off euthanizing the animals. Even though there are all these food banks out there that need the food, the systems as they are in place currently make that economically unfeasible, so to speak. Yeah, it's a challenging situation. And some of its economics and some of it is operational as well. So you can employ certain strategies to slow down the rate of gain of a hog or a cow and to try to extend that window when that animal can be harvested appropriately in a processing plant. And it's a little bit different than if it's fresh produce. We know there's been some disruption in the fresh produce side as well, but you can put a box of vegetables together and get those over to a food bank or sell them at a farmer's market or donate them. Because you don't need to process them. You can process them on the farm. Exactly. There's no need to send it to a third party facility. Yeah, it's very simple. You've got that vegetable and it can go right into commerce, whereas a live (23/41)
animal, it takes equipment, it takes a regulated process for that product to get into commerce. It's heavily regulated by the Food Safety Inspection Service to ensure the quality and the safety of that product. And it's not as though you could donate a bunch of pigs to a food bank and let them harvest them themselves. It's just not something that can be done. These are super expensive facilities. I've seen these processing facilities, but in the case of these farms that, for example, have turned over lettuce, why have they done that if they don't need to send it to a third party facility? Well, again, some of that is their established channels for commerce have been disrupted. And so maybe they had contracts with restaurants or other food service companies that their demand has gone down significantly because we all know that in most parts of the country we're social distancing and you can only do restaurants through takeout, curbside, that delivery, those types of things. And then big (24/41)
that has shifted tremendously just in the last six weeks. And I don't know what the numbers are for particular products, but obviously food service is down a lot nationally. Now fast food continues to do pretty well. I'm not sure they're meeting the same volumes as they did pre-pandemic. So are McDonald's and Hardee's and those places are still open? For sure. Yeah, so I know at least where I am in Virginia, for example, restaurants can continue to serve as long as it's drive-through, delivery, or curbside pickup. And it seems like every time I drive by and not to call out any particular company, but every time I drive by this Chick-fil-A near where I live, I mean the line is very long. So we know that they're doing a good bit of business, but how that compares to their pre-COVID sales, I couldn't tell you. Okay, so as a layman consumer, one of the questions I had when I was looking at this was if say 50% of food is made for the food service industry and most of that can immediately be (26/41)
repurposed for retail and people need to offset the food they normally consume in cafeterias or at restaurants by eating at home, then does that translate to higher prices at the grocery store? Yeah, so there are a couple of things that we can examine along those lines. And one is the form that that product takes is different for food service. So there are some differences there and that's actually become a little bit of a challenge as we go through this pandemic. Are there ways to redirect food service oriented product to retail right now while we know that there's this spike in demand? And why is that so difficult? So labeling is one issue. Another issue is just how it's packaged and packed. So are people going to want to go to a grocery store and buy a huge, like I'm going to make it up, but a 10 pound bag of chicken nuggets when they're used to buying a one pound small freezer bag of chicken nuggets. And so there are some challenges in how it's packaged, how it's labeled. And there (27/41)
are also some proprietary restaurant like recipes and configurations that I think are a consideration as well. So some of that restaurants have been, I think, a little bit hesitant to redirect some of their proprietary products that may be kind of pre-marinated or pre-assembled because of kind of some of their branding and proprietary nature. So there are definitely some challenges to redirect. I've read that this is a huge problem. I mean, from what I've come away with, the closing down of so many restaurants and the shutting down of schools and the school lunch program has had a significant disruptive effect on food supply chains. And it's led to a lot of what this wasted food is. Is that correct? I wouldn't say necessarily that that has led to a lot of food waste. I would say that that has led to, at least in the sense of our member facilities, a lot of food sitting. So as long as that is temperature controlled product, it has a longer shelf life. So that's not really leading to (28/41)
food waste, but it's again, maybe displaced food or food that is not moving as it was originally intended. Isn't that also the primary reason that we've seen euthanizing of animals, for example, on farms? I wouldn't say that's why we've seen the euthanization. The euthanizing, in my opinion, has been directly related to the ability of processing plants to accept new animals. And that's really the crux of that. So you've got a big plant that harvests thousands of animals a day and it goes offline for two weeks. There's no place for those animals to go. So that's the big issue. When it comes to the major bottlenecks we're seeing as a result of this crisis, though the demand side has impacted things, the primary source of the disruption is happening at the processing facilities. Well, when you look at fresh meat and poultry, then I would say that the answer is yes, that has been the primary disruptor. But again, that's just an isolated example from a meat and poultry perspective. When you (29/41)
look at the food service breadth of product that would be oriented for food service, it spans pretty much everything. And even in the meat side of things, I know I was talking with one of our members recently and they actually were asked by one of their customers to redirect Turkey that was originally set for restaurant market. And they were able to say, we're going to relabel and instead of that going into a restaurant as a fresh product, we're going to blast freeze it and we're going to relabel, repackage, and then we're going to be able to get that into the retail chains. So there are ways that this is happening, but there's certainly are challenges as well. So I'm curious to ask you, what do you expect us to see going forward? And how much of what's happening in the supply chain reflects the types of disruptions that we've already experienced as consumers at the final end of the chain? And how many are still baking into the cake, so to speak, like with agricultural products, where (30/41)
if there's a disruption during planting season, that's going to have an effect on harvesting in the fall. So what is the lag? Because again, in my research, I've seen reports that we can expect to see farmers continue to have to euthanize livestock as a result of disruptions to processing facilities that can't be turned around in time to save those animals going forward, I don't know, a few weeks or a month or so. Yeah, I certainly hope that the euthanizing of animals can be minimized as much as possible. And we haven't really touched too much on the Defense Production Act and President Trump's use of that to ensure that meat and poultry facilities remain open. But that happened this week. And it was done, I think, in many ways to avoid the euthanization of animals, as well as, you know, try to ensure that that disruption of the meat and poultry flow into the food supply chain and ultimately to grocery stores is minimized. Now, I can't say there won't be more in the coming weeks, but I (31/41)
think this will hopefully help minimize that. But time will tell. Well, you know, I think I speak as someone who is concerned. I've done the best that I can to be prepared. But obviously, I'm concerned about sourcing food, right? I'm fortunate I have relationships with some local farms in this area. And in fact, I'll give you an interesting anecdote. An owner of a local farm near where I'm at told me that he's never seen what he's seeing in the town where he's located. And this is in the North Fork of Long Island. He's seen basically summer traffic, right? People are coming, normally the kind of traffic they see during the summer, in terms of people coming and staying there. That's what they're seeing now. But on top of that, they're seeing lots of people from New York City itself and from surrounding areas that he's never interfaced with before, reaching out to get meat and other products from his farm. We actually spoke when he was on his way up to a processing facility in Upstate (32/41)
New York, is there a real concern that a consumer out there in, let's say, the next month or two months could see significant price rises and shortages in key meats and other products that need to be processed at some of these facilities, which seems to be, again, the most concerning issue facing food supply networks? Let me, I guess, start with the price question. And obviously, supply and demand helps identify and drive what the pricing is, particularly when you're talking about commodities like meat and poultry. So I do think that you'll see some fluctuations in price there for meat and poultry as supply tries to meet that demand. And with production challenges that we've already talked about, that could lead to some increased prices. I feel very confident that we are not in a food shortage. With that said, we have to be able to maintain production to ensure that we stay that way. And so when you talk about plantings and potentially, what does that mean when it comes to harvest time (33/41)
in a few months, we have to ensure that we're continuing to plant crops. We have to ensure that we're continuing to raise pigs and raise cows and raise chickens for that domestic production. There's still a lot of food in the system, but we have to be able to continue to replenish that food that goes out to the grocery stores and into those markets with new product. And so exactly what you're talking about is critical that we have to continue to plant. We have to continue to raise animals. And it's definitely a cycle. It's a chain that we have to keep every link strong. So here's a question for you. One of the things that we've seen, and it's not just in food supply chain networks, it's across the board. Whenever the one good byproduct of a crisis, whether it's a financial crisis or an economic crisis or a crisis in a relationship or something, it reveals aspects about the structure of the system, the ecosystem, the organism, whatever you want to call it, that you wouldn't be able to (34/41)
see otherwise. Right? Choke points emerge. These are stress tests. And so what we're seeing is that we have a, I think, like many other places in our economy, our food system has made trade-offs of resiliency for efficiency. This is something we see across our economy in our financial markets and in our supply chains and networks. How do you think, first of all, is it a fair concern that we should try and make our systems more resilient going forward, that perhaps we've traded too much in terms of efficiencies? Another place we've seen this, for example, is hospitals. In the United States, hospital efficiency is a premium. And so as a result, there's much less marginal capacity for beds and that's had an impact during COVID. Where can the food system as it is currently constituted improve in this regard to make it more resilient? Would this be, for example, local sourcing, more local sourcing of ingredients? And is this an argument for more government investment in agriculture and in (35/41)
event, things can happen, right? Yeah, no, you're absolutely right. And I do think, so inventory strategies is one of the big considerations and that's going to be different for every company. It's going to be different for different kinds of commodities, I think, but it's going to require some investigation, some analysis of how specific nodes in the supply chain performed and what could be done to harden them. Now, I would argue that fundamentals of the supply chain have performed pretty well. And yes, we had surge in demand. Yes, it took some time for the replenishment to catch up. But all the while, I would argue that we didn't have people going hungry because of the supply chain. Yeah, they maybe didn't have the same variety that they're used to in the grocery stores, but that's different than there being a food shortage. So, in closing, what do you think, what's the takeaway from this? What do you think people should know? It sounds like you're not particularly concerned about (37/41)
shortages going forward. It sounds like also when it comes to prices, if I understood correctly, you're not particularly concerned about rising prices or there are going to be rising prices, it'll be totally temporary. And with the latest measures taken by the government, we can expect to see these processing facilities reopen soon. In fact, I think some of them, as you said, have already reopened. What's the major takeaway here for listeners? Yeah, and I just want to revisit the price point because I don't want someone coming back and saying, oh, well, the price went up here and he said, oh, we're don't expect any price increases. Price is a supply and demand function. And if there are supply issues or surges in demand, we may see some fluctuation in prices. So, I don't want to misrepresent that you may see higher prices for meat and poultry as a result of this. I think that's definitely, we will see some of those fluctuations. So, I just wanted to clarify that. But as we look at this (38/41)
for the future, a couple of things strike me. And the first, and I'll kind of close the way I started, the food industry has really come together really well. And there are some ways that the food industry can learn from this to be more efficient and more effective in the future. But we're all in this together and we've seen food service that has slowed come in and raised their hand to help retail because retail was just absolutely going crazy. And so, we've seen people come together and find ways to be creative. We've seen innovations in our own facility operations and innovations in working with truck drivers. We really didn't touch much on transportation, but that is so critical. And there have been some really good innovations on working with drivers to minimize that person-to-person contact, but actually do it in a way that enhances efficiency. We've seen enhanced efficiency in warehouse operations. And so, I think we learn from what we've been through. We embrace those new (39/41)
efficiencies and what we've learned. And we embrace this concept that we're all in this together and that we can be stronger if we work together to find those innovative solutions. Well, that's great, Lo. So, if people want to learn more about the Global Cold Chain Alliance, where can they do that? Absolutely. So, we've got a website, www.gcca.org. And I would point you to our Coronavirus web portal. It's got lots of resources that are important for our industry members, but really good resources. I think for anybody who's interested in how the food industry is responding, we've got protocols on there on, you know, how do you best social distance in a food production type atmosphere? What to do if you have a positive test in you within your facility? Different resources like that. So, we would welcome anyone interested to go to our website, use the resources on that web portal. As I said before, we're all in this together, so we want to make those resources available. All right, Lo, (40/41)
thank you so much for coming on the program. It's been my pleasure. Today's episode of Hidden Forces was recorded in New York City. For more information about this week's episode, or if you want easy access to related programming, visit our website at hiddenforces.io and subscribe to our free email list. If you want access to overtime segments, episode transcripts, and show rundowns full of links and detailed information related to each and every episode, check out our premium subscription available through the Hidden Forces website or through our Patreon page at patreon.com slash Hidden Forces. Today's episode was produced by me and edited by Stylianos Nicolaou. For more episodes, you can check out our website at hiddenforces.io. Join the conversation at Facebook, Twitter, and Instagram at Hidden Forces Pod or send me an email at dk at hiddenforces.io. As always, thanks for listening. We'll see you next week. (41/41)
they had some really great libertarian market, you know, free market principles. They had it because they had very competent industrial policy. I disagree on that, actually. Well, great, because this is a good opportunity to have this conversation because they've really crushed it on EVs. So what explains the rapid advancement in EVs and how they've taken the global economy by storm in that area so much so that it's terrifying the Europeans and the Americans have put tariffs on non-existent imports. I mean, they're not even, it's not even an area of competition right now. So what, how do we explain that? So I think the narrative right now in the Western world is the one you just described. It's, oh, China's really good at giving government subsidies and we suck at it. In essence, that's the narrative. I look at it a little bit differently. I would say that first and foremost, being an industry, you build in a whole ecosystem that you don't wake up one morning and decide, you know what, (27/42)
What's up, everybody? My name is Dimitri Kofinas, and you're listening to Hidden Forces, a podcast that inspires investors, entrepreneurs, and everyday citizens to challenge consensus narratives and learn how to think critically about the systems of power shaping our world. My guest on this episode of Hidden Forces is Louis Vincent Gave, the CEO and co-founder of Gavacol, a company that started as an independent research firm with a focus on Asia and has evolved since to include fund management and data analysis services. In the first hour of our conversation, I asked Louis what he thinks are the most important trends set to define the investment landscape in the years ahead, including why he believes that the US and Europe are set to undergo a long period of structurally high inflation while China's economy is set to experience what he describes as a deflationary boom, driven in part by rapid advancements in key industries like semiconductor manufacturing and electric vehicles. In (1/42)
the second hour, we explore why Louis believes that the American imperial model, dollar recycling, is unsustainable and why de-dollarization is a prerequisite for the reindustrialization of the United States. We also discuss whether or not America needs an industrial policy to achieve this and help reverse the multi-decade financialization of the American economy that has helped drive up asset prices relative to their underlying income streams, exacerbating the wealth divide and destabilizing the country's political system. If you want access to that part of the conversation and you're not already subscribed to Hidden Forces, you can join our premium feed and listen to the second hour of today's episode by going to hiddenforces.io. All of our content tiers give you access to our premium feed, which you can listen to on your mobile device using your favorite podcast app just like you're listening to this episode right now. If you want to join in on the conversation and become a member (2/42)
of the Hidden Forces Genius Community, which includes Q&A calls with guests, access to special research and analysis, in-person events and dinners, you can also do that on our subscriber page. And if you still have questions, feel free to send an email to info at hiddenforces.io and I or someone from our team will get right back to you. Lastly, because this conversation deals with investing, nothing we say on this podcast can or should be viewed as financial advice. All opinions expressed by me and my guests are solely our own opinions and should not be relied upon as the basis for financial decisions. And with that, please enjoy this thoughtful and educational conversation with my guest, Louis Vincent Gave. Louis Gave, welcome to Hidden Forces. Thanks for the love for having me. Very nice to meet you. Yeah, I didn't try to go full out French accent. How would you say your name in French if you're speaking to a French person? Louis Vincent Gave. That sounds so much better. It's not (3/42)
just a cliche. So Louis, it's great having you on. What prompted this conversation was actually my most recent episode with Paulo Macro and Le Shrub. And I read a bunch of your opinions through Paulo because he was referencing them in many of his pieces. So I was like, this would be kind of like a normal transition, which would be to speak to Louis afterwards. So before we get into today's conversation, which is going to be, I think mostly about China, but there's a lot of other stuff that you write about and you explore in your research. I'd love to learn a little bit more about you. How do you describe what you do? And then to that point, why do you think you're good at what it is that you do? I don't know if I am good. I wake up early morning and try to be good, but we have a bit of a hybrid firm. It's a firm I started, my father Charles and a friend of ours called Anatole Kolecki, this is some 25 years ago now. We started off as a pure macro research firm, publishing macro reports (4/42)
and basically selling them to large institutional investors. Early on, we felt that China was going to be a pretty big deal. We started the firm in London. We moved to Hong Kong and then opened an office in Beijing on the premise that China was going to be a big, important factor for macro for the coming years. And so we were very lucky in terms of being in the right place at the right time. Pretty early on, starting 2003, 2004, 2005, China really started to take off. And there were a few people at that time doing what we were doing. So again, it was a question of being right place, right time. Parallel to this, starting around 2005, we built a money management arm where we started off with an Asian equity fund. And then when China basically started to open up its bond market, we started to get pretty big into Chinese fencing as well. Then in 2011, we also bought a stake in a private wealth firm in the US called Evergreen Gavgal. You might see that on social media. And so we added a (5/42)
third leg to our business, aside from asset management, aside from research, a wealth management arm that initially was just in the US and that has now become a little more global. We bought a couple of years ago a wealth manager based in Mauritius. So we're a hybrid firm. We do different things. Obviously, since we started, we've grown from just the initial three partners to now eight partners working in the firm. Our headquarter though remains in Hong Kong. Our second biggest office does remain Beijing. And I do still spend a lot of time in China. And I still find it absolutely fascinating. I think it's one of the most important macro story of, frankly, of humanity, how 600, 700 million people came out of poverty within a generation is, to me, worthy of a lot of ink, a lot of studying. It's a testimony for perhaps future generations. So I agree. It's the most remarkable economic growth story in the history of humanity. And it continues in some ways. So you guys write a lot of stuff. (6/42)
I mean, you publish a lot. I've seen, like, how many times would you say you write an article every month? How many articles do you publish? You personally? Personally, less than I used to, because the team has grown. And we try to limit ourselves to no more than three publications every day. So we have a set schedule as a firm. We start off with the daily, which is usually two to three pages at most. And the idea is to take one idea, something big that happened in the previous day or two, and that could have an impact on financial markets. And so that's our daily short punchy to the point. The idea is you can basically read it on your way to the bathroom. We write a think piece as well. We have one think piece a day. And then we might have a second think piece specifically linked to China, without China product. So I highlight this because we now have a pretty big bench of analysts, a big bench of people looking to contribute. And we're all competing to try to get published. And very (7/42)
often, I write pieces that end up on the floor, because there's better pieces published by some of my colleagues. Charles, right now, my dad, who still writes every now and then, is really pissed, because he's got three or four pieces in the cupboard that have been there for like two months, and he clamors to get them published. So I highlight this to answer your question. I probably write, I would say, five or six dailies a month, and then three or four think pieces a month, ideas pieces. So I probably publish anywhere from seven to 10 pieces. Yeah, I mean, that's a lot. And you guys put out a lot of information. So as I said, while I do expect us to talk quite a bit about China, you guys cover a lot of different trends. And so I feel like the appropriate question to maybe start this conversation with is what are the most important trends that you've been focused on over the last several years and that you expect to remain focused on over the next several? In other words, which are (8/42)
the enduring trends that define the investment landscape in your opinion? You know, everybody's got different processes. And I start off with a very simple idea that there's three prices that determine everything. The price of energy, the price of the US dollar and US interest rates, and that as investors, you know, it pays to have a pretty clear and intelligent view on any one of these three things, because these three prices, again, will determine pretty much everything else. And now, having said this, the other sort of starting point for me personally is that economic activity is energy transformed, that energy matters a lot more than you know, people give it credit for. And that there's, of course, massive interaction between the world of energy and the world of currencies. So I do spend a lot of time looking at energy. And for me to answer your question, perhaps the single most important macro development of the past decade or so that people just don't spend enough time on has (9/42)
been the US shell revolution. I wrote a book about it back in 2012. The book was called Two Different for Confort. And, you know, as I look at it, you know, the US went from producing five million barrels a day to 13 million barrels a day. It basically added one Saudi Arabia. And as it did, it made for a stronger dollar. It made for lower inflation in the US, which allowed the Fed to keep monetary policy much too easy for far too long, allowed for a massive re-rating of the US, et cetera. And amidst all the talk of US exceptionalism, for me, that's the part that people don't focus enough on. Now, this is where it gets fascinating is the US in the past decade has gone from five million to 13 million barrels per day. The big question for me is where do we go from here? Does the US basically keep the massive comparative advantage it has built in energy? And if it does, then happy days for the US economy, happy days for US markets, happy days for US policymakers, or is this, this massive (10/42)
comparative advantage that the US had starting to stall, starting to stall because not enough has been invested, because policies haven't been that friendly to the energy space. To cut a long story short, do you think over the next five years the US finds another Permian or not? I don't. I think right now nothing is being done to, to find another Permian. And therefore it makes for a very, very different world. A world where the US goes from five to 13 and a world where the US goes from 13 down to 12 makes it a very, very different world with impact on the currencies, impact on interest rates and impact eventually on policies as well. So that's one massive trend that's out there. The other massive trend, of course, and I'm sure you talked about with Palo, I must admit, I didn't listen to the talk yet with Palo and the shrub. I'm a big fan of both. I subscribe to both Palo and the shrub, substax. They're both tremendous reads with, I think they have a great pulse on the markets. But (11/42)
look, the biggest trend out there, which partly goes with the energy story, is that we've moved from a fundamentally deflationary world to a fundamentally inflationary world. And in an inflationary world, portfolio construction is massively, massively different. We're seeing it every day. In a deflationary world, bonds are the natural diversification for portfolio. In an inflationary world, they're not. An inflationary world, energy is the natural diversification for portfolio. Failing that precious metals and failing that strong currencies. And that brings me to the third big trend out there, is that for the past decade, partly thanks to energy, partly thanks to monetary policies, the US dollar has been structurally strong. And I firmly believe that with the fiscal policies that are being implemented in the US, frankly, the monetary policies that are being implemented in the US, we've now had three consecutive years where inflation has been above 3%. And instead of sounding hawkish, (12/42)
the Fed does its very best to sound dovish. So I think we're now in a structurally inflationary environment, again, that has huge consequences for portfolios, currencies, for lots of different things. So let's tackle the deflation to inflation paradigm first. What is it specifically that you point to that makes it so that you believe we are in a structurally inflationary environment? Well, the first, of course, I would say the runaway budget deficits everywhere. My very favorite economist is a French economist called Jacques Ruff. And Jacques Ruff was the gold's advisor in the 60s. It was actually him who advised the gold to get the gold back from New York and got the Americans pretty pissed off. But, you know, he was looking at the twin deficits that the US were running and saying, look, this is just simply not sustainable. The US is going to have to devalue against gold. Here's how I put it today, you know, where three or four years into a global economic recovery following COVID, (13/42)
pretty much anywhere you care to look at except perhaps China, you've had nominal GDP growth, meaningfully above structural growth trends. This is true of the US, it's true of Europe, it's true of India, it's true of Japan. Now, take any one of these countries. The US today is running budget deficits of six, six and a half percent of GDP at a time of full employment. India is running roughly four. China is running roughly four. Japan is running roughly four. France, my home country is running five and a half. Now, Jacques Rueff used to say that inflation is its expenditures that give no return funded with money that does not exist. And this is exactly what we're seeing everywhere. We're seeing the subsidizing of expenditures that give no return, whether you call them, you know, magic windmills or magic mirrors to get energy in a highly inefficient way, whether you call them massive increases in defense spending, whether you call them massive increases in social spending. Everywhere you (14/42)
care to look, you see big increases in government spending. And at the same time, massive discomforts with population who feel hold on. You got runaway budget deficits. My taxes keep going up. And against that, public safety is getting worse. Against that, public education is getting worse. Against that, public health care is getting worse. And so, you know, this inflation is subsidizing expenditures that give no return with money that doesn't exist. You'll be hard pressed to find a country today where, frankly, this isn't the case. Except perhaps the one country that doesn't suffer inflation today, which is China. You know, in China, you have had big increases in debt. You've had big increases in government spending, but you're at the phase of their structural growth where people can see where the money's been going. Right? It's been going in high speed railways. It's been going in dams and ports and airports. It's been going in infrastructure. You know, I've been, I'm older than you (15/42)
are. I'm 50. I started my career, let's say, for the sake of argument 30 years ago. When I started, the US government had four trillion in debt. Today, it's got 34 trillion in debts with debt growing by one and a half, two trillion a year. Now, here's the thing in the past 30 years, what did you get for that money? You know, where's the Huvodam? Where's the new interstate highway system? I think the last major airport that was open in the US was the Denver airport in 1991. So, you know, you've had massive increases in debt that have primarily funded expenditures that give no return. It's gone into social transfers. It's gone into silly military operations. And that's the very definition of inflation. And so you see the inflation all around you. I think it's delusional to not see it. Is it fair to say, I mean, it's hard for Americans to think of America as an empire, because when you're living in an empire, you don't see yourself as an empire if you're a country like the United States. (16/42)
But in some sense, is it fair to say that what we're talking about here is also the American imperial economy, where you had the American market being an import destination, running current account deficits. The dollar was very strong. And so what's happened is we're now in a world where the military balance of power is changing and that threatens to undermine the symbiotic economic relationships that built up around American hegemony, especially post fall of the Soviet Union. Does that resonate with you, that description? It does. And look, I don't want to be sounding like I'm touting my own books, but I wrote a book about this back in 2019 called Clash of Empires, which is available on our website. I think the eversion is for free if people want to download that. We can go down the wormhole of vampires and I'm happy to wax lyrical on it for ours. What I would say is this, is that historically, you've had two kinds of empires. You've had the land-based empires. So you build roads, you (17/42)
build railways. And very clearly, this is what China's aiming towards. You know, the one belt, one road, the Silk Road Fund, the Asia Infrastructure Investment Bank, all these investments that China is making is really an attempt to be a modern day empire. You know, fundamentally, that's what empires often do. Empires build roads. That's why in Europe, we say all roads lead to Rome. Empires build roads to bring commodities in cheaper, transform them into higher value-added goods, and push them out to the rest of the empire. That's always what empires have tried to do. That's what Britain did. That's what France did. That's what China's trying to do. Terrestrial or naval, through waterways or land, presumably. That was going to bring me to my second point, which is that you're absolutely right. There's, you've got the land-based empires, i.e. Rome, and you've got the sea-based empires, i.e. Cotage in the old days. Now, land-based empires are very costly to maintain. You need to, you (18/42)
know, manage the road. You need to put stations. If the U.S. is an empire, it's obviously a sea-based empire. It controls the world's oceans. Now, having said this, and this, you know, if you take a step back, there's a couple challenges to this. The first challenge is the U.S. is a very weird empire. And I would say perhaps a reluctant empire. Again, if you start off with the premise that the goals of empires is to bring commodities in cheaper, to push out finished goods to the outer realm of the empire, the U.S. was undeniably doing this in the 1950s and the 1960s. There's no doubt that's what the U.S. did. You know, that was what the Marshall Plan was about. Here, we'll lend you money, and you're going to use this money to buy Caterpillar machines and to buy, you know, General Motors cars and whatever else. But the U.S. stopped doing that like 30 years ago. The U.S. stopped being an empire. It's like, we're going to bring in the commodities here, transform into a higher value added (19/42)
goods and ship them out to the rest of the world. The U.S. doesn't do that anymore. The U.S., as I think we're seeing now with this Ukraine war, the U.S. no longer really is an industrial power. You know, the Ukraine is running out of 155 millimeter artillery shells simply because neither Europe nor the U.S. can produce them anymore. We simply do not have the manpower, the factory, the expertise to produce 155 millimeter shells that we were producing like at great scale during World War II. We're not even capable of doing that today. Or maybe you say, well, we choose not to. But the idea that, you know, the U.S. is no longer basically an industrial power. So can you be an empire and not be an industrial power? I think it would be my first question mark. The second question mark is, as you pointed out, the U.S. is a sea-based empire, which was great because that was a very low cost way of being an empire, except that we now know that a couple of guys with a drone can threaten entire sea (20/42)
lanes, as we saw with the UTs. But it was something that really we'd seen before with the Armenia as a by John War and now that we've seen with Ukraine, that basically controlling seaways thanks to massive fleets and aircraft carriers and destroyers, etc. When these can get taken out by a $50,000 drone, all of a sudden the equation changes dramatically and your ability to control all of the world's waterways is perhaps no longer the same. So I think we're seeing some profound shifts today that make for a very, very different world. So on that point, if you had to sort of describe what the nature of this relationship is between the U.S. and China and how it has evolved, what is the story you would tell and how much of this is an appropriate response on the part of the United States, for example, to try and prevent China's military rise and how much of it is an overestimation of the threat that China poses that risks backfiring on the U.S.? Look, I think the entire relationship changed (21/42)
with the arrival of Xi Jinping to power. You know, I think pre-Sijinping, the U.S. saw China as this sort of cheap manufacturing hub and, you know, they're going to produce the microphone that you're speaking on today and they're going to produce the shoes that I'm wearing and, you know, they're going to do this at very low margins and we're going to capture most of the margins through marketing, through sales and keep those margins in the United States. And that worked great from roughly 1982 to 2012. And then in 2012, if you remember, Xi Jinping comes in and does two things. First, he starts talking an imperial talk, like the One Belt One Road, the Silk Road Fund. Remember, every Chinese president before Xi Jinping was inward looking. It was like, you know, you came in and you didn't really care what was happening abroad. There were so many problems at home. It's like whatever, the foreigners can take care of themselves. I'm focusing domestically. And then Xi Jinping comes in and (22/42)
says, you know what? We're going to build roads in Africa. We're going to build big ports in the Middle East. So, you know, that peaks up the U.S. interests. It's like, well, hold on. You know, you're supposed to be the chief manufacturing center. You're not supposed to be an empire. So that's number one. Is that also because implicitly the United States saw China within the orbit of American empire, right? There was a unicelder power, right? China was the manufacturing center of the U.S. empire. Then China comes out and says, we're going to have our own empire. So the U.S. already is like, wait, what? Then the second thing that I think Xi Jinping did, if you remember, he had this big China 2025 dream where it's like, by 2025, we've got to be able to produce our own commercial airplanes. We have to be a car exporter. We want to be a telecom switch exporter. And not just a, we want to be the number one in the world at exporting cars. We want to be the number one in the world at (23/42)
exporting telecom switches and earth moving equipment and tractor and whatever else. At which point the U.S. says, hold on, like we liked you when you were producing socks and underwear, but if you're now going to be competing with Cisco for telecom switches, and if you're not going to be competing with John Deere for tractors, and if you're going to be competing with Ford for cars, and you're going to be competing with Boeing for planes, then we have a problem. You know, you're supposed to be low value added stuff. You know, you can't be moving up the value chain. And so we're going to, you know, prevent you from doing that. We're going to like make sure you don't get access to see my conductors. We're going to impose tariffs. And, you know, as this has happened, what the U.S. has found, I think, to its dismay is that instead of collapsing, you know, the Chinese economy took the punches and they were pretty big punches. You know, these were, took the punches and kept going, kept (24/42)
going. And China, you know, pre 2025 has become the world's biggest car exporter and has become the world's biggest tractor exporter in spite of the punches. And I think that's the situation we're in today. Now, the good news is, you know, we're recording this on May 14th. The U.S. has just announced 100% tariffs on Chinese electric vehicles. It's just announced 50% tariffs on Chinese batteries and on Chinese solar panels, which is great news. I think that's terrific news because for the past 10 years, I was shaking in my boots that we lived in a climate emergency. I was told that the world would end in five years time if we didn't dramatically change our ways. But now I've just found out that actually we don't need to change to electric vehicles and we don't need solar panels everywhere, that the climate emergency must have been pushed back because, you know, we can afford to have all these tariffs on China, even though the world is supposedly burning. So I woke up with a great sense (25/42)
of relief this morning. So, I mean, that might be an opportunity to go back to the conversation about energy and how much of your opinion on shale is a result of insufficient capital expenditures and how much of that is because the private sector isn't investing enough or how much of it is because of government regulations or forward guidance around the energy transition, ESG, stuff like that. But let's just bring it back to this conversation. This kind of, we're obviously, this is not, doesn't fit neatly into the investor bucket, but it's sort of relevant for the larger framework. From the European and American perspectives, does it make sense to move away from the neoliberal consensus of largely unconditional support for free trade? And open markets, given the fact that they have been competing with China, which has been very good at industrial policy, very good at using state subsidies. I mean, the EV sector is a great example. They didn't become the number one EV exporter because (26/42)
I'm going to throw a bunch of money at this manufacturing. Look, this is what the US is trying to do right now with CMI conductors. Right. They've decided, oh, you know, Taiwan and South Korea have gone to be much better producers of CMI conductors than us. By the way, did TSMC get a bunch of subsidies from the Taiwanese government? No, they just got good. It got good because Taiwan, like China, has a whole both tech and industrial ecosystem. You know, progress in industry is made mostly by workers who tinker, who make small changes. Now let's talk about the EVs. Since I do agree with you, that's a great example. Today, you do have a number of Chinese brands that are breaking out on, on the upside and they're breaking out on the upside with tremendous vehicles, whether you look at BYD, whether you look at Polestar, like, you know, there's a list of them. And also extra, I mean, the huge price differentials too, right? The Chinese. Huge price differentials. But there's also a huge list (28/42)
of cars on the side, roadkill. Like you've had tens of bankruptcies of car producers in China over the past decade. Tens. So I would say that, you know, the difference is perhaps that in the US, you're down to three car producers, that it's a far less competitive landscape as opposed to China where you've got dozens. You know, in the US, if you go back to when cars were first introduced at the beginning of the 20th century, the US had what, 100, 150 car producers and they were egging each other on and you had people tinkering in their garages and making things better, et cetera. And eventually Ford got to be better than everybody else. And so did General Motors and they cleaned up. They took over competitors or the competitors just went bust. And as you get big, you get fat, you get lazy, you get stupid. And the more protectionism you get, the more fat, lazy and stupid you can be. Now, you know, you look at China, you've had literally dozens of electric vehicle brands being launched in (29/42)
the past 15 years or so. And you've had dozens die by the wayside. And today what you have are the survivors, the BYDs of this world that are lean, mean fighting machines. Now, does China have comparative advantages in that it might not have the same environmental rules we have in the West? Absolutely. Does it have cheaper labor costs? Absolutely. Have there been subsidies given to electric vehicles? Yes. And have there been sort of governments ordering fleets of electric vehicles for the Ministry of Defense and ordering fleets for this ministry and that ministry, et cetera? Absolutely. But the West does that as well, right? I mean, it's not as if our electric vehicle industries in the Western world haven't benefited from enormous subsidies. Would Tesla have existed if it hadn't been for government subsidies, especially early on in its life? So we can sit around and say, oh, China's successful just because of subsidies. But I think we're hiding ourselves from the more important truth, (30/42)
which is that China has built an industrial ecosystem. And it is that industrial ecosystem that allows it to be competitive. And now we could say, well, it managed to build it through subsidies in the beginning, et cetera. But we have spent the past 20 years destroying our industrial ecosystem. And China spent 20 years building its industrial ecosystem. And so to think that our problem is the lack of subsidy, that's not the problem. Well, I should be clear. Subsidies is one thing I mentioned. It's not the only thing. What I'm really trying to get at is that in China, the government is a greater partner in the economic process in a way that the US government no longer is. So what explains that? What explains the deindustrialization of the United States and how much, if any of that deindustrialization was policy driven? In other words, how much of the loss of US manufacturing and the financialization of the American economy is the result of explicit policy choices made in Washington? I (31/42)
think the government let it happen. But the ones who are responsible, look, is the US government responsible for the fact that Boeing can't make planes that don't have parts falling off of them? Or is that Boeing management that, you know, focused on short term profits at the expense of everything else? Is the US government responsible for the fact that Ford and General Motors cars are now being undercut massively? Well, where does that come from? That's a great example. You've written about Boeing also. Where does that come from in the United States? That focusing on profits at the expense of everything else? That's just a cultural manifestation in your opinion? I think it is a cultural manifestation. And I think culturally in the US, everything has been done in the past 30 or 40 years to glorify money making over everything else. Right. And there is, you know, in the US, the gap between CEO pay and worker pay is greater than anywhere else in the world. The gap between the 1% and the (32/42)
bottom 20 is greater than anywhere in the world. Now, we could argue that this promotes creativity, that this attracts all the best talent of the world in the US, that it promotes the highest GDP growth. What it doesn't promote though is industry. However you want to cut it, it does not promote the building of factories, the paying of workers, because what it promotes is saying, oh, I can get a worker in Mexico or in China for a third of the worker in the US. So I'm just going to go ahead and do that. And I'm going to transfer along as I do that, I'm going to transfer along knowledge. So we could argue, you could say, well, look, if we hadn't done this, the S&P wouldn't be where it is, it'd be half of the level. We'd have the same stock market returns as Europe or the same stock market returns as Japan, which isn't that great. Yeah, we'd have an industrial base, but you know, houses in the Hamptons, instead of costing 25 million bucks, would only be at 5 million bucks. And I would say, (33/42)
yeah, so these are the choices that were made. And I'm not sure they were made by politicians or they were made perhaps by default, the US just fell into it. But it sounds like your opinion is that we would be a better off with lower asset prices, less income and wealth inequality. It's not really my job to put a value judgment on it, to be honest. I'm not a politician. It isn't really my problem. My problem as an investor is just to observe and to draw the investment consequences. Now, the investment consequence of this is that the US is deindustrialized. And for now, the consequence of this as the US is deindustrialized and as China's industrialized, the US is saying, okay, this is a problem. We're going to perhaps put wrong causes on the problem. The reason for this is China subsidizes its industry. Instead of looking inward, we're going to blame somebody else for our own problem. And what we're going to do is we're going to put tariffs to deal with this problem. Now, here's the (34/42)
thing. Tariffs, you know, I'm a free trade guy. So I'm naturally some against tariffs, but I do acknowledge that tariffs can work as a band-aid. If you put on tariffs and say, look, we need to build up this industry. And as we do, we're going to protect it for a little while. As it gets critical mass and we get up and running, then tariffs can make sense. But there's none of that in the US today. That's just, we're going to have tariffs and tariffs for tariffs sake just means that you're sheltering your industry, which deep down makes it worse over the long term. And so today the US is basically, I think, has a cancer and has decided, I'm going to put a band-aid on this cancer and the band-aid isn't going to work. So you write, I mean, the reason I'm asking these questions also is because they're central to where the electorate is today. I mean, I think whether they're directly being posed or whether they're sort of implicit in the conversations that are going on within, especially the (35/42)
Republican Party, they're central and industrial policy and defense spending are part of that. You guys comment on and think about the US elections, understandably, in politics. It's important. Again, if we take this imperial model, what goes on in the United States is very important for the rest of the world. How do politics fit into your framework? And how do you follow and think about the 2024 election and the context of the US-China geo-strategic competition? And how was that important for investors? These are super important questions. So first, I'm not American. You know, I'm a French citizen. So I don't really have a bone in this fight. So I actually, to your point, I think of it as an investor, but I'm not emotionally involved, like a lot of people in the US perhaps are with this issue. And now the first point I'd say is that as an investor, you know, you could say, well, do I really care if it's Trump or Biden? Again, I know there's big cultural differences between the two, (36/42)
but cultural issues don't matter all that much to markets, typically. And so I look at it and I think, okay, you know, what impact are they going to have now? Whether I look at Trump, whether I look at Biden, they're both going to run massively easy fiscal policy. Whoever gets elected, that budget deficit in the US, which in my mind is completely unsustainable, that's not coming down. You know, it's going to stay at five, six, seven, eight percent of GDP for as far as the eye can see. Now they may spend the money on different things. There's going to be a lot of rhetoric difference between the two, but basically it's going to be roughly the same thing, where perhaps there is a difference between Trump and Biden is that is in foreign policy. So Trump splits the world between US and foreigners and foreigners are wrong-ends. You know, however you cut it, if you're a foreigner, you're trying to take advantage of the United States. And that was his inauguration speech. It's America first, (37/42)
America first, America first. Biden splits the world between good democracies and bad non-democracies. And it's a very much a black hat versus white hat, sort of, you know, Walt Disney or Western view of the world, where you got the good guys and the bad guys. Now, I think, to be honest, some of the good guys, i.e. the Japan of this world, have taken advantage of this Biden position. You know, for me, the biggest anomaly in the markets right now is that the yen is at 155, 160. You know, that's completely crazy. You've got the world's biggest industrial power, one of the world's biggest in second after China, running a currency that's 40% undervalued on a purchasing parity basis. It's madness. You know, today the yen is one of the cheapest currencies around. Like on a purchasing parity basis, it's cheaper than the Indonesian Rupiah, cheaper than the South African Rand. You know, to me, that's crazy. Now, I highlight this because I tend to think if Trump gets elected, he's not going to (38/42)
stand for that. I think he comes in and he tells the Japanese, hey, guys, 155 is in the price, 120 is the price. And then this has a big impact on markets because the cheap yen has allowed for bond yields everywhere in the world to probably be lower than they should be. It's allowed for carry trades to continue. It's triggered a lot of outflows from Japan into gold and triggered a massive structural bull market on gold. So, you know, that one I could see having a big impact. Otherwise, you know, I think whether you've got Trump or Biden, the anti-China rhetoric frankly stays the same. Whether you have Trump or Biden, I think both actually want to get the US dollar lower. Now, Biden is less explicit than Trump on this. Trump is just out there saying, hey, we want a weaker dollar. Lighthizer is main economic advisor, says it every day. So you've got either way, you end up with a policy of excess budget deficits, weaker dollar, the excess budget deficits and the weaker dollar combined to (39/42)
continue pushing yields higher. So as an investor, it's like, yeah, it's sort of same, same, except perhaps if Trump gets him to come in, a lot of the carry trades might implode pretty early on in his presidency. So, Louis, I'm going to move the rest of our conversation to the second hour. I want to talk about something that is being discussed quite a bit now. In the media, which is the R&B and potential R&B devaluation. I know you have a contrary take to that. This will also give us a chance to talk about de-dollarization, which is something I think we should also clarify conceptually, because I feel like it's a term that's used a lot and often means different things to different people. And to discuss how it fits into this larger framing of American empire and the American imperial economy, which we've been discussing. For anyone new to the program, Hidden Forces is listener supported. We don't accept advertisers or commercial sponsors. The entire show is funded from top to bottom by (40/42)
listeners like you. If you want access to the second hour of today's conversation with Louis, head over to hiddenforces.io slash subscribe and sign up to one of our three content tiers. All subscribers gain access to our premium feed, which you can use to listen to the rest of today's conversation on your mobile device. Using your favorite podcast app, just like you're listening to this episode right now. Louis, stick around. We're going to move the rest of our conversation onto the premium feed. If you want to listen in on the rest of today's conversation, head over to hiddenforces.io slash subscribe and join our premium feed. If you want to join in on the conversation and become a member of the Hidden Forces genius community, you can also do that through our subscriber page. Today's episode was produced by me and edited by Stylianos Nicolaou. For more episodes, you can check out our website at hiddenforces.io. You can follow me on Twitter at cofinas and you can email me at info at (41/42)
There is a lot to be said for going all in on one project and committing to it. Instead of spending time switching between everything you can just be active here all the time.
LeoStrategy bought 130k+ $LEO in the last 24 hours
SIRP velocity is growing (more revenue is being fed to the SIRP via Leo.voter HP delegations, beneficiaries to @leofinance, premium subscribers, etc.)
POL is building the perma-staked LEO position daily
LSTR’s SURGE token sales are increasing and will likely sell out soon
LSTR is working on other financial products/tools/services for the LEO ecosystem with one goal: generate revenue to buy more LEO
Things are shaping up nicely for us. Not saying you shouldn’t consider a little hedge via SURGE to protect your downside but LEO is in the best shape it’s ever been in from a tokenomics/economics perspective
Impressive numbers across the board! That $1M+ trading volume on LeoDex and the consistent LEO buybacks via LeoStrategy are strong signals of growing ecosystem health. From a tokenomics view, this kind of momentum often fuels sustained value growth
Yeah, things are heating up and we are just getting started. The little correction in $LEO price feels like a blessing as it will allow leostrategy to gather a larger position at lower cost.
Very curious about the $SURGE pool(s), will that be $LEO : $SURGE or $LSTR : $SURGE or $SURGE:$SWAP.HBD? (I can see benefit of all of these haha)
LeoStrategy’s continued success will mean buy pressure in perpetuity for $LEO
Once we start to wrap our heads around this, everything changes
Consider a future where you have a highly liquid cross-chain LEO market (bLEO, pLEO, heLEO, LEO, etc.) and a highly liquid LSTR market and a highly liquid SURGE market
LeoStrategy has a moat for arbitraging all these market pairs and making a profit
Then 100% of the profits flow to buying more LEO and perma staking it
This is permanent LEO Per Share added to the LeoStrategy balance sheet
Fascinating setup with LeoStrategy creating constant buy pressure for $LEO. The cross-chain arbitrage moat is a smart play—profits cycling back into perma-staking could really drive value over time. Flywheel indeed
Preferred offerings are the biggest moat in Strategy companies
Microstrategy currently has a monopoly on them at scale in the stock market because Strategy companies haven't caught up yet from a regulatory/scale sense
LeoStrategy completely changes this landscape and the SURGE offering - which is a preferred token - is the proof of it
Selling out SURGE is top priority right now. Getting the open market trading to start on the $50k pool that will go live after SURGE sells out will have a huge mNav benefit to LSTR (Not to mention all the capital that's raised to buy LEO while its still cheap)
Protect your portfolio and pick up some SURGE while helping LeoStrategy build a moat like Microstrategy's 🦁
very interesting, i‘m still wondering if and how that prioritizing of premium threads really works … 🤔 🤓 … or are you never using the „for you“ feed? 👀
Please feel free to tag me to any opportunity to make money in web 3.0. I need everything I can get between now and the next 2 months. I may even need to start a power down of Hive. But I wish I don't have to.
good morning all.
Heading into the shop to work.
Have a good day.
GM! Get after it!
have a good one man
May your tools behave and the coffee not run out. What’s the first job on the bench today?
full paint correction BMW X5
awesome. Got any pics?
It's a no brainer for me to invest in SURGE right now. With Hive price going down, the discount on SURGE increases. The effective yield increases, it's almost 18% right now .
🎉 Thank you for holding LSTR tokens!
Your post has been automatically voted with 6% weight.
This is nice, thanks .
It’s a no brainer
The @leostrategy team’s new bot on Threads will show the effective yield in real time
This definitely helps. Khal, any plans for autocompounding SURGE?
absolutely! The picture will soon get clearer for most.
That 18% effective yield on SURGE does look tempting with Hive's price dip. Discounts like this can be a great entry point, though timing the bottom is always tricky. In my experience, focusing on long-term value over short-term swings pays off
Well, long-term value is definitely there. 15% is actually good enough for me but I am getting more than that with SURGE.
Agreed, 15% is already a strong return in most markets. SURGE pushing past that with the current discount makes it hard to ignore for yield seekers. Long-term holding could really compound nicely here
DCA works pretty well for offsetting "timing the bottom"
Absolutely, DCA smooths out the volatility and takes the guesswork out of timing. It's a solid strategy for building positions over time, especially in markets like this
Yeah it works well especially if you can automate it.
Automation is key for sticking to a DCA plan. It removes the emotional second-guessing during dips and keeps you consistent through market swings
😆
Purchase during the dull moments, or you'll end up acquiring from the person who did just that.
Makes sense. What do you use to spot those quiet windows, volume drops, fewer posts, or just gut feel?
I usually just go by gut feel and check if the chatter online has died down a bit. Volume drops help too, but I'm no pro at reading the charts. How do you spot those moments?
Me too, I don't know how to read charts but usually the news on chain / articles is what makes me decide whether to invest or not.
Same here, I often look at the news or whatever's trending on chain to decide. It’s not foolproof, but it gives a decent sense of the vibe
As long as we have community backing the coin, it's almost safe lol.
Totally, a strong community can make a huge difference. As long as there's solid backing, it definitely feels a bit safer to jump in
The $10 is untouched as I countdown to renew my InLeo premium status in 2 days.
Premium status with so much value.
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good to see you are prepared in advance
MEN, REMEMBER:
It's okay to feel uncertain at 26
Low on funds at 30
Fit by 32
Wealthy at 35
Transforming by 40
Perseverance is key.
Good reminder that paths aren’t linear. Which one habit matters most when cash is tight and you’re still figuring things out?
Sticking to a budget is huge when cash is tight. Even small cuts, like skipping takeout, add up. Helps you stay grounded while figuring things out.
Here are some reflections on nurturing the next wave of innovators in the age of AI. With teenagers in mind, it's a relevant topic.
It's time to rethink education, focusing on empowerment and creativity.
Wealth-building doesn't require starting with a large sum of money.
However, investing is crucial to achieving wealth.
The common belief that one must be wealthy to start investing is false. It's the regular, even small, investments that truly power wealth generation.
Absolutely, small consistent investments compound over time. Starting early with whatever you can afford often beats waiting for a big sum. Market cycles show that time in the market usually trumps timing the market
did we just have "the pump before the pump" #BTC and #ETH
The market has been pumped.
🎙 NFTOPIA Metaverse Convention🌐Aug 16-17 ( 👇 ): "⚡️KEYNOTE SPEAKERS at #NFTOPIA5 📍AUGUST 16, 2025
🌟12pET (4pUTC)
DIGITAL CASH'S COMEBACK
@thedessertlinux from @dashpay $DASH " [...]
#crypto #evolution
REMINDER ⏰
Exchanges don't need to worry about Dash transactions being reversed. Thanks to InstantSend and ChainLocks, all transactions are deterministically final, instantly.
The age of exchanges worrying about reorgs should be over. It can, if we want it to be.
#crypto #dash #monero
https://inleo.io/threads/view/thedessertlinux/re-leothreads-2uimglhsq
Sounds like reorgs just got benched by InstantSend and ChainLocks. Are most exchanges using this yet?
Many exchanges, such as Coinbase, recognize our security features and accept deposits much more quickly. Not enough yet though!
Don’t time dips perfectly—DCA smooths volatility risk.
I firmly believe that LEO is going to hit $1 by the end of the year, and will probably go to $3-$5 next year. Both of those could happen sooner, but that's my thinking. With that in mind, I'm happy to keep scooping chips under 20 cents rather than paying 25, 30, even 50 cents. Still a 5x to $1 from here. Gets less and less the higher it goes. Simple math. I'm not selling below $1 so might as well get them as cheaply as possible.
Quite realistic in my opinion as well. 👍
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That's a good perspective you have on Leo. My target is $0.50 by the end of the year.
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You can take profits and, during a small correction, buy more with those profits! But I respect those who don't sell a single LEO! 🦁
Good reminder!
If you want it at its best, you've got to pay the high price
You get what you pay for
#cmduo
Guessing game.
Win $DUO
Read the rules, link in comments.
Range: 870-1000
No correct guess in previous round - @master-lamps was closest, congrats!
Prizes:
Closest guess: DUO call (0.2 staked DUO)
Correct guess: 0.6 DUO staked to your account
Deadline: August 17th @ 8 am UTC
#duo #threadcast #gameonleo #pob #cent #sloth #duogame #guessinggame
taglist:
@anderssinho @chaosmagic23 @lourica @ijatz @moretea @brando28 @mmonline @ben.haase @bitcoinman @dubble @drakernoise @luchyl @les90 @rainbowdash4l
(ask to be tagged or removed from taglist)
963
!DUO !PIMP !BBH !SLOTH !BEER !LUV !vote
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You just got DUO from @caspermoeller89.
They have 1/1 DUO calls left.
Learn all about DUO here.
969
990
965
992
!LOLZ !ALIVE !BBH
lolztoken.com
It’s all fun and games until someone loses an I.
Credit: reddit
@caspermoeller89, I sent you an $LOLZ on behalf of ben.haase
(3/10)
Farm LOLZ tokens when you Delegate Hive or Hive Tokens.
Click to delegate: 10 - 20 - 50 - 100 HP
971
!LOLZ, lucky me!
996?
!BBH
lolztoken.com
Gross-eries
Credit: reddit
@caspermoeller89, I sent you an $LOLZ on behalf of master-lamps
(1/10)
Farm LOLZ tokens when you Delegate Hive or Hive Tokens.
Click to delegate: 10 - 20 - 50 - 100 HP
987
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Hey buddy, you're guessing on an old post 😉
!BBH
Lol 😂
The Monero security issue got bad enough that Kraken has suspended deposits. 👀
Better get a security overhaul done fast!
#crypto #monero
Focus on your integrity and future work, not the drama. Build strong ties with supportive mentors, document your contributions, and let results speak louder than gossip. Protect your reputation by moving forward, not looking back.
Academic dismissal from your programme isn’t the end. After time away, you can often reapply or transfer credits. Focus on finishing strong, not past setbacks. Persistence counts.
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Come along, this one, please!
I will be trying to be as alive as I can!
https://inleo.io/threads/view/forkyishere/re-leothreads-zf9knrzy
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Caturday's🧵 for feeding the #mighty #leoai 🦁💡
Every #comment is a data snack 🍪
Every 🧠 you tag, a new flavor in the mix.
Let’s train it well, together. Don't forget it's classic #lpud
#threadtofeedthelion #leoecosystem #bbh
#20250817
This is the full transcription of podcast 'Hidden Forces'.
9 11 Terror Attacks and the Saudi Connection Senator Bob Kerrey #Podcast #Transcription #ReadAlong #KnowledgeUnlocked
And after 9-11 we did. And certainly after the reforms that Congress enacted. And the problem the Bush people had is that no matter what you do, the focus is going to be on them because they had the power. They're in office. And it can be uncomfortable. It can inhibit their capacity to plan and do additional things. And one of the maybe the most important contributions I made in 9-11 commission was to argue that we should not have minority reports, that we need to be unanimous. Because if we weren't unanimous, the public could- Was there a minority report? No. I was. But one of the few times in my life where I successfully argued for something and got it. So we didn't have minority reports. There were five Democrats and five Republicans. And they were selected in an extremely partisan environment. And thanks to Tom Cain and Lee Hamilton, it wasn't partisan. We didn't attack Bill Clinton. We didn't attack George Bush. Many of the criticism came from Republicans that thought we ought to (23/31)
2004 they said, oh my god, we better be a part of trying to beat back radical Islam or we're not going to survive. But I'm talking about 1991 where the United States came into the defense of Kuwait and station troops in Saudi Arabia. But the Saudis were concerned that Saddam Hussein would invade into Saudi Arabia. And they were grateful to have American troops in Saudi Arabia, weren't they? And they paid for it. Yeah, but what I'm saying is that they- Were they grateful? Yes. Yes, they were grateful and they didn't trust that bin Laden- and bin Laden wanted to do it himself. And he regarded it as an offense to Islam that we were on the holy soil where Mecca Medina are and that we invited a posthit. So what you're saying basically is that the Saudi regime is so unpopular and so corrupt that on the one hand they needed the United States to protect them against a state actor in Saddam Hussein with his army, but at the same time had to appease the radical Wahhabis. And so they were doing (26/31)
What's up everybody? I'm taking the next couple of weeks off and my release schedule for the end of August and the beginning of September is going to be a little irregular. I've already recorded another episode that I hope to release sometime in the next two weeks and I've got recordings lined up with all sorts of super interesting people including the former chairman of North America for Louis Vuitton, the co-founder of Kickstarter. John Meerschmeier is also coming on the show, which is great because I'm a huge fan of John's and it's always great to have a brainiac on foreign policy on the podcast. Who else? Michael Casey of Crypto Acclaim is coming on as is my good friend Mike Maloney who is long overdue for his hidden forces christening. It's going to be a baptism by fire. We're going to talk about gold, crypto, economic philosophy, and Tesla I'm sure because Mike and I have some friendly disagreements on Mr Musk. So that's going to be a lot of fun and there are a bunch of other (1/31)
great guests who I can't even recall off the top of my head but it's going to be awesome and it's a lot to look forward to. So what you're about to hear now is the overtime to my episode with Senator Bob Carey that was recorded in December of 2018 and it was the very first overtime segment that I released to our subscribers. I've chosen it for a number of reasons. First of all, I really liked it. I also really like Bob Carey. He's a really nice guy. It was a jovial conversation. He's a charming person. He's good-natured and I think that it is the type of conversation that's missing in politics today. I don't think every conversation should be like this but I think it would be nice if we had more of them where we could talk about politics in a way that was also just not necessary adversarial because I don't think that Bob Carey and I agree about everything. So it was fun. He's so funny and I think in that sense it'll be a joy to listen to but I also think it's informative. Bob Carey was (2/31)
one of the 10 9-11 commissioners and he actually gives his opinion about what he thinks the role of the Saudi government was in the 9-11 attacks which I think is a really big deal. It's something that Senator Bob Graham has spoken about. In fact, I asked him specifically about Bob Graham's work in this area. So in some sense the most remarkable thing about Bob Carey's admissions is how unremarkable they are. But of course if we had heard these statements back in 2001, 2002, the world may be a very different place today and certainly Saudi Arabia would have lost its single biggest ally and protector in the United States. So before I toss it to the episode guys, it is the end of August. I am going to take a little bit of time off. Don't expect anything next week. If there is something it'll be a surprise but we're going to pick back up in the beginning of September. I hope you all have a great end to your August and that you have some fun plans and in the meanwhile please enjoy My (3/31)
Overtime with Senator Bob Carey. All right, we're back. That was a nice break. That was a great break. So the one thing I want to ask you before we get to this at your experience in the commission, I asked you about Khashoggi and all this stuff now with the Saudis, we were talking about Elizabeth Warren 2020. What do you think is going to happen in 2020? Now we have now Donald Trump who's a phenomenon. I've never seen anything like him. Certainly Andrew Jackson could qualify maybe, right? But he was also at a different time. No, no, my God Andrew Jackson. Well they had to resuscitate him in the White House so he drank out his enigaration. He was pretty bad. Yeah, he drank big deal but he didn't lie every five minutes. But don't politicians all lie. It's just the way he... No, no, no, no, no. He's taking offense to that. Well, no, first of all, all of us lie. You find me a human being lying and he's the guy in the street corner saying the world's going to come to an end. So there isn't (4/31)
anybody that it's true that politicians probably lied 20% more than everybody else but we've never seen anything like Donald Trump. We've never seen anybody that covers his observations of what's going on in the world with things that are factually incorrect. So it's way beyond anything we've seen before. Well is it just about his lying or his facts or is it more about, to me, like... It's not just lying. It's taking credit for everything. There's a boastfulness that I find to be offensive because I don't think it's the way you get things done. I don't think you get things done by saying, I, I, I all the time. I agree. But for me now, it's not about the lying. What makes him so unique in that sense is the temperament. It's his temperament. Yeah, two reports that came out yesterday that were ordered by the Senate Select Committee on Intelligence, run by a Republican. It's a bipartisan group. He nanops vote to authorize those two reports. They provided these two organizations with all (5/31)
the stuff they had from Facebook, Google, all the other social media stuff that they had been provided, Twitter. Tell us what happened. That's what they said. First of all, they said what happened is these companies came before you and they didn't tell you the truth. But the most important thing is Vladimir Putin made a decision. He wanted Donald Trump to win the Republican primary. He wanted Donald Trump to win the general election and he contributed to that victory. And he's continuing through social media, through trolls, to try to deliver supporting messages that are consistent with what Trump is saying. Mueller's bad and Trump is good. It's fake news. It's big witch hunt and hoax. So I think overwhelmingly persuasive argument that he won because of Vladimir Putin. That doesn't mean he colluded with him. That doesn't mean he violated the law. But what it means is a foreign power decided to have a major impact and use our own... You think you had that big of an impact? Absolutely. (6/31)
Really? Oh my God. All you have to do is suppress the voters of 70,000 people in Wisconsin, Michigan and Pennsylvania and you've got 270 electoral votes. Okay. So let's say that's true. Let's say... Well, it is true. We've got two lengthy reports that draw absolute positive conclusion that it's true and that it continues. Well, what I'm saying is we don't know whether ultimately it swung the election or not. But what I'm saying is... We do know that it swung the election. We know that... Absolutely know it swung the election. Okay. Hi, look, I don't know enough. Why are you laughing? You yielded so quickly. You're so funny. You didn't want to. You didn't want to. I figured this out. Look, I don't know enough to argue with you on that. It's funny that I told you this is what I saw when I watched you with Mira Carusa, Cabrera and CNBC. This is why I could tell that there are a lot of things, probably debates, that you... You probably enjoyed debates. Did you enjoy debating in politics? (7/31)
Were you just enjoying debating people like me who didn't know what they were talking about? No, no. I like a good argument. You do. Okay. So where I was going with that was... I'm going to use the word shit again. Was it because Hillary Clinton was such a shitty candidate for the Democratic Party and so many people didn't like her. She ran against Barack Obama in 2008, lost. If she had gotten 270 electoral votes, she'd be a genius. And were it not for Comey's two press conferences and the Russians, she would have got 270 electoral votes. Did she make a mistake? She didn't wow anybody though. Couldn't the Democrats have found a better candidate? I don't know. I mean... You don't have to say. A lot of people didn't like the Clintons and she lost in 2008 to Barack Obama and she still got the nomination and she railed out Bernie Sanders. She didn't rail Bernie Sanders? My God. Look at the facts and answer this question. Who has done more for the Democratic Party? Hillary Clinton or Bernie (8/31)
Sanders declares he's not even a Democrat. He wasn't independent up until now. Hillary and Bill Clinton have been out helping Democrats for the last 40 years. It's not surprising that people who they helped are saying, yes, we'll help you win. That means that the Democratic Party was representing itself, its own interest, and not the interests of the American people. No. First of all, it means that there's a human side to politics. I'm not doing something bad if I help somebody who helped me. We typically think that's a good thing for somebody to help somebody else who's been helpful to them. That's what Hillary was. She was a very good thing. But I think it's a little different when it comes to politics for the American people. Political parties are hard. Among the reasons I've burned it, probably pretty smart not joining the Democratic Party because you don't have to go to the conventions. You don't have to argue the policies. You don't have to put together a platform. You don't have (9/31)
to walk out with people mad at me because you supported a woman's right to choose and you had an argument with somebody who don't and you won and they didn't or vice versa. These arguments, you can end a friendship as a consequence of working in either the Republican Party or the Democratic Party. They're hard work. That's an interesting point you brought up. It's a rough thing. I've actually definitely lost two friendships as a result of this recent electoral cycle. I find myself, and the reason why is because I've become really aversive to ideological extremism. I often find myself getting in trouble with people who I'm friendly with or friends with or even the audience on the right. I've had people in the audience criticize me for sounding bias, being biased against the right wing and also the same thing, bias towards the left wing. I feel like people are so ideological and not willing to meet somewhere down the middle. To see the other side as a human being. I completely agree with (10/31)
that. It's hard. By the way, you asked me earlier, I like getting arguments. There are times I get in ferocious arguments that people get up and walk out of the dinner. It happens. Then you got to apologize and move on. When was the last time that happened to you? Last night. That actually happened to me a few months ago. It doesn't happen to me often. I didn't walk out. I didn't mind it. My sister, who was in the legislature for a while in Nebraska, and she's at least as good as I am, but people that know both of us, she thinks she's better. We once went to a restaurant, we're having dinner with our families and it's crowded and it was like, you know what a Petri dish is? In a Petri dish, you can see the bacteria is spreading. In our case, we're sitting there and also we look around and everybody had been close to us and left because we're screaming at each other. That's how my family is. That's very funny that you guys are like that. I'm also a Greek family. We yell. Let me ask you (11/31)
one more question before we get to the 9-11 commission. Do you have any guesses about what's going to happen in 2020? Who the Democrats are going to run? What's going to happen with Trump? Is he going to be impeached? What's going to come out of the Russian investigation? Any predictions? Well, I don't know if I could keep it short enough to be done by midnight. The 20 election, I think the odds favor whoever is the Democratic nominee winning the general election. There are way too many people who are Republicans who are saying, I'll vote for anybody other than Donald Trump. Do you think the Democrats have it in the bag? No, I don't think anything is in the bag. That's the thing with politics. If you get it in the bag, then you don't. It's a shit show. No, you just don't know. I mean, I think the likelihood of President Trump winning Michigan, Pennsylvania, and Wisconsin, and he's got to win all three of those. The election comes down to that. If you win all three of those, you're (12/31)
going to have two and a seven electoral votes. Either candidate. I think it's much more likely this time around that all three of those states wear, by the way, we now have three Democratic governors. So I think it's much more likely that happens, and it certainly is going to be true that who of the Democratic nominee is, they know that that's the case. They know they cannot afford to lose those three states. Oh my God. Do you think he'll be impeached? Do you think there's any chance of that? What do you think will come out of this investigation, and why has it taken so long? Relative to every other special prosecutor. It's a fast-moving operation. How long did the Nixon Watergate stuff take? Like two years ago? Almost three years. Yeah. I mean, Clinton's went on from just after he came into, I mean, like seven years or something like that. So they take a while. Mueller's actually moving relatively fast. He's an extraordinary guy. I mean, Washington is a town where everything leaks, (13/31)
and he hasn't leaked anything. No one's been here. Trump's scared? Oh my God. He's terrified. He's going to send Cohen to jail. Yeah, he's going to jail. He's got three years. Right. For lying. Not for lying, but for violent. And Trump is a part of that transaction. It's not persuasive. Just say, well, he's my lawyer. He's going to do it. No, you tell your lawyer what to do, especially Trump. That's his whole modus operandi. Sue him. He tells the lawyer. But that's the thing that's so crazy about Trump. No. What I mean is the fact that he'd be on Air Force One, and he would tell people, no, I didn't know about it. And the next day, yeah, I did know about it. That's crazy. You can sue another human being and intimidate him. You can't sue the Department of Justice and intimidate him. So the big question is, if he doesn't win in 2020, will the Southern District bring a charge against him? And I think it's way better than 50-50 that they will. Yeah. Well, that's for sure. I think it's way (14/31)
better than 50-50 if they go into a court of law, he's going to have to have a pretty serious plea bargain to avoid jail time. He's in trouble if he's not president, that's for sure. It is challenging to impeach him if he's president. These two reports that came out of the Senate Select Committee on Intelligence, those two reports are devastating. And because they provide a background that if, and I don't know what Mueller's going to have, I mean, whether Mueller, he actually is finishing his work as he goes. This is in a situation where he gets all the way done, like Ken Starr, here's the report, and you got to do something with it. But he's got 17 people, he's already indicted or sent to jail, and he's seriously going through this thing. That's scary. And the next one is probably Donald Jr. And then he's going to take the question as the president himself. Do you think Donald Jr. is going to jail? I don't know. I don't know. But I... You don't have the answers? I don't. I don't. I (15/31)
mean, that's a really good thing about Mueller's done is he's kept it very, very confidential. I actually don't know. But I do know is he's been very successful. So sticking on conundrums, on Trump conundrums, let's use the case of Khashoggi and Muhammad bin Salman. By the way, is it just me or are we obsessed with using acronyms for everything today? Now, everyone calls Muhammad bin Salman MBS. And this is like a thing. Have you noticed this? Everyone refers to people by acronyms. They used to call people by their real names. Now, they call them by their initials. It's easier. It's more... Sure, it's easier, but you know... It's certainly a lot easier with an Arab name. So... Yeah, for sure. Anyway, so Trump has... And by the way, that's what he likes. He prefers being called MBS. So it's not... Does he really? That's interesting. So this is a peculiar case, peculiar beginning with Trump and the fact that he has been so adamant about not holding MBS accountable. Why do you think that (16/31)
is? Well, I think I've got a lot of stake. Financially and... No, no, I mean... In Saudi Arabia. No, I wouldn't be surprised... Politically. I wouldn't be surprised if they come in as partners in a real estate deal after he's out of office. But no, I think Jared Kushner was given the responsibility for coming up with a plan from the Middle East. I think rationally thought, well, if I can get UAE and Saudi together with Israel, we ought to be able to come up with something... How big is an Israel in this, in other words? Like, an Idaho in Israel. I do think the Palestinian issue is a big deal. And I think if you can get something that is coming out of Saudi Arabia and UAE with Israel on board, I think it's going to be easier to sell. I mean, I think it kind of makes sense on that level. So they have a lot of stake there. And I think they have a lot of stake in the military. I mean, Trump is... You've got to give them credit for being honest on that. He said, I'm doing it for oil. I'm (17/31)
doing it for weapons contracts. So I think they've made a big bet on Saudi. And they're not the only ones. I mean, a lot of people getting money from the Vision Fund right now. That's 75% of that is Saudi money. And by the way, I think it is important that we help Saudi make this transition from, you know, basically an autocratic kingdom to something that has a more liberal foundation. I am not confident that MBS is the guy to get it done. And what Khashoggi has done, the Khashoggi case has done, has done, for me, a couple of things. It's shown how massively incompetent these guys are. I mean, 12 guys with a bone saw flying in and then flying back out. How hard was that to figure out? 100 and nothing vote in the Senate saying Khashoggi did it. But the president continued to say, well, we're not sure about it. But I think it's going to lead to a significant change in our policy towards the war in Yemen. I think that's going to be a good thing. But I'm not confident that MBS is going to (18/31)
pull this off. I mean, he announces women can drive cars. And what else does he do? He puts the women who are advocating for women drive cars in jail. So don't put me down on the camp of people that are optimistic about the transition to a more modern society and a more modern economy in Saudi Arabia. 15 years ago, we never would have heard any negative comments about Saudi Arabia. The criticism of Saudi Arabia began really with the Barack Obama administration. And I think a big part of that ultimately was about oil, right? And fracking and energy. 15 and 19 hijackers were Saudis. Right. So well, they were, you're right, they were. And you know a lot about that. And we put one of the 10, 9, 11, 11. Yeah, the first two planes that left the United States were carrying Saudis out of the United States. So exactly. The bin Laden family. Right. But that was totally swept under the rub by the media. That was not discussed. That wasn't something that we weren't told. I don't think I'm correct (19/31)
and say it was not totally swept under the rub. But you're right. It wasn't the major media story. Why wasn't it? Was it because the Bush family was so connected to the Saudis? No, I think it's genuinely a complicated story. I mean, one of the problems that the 9, 11 Commission had in addition to the running on a limited time frame, which limited our capacity to do all the things that you'd like to be able to do. And why was that? Because they just wanted to get it over with? Republican Congress would extend our timeline and the Republican administration didn't want to extend the timeline. Why? It was such an important investigation. It was an important investigation. And part of it is it's impossible for any but myself, including because I was there in the 1990s as well. I was there when the first attack, the 93 attack on the World Trade Center. Yeah, the 93 attack. Right. I mean, that was the same guys. And we were making fun of them. We called them nose here in Salami, you know, (20/31)
because they would try to get their deposit back on the right or truck. And we didn't size it correctly. We had supported the Mujahideen in Afghanistan all the way through the 1980s. The Russians leave in December of 1988. And what do we do? We basically say, well, that's done. And well, it wasn't done. Right. And you said you were on the Intelligence Committee when we were in the Senate, right? So you were getting a lot of these reports. Getting a lot of the reports. And so you were not caught by surprise that Ben Laden was involved. No, I was not surprised at all. I mean, we were first the 93 attack. We didn't put him on the 93 attack, but we knew it was coming from a group of Islamic individuals who believe that we're a threat to their vision for the world. So they regarded us as an enemy. And they guarded us as apostates. And they regarded us as a good thing if they could kill Americans. So that's what they were doing with the World Trade Center. And then the big one was the 98 (21/31)
attacks on our embassy in Dar es Salaam and Nairobi. And the coal. Well, the coal was 2000. But the Nairobi attack was a really sophisticated operation. That wasn't just a couple of guys, you know, lighting up a room with automatic weapons. I mean, that was a very sophisticated operation and a very successful operation. And we were 98 percent certain it was al-Qaeda that did it. And we were 100 percent certain that it was a coal. We just didn't respond. We let them keep their sanctuary in Afghanistan. We threw a couple of cruise missiles in there right after Bill Clinton said I did have sex with that woman after all. That was a wagged-a-dog accusation he's made against him. And we didn't do enough. We just didn't. We didn't warn the airports after we had information. The walls that were created between the FBI and the CIA were made it difficult. It is true the leadership was concerned about it. But we just didn't have a coordinated effort. And we certainly didn't have a global effort. (22/31)
attack Bill Clinton. And a lot of Democrats that thought we ought to attack President Bush. And that was among the reasons why it was difficult to extend the timeline. But the central problem was it was a conspiracy. It was a conspiracy going back. You've heard you say 30 years. Yeah. I mean, quite a long time. I mean- But when you say it was a conspiracy, you mean it was a conspiracy by the Mujahideen and by Al Qaeda. By factions. Yes. Yes. Yes. There wasn't a- What about factions of the Saudi government? At the highest levels of- That's quoting Bob Graham. He said that this goes up to the highest levels of the Saudi government. And he refers to the 28 pages that I referred to at the beginning of our interview that 60 Minutes has published a piece on. I think we're part of a joint congressional inquiry into the 9-11 attack that happened right after you guys released your- Yeah. Look at it. The world on looking at 9-11 oftentimes divides into different camps. And this camp, I can't (24/31)
imagine. I don't think it's credible that 15 Saudis could participate in an attack on the United States of America without somebody at the senior level knowing about it. So what does that mean? What does that mean in a word? They've got blood on their hands. But why would they do that? Why would senior members of the Saudi government want to be involved in an attack against the United States? Because the family made a decision. We're going to support the Wahhabis. We're going to support people who are- have really seriously radical beliefs about the world and that everybody ought to be like completely pure and follow our rules and we get to decide what the rules are. It's a radical form of Islam. But the family owed their existence to the Bush family. Their existence to HW Bush. No. They owed their survival. To the- That's what I mean. No. They owed their survival to the support of the Wahhabis. And it wasn't until they got to attack until Al Qaeda starts going after them in 2003 or (25/31)
this balancing act. Right. And that their involvement in 9-11 was a result of their need to appease these terrorists that were- That's correct. That's correct. Threatening their own regime. That's correct. Now, I need to be clear about something that I wasn't clear about. The 9-11 commission did not conclude that the Saudis were responsible for 9-11. On the other hand, it did not conclude, as the Saudis have been saying in court, that we vindicated them. We did not vindicate them. We did not say they didn't do it and we didn't say that they did. So what I expressed earlier was my own opinion based upon my own reading of the- both of the documents that we had as well as some of the documents that we didn't have. What I find confusing in this is how this would sit with George W. Bush and the Bush administration, knowing this as I'm sure they did, how that sat with them and why they would ship the family members out. Was that- Do you think something just had a blind loyalty? I don't (27/31)
really have any answer to the question. I don't- I don't know. All I know is that they were allowed to leave and I think part of it was they were afraid for their lives. They wanted to get out of here because they knew- Well, they were. The families were, but why would the Bush administration allow them out? You can take a benign point of view. My benign point of view would be I'd give them the benefit of the doubt and say, look, they knew with 15 Saudi hijackers on there that Americans might be saying, we want to punish anybody who's still here because I don't have any evidence that there was any other motivation behind that. Okay. So then why then did the Bush administration not call out the Saudis? Given what we're talking about here, I mean if Bush- I mean he was on the rubble in 9-11. He bombed Afghanistan, invaded Iraq. Why wouldn't he have put the Saudis on notice? What do you think? I mean, you've been in politics- Well, I think the Saudis were put on notice. I mean, they (28/31)
certainly knew that they- They fucked up. Well, yeah, when 15-year-old people were on those planes, they could hardly say that the Saudis weren't involved. So they were put on notice, but they didn't really, I would say, get religion until all of a sudden radical Islamic groups started to attack them. But they knew it. I mean, they had to know what the Wahhabis were doing. The Wahhabis were moving all over the world, the worst and relatively close area for them to go. They were in Mumbai, setting up schools and- Right. I do understand why the Kings did that, why the royal family did it, but I think it created major problems both for them and for us. Well, I think it raises questions that will never be answered for the American public because the Bush administration was Machiavellian in the extreme. We're living now in a time where the- What's his name? Is playing- Christian Bales playing Dick Cheney. Looks pretty good. Looks pretty good. It reminds me, I forgot how scary Dick Cheney (29/31)
was. Look, here's the thing. When you start off with the presumption that it's a conspiracy. Of course. Alternatives conspiracies are relatively easy to put in the storyline. It just is. I mean, I still get people to come up and say those Jews did it. The government did it. It was an inside job. Couldn't possibly have knocked those planes down. They were holograms. Yeah, they couldn't possibly have knocked those buildings down to the plane. I mean, there are alternative storylines that go on about 9-11, but I don't have any doubt about who organized it. I don't have any doubt it began with Ben Laden's desire to attack the United States. It was a series of events that led up to the attack on us on our own ground. I don't have any doubt about that at all. I know what Kaili Sheikh Mohammed's role was in this thing. I know- 93. Yeah, but not only 93, but again in 2001. It doesn't have anyone. Right. So I don't have any doubt about that. That's where it came from, but there's a lot of (30/31)
moving parts beyond that that you're right. We probably never will know. Yeah. Senator Kerry, thank you for spending so much time with me between two bathroom breaks. Yeah. Thank you for putting the bathroom so close. I had a great time having you on the program. Thank you. You're welcome. Nice to be with you. (31/31)
This is the full transcription of podcast 'Hidden Forces'.
Howard Marks Overtime and Subscription Launch Announcement! #Podcast #Transcription #ReadAlong #KnowledgeUnlocked
differently, reach a different conclusion than the consensus, feel that the price should be much higher or much lower, take action on that. This is the way to be a serious outperformer. You have to see things a little differently. You have to see what you believe is the error in the consensus. So you have to see things differently. But there's another requirement. You have to be right. And most of the time, the consensus does a pretty good job of being right, and you can't habitually have a non-consensus view and expect it to be consistently right. So the requirements are, you have to think differently and better. It's not easy. And this is a lot of what Charlie Munger meant when he said that investing is not easy. And yet this is the requirement. How else can you be a superior performer unless you see things different from the crowd and better? Do you come to your investment insights or your contrarian views gradually? Or have there been instances in your life where you have this (16/32)
What's up, everybody? Merry Christmas. Happy holidays. This show is coming out on Christmas Eve for our American listeners and Christmas Day for everybody else. As the title of this episode suggests, there will be a segment from my interview with Howard Marks. It's between 20 and 30 minutes. Let's leave it at that. So that'll come at the end of this, but I have an important announcement to tell you all about beforehand, which is that finally, after a year of promising you, my listeners, a Hidden Forces subscription, I've finally done it. It's a long story as to why it took so long, and I'm not going to get into it. But one of the benefits that it took so long is that now anyone who subscribes gets immediate access to the transcripts of every episode we've ever done and to over 50 rundowns, starting with episode 19, which are these beautiful show outlines with reference materials, charts, pictures, quotes, all the rest of it. So anyone who's a regular listener has heard me reference (1/32)
these documents. They're the outlines that I put on Twitter and my personal feed and pictures and photo shots. It's like the nerd porn that I put out on social media. It's great. It's what I create before every single episode. So going forward, I'm going to be incorporating subscriber feedback and input into how I construct these, and I'm going to make a bigger effort to include links and documents and things like that related to the show. So that's all going to be made available through our website. And my intention in making these materials available is so that they can serve as educational compendiums to the subjects that we cover every week. And the same goes with the transcripts, which I'm happy to improve upon with user feedback. Again, if people want links or notes incorporated into them, I went through a couple of companies in order to find the right ones for these. So if you find errors in the archive, email me so that I can get them fixed. But this is going to be an (2/32)
evolutionary process with the goal of always being able to help you get more out of every single episode. But again, like I said, the archive of the transcripts is going to go all the way back to the very first episode. So when you get the subscription, you have access to everything. But wait, wait for it. There's more. And the more is that the baseline subscription is actually an entirely new podcast feed that you can add to your podcast application and get overtime segments, afterthoughts by me about the show, special one-off episodes that I put together for subscribers. So basically, I've already done two of these that I'm going to release with my episode on modern portfolio theory and the evolution of financial theory with Daniel Parris, as well as my episode with Bob Kerry, Senator Bob Kerry, the former 9-11 commissioner, Medal of Honor recipient, former governor and senator from Nebraska, which I actually completed right before I'm recording this. In both of those cases, a huge (3/32)
chunk of that interview, even longer than the 20 to 30 minutes that I'm releasing with Howard Marks today, which was originally meant for the purpose of being an overtime segment for the subscription, are going to be made available for subscribers. So that's what's going to come with the subscription feed. And I'm going to be releasing at least one of these every other week, but I may just end up doing it weekly or maybe even more often. It depends on what feedback I get from all of you. Most importantly though, I don't want any of you to think of these things, the rundowns, the transcripts, the audio or any future additional notes or educational materials that I put together around the podcast. I don't want you to think of these things in transactional terms. This is not a transaction. I've been doing this show for almost two years and I haven't asked for anything or taken any sponsors. I've done this and I continue to do it because I love doing it, but that doesn't mean that I can do (4/32)
it indefinitely without finding a way to cover the costs of production and I don't want to rely on advertising. I don't want to be interrupting these conversations with product or service announcements or pitches or anything like that. And I think that this is totally doable because I'm not looking to use this as a way of generating income for myself. I just want to make sure that I'm not covering the costs of this show out of my own pocket so that it's sustainable as a long-term project, which is what I want it to be. So when I say this isn't transactional, what I mean is that almost all of the value of what I do is the show itself, which is free, has been free, and always will be free. The vast majority of people on earth will continue to listen to it without ever making the choice to contribute a cent to making it possible, which is totally fine. But a small percentage of you are going to make the choice to support the show. And it's you that all of us, most of all me, are going to (5/32)
be immensely grateful for. So let me cap this off with some specific actionable information about how this is going to work. I looked at e-commerce platforms and subscription services that I could deploy myself through my site and decided that the best way to do this was actually to integrate Patreon into the Hidden Forces website, which I've never seen done before. So we're going to be using Patreon, which makes this way easier for those of you who already have Patreon accounts, but you're going to be able to access all of this material directly through the Hidden Forces website. So right now, as I'm talking, if you can go to hiddenforces.io, when you open up any individual episode, you'll still see the tabs that you saw before, info, related, bio. And to the right of those, you're going to see tabs for transcript, notes, overtime, or whatever else. And if you go into those, you're going to see that you can sign up and subscribe to them by going through Patreon. And that stuff's (6/32)
eventually going to be made available through the site. So if you subscribe, Patreon will know that you're logged in and it'll be able to make that stuff available to you. And each of those is part of a different bundle. So for $10 per month, you can access the overtime, which is all the stuff I was just telling you about, the extra bit with Bob Kerry, where we talk about 9-11, the 9-11 commission, and I get his opinion on what the role of the Saudi government was, the highest levels of government, and what the Bush administration knew or didn't know. And then with Daniel Parris, same thing, we go into a lot of really awesome stuff that deals specifically with investment options around the conversation that we have. So in both cases, this is really high quality material that you cannot get on the normal shelf. So that's for $10 a month. For an additional $5 a month, you can have access to all of the transcripts. And then for an additional $10, you can get access to everything, (7/32)
including the rundowns. So I thought a lot about this pricing. It's not fixed in stone, but I feel very comfortable with it. And let me tell you why. I looked at what all the other shows were doing, and besides making extra audio feeds available, and in those cases, a lot of times, the audio will come out once a month, I haven't seen much in the way of what we're providing. This is a huge archive of material, and there's no commitment. You can cancel the subscription at any time. You can also support separate from the subscription. If you want to just give a dollar a month, you can do that. And you know what? I'll love you for it. That will mean a lot to me and to everyone else, that you took the time to support the show and what we're doing. Of course, you can also provide more, and then I'd really love you. So here's my promise to you. If we get to a place where all the costs of producing the show, including the rental of my studio, the payments to my editor, web hosting, and all the (8/32)
other costs associated with putting this thing together, if we get to a place where all of these costs are covered, I will make an announcement and we'll figure out how we can use any additional income to create new and better content and grow the show. Like I said, I'm not interested in using hidden forces to generate income for myself. The most important thing that money can buy from you right now is time. And that means time to focus only on creating new content and generating ideas for new shows or newsletters or whatever else. Okay. So before we get to Howard Marks, I also want to say that for anyone who travels on British Airways, you can now expect to find hidden forces listed on BA's in-flight entertainment. We just finished onboarding our episodes with them, so that makes two airlines, the other one being United, that feature our show, which is super exciting. Okay. So Howard Marks, this segment lasts for about 25 minutes or so, I think. It rivals the episode itself for (9/32)
quality of content, in my view. In fact, I think it might very well be better. I asked Howard Marks about the role of intuition, how he relies on it in the management of his portfolio, contrarianism in investing. This moved from active to passive, the transformation in American capitalism after World War II with professional managers and professional management at companies. And if this trend has kind of run its course. I also asked him for what he would do if he was getting out of college today and how he continues to motivate himself every morning to go to work at Oak Tree for free, as it turns out. But finally, before I throw it to Howard Marks, I want to say in all likelihood, I'm going to release an episode for New Year's. I'm going to be in Greece when this episode comes out, visiting my family, but I'm going to find a studio there, hopefully to be able to record an intro to that episode. Look for that on New Year's Day, but if you don't get it, it will just skip straight to the (10/32)
second week of January, since this is the holidays and it's tough to publish through that. So, Merry Christmas, happy holidays. Hopefully, I won't have to give you happy New Year until next week, but if I do, happy New Year and enjoy the Howard Marks overtime. Howard, thank you for staying for this overtime segment. This is the first time I'm actually doing it, so I'm looking forward to see how it goes. There are a few questions that I had in our regular rundown that I wanted to ask you, and then I've got a few special questions that I have just for this segment. One has to do with intuition, which is something that you write about in the book, and it came up a lot in our conversation where you sort of danced around it, but I didn't ask you about it directly, which is, what role does intuition play for you when you're managing your portfolio? I think a lot of it depends on your definition of the word intuition. I'm not talking about voodoo, I'm not talking about guessing, I'm not (11/32)
talking about throwing darts or deciding on the basis of which foot I put on the floor first in the morning, but I think that we have to make judgments, subjective, personal, qualitative judgments. One of my favorite quotes is from Einstein, who said, not everything that counts can be counted and not everything that can be counted counts. Not everything can be quantified, nothing about the future can be proved, so I think it all comes down to judgment. If you think about it, just about everybody has access to all the same numbers. Just about everybody has the intelligence to process those numbers equally well. The margin of superiority comes from people who understand better than others the import of those numbers, the inferences that should be drawn and the actions that should be taken. I think that these kinds of judgments are extremely important. Somebody I can't remember right now said, I'd rather be approximately right than precisely wrong. You can't attain that much precision in (12/32)
your life when you're making judgments about the future, but you talked before about the importance of experience. Observation, emotional control, insight, hopefully second level insight. These are the things that can permit you to do a superior job. Is that just also a necessity or a feature of how our brains work that we can only ... There are theories in neuroscience, specifically one I'm thinking about called cognitive load theory, which is why a lot of high performers wear the same stuff, Barack Obama, Steve Jobs, et cetera. So much power to make decisions and that allocating more of that to the unconscious is the way to maximize performance. Is that one way to think about it? The importance of it, that is. Yeah. I don't know if I would use the word the unconscious, but I guess I would say the non-quantitative. The most important questions about a given company are not what it's going to earn this year or next. The most important questions are what kind of business it's going to (13/32)
have in 10 years and what kind of success and what kind of market share. And so I think that those things, as I say, anybody can reach the quantitative conclusions. The qualitative subjective conclusions are what separates the winners from the losers. Another question I had for you that we danced around in the interview had to do with contrarianism. And you have this great quote in the book. I'm going to butcher it if I try to say it, wing it. But your point is that it's not just enough to be right. If you're right and you're part of the consensus and everyone else is right, then you're not going to make any money. You have to be right and you have to have a view that's different than the consensus, which is what contrarianism is. And you also make this great point about the difference between contrarianism and pessimism, which can often be conflated. Talk to us a little bit about this notion of contrarianism and the role it plays in superior investing. We've talked a couple of times (14/32)
about second level thinking. And it seems clear to me that if you think the same as others, you will reach the same conclusions. If you'll reach the same conclusions, you'll take the same actions. If you take the same actions, you'll have the same performance. And yet success in the investing business is performing better than others. So that process can't be the one that leads to success. You have to, at some point, diverge from the crowd. You have to develop a knowledge advantage. You have to see things differently. You know, one of the important phrases in investing is variant perception. You have to see things at some point differently from others. The way that everybody, the massive investors, sees a given company is what determines its stock price on a given day. It is a voting booth, as Ben Graham said, and everybody cast their vote on a given day for the value of Apple. And the consensus becomes the price. That's what a market is. And the big wins come when you see things (15/32)
revelation or this contrarian idea and you see something in that moment that you hadn't seen before and that no one else is seeing and it's a really great opportunity and you have to move on it? I mean, I wouldn't accuse myself of having many epiphanies. I try to be rather level in my views toward the markets. And then as the market changes, as the price of an asset changes relative to the asset's fundamentals, if the price rises relative to the fundamentals, I should gradually like it less until eventually if the price gets high enough relative to the fundamentals, I should absolutely dislike it. But that's a process of gradual accretion and not epiphany. The only time I think things change radically is when the world changes radically. September 14th of 08, most things were pretty much okay, people thought. September 15th, Lehman Brothers declared bankruptcy and everybody thought that the financial world was going to end. So when the world changes radically, it makes sense that your (17/32)
view on the proper behaviors should change radically and we did. There's something else comes out of that question, which is that after 2008, we've seen this major shift away from active management towards passive. Right. A lot more people... In the stock market. In the stock market. More people have been moving to index funds, ETFs, et cetera. Is that a trend that you expect to continue? And the other question I have is if most investors are, as you say, on average, average, and in most cases, it may very well be a rational decision to put your money in an ETF or in an index fund as opposed to giving it to an average manager who will either do average or below average. And charge high fees. And charge high fees. The question is, well, where are the great managers and how does someone find one and then how do they give them their money? Well, this is the great dilemma and this is something that's really not easily answered. The trend toward passive investment really has... I mean, when (18/32)
I was at University of Chicago more than 50 years ago, this is when they first told me that on average, most people do average before fees and below average after fees. So you shouldn't pay somebody high fees to give you average performance. You should only pay people who are exceptional. We went through a period when pretty much everybody could charge fees commensurate with success when they weren't producing success. We have the Morningstar system, which gives mutual funds ratings, not on some absolute standard of whether they did a good job or whether they beat the stock market, but on whether they beat others. You can have a five-star rating and still have not done as well as a stock market, in theory. The point is that the first real index fund was formed around 1974. It gradually started to raise money. Nobody took it that seriously because somebody in the mutual fund industry that I won't name said, well, who's going to accept average performance? The answer turned out to be a (19/32)
lot of people will accept average performance if the alternative is below average performance. As the world has gotten smarter through the process that I described before, as people look at things more objectively, I mean that argument, who would settle for average? That's a great argument until you look deeply into what's really going on. When you do, a lot of people would say, I will. The average is pretty good. If I can get the average certainly and with low fees, I'm in. Now the trend towards passive has strengthened. Now something like 38% of all the mutual fund equity money is managed passively. Our next question is when will it stop? I think it makes sense to think that the trend will continue as long as the passives do better than the actives. We've been going through a long period here when the passives have been doing better than the actives. This year started off weak, which means that the actives who might have had less than full representation in the leading stocks (20/32)
outperformed, but then the market has turned strong in the last few months and now the active managers are behind again. I think that trend towards passive will not stop until passive underperforms for a while. I don't know when that'll be or what would make it happen, but it may happen at some point in time. The other question that's interesting, I wrote this last memo called Investing Without People, which started off with the discussion of passive investing. Passively as more and more money is managed passively and fewer and fewer people are out there looking for bargains, then we can assume I think that the level of so-called efficiency will decline and that it will become possible once again to get some bargains. That's my hope. That speaks to, in fact, you took the words out of my mouth, the move towards passive investing is not independent of this move towards market efficiency that we've been discussing during the interview and the financial markets and the size of the (21/32)
financial sector growing. Well, market efficiency makes it really hard to outperform. I think that in the last 40 years, people have concluded that markets are much more efficient than they used to think. There's another trend that we've seen over the decades and that has been this move since I think primarily after World War II of separating management from ownership. It's been a financial innovation that's really generated a lot of wealth and it's allowed the principles of specialization to work wonders in many cases. What we've also seen in more recent years is perversions of that. I think one perfect example is tying executive compensations to stock value and then stock buybacks and trying to game your income in that way. Do you feel that the benefits of that model have run their course or that there needs to be some sort of rejiggering of that? I think this is an important topic. I learned about this when I was in college, which was a long time ago. What I was taught was that one (22/32)
of the reasons that the free market system, capitalist system, the US economic system had produced good results was that whereas 100 years ago or maybe 150, companies were pretty much run by their owners. Eventually, we developed this thing called professional management. At an appropriate point in time, the professional managers took over from the founders and owners and brought skills that the founders and owners or certainly their children or their children's children didn't have. Managing companies was turned over from the owners and founders to professional managers who maybe had skills that the others didn't have and that this was a great source of our economic success. Makes sense. However, nothing's perfect. That's one of the bottom lines on life. Through this process, we developed basically two classes of people, the company owners and the company managers. It gets dangerous, as you say, when the managers are not responsive to the owners. If they paid themselves too well, if (23/32)
This is the full transcription of podcast 'Hidden Forces'.
Howard Marks Overtime and Subscription Launch Announcement! #Podcast #Transcription #ReadAlong #KnowledgeUnlocked
What's up, everybody? Merry Christmas. Happy holidays. This show is coming out on Christmas Eve for our American listeners and Christmas Day for everybody else. As the title of this episode suggests, there will be a segment from my interview with Howard Marks. It's between 20 and 30 minutes. Let's leave it at that. So that'll come at the end of this, but I have an important announcement to tell you all about beforehand, which is that finally, after a year of promising you, my listeners, a Hidden Forces subscription, I've finally done it. It's a long story as to why it took so long, and I'm not going to get into it. But one of the benefits that it took so long is that now anyone who subscribes gets immediate access to the transcripts of every episode we've ever done and to over 50 rundowns, starting with episode 19, which are these beautiful show outlines with reference materials, charts, pictures, quotes, all the rest of it. So anyone who's a regular listener has heard me reference (1/32)
these documents. They're the outlines that I put on Twitter and my personal feed and pictures and photo shots. It's like the nerd porn that I put out on social media. It's great. It's what I create before every single episode. So going forward, I'm going to be incorporating subscriber feedback and input into how I construct these, and I'm going to make a bigger effort to include links and documents and things like that related to the show. So that's all going to be made available through our website. And my intention in making these materials available is so that they can serve as educational compendiums to the subjects that we cover every week. And the same goes with the transcripts, which I'm happy to improve upon with user feedback. Again, if people want links or notes incorporated into them, I went through a couple of companies in order to find the right ones for these. So if you find errors in the archive, email me so that I can get them fixed. But this is going to be an (2/32)
evolutionary process with the goal of always being able to help you get more out of every single episode. But again, like I said, the archive of the transcripts is going to go all the way back to the very first episode. So when you get the subscription, you have access to everything. But wait, wait for it. There's more. And the more is that the baseline subscription is actually an entirely new podcast feed that you can add to your podcast application and get overtime segments, afterthoughts by me about the show, special one-off episodes that I put together for subscribers. So basically, I've already done two of these that I'm going to release with my episode on modern portfolio theory and the evolution of financial theory with Daniel Parris, as well as my episode with Bob Kerry, Senator Bob Kerry, the former 9-11 commissioner, Medal of Honor recipient, former governor and senator from Nebraska, which I actually completed right before I'm recording this. In both of those cases, a huge (3/32)
chunk of that interview, even longer than the 20 to 30 minutes that I'm releasing with Howard Marks today, which was originally meant for the purpose of being an overtime segment for the subscription, are going to be made available for subscribers. So that's what's going to come with the subscription feed. And I'm going to be releasing at least one of these every other week, but I may just end up doing it weekly or maybe even more often. It depends on what feedback I get from all of you. Most importantly though, I don't want any of you to think of these things, the rundowns, the transcripts, the audio or any future additional notes or educational materials that I put together around the podcast. I don't want you to think of these things in transactional terms. This is not a transaction. I've been doing this show for almost two years and I haven't asked for anything or taken any sponsors. I've done this and I continue to do it because I love doing it, but that doesn't mean that I can do (4/32)
it indefinitely without finding a way to cover the costs of production and I don't want to rely on advertising. I don't want to be interrupting these conversations with product or service announcements or pitches or anything like that. And I think that this is totally doable because I'm not looking to use this as a way of generating income for myself. I just want to make sure that I'm not covering the costs of this show out of my own pocket so that it's sustainable as a long-term project, which is what I want it to be. So when I say this isn't transactional, what I mean is that almost all of the value of what I do is the show itself, which is free, has been free, and always will be free. The vast majority of people on earth will continue to listen to it without ever making the choice to contribute a cent to making it possible, which is totally fine. But a small percentage of you are going to make the choice to support the show. And it's you that all of us, most of all me, are going to (5/32)
be immensely grateful for. So let me cap this off with some specific actionable information about how this is going to work. I looked at e-commerce platforms and subscription services that I could deploy myself through my site and decided that the best way to do this was actually to integrate Patreon into the Hidden Forces website, which I've never seen done before. So we're going to be using Patreon, which makes this way easier for those of you who already have Patreon accounts, but you're going to be able to access all of this material directly through the Hidden Forces website. So right now, as I'm talking, if you can go to hiddenforces.io, when you open up any individual episode, you'll still see the tabs that you saw before, info, related, bio. And to the right of those, you're going to see tabs for transcript, notes, overtime, or whatever else. And if you go into those, you're going to see that you can sign up and subscribe to them by going through Patreon. And that stuff's (6/32)
eventually going to be made available through the site. So if you subscribe, Patreon will know that you're logged in and it'll be able to make that stuff available to you. And each of those is part of a different bundle. So for $10 per month, you can access the overtime, which is all the stuff I was just telling you about, the extra bit with Bob Kerry, where we talk about 9-11, the 9-11 commission, and I get his opinion on what the role of the Saudi government was, the highest levels of government, and what the Bush administration knew or didn't know. And then with Daniel Parris, same thing, we go into a lot of really awesome stuff that deals specifically with investment options around the conversation that we have. So in both cases, this is really high quality material that you cannot get on the normal shelf. So that's for $10 a month. For an additional $5 a month, you can have access to all of the transcripts. And then for an additional $10, you can get access to everything, (7/32)
including the rundowns. So I thought a lot about this pricing. It's not fixed in stone, but I feel very comfortable with it. And let me tell you why. I looked at what all the other shows were doing, and besides making extra audio feeds available, and in those cases, a lot of times, the audio will come out once a month, I haven't seen much in the way of what we're providing. This is a huge archive of material, and there's no commitment. You can cancel the subscription at any time. You can also support separate from the subscription. If you want to just give a dollar a month, you can do that. And you know what? I'll love you for it. That will mean a lot to me and to everyone else, that you took the time to support the show and what we're doing. Of course, you can also provide more, and then I'd really love you. So here's my promise to you. If we get to a place where all the costs of producing the show, including the rental of my studio, the payments to my editor, web hosting, and all the (8/32)
other costs associated with putting this thing together, if we get to a place where all of these costs are covered, I will make an announcement and we'll figure out how we can use any additional income to create new and better content and grow the show. Like I said, I'm not interested in using hidden forces to generate income for myself. The most important thing that money can buy from you right now is time. And that means time to focus only on creating new content and generating ideas for new shows or newsletters or whatever else. Okay. So before we get to Howard Marks, I also want to say that for anyone who travels on British Airways, you can now expect to find hidden forces listed on BA's in-flight entertainment. We just finished onboarding our episodes with them, so that makes two airlines, the other one being United, that feature our show, which is super exciting. Okay. So Howard Marks, this segment lasts for about 25 minutes or so, I think. It rivals the episode itself for (9/32)
quality of content, in my view. In fact, I think it might very well be better. I asked Howard Marks about the role of intuition, how he relies on it in the management of his portfolio, contrarianism in investing. This moved from active to passive, the transformation in American capitalism after World War II with professional managers and professional management at companies. And if this trend has kind of run its course. I also asked him for what he would do if he was getting out of college today and how he continues to motivate himself every morning to go to work at Oak Tree for free, as it turns out. But finally, before I throw it to Howard Marks, I want to say in all likelihood, I'm going to release an episode for New Year's. I'm going to be in Greece when this episode comes out, visiting my family, but I'm going to find a studio there, hopefully to be able to record an intro to that episode. Look for that on New Year's Day, but if you don't get it, it will just skip straight to the (10/32)
second week of January, since this is the holidays and it's tough to publish through that. So, Merry Christmas, happy holidays. Hopefully, I won't have to give you happy New Year until next week, but if I do, happy New Year and enjoy the Howard Marks overtime. Howard, thank you for staying for this overtime segment. This is the first time I'm actually doing it, so I'm looking forward to see how it goes. There are a few questions that I had in our regular rundown that I wanted to ask you, and then I've got a few special questions that I have just for this segment. One has to do with intuition, which is something that you write about in the book, and it came up a lot in our conversation where you sort of danced around it, but I didn't ask you about it directly, which is, what role does intuition play for you when you're managing your portfolio? I think a lot of it depends on your definition of the word intuition. I'm not talking about voodoo, I'm not talking about guessing, I'm not (11/32)
talking about throwing darts or deciding on the basis of which foot I put on the floor first in the morning, but I think that we have to make judgments, subjective, personal, qualitative judgments. One of my favorite quotes is from Einstein, who said, not everything that counts can be counted and not everything that can be counted counts. Not everything can be quantified, nothing about the future can be proved, so I think it all comes down to judgment. If you think about it, just about everybody has access to all the same numbers. Just about everybody has the intelligence to process those numbers equally well. The margin of superiority comes from people who understand better than others the import of those numbers, the inferences that should be drawn and the actions that should be taken. I think that these kinds of judgments are extremely important. Somebody I can't remember right now said, I'd rather be approximately right than precisely wrong. You can't attain that much precision in (12/32)
your life when you're making judgments about the future, but you talked before about the importance of experience. Observation, emotional control, insight, hopefully second level insight. These are the things that can permit you to do a superior job. Is that just also a necessity or a feature of how our brains work that we can only ... There are theories in neuroscience, specifically one I'm thinking about called cognitive load theory, which is why a lot of high performers wear the same stuff, Barack Obama, Steve Jobs, et cetera. So much power to make decisions and that allocating more of that to the unconscious is the way to maximize performance. Is that one way to think about it? The importance of it, that is. Yeah. I don't know if I would use the word the unconscious, but I guess I would say the non-quantitative. The most important questions about a given company are not what it's going to earn this year or next. The most important questions are what kind of business it's going to (13/32)
have in 10 years and what kind of success and what kind of market share. And so I think that those things, as I say, anybody can reach the quantitative conclusions. The qualitative subjective conclusions are what separates the winners from the losers. Another question I had for you that we danced around in the interview had to do with contrarianism. And you have this great quote in the book. I'm going to butcher it if I try to say it, wing it. But your point is that it's not just enough to be right. If you're right and you're part of the consensus and everyone else is right, then you're not going to make any money. You have to be right and you have to have a view that's different than the consensus, which is what contrarianism is. And you also make this great point about the difference between contrarianism and pessimism, which can often be conflated. Talk to us a little bit about this notion of contrarianism and the role it plays in superior investing. We've talked a couple of times (14/32)
about second level thinking. And it seems clear to me that if you think the same as others, you will reach the same conclusions. If you'll reach the same conclusions, you'll take the same actions. If you take the same actions, you'll have the same performance. And yet success in the investing business is performing better than others. So that process can't be the one that leads to success. You have to, at some point, diverge from the crowd. You have to develop a knowledge advantage. You have to see things differently. You know, one of the important phrases in investing is variant perception. You have to see things at some point differently from others. The way that everybody, the massive investors, sees a given company is what determines its stock price on a given day. It is a voting booth, as Ben Graham said, and everybody cast their vote on a given day for the value of Apple. And the consensus becomes the price. That's what a market is. And the big wins come when you see things (15/32)
differently, reach a different conclusion than the consensus, feel that the price should be much higher or much lower, take action on that. This is the way to be a serious outperformer. You have to see things a little differently. You have to see what you believe is the error in the consensus. So you have to see things differently. But there's another requirement. You have to be right. And most of the time, the consensus does a pretty good job of being right, and you can't habitually have a non-consensus view and expect it to be consistently right. So the requirements are, you have to think differently and better. It's not easy. And this is a lot of what Charlie Munger meant when he said that investing is not easy. And yet this is the requirement. How else can you be a superior performer unless you see things different from the crowd and better? Do you come to your investment insights or your contrarian views gradually? Or have there been instances in your life where you have this (16/32)
revelation or this contrarian idea and you see something in that moment that you hadn't seen before and that no one else is seeing and it's a really great opportunity and you have to move on it? I mean, I wouldn't accuse myself of having many epiphanies. I try to be rather level in my views toward the markets. And then as the market changes, as the price of an asset changes relative to the asset's fundamentals, if the price rises relative to the fundamentals, I should gradually like it less until eventually if the price gets high enough relative to the fundamentals, I should absolutely dislike it. But that's a process of gradual accretion and not epiphany. The only time I think things change radically is when the world changes radically. September 14th of 08, most things were pretty much okay, people thought. September 15th, Lehman Brothers declared bankruptcy and everybody thought that the financial world was going to end. So when the world changes radically, it makes sense that your (17/32)
view on the proper behaviors should change radically and we did. There's something else comes out of that question, which is that after 2008, we've seen this major shift away from active management towards passive. Right. A lot more people... In the stock market. In the stock market. More people have been moving to index funds, ETFs, et cetera. Is that a trend that you expect to continue? And the other question I have is if most investors are, as you say, on average, average, and in most cases, it may very well be a rational decision to put your money in an ETF or in an index fund as opposed to giving it to an average manager who will either do average or below average. And charge high fees. And charge high fees. The question is, well, where are the great managers and how does someone find one and then how do they give them their money? Well, this is the great dilemma and this is something that's really not easily answered. The trend toward passive investment really has... I mean, when (18/32)
I was at University of Chicago more than 50 years ago, this is when they first told me that on average, most people do average before fees and below average after fees. So you shouldn't pay somebody high fees to give you average performance. You should only pay people who are exceptional. We went through a period when pretty much everybody could charge fees commensurate with success when they weren't producing success. We have the Morningstar system, which gives mutual funds ratings, not on some absolute standard of whether they did a good job or whether they beat the stock market, but on whether they beat others. You can have a five-star rating and still have not done as well as a stock market, in theory. The point is that the first real index fund was formed around 1974. It gradually started to raise money. Nobody took it that seriously because somebody in the mutual fund industry that I won't name said, well, who's going to accept average performance? The answer turned out to be a (19/32)
lot of people will accept average performance if the alternative is below average performance. As the world has gotten smarter through the process that I described before, as people look at things more objectively, I mean that argument, who would settle for average? That's a great argument until you look deeply into what's really going on. When you do, a lot of people would say, I will. The average is pretty good. If I can get the average certainly and with low fees, I'm in. Now the trend towards passive has strengthened. Now something like 38% of all the mutual fund equity money is managed passively. Our next question is when will it stop? I think it makes sense to think that the trend will continue as long as the passives do better than the actives. We've been going through a long period here when the passives have been doing better than the actives. This year started off weak, which means that the actives who might have had less than full representation in the leading stocks (20/32)
outperformed, but then the market has turned strong in the last few months and now the active managers are behind again. I think that trend towards passive will not stop until passive underperforms for a while. I don't know when that'll be or what would make it happen, but it may happen at some point in time. The other question that's interesting, I wrote this last memo called Investing Without People, which started off with the discussion of passive investing. Passively as more and more money is managed passively and fewer and fewer people are out there looking for bargains, then we can assume I think that the level of so-called efficiency will decline and that it will become possible once again to get some bargains. That's my hope. That speaks to, in fact, you took the words out of my mouth, the move towards passive investing is not independent of this move towards market efficiency that we've been discussing during the interview and the financial markets and the size of the (21/32)
financial sector growing. Well, market efficiency makes it really hard to outperform. I think that in the last 40 years, people have concluded that markets are much more efficient than they used to think. There's another trend that we've seen over the decades and that has been this move since I think primarily after World War II of separating management from ownership. It's been a financial innovation that's really generated a lot of wealth and it's allowed the principles of specialization to work wonders in many cases. What we've also seen in more recent years is perversions of that. I think one perfect example is tying executive compensations to stock value and then stock buybacks and trying to game your income in that way. Do you feel that the benefits of that model have run their course or that there needs to be some sort of rejiggering of that? I think this is an important topic. I learned about this when I was in college, which was a long time ago. What I was taught was that one (22/32)
of the reasons that the free market system, capitalist system, the US economic system had produced good results was that whereas 100 years ago or maybe 150, companies were pretty much run by their owners. Eventually, we developed this thing called professional management. At an appropriate point in time, the professional managers took over from the founders and owners and brought skills that the founders and owners or certainly their children or their children's children didn't have. Managing companies was turned over from the owners and founders to professional managers who maybe had skills that the others didn't have and that this was a great source of our economic success. Makes sense. However, nothing's perfect. That's one of the bottom lines on life. Through this process, we developed basically two classes of people, the company owners and the company managers. It gets dangerous, as you say, when the managers are not responsive to the owners. If they paid themselves too well, if (23/32)
they engage in protective rather than optimal behavior, then bad things can happen. Now, that doesn't mean that this division is a bad thing. It just means that it has some bad attributes and that makes perfect sense. Then we get the activist investors coming along, the green mailers and so forth. The activists say, I'm an owner. You're not running this company for the owners. You have to do this, this, this and this. You have to give me a seat on the board and so forth. I think that some activists have produced some success. Again, nothing's perfect. The trouble with activism is whether they produce genuine long-term improvement in the way the company has run or just a short-term blip in the stock price and take their profits and go home. By the way, you look at a drug company and if an activist forces them to close the R&D labs in order to increase next year's profits, you might argue that that's a bad thing. On the other hand, as I say, if they take actions which are beneficial in (24/32)
the long run, maybe it's a good thing. I have some personal questions I want to ask you now. I don't know how many we'll get to just considering the time. I'll probably start with maybe the ones that I think are most interesting. What has to do with if you were starting your career today because you've had such a long career and you've seen so much and the world is very different as anyone could understand from our conversations. Prices and profits itself transform. When you went into it, salaries were much smaller. Potential return was much smaller. That's obviously changed. If you were starting out today, if you were graduating today, you have a son, I believe, who's a money manager. He's graduated some time ago. He did just graduate. But perhaps when your son graduated, you saw that and you thought to yourself, what would I do if I were my son's age? Today, if you were graduating today and coming out into the workforce, what do you think the most interesting, exciting opportunities (25/32)
would be and what would excite you most about the future? Well, look, I use a lot of quotes. You use some of my quotes. My favorite quote on that subject is from a guy named Christopher Morley, who was a British writer, who said, there's only one success to be able to live your own life, your own way. I would, for myself and for everybody, I would try to figure out what my way is. It's not so easy to know what you're really good at as opposed to what you think you're good at and what you should do as opposed to what society thinks you should do. You should pursue your own definition of success, not society's definition of success. If you have the luxury, the ability to do it, you should do something you love, something you enjoy. Most people probably shouldn't making a lot of money first, but they tend to do so. That's our materialist society. But really, the questions are, what are you good at? What gives you pleasure? What can you excel at? I love the investment business. It's been (26/32)
fabulous. I think that our discussion is indicative of the fact that it's an intellectual topic where I think there's a payoff to being a deep thinker. It's like a big chess game where the best results go to the people who think the deepest and the best. That's been great for me. As I say, it shouldn't be just money. When I went into the business, when I was getting out of graduate school in 69, I applied for six different jobs in six different fields and they all paid the same. I happened to go into the money management business, but it paid $13.5 at that time and they all paid between $12 and $14. It happens that in 1982, God woke up one day and he said, you see that little group of people over there? I'm going to let them make 100 times what everybody else makes. I would say that I feel safe in saying that the investment management business has been generally overpaid. I'm not complaining, mind you, but I'm able to admit it. If I was giving people advice for the future, one thing I (27/32)
would try to discourage them from doing is making the decision based on a continuation of that earnings differential. It doesn't make much sense and my guess is it's not going to continue to the same extent. What motivates you and has that changed over the course of your life, not just with respect to your work, but more generally for your life? What motivates you when you wake up in the morning? I have the luxury now of being able to tackle difficult questions. I'm not managing money now anymore. I've turned that over to my colleagues and my successors. I think about big questions, both the macro and how we should position ourselves and then bigger intellectual questions like what is risk and how should we deal with it and cycles and things like that. This is what I've been doing for the last while and it gives me great pleasure. Before that, I spent some good period of decades building an investment organization, leading people, trying to inspire them, trying to come up with an (28/32)
investment philosophy and approach that was effective. I was an analyst, but these are different stages of my life and I'm very lucky to have stumbled upon some things that made me very happy. It may interest you and your listeners to know that I don't get paid to work at Oak Tree. Really? I don't get a salary. I don't get a bonus. I don't have an interest, a direct interest in the profits of any of our funds. I could say I would do it for nothing, but I kind of do. My only financial interest is my ownership of Oak Tree stock and I would own that if I worked there if I didn't. I believe that maybe if I worked there, maybe it'll be worth more than if I don't, but still, I can honestly say I don't do it for the money, but I love the people I work with. I love leading the team. I love the Oak Tree ideals. I love working with the clients. I love dealing with the intellectual issues that I describe. What a great life. Let me ask you one more question. If you could say that you learned one (29/32)
thing, it might be difficult to do. I mean, after all, your book was called the most important thing and it was about a lot of things. This might be a trick question, but if there was one thing that you would impart on people, you mentioned don't work for money, don't make money your objective, but is there one lesson that you have taken from life that you value and cherish to this day that you would want to pass on to your children or to your profanities? From somebody who went to Wharton in the University of Chicago and came out, was considered himself analytical and did numerical analysis all day, I would say that the most important revelation for me was the importance of people, family and friends. For me, there's nothing comparable. We get so much reward, potential reward, especially if we're good friends and good parents. That's really our highest calling. I concluded that in the last, well, since I've had children and I think I put a lot into it. My children seem pretty happy (30/32)
and well adjusted and they tell me I did a good job. It's a funny thing. My son just got married and he said there that I was always there. He said, he says my dad went to all my games and all my concerts and all my open school meetings. Now, I'm confident that's not true because I was building Oak Tree and I was traveling all the time, but if I was in town, I went. If I went, I was present. The rewards for doing that are enormous. Erickson, the psychologist, talked about the stages of man. When you get to be senior citizen, you have to look at your life and say, did I do okay? It's too late to make it what you want it to be if you haven't done the work already. You say, am I happy with the way I live my life? Also, do I have the respect of others? How do they feel about how I've lived my life? This is very important to me and very glad that that analytical guy of 50 or 60 years ago figured this stuff out. Those are words of wisdom. Again, Howard, I really appreciate you coming on the (31/32)
program. Great pleasure. Glad I was here. (32/32)
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American Zeitgeist Commentary on Politics, Culture, and the Winds of Change #Podcast #Transcription #ReadAlong #KnowledgeUnlocked
airtime on C-SPAN or wherever he was able to buy airtime and he was going through pie charts and explaining the debt, but the level, the concern that the country had at the time and that Bush, for example, would express in that famous question, of course, there was a young African American woman who had asked Bush about how the national debt affects him personally. And it was just another example. It was like him at the supermarket with not knowing how to check out of the supermarket, not being able to actually buy his own groceries. Actually, you know what? I'll say something else now. I'm going on a rant, but my guest, who I was going to have on the program, I was watching some footage from the 92 campaign and he was taking a shot at Bush and he also took a shot at Dan Quayle. And I don't know if how many of you remember or know that Dan Quayle was considered an idiot in American politics. That was the reputation he got. He couldn't spell potato. I don't remember that time obviously (5/32)
back, I think there are these huge challenges. And how do we face them if we don't have a common identity? We talked about this with Jonathan Haidt. Common identity politics is something that we need. Identity politics, social justice, these ideas are not helping the country. They're not helpful. I mean, maybe there are certain aspects of them that there is signal that says, hey, something's wrong here. We need to address it. I'm not disputing that. I'm not disputing it at all. Just that the way that we indulge the tribalism is not just bad. I find it so distasteful. But in any case, the point I was making, I think, was that Reagan, the Reagan revolution and the Obama wave, I think even Barack Obama will tell you that he took a lot from Ronald Reagan. I remember him talking about that in 2008. And that's why I found his campaign appealing. But so I got pulled off there on the 80s. But the comparison I was originally trying to make was between the 70s and the 90s. And it's remarkable. I (10/32)
Warren Commission. So anyway, that's something else that I had here in my notes that I wanted to discuss, which was 9-11, the Saudi connection, some facts for you guys so you know that I'm not just throwing stuff out there. If you want to look into this, the 28 pages, there's an article, The New York Times has covered this, Washington Post. There's video footage of Bob Graham speaking. In fact, let me actually quote for you something that I've written out here. This is from, so Bob Graham gave a speech at the National Press Club in August of 2016. And I've transcribed some of what he said that I thought was relevant. It is time for our government to release more documents from other investigations into September 11th that have remained secret all of these years. The recently released 28 pages were written in the fall of 2002 by a committee of which I was co-chairman. The government's possible suppression of evidence of Saudi support for the 19 hijackers would go beyond passive cover- (17/32)
What's up everybody? I am here in the Hidden Forces studio in New York City with my engineer who is facing the double mac trading screens. I don't know if he is trading back there. I don't think he is doing that. But I am sitting and in front of me is where my guest should be and my guest is missing in action. That is because he canceled on me an hour before the episode. We rescheduled it for later in January. I hope that it will work out then because I did spend many days as you all know, many days researching and preparing for this conversation. I read his memoir and watched a lot of political footage from when he ran for president and a number of other things. I'm not going to tell you his name, but he was a senator. He was a governor and he was also one of the 10, 9, 11 commissioners and a Medal of Honor recipient. There was a lot to talk about. My rundown starts with Vietnam where he fought and we kind of proceed through there, both historically, 70s and 80s. I've been kind of (1/32)
really in this interesting zone headspace, which I think was helped by taking a couple of weeks off where I've been really focused on the 70s. I haven't done much reading on them. It's just more that when I prepared, for example, for Bill Janeway and I was looking at that period or when I had Howard Marks on and we discussed the junk bond market and the sort of bear market of the nifty 50 stocks that had been doing so well in the 1960s. I just have been thinking about how little I've appreciated the impact of that period and the reverberation of the darkness of the 70s on the politics and policies of the 80s and 90s. Also the contrast, something that I've also been thinking about because we did the episode, of course, with Brian McCullough on the history of the 90s internet, the contrast and also, of course, with Janeway talking about the 90s. My guest was one of the front runners for the Democratic nomination in 1992. The contrast between the 90s and the 70s, right? The 70s were the (2/32)
decade of darkness. It was a decade of stagflation. It was a decade of, well, the political assassinations of 1968 were, of course, only two years before the beginning of the 70s, but they were part of that period. You, of course, had the attempted assassination of Gerald Ford. You had the attempted assassination of Reagan in 1981 by John Hinckley. You had the crime wave. 1981 in New York City was the most violent year in the city and generally crime was up. New York City almost went bankrupt in 1975. 1974, Nixon resigned. I mean, so much stuff. I mean, I can't imagine what it was like to live in that period. Like I said, this stagflation, the double-digit inflation, the unemployment, the broken Phillips curve, things weren't working. People thought America was in decline. It's funny also when you go back and you listen to the rhetoric of the 92 campaign, Ross Perot, the general election with Perot and Bush and Clinton, which by the way, guys, I don't know what kind of political (3/32)
junkies you are. I used to be quite a political junkie and I don't really have the taste for it so much anymore. I have no longer a carnivore or whatever. I'm not into that stuff. But if you look, I mean, C-SPAN is amazing because it has all this coverage, but you look at these debates and it's really amazing. You could just see what a brilliant campaigner, what a brilliant politician Bill Clinton was and how comfortable he was lying to the public, not just necessarily in those debates, but generally everything we know about Bill Clinton that's come out. Then you look also at Bush Sr., HW Bush, and how he couldn't hide his condescension for the public or for just the process. That was famously encapsulated in that iconic image of him looking at his watch during one of the debates. And Perot, just Perot had everything that I feel so much of the country found attractive. But ultimately, I think he got only like 20%. But I don't know how many of you remember his pie charts he took out (4/32)
very well. I was like a little kid, but stuff got handed down. So I'm familiar with some of it, but he had this great quote that he said and it was something along the lines of people say that George Bush was a man who was born on third base and thought he hit a triple. And then he said, well, Dan Quayle is a man who was born on third base and thought he kicked a field goal. Anyway, I don't know if it's funny when I say it, but it was hilarious listening to it. And it also struck me just compare that to modern politicians. Donald Trump obviously king of the hill when it comes to shit talking on the campaign trail. But everyone, the noise in general, has amplified the viciousness of the attacks have grown as has the partisan divide, I think. But anyway, yeah, I don't know where I was going. I think I was going off on this tangent talking about the 1970s and this fascinating difference in the 70s, which was this dark period. And I think very much contributed to the morning again in (6/32)
America campaign of Ronald Reagan, the appeal of that type of character, which I think actually Reagan had a lot in common with Barack Obama. The messaging, at least the tone was so uniting. We live in a time where the media and sort of the who are they, the guardians of political correctness celebrate this tribalism. If you want to say, hold on, let's not use all these tribal distinctions and stereotypes of white male privilege and women and African Americans. And they'll say, well, you're being racist. You're trying to deny the reality of racism and stereotyping. But what if you're not trying to do that? What if you're just trying to hold two ideas in your head at the same time, which is one, I accept that these things are the case. And in fact, I think they strengthen us. The diversity in the United States can be a strengthening quality. I mean, growing up in a metropolitan city like New York as a little kid, I moved around a lot in the country. In fact, that was also beneficial in (7/32)
some ways because I got to see, I lived in North Carolina as a kid for four years. I lived in Pennsylvania. I was born in Cincinnati, Ohio. I lived briefly in Greece. I lived in Italy, lived in Washington, D.C. But there's nothing like New York. New York's got so many different nationalities and ethnicities and backgrounds. So that diversity is a wonderful thing. But at the same time, if we don't have something to unify us, some kind of unifying superstructure, then how are we supposed to come together as a country and solve the big problems that we need to solve if we want to move forward, which I believe we need to solve. And I think climate change is one of those things. I think climate change is just one of those things, by the way. And it's sad that it's such a political issue because, and I understand why it is, by the way, I understand because the experts, the academics, lots of academics talk down to people. And if you go back to, I mentioned, when I had Bill Janemey on the (8/32)
show, I mentioned when I watched an interview that he did, or his father did, I apologize, with William F. Buckley. You go back in time and you watch the intellectuals that came on that show. Granted, I missed some of those intellectuals. There was value to those people. Now what we have is the thought leaders. The thought leaders are the ones who they've got a whole framework to give you. It's the whole package. They're going to sell the whole thing to you and you got to take it or leave it. Intellectuals provoke you. They're people like Christopher Hitchens or Gore Vidal. And those people are valuable. But what you also get when there's a bull market in intellectualism, you get a lot of blowhards who sit there and speak unchallenged and make assertions. And people are tired of that. They're tired of being talked down to. And I think it's a big part of what, of course, the Brits were reacting to when they said, we're done with the experts. We're tired of the experts. So to bring it (9/32)
mean, I studied the works of many of the 90s intellectuals in the foreign policy establishment when I was in college in the early 2000s because I double majored in economics and politics. It turned out that the economics was a negative impact on my education. I had to actually work for a number of years to deprogram my defragment to erase the hard drive of my brain associated with everything I learned at NYU around new classical economics, with the exception of maybe economic history. But the political science that I learned, a lot of that was actually very valuable. And the most valuable class was my class on American foreign policy. And there was, of course, the famous paper that Francis Fukuyama wrote after the fall of the Berlin Wall, which was the end of history. That was the name of the paper, which then became a book. And it's remarkable to read things like that from PhDs, right? From establishment thinkers that they could have been so caught up in the euphoria that they would (11/32)
make statements like, this is the end of history. The future now is American empire. They didn't use those terms. But the future is America and this global world and we're going to ride off to the sunset. It turned out that lasts for about a decade. The Democrats couldn't even put together universal healthcare. We had the end of the Cold War. The Democrats wanted to use the budget to turn it into socialize things in the country, socialize healthcare, along with, I don't know what else. And the right, what did the right want to do? Guys like Bill Kristol, those guys, they wanted to go to the other extreme and say, well, this is an opportunity to really double down on American empire. And that was the concept of full spectrum dominance. This idea that we're going to, we're going to pour in so much money that we're going to become such an overwhelming force that no one will challenge us. But in any case, in either of those cases, both the left and the right, they were aspirational. They (12/32)
were like, okay, now is our opportunity to really go for broke here. It's an opportunity to swing for the fences. And I don't think anyone who lived in the 90s, who grew up in the 90s like me, could have ever imagined that we would be where we are today. I mean, it was stock market was roaring, people were partying, everyone looked great, everyone felt great. It was one of the most incredible times that I remember in terms of just euphoria. So anyway, comparing those to the 70s and the 80s, that's been coming up a lot in my mind lately. And I would like to explore the 70s more. I mean, I think we've covered the 90s enough, maybe from a political standpoint from the both domestic politics and maybe even foreign policy would be interesting if we had the right guest on. I mentioned full spectrum dominance. Andrew Bacowicz wrote a book, American Empire, where he talked about that, but I'm sure there are a number of books that cover it. But especially the 70s, there's so much there to (13/32)
explore. I know much less about the 70s than I do about the 90s, because I wasn't alive in the 70s primarily. And I haven't studied it much. Most of the stuff that's been published is about the Great Depression that I've read. And of course, there are books that cover the whole swath of American history, but the 70s, there seems to be a dearth of material there. And a lot of the conspiracies around the globalism and America in decline, there's a common thread between some of the stuff that came out then and what we saw after 2008. And the conspiracies around 9-11 and the conspiracies around the financial crisis, just sort of the dark conspiratorial lens around which a larger percentage of the public viewed some of the events of our history with good reason, because the official narrative didn't make sense. And that's something I did want to talk about with my guest, and I hope I do want to talk about with him, which is really, what do you think happened on 9-11? I know it's one of (14/32)
those things when people talk about 9-11, everyone's scared to talk about it, because you don't want to get branded as some kind of kook, tinfoil wearing conspiracy theorist. But that's kind of silly, because we now know that what we were told happened on 9-11 isn't the whole truth. At the very least, we now know that the Saudis were involved, not just that there were 15 Saudi hijackers, but based on what these senators have said. Bob Graham is no radical, the guy's a normal person. And these 28 pages were just a few of the documents that have been released of the thousands or tens of thousands of documents that are marked confidential that he and others have asked for the United States government to make available to the public. It's come to light that the Saudis have been involved. The 60 minutes did a piece on this. So that was not something that we were ever told in the early 2000s. And it didn't make sense that the story was just too simple and the answers that the government had (15/32)
were too ready. And even at the time, it was so obvious that the adventure in Iraq was a horrific idea. So just certain things didn't make sense. And the process was rushed. And I think it's something that I'm not saying that I know what the hell happened, but it's something that a lot of people have reservations about. But again, it's one of those things where it's such a traumatic part of our history, 9-11, especially for those of us who lived in New York City. I was woken up by the explosion, not by the sound, but the actual vibration of my bed. I lived below canal. I lived right by the tower. So I remember it very clearly. It's not something that anyone wants to revisit. And it's one of those things where you're almost afraid about what you're going to find out. I've read some of the history of the Warren Commission. A lot of the people that were put on that commission didn't want to be on it. I think Gerald Ford was an example of that. He was not happy about being put on the (16/32)
up. Is the government releasing false information while continuing to classify documents containing the truth? As the presidential campaign is proving, appearances of government deception have contributed to wary Americans becoming more and more outraged with their elected officials. The United States government is protecting Saudi Arabia, and I think the reasons have carried on over the 15 years of that protection. And I think that one of the key reasons early on was that President Bush said at the site of the World Trade Center that we will follow these heinous people to the ends of the earth to bring justice to those who have lost their lives. We immediately decided that the ends of the earth were Iraq. It was rather embarrassing then to have information flowing into the intelligence agency that Iraq didn't have anything to do with 9-11 and that Saudi Arabia had a lot to do with it. So how do you square that difficult circle? I think the way in part was to submerge and suppress the (18/32)
information about the Saudi involvement. I think another factor is the long relationship with Saudi Arabia. Another reason more recently has been all the turmoil in the Middle East. So that was the relevant quote that I took out of it. And as you can see, that's not ambiguous. The idea that there was a Saudi connection, that the Saudis at the highest levels of government, whether I said it in that quote or in other quotes, it's been said. I think Max Cleveland also former senator from Georgia made a similar point along with the fact that I think he and others made the additional point that the Bush administration was making it difficult, didn't want an independent investigation. So there's a reason that people form conspiracy theories and it's because there's an absence of credibility by the state, which has the official story, right? That brings us back to 101 with what we were discussing with Bill Janeway, which is if you don't have credibility as a government, it makes the mission (19/32)
driven model of the state as an economic engine at the very early stage of the business cycle, the innovation cycle for new technologies, very difficult. We would not have managed to go to the moon in the 1960s if Americans didn't believe in the country and in the mission. I just don't see how we're going to address similar challenges when we're literally eating each other up, right? Social media is a great example. This is something else that I had to speak about today with my guest, which is a very recent story. It was an anecdote to get into this conversation, but there's a Senator, Republican Senator Cindy Hyde Smith. This I think came out yesterday or a few days ago. She made recent remarks in Mississippi. She was quoted as saying she was in front of a statue taking a picture with a local rancher. She said, if he invited me to a public hanging, I'd be on the front row. The media spun this story that she was basically talking about lynchings. It was some racist spinning of this (20/32)
story. I tried to figure out, just based on what she said, I went back and looked at it, read it, watched whatever I could find. There was video footage of it. There is absolutely nothing in that that any objective human being would call racist. You have to literally think that a public hanging, by the way, the last time we hanged someone in the United States was in 1996, and it was a white dude. We used to hang people in the US. There used to be hangings. Hanging is not synonymous with lynchings, right? But here's my point. This is what I want to get to. Maybe this woman's a giant racist, and she has a backstory, and that's it, right? But my point is that no one actually hears what this woman had to say. The only thing that matters is the articles that you saw splattered on your highly curated social feed. Lots of people live in total delusion. They think that there's this senator in Wyoming or in Nebraska who's a giant racist, and they have no clue what she said. They're just (21/32)
trusting something that they saw. Forget fake news. This was like Washington Post stuff or the opposite. There's so much crap, and I get this all the time because I go into these rabbit holes where I explore one side of the political spectrum or the other, and my news feed will become curated in a very quick period of time, depending on what I'm looking at. I've been in a Joe Rogan wormhole the last, I'd say, month. I love watching Joe Rogan clips before I go to bed. My news feed has gotten so curated for basically I am being segmented as a right wing Republican. You see all these thumbnails of women or the classic ones are Jordan Peterson destroys dumb liberal, whatever. People just sometimes don't even read the videos. They just see the title. My dad will do this to me. He'll be like, did you see what Hillary said? I was like, I don't even know if she said that. Who knows? That article that came out this last weekend that Hillary was going to run in 2020. The first thing I did when I (22/32)
saw that, I said, okay, now I looked into it, I read it, and I realized that she never said she was going to run in 2020. The writer put forward a case for her to run, but they made it sound like she was going to run. This is coming from her. Who knows what's true anymore? This is such a huge problem because you can't believe anything. The Chinese recently, this also some days ago, you could find this online, the Chinese government put out this incredible video of one of their newscasters, which looks 100% real, and it was actually an AI. They put this out to say that their news organization, that the central news organizations in China are going to be using this technology to cover events, that they don't have the staff to cover. Basically, they're going to have, let's say, you're going to have, I don't know, who's that woman on MSNBC, Rachel Maddow, or that guy, the equivalent guy on the right who's a big Trump supporter, Sean Hannity. They're going to replicate these people, and (23/32)
they're going to have robots covering stuff across the country. I mean, it's totally wild. It's totally insane. This brings us back to the value of cryptography and some of these platforms, right? Because you have to trust the source. No one's going to believe anything that they see anymore. Ironically, we went from having these island websites where people would go to the New York Times or go to CNN.com and get their news, and then we got to the point with Facebook and just all got dished through one river. We're going to go all the way back again, where people are going to have to go to trusted sites or somehow do some kind of authentication process where they're able to verify the source that they're getting information from. That was another thing I was basically talking about, and it was part of this larger point about the media and the bipolarization of the media and how everything is just so political today. There's no easy way to transition from that to some of the other things (24/32)
I want to talk about before I ended this impromptu conversation. To tie it off, I mentioned a lot of things, but the point about the 1970s and the 1990s, thinking about the 70s, thinking about the 90s, it got me to thinking about this last decade because we're getting close to 2019 now. We're almost a year away from closing this decade and moving into the 2020s. First of all, it's remarkable that the time has passed so quickly. It really is remarkable. It feels like yesterday that Barack Obama was elected. It feels like yesterday that the financial markets crashed. It really does. It's hard to believe that 12 years have passed since then, almost 12 years, 11 years. It's remarkable to realize that 17 years have passed since 9-11 or 15 since the Iraq War or 14 since Hurricane Katrina. It's absolutely remarkable. I think about what this decade has been like, I mean what it feels like now and maybe what it'll feel like when people look back on it. I feel like it's a confusing time. The 70s (25/32)
felt dark. The 90s felt extremely optimistic. The 80s felt a little surreal, I guess. There was some surreal quality to it. There was also cocaine was big in the 80s, money, finance, recklessness with respect to money that was captured in the movie Wall Street, Oliver Stone's movie Wall Street, but a number of other movies, the secret to my success with Michael J. Fox or Risky Business with Tom Cruise. The 2010s, the 2000s felt, I think, scary and there was a lot of darkness. The 2010s, I don't know. I mean there was a period of darkness after the financial crisis, but I think there's just a surreal quality to them and I think so much of that is driven by the technology. But there's of course the overhang of terrorism that's there. There is this confusion about America's place in the world. In the 2000s, after 9-11, there was no confusion about America's place in the world. We were top dog. We were number one. There was no question when Bush met with Putin who was the boss. I don't (26/32)
mean that as a slight for the Russia investigations at the Donald Trump. I don't even know if that shit's real. I don't even know how much of that is manufactured. There's been two years of Mueller investigation. I don't know what's going on with that. But there was no question that America was in charge of the world. That's how it was, right? But that's not the case today. We live in an increasingly multipolar world and you can see that. I mean, I brought up Saudi Arabia in the context of the 9-11 attacks, but you can see it with this situation with our relationship with Saudi Arabia and Iran and Israel and North Korea, South Korea, China, Japan, the Europeans. There was a World War I celebration this week. It'll be last week when this episode comes out where Trump was in Europe. Macron was there. Merkel was there. All the big leaders were there. Putin came up and shook Trump's hand. I mean, it's a super weird scene. Just a lot of confusion about the roles. Just changing roles. It's a (27/32)
time of change on the international scene. I think that's the least you can say. It's challenging notions of American exceptionalism. By the way, the hypocrisy of American foreign policy is being exposed badly by this administration because the Democrats, of course, became very comfortable with war once Obama became president. They were anti-war, being a Democrat in the early 2000s, being a dove, being anti-war, being a pacifist. But once Obama came into office, it just became another way of doing war. Drone strikes, extrajudicial killings, et cetera. Again, I'm not here to pass judgment on his decisions or to pass judgments, by the way, on Bush's decision. I don't doubt that George Bush went to war in Iraq because he thought he was doing the right thing. But he lied. That's what politicians do. They lie. But it was a big lie. Like I said, the overhang of terrorism, the challenge of American exceptionalism, technology, I got to say, I got to feel like technology plays the biggest, the (28/32)
loss of privacy, the normalization of this open relationship to the world, which not in a good way necessarily, and this hyperconnectivity, the challenge that parents have to be present with their kids because they're constantly being sucked away by their device. I think that's what the 2000s is. I think it'll be remembered for the first decade of real change in norms, the Me Too movement, this renewed attention around the disproportionate murder of black men versus white men, racial injustice, prison, drugs. I mean, there's a lot of change happening. And I think the optimist in me says, this is great. I mean, some of it sucks while it's happening, but it's great in that it's causing us to have to come to terms with these changing realities. I mean, the Me Too movement is a reflection of the empowerment of women. They're making more money. They're demanding more power in society. And I think that's fair. I mean, it's not for me to say it's fair, but makes sense to me. The issue is, how (29/32)
does that conversation happen in a way that doesn't throw the baby out with the bathwater? And so often, I think something feels off with that conversation, just like the white male privilege conversations. Same thing. There's much to be desired. And when you're a white man, you obviously are more sensitive to, you can feel it. But I feel like these things need to happen in order to bring about the type of change that I think, again, the optimist in me says, we'll look back and it'll all be fine. The pessimist in me, and maybe it's not so much the pessimist, maybe it's the realist, that understands that change, regardless, even if it's necessary and things will change, change is also about loss. And there is a sense of loss. I mean, there's a whole analog world that just feels like a distant past when I see brought up the 70s before I'll bring it up again. But in the 1970s, forget cell phones. I mean, it was so analog. I spend so much time researching and reading, and I will fall upon (30/32)
these periods, and I'll watch videos. I mean, watching buckly conversations on television. Imagine how much it costs to produce that. And what was it? Just a couple of cameras, right? I mean, the world is totally different. And I think this decade is a decade of change. And I imagine the next one will be much the same. And I think the scary thing is, to what extent will our environment change? We see these wildfires in California. We had Superstorm Sandy, which I think would have been a completely different storm. Were it not for the fact that ocean levels were already where they were at? But what happens if over the next 20 years, the likelihood of a random hurricane getting to a category five and just running right up the East Coast, right through New York with higher sea levels, what's that going to do? I mean, just all these things are scary, but they're, you know, I guess, what was it, Confucius that said, may you live in interesting times? I think that's kind of the constellation (31/32)
of all this, at least being able to think about it and cover it gives you some solace. Well, listen, everybody, I'm sorry for, I hate apologizing, but I am sorry that this happened. Of course, I did not want to be in the situation. I look forward to having this guest on in the future, but I hope that this recording that I did is appreciated and that it was valuable in some way for all of you to listen to. I appreciate all of you very much. And I look forward to a number of the upcoming episodes that are equally awesome with equally awesome guests. And as I said, I'm going to be focusing heavily on finance and maybe some tech, but really, I just want to cover a lot of market stuff. I'm really into it. So more stuff like Janeway coming ahead. Have a great week, everybody. (32/32)
This is the full transcription of podcast 'Hidden Forces'.
Matt Taibbi Democratic Contenders, Election 2020, and the Goldman 1MDB Scandal #Podcast #Transcription #ReadAlong #KnowledgeUnlocked
What's up everybody? My guess for today cancelled unexpectedly last minute. We rescheduled it, but rather than try and fill the hole with another guest who I'd also have to book last minute, I've decided instead to release an overtime to an episode that was particularly popular with all of you. My episode from February of this year with Matt Taibbi. The overtime is roughly 30 minutes, maybe a little less. We talked about the Goldman 1MDB scandal. We also talked about Matt's experience on the campaign trail with Donald Trump back in 2016 and projections and predictions for the 2020 election. I thought besides the fact that this was a popular episode, it's also relevant to the news cycle with the recent Democratic debates, round two last week. So I think you're all going to enjoy it one way or the other. Matt's fantastic. And I also apologize for not having something new everyone. I try to do it every week. And as a result of trying to keep things timely, I also end up not having stuff (1/33)
in the tank ready to go in the event that something like this happens. So please enjoy this. And if you want to hear more over times, I always say this, the over times are often better than the full episodes. And this may well be true with Matt. I can't remember. It's been a long time since I heard it, but it's definitely true of a number of other guests. So if you're interested in hearing more of these over times from past episodes that you really enjoyed listening to or for future ones that haven't come out yet, I'd suggest going to patreon.com slash hidden forces and subscribing to the audio file subscription. You can also subscribe to the AutoDidact or the Super Nerd, which are the transcripts and rundowns. But that's up to you. The minimum subscription is the overtime. Also, before I hand it off everyone, this is a unique opportunity for me to make an ask that I normally only do as a pre-roll before every episode. And it's about Apple podcasts, specifically about ratings and (2/33)
reviews. Right now we have 239 people who have reviewed hidden forces with almost all of those at five stars. Our average rating is 4.9. But I know how many listeners we have and obviously that's not even a fraction of our listener base. And I know it takes some time. I get it. I know it takes some thought to write something. And I think many of you, if you're anything like me, feel like you're going to get to it at some point because you want to say the right thing and you want to choose the right words. Well, I want to encourage you not to even have to worry about that. You can rate the show without having to write a review. You can come back later and write the review. You can go into the Apple podcast app, click on hidden forces, scroll down past the episodes and you get to the ratings and reviews. And all you've got to do is tap on the star that you think we've earned with the work we do. And I say we because there are a number of people who help make this podcast possible, not (3/33)
the least of which is my editor, who makes me sound 10 times better, more coherent and more intelligent than I am in real life. So it's literally that simple, everyone. It literally will only take a second of your time and it would mean everything to me if you did that now before going into the episode with Matt Tyebe. All right? I appreciate all your support, your listenership and without further ado, here is my overtime to my episode with Matt Tyebe. Matt, welcome back. Thank you, Dimitri. That was an awesome episode that we just did on media. So it was fun. Yeah. So I want to talk to you about your experience on the campaign trail with Trump. Oh, yeah. And then I want to talk to you about your experience with the financial crisis. Let's start with Trump. I've loved hearing your take on this because Trump is a phenomenon. Yeah, yeah. So when did you first meet this guy? Have you met him in person? When did you sort of first follow him? And what was your experience on the campaign (4/33)
trail with him? I don't think I ever met Donald Trump personally. It's funny, my first job in journalism, I was an intern for Wayne Barrett, who was sort of a famed muck raker here in the Village Voice and he was Trump's first biographer. Couldn't stand Donald. So I heard things about Trump over the years. Trump was also sort of the main character in Spy Magazine, which was a huge influence on me growing up. It was the satirical magazine started off by Kurt Anderson and Graydon Carter. And so Trump was a central villain in that magazine. But I always thought of him as sort of a joke. I never thought of him as somebody who would be part of a real political movement. But then literally the instant I saw him on the campaign trail, I knew that it was serious. Just the instinct he had for it? Well, there were a couple of things going on. I think this is a really interesting topic because it's still totally unexplored. There were two parallel developments that were going on at the beginning (5/33)
of the Republican race. One was this thing that we talked about in the podcast, that there was all this discontent out there. And Trump, for all of his lack of book smartness, has a tremendous sense of crowd. He has this ability like a lot of comedians have to walk into a room and kind of feel where people are. And so he pretty quickly was able to create positions that molded to the discontent for the crowds that he was feeling. So he didn't start out really particularly against the wars in the Middle East, but he noticed there were lots of vets in the crowd. He's like an algorithm. Exactly. He's a machine learning algorithm. So I saw early on that he was sort of like this vacuum cleaner for discontent and he was dominating the conversation. He also had this incredible pullover media that was unique. But the parallel phenomenon that nobody talks about to this day was the total collapse in public confidence in the Republican Party. Because if you look back, you'll see people like in (6/33)
538.com, right? Like Nate Silver. Nate Silver. All those people. They were saying Donald Trump was a protest candidate. Here's how protest candidates work. They get an initial surge of support and then they fall back to the pack and then the real candidate emerges. So that actually happened. There was a moment in October of 2015 when Trump, his numbers just started to fall off a little bit. I remember that. Right? And what was happening was the Republican electorate was like, we can't do this. Let's look elsewhere. Electability. Right. This was the pattern that was normal. We saw candidates like this in the past. Who was the pizza guy last time? Oh yeah. I don't even remember his name. 9-9. Who was it? He had the plan? Yeah, whatever it was. See, we've forgotten him that quickly. Can't remember the guy's name. But when Trump fell back to the pack in that October, the people who rose were Carly Fiorina and Ben Carson. Right? There was nobody that voters, as many times ads were shoved (7/33)
under their nose, they refused, absolutely under gunpoint to vote for somebody who was part of the Republican Party. They just would not vote for a politician. And Jeb Bush, they spent $150 million. He got three delegates. This is what people don't get when they look at the Trump phenomenon. It's not just about Trump and about this rise of something. It's about the collapse of something, primarily. He stepped into a vacuum. It's not about what people want, it's about what people don't want. Exactly. Exactly. And first they didn't want the Republicans, and then after that they just barely didn't want the Democrats. Right? And, or depending on who you asked, they won the popular vote, but still it was close enough, right? It was a hate offer. It's crazy that these elections are so close. Right. Oh, they're always so close. And that's another thing that Chomsky said. He's like, you would only expect a 50-50 distribution in this huge of a situation normally if something was completely (8/33)
random. Like if you asked people to choose the president of Mars, you'd get 50-50, right? So only when nothing is at stake would you get something this even, which tells you something about our politics, right? Right. Like if they were rationally decided, if it was split along class lines, for instance, it would be 80-20 or something like that, right? Or if they felt there was a meaningful difference between the two candidates. Exactly, yeah. Yeah. Or if it wasn't stage managed in some way. So yeah, it was fascinating. And I, looking back, I'm proud of the fact that I called early that he was going to be the nominee, but then I let myself get talked out of him winning the general pretty early by a pollster. And that was a huge mistake. Looking back, I listened to somebody's spiel from Washington, and I'm never going to do that again. Well, you know, we've never had a president, well, I mean, the WW has only been around for so long, but to watch him shave Vince McMahon's head, right? To (9/33)
be on stage with professional wrestlers in the most just concocted environment. I mean, it's remarkable, you know? It's remarkable. Oh, yeah. But we've never really seen anything like this, truly. No, no. I mean, I'm trying to think of who would be even a close parallel. There's nobody. I mean, you know, Pat Buchanan hit some of those themes, but he was serious. Yeah, he was buttoned up, too. Yeah. I mean, Donald Trump, there's no way, I guarantee you, he didn't think he was going to win. He did this as a publicity stunt. You know what he reminded me of? Do you remember when Mike Tyson came out of retirement or came back? Of course. From prison. From prison. His first fight was against this guy, Peter McNeely. Yeah, the big white guy from like Boston or something. The mullet, right? Yeah, yeah, yeah. So Peter McNeely knew who was going to get killed, and when the bell rang, he like ran to the middle of the ring, like right into a Tyson right cross, right? He was like a guy in a frat (10/33)
there, basically, right? Like he psyched himself up to go charge into the middle, and you know, it was over in a second. Trump did the same thing. He like shot himself out of a cannon at the beginning of the race, and I'm sure he thought this was going to end at any minute. To his amazing surprise, like everything, the entire infrastructure of American stupidity just sort of catapulted him into the middle of this firestorm of controversy. It was an awesome thing to watch, and I say that in the truest sense of the term. I don't mean that it was great. Respectful. Yeah, I mean it was incredible. But you know, there is an appeal. He has an appeal, right? So what is it that voters, Trump voters, find so appealing? Because I've spoken to many people who, some of them are my friends, they're still on my friends. I don't not hang out with people based on who they vote for. But I was blown away by not the fact that they necessarily voted for him, but the fact that they liked him. There's a (11/33)
couple of things going on. One is that people see him as an iconoclast, right? There's a thing up there that they hate, that they think is phony, right? And they know that the worst thing in the world, the thing that whatever that is, thinks the vilest thing in the world is Donald Trump. And so what they decided to do was send Donald Trump into the middle of Washington. And it's the ultimate protest for it. It's not just we want to... It's like hurling bags of dog shit at the White House. Exactly. That's exactly what they were doing. That's a Matt Tyvee line. That should be some mute right there. Probably already written it. I've probably already... Yeah, there's something like that. But that's basically what it was. It was the whole like, you know, to set the dog shit on fire and the stoop thing. I mean, you know, even today, I know people, smart people, like people with multiple degrees who are praying for Trump to stay in power. And then people who work in Washington because they (12/33)
hate their co-workers so much. You know what I mean? So I feel you on that. This speaks to something. I know the business editor at Breitbart. I know him from his days working at CNBC and we're friends on Facebook. I don't know him well. I mean, but I remember after the election, I was shocked at the election all of Trump and I saw a status up that he put on Facebook and he said something along the lines of the sort of the liberal sort of hair on fire like your freak out is delicious. And I tell you something. I read that and I thought, it is delicious. I was like, I was like, I feel that and I felt bad about it, but I also couldn't deny that I was enjoying it. So Donald Trump's election has given me that satisfaction. And I say that even as someone that did not want Donald Trump in the White House, does not want him in the White House to this day, I think that he's the exact opposite of what the country needs. But maybe it's what the country wants exactly because he feeds that (13/33)
visceral, rowling up that has happened in our country as a result of many of the things that we've discussed today. Yeah, no, I mean, I couldn't be more opposed to basically everything that Trump stands for both personally and from a policy standpoint. But as somebody who has had to deal with, for instance, somebody like Robbie Mooc, right? Or not Robbie Mooc, but the Clinton campaign sort of infrastructure. Robbie Mooc was the campaign manager for the Hillary Clinton campaign. Yeah, actually, I never dealt with him exactly. I dealt with other people in their campaign. But you know that those people, there's nothing in the world that they would find more offensive than Donald Trump and losing to Donald Trump. Those are disgusting people. And so I get it. You know what I mean? But yeah. So this is the thing, right? I mean, I think that you make this really great point in hate, which has to do with how the news used to be blue collar. We said it, we talked about it as well. It used to be (14/33)
more blue collar and now it's more white collar. And there's a level of sick of fancy. People that don't want to follow the herd. I'm in that camp. I know you are in that camp. I think that this is distasteful, right? And I think that's kind of what you're touching on. There's a sense of an air of inevitability. We're the establishment. We're sort of the... Exactly. We know better. Yeah. We're the experts. Right, exactly. And there's a thing where you're just kind of like, you know what? And I don't care even if we're all going to go down in a flaming ship, I want to see you go down and play. You want to see them kicked in the face by a mule. And it's satisfying. Yeah, exactly. They're so pretentious. And I get it. You know what I mean? I think the messaging that comes from Washington is so condescending. And for Trump, for a lot of people, it was just a way to send a message to Washington, and it was extraordinarily effective. I think the Democratic Party, Democrats underestimate the (15/33)
extent to which that feeling can translate to votes. Oh, absolutely. You know, I think they underestimate that. They underestimate it because they don't know how few they are. You know what I mean? People don't like the moralizing thing. You know what I mean? When people try to moralize, and the right has done this as well in different periods of time, people don't like that. They respond negatively to it. Absolutely. They'd be responding negatively to being preached to. So Bernard Goldberg writes that book, Bias, right? The famed book about the liberal media, which I basically totally disagree with. But there's one line in there where he talks about how in 1972 he was having a discussion with a film critic from the New York Times who couldn't believe that George McGovern lost because she didn't know anyone who voted for Nixon. Now that is still a thing, right? And it's more of a thing now because there's been this radical change in the press. Back in the 60s and 70s, people who were (16/33)
journalists were very often the children of plumbers and construction workers and printers or whatever it was. Steel workers. Yeah, exactly. Automotive workers. It was not an upper class profession. Now it's 100% upper class. And almost everybody you meet on the campaign trail went to an Ivy League school and has a lot of money and lives in a big city and shops at urban outfitters and all that stuff. And they don't realize that they constitute maybe at best 10% of the country, right? Like the overwhelming majority of the country doesn't have money and doesn't have that lifestyle. It's frustrating. That's a problem. It's a problem. People was less diverse ethnically back in the day. But it's not more diverse now because even though they've diversified from ... They've homogenized on their opinions. They've homogenized the opinions and also almost everybody's upper class that they bring in to the press now. So they've replaced one problem with another and it's had drastic consequences. I (17/33)
couldn't agree with you more. It's something else we've discussed on the show. It has become a brand in general in American politics and intolerance has gone way up. There may be more tolerance, at least grandstanding tolerance about identity groups that are sanctioned based on skin color or based on gender or based on sexual orientation. But there is an intolerance for people whose views differ. And this is something that we talked about with Jonathan Haidt who of course wrote The Righteous Mind and talked exactly about this, which was a book I relied upon tremendously after the 2016 election to help me sort through the mess. Actually, I think it was right before the election. It was in the summer of 2016. Yeah, I think that book came out that summer. 2013, I think. That's when I read it, but I think it came out like 2014 or something like that. Yeah, I mean that's when I read it though. So what do you think is going to happen in 2020? You know, it's a crapshoot because a lot depends (18/33)
on what happens with the Democratic Party and this is a genuine contest of power, which is unusual. But for the most part, in the past, when you were covering a campaign, you were basically trying to figure out who was going to be the representative of the same kind of politics. So whether it was going to be John Kerry or Bob Graham or whoever it was, they were basically going to be an agent of the DNC and the big donors and whoever it was. Now, there's real stuff at play. Bernie Sanders becomes the nominee. That's a radical change for the party that then now all of a sudden you're kicking out all the people who are the donors, the think tanks don't have a say. You're replacing the people who are part of the traditional political infrastructure or potentially in Washington. So that's a massive contest. It's going to be bloody and angry and it's going to be vitriolic on all sides and very interesting. And you know, unless for some reason Sanders decides not to run. You think he's going (19/33)
to run? He's going to run. Yeah. You think he's going to win? Well, what's interesting about this is that the same thing that happened in 2016 with Trump is kind of lining up to happen with Sanders. The Republican Party made a massive error in not coordinating beforehand. There were too many candidates and by the time they got to New Hampshire, there were seven or eight viable candidates and they all took votes from each other. But Trump was the only person who had an insoluble base of support. So you could win with a small plurality. Yeah. Now Sanders won 42% of the Democratic vote last time. Right? So if he even gets half that going into the primaries, the initial primaries, and people are talking about having 20 candidates in this race, you know, 20%, 18% could be a winning amount in this race. So it's going to be really interesting. A lot of it's going to depend on whether Warren and Gabbard take and Sanders take votes from each other. If those candidates stay viable, then we have (20/33)
something going on. But if they don't and you have Biden and Harris and all these people, you know, in there, the Biden one sounds ridiculously stupid. Chris Christie, who you wrote about recently was on the Bill Marsh Show real time and he said that he thinks Biden has the best chance. I feel like Biden is like the classic Hillary Clinton running in 2008. Hillary Clinton ran on the platform of let's bring back the nineties. Let's go back to the Clinton years of 1999. And it feels like Joe Biden with the exact same thing. Let's go back to the Obama years. Yeah, that just shows you how completely clueless they are. Oh, let's give you more of the same. That went over so well last time, you know? Can't they tell that people are angry and also don't they understand how big of an issue the wealth gap is? They are completely clueless about that. How are they so clueless? Well, one of the things that Trump has helped them to a degree because he's been so inflammatory and he guarantees them a (21/33)
certain amount of votes because he's so off-putting and offensive and all of that. So you know, you had the midterm result that they had, which was in their eyes pretty good. You know, I look at any contest with Donald Trump in it and I think if you don't win in a landslide, you should be really worried, right? And you know, when it was close, the popular vote was 3 million votes and it should have been 30. They should have been panicking. They should have been running around with their hair on fire wondering what happened, but they haven't done that. They haven't gone through that process. So they still think that they're doing fine because they've just been in this paradigm where the Republicans always get somewhere between 47 and 52%. So as long as we get a couple more percent, we're doing okay. They don't realize that that whole model's been shattered and you know, I don't know. It's frustrating. I mean, look at how they're reacting to Ocasio-Cortez, the Democrats. Oh, they... (22/33)
Their sensibilities have been shocked. So they hate Ocasio-Cortez and Sanders and the Justice Democrats. They hate them more than they hate the Republicans and they're afraid of them more than they're afraid of the Republicans. And that vitriol is... It's amazing because the possibility exists that Sanders could be the nominee this time and Ocasio-Cortez could be the future of their party. 100% she's the future of the party. And they are doing everything in their power to, you know, antagonize her right now. Or I think what they're trying to do is they're trying to do a carrot and stick thing with her. They're trying to say, if you behave X-Way, you're going to get a lot of flak from us. We're going to bring you into the fold and we're going to make you the anointed one, but you got to change your tune on X, Y, and Z. But it's not going to work. She got there because she ran against the idiot traditional Democrat, you know, and she has absolutely no incentive to change and they don't (23/33)
get that. I think it's also fascinating because she is from the same wellspring, the same force that elected Trump is what is brought Ocasio-Cortez to the front, right? First of all, there's a populous quality, right? And there's a direct relationship to her base. She'd shoot right over Washington, the Washington establishment, the media, communicate directly through Twitter. She's fantastic at it. She knows she has camera presence. She has social media presence. She knows how to use all of this. She's good looking. She's young. She is absolutely the future. You know what I mean? It's her politics that are unacceptable, right? The wealth tax thing is unacceptable. That will never be agreed to. You know, the other politicians like Warren and Sanders also had proposals along that line. The people who traditionally support the Democratic Party financially will never let that happen. They will fight a pitch battle. It'll be antitum, you know, before they let that happen. I wonder how you (24/33)
feel about this. I think the idea of 70, well, it depends on what the income bracket is. In general, I always have a problem with taxes because I always know what they're talking about. They say we're going to raise income taxes, but what they end up doing is they create loopholes for certain people that are wealthy. But I think here's the thing, and I wonder how you feel about this. And then I want to ask you one more thing. We'll wrap it up. I just don't see how we can move forward without finding a resolution and without compromise because the wealth gap has grown enormously due to technological reasons, regulatory changes, globalization of our economy. Our political system isn't going to work. So either we compromise or we just get radical candidates that come in and just basically jump right over the media, jump right over the Washington establishment and get elected President of the United States. Yeah, I agree with you. I think the political establishment needs to find a way to (25/33)
be more invested in everybody's outcome. Right? Like they've got the point where they're financially supported by people who are not invested. Right? So if you're a billionaire in this country, you're a citizen, maybe only nominally. You know what I mean? You don't really care. In the old days, if you were Milton Hershey or something like that, the old school oligarchs sort of had this vision of sort of lifting up all of society. That's sort of gone now in the global economy. And I think that's one of the things that people are responding to. The voters, this is this idea that we've been abandoned by this sociopathic class that doesn't really care that we have no health insurance, that we're one illness away from being bankrupt, all that stuff. So the political class has to do something about that sentiment, that feeling of we've been left behind by people who have stuff. And if they don't... And they see it on their screens every day. Every day. On their social media accounts. It's (26/33)
rubbed into them. It's rubbed into their face. Yeah, exactly. And so there has to be some kind of movement towards something that gives people a little bit of a break and that moves us a little bit more in the direction of not having this plutocrat class that's just sort of hovering over everybody that's unaccountable in every way. So I think that's a big thing. The media and our politicians also stoke division and that division makes it difficult for us to unify, which is what we need in order to move something like this forward. Matt, you have written about the Goldman Sachs 1 MDB scandal. What can you tell us? I mean, this is not something I've read about pieces here and there from, you know, including stories of people getting murdered, which is crazy. Oh, no. Yeah, they're murderous. Yeah. What can you tell us about this? And I'd love to also see how this all fits into this larger area of Goldman and the financial system post-2008. It's an unbelievable story. All of these (27/33)
financial scandals are insane. This one is particularly crazy. It's basically the short version of it is a couple of bankers for Goldman who were in Malaysia, got in bed with the local dictator and they decided to have a sovereign wealth fund that they called 1 MDB and they went around the world raising money. So they pitched institutional investors in the idea that they were investing money in sort of Malaysian infrastructure projects. So they raised money from people all over the world, billions of dollars for people who thought they were building subways and agricultural drainage projects, all these things. In fact, the money just all went into a big account and turned into a party for this guy named Joe Lowe, who was like an aide to the president. Yeah, his short name is like J-Lowe or Joe Lowe, right? Yeah, it's J-H-O-Lowe. They stole, like, you know, upwards of four and a half billion dollars and part of that money went to funding the movie Wolf of Wall Street. They bought (28/33)
Picasso's. They had parties. They were still hiring Snoop Dogg. They had parties. They were going all over the world. So it's basically sovereign ripoff. So they created a fund, as I understand it. They used the sovereign bond market. They issued securities on the credit of Malaysia in order to liquefy the fund from which they then extracted money for their own purposes. Exactly. What was Goldman's participation in this? They issued the bonds. They issued the bonds. The bonds of the sovereign wealth fund. And they made $600 million. So the fees were something like 10 times what they would have been normally. Right, which is a giant red flag. Yeah, it's like a big... Because they knew they were doing something really, really bad. It's like getting a $5,000 massage. It's probably more than massage, right? Yeah. You're getting pay. You're getting pay for something more. Yeah, exactly. And so the problem with that, and this is why it's such a dangerous story for Goldman, is that the size (29/33)
of that fee, there's no way that somebody back in New York didn't say, hey, you know, what do we do to make all that money, right? And there's some evidence now that some of the participants in this scandal met with the highest ranking members of the bank, maybe at least once they actually met directly. There was a direct meeting between one with Lloyd Blankfein and the president of Malaysia, right? Yeah, no, with Joe Lowe. Joe Lowe, sorry. Yeah. They've charged a couple of people already, but if it snakes higher... There's talkstaking abeting. The stockstake... Because investors are concerned that they've laid out a certain amount of money, right, in preparation for having to pay fines that are larger than anything they've had to pay before. Yeah, this would be like the deep water horizon thing, but like twice that size. It's the only reason that they're even in danger of having to pay because this didn't happen to Americans. If this happened domestically, they would have gotten away (30/33)
with it. That's an interesting question. Yeah. That's an interesting angle. Yeah, I hadn't even thought about that. It was so brazen. Yeah, because the only reason that this is going forward is because the president actually got voted out in Malaysia, which allowed the investigation to go forward. You could kill it from the inside if you still had some political influence, but they don't need more. So now that Najib, the president, is gone, this thing is going forward and the traditional levers that they have of control over these scandals is the absence. So that's an interesting question, but they're looking at paying an amount of money that's mind blowing. Yeah. It's now 10 years since the crash. What's the verdict for you? Where is our economy today? Where are markets? Are we in danger of something similar again, or is just going to show up politically and electorally? I don't know. I mean, I think you probably know better than me, right? You're more of an expert than me. People I (31/33)
talked to from back in the day, they warn that a lot of the same things are going on. I have people who tell me things like the same kinds of behaviors we saw with mortgages back in the day you're seeing with CLOs now, right? Like small business loans, securitized loans, like that market's overheated. People think the stock market's overheated. I don't know. Corporate debt market also. Corporate debt market, like the debt levels are now as high as they were in 08, right? Total debt is higher. Is it higher? Yeah. So I don't know. You don't have an opinion, Matt? I mean, if I have to put money on it, catastrophes are where the bet is. What would Namchomsky say? That's enclosing to this. What would Namchomsky say? What would Namchomsky say? I'm sure he would predict disaster and more of the same than just as bad. Matt, thanks so much, Matt, for staying so long. I didn't expect it to be this long. I appreciate you. I know you didn't expect it to be this long. This is a marathon. We're here (32/33)
for like two hours straight. Thank you so much. No, thank you. I appreciate it. (33/33)
This is the full transcription of podcast 'Hidden Forces'.
Isolationism A History of America’s Efforts to Shield Itself from the World Charles Kupchan #Podcast #Transcription #ReadAlong #KnowledgeUnlocked
Today's episode of Hidden Forces is made possible by listeners like you. For more information about this week's episode or for easy access to related programming, visit our website at hiddenforces.io and subscribe to our free email list. If you listen to the show on your Apple Podcast app, remember you can give us a review. Each review helps more people find the show and join our amazing community. And with that, please enjoy this week's episode. What's up everybody? My guest on this episode of Hidden Forces is Charles Cuppchin, a senior fellow at the Council on Foreign Relations, a professor of international affairs at Georgetown University and served as special assistant to the president for national security affairs in the Obama White House and also served on the National Security Council under President Bill Clinton. He is here today to talk about the subject of his latest book, isolationism, a history of America's efforts to shield itself from the world. Professor Cuppchin, (1/33)
welcome to Hidden Forces. Very nice to be with you, Dimitri. It's great having you on. So, for those who haven't read your book, because I think, is it already officially out? Yes, it officially came out on the 1st of October. Okay. So, we're actually recording this today on the 7th. For those who haven't read your book, how would you describe it for our listeners and what was your objective in writing it? I would say it's the first book to tell the story of isolationism across US history. I start with the French and Indian wars in the 1760s and go right up to the Trump administration and the 2020 election that we were about to witness. So for starters, it's simply a historical overview of this impulse that has been with the country since the very beginning. And that is to avoid foreign entanglement, to operate on the principle that getting involved in the troubles of others only invites them to come mess around with us. Nobody interestingly enough had ever really told that story. (2/33)
There's a story about the founders. There's a book on isolationism in the 30s, actually many books. There's a book about Woodrow Wilson and the defeat of his effort to bring the country into the United Nations, but nobody kind of did the soup to nuts book. And my purpose was really to bring this history to Americans at a time when I think we all need to know more about the country's foreign policy before Pearl Harbor. I started this book almost a decade ago because I began to sense that there was an inward turn in the United States. It started after the end of the Cold War. I sensed it when I was in the Clinton White House. It was put into abeyance to some extent by 9-11, but then came back in spades once the wars in Iraq and Afghanistan didn't go so well to put it mildly. And I began to wonder, this robust internationalism, this willingness to run the world, this America with almost 800 military bases, is this more fragile than it looks like? And that's really the question that I (3/33)
wanted to explore. And I decided to do so by going back and trying to tell the story of the American experience through the lens of the isolationist impulse. That's what the book is really meant to do. Well, that was actually going to be my next question or one of my next questions, which was when did you first begin to see signs of a return of isolationist sentiments in the US? And the period for me that was where I saw it was really I put between 2004 and 2007 exactly to your point when the war in Iraq started not going so well or the public opinion began to turn a bit against the war and right up until the surge. And also in the early 90s, I think most notably with the popularity of Papua Canons message, those were kind of the two periods that I remember. But when did you first begin to see signs and what were those signs? I think that the biggest clonk on the head for me was Clinton's reluctance to engage in the Balkans. Also remember that not soon after the Cold War ended, (4/33)
Yugoslavia began to fall apart. And the George H.W. Bush administration basically said, we don't have a dog in this fight. We're going to stay out of the Balkan Peninsula. Clinton, when he was a candidate, said, we're not going to let that happen. We're going to do something about this. This is a humanitarian disaster. And then he gets into office and I was there at the beginning, so really the first couple of years, and he was quite reluctant to get involved. There was a lot of pushback from the Pentagon. And eventually he did get involved. We had the war for Bosnia and the Dayton Accords and eventually the intervention in Kosovo to push out the Yugoslav army and stop the ethnic violence between ethnic Serbs and ethnic Albanians. But that's when I began to say, something's going on here. And you're right, Dmitri, to point to Newt Gennrich as a turning point, because I think that it's in the 1994 midterms when the Republicans did well, that you really begin to see the collapse of what (5/33)
I call in the book the bipartisan compact between moderate Republicans and moderate Democrats behind liberal internationalism, behind a formula of combining American power with partnership, power plus partnership. That was the formula of liberal internationalism that really emerged under Roosevelt during World War II and was alive and well right through the Cold War up until the 1990s. That compact starts to come apart after the 94 midterms. And ever since then, I think Democrats and Republicans have really gone in different directions on foreign policy, which is one of the reasons that I think the country has been adrift. And one of the reasons that there is a isolationist comeback of a sort that is very important. And I think it's quite visible in Donald Trump's America First. After all, when he said America First, it's only America First in his inaugural address, he was going back to the mantra of interwar isolationism. The America First Committee was born in 1940 to stop Roosevelt (6/33)
from sending aid to the victims of Nazi aggression. They fought tooth and nail to keep the US out of World War II. And so Trump harkening back to the America First days was to me a strong sign that the isolationism, the turn inward that I saw in the 1990s was really gaining steam and in fact taking root in the White House. And in my mind, Trump is not the cause of it. He is more the symptom, the visible manifestations of a country that at least from his mind wants to step away from having bitten off more than it can chew. So isolationism has tended to have a bad name, certainly during this period of liberal internationalism. And I wonder, I guess one of my questions is, is that merited? One, two, where does that narrative come from? And that maybe three could open the door to really explore the history before the 1940s, which you document so well in all of these different stories, whether it's the Spanish-American war or the Monroe Doctrine, and maybe explore how isolationism actually (7/33)
served the nation well during that period. You're right to point out that isolationism is today a dirty word. And if someone calls someone else an isolationist, it's really an epithet. It's an attempt to denigrate them and isolate them politically. And one of the things I wanted to do in the book is to refurbish isolationism's reputation, not because I'm an isolationist. I'm not. I'm sure we'll get to that later. But because I think that the country needs to have a searching, open debate about the future of its role in the world, and that anybody who says, hey, let's lighten the load, let's step back. Let's let others do more. They shouldn't be called an isolationist. And so I think it does a disservice to the quality of debate in this country to continue to use the notion of pulling back, of lightening our load abroad as some sort of insult. But that's the way it's been since 1941. And that's because the isolationists were pushed to the margins of American politics during World War II (8/33)
and were seen as the fringe elements who made the big mistake of keeping the United States behind a moat, fortress America, while fascism and militarism and virulent nationalism and Nazism were sweeping Europe and Asia. And I agree with that. I think that the isolationism of the 1930s was a deluded bout of a search for strategic immunity that led to a disaster, the bloodiest, most costly war in the history of the world in which 400,000 Americans lost their lives. And I mean, it was a big mistake for the United States not to engage earlier. That having been said, I think if you go back to the 19th century, you see a brand of isolationism which served the country well. And the isolationist in calls goes right back to the founding days. And the guiding advice came from President George Washington in his farewell address of 1796 in which he said, the great rule of conduct for us is to have commercial relations with everybody and entangling alliances with no one. And for the rest of the (9/33)
19th century until the Spanish-American War, the United States stayed home. Now the U.S. was extremely expansive in North America, trampled on Native Americans, grabbed a whole lot of land from Mexico, tried several times to take over Canada, but it didn't go further. And that's because there was a consensus that the United States had no business expanding beyond North America. Actually, if I'm not mistaken, it was in your book as I do so much reading for this program. Sometimes I confuse different authors. But I think in your book you made the argument that those who argue that westward expansion was a form of internationalism were making a faulty argument. Is that correct? You know, it's a form of internationalism if internationalism is equated with expansion because we certainly engaged in territorial expansion. It's not internationalism if it means intermixing with foreign people because in general the United States' western boundary followed the extension of white settlement. And (10/33)
there was a racial quality to American identity. There still is for some Americans. And therefore the idea was that the union would expand in step with the frontier of white settlement. And then when it came to going beyond that, one of the reasons that the government and the public kept saying no was in part because they were not deemed to be part of the American experiment. Blacks, Latin Americans, Hawaiians, Asians, they were not American in the more ethnic sense of the word. And as a consequence, that was a break on expansion. There were also other motivations such as we don't want to entangle ourselves in great power politics. We want to be an exceptional nation and knock down the path of empire. But certainly the question of race and who participated in the American experiment was part of the explanation for why the US went to the Pacific coast but did not go further. So I mean that part of the history is actually very fascinating. The racial components because of America's (11/33)
history with racism, with slavery and the sorts of populations that existed in Latin America. And I have a lot of really great illustrations in the book from Puck and some from ... Are you familiar with these illustrations of Dr. Seuss that he did during the interwar period? No, I'm not. Do they have racial content? Well, those are not racial. Those are related to isolationism and they have these great images of ostriches putting their heads in the sand and Uncle Sam sleeping in a bed next to Europe as they're suffering under Nazi fever. But the racial component and xenophobia and the correlation between isolationist impulses and those qualities I think is interesting and something to explore. I want to actually drill in a bit more about this point about Western expansion and then that could maybe lead us into a definition of isolationism. How do we define isolationism? Because again, for me it's a bit complicated. Is it fair to say that the reason that the United States was (12/33)
fundamentally from the beginning isolationist was because it had more than enough to chew on in North America. If it wanted to expand territorially, which is one reason why countries engage internationally, at least during that period of time, they could do that. They had plenty of resources to extract from those territories and they were able to engage diplomatically with the Native American peoples in the territory. So there was some level of cohabitation with the external world and engagement. And obviously there was commercial engagement, which doesn't speak to the political component. But how do we define isolationism in a way that separates it from what I'm describing here? The term means different things to different people and there are historians out there who would say that the United States never was isolationist because number one, it was a trading state from the beginning. Number two, the US was never culturally isolated. Ideas from Europe, from Asia were coming and going (13/33)
and others would say that the US was expansionist in North America and that disqualifies it as isolationist. For me, isolationism is a lack of readiness to extend strategic commitments beyond the mothership. And it has an enduring geopolitical slash geographic logic to it, which is ever present during the founding era. And that is that the United States has to its east and west big flanking oceans. It has to its north and south smaller, relatively mild neighbors. And as a consequence, the United States should bank on that natural security. And yes, during the early decades, we didn't have natural security because we were surrounded by the British, the French, the Spanish, and also the Russians that had the territory up in the North Alaska. And so part of realizing isolationism was to gradually push one by one European powers out of the Western Hemisphere. And that to me was really the sort of double edged goal of America over the 19th century. One, to expand westward and become a (14/33)
formidable North American redoubt. And two, while that process moves forward to gradually unseat all European powers from their strategic presence in North America. And that generally worked. The French left early on. The Spanish stuck around until 1898, but then we booted them out in the Spanish-American war. And then the British left relatively early in the 20th century after Anglo-American Rup Rochement pulling out their last troops from Canada right around 1905, 1906. So what I actually, the part of the book that I found most illuminating and interesting is not the geographical or natural security conditions that would make isolationism a viable or intelligent or strategically advantageous strategy, but rather the way in which American political history and culture told stories about itself and its own relationship to the world that ultimately became self-fulfilling prophecy. First of all, do you, I mean, would you agree with that interpretation that this was the strongest source (15/33)
of the isolationist impulse in American life is actually a cultural one? I would agree with that. And, you know, culture is a slippery concept. And I think the geographic dimension ended up being part of our culture and our identity. And in my mind, it all can be wrapped up in the concept of American exceptionalism. And this is going to sound bizarre to most listeners because ever since 1941, American exceptionalism has basically been a justification for running the world. The U.S. sees further. The U.S. knows better. Everybody in the world in the end of the day wants to be a liberal Democrat. It's our responsibility to let them find that outcome. Before 1941, and certainly before 1898, American exceptionalism was exactly the opposite. It was a justification for running away from the world because Americans believed that even though they had an obligation to share their experiment with others, they would do so only through the power of their example. And the fear was that anything more (16/33)
ambitious than playing the role of exemplar would threaten that experiment itself. One because early Americans were terrified of domestic tyranny and they feared that if we aspired to be a great power, we'd have an overweening federal government, large military establishments, high taxation, and that our ambition abroad would come at the expense of our liberty at home. And that in many respects was one of the guiding lights. Another part of the narrative that's very important here, and again it is, I think, captured by the notion of exceptionalism, is that the United States is going to defend not just liberty at home but liberty abroad. Does not want to be entangled. Does not want to let other countries tell it what to do. And I'll just give you two quick historical examples to demonstrate the degree to which isolationism and this unilateralist impulse were very difficult to disentangle. In 1778, we were losing the Revolutionary War. And even though the founders were reluctant to look (17/33)
to others for help, they reached out to the French because they were afraid that if they didn't find an ally, the war would fail. And the States would remain under the tutelage of the British Empire. The French say yes, they come across and may help us defeat the British, and lo and behold the United States is born as an independent country. In 1793, Britain and France go to war again, and the French say to the United States, you are our ally. We took your chestnuts out of the fire in the Revolutionary War. Now it's your turn to come help us. What does George Washington do? He issues a proclamation of neutrality in which he basically says to the French, good night and good luck. You're on your own. This was a bald act of infidelity. That alliance was on the books. The French were right that they bailed us out and they expected us to do the same. When Washington reneged on the French alliance, it was the last alliance that the United States had until after World War II. That gives you (18/33)
some sense of how averse successive administrations were to tying American foreign policy to others. Do you think Washington would have terminated the alliance had the French monarch not been toppled? No, basically no. The issue was that Washington along with just about everyone else did not believe it was in the interests of the United States to get involved in another war with Britain, simply put. The other example is from Woodrow Wilson that we have in 1898 the turning point in which the narrative of American exceptionalism shifts and Admiral Mahon, Teddy Roosevelt, a historian named Frederick Jackson Turner. They all argue that the United States has made it to the Pacific, that the frontier has closed, and that if the United States is going to maintain its exceptional character, it must take manifest destiny abroad. It's time to go global. That leads to the Spanish-American war and also World War I, both of which the United States won. Interestingly, despite the success, Woodrow (19/33)
Wilson then tries to guide the United States into the League of Nations, a body that would commit the United States to play a role abroad moving forward. What happens? He goes down in flames. The Senate voted three times on the League of Nations, all three times it voted no. Then Wilson says, well, the problem is that there are unilateralists and isolationists in the Republican Party, so I'm going to take my case to the American people. He said the 1920 election is a referendum on American internationalism. The Democratic candidate, James Cox, was in the Wilsonian camp. The Republican candidate, Senator Warren Harding, said, make my day. I stand for the policies of George Washington. I stand against foreign entanglement. What happened in that election? Warren Harding won in one of the most lopsided elections in American history. So basically, you go through this interregnum of internationalism from 1898 to 1919, and then the American people say, hey, we need this like a hole in the (20/33)
head. That sets the stage for the stubborn isolationism that you see in the 20s and the 30s. One of the things that came to mind while you were talking about Woodrow Wilson and the League of Nations, which came after World War I, which is that certainly the experience of fighting two World Wars must have driven some percentage of the country towards being more isolationist. But then I also thought about the Vietnam War and that the reaction to that war was not so much isolationism, but rather an increased levels of pacifism. So how do we think about isolationism as it relates to things like pacifism, like the desire not to engage in foreign wars, but not a desire to pull away from the world? And why did, let's say, the reaction to Vietnam elicit one, but not the other? Well, pacifism was part of the isolationist narrative from the get-go, particularly in New England, where you had a lot of religious communities who did not believe in the use of force. And they opposed the Revolutionary (21/33)
War, they opposed the War of 1812, they opposed the Mexican-American War. Thoreau famously went to jail in opposition to the Mexican-American War because he said he wasn't going to pay taxes to support a bloody act of aggression. But I would say that over the course of American history of the various elements that we've been talking about, the exceptionalist narrative, manifest destiny, race, liberty and unilateralism, pacifism is probably the least influential. And that's part because even though there were large pacifist communities in New England, much of the country was not pacifist. And as a consequence, even though you had by the 1820s an American peace society, you didn't really see a strong movement. The one exception would be after the Spanish-American War, when the United States takes a whole lot of territories from Spain, including the Philippines, and we end up with a very difficult insurgency in the Philippines against the American occupation. Some 4,000 American soldiers (22/33)
died, hundreds of thousands of Filipinos died. That's when you begin to see a strong pacifist movement that digs in right up interwar period. And one of the factors that led to the defeat of the League of Nations as we were talking about is this unusual alliance between the pacifist left and the libertarian right. Interesting that we're beginning to see that kind of coalition come back today, but we can get to that later. In regard to the Vietnam War, there was a pacifist movement and there also was a stepping away, but I wouldn't call it isolationism, I would call it retrenchment. Richard Nixon put forth what was called the Guam Doctrine, which was, we will let our partners abroad do the fighting for themselves. And that led to the Vietnamization of the war and the US essentially ending the fighting. But I think it's safe to say that after the Cold War, isolationists were never really able to get a foothold. There was a push at the end of the 1950s because of the Korean War, because (23/33)
Truman decided that he was going to send several divisions, army divisions to Europe. There was a push to try to get isolationism back in the game, but that really died out by 1953 and 1954. And after that point, isolationism was essentially in the same place that internationalism had been before World War II. That is to say, it was really at the margins of American politics. Do you think that if the Soviet threat had not emerged after the end of the Second World War, that American politics would have allowed the sort of expansion of military power that we saw during the course of the Cold War? In other words, could the United States, from its place where it was culturally and politically in 1945, could it have seized a unipolar moment like it attempted to seize in 1991 in the absence of the Soviet Union? What Americans stood for that? It's an interesting counterfactual. And in some respects, the answer is that there was a sea change in American attitudes toward the world that took (24/33)
place during World War II that was irreversible. And I would point out that in 1945, before the Soviet threat emerged, the Senate passed the United Nations, the post-World War II order, the Bretton Woods institutions. And what you witness there is that the coming to life of the bipartisan center with Republicans and Democrats together buying into a large peacetime presence abroad to help keep the peace. And this was in part because this exceptionalist narrative had in fact gone global. And the Roosevelt era had basically taken the realest bent of the War of 1898, combined it with the Wilsonian idealism of World War I and created this amalgam of what we call liberal internationalism. Now that having been said, if you look at what was happening in the mid 1940s after the end of the war, there was a clear downsizing of the defense budget. There was demobilization. And then once the communist threat starts to emerge, Truman actually has to scare Americans into taking it seriously. This was (25/33)
the Truman doctrine when he was asking for assistance to Greece and Turkey to prevent the spread of communism. So yes, there are signs that the U.S. was settling back towards disengagement, but that was stopped in its tracks by the Soviet threat. And the Soviet threat also played an important role in silencing the libertarian right because the America first movement during the interwar period, a lot of those people were hardcore right wing libertarians, American nationalists. What happened once the Soviet threat came along was that anti-communism trumped anti-internationalism and it trumped this hard right libertarian sentiment. So that's when you get the John Birch Society and these other kind of libertarian leaning and I would say somewhat racist and anti-Semitic groups becoming internationalists. They weren't multilaterals. They didn't like the UN. They didn't like alliances, but they were ready to send American soldiers abroad because they thought that the real threat was (26/33)
communism. The communism became the unifying force. Here's another thought experiment. Do you believe that the United States could have entered either World War without a cataclysmic event like Pearl Harbor or the sinking of American ships by the Germans? Could we have entered either one of those wars without something like that? Is that how powerful the isolationist impulse is? Yes. Those are good examples in the sense that Wilson is remembered as this idealist World War I League of Nations, but from 1914 to 1917, he was a hardcore isolationist outside the Western Hemisphere. One of the interesting things about Wilson is that he was an imperialist and an interventionist in Latin America and the Caribbean. That started in 1898 and it continued right through the 1930s. Some would argue right through to today, but when it came to commitments outside the Western Hemisphere and in particular to inserting the United States into World War I, Wilson was, we don't have a dog in this fight. I (27/33)
see moral equivalents in the Germans and the French and the Brits. This is a garden variety war basically for money and greed. We're staying out of it. All the isolationist tropes that guided American statecraft in the 19th century, they were alive and well in the Wilson administration until 1917. When Imperial Germany starts sinking boats, American ships that are crossing the Atlantic to do business because the United States believed that neutrality meant the ability to continue to trade with belligerence, but Germany said, nope, we're not going to let that happen. That's when Wilson says, we're going to go to war. He does so very much as an idealist. I would urge your listeners to get on the internet and go read his request to Congress for a declaration of war in April 1917. It's remarkable. It is all about principles and rights and saving the world for democracy. There's not a word about the national interest and in part that's what got him into trouble. He was too idealist. He said (28/33)
this is a fight for American values. Ultimately, when your sons are dying in the trenches, you want to know that it's more than a fight for American values. The same would go for World War II, Demetrius. Especially when I began to dig into the 1930s, I was quite surprised by the public image of Roosevelt that exists today in the sense that, yes, he was a great wartime hero. He pulled off the new deal. Over the course of the 1930s, he was right in the midst of the isolationist mainstream, guiding one piece of neutrality law after another. This was real tight neutrality. This basically said that the United States could do no business with any belligerent because we don't want to run the risk that what took us into World War I would happen again. He then changes his mind in 1939 after the fall of most of Western Europe. He does so because he thinks that if the Nazis succeed in taking Britain, they will be powerful enough to come to the Western Hemisphere. That's when he convinces Congress (29/33)
to go ahead with what's called cash and carry, which is that belligerents could bring their own ships and pay in cash and buy goods from the United States. Then he goes ahead with the Lend-Lease program in 1941 where the United States starts giving ships and aircraft and other material to the victims of both Japanese and German aggression. This is important. When he sold cash and carry and when he sold Lend-Lease to the Congress and to the American people, he said, I am doing this to keep us out of the war. I am doing this so that we don't have to go fight, but we will empower those people who are fighting for themselves. Even though that was his position, the America First Committee fought him doggedly because they believed that if we were supplying those that were fighting on the Allied side, we would eventually find ourselves at war. That is in fact what happened. Had it not been for Pearl Harbor, it's really quite questionable whether the United States would have entered World War (30/33)
II. I want to move the second part of our conversation into the overtime, Professor. I'd like to actually spend most of that time applying the lessons of America's isolation as past to today. You write in the book that you make a case for what you call strategic retrenchment, which is I guess is a more thoughtful approach to isolationism. That's one way to maybe put it. I've been thinking, I mentioned to you before we turn on the microphone that I spent the morning rereading parts of Barbara Tuckman's book, The Guns of August. I've been thinking a lot more and more in the last few months about comparisons between the present time and both the pre-World War I era as well as the interwar period. I think there are commonalities and there are differences. Some of those came up for me when I was reading your book because, well, it speaks directly to the issue of internationalism or isolationism. I'd like to delve into that dimension as well and also given how close we are to the November (31/33)
election, I think a discussion about the candidates, their platforms and the implications of either a Biden or Trump presidency would also be worth discussing. For regular listeners, you know the drill. If you're new to the program, Hidden Forces is listener supported. If you want access to the second part of my conversation with Professor Kupchen as well as to the transcripts and rundowns to this episode and every other episode we've ever done, head over to patreon.com slash Hidden Forces. There's also a link in the summary page to this episode with instructions on how to connect the overtime feed to your phone so you can listen to these extra conversations just like you listen to the regular podcast. Professor, stick around. We're going to move the second part of our conversation into the overtime. This episode of Hidden Forces was recorded in New York City. For more information about this week's episode or if you want easy access to related programming, visit our website at (32/33)
hiddenforces.io and subscribe to our free email list. If you want access to overtime segments, episode transcripts and show rundowns full of links and detailed information related to each and every episode, check out our premium subscription available through the Hidden Forces website or through our Patreon page at patreon.com slash Hidden Forces. Today's episode was produced by me and edited by Stylianos Nicolaou. For more episodes, you can check out our website at hiddenforces.io. Join the conversation at Facebook, Twitter and Instagram at Hidden Forces Pod or send me an email at dk at hiddenforces.io. As always, thanks for listening. We'll see you next week. (33/33)
This is the full transcription of podcast 'Hidden Forces'.
What the Bailout of SVB Means for the Fed's Fight Against Inflation Steven Kelly #Podcast #Transcription #ReadAlong #KnowledgeUnlocked
happens when you eviscerate a sector is they start to run down their deposits and they start to disappear. And when a bank loses deposits, they have to sell assets. And when the Fed is raising interest rates, your assets aren't worth as much as they used to be. So that's sort of the story. SVBs is similar, except they're much, much bigger. Top 20s bank by asset size in the US, they were banking the tech sector, they're banking Silicon Valley, as the name says. And so as venture capitalists have sort of seen their investment sour, cash burn goes up, they're basically forced into an asset sale. And the thing about banking crises is, and part of why they happen so fast is nobody, there's not really an incentive to be that concerned about banks failing most of the time. There's not an incentive to dig deep into their asset book. We don't even know what the asset book looks like most of the time. It's really the burn of deposits that caused us to look at their asset book and go, holy cow, (6/36)
What's up everybody? My name is Demetri Kofinas and you're listening to Hidden Forces, a podcast that inspires investors, entrepreneurs, and everyday citizens to challenge consensus narratives and to learn how to think critically about the systems of power shaping our world. My guest in this episode of Hidden Forces is Stephen Kelly. Stephen is a senior research associate at the Yale program on financial stability whose work focuses on financial crises and how to fight them. And he occasionally releases research notes on his sub-stack at withoutwarning.substack.com. This conversation was recorded on the morning of Monday, March 13th, less than 24 hours after the Federal Reserve, the Treasury Department, and the FDIC came out with a joint statement assuring depositors at Silicon Valley Bank and Signature Bank that all of their deposits would be fully protected irrespective of whether or not they exceeded the FDIC's $250,000 deposit limit. While this stems the immediate fears of a bank (1/36)
run, the manner in which this was done creates further complications for the Fed and raises more questions than it answers about the direction of monetary policy. My goal in today's conversation has been to recap what has happened thus far, why it happened, how it happened, what the government's response has been, and the implications of that response for monetary policy, financial markets, and the economy. You can find related podcasts to this one on this week's episode page at hiddenforces.io, where you can also access our premium content, including transcripts, intelligence reports, and key takeaway videos by joining one of our three content tiers. All subscribers gain access to our premium feed, which you can listen to using your favorite podcast app, just like you're listening to this episode right now. If you want to join in on the conversation and become a member of the Hidden Forces Genius Community, which includes Q&A calls with guests, access to special research and analysis, (2/36)
in-person events, and dinners, you can also do that on our subscriber page. And if you still have questions, feel free to send an email to info at hiddenforces.io, and I or someone from our team will get right back to you. And with that, please enjoy this incredibly timely conversation with my guest, Stephen Kelly. Stephen Kelly, welcome to Hidden Forces. Thanks, great to be here. It's great having you on, man. So before we get into today's conversation, I'd love for you to tell me a little bit about you, your background, and how you got interested in studying issues of bank regulation and financial stability. Yeah, so really cut my teeth on the global financial crisis working afterwards in capital management, and then moved over to the Yale Program on Financial Stability, where I am now inside the Yale School of Management. And we were born in the aftermath of 2008 to really focus on having a modern break the glass playbook to fight financial crises. You know, Tim Geithner was our (3/36)
founder, and he, of all people, knows how much cost there is to wander around in the dark in crisis time, how costly it can be to lose even an hour, let alone a day or a month, trying to figure things out. So we are focused primarily on crisis fighting, whereas a lot of the world is focused on crisis prevention. We sort of have the political freedom to focus on the fighting measures. So COVID obviously took up a lot of our time, and aside from that, we do a lot of historical research and things like that. So yeah, that's my background here, focused on financial crisis fighting, which unfortunately has become newly relevant. Yeah, exactly. We're told that we weren't going to have to worry about this. We had Dodd-Frank, we had Basel III, we went through a whole financial crisis in 2008, so we wouldn't get back here, and yet we're here. So what I would like to do is do a recap at the very top of what's happened thus far, why it happened, how it happened, and what the government response (4/36)
has been and the implications of that government response, because we're recording this on Monday morning, and so the government announced late Sunday evening that it would make depositors whole at both Signature Bank and Silicon Valley Bank. So what happened here, and what are the origins of what is now the second biggest bank failure in U.S. history after the collapse of Washington Mutual in 2008? Yeah, so these banks basically had business models that were focused on sort of bubbly industries, I guess. So as the Fed has moved us away from a world of zero interest rates to fight inflation, certain industries have come under more pressure than others, crypto being the first to go, obviously a very speculative sort of investment environment. So to the extent you can get interest rates in the real world, you sort of get less interested in what's going on in crypto. So Signature and Silvergate were big crypto banks, they sort of bet the house on banking the crypto sector. And what (5/36)
they have a bunch of unrealized losses. And then the run was on. So they lost $42 billion in deposits in one day last week, and then the FDIC shut them down on Friday. One of the things that's really interesting about the liquidity crunch that Silicon Valley experienced is that in some very important ways, it is very different from what we had in 2008, where we had a systemic crisis of confidence in the banking system, driven by illiquidity and what we're called collateralized debt obligations or CDOs made up primarily of risky mortgages that caused a run on investment banks and money market funds and in the case of AIG insurance companies. What we have in the case of Silicon Valley Bank is a situation where they loaded up on the most pristine high quality collateral like US Treasury securities, but they did so when rates were much lower. And because the duration on much of that portfolio was long, the valuation on those securities got crushed over the last year as the Fed embarked on (7/36)
this very steep tightening cycle. I think it would be extremely helpful if you could walk us through your understanding of how the bank got here and the role played not only by their portfolio management and this duration mismatch, but also what we know about how the run happened, which as I understand it, was driven by the bank's need to raise capital and because of the very concentrated deposit base, venture funds in the valley and their companies caught wind of this and they basically had a bank run. Sure. And a lot of this information is still coming out in real time. And that's another thing that made me to note up front is sort of the nature of when a bank fails and it becomes a crisis or the nature of banking crises is you do these ex post investigations and it looks like a lot of fraud, it looks like a lot of mismanagement. And those things are true, it's just worth noting that those things go on every day in the banking sector and they don't cause bank failures because we (8/36)
don't know about them because we're not investigating them. So, just something to keep in mind as the news drip keeps coming that not everything that this bank messed up doing is the reason it failed. There are simpler business model flaws that are the reason it failed, but we're going to find out more about all the management failures and who messed up where. But that being said, go back to the question. Yeah, the SVB had basically a bunch of interest rate risk that they had short term deposits, they have long term assets, it's sort of the core banking risk. They failed to hedge interest rates using derivatives or anything else like that relative to their competitors. And so basically, as the Fed starts raising interest rates, the valuations on those assets of lower interest rates start to go down and SVB had a bunch of unrealized losses, which again, weren't crucial until they started losing funding. And then you can think of the marginal funder of the bank who wants to fund a bank (9/36)
that's sitting on a bunch of losses they have yet to realize. So that's sort of the story there. That's sort of the sequence of events that it really was the liability book that started disappear and then the world kind of woke up to how bad their assets were. So you've raised an interesting point which has to do with hedging interest rate risk. One of the things that's come out is that there's this distinction between hold to maturity securities and available for sale securities. And the bank made a decision, I guess in 2021 to move a significant portion of their US Treasury and MBS positions into the hold to maturity part of the portfolio, which meant that they, from what I understand, were not able to hedge interest rate risk. In other words, the decision that put them in this situation happened a year or two years ago. Can you clarify that for our listeners, what that distinction is and why it's relevant? Yeah. So basically a bank can account for assets in three ways. One is (10/36)
trading. Two is what's sort of this middle ground that we call available for sale and three is held to maturity. And your accountants are going to make you hold assets for what you actually intend to do with them. So if you're running a trading book, you're going to be in and out in a day, your accountants are going to make you classify that as trading. Available for sale is sort of like a yellow light. We have these assets, if the price is right, we'll sell them, but we're not going to be out of them tomorrow just because. And then held to maturity is exactly what it sounds like. We're holding these assets until they pay off at maturity. And they're accounted for in different ways. Trading assets flow right into the income statement. They affect your capital directly. Available for sale securities, they don't have to be reflected in earnings, but you basically sit on unrealized losses. And held to maturity securities, you can value at cost and they sort of, they amortize over time. So (11/36)
the advantage is in theory, you don't have to report changes on your balance sheet to your held to maturity assets. So it sort of reduces volatility and what you report in your financial statements. You don't mark the assets to market. You certainly don't mark them to market and the changes don't affect your capital. They don't affect your earnings. It's like reverse depreciation over time. And if you say you have a bunch of treasuries in held to maturity, the market can see, okay, rates went up 5%. The market has a sense of how to value that. But it does, your accountants are going to limit what you can do. They can still be hedged. All this can be hedged, but it just, in theory, it affects the accounting. I don't know how much that was really at play because you can have unrealized losses in both categories. And the market's going to be aware of it, especially when it's treasuries. And you can sell stuff out of your held to maturity book, but then your accountants are going to make (12/36)
you reclassify it and you're going to have to book that unrealized loss. So I want to ask this question in a different way or a different aspect of the same overall phenomenon that we're dealing with here. Are we underestimating the risk of bank failures because we've defined risk based on liquidity coverage ratios that rely on, or see US treasuries and things like MBS as very safe collateral, but because the Fed has been hiking interest rates so quickly that there is this duration mismatch. And so this might also bring us into a question about what the government has done in its response and whether it resolves this problem. Yeah, I think that's right. We've sort of built up the post 2008 system on this precept that treasuries and MBS are, particularly treasuries, are rock solid, both from a credit and liquidity perspective. And that's sort of unavoidable. I mean, we wrote it into law in particular post 2008, but it was always the de facto case. I mean, it's just how banks manage (13/36)
liquidity is how the government thought about these markets. The Treasury market underwrites the whole global economy. Every interest rate is based off what's going on the Treasury market. There's just no way around it. So yeah, I think that does lead nicely into what we saw from the Federal Reserve response, which is basically to think about the losses on the, to basically underwrite losses in these markets. And this is a theme we see again and again, and started in a big way with quantitative easing in 2008, which is just mass purchases of Treasury securities. These markets are essential and they're all the more essential when you write a system of laws that sort of depends on their continued stability. So yeah, I don't think that we're necessarily overconfident or underconfident. It's the Fed's job to underwrite this system going forward. So what prompted this conversation, Stephen, was that you put out a thread over the weekend throwing cold water on the idea that the government (14/36)
can just bail out SVB, Silicon Valley Bank, without legislation from Congress. You wrote that crisis fighters authorities were curtailed following 2008. The Fed and Treasury almost certainly can't rescue SVB now. Maybe the FDIC can. How did the government justify this bailout? And what was it about the way that they did it that took you so by surprise? I would say not much of it took me by surprise, aside from maybe the fact that they did it. I mean, I was maybe on the edge of that, but that's exactly what happened is the FDIC stepped in and rescued the uninsured depositors. But SVB is still, you know, it's in receivership. It's on the way out. It's, you know, the FDIC is selling the assets. It's going to sell the business. So what I'm getting is that they identified it as a systemic risk. And your tweet thread, you made a point that you thought that they wouldn't do that because it didn't represent a systemic risk. And many other analysts have said the same thing, that it didn't (15/36)
represent a systemic risk, but they labeled it a systemic risk nonetheless. And what I'm actually interested in, well, there are a lot of things I'm interested in, but one of them is I want to understand how do they justify this? Because one of the things that I learned in the 2008 financial crisis was that when push comes to shove, the government can do anything. And one of the things that I've learned to try to understand is how do they justify the things that they do? So I'm curious to understand legally, how do they justify this? How did this fall within their regulatory purview? Yeah. And the first thing I'll say is maybe to push back on some of the critique that the Fed will bend its laws as necessary in a crisis. They do take this very seriously. And, you know, so I was thinking in advance of this, okay, if the Fed is willing to call this systemic, because the Fed has to sign off on the FDIC's use of the systemic risk exception. And so if the Fed signs off on that, then they (16/36)
really see this as systemic. And part of this decision, I think, is justified from a risk management perspective. As I noted, you know, Dodd-Frank took away a lot of crisis fighting and responsibilities. The crisis response, while largely successful in 2008, was really unpopular. And Dodd-Frank and Tarp, for that matter, took away a lot of crisis fighting authorities. And so authorities today are left with very few powers to intervene outside of banks that are already in receivership. So in 2008, we did mass bank debt guarantees. We did these huge interventions for Citigroup, for Bank of America, open bank assistance. And most of that is no longer legal. So for the Fed, the FDIC, the Treasury, to take over SVB and put in the systemic risk exception, write a new program, you know, for the Fed to backstop liquidity writ large, it's a smart risk management play to say, look, this thing isn't systemic. But once something is systemic, we no longer have the tools. It'll be too late. We no (17/36)
longer have the tools to stop this. We're not going to wait until the next bank, whether it's called US Bank, called PNC, some bigger bank, some more systemic bank is already in receivership. So what are the important details of the government's rescue that are relevant here, that we should focus on and try to understand? So the biggest thing is the FDIC is standing behind uninsured depositors in SVB and in signature, both banks that it took over. So it used to have authorities to stand behind to basically write such a program for the whole system. It's since lost that authority in the law. But it's taken over these two banks, it's standing behind the uninsured depositors. So that's a big piece. And I think that was the biggest concern. And that was probably their biggest motivation. Shareholders will be wiped out. Management has been removed from these banks. Unsecured bondholders will get some sort of share of their investment, but that remains to be seen in liquidation. So that's (18/36)
the big piece for the FDIC and the banks they took over. The Fed has also backstopped the banking system writ large with a new term lending program. So they're lending for up to a year against basically the face value of treasury securities and MBS. So they're sort of saying, okay, we know we've done a lot of interest rate increases, which have destroyed the value of treasury. I mean, anything, basically all financial assets are priced off interest rates, but we're going to at least stand behind agency debt, which is de facto guaranteed by the US government and treasuries. And we're going to value them at par, at face value, and we'll lend to you against those. So they've sort of underwritten this interest rate risk. They haven't underwritten what started at Silicon Valley Bank, which was problems in the tech sector and that kind of run. But they've said, look, if problems migrate to the asset book, we will stand behind it. That seems like, if not a big story, the big story here. (19/36)
Absolutely. Absolutely. I mean, not only a rebuke of, mark to market accounting or market value accounting, but also of just risk. I mean, this is risky, you know, on its face for the Fed. Like these securities are going to pay off. There's not credit risk to these securities that the Fed might take. But to have 0% haircuts on long-term assets to do a one-year program and basically ignore even the market value of these assets and lend against par, I mean, you could have a 30-year treasury trading at 80 cents on the dollar and get 100 cents from the Fed for it. That's new. That's different. I mean, that's a watershed. You know, in moments like this, I feel the impulse to say an unhedged, very non-nuance statement like the system is insolvent. You know, obviously the system is not insolvent, if you want to take that to the limit. But what we just seem to be doing is moving closer, more and more towards the government and the central banks taking more and more control of the financial (20/36)
system, because there's so much debt in the system and it's so levered that it cannot function in the way that our frameworks have tell us that it does. Because this isn't 1980 or 1970 or 1960 or 1990. It's 2023 and a lot of stuff is broken in the interim. And the Fed has come up with a lot of patchwork solutions in the process. And here we had, Dodd-Frank, we had years of re-regulation of the banking system post-2008 expressly for the purpose of avoiding this kind of ad hoc solution. And I'm curious, is it a kind of fool's errand to even wonder whether or not this crisis is going to lead to some kind of more formalized regulation? Or is this just an affirmation of the fact that we're in this, this is the world that we're going to live in until there's some kind of larger reset to the system? So I'm going to back up your unhedged statement and say, the banking system is always conditionally insolvent, which is that balance sheets are sort of like a bicycle and that they have to keep (21/36)
functioning, they have to, you have to keep peddling to keep them moving forward, they're going to tip over. And the minute that machine stops, we have these conversations over, oh, let's look and see if they're solvent or not. That doesn't matter. Whether a bank is balance sheet solvent, whether their assets are more their liabilities, is irrelevant if nobody's going to transact with them. That bank is over if it can't go to market and get funding and be there for its customers to do loans. So the system's always conditionally insolvent and that's why we have financial crises and it's why you can regulate these things to death and it's always going to be too much or never enough. Right? I mean, so we have way better regulation. We have stability at the core of the system versus 2008. But the pre-2008 banking model of let's leverage the system, to all hell, like let's run these things as lean as we can, is probably the right thing most of the time. Bank capital, bank equity is a scarce (22/36)
resource and what we want out of the banking system is deposits and loans. So there's an incentive to run the system as lean as possible with as little capital, little liquidity set aside as possible. That being said, you can increase the requirements and I'm sure that's the direction that Congress is going to go, whether that's the right lesson here or not. They're going to tighten the screws on capital and liquidity, particularly amongst big and big-ish banks. That's the last time though. Right. That's exactly the point, is you can turn the screws all the way up until you get to 100% and then you've just told banks they can't be banks anymore. I mean, you can be a place that takes dollar bills and puts them in a cookie jar and you have perfect liquidity and you don't need any capital, but you're no longer a bank. I mean, where are those dollars coming from? You're not creating the money, you're not creating deposits that run the economy. So I'm curious to know where we go from here. (23/36)
One, what are the implications of the Fed's response, not just for the banking system, but also for other parts of the economy? For example, mortgage rates, how are those affected? Silicon Valley Bank has, I think, an MBS portfolio of like $55 billion in the whole to maturity bucket. Do they unwind that? What happens when they do? That's just one example. I mean, I know commercial real estate and real estate in general is so upside down because of these massive rate hikes. The math doesn't work for a lot of these properties. Either rents need to go up or prices on properties need to go down. So I'm curious, again, one, what are the implications of the response? Two, what areas of the economy are most vulnerable that we might be keeping an eye out for? And three, what does this mean or portend for monetary policy? Does this actually enable the Fed to take rates even higher or maintain credit conditions as tight as they are for longer because they're putting one hand on the banking (24/36)
system and maintaining stability or trying to maintain stability while also using rates to contract economic growth and bring down inflation? Is that the strategy here? I think that's exactly right. And I'm going to answer the questions in reverse. I think this has implications for monetary policy to the extent this can effectively put a lid on financial instability. And that remains to be seen. The Fed gets a lot more room on monetary policy. So the Fed's strategy has explicitly been to tighten financial conditions. It wants to use its interest rates to tighten financial conditions, make credit scarcer, take some of the froth out of the system. That's Bennett's explicit goal. The Fed is in a unique position in that it's also responsible for the safety of the banking system. It's a bank supervisor. It's focused on financial stability. So it's in this weird position where it wants to tighten financial conditions and not hurt the safety of banks, basically the core of our financial (25/36)
system. So this really does put kind of a hand on both sides of the scale and is elegant from the Fed's perspective. In that sense, in that this gives them more room, they've underwritten the banking system, they can continue to tighten financial conditions surrounding the banking system. And that goes back to your question about where the vulnerabilities lie. To some extent, those vulnerabilities are what the Fed is trying to wash out of the system. It was trying to wash out the froth in tech. It was trying to wash out crypto. So thinking about where the weaknesses lie, part of this is a policy goal. Part of this is exactly what the Fed's trying to do when you see a bankruptcy at a thinly capitalized mortgage lender. That's not a policy failure from the Fed's view. But once you start talking about a bank failure, this gets a little dicey here and the Fed has sort of a mixed set of responsibilities. So I would encourage listeners to go back and listen to episode 243 with Russell Napier (26/36)
because I think Russell has nailed what I think is actually the path here. And this confirms that, which is to say that there's going to be credit rationing because there's just kind of no way around it. And that's what we're seeing here, because raising rates on the one hand and creating lending facilities on the other is a way of making choices about where money goes, at what price, who gets it, how. And like you said, the official mandates of the Fed are inflation fighting and maintaining, balancing inflation and employment. But there's also financial stability and actually financial stability, the unstated one is actually, I would say the priority. The second is inflation. The third is employment. And once we get down the stack to employment, now I'm opining here, but I'm curious to hear what you have to say. I think that we eventually get to a place where the government begins to enact fiscal transfers or fiscal subsidies, whether it's to particular parts of the economy, to labor, (27/36)
et cetera. And then we get into a really discombobulated place where the Fed is trying to run monetary policy at the same time maintaining credit facilities to prevent financial stability. And then you have the government, which is motivated, or the fiscal side of the government, which is motivated by stronger political pressures, trying to maintain political stability. Everything's kind of at each other at cross directions here. Yeah, no. And that's certainly a risk. And we sort of saw this where, especially when inflation started roaring, some countries were sending out checks to citizens to help them bear the cost of inflation. And you can imagine how that immediately would make inflation worse. So these things are always at crossroads. And this is sort of an evergreen problem, especially between the fiscal and monetary authority. I mean, there are other examples too, where the Fed goes out and buys long-term treasuries because it's engaging in QE, not currently, but that's a common (28/36)
recession response. And how does the treasury respond? It goes, oh, hey, look, why don't we issue a whole bunch of long-term debt because now we have a new buyer at that end of the curve. And our responsibility is to minimize interest rate costs. And so you sort of have the Fed and treasury, the fiscal authority, the monetary authority working at cross purposes. And we could see that. I mean, right now we're seeing the Fed battle with itself between financial stability and price stability, which is not without historical precedent. They've done this sort of thing before, maybe not as newsworthy of fashion, but these tensions come up and the Fed's financial stability tools are there for hawkish times too, not just dovish recession times. So we don't remember this as well because the playbook has been the same since 2008, cut rates by trillions of dollars of assets and then do these credit facilities. We did that in 2008. We did it in 2020. But we can do these things when rates are high (29/36)
too. I mean, we can think about inflation as very much akin to the Fed has hit the zero lower bound on interest rates. That's where we were in 2008 and 2020. The Fed couldn't cut rates. Now we're sort of in a world where the Fed won't cut rates. And so as stuff starts to break, the Fed needs to intervene and sort of target specific markets that it wants to maintain. In this case, it's the banking system. So we'll see these tensions go forward. I'm not as worried that we'll start to get fiscal transfers, but I'm not a political T. U. Lee Freider and that's certainly possible. They got to figure out the debt ceiling first, I guess, but after that. So I'm going to kind of further enunciate what I was talking about before and I'm curious to get your take on it. I feel like the government has two major problems right now. One is inflation, which falls within the Fed's mandate. And the other is this wealth gap problem, this long-term disequilibrium in society that's leaking into our politics (30/36)
and creating a lot of political instability. And I've always felt that one way or the other, the government's going to have to find a way to address that. And ironically, if you want to talk about cross purposes, the pandemic response began to address that, but it caused inflation. And so the Fed is responding to that inflation with higher rates, which causes higher levels of unemployment and instability. Now they're trying to get their hands on the instability portion, but that still doesn't solve the problem of employment. And that's where I feel like once employment gets out of control, assuming that it does, assuming that it's an assumption, but there's a good reason to make it, that these credit conditions are going to have a really serious effect on the economy and the long and variable lags aspect of monetary policy is going to show up at some point, maybe later this year. At that point, do you see, I mean, maybe I kind of asked this, but I'm trying to enunciate it more clearly, (31/36)
do you see that this is eventually where we go and how does that work from a policy perspective? I mean, have you considered that? I know it falls kind of, I don't think it's a conspiracy, I don't think it falls within the conspiracy bucket, but it does fall within the kind of creative, maybe you don't want to say this if you're like a professional working in academia type question. Well, that's the beauty of academia is, I can say the sky is green and get a promotion. But I mean, I just want to hedge this, you know, my work is financial stability, and this is a little bit of a long-term structural growth question. But yeah, I think one thing that maybe the Fed would be more comfortable with, and we sort of learned this lesson in 2008, is that if we really hit an employment rough patch and a financial stability rough patch down the line and inflation has not yet fallen, I think that would test the Fed to resolve. And the Fed, you know, I'm less confident that we would be stuck in a (32/36)
world where the financial system was breaking or fragile, unemployment was high, and inflation was continuing. I mean, that's certainly not impossible, but I think the Fed would see itself as sort of, you know, having gone too far, you can call it long and variable legs. And maybe just to go back to the genesis of this conversation, I think SVB is probably at the margin making the Fed think harder about the long and variable legs and sort of where things are breaking. You know, the Fed has had a sense, especially in recent weeks and months, that it's not as far along in the hiking processes as it thought it was. And to me, the Silicon Valley Bank situation says the opposite, that maybe the Fed is actually a little further along, and things are a little more fragile than they realize. So, you know, we're seeing some great resets in the market already, and the Fed has a meeting, we're recording this on the 13th, the Fed has a meeting in eight days, they'll make a decision in nine days. (33/36)
And so, you know, we'll see what comes from that. People were talking 50 basis points, and now a lot of banks are moving towards zero. So, again, we may already see. What do you think? I don't know, I don't think the Fed wants to ease off. 25 seems reasonable to me, but, you know, we'll get a sense of where the Fed is thinking about how financial stability is impacting employment and inflation longer term, even though we haven't seen it. And so, maybe these tensions will start to play slash ease out already next week. Yeah, maybe we should get Nick Timmerios back on the podcast, and he can spill the beans for us. So, major takeaways are deposits are safe at regional banks. I mean, I think that's a fair assumption out of May going forward, people have their deposits. That doesn't mean keep your deposits there, this is not financial advice. I'm just saying that's kind of the takeaway. And we're not out of the woods yet. And all eyes on the Fed to see how they respond to this and what the (34/36)
priorities are in terms of monetary policy. Stephen, thank you so much. This was wonderful. If people want to follow you, follow your work, how can they do that? Best thing would be to follow me on Twitter, Stephen Kelly 49. I have a sub stack called Without Warning, free research notes. And then follow the Yale Program on Financial Stability. We have a weekly newsletter. Fantastic. Thank you for this update, Stephen. I really appreciate it. Thanks. Great to be here. If you want to listen in on the rest of today's conversation, head over to hiddenforces.io slash subscribe and join our premium feed. If you want to join in on the conversation and become a member of the Hidden Forces Genius Community, you can also do that through our subscriber page. Today's episode was produced by me and edited by Stylianos Nicolaou. For more episodes, you can check out our website at hiddenforces.io. You can follow me on Twitter at cofinas, and you can email me at info at hiddenforces.io. As always, (35/36)
thanks for listening. We'll see you next time. (36/36)
This is the full transcription of podcast 'Hidden Forces'.
The Memory Thief & the Secrets Behind How We Remember Lauren Aguirre #Podcast #Transcription #ReadAlong #KnowledgeUnlocked
spent with him, we kind of drove around and he, we stopped at a coffee shop and he said, oh, let's play Scrabble, but he had never played the board game version of it. He had only ever played it on his phone. So he hadn't had to learn the rules. And so every turn he would say, how many letters in the tray? And I'd have to say seven. So, and yet he beat me. He has a much better vocabulary than I have. So that sort of shows you the specificity of this type of memory loss that you have your prior knowledge. You just don't have the ability to make new memories. So I have a question about this. One, how is he emotionally at this point in time? Has he accepted his condition? And is he more or less emotionally grounded in that? And the other question is, because this is something again, that I related with so many of the stories in the book, and Owens in particular. I mean, I did those cognitive tests. They were scary, frustrating. I had an appointment at NYU with a cognitive psychologist (23/37)
What's up, everybody? My name is Dimitri Gafinas, and you're listening to Hidden Forces, a podcast that inspires investors, entrepreneurs, and everyday citizens to challenge consensus narratives and to learn how to think critically about the systems of power shaping our world. My guest in this week's episode is Lauren Aguirre, an award-winning science journalist whose book The Mind Thief tells the story of a team of doctors who through years of investigation discover a surprising connection between the use of opioids, specifically fentanyl, and memory loss. This condition, first discovered in overdose victims with severe damage to their hippocampus, has since led to a series of discoveries about the nature of memory, as well as the mysteries that persist about how we remember, where memories live, how they're formed, and why we forget most of what happens to us in a day but can remember some events with stunning clarity, years, even decades later. Perhaps the greatest mystery that (1/37)
Lauren tackles in her book, however, is why Alzheimer's, a degenerative brain disease responsible for causing dementia and early death, has continued to evade scientific capture despite afflicting tens of millions of people around the world. It's one of the questions we explored during the episode over time, where Lauren also shares information about some of the more promising new strategies and developments that may finally lead to an effective treatment and perhaps even cure of this devastating disease. So without any further ado, please enjoy this week's highly informative and eye-opening conversation with my guest, journalist, and author, Lauren Aguirre. Lauren Aguirre, welcome to Hidden Forces. Hi, Dimitri. I'm happy to be here. It's great having you on, Lauren. So I'm very excited to talk about your book. The title of the book is The Memory Thief and the Secrets Behind How We Remember. What would you say the book is about and what is it about memory specifically that intrigues (2/37)
you so much? Okay, so I'll start with the subject of memory and why it intrigues me. Of course, it intrigues everyone. And as you go around and tell people, hey, I'm writing a book about memory, they say, oh, my memory is terrible. But in this case, I was particularly interested in memory because like you, I have a brain abnormality that I was completely unaware of until I started having these bizarre kind of deja vu moments more and more frequently where it seemed like I had done exactly that thing before, but obviously I hadn't. So that's a trick of memory. But then early one morning, it was much worse. And what happened was it's called ja me vu. So this feeling of dread crept over me. And at the same time, my memories just completely slipped away. So I no longer knew where I was, where in time or even history I was. And most of all, I didn't know who I was. So if you had walked into the room at that moment and said, hey, I'm Dimitri, who are you, I could not have told you. So that (3/37)
was so terrifying that I lay face down on the floor and close my eyes and just hoped it would pass. Unfortunately, it did after a few minutes. So I picked myself up, took myself to the doctor and she said, that sounds like a seizure. You might have a brain tumor. So lots and lots of tests and EEGs and MRIs and consultations. One neurosurgeon said, well, that could be cancerous, we should take it out. But I got a lot of second opinions, because as you can imagine, that that wasn't high on my list was to open up my brain right from the get go. So one of the people I asked for his opinion on it was someone I knew a neurologist named Jed Barish. And he came over to my house and looked at my brain scan. And I have a pretty gnarly looking right front to low, but he looked through it and he said, you know what, you're going to be fine. You should just take your medicine and I think everything's going to be okay. So that was the course I took and he was absolutely right. And the only thing it (4/37)
really left me with was, you know, a fascination for weird brains and a very deep respect for how frightening it is to lose your memory. How did that experience help you in writing this book and in the research that you did beyond simply just giving you an interest in the subject? Did it help that you knew intuitively how bizarre an experience it can be to lose your memory? I think it probably helped. Of course, I can't run the control experiment, but I was possibly much more sensitive to what it feels like to lose your memory in terms of talking to people to whom this happened or to their family members. And the other connection was that Jed Barish, the neurologist who looked at my scan, three years later, saw the first patient who had this strange new brain injury. And what this injury is is sort of like a chemically induced brain injury where people who overdose on fentanyl and only a tiny fraction of people who overdose on fentanyl, which is in and of itself mysterious, for them, (5/37)
fentanyl hones in on the hippocampus and causes severe, severe damage such that when they come to from the overdose, they have what you had, they had enterograde amnesia and they can't remember anything for more than 30 seconds. So, if they're in the hospital, they'll wake up, they'll say, why am I here? And the mother will say, you overdosed and they'll be sad and upset about it. And then they'll forget and 30 seconds later, they'll ask the same question. So, if I remember correctly, Jed Barish was not the first physician in your book to encounter this issue, documented at least. What is the first documented case that we have of patients presenting in hospitals with this type of brain injury? That actually was the first case, but I think what you're referring to is I opened the book with kind of a flash forward in 2018 of a patient who had this happen to him and woke up and none of his doctors knew what it was, even though these patients had been identified starting with that first (6/37)
one in 2012. Right, the patient who had been a heroin user, I think 15 or 20 years ago, is that the patient you're describing? The patient had been, I call him Owen Rivers in the book, just to protect his privacy. He had actually become addicted to drugs starting at the age of 11 when he found some Vicodin in his neighbor's medicine cabinet, sort of classic story that you hear about. And he progressed to more and more drugs and higher and higher, more potent opioids to ultimately to fentanyl. And all the while, he is a very, very unusual story because all the while he grew increasingly concerned about his memory loss to the point of spending hours every day writing down lists of things to do, things he mustn't forget, and also journaling just about his thoughts about the day. And this became really a debilitating obsession for him. He was also very, very intelligent. So despite this really frequent drug use, he went to a prestigious university, he studied the neurobiology of memory, he (7/37)
studied how drugs affect memory. But then finally, he succeeded in being sober for about 18 months. This was several years after he graduated, but it was always hard and the cravings were always there. And then he experienced a seizure, basically an aura. He started smelling things that no one else could smell. So he took himself to the doctor and the doctor said, I think you might have a tumor, let's get an MRI. So he was waiting for the results. There was a first MRI that was suggestive, so he had to go for a second. And he was ecstatic. I mean, I was terrified. But he was ecstatic because this was his ticket to go back to using fentanyl. If there wasn't any fear of letting people down, and that was what was keeping him sober, if he was going to die of cancer, he could go back to it. So he was happy for about two weeks. And then one night, he got an email from his doctor saying, great news, there's no tumor, you're actually fine. And that was such devastating news that he went on (8/37)
Craigslist, found some fentanyl, drove out to get it, came back, used it, and when he woke up, he had this same enterograde amnesia. I mean, obviously that's disturbing on so many levels, one emotionally to have that sort of reaction to what is ostensibly good news. But also to wake up with this kind of brain injury, can you describe for our listeners what we're talking about here, what it is that actually occurs both biologically and then also phenomenologically to individuals that experience this? So phenomenologically, like I said, he wakes up in the hospital, but he, having studied memory, it's much more salient to him. And the doctor knows this. So the doctor says, you overdosed and you damaged your hippocampus. And he says, what my hippocampus and, you know, immediately starts crying because he knows what that means. But then he gets distracted, you know, his doctor wore the same shoes that he wore, and he noticed that and he said, oh, hey, doc, you're wearing Doc Martens. And (9/37)
the doctor's like, yep, I'm wearing Doc Martens. And then he walks around the foot of the bed and comes back into view and, oh, and says, hey, doc, you're wearing Doc Martens. So, you know, that's sort of funny. And actually his family, they sort of laughed about it. But ultimately, it's just such a disassociation from your life. And for him, it becomes hard to maintain relationships because their lives have moved on. So he still remembers everything that happened to him before. But he can't lay down any new memories, because that's what the hippocampus does is it allows you to form new memories. So his best friend might have broken up with his girlfriend and told him that the night before. And he'll go out and have lunch with him and not know and sort of step in it. So he's sort of stuck in this permanent present and can't kind of piece things together. Now, he's still, it's interesting because he still remembers emotions, but he can't attach them to a specific episode or a specific (10/37)
event. And time is really difficult for him. Like on his birthday, he didn't remember how old he was. He had to do the math to figure it out. Yeah, that's, to that point, sort of flesh out for listeners, what you're saying in terms of emotionally is, for example, if someone attacks him on the street, if he were to meet that person again, he may very well feel the emotions associated with that experience and have negative feelings towards that individual, but not understand why or recall the event. That's exactly right. Yeah, he might have some vague sense of it, but he won't be able to put it together in a scene. And this is one of the ideas about what the hippocampus does is it's a scene constructor. So it pulls together the sights, the sounds, the smells, the emotions, the order of things and creates an episode. So there are two ways we can take this conversation. One is that we can take this opportunity to explore a bit more for listeners how it is that we understand that memory (11/37)
works, the role of the hippocampus, where memories are stored, how they're tagged, how they're used and stitched together in a timeline to create a narrative about a story about the past and how the role that all of this plays in our capacity for imagination, which is so powerful and oftentimes underlooked and something that you do discuss in the book. Otherwise, we could continue the conversation around the main story of the book, which is actually trying to figure out who or what the memory thief is, what's causing all of these injuries. So I leave that up to you. Okay. Well, I think we should continue with the memory thief, because if I go into memory, you'll forget where I started, not you, but my listeners. So it won't make as much sense. And I really did try from a narrative perspective, because the field of memory is so vast, to somewhat limit myself to the concepts that would make sense in light of this story. So throughout the book, I go back and forth between this (12/37)
investigation and what we know about how memory works and how we know it and what we know about Alzheimer's disease. So to go back to the investigation, it was 2012 when Jed Barish and other doctors saw this first patient, and they just didn't know what to make of it. They had never seen a brain scan that looked like that, where just the hippocampus showed up as being damaged. And what happens is, when neurons die, the blood flow changes and it can't move through that tissue as well. And so this particular type of MRI picks that up, that the water is not moving as it should. And then that bit of brain tissue will glow. It'll show up bright and the rest of the brain will be like a dark gray. So as Barish described it, it was almost like someone took a page out of his neuroanatomy textbook and outlined just the hippocampus, which is very unusual for just one part of a brain to be damaged. So that was 2012. And the doctors at Leahy in Burlington, where they saw this patient, didn't know (13/37)
what to make of it. And lots of neurologists will see such flukes and kind of filed them away in the back of their minds because they don't know what to make of it. And then a few years later, a construction worker from New Hampshire came in with his wife and mother for answers. He had two months earlier experienced the same sudden amnesia. His family had gone away for the weekend and he was fine when they left. And when they came back, he was just like Owen and just like Max, the 2012 patient. So Barish wasn't, he hadn't yet connected the dots with Max, but he found out that the patient did have a history of heroin use. And when, then when he put the scan in and looked at it, it was exactly the same pattern as Max. So then at that point, you say, okay, it's opioids are the connection, but people have been misusing heroin for many decades. And I'm not seeing cases like this when I go into the literature. So what has changed? And he has epidemiological training. So he thinks about it in (14/37)
that kind of big picture population way. Well, what had changed, especially in Massachusetts is that starting in 2012, fentanyl was making its way into the drug supply. And so people were often taking fentanyl without knowing it. That's still true today. And it's part of what's driving the opioid overdose deaths. So if there were two people, two people isn't a lot, but for him, he thought there's something important here. So he reached out to the CDC and said, you know, we have no way of knowing how many other people there are like this out there. You know, what about putting out a nationwide call for more cases? And they came back and said, you know, it's just two, it could be a coincidence, it could be amnestic shellfish poisoning. There's really not enough to go on here. So then he went to the Department of Public Health in Massachusetts, where the state epidemiologist, Aldi Maria said, wow, that's really interesting. If you find a few more cases, I'll put out a health alert in (15/37)
Massachusetts. So maybe nine or so months later, they did come across two more patients at Leahy, which makes you think it's got to be a fair bit more common because that's just one hospital in Massachusetts. So at that point, they did put out a call to all Massachusetts doctors, and within minutes started getting emails back. Oh, I've seen such a patient, 49 year old male, history of heroin use, complete enterograde amnesia. So they got about 25 reports. Not all of them met the criteria that they laid out, but an additional 10. So that got them an additional 10. So this was a cluster of 14 patients associated with opioid use with this image. All at Leahy. No. So the first four were at Leahy, and then the 10 others were from mostly from the Boston area. So this time the CDC took note and a report was published in the MMWR, Morbidity and Mortality Weekly Report. And that's when the media picked up on it. And that's when I said, hmm, this sounds really interesting. And is there more to (16/37)
it? And it turned out there's a lot more to it. So first of all, how do you find out if your hunch that it's fentanyl is correct? Because ironically enough, none of those 14 tested positive for fentanyl, but that's because they weren't tested for fentanyl, which seems surprising, but it's expensive to test for fentanyl. You have to send it out to another hospital. And many people are taking multiple drugs. They might be taking heroin mixed with fentanyl. So if you do a drug screen for an overdose patient in the hospital, and you get opiates and amphetamines, you're done. You understand why they overdosed, but you don't know if they took fentanyl. And you also don't know, in addition, whether it was one of the other drugs or whether it was some cocktail that led to that outcome. Right. You don't know that. And you also don't know, is it a toxic contaminant and not fentanyl or some other drug? So what they really needed was someone who took fentanyl, for sure, let's start there, and then (17/37)
someone who only took fentanyl. So that took a while to get to, but Barrish stumbled across a neuropsychologist in West Virginia who had seen one of these patients, but chalked it up to amphetamines, because he wasn't tested for fentanyl. So Barrish called him up and said, you know, if you see this again, can you test for fentanyl? So a short time later, in fact, that did happen, and the person was positive for fentanyl, but he was also positive for a handful of other drugs. So another option was to look at the chief medical examiner in Massachusetts at their office, because they do test for fentanyl when someone dies of an overdose. But for complicated reasons, that just didn't seem like an appropriate research project. But then the third option was go back to the Massachusetts doctor community with another alert from the Department of Public Health and say, if you see another such patient, it would be great if you could test for fentanyl. So very quickly, they got four such cases, (18/37)
three of them had other drugs, but one used fentanyl alone. So that was, okay, we know for sure that fentanyl alone can cause this damage, although there was still the lingering question of a toxic contaminant. Exactly. Because it's a street drug who knows what was in it. But then shortly thereafter, a woman in Canada, 63-year-old woman in Canada who was prescribed fentanyl patches for severe pain, used two one night instead of one, and she woke up with this exact same condition. So that pretty much rules out the idea of a contaminant. So I have a question there, which is two patches, I mean, I don't know how much more fentanyl that is than the prescribed dose. It doesn't sound like that much. I mean, certainly, when you compare it to Owen's case, for example, it sounded like in that case, he took way more fentanyl. So I mean, how are they able to distinguish, and let's say in this case, they have one patient, she was an older patient, if I remember correctly, she didn't take anywhere (19/37)
near as much, if I'm not mistaken, as let's say some of these other overdose patients. And granted, we know for sure that there weren't any contaminants, or at the very least, if it was contaminated, it was contaminated from a regulated laboratory. It's still just one patient. So where did the investigation lead from there? What conclusions could they draw, and what additional measures could they take in order to try and gain more confidence around this diagnosis? Right. So to answer your point about the dose, that depends a lot on the person. I don't actually know, you're probably right that Owen took more than she did, but the dose is affected by the person. So if she also hadn't used her fentanyl patches in a while, she then was not tolerant to it. She hadn't built up that tolerance. If I remember correctly, that might have been the case. But in order to dig deeper, obviously, they need more patients. And they are very hard to find for a number of reasons, not least of which is the (20/37)
stigma surrounding people who have substance use disorders, who we often just don't seem to care as much about. But they also, most of these patients had either passed away or disappeared. So you couldn't do follow-up and say, well, what exactly did the damage look like later on, once that initial injury had kind of healed? What was the permanent damage? How did it affect the hippocampus in different ways? How much did it shrink it? And what does their long-term memory impairment look like? So that's where the story of Owen Rivers becomes so important in the investigation. Because he had had an MRI before he overdosed, they knew exactly what his hippocampus looked like then. They had the MRI from the overdose. And he, because he really wanted to make some sort of meaning out of his tragedy, and if not find answers for himself, at least sort of help the investigation, he agreed to go to the Memory and Aging Center at the University of California in San Francisco and participate in (21/37)
research. So there they did these really advanced kind of volumetric studies of his hippocampus and found that it had shrunk by about 10%. It doesn't sound like a lot, but that's as much as a 60-year-old would lose in a decade. And it also sort of shrunk in a, not in a uniform way, which would lead you more to think that it's not something like hypoxia, which many doctors sort of initially, when I described the syndrome, would say, oh, well, they're deprived of oxygen and that's what it is. But that tends to be a more diffuse injury. It wouldn't have that specificity to it. It almost certainly does contribute to the injury. So they learned that about the imaging, and then they also did really advanced neuropsychological testing and found that his episodic memory, so his memory for new events and new information, was on par with someone with advanced Alzheimer's. But the rest of his cognitive function was pretty much intact. I mean, he is very intelligent, as I said, and one day that I (22/37)
there who ran me through a bunch of tests. And it was incredibly frustrating and scary to see just how awful my results were in real time. And I was deeply emotionally disturbed during this time. But the thing that I wanted to ask you also is in addition to how he felt, the thing that I never really understood for myself was I couldn't remember anything, but I could remember that I couldn't remember. So he's able to remember that. How are they able, has anyone been able to provide some answers as to how it is that Owen knows that he has a brain injury and yet can't remember anything after the brain injury, but he can remember that he has a brain injury? Yeah, that's really interesting. I'm not sure I have an answer for that. Maybe that requires an injury that is bigger than the hippocampus. The doctor, the neuropsychologist who found the West Virginia patient told me about a stroke patient that he had. And I think her damage was definitely to the hippocampus, but might have been (24/37)
broader. And for her, it was very, very difficult for him to teach her, why are you here? And that took massive repetition. But once she understood that she had a memory problem, then she was kind of available for, okay, I understand that I need some strategies to have some kind of independence. And so he harnessed a different memory system that does not involve the hippocampus, which is procedural memory, which is things like riding a bike. And through that, he was able to teach her sort of how to move through her house, how to move through the day and take her pills and make her coffee. So yeah, that's a really interesting question as to how he knew, but he definitely knew that he couldn't remember. So as to how he feels now, I asked five people who were prominent in the book to write an essay for the end of it, just to give their perspective on what did this mean to them. And he wrote the most beautiful essay I've reread it so many times, because he describes what it's like and the (25/37)
frustration, but also the irony of he is, he feels he has become sort of like the patient that he used to study, HM, the patient who had his hippocampus removed to treat epilepsy, and that's how they learned, oh, you need your hippocampus to make new memories. So he had studied this patient over and over again to the point where it was sort of annoying. And then he was like, wow, I'm like HM. And that's what he felt like when he got the news of how bad his memory was. But he's also, you know, he says, I wish there had been some sort of more kinder, more gentler way to impart this lesson of having gratitude for what you do have. And so he is just very grateful for his friends and his family and his support and everything that he learned before that he can still use. And strangely enough, the, you know, obsession of list writing and journaling that was so bothersome to him before are now the strategies that he needs to survive. Like if if he had not honed those skills, he would be in (26/37)
much worse shape right now. So he has a job, he takes classes at a community college, you know, and he has a life and it's very different from what he thought it would be, but he's mostly grateful. So you said he takes classes at community college. How does he retain that information? What are the systems that he's developed to be able to actually learn considering that his short term memory has been so badly impaired? Notetaking. So if he doesn't remember, he goes back and looks at his notes. And remember, his hippocampus isn't removed. So it's not like a complete inability to remember things. And it's also some things are harder than others. So like spatial information is completely gone. Like, does that also mean that in abstract terms, he can't distinguish positioning? For example, does he know that Boston is north of New York? Right. I remember you saying that was a problem for you. I never asked him that, but he did, you know, one of his jobs involved working at a senior center (27/37)
and going around on a little cart and collecting quarters from the laundromat. And there was no map. And it was a different route every day. But because of the tools that we have and Google maps and because he's really intelligent, he figured out a system to make that work. So in a way, it doesn't really matter to him whether, you know, Boston is north of New York or not. But he did feel like people at the senior center wondered why he was constantly taking notes. But that's what he needed to do to remember the rules, to remember who was who. Yeah. So I did ask you, and I am curious how he copes with this emotionally. You said he feels gratitude, but is there a heightened, would he say that he's more anxious or would he be described as being more anxious now post injury than he was prior? I don't think so. Because part of what really fed into his substance use disorder was obsessive compulsive disorder. So his, what he refers to as memory hoarding, his list writing and journaling was (28/37)
the manifestation of his OCD, which had been very resistant to treatment. And he also suffered from depression and anxiety. So mental illness is definitely a risk factor for substance use disorders. So after the overdose, he finally got into a program at UCLA, which really helped his symptoms. You know, it's not gone, but it's not kind of an obsession that feels overwhelming. So it seems to me that emotionally, he's in a better place. So where are these researchers currently with this? And what sort of help are they getting from the CDC and national institutions to try and garner a larger data set, a larger cohort of individuals so they can feel more confident about the source of this memory thief, as you call it. Right. So we have a lot of problems in this country to work on health problems. And this really seems sort of like paying a lot of attention to it would be worrying about the arrangement of the deck chairs while the Titanic is going down. So at this point, it's still bearish (29/37)
and a handful of other neurologists and anesthesiologists and radiologists kind of working on their own time saying, how can we investigate this further? How can we move this forward? So they have been in touch with the FDA. The FDA has this kind of listening system where people can go in and post reports about potential adverse reactions, but they're not going to do it about street drugs. That would only happen with pharmaceutical fentanyl. So that's not the best route. There is a surveillance system in Massachusetts that they're trying to look at to just get a sense of prevalence. And they are, you know, one of the ideas to come out of this investigation is, as I said, the dose makes the poison. So we know that fentanyl, which is an incredibly powerful opioid, does this severe damage to the hippocampus? And if you want, if we have time, I can talk about why. But what about lower dose opioids? Are they causing subtle memory impairments that are going under the radar in people who are (30/37)
taking their medicine as prescribed, their opioids, but high dose opioids for long periods for chronic pain? So I'm not talking about someone who, you know, has surgery and takes Vicodin for a few days. This is really ongoing use because there's a lot of anecdotal information and patients complaining like, my memory just isn't working right. So these researchers at UPenn are going to investigate this. Well, that was going to be my next question, which is that fentanyl is used, people might be familiar with this, is used in anesthesia. So the question is, why has that not shown up there? And what does that tell us about how fentanyl could theoretically be impacting people who show up with this like massive injury to their hippocampus? And then, yes, how does this relate to chronic opioid use, not just fentanyl? Right. So the theory about how this damage is caused is based on, so there's two classes of neurons in the brain. And the ones we think about are called excitatory neurons. And (31/37)
they're kind of dumb because they just take in information. And when they get enough, they pass it on to the next neuron. And those make up about 80% of your neurons. But the other 20% are called inhibitory neurons. And they're the real brains of the system because they control the timing and the flow of information. You can't just have signals passing on without any kind of breaks in the system. So they're kind of like the bouncers at the bar. And if you, you know, take them out of the picture, you have chaos. So fentanyl being a really powerful opioid, it binds onto these mu-opioid receptors, which in inhibitory neurons shuts them down. So they can no longer do their job. And also in the context of not having enough oxygen, the hippocampus just can't keep up with the metabolic demands and cells start to die. So, and this is known that fentanyl does this, that it interacts with the mu-opioid receptors in this way. So that's not really a question. Then you have to ask, well, is it (32/37)
purely the lack of oxygen? So an anesthesiologist, actually the same one who's going to do the lower dose opioids question, he did a whole series of experiments with rodents looking at what fentanyl does to the hippocampus. And he kept them intubated. So it wasn't a lack of oxygen. And they had this same damage to the hippocampus. So then you have the animal evidence really backing up what is seen in these amnestic patients. So that's enough of a basis to say, well, is this really relevant to humans? And is our opioids at lower doses and less potent opioids, are they not like removing the bartenders from the bar, but just giving them some drinks so that they're not doing their job as well, and then interfering in the function of the hippocampus. So do we know anything about how opioids interfere with inhibitory neurons? Yes. So they do the opposite of what normally you would think, oh, you put a drug in and it turns on a neuron. Well, it doesn't. It turns these guys off completely. So (33/37)
not just fentanyl. Not just fentanyl. All opioids have this effect, but most opioids are a lot less powerful. So they're not going to shut the whole system down and lead to widespread cell death. But they are going to impair the information processing. The hippocampus is extremely finely tuned. It has an incredibly difficult job to do of pulling together all this information at once. And so that's a tough information processing job. And if you don't have your gatekeepers and your neurons that are saying, turn off, turn on, don't go, the memory encoding just doesn't work as well. So Lauren, I'm going to move the second part of our conversation into the overtime. In your book, you mentioned Alzheimer's, which represents, I believe, roughly two-thirds of all dementia cases in the United States. So it's a devastating illness. And of course, everyone as they get older, they lose memory function over time. So this is something obviously that concerns everyone in one way or another. And I (34/37)
absolutely want to talk about that because I think it's interesting what you've written about and also how this study and this science and this story relates to that. I would also like to discuss strategies and tools and developments as they relate to memory and what we've learned about how we can actually strengthen memory, not just if we have memory problems preexisting, but also as we get older. Because what I've learned over the years is that we absolutely bearing extreme cases of lobotomies or cases where people have massive injuries to the brain, we can absolutely impact our memory and our memories can get better and they can also degrade. And something you don't talk about in the book, but I'd be curious to ask you as well in the overtime is if you've seen any studies that look at how technology, particularly the types of technologies that allow us to offload all sorts of daily tasks to computers, whether it is GPS, whether it is memory related tasks, degrade our memory and (35/37)
degrade certain aspects of how our brains work. So that's what I want to talk about. For anyone who is new to the program, Hidden Forces is listener supported. We don't accept advertisers or commercial sponsors. The entire show is funded from top to bottom by listeners like you. If you want access to the second part of today's conversation with Lauren, as well as the transcripts and rundowns to this episode and every other episode we've ever done, head over to hiddenforces.io and check out our episode library or subscribe directly through our Patreon page at patreon.com. There's also a link in the summary page to this episode with instructions on how to connect the overtime feed to your phone so that you can listen to these extra discussions just like you listen to the regular podcast. Lauren, stick around. We're going to move the second part of our conversation into the subscriber overtime. Okay. Today's episode of Hidden Forces was recorded in New York City. For more information (36/37)
about this week's episode or if you want easy access to related programming, visit our website at hiddenforces.io and subscribe to our free email list. If you want access to overtime segments, episode transcripts and show rundowns full of links and detailed information related to each and every episode, check out our premium subscription available through the Hidden Forces website or through our Patreon page at patreon.com slash hiddenforces. Today's episode was produced by me and edited by Stylianos Nicolaou. For more episodes, you can check out our website at hiddenforces.io. Join the conversation at Facebook, Twitter and Instagram at hiddenforcespod or send me an email at dk at hiddenforces.io. As always, thanks for listening. We'll see you next week. (37/37)
This is the full transcription of podcast 'Hidden Forces'.
Eugenia Zukerman Like Falling Through a Cloud a Conversation About Life, Music, and the Ethereality of Memory #Podcast #Transcription #ReadAlong #KnowledgeUnlocked
Today's episode of Hidden Forces is made possible by listeners like you. For more information about this week's episode or for easy access to related programming, visit our website at hiddenforces.io and subscribe to our free email list. If you listen to the show on your Apple Podcast app, remember you can give us a review. Each review helps more people find the show and join our amazing community. And with that, please enjoy this week's episode. What's up everybody? My guest today is Eugenia Zuckerman, an internationally renowned flutist, writer, and former television correspondent. She was the artistic director of the Bravo Vale Valley Music Festival in Colorado for 13 years and the arts correspondent on CBS Sunday morning for more than 25. She is the author of two novels, two works of nonfiction, and numerous screenplays, articles, and book reviews. Three years ago, Eugenia's family began to notice changes in her cognition. She was unusually forgetful and at times confused in ways (1/37)
that seemed unlike her. Pushed by her family to undergo testing, it was determined that she was suffering symptoms consistent with a diagnosis of Alzheimer's. It was around this time that Eugenia took pen to paper and began writing what turned into a lyrical memoir of her experience in real time, coping with the forgetfulness and confusion that come with such a difficult diagnosis. I was unsure how I wanted to approach this conversation. Not knowing Eugenia personally, I wasn't sure how her symptoms would impact her ability to have the type of discussion that I'm used to having and that you're all used to hearing on this program. On that front, I will say that I was impressed at how well Eugenia seemed to remember dates and recount stories when prodded. In fact, there were multiple moments during our conversation that I'd wished I'd been better prepared to discuss instances or anecdotes from her life and career, which is so rich and offers so much in terms of inspiration, wisdom, and (2/37)
just good old fashioned storytelling. In any case, I didn't want to put her on the spot or forget that I was speaking with someone who was exposing herself to me in the most vulnerable circumstances possible. I wanted to be present and open to what and who she was in the moment and less concerned with plumbing her brain for answers or fishing for stories that though interesting would have caused me to miss the larger opportunity to take in the tenderness of the moment. What Eugenia is going through is a variation of what we will all face at some point in our lives. It's something that is particularly hard to accept for those of us who have been blessed with bountiful lives and the capacities to shape them. We're used to getting our way, but when it comes to our mortality, we're all in the same boat. We all have a common fate to share, and in some odd way, I find this comforting. Maybe it's just me looking for a silver lining, but I don't think so. I'm moved by our humanity. It moves (3/37)
me. As we move into this new decade full of life, love, relationships, and opportunities, I want us all to focus a little bit more on the things that bring us together and less on the things that set us apart. With that, I'm honored to bring you my conversation with flutist, writer, and author of Like Falling Through a Cloud, Eugenia Zuckerman. Eugenia Zuckerman, welcome to Hidden Forces. It's a pleasure. It's my pleasure having you on. I spent the morning listening to your music. I downloaded a bunch of albums on iTunes. I started on YouTube listening to music of yours. I love classical music, but I don't know the names and stuff. There was one that was like some concerto flute major thing. It was beautiful. Well, I'm glad. Thank you. Yeah. How did you come to play the flute? How did that happen? When I was a child, my father was an inventor, and he loved to make music. He played the piano. My mother was a dancer, danced with Martha Graham, and it was a very musical household. I have (4/37)
to say that when I was in grammar school, there were teachers who taught the kids how to play music on instruments that were donated to the school. They also had members of an orchestra come to the school and play their instruments. I heard the flute for the first time, and I was absolutely bowled over. I ran home, and I said, I've just heard the flute, and I want to play the flute. Can I please? Can I please? And my parents were delighted about that. And as I said in those days, there were instruments that you could take out from the school, and there were teachers who loved to teach. I was very lucky because at the age of 10, I was already starting to play and play well, and all through my teenage years I played, and I had wonderful teachers. So by the time I was, I would say 10 to 15, those were the formative years for me because that's the time when you learn the quickest and you retain the best. And I just loved playing the flute. And for me, it was what I would say my other. I (5/37)
could come home from school, and I was never lonely because I would go up to my room and take out my flute, and it was my best friend. And it remained my best friend, and it still is my best friend. And I feel that I am very lucky that I had the kind of training that I had, and that I had the parents who really helped me keep going when I would say this is too hard, etc. It was parental help that really was the key. So I'm not an expert in music in any way, so this is a layman's opinion, but the flute seems to be uniquely ethereal. It's sort of magical. It's ancient also. It's been around forever. And it's also a light companion. You can take it with you. Like you said, were there any other instruments that you were drawn to? Not at all. That's so interesting. No. My parents played the piano, and my older sister played the piano. And it was just too ... I didn't like hitting things. That's so interesting. You don't just depress the key. You hit the key sometimes when you're playing the (6/37)
piano. The thing I think that was most of interest to me is that through my own breath, and by having my breath go into the flute, I could make sounds of my own. And for me, it was like coloring. And it became more like coloring. You color the sound, and you have to find your own way of how to do that. And again, I think for me, it was the fact that the flute became my best friend. Well there's a poem in the book. I don't have it off hand, but you talk about shaping the air. Shaping the sound. Shaping the sound. And you can shape the sound by how much energy you put into your blowing across the embouchure. The embouchure is means the place where you make the sound. So for me, that was just what I've always tried to do is to make sounds that carry meaning. How much of your training came from being taught, and how much of it was improvisational, just playing around with the instrument on your own? Both, I would say. I played around on the instrument, and I had a rigorous training with a (7/37)
private teacher, but also rigorous training at the schools that I went to, I went to public schools. And then by the time I went to college, I went to Barnard College. I had a teacher in New York who was one of the greats, and he was very encouraging to me. His name was Julius Baker, and he was amazing. And some of the greatest flutists have come from his studio. So I do want to talk more about this, and I think we will, but I want you to take us back if you can to the beginning of this journey that led to the book that you've written. I assume that would be around the time of your diagnosis. Well I was forced into a diagnosis because my daughters kept saying to me, what's the matter with you? You're speaking strangely, you're repeating yourself, and I kept saying I'm perfectly fine. And then they finally said, okay, it's time. You are going to go to the hospital and get tested. And my younger daughter came with me, and I went and everyone seemed so much older than I was, but it was a (8/37)
very nice and easy way to sit in a room and then be called in. My daughter came with me, the doctor who talked to me was very nice and very bright, and we talked about many things. And she decided that it would be the thing to do to be tested. And the first testing that I was taken to was CAT scan. They decided that they needed to have a CAT scan. And when at the end of my meeting with this woman, I went down for my CAT scan, I wasn't scared at all. I was kind of excited. And I must have been one of the very few people who got into the CAT scan and loved it. Because I loved hearing sounds that I had never heard in my life. I think most people are pretty frightened of a CAT scan. But I came here- MRI, baby. Yeah, I think it was an MRI. MRI, yeah, trust me, I know. Right. You said it in the book, but I've been in the same situation. And I remember in one of your poems, you were writing about this when you went to the doctor, and before you went down to get the MRI, she administered a (9/37)
test. You tested your cognition in the room. That was the other way around. That was the other way around. I went to the cognitive place the second time I came to the hospital. The college for physicians and surgeons. Yes, yeah. Up at Columbia. Up at Columbia, right. So the first time that I was tested, it was for an MRI. And then I was told that I had to come back to do some cognitive learning. No, I've taken those tests too. We talked about this. My audience brought this up many times now in different interviews for different reasons, but I had dementia. And it was very hard taking those tests. I mean, what you described, your feelings were the feelings I had, frustration, fear, and just a desire to just stop. There's something else that comes across in your work, which is interesting. And you're very successful, and maybe there's a correlation between being successful and maybe sometimes being hard on yourself. Well, I think that someone who's driven, who has a goal, a constant (10/37)
goal, you never really reach your goal. It's constant. And I think that I am hard on myself. I've always been hard on myself. As a kid, I remember hitting myself on the head when I couldn't do something. And I just wanted to be able to do something instantly. Give the right answers on that test. Oh yeah, all the time. So when the day was over, when the tests were over, when, what year was this? How far back? This is about three years. Three years ago. Three and a half years ago. And then at that point, you went home and they didn't give you a diagnosis yet. You were going to find out the results of the tests and everything else. And you talked about actually being relieved that you didn't have to think about it. But you began writing after you came back from the doctor. Was that when you started writing? After the very first time I went to the hospital and my daughter was with me, we took the subway downtown to where I lived and I went up to my apartment. And I sat down at my desk and (11/37)
I stared at the wall for a while. And for some reason, I picked up a pen and pencil and simply started writing. And I didn't have any goal. I just wrote. And it all came out in poetry. I don't really know why. I have written a lot of poetry, but I had not tried to write a sort of story. But this just all flowed. And I didn't tell anyone about it. For about, I would say a month. And I asked my younger daughter if I could send it to her because I seem to be writing something and I'm not sure it's worth it. And she came back to me almost instantly and she said, mom, this is really very special. Keep going. And that helped me. I realized maybe this is something. And even at that point, I hadn't realized this is poetry. This is something that is unusual for me to do, especially in the long version to keep going. And I found that every day it made me feel stronger, better. There's a certain clarification that happens. And you must find this too in your writing that by the very action of (12/37)
writing, because it's a movement forward, I think that helps you kind of figuring out at the same time that you're writing. Well, I think you're very courageous for having done this because to be honest with you, I did write about my experience, but only after, long after it was over. Well, that makes sense to me. I do not know why I was driven to do this every day. I think I had a humongous amount of fear. And I think perhaps by writing daily, it made me realize, okay, I am still someone who is able to connect to words and to express myself. What were you afraid of? What are you afraid of? Well, what I was afraid of was that I would lose all cognitive ability and lose my ability to connect to people because we need to be able to express ourselves. I knew that I never wanted to stop making music. And by that time, I was the artistic director of the Clarion Concerts in Columbia County. So I was already in a position of not only making music, but being someone who was in charge of a (13/37)
musical organization. So I had a lot on my mind. And I think by writing, it simply helped me organize myself. You said Clarion County, that's an upstate New York? Yes. Clarion Concerts in Columbia County is the actual name of this organization. And it's over 50 years old, started by someone who went to Europe and brought back a lot of wonderful music. And so that is how all of it happened. And the man who started Clarion Concerts now, 60 years ago, who is no longer on the planet, Newell Jenkins, started this. And it has always been an ongoing situation. And I'm very lucky to have met people who wanted me to continue working with them and to have concerts, which we do. You did a segment with CBS Sunday Morning. And you were actually for how many years, a curator of content there, a producer? No, I was always the artistic correspondent for them. So I was the person who got to do the wonderful stuff, like interview the famous people like Judy Collins, like Paul McCartney, so many people. (14/37)
And that was wonderful. What was that like? It was great. I found that all the people that I sat across from were interesting, wanted to be there, wanted to be known. And you say wanted to be known generally or they wanted to be known specifically and be there with you on CBS Sunday Morning? I can't speak for how they wanted to feel about me, but I can tell you that I wanted really to find out who's this guy sitting across me. Okay, so he's famous and let's talk. Who were some of the most interesting characters? I have to say every single one of them. Judy Collins seems like she'd be pretty interesting. Judy Collins was a friend of mine even before I was on CBS Sunday Morning, so I knew her very well. And she's one of the most wonderful people. And that I don't know if it's easiest to talk with someone who you know best or whether it's someone who you don't really know. But I am... That's interesting. I've had sometimes people on the show that I know rather well. And actually, I feel (15/37)
like it's easier for me to have people that I don't know that well. Maybe I get more excited because there's so much more to learn. Right. I think that that's the case too. I know that Judy Collins was just one of many people and I am sort of embarrassed that I don't remember as many people as names, et cetera. You call him a cartony, for example. Right. Well, I had never met him before and there I was sitting across from her. That had to be so cool. He was very cheeky and very, very adorable. And he was there because he had written a serious piece and he was terrific. And he talked a lot about his father and his father's interests in music. So to be across, right across from him was fun and thrilling. And I think anyone who says, yes, I will have an interview, they're not wanting you not to like them. So I think I got the best of most of the people I talked with. Did you have a certain strategy or way of coming to the interview in order to make it better? Or did you have, let's say, a (16/37)
way of putting yourself into a certain mindset before you sat down with, did you have a ritual or something like that? I didn't have a ritual. I did my work. I looked up everything I could about the person I was going to talk to. I wrote down questions that I would be asking and I didn't have a piece of paper. It was like, you know, meeting you and talking with you and finding out who you are. That's the way I approached it. It helped a great deal that Sunday morning was already an entity. No, that's not true. Here's the deal. Now I remember. I got a phone call quite early. I was still at Barnard. I got a phone call from Shad Northschild and he said, my name is Shad Northschild. I have a TV show and you're going to be on it and you're going to say- You're going to be on it. You're going to be on it. He didn't even ask you. No, he didn't tell me who he was or anything. He said, no, he did. He said, I am Shad Northschild and I have started a program called Sunday Morning and you're going (17/37)
to be on it and you're going to be talking to people in the arts and you'll have a salary and you're going to say yes. You're going to say yes. Yes. He was one of the great people. He was just so charismatic and when he was mad, I learned what mad was. Really? He really could tell you off, but he also really would tell you this was terrific. I have to say that Sunday Morning is still ongoing as you know because I was very thrilled that they wanted to do a piece about me and what has gone on. You were there from the beginning. CBS Sunday Morning, I think, began in 1979. I think their first episode was in 79. You were there around that time? Yes. I was maybe there for the second or third time. Amazing. I had no idea what I was doing. That was an amazing time still to be on television. I think television used to be more magical than it is now. Now it doesn't have that sense of inaccessibility. It used to be really, if you saw someone from television, it was like you were seeing a god or (18/37)
something. Right. Well, I have to say that Charles Carreld who was the executive producer and he was the person who had all of the ideas and the person who was sort of the face of CBS Sunday Morning. It was just wonderful to be able to do what I had not even in my mind thought I wanted to do and that was to be able to not only sit and talk to people but fly out to Minnesota to find out about such and such an artist. It was a great privilege to be on that show. What is the instrument that they begin the show with? There's a sound like ... It's a trumpet. It's a trumpet. Did you ever meet Don Hewitt? Yes. What was he like? I don't have much of a recollection. I know I met him but not as well as some of the others. That was amazing that a program like that could have been as successful as it was, both 60 minutes and Sunday morning. I think television has changed a lot, not necessarily for the better and it's wonderful that there are still programs like that that endure. I know so many (19/37)
people that watch CBS Sunday Morning because they like watching something that's pleasant and shows the brighter side of humanity. I remember that they had the brighter side of humanity but they also had pieces on things that were frightening and not so happy. That's one of the things I really appreciated about it. It was real life, real people, real things happening. I felt that as I traveled around, I can remember going to a holiday inn out somewhere and a man who was sweeping the floor came over to me and he said, aren't you Eugene Yuzukrim? I said, yes I am. He said, I loved that piece that you did about Tchaikovsky. I'm watching this guy who is sweeping the floor and Sunday morning had made inroads. How does that make you feel? It makes me feel that music and art is so important. I also remember being somewhere in Europe and having an outdoor meal somewhere and someone popped his head up and said, are you Eugene Yuzukrim? I said, yes. He said, I listen to you every Sunday and (20/37)
there we were in the middle of somewhere. That's so nice. I do think that it's changed and it has changed because everyone wants something faster and quicker. We used to have 12 minute segments and by the time I left it was down to six. One of the things for me was real learning experience was going with a group of people, a sound man, the photographer, others, etc. We would be together with people who didn't really know each other but we got to know each other and to make something together. You had a regular crew that you worked with? It wasn't always regular. We all mixed around. It depended on who needed what, etc. I was astounded to find out that I'd been there for more than 25 years and then I was told that people no longer wanted classical music. I love classical music, I must say. Again, I'm embarrassed at how little I know about music. It's interesting, when I was growing up it was even more the case. I was more into movies. In the last few years, it's like my ears have opened (21/37)
up like a car engine. It took some miles through the engine open and it's like now I can hear things. I really just loved listening to your music, to you playing the flute this morning. Thank you. That prods me. I want to ask you about this. I might as well ask about it. Now, your husband, how did the two of you meet? I think I had this idea in my head that you met at one of your concerts. How important was music to how you came together? Very important. I had already had two husbands before. The first one who was a famous musician, the second one who was a screenwriter and movie maker. That area felt very comfortable for me. I met my husband, Dick Novick, through a friend having decided that I wanted to spend time by myself in the woods up near Tanglewood for a summer just by myself. I got there and got a phone call from a friend of mine who said, I know this wonderful guy. He loves music. He does this. He does that. He wants to meet you. He's going to call you. I said, no, no, no. (22/37)
It's just way too soon. She said, get over it. I went to Tanglewood the next day. I think we spoke first and I had no idea what he looked like really. But he said, meet me at this place, et cetera. I went at intermission we met. I took one look at this just fabulous looking man. Swashbuckling. Swashbuckling, yes. With most beautiful blue eyes and a smile. He said to me, I've brought a beautiful young woman with me and I thought, oh my God, this guy is weird. But then he took me to the beautiful young woman who was his beautiful young daughter, one of his beautiful young daughters. That was funny. Then I knew we had to go back in after the first half was over. I saw where he was sitting and I listened to the music, but I watched him. I could see the back of his head and his foot was going exactly where it should have gone at the right moment. I sat there saying to myself, I'm going to marry this man. Really? I forced him into it. That reminds me a little bit of a story recounted by Jane (23/37)
Fonda about how she first met Ted Turner. Ted Turner had supposedly, according to Jane Fonda, called Jane right after her divorce. She does this impression of like, hello, hello, this is Bill. I heard you're getting divorced or whatever. She says, no, no, no, it's too soon. Call him back in six months. He called her back in six months on the dot and he took her out on a date and she was instant attraction from the very beginning. I wanted to ask you guys, you were on CBS Sunday morning. He filmed you up in this beautiful farm that you live at now full time, but tell me a little bit about this place. How long have you been going there? As soon as I met Dick. That was his house? Yes, it was his house. He introduced me to his house. It was winter time and I think you had two dogs at the time and it was snowy and we walked up an icy hill and I said, what's that? He said, what? I pointed and it was blood all over the snow and he said, take the dogs, go inside. Another bear. No, but he said, (24/37)
take the dogs, get them inside. I said, what are you going to do? You're not going to kill this creature. He said, I have to. Here I was this person from New York. We don't think about guns or anything and I have just met this man and I have his two dogs and he's going to shoot an animal on the snow. More than you bargained for. More than I bargained for. Was it a bear? No, it was a bobcat. A bobcat because the three of us were discussing in the green room earlier about the presence of bears on the property. I think there's a growing fascination among my generation and younger about the wilderness and hunting and things like this and I think that maybe it's just a cyclical thing. This always happens every so many generations or whatnot, I don't know. Or maybe it's also driven in part by the record level of people living in urban environments. Well, there's that, but I will tell you, this was a rabid bobcat and he knew my husband knew it was rabid and I didn't. I thought, poor little (25/37)
thing. It was an eye-opener to the world outside of New York for me. What was the first thing that you wrote when you sat down to write? Which one was the first poem? Was it straight from the beginning? It was absolutely from the beginning. I'd love for you to read Like Falling Through a Cloud because that is a beautiful. Is that the first thing you wrote? Yes. That's incredible. Yeah, but I also want to say that I had no idea what I was going to be writing, but I knew the title. I knew Like Falling Through a Cloud and the reason I knew the title was because my mother died at 103 and that was three years ago. It was just my, I knew that my mother was cloudy and I knew that sometimes she would wake up and be very bright. I always felt that her waking up was like, her head was a empty coconut. I used to think of it that way. For some reason, the way she was able to wake up was to let the insides drip down into the coconut until something came out. For some reason, I do not remember the (26/37)
exact moment, but I knew I was going to call it like falling through a cloud. That also resonates. I mean, the cloud metaphor, I thought of when I was going through this and forgetting and was getting harder and harder to remember things and recognize people. It felt very much like a fog, sort of a fog had descended and it was just growing thicker and thicker and it was hard to see through and I had to make all these different efforts to see more clearly, more coping mechanisms or way of doing it. This was one of many poems in the book that I found relatable. I'd love if you could read it. Like falling through a cloud, sometimes when I wake up it's dark. Where am I? Sometimes I know and sometimes I have no idea. So I let the night spirits wrap around me and they whisper to me, don't think. You will remember. I lie very still and then suddenly like falling through a cloud, I know I am here. What is that capture? What are you describing when you say that? I actually do think of falling (27/37)
through a cloud. I do think of floating and that probably comes from seeing my mother sort of float above her bed, that feeling sometimes when I would go in to see her it was as if she was somewhere else. But I think perhaps it's something that we all go through and that is that there's something going around in your brain and you're trying to grasp it and you have to fall through something to wake up. That's part of what I think I felt when I decided to call it like falling through a cloud. Part about night spirits wrapping you, I found it resonated with me. Is some of this about learning to let go? Is that part of that process of not, in the specific case of trying to remember something, not trying to force yourself into remembering it but just letting it be what it is and letting things come to you? Absolutely. This was something I became aware of right in the beginning of writing the book because I know that if you squeeze something too hard, you're going to hurt it and you won't (28/37)
be able to express yourself in the way that you can if you not make yourself but help yourself to relax. I think that every time I have tried to make something happen, I have failed because I have tried too hard or have pushed too hard. I guess this also goes back to something we mentioned earlier, which is that a lot of people that are successful, they tend to be type A personalities. They go getters, they know what they want, they chase it. If they want something, they make it happen. I think also just part of either getting older or confronting illness or challenges. Sometimes, in my experience at least, requires learning a new skill of acceptance or surrender to the moment or circumstances. Is that something that you've found to be true? Have you grown in that sense in terms of your own compassion for yourself and for being more understanding with let's say your shortcomings or whatever it is in the moment that you're dealing with? I'm not really sure about that but I can tell you (29/37)
that, can I read another poem that is involved in what we're talking about? Absolutely, yeah. This one is called Marbles. Or maybe they're rolling around in my head looking for a place to land. Or maybe not. My daughters tell me to get tested. Tested for what I ask, even though I know for what. But it's for what I don't want to know. So I let the marbles roll around in a swirl of distracting colors because I don't want to listen to them, the daughters, because if I hear them I will be very afraid. And this mother cannot be that mother, not ever, never. And I think that is a poem about my passion for my daughters. I don't think I was a very clingy mother and I adore my daughters and my granddaughters now. But I think that I just forced myself through feelings of inadequacy. And I think most mothers feel inadequate from time to time. But I wanted this feeling of marbles, et cetera. I like the feeling of how marbles roll and how the colors come, et cetera. For describing the way in which (30/37)
your mind feels and your memories? No, just I think more of, I don't even remember now. Because it does conjure something that I feel like I understand it. I mean, again, it's just like falling through a cloud, right? It's the marbles sort of just rolling around, just like falling through a cloud. It's just sort of almost effortless. I think effortless, but I also think purposeful. I think that when things are rolling around and you're trying either to stop it from rolling around or be fascinated with it, I think the whole period of when I was writing this book, I felt that things were in motion. And I think that, come to think of it, I think that every time I've written a book, I have wanted that sense of keep going, keep going. And I have had times when I've been writing a book and I have felt it's not working and it's not working. And once or twice, I actually have, after a lot of work on a book, I gave it up. So I guess the marbles is something that you want. When you're trying to (31/37)
do something, you have to let things roll until you're able to kind of control it. That's also relatable. We did an episode recently. We haven't released it. This will come out first with David Epstein, who's an author, who's written some great books. He was a journalist for Sports Illustrated. And I believe it was with him that we talked about this, but sometimes you can put an enormous amount of work into something and it just doesn't work out the way that you thought it would or that you wanted it to. But then it turns out that something more beautiful comes out of that. I think you can get stuck. You can get stuck on something that you really think is going to work. And for most of my writing life, I have always told myself it is not acceptable to give this up. You just have to keep going. And once or twice, I really have given up on something that I at first was really excited about. So that kind of brings up again something I mentioned earlier, which I want to see. Maybe I can (32/37)
ask it again, which is something in my own life that I realized as I got older and went through certain experiences is the difference between quitting or giving up and surrender or acceptance. How have you dealt with this at this stage in your life? What you're dealing with, what you're coping with? How have you navigated this? I think I've navigated it in the best way I have writing anything. And that is honesty. Everything I wrote is extremely honest. I didn't make anything up. Might have come from something in my background, et cetera. But I never gave it up. And I think that by being positive, particularly now that I have a diagnosis, it's a diagnosis of death. But we all have diagnosis of death. And I don't want to sort of get away from what we're saying. But I remain positive. And maybe I remain positive because this is the happiest time of my life. Talk to me about that. It doesn't seem as if it should be, but it is because I have a great love in my life. I have extraordinary (33/37)
children. I have friends and family. I have animals I adore. I have everything I need around me. Do you think you have a deeper appreciation now for those things than you did before? Far deeper. Far deeper. You think that's why? Maybe and also maybe because I know I'll have to leave them and that they will have to leave me. And I do wake up every morning and think to myself, thank you. It's really good to be here. Your sense of gratitude is huge. Huge. Huge sense of gratitude, except for my dog Lucy. I absolutely adore her. And she comes up to my room when I'm practicing. And if she doesn't like the piece, she puts her paws over her ears and shakes her head and walks off as if I have pooped in the room. Really? Seriously. So there are certain pieces that she likes and certain pieces she doesn't like. Exactly. That's so interesting. So for anyone that's listening who either is going through this or more likely who has a family member that they love, a mother, a father, a sister, a (34/37)
brother who is going through this, whether it's Alzheimer's, whether it's the natural process of aging and forgetting, what advice can you give or what would you hope that your work and your presence here today can convey? I would just say to everyone, live every day. And by live every day, I don't mean wake up and brush your teeth, but it is such a gift to be alive. And you as someone who has had similar problems that I have had, I would imagine you have that same feeling. It is just, whoa, my eyes are open. I am living. I have that sense every morning. Well, it was, who was the actress on Saturday Night Live? No. I think it was Gilda Radner who said, I'm forgetting who mentioned this on one of our episodes, but she said something like cancer is amazing except for the downside or something like that. I can't remember exactly how she said it, but it's true. I mean, there's so much gratitude and perspective that you gain from that type of experience. And I can imagine that there are (35/37)
many beautiful moments with your husband and the farm surrounded by nature or when your daughters come or when you see your grandchildren. Every day I wake up hoping that I will still be here so that I can connect with these people who mean so much to me. And I don't think every day about death, but I am aware. I am aware every day that I probably, if it's not going to be all that much longer, but I also tell myself every day you could step off a curb and get hit by a car probably faster than you. Probably faster than the time you're going to die. There's also something interesting that happens when you're present, which is that your life extends it in a sense because time, there's a yawn, there's a chasm that grows. And again, that's to the point of living in the moment. Eugenia, thank you so much for taking the time to speak with me today. It was such a pleasure to talk to you. Today's episode of Hidden Forces was recorded at Creative Media Design Studio in New York City. For more (36/37)
information about this week's episode or if you want easy access to related programming, visit our website at hiddenforces.io and subscribe to our free email list. If you want access to overtime segments, episode transcripts, and show rundowns full of links and detailed information related to each and every episode, check out our premium subscription available through the Hidden Forces website or through our Patreon page. At patreon.com slash Hidden Forces. Today's episode was produced by me and edited by Stylianos Nicolaou. For more episodes, you can check out our website at hiddenforces.io. Join the conversation at Facebook, Twitter, and Instagram at Hidden Forces Pod, or send me an email at dk at hiddenforces.io. As always, thanks for listening. We'll see you next week. (37/37)
This is the full transcription of podcast 'Hidden Forces'.
A History of the Future Hope & Fear in the Social Smartphone Era Rory Cellan-Jones #Podcast #Transcription #ReadAlong #KnowledgeUnlocked
what's happening on YouTube now on platforms like Vice. There is evidence that there is an appetite quite often for long form, for just immersing yourself in video at greater and greater length. Yes, there is a short attention span for some stuff, people dip in and out, but there is the possibility of long and absorbing online experiences. And that's happened as well in the sort of... You think about the documentary world, in fact, too much, too much. Quite often, the ninth series of this documentary that might well have been compressed into a 90-minute experience. So, I think it's fragmented. There are all sorts of incredibly fleeting short-term ephemeral experiences, and there are a lot of immersive long ones. I couldn't agree more with that, actually. And that, of course, is the reason why... One of the reasons why I created this podcast, and I created it the way that I did, that it's a long form, two-hour-long conversation. So, that actually speaks to podcasting, because you work (25/38)
What's up, everybody? My name is Demetri Kofinas, and you're listening to Hidden Forces, a podcast that inspires investors, entrepreneurs, and everyday citizens to challenge consensus narratives and to learn how to think critically about the systems of power shaping our world. My guest in this week's episode is Rory Kethlin-Jones. Rory is the BBC's principal technology correspondent, which means that he's responsible for reporting on the biggest developments in news stories and tech. From the dot-com bubble of the late 1990s to the rise of Google and Facebook, he's covered it all and interviewed some of the most influential tech luminaries and entrepreneurs from Steve Jobs to Mark Zuckerberg to Elon Musk. Stories from these interviews and more are part of his new book titled Always On that chronicles the rise of the smartphone era and how technology has altered our customs, our expectations, and our very lives in ways that are easy to forget only 15 years since the launch of the first (1/38)
iPhone. This is a conversation unlike most any other that you will have heard on this podcast, because there isn't one particular lesson that I want you to take away from it. Instead, I want you to use it as an opportunity to reflect on just how much change we've seen in our lives over the last 15 years and think about not only the causes of that change, but how different the world will be over the next 15 if current trends continue and what that's going to mean for our lives, for our businesses, and for our political systems. In the overtime, Rory shares his impressions of Silicon Valley culture and what he's learned from interviewing some of the most powerful people in tech. We also discussed the transformation of media, cultural differences between British and American journalists and the press, and the future of independent publishing and podcasting and what it means for the viability of traditional news outlets, especially those that depend on ever more sensationalism and (2/38)
controversy in order to eke out a profit in this hyper-competitive media landscape. Without any further ado, please enjoy yet another educational, entertaining, and engaging episode with my guest, Rory Kethlin-Jones. Rory Kethlin-Jones, welcome to Hidden Forces. Very excited to be here. That's my pleasure having you on the podcast, Rory. I loved reading your book. I really enjoyed it, and it was so different than what I'm used to doing, which is usually the kind of stuff that we have whenever we do technology-related so they're very technical and they're focused on some particular aspects of technology or maybe the effect of technology on society, which I do think is something that's relevant to your work and to your experience and your career, which I think you can help shed some light on. But I think what's also really fascinating about it having you on is that you're a big name in media and in journalism. The BBC has no comparable media outfit in the United States. PBS is a public (3/38)
broadcasting system in the way that the BBC is, but it doesn't have the same type of cultural significance or reach in the public. It'll be fascinating to also get your perspective as someone who's worked in the media since the early 1980s, I believe, or late 70s. That's true. 1981, I started. It may be amazing. Your father was a director at the BBC. I believe your mother also worked at the BBC. You have a podcast, you have a sub-stack account, so you've seen so much. You've seen so much transformation. You've embraced it, which also makes you really wonderful and unique. Instead of me droning on and on about your background, because especially we have so many, we do have many listeners in the UK who don't need to know who you are. They know who you are already, but for those of our listeners who are piping in from anywhere else in the world, in particular the US, where a lot of people don't know anything outside of American borders, tell us a little bit about who you are, what you do (4/38)
at the BBC, and how you got into journalism. Well I am a BBC lifer, and you're right. The BBC is an extraordinary organization, which is about next year to celebrate its centenary and dominates the media landscape in Britain in a way which Americans might find difficult to come to terms with. It's supported by a licence fee which everyone has to pay, which would be extremely controversial, I know in the United States, sometimes controversial in the UK, but somehow has survived my 40 years at the BBC. I joined the BBC in 1981 in a local newsroom working on local news. I spent some time in the national newsroom as a producer, always wanted to be on air, so went to a local station, BBC Wales, doing their evening news, and then came back, worked on the breakfast show, became a business correspondent, and then in the late 90s I was kind of bored with the standard business stories I was covering, but I was very excited by what I saw happening in terms of technology. The dot com era, if you (5/38)
think about the late 90s, what a time to be covering technology, or wanting to cover technology. The birth of Google, the dot com era, the dot com bubble. And eventually, because of those were the stories I was showing so much interest in, in 2007 the BBC said to me, hey, why don't we call you technology correspondent? And that's what I've been doing ever since. And it's interesting what you said about the book and so on. The book is written by someone whose job has always been not to be highly technical, but to translate the excitement and the importance of this extraordinary era to a very broad audience, not to be too specialist, quite a difficult tightrope to walk, because you're often in danger of kind of offending real specialists. There are a lot of very knowledgeable people out there, but at the same time, you've got to reach the people who will watch the Nightly News program, listen to the morning radio, even read the BBC website, who have a passing interest in technology, but (6/38)
no great knowledge of it. So that's been my mission, conveying the excitement of this era, which has been a fascinating era. I was appointed BBC technology correspondent in January 2007. My first big story was being at the launch of the iPhone, the unveiling of the iPhone. And that's the story the book tells how that era unfolded from that moment. Yeah, that's a I love that part of the book. The unveiling of the iPhone happened at the Moscone Center in San Francisco, as you say, in January of 2007. I only had an opportunity, like most people, to watch that from television. What was it like to actually be there? Well, let me give you the context here. So I'd been appointed technology correspondent, and we had decided that the BBC would go big time for the first time to see, yes, the annual great big gadget show in Las Vegas, which I've been to lots of times since. And we were spending quite a lot of money, the BBC is very careful about its money, because you know, it's always limited. (7/38)
But I said to my bosses, listen, I know we're spending on this money to go to Vegas, but I think it's going to be worth taking a day out, because Steve Jobs doesn't go to other people's events. He runs his own event, and it's called Mac World. And the rumor is that there's going to be something big there. So I landed in San Francisco from Vegas for just a day, pitched up at the Moscone Center. And it was my first experience as a kind of slightly cynical British journalist of that atmosphere that you got at Apple events and increasing at other events. Because I was used to going to press conferences where it's taboo for a British journalist to clap at a press conference, you would never dream of doing that. And suddenly I was in this hall where people were whooping and hollering. And of course, there were some journalists, there were a lot of bloggers. I think what one had to realize back then, and it's still the case, is that there was a kind of an audience of bloggers who made their (8/38)
money by being incredibly, uncritically enthusiastic about Apple products. So they were there. But it was what unfolded was the most extraordinary performance by Steve Jobs, because he took to the stage in his trademark jeans and black polo neck sweater and wireframe glasses. And he didn't say anything for a couple of seconds, he just strode head down and then stopped and said, we're going to make some history here today. And again, as a cynical British hack, I was go, Oh, please, here we go. And then he outlined the history of technology and in particular, groundbreaking Apple products from the first Mac to the iMac to more recently, the iPod. And then he said, he eventually built up to, we're going to unveil not one, but three groundbreaking products here today. And he kept on with his mantra. An internet device, a music player, and a phone, an internet device, a music player, and a phone. And eventually he said, Are you getting it yet? Because they all were beginning to get it. It (9/38)
was all one device. And it was the iPhone. And everybody went mad. And it was a brilliant performance. I don't know if you've seen the film about Steve Jobs, where what happens backstage at those keynotes, and it was which I thought was very believable is that the support team who'd get anything wrong, get absolutely crucified, but but nothing really went wrong that time. It all worked. And the reason I, I mean, I was really impressed. The reason I knew that this was going to be big was when I got out of the hall, running back because we were eight hours behind London. And that meant we were in a tearing hurry to get our item on the nightly news. And I took a call from the news desk saying, who'd seen the pictures, the agency pictures coming out of this phone. And bear in mind, my news desk full of wizened old hacks, not very impressed by technology. But this guy was saying, You've got to get your hands on that phone. It's amazing. And then there was a whole business of me saying, (10/38)
There's no way I'm going to get my hands on the phone. Apple doesn't do that. The phone's not actually coming out for another six months. They won't let me near it until I realized that I'd booked an interview with not Steve Jobs, but Phil Schiller, his marketing chief. And I'd rather sort of said to Apple, Yeah, yeah, we'll definitely come thinking, No, we won't, we won't be interested in Phil Schiller. And I changed my mind and reversed back, leaving the cameraman to go and edit and grabbing another little cameraman. I went and interviewed Phil Schiller, but first of all said to him, You don't happen to have the phone, do you? And of course he did. And I took the phone, grasped the phone from his hand and stood there and did my, what we call a piece to camera, what American crews call a stand up, grasping the phone. And that was a big moment. And I say in the book, it was, there were complaints about the piece that went out on TV, British viewers said, You're plugging a product, you (11/38)
shouldn't be plugging a product. And I went on a complaints program and said, Well, I think that was the kind of moment that Henry Ford launched the Model T Ford, would we have covered that? And this was a Henry Ford moment. And I think that proved to be the case. Well, didn't some other broadcasters claim that you look like you were holding the one true cross in your hand? Yeah, yeah, which of course, reflected the fact that it had been such a struggle to get hold of the thing. Well, I think it also reflects something else that I'd like to ask you about, which is, if consumerism has become sort of the new religion, and that these really perfected by Steve Jobs, these product reveal ceremonies are a form of ceremony, religious ceremony. And then subsequently, the purchasing and use of these products has become sort of ritualistic. And it's sort of, as part of that larger context, do you think that people, or how many people appreciate it at the time? How viscerally transformational (12/38)
this product was? Well, certainly the rest of the, I mean, the what it's an extraordinary, you know, business case story, you know, I'm sure books have already been written Harvard Business School has probably done endless studies. But certainly what happened was that the rivals didn't see it. They were very keen to downplay the significance of the iPhone. Steve Ballmer, leading Microsoft at the time, which would eventually launch Windows Phone and already had a big Windows offering, which he thought was going to be big, just poo pooed it and said, this is never going to be, it's going to be a tiny market share, which in a way was true. It's never had the dominant market share. But he refused to see what the significance would be Nokia, which was of course, the giant of the industry, Finland's Nokia, much loved company, slightly, you know, mourned. It didn't see this coming. It was completely destroyed by the iPhone. I tell a story of a British executive retailer who went to see Nokia (13/38)
and tell us his contacts there that this was going to be big and he might be buying iPhones rather than Nokia's and him telling his Nokia counterparts, it's the kind of phone my four year old child could play with. And the Nokia executives responding, we don't make phones for four year olds. So there was a lot of blindness, a lack of a willingness to see what an important moment this was. But it was also the kind of changing of the guard. Somebody described it as the era of the bellheads, the people who were from the telecoms industry, confronting the net heads, the Googles, the apples, the software people, because of course, you know, it was the software that ended up being key in many ways, despite the beauty of the device. And the net heads obviously won. Well, one of the things that I was thinking about when I was reading the book and you were describing this is that we really haven't had a jobsy and like figure. I mean, Elon Musk has tried to fill his shoes, but I really don't (14/38)
think we've had anyone like him. What was it about Steve Jobs and the iPhone that people found so compelling? And what was it about Apple that people loved so much? I mean, Apple was the kind of indie band that went mainstream, wasn't it? Because for years, there was a sort of cachet in having an Apple device, an Apple computer. You knew it was more expensive and it was a failing company, but you were the fan of this indie band. And Microsoft was the hated dominant organization. And, you know, I don't know if you remember, but people used to write the word Microsoft with a dollar replacing the S, as if Microsoft is only about money. And obviously, Apple wasn't about money because it was not making any. And then the roles were reversed. I mean, what was compelling about Steve Jobs? That from my point of view was that he was a communicator in a way that an awful lot of tech chief executives were not. He could speak without the jargon. Well, he created his own, you know, special Apple (15/38)
speak. He was a performer. He presented a compelling vision. And he put on a show. I mean, these keynotes were great shows. I do think, you know, 14 years later, that kind of magic has faded and would have faded even if he'd still been alive because there's a sort of law of diminishing marginal returns. You can change the world once, but, you know, when you come up with the 12th version of a slab, a rectangular slab of black glass, it is, it is a lot more difficult to get people excited. But what Apple did was give people a sense of excitement about the magic of the technology and the beauty of it. I mean, it wasn't technically as good as quite a lot of existing phones. Don't forget the first iPhone didn't even have 3G. It had a lot missing from it, but it was captivating in a way that others were not. Well, I also remember how many people were pessimistic on the phone. One of the common complaints was that it didn't have a touchpad. It didn't have a keypad. Blackberry users would (16/38)
never use it. And I do think there is something true to the fact that, like you said, there was a changing of the guard. There was also a generational component to this, which is this was embraced by younger people and non-professionals in a way that, you know, let's say finance people who had their blackberry did not. Yeah, but it was also, it wasn't just younger people. It was democratizing the phone. I mean, the real aficionados of phones before then had been, you know, to use a cliche geeks, the people who really wanted to understand how the technology worked, worked, were wedded to a certain way of doing things. And Apple reached out way beyond that. I mean, just by making things easy. Apple launches products often years after others have tried them out. Think of the iPad. I remember when the iPad came out looking back at a picture of Bill Gates in 2001 with a Windows tablet PC, which was a very ugly piece of kit. It just did not communicate to people. Apple had the ability to (17/38)
democratize technology in a way that some didn't. How do you think, do you ever think about how Apple and the iPhone would be different products and different companies if Steve Jobs were still around? I mean, one of the things I noticed, and again, you're probably the perfect person to ask this to, I noticed that the phone became increasingly more complicated. One of the things that Jobs really preached was simplicity, that people wanted not just simple products, but they also wanted direction. They wanted to be educated on how to use it. And they didn't want to have too many options. And the phone has actually moved more towards the Android side and away from what iPhone used to be so unique about the iPhone, which was its simplicity. Does that resonate with you at all? And has Apple also become much more of a sort of, just almost like a Sony in terms of its consumer products? Yeah, I know what you mean. There is not the excitement that there was under Steve Jobs, but I'll tell you (18/38)
two points here. First of all, it's difficult to say that under Tim Cook, Apple has not done well with the iPhone. From 2011 to now, the iPhone has just gone on to reinforce its position as the single most profitable product in history. And it keeps, every time it seems to be on the wane, it comes charging back. And the other thing I would say is there's no guarantee that Steve Jobs would have gone on to produce more iPhone moments. And he got some things wrong. He, not only was, so 2007 was a great key moment, perhaps more important in the success of the iPhone and the way it transformed the world, was 2008 and the launch of the App Store. And that was something that Steve Jobs had to be persuaded into because of his extraordinary controlling nature. He had not wanted any old app to end up on his beloved iPhone. You got what Apple produced, you know, with its particular design skills. And then people started side loading apps onto it. And eventually Apple said, right, they still (19/38)
obviously exerting a lot of control, but they opened the App Store and it was the app economy, the ecosystem that really cemented Apple's victory. So Steve Jobs didn't always get everything right. And, you know, there's no guarantee that, I'm sure, in fact, he would probably have got bored with the iPhone. He would have been, I've done that. I will let other people carry on changing that. But I will move on to something else. Right. Which actually, what I was thinking was that, and this kind of reminded me of a case study from a book called Moonshots written by Safi Bacall, who had been on the program, the case of Pan Am and American Airlines. And Pan Am was founded by a sort of Jobs-in type figure, similar to Polaroid, an innovator who was product driven, whereas American Airlines was at the time led by an incremental innovation business model type guy, similar to Tim Cook. An logistics kind of guy. Right, exactly. And if I remember correctly, American Airlines was able to really take (20/38)
advantage of the deregulation of the airline industry with some of these really important incremental innovations, whereas what happened was Pan Am over-innovated, so to speak. Pan Am went along the jumbo jet, and it ultimately cost the company, I think it went bankrupt in 1991, it was bought out. I remember how it resolved. And that could have been ultimately where things would have gone for Steve, whereas he might have created another incredible product like an Apple back in the 1980s or next and just be priced out of the market. He could have created another Newton. Another Newton, exactly, way ahead of its time, speaking of being ahead of their time. So I want to bring it back again to what I think interests me most about this opportunity to speak with you, which is your experience in media and also, generally speaking, in technology and covering this, because you've covered at the very least two technological revolutions. One is with the iPhone and mobile, actually arguably three, (21/38)
internet and also the personal computer. That's one. And then the other one is the parallel track of media. Now, there's also the difference between the British version of the British ecosystem and even the larger European media ecosystem and how that is culturally distinct from the American one. So there's that. But then there's also just the fact that technology has transformed this entire space. And you are, I think, rare in that you have embraced that. You have a podcast, which is very successful. You have a sub-stack. You're a prolific Twitterer. So maybe we can talk about that first. How has the media changed? I haven't yet managed TikTok. That's my shame. What do you think of TikTok? How much have you engaged with that platform? I've kind of watched and admired, really. It kind of sums up the good and the bad of this extraordinary media age. You were talking about the two revolutions I've particularly focused on in this book. One, the smartphone and two, these extraordinarily (22/38)
powerful social media networks and how those two came together to transform the way we live. And TikTok, the great of it is that it is the explosion of creativity that Tim Berners-Lee, for example, had always wanted from the web, which didn't happen in the early days of the web. I mean, when he created the web, Tim Berners-Lee talked about it as a read-write space, you know, so different from broadcasting. I started in broadcasting. I grew up in the TV age, where we all sat mesmerized in front of this magic box, and it was a very one-way experience. Tim Berners-Lee wanted the web to be a two-way experience, a read-write experience. Yet until it went mobile and until, in many ways, the social media chance came along, for most people, it was still mostly a broadcast experience. TikTok is the ultimate creative experience. But with all that, and we don't see it as much reported with TikTok as with other social media platforms, comes all the damaging impacts of social media and the (23/38)
unregulated kind of nightmare world of trolling and abuse. Well, also, there's something else that's interesting about TikTok, which is that what we've seen with media, with hyperconnected, ubiquitous connectivity through mobile and broadband and social media, has been the condensing of time. Everything becomes shorter and shorter as people's attention spans narrow and narrow. How real is that? I mean, how have you experienced that as a broadcaster and as a creator of content in your career? Well, I think that's an interesting theory, and I think I might begin to challenge it. So, in my career as a broadcaster, certainly that is... Well, here's one example. When I began in broadcasting, the average sound of a duration of a soundbite was maybe 30 to 40 seconds, and it's come down and down and down and down and down over the years to... Well, we look at American TV news sometimes and go, God, where somebody goes, yes, and somebody else goes, no, and that's a soundbite. But just look at (24/38)
in podcasting. It's a fascinating medium. Actually, in general, I'm just someone who's endlessly fascinated by the role that media plays in shaping culture, in taking cues from culture, but then also telling us about who we are. And obviously, each technology comes with its own set of business models, its own distribution, and its own particulars in terms of how it shapes the content. What are your thoughts on podcasting, this phenomenon of podcasting? It's not as popular in the UK as it is in the US. It's pretty popular. It's become more popular. Well, here's the situation. It's very dominated in the UK by the BBC, which some people might possibly rightly say was distorting the market, because so many BBC programs are put out, frankly, as podcasts. Mine included. There are some that are now specially crafted just for podcast, but there are a lot of programs that are just put out there for people who've always liked, and now basically get on demand. My feeling about the podcast, boom, (26/38)
is I hope it continues, but I have slight concerns that it may be built on sand, that we may be going through a bubble. I think the economics of it are really interesting. I don't see an awful lot of evidence that many podcasts are sustainable. I think many of them are supported by kind of vanity corporate money. It's the latest thing. Companies used to buy full page adverts in the Financial Times or the Wall Street Journal, which were kind of, the return on the investment was always very hazy. They were brand building. I think the great thing from podcasting right now is that it's getting some of that money. You're getting support for podcasts made feasible by that kind of money. Whether there is enough actual consumer demand to support a continued expansion that we've seen of podcasting, I'm not so sure. That's interesting. I would actually agree that there's going to be a huge culling of the field, certainly during a recession, because so much is dependent on sponsorships. But (27/38)
you're saying is that the entire industry would be wiped out eventually because it's not? No. What I'm saying is, well, I mean, there are so many different business models on there. I've done quite a few podcasts, lately been a guest on quite a few podcasts. I was spoke on one British media podcast the other day from a guy who runs a great gadget blog. I said, what's the point of the podcast? He had no sponsors, no advertising. He said, oh, it's just part of our brand. That's one model. I was on another cybersecurity podcast, which was much longer, less edited, quite fun, like Rambly. It had a sponsor. I would bet that that sponsor probably has no idea how many people actually listen to it and probably doesn't care that much. That kind of support mechanism may be ephemeral. When a new platform emerges, that money may move to that or may go back to just straightforward social media advertising or disappear altogether. Yeah, no. I mean, that's a really interesting take. I will tell you (28/38)
for this podcast, I turned down sponsorship money early on because for a number of reasons, I wanted to try and build a subscription model. This podcast is supported with 2,000 paid subscribers currently paying between $10,000 and $1,000 a month. That is fantastic. It is. I'm very happy about it. It required extra work to do it, but it shows you that there really is a market out there. What's also, I think, encouraging about this podcast's success is that while I do depend on a large cohort of financially minded investors and tech people, the content isn't focused on just tech and finance. There's philosophy, religion, science, medicine, art. I've found a way to do it. I think there are, but I will grant you that it's very difficult to monetize podcasts if you don't have a large enough audience. The problem with sponsorships, again, is that it leaves you vulnerable. Another thing I should say is that what I have found to be true is that authors love to go on podcasts. It's like the one (29/38)
place where you can really sell books. Yeah. Well, no, I'm just that author, but I think there are interesting parallels with the publishing world here. Anyone who's ever written a book will know that it's a lovely thing to have done, but it is not the way to make a living. Publishing is a bit like venture capital out of every 10 books. One will be a blockbuster, a couple will break even, and the rest will lose money. The problem is of supply. There are endless numbers of people wanting to be authors, whether or not they make a living out of it. I think that's the same with podcasting. There are endless numbers. It is not that expensive. It's easier, frankly, to start a podcast than to get a book published. That means there's an awful lot of supply, which is frankly, uneconomic supply. Well, it's also 100%. That also speaks to something else, which is that, and I'm curious what your thoughts are on this and if it resonates. I have noticed, and it's not just true in podcasting and (30/38)
media, across the board, people have become increasingly branded, or they self-brand. They see the entire scope of their existence as a commercial operation. I think that's one way in which podcasting has fit into things. That actually speaks to something else. There's that one phenomenon of commercial branding and the branding of oneself. That, again, is part of this larger commercialization and seeping of capitalism to everything, which speaks to the point about religion and ritual. Is it about capitalism, though? Is it not about identity and democratization? People used to, well, I mean, on a sort of micro scale, I think about journalists who used to working for big organizations. Quite often, there would have been a few-star journalists, but most people would have been fairly anonymous, just cogs in the machine. Now they all want to, and I put my hand up, they want to have their own substack, they want to strike out on their own, they want their own brand. That probably applies (31/38)
more broadly to all sorts of people who were just cogs in giant machines and see the internet as an opportunity to break free from that. 100%. That's definitely true. I agree with that, and we can explore that all day, every day. I think it's absolutely true. What I mean about capitalism or commercialization is that so many otherwise intimate moments or things that previously were not monetizable have become monetizable today. Reality TV, the phenomenon of reality TV is a big part of that. You see that with influencers, people that basically use the same medium that you and I might use to share moments of our personal lives. They use those to monetize their lives. In a variety of ways, which again, I think there is a connection there, the same connection that speaks to why we fulfill so many of our ritualistic desires through commercial technologies and products. In terms of the personality-driven media, this is also something that fascinates me, because of course in the United States (32/38)
we have Joe Rogan. Joe Rogan is the ultimate manifestation of the modern media age and media ecosystem. He has more viewers, more downloads, more streams than anyone else in media. No one knows exactly. Well, some people do, but most people who listen to him have no idea of just how popular he is. I don't think there's anyone like that in the UK, for example. Do you think one that, well first, what is driving this empowerment of the individual through technology? We also see this, for example, in sports, not to go too far afield, but athletes today have much more power than they used to have, relative to the ownership, relative to the leagues that they play in. I think media and their ability to distribute their message is part of that. What is driving that, the power of the individual? How much of it is changing people's relationship to news and to information? Is this ultimately a good thing? Where do you see this going? Wow, that's a whole lot of big questions. I mean, obviously the (33/38)
technology has made a huge difference. What I was talking about earlier, we've gone from the very simple broadcast model and a very hierarchical model where a few major media organizations controlled the flow of information. We say it's more democratized, but then it's also a winner takes all situation. Both in sports and in wider celebrity culture, that one person can reach a massive audience very quickly without much intermediation. People have got the ability to connect with those personalities in a way they never had before and are finding that attractive. I think it'll be interesting to see how long those personalities last. Will Joe Rogan be as big a thing in five, 10 years time as he was? Celebrities historically have had very long careers. They've gone on until they die. I think they may be more ephemeral these days, but it speaks to a desire to connect, to admire, to feel ownership of a celebrity that maybe didn't exist to that extent before. How much of that is authenticity, (34/38)
that people crave authenticity in a world that feels increasingly phony? Yeah, well, that was the old phrase, if you can fake authenticity, you've really got it made. Yeah, well, there's a culture now. I'm going to actually move this part of the conversation to the overtime Rory because you mentioned early on, you talked about this cynical British approach to media when you were at the Moscone Center in 2007. Something that I've always noticed, I've never actually understood why there is that distinction. If you go, let's say, on hard talk of the BBC versus if you're on some equivalent program in the United States, why there is that sort of cynical culture in British journalism. However, I found that cynicism actually quite refreshing in your book because- Yeah, I've got a couple of stories to tell about that. Well, exactly. We'll do that. I'll move us into the overtime for that. But the reason I found it refreshing just to tease it to listeners is because I, and I know many other (35/38)
people have become sort of have reached our limit with this fake it till you make it, sanctimonious culture and tech. It was really refreshing for me to have you interview some of the biggest names in the industry like Elon Musk or Mark Zuckerberg and to actually have you give a much more raw, honest impression of their messaging, their products, their pitches, etc. And I want to ask you about what your experience of some of those people was like. But I'm going to hold those questions off for the second half of our conversation, Rory. For anyone who is new to the program, Hidden Forces is listener supported. We don't accept advertisers or commercial sponsors. The entire show is funded from top to bottom by listeners like you. If you want access to the second part of today's conversation with Rory, as well as the transcripts and rundowns to this episode and every other episode we've ever done, head over to hiddenforces.io and check out our episode library or subscribe directly through (36/38)
our Patreon page at patreon.com slash Hidden Forces. There's also a link in the summary page to this episode with instructions on how to connect the overtime feed to your phone so you can listen to these extra discussions just like you listen to the regular podcast. Rory, stick around. We're going to move the second half of our conversation into the subscriber overtime. For more information about this week's episode of Hidden Forces or if you want easy access to related programming, visit our website at hiddenforces.io and subscribe to our free email list. If you want access to overtime segments, episode transcripts and show rundowns full of links and detailed information related to each and every episode, check out our premium subscription available through the Hidden Forces website or through our Patreon page at patreon.com slash Hidden Forces. Today's episode was produced by me and edited by Stylianos Nicolaou. For more episodes you can check out our website at hiddenforces.io. Join (37/38)
the conversation at Facebook, Twitter and Instagram at Hidden Forces Pod or send me an email at dk at hiddenforces.io. As always, thanks for listening. We'll see you next week. (38/38)
This is the full transcription of podcast 'Hidden Forces'.
A.I. Future Utopia or Apocalypse Ten Visions For Our Future Kai-Fu Lee #Podcast #Transcription #ReadAlong #KnowledgeUnlocked
What's up everybody? My name is Demetri Kofinas and you're listening to Hidden Forces, a podcast that inspires investors, entrepreneurs, and everyday citizens to challenge consensus narratives and to learn how to think critically about the systems of power shaping our world. My guest in this week's episode is Kai Fu Li. Dr. Li currently serves as CEO of Sinovation Ventures, a leading Chinese technology venture firm and was formerly the president of Google China and a senior executive at Microsoft, SGI, and Apple. He's the New York Times best-selling author of AI Superpowers and is out with a new book titled AI2041, 10 Visions for Our Future, which provides the foundation for today's conversation about the future of our world, what it's going to look like, and the challenges and opportunities that such a world will create. In the first part of today's episode, Kai and I discuss a number of key technologies that he believes will play a pivotal role in transforming our lives over the (1/38)
next 20 years, such as artificial intelligence and quantum computing, how these technologies work, and their application in fields such as autonomous driving and predictive analytics. Most of the first half, however, is spent on the subject of deep learning, which is a subset of machine learning, which itself is fundamental to many of the transformative technologies that we speak about today. In the second half, which is available to our premium subscribers, our conversation turns to the subjects of deep fakes and autonomous weapons, job displacement, as well as digital currency, and how to think about money and the type of post-scarcity world that Kai Fu believes we're progressively moving towards as the technologies we discuss today are increasingly integrated into our applications, devices, and systems. Again, a fascinating discussion that fits right in with the type of content that you have come to expect from this podcast. If you enjoy the first half of today's conversation, I (2/38)
encourage you to take the leap and become a premium subscriber. If you aren't already, there's no commitment, you can cancel at any time, and the entire library of premium content going all the way back to episode one becomes instantly available to you, including the overtimes, transcripts, and rundowns, depending on your tier. So without any further ado, please enjoy yet another incredibly informative and engaging episode of Hidden Forces with my guest Kai Fu Li. Kai Fu Li, welcome to Hidden Forces. Well, thank you. Thanks for having me. It's great having you on. I thought we started this recording 15 minutes ago, and I forgot to press the record button. It's funny, we're talking about the most advanced suite of technologies, and this is a clearly an example of both a very rudimentary technology and one which works fine, if not for the mistakes of the operator. So congratulations on your, what is your second book? Your first book was AI Superpowers. I would describe this book as (3/38)
primarily a nonfiction book that uses fictional stories as thought experiments meant to both help readers understand the most important technologies that you expect to play a role in our lives over the next 20 years, and to convey how these technologies could change our lives, our identities, and our conceptions of the world in ways that are very difficult for us to imagine. Do you think that's a fair description of the book and how would you describe it? Yeah, actually, I couldn't describe it better myself. That's exactly right. What I would add is that the reason I wanted to use the fictional stories is to make technologies more understandable and even entertaining to people who might otherwise find high tech like AI to be intimidating. And because AI is so important, people should understand it and telling stories is the best way for people to understand. And that's why I have a co-author who is a well-known science fiction writer and he writes the stories and I create the what (4/38)
technologies are doable map and he writes stories from that and that hopefully delivers the goal. How did you go about choosing the scenarios for the book and were there any scenarios that you had to leave off the table? Well, choosing the scenarios is really brainstorming that considers the many technologies I wanted to cover and they needed to be covered in a sequence from easy to hard. And I also wanted to connect the technologies to different industries like healthcare, education, and so on. And my partner, he wanted to place it in 10 different countries. So it was a fun puzzle where we try to play with these pieces until everything fits. I think we managed to get everything in because I think some of the things we left out are really just didn't have space for it because it can't just be about AI, right? Because many other things are also important. Quantum computing, blockchain, drug discovery, and energy, materials, climate are all important. So we included all of that in the (5/38)
book. One technology we just couldn't get in that I thought was quite important are related to gene editing and CRISPR. And we just couldn't fit that in the story because that had to be a major part of the story, our ability to edit our own genes. It couldn't just play some secondary role. And we just went out of space and we had to leave that off the table. It's really not AI per se, but it is related to AI. Yeah, I noticed that I was going to ask you about it. You did get to fit in autonomous weapons, which is something I do want to ask you about. And you did cover the medical applications of artificial intelligence and precision medicine. So that's something that we'll also discuss as well. What are some of the misconceptions that you think people have around what AI is and how do you think most people think about what it is and what is it? How would you describe it? Right. So I think the first misunderstanding is that people think programmers program AI, the way that people think (6/38)
if then else kind of rules. And it's true that once upon a time, 40 years ago or so, 30 years perhaps for some people, this type of rule-based approach was predominant in AI. But it was around 30 years ago, but really was not became dominant until the last five or 10 years. A new subfield of AI called machine learning became the dominant subsector of AI. And machine learning does not work at all with human micromanaging decisions. The way machine learning works is that it takes a large amount of data and figures out how to make decisions from the data. And the human doesn't really have an opportunity to micromanage and set the rules. The human just says, here's the goal. Here's a bunch of data and let AI figure it all out. The advantage of taking such an approach is that as you have more data, the decision making it becomes more accurate. And that's why we see AI beating people as more and more data are gathered running on powerful computers, training these smart machine learning (7/38)
models that eventually outperform people when trained on enough data. Yeah, that's super interesting. And that's something I want to discuss too, because it has implications for the social implications of AI, which is for example, while there's a model for learning in these systems, the systems don't necessarily generate or certainly they don't generate models that we can inspect and understand. And so they arrive at decisions in a way that almost feels like oracular, magical. And how do we incorporate such systems in our existing frameworks and regulatory models that rely on accountability and the ability to extrapolate from an event an explanation? That's something that I definitely want to discuss with you at some point. So there are 10 stories in the book, as we discussed. When I was preparing for this conversation, there were certain ones that really resonated with me that I wanted to cover. But as I started going through them, I realized, okay, well, these are actually (8/38)
structurally in order on purpose, because they sort of lead the reader by the hand. And there's a lot of aspects of AI that are the sort of AI complex, let's so to speak, not necessarily deep learning that are present in all these different stories. So it isn't that just one covers one aspect. The opening story, I think is the one that is most maybe relatable isn't the right word, it certainly is relatable in a way, but it's also the most believable because it's the most proximate to the world we live in today. And it revolves around a family in Mumbai who is signed up for this deep learning enabled insurance program. And as part of that, the family uses a series of applications intended to improve their lives in a way that is ostensibly concordant with the objective function of reducing their insurance premium. What was your goal in telling this story? And what did you want readers to take away from it? Right, while people are concerned about large companies with a lot of data. And (9/38)
the example in this story is a company that is even larger than the likes of Google and Facebook, because they produce social networks and e-commerce as well as insurance. So it's combining several internet giants into one. And that allows it to learn from much more data from each individual, thereby providing excellent results on the AI, meaning they can optimize insurance premiums for individuals. They can help people pay less premium, which means for health insurance is help people get sick, not as much, or don't get very sick, because those cost a lot of money for the insurance company and a lot of pain for the individual. So the second point related to that that I wanted to get across is that even when the owner of AI appears to be highly interest aligned with the individual who buys the policy, things can go wrong. Because when people look at why does Facebook or YouTube show me things that make me angry or frustrated or violent or waste so much time, and people can explain as (10/38)
the documentary social dilemma has very well done, is that, hey, YouTube and Facebook want you to spend more minutes, and that helps them make money, but they don't care the quality of the content you see. So they keep showing you things that you'll keep clicking, and that's what causes the addictive behavior and the regret after you watch so much. But I wanted to present in the Golden Elephant a story where the insurance company and you want the same thing, which is don't get sick as much, be healthy, so you don't have to get insurance company to pay for your illnesses. And yet, when it appears to be so interest aligned and well-meaning, still things could go wrong. So I wanted to get that point across. So this is really awesome. I read the first book that I had ever read on AI was a number of years ago. It was called Super Intelligence. And I learned quite a bit about all the things that could go wrong with AI, some of them very heady, sort of out there theoretical, but some of them (11/38)
very concrete related to the objective function in this case. What are some of the ethical and technical challenges associated with implementation, with implementing this type of learning function, or this kind of targeted outcome to more and more of the machines and applications that we interact with every day? Well, first, it's just the awareness. Many often the engineers aren't aware that they're building in technologies that essentially brainwashes us or causes us to see things and think in certain ways. And that's how powerful these algorithms are. That's right, because the engineer is thinking, hey, I work for a large internet company that want to program the content so that users click more. Seems completely reasonable, because, you know, we people for offline grocery stores want people to come in the store and buy more and hang around more and they give people coupons and whatever enticements. So it seems like a completely normal and commercial thing to do. But what is also (12/38)
people are missing is that AI is so powerful that when you tell it, go do one thing maniacally focused on that, it will do so to such a degree of optimality and perfection that it can cause other bad things to happen. So to fix this, I think first the engineers and the product managers and CEOs have to realize what a powerful weapon they've got. And they have to build it carefully considering multiple factors, not just how much money they make, how much we click. But also, is it showing quality content? Is it showing bias content and how to control the quality of content, reduce fake news, etc. So I think the awareness and then building in the processes and the tools that will help the products not to have some of the negative side effects. Well, this is the part of AI that I find have always found the most interesting and fascinating, because it grapples with philosophical questions and concepts that people have been dealing with for millennia. And there are no good answers to these (13/38)
questions. Or rather, there are good answers, but there aren't any answers that we can definitively point to and say, aha, that's the right answer. And so what is the ethical dimension of this, which is that there are no universal ethics that we can empirically point to and say, these are the correct ethics for society. So one, how do we as a society go about deciding? Or first of all, do we have to make decisions about who we can entrust with making these decisions? And then second, how do these individuals make the right decisions? Then how do they go about constructing the right objective function? And then how, and now I'm reminded of an episode we did on philosophical mathematics, where we looked at Wittgenstein and the challenge of logical clarification of thought. How do you translate? How do you take what your intention is and properly instantiate that in code so that you actually get the effect that you want? Understanding that these are, this is very complex. I mean, this is, (14/38)
I certainly can't appreciate how complex it is. I can only imagine. Yeah, there are many things we can do. There's no way there can be a perfect answer. Even prior to AI, even humans, we make lots of errors in bias and unfair decisions, and we don't explain ourselves well. And people do things to cause other people to get addicted to. So let's take a step back and not assume without AI, anything's perfect. I think we should at least deliver a decent experience. So often, there are, I think, awareness, education of the engineers and CEOs who work on these projects. Secondly, I think there should be regulations, you know, just like there are regulations against certain child pornography, there's regulations against sending out pyramid schemes and chain letters. So things like that should be used to prevent extremely bad behavior for the companies that own all this data. They have to be responsible. Third, I think there can be tools that will catch problems. So if an AI researcher is (15/38)
trying to train a new model for, you know, Facebook or something, and then the person didn't use enough women training data, so the algorithm may become biased against women, then, well, AI should be able to detect that and say, you can't launch that unless you fix the data fairness problem or the data distribution problem. So technology can be used. And then lastly, I think there can be social and market mechanisms that are essentially working to become a watchdog for companies that misbehave. So for example, maybe there can be a metric of how much fake news is in every social media or how much deepfakes are they let through their software and scores are published on a monthly basis. So that forces the companies to behave well. And if they don't do a good job, there could be regulations, there could be fines, there could be audits, just like their financial audits. So these things could take a decade to all be figured out. But I think once there's awareness, then there are people in (16/38)
public and private sector who will try to fix these problems. Yeah, I mean, I think that's a great point, which is that this is a work in progress and you would be working alongside researchers and developers and engineers, we're working alongside the evolution of these systems. I think where concerns around the initial setting of conditions are, how would I describe it, our most dystopian is when you think about the long-term trajectory of AI and do we end up creating something that ends up either for malevolent or benevolent reasons or benevolent reasons replace humanity. You mentioned deepfakes, I want to talk about that because that's the next story in the book. Before we go there, I have one last question and maybe we'll get into more details on this in the overtime. And it has to do with attacking these systems. Do you envision ways in which attackers would attempt to either attack the objective function itself, trying to mess with the objective function, or the input data in (17/38)
order to, as another way, mess up with the output? How do you see ways in which these systems could be vulnerable to attack? Yeah, AI security is yet another new field that's different. Just like when we had PC, the malware usually mess with our Windows registry and the things to our computer, disabled it. When mobile often is in there to steal the money. And then with AI, there are a number of ways that the bad people can get in. One is just by poisoning. So it feeds the wrong training data so that you train something that ends up doing something you don't want, unable to recognize something that you should, or always let these bad people go through in facial recognition or something. So that's one possibility. Another is when is AI being run, you find this fragility, and then you do something with the inputs that is being tested to trick it because it's never seen anything like that before. So we've seen people who've put some tapes on a stop sign causing autonomous vehicles to no (18/38)
longer recognize it as a traffic sign. Yet all human drivers would recognize it. So because AI is only as good as all the training data it's ever seen, so most training AI have seen stop signs that are far or near with paint coming off, maybe with some snow on it, but they've never seen stop signs with cross tapes on it. So it could get confused. So that's another approach. I'm sure there will be others. So I think we have to really be careful and start the research ahead of time before the bad guys take advantage of all these AI holes. So you actually have a chapter in the book called The Holy Driver, which is about autonomous vehicles. And it's actually super interesting because it adds a dimension to the implementation of such technologies that I hadn't considered, which is the Holy Driver, which is human intervention. So how advanced is autonomous vehicle technology today? Because I think some people, well, I think for a few years ago people were surprised at how advanced it was. (19/38)
Maybe they didn't realize just how far we'd come. But maybe today, I think today there are a lot of people that might have the opposite point of view, which is they think it's more advanced than it actually is. So how advanced is it at present? And if you could sort of summarize how autonomous vehicles work, given without having to repeat everything we've already talked about, about how AI works or how deep learning works. Sure. So autonomous vehicles take a bunch of inputs and uses that to decide how to manipulate the steering wheel, the brake and the accelerator and so on. And the input it gets are input from the many cameras that they put in an autonomous vehicle and also a number of other sensors, such as LIDARs and other types of sensors that sense the condition around you. It tries to make out is that the shape of the thing coming at you. And then on top of that, it has deep learning, trying to recognize from all these subjects, which are pedestrians, which are cars or trucks, (20/38)
and which are stop signs and traffic lights and sky and cloud. And then based on that, it's further trained on how to continue to follow the road and the brake when the car in front of you stops. So it's a lot of complex issues. It takes a human some 40, 50 hours to learn how to drive. So this is not something trivial. Some people never learn. That's right. That's right. So AI may not see all the data of all the permutations. So that's why today in constrained environments, AI already drives extremely well. So environments like a inside the warehouse, drive a forklift, that is AI can do so much better than people. In fact, if there aren't people around, they can drive really fast. And even with lights off, they can often do still run in the warehouse. We actually have invested in such a company. And then as you go to more complex scenarios in buses, AI can still do a decent job because that's in a fixed route and fixed stops. Trucks on highways, AI can do a great job because highways (21/38)
are natural for AI because there aren't a lot of strange things happening with crossroads and and pedestrians and all that doesn't have to worry as much about them. AI can also do better in well lit conditions without a big storm or snow or something like that. So AI already drives better than people in the scenarios I told you about, some of which people think is hard, you know, driving on the highway. Some people are scared of that. But AI is actually quite good at it because it's a relatively constrained environment. But then when we get to, you know, driving in the night with heavy snow in a downtown with pedestrians walking about, in that case, I would not ride in any autonomous vehicle today, because there's just too many long tail things that will take much longer for AI to collect enough data or do simulations to train on. So the approach that the industry is taking is gather a lot of data, start from simpler environments. For example, when you drive a Tesla, all the pilot is (22/38)
used with humans still supposedly watching over and stopping when the AI makes a mistake. And it's doing things like summoning when you park the car. And it's all at the same time, it's gathering data to make it work better and better. And when it improves, Tesla will update your software, then it gets better. So that I think is generally how autonomous vehicles will work. Start with constrained environments, gather a lot of data, improve, then go to the less constrained environments and eventually reach a complete replacement for humans. Yeah, two interesting conceptual observations. One has to do with something you said very early on when we were talking about how most people conceptualize AI, which is a lot of people still, probably older people, think of AI in very atomic terms. They might think of it in terms of the interface, the robot, the entity. When people think about in this context, in terms of autonomous vehicles, maybe the old way of thinking about it was kit from Knight (23/38)
Rider, the car itself. But of course, in this case, the lessons learned by individual cars are not learned by that car, it's learned by the entire computational system that informs each of those individual pieces of hardware. Number one, I just wanted to reemphasize that point. But then I have a question, which is is one way of thinking about intelligence or defining intelligence, the ability to work well in environments of uncertainty or environments that are unpredictable, is that how one way we can think about what an intelligent machine is? Well, I think that's one of the expectations of intelligence. And there are many other aspects, right? Being able to analyze chess moves seems like a perfectly reasonable measure of intelligence until computers learn to do that. So what you just described is something that humans can do and AI cannot yet do, dealing with unseen environments. But someday AI may be able to do that. So I think we can probably list 30 or 40 things that we used to (24/38)
think made humans intelligent. And for the past 10 years, AI has been overtaking humans in some of these tasks. And yet others are still quite a ways to go. So one last question on autonomous vehicles, because this raises a lot of the social, ethical, political considerations that we touched on earlier. But in perhaps more immediate ways, one thing we didn't talk about, we talked a little bit about the black box problem, which exists also here, right? Which is in terms of how do you manage liability? Who's to blame? And also, how do you determine how a decision was made? And if you can't determine that, well, then how do you assign blame or how do you just go about thinking about that problem? That's one. And then there's the so-called trolley problem, which brings us back to the issue of ethics and the designing of objective functions. So one, maybe you can let our listeners know what the trolley problem is. And then more to the point, again, how is this an example of, for a (25/38)
technology that's right, we're dealing with it right now, how do we go about regulating the space? How do we go about managing this problem? Which is that these systems are going to result in casualties specifically. Right. And bad outcomes. And something I didn't ask you before is, should the metric of success simply be that the outcomes result in fewer bad outcomes than they would under the conditions of a human operator? If so, how much better should the outcomes be? In other words, how much value do we assign to the ability to simply understand why something happened, as opposed to simply getting a better outcome? If that makes sense. Yeah, absolutely does. These are very complex issues. I think from a, first, the trolley problem is the case where the trolley moves by default in a particular direction. The driver has to push it in order to move it to another direction. So the trolley problem describes the dilemma that the driver faces when it's inevitable the trolley would hit, (26/38)
let's say, two people if the car were to kept going straight. And then, but if the driver pulls the lever and moves it to another track, it would only hit one person. So is it morally right or wrong to pull the lever? Because if the driver doesn't pull anything, it's not his or her responsibility, but two people will die. If you pull the lever, you save a life, but then you're deliberately killing that person who would otherwise not have to die. And that person may be crossing the tracks thinking is perfectly safe because the trolley car wasn't supposed to go that way. That's the ethical moral problem. And I think the autonomous vehicle problem is akin to that because computers AI will be making decisions on left turn, right turn fast, slow that will have lives that ride on that decision. So I think the programming per se is not by rules. So you don't really say if there are two younger people, one older people, then do this and do that. It's no human will ever have to have to program (27/38)
that. Think of it as more like programming, get people from place A to place B, and on the average have the fewer lives lost. That's probably more or less the direction humans would give it. So because these systems aren't deterministic or because the deterministic function is so complex that it isn't open to our understanding, do you foresee us getting to a point with these systems where you start getting really bad outcomes, people panic, they don't understand why they're getting the bad outcomes, they can't really investigate them and understand why they're happening. And so how do we as a society and as governments wrap our arms around those eventualities? Yeah, this is a really tough one. First of all, there are going to be some people who will think it's totally unacceptable for machines to ever make decisions that cause human casualty. And if the majority of people think that, then AI will never get off the ground, then we should stop all the work. So assuming that we as a human (28/38)
race accept that sometimes, not intentionally, because intentionally it would be an autonomous weapon. But in order to deliver a goal that is proper and helps humans overall, there are lives lost anyway, but under what conditions can you allow a AI product to launch even though it leads to, let's call it unintentional, basically casualties. So I think as a society, we do have to detect, debug and try to fix each casualty, but it won't be if then else rules, did you break the law, if you did go to jail kind of situation, but rather programmers will have to go back and see if they have to gather more data and things like that. And as far as the level of explainability, I think it will be possible with some more research for AI to approximate human description of why something happened, because humans aren't perfect explainers either. So the AI decision is certainly way too complex for us to understand, but it can tell us the most prominent five reasons are ABCDE enough for people to (29/38)
understand and assess whether this is a horrendous mistake or not. Yeah, humans are horrendously bad at providing honest explanations. They're very good at coming up with explanations for why they did something after the fact. That's right. It reminds me of an episode we did with Jonathan Haidt where he wrote the book, The Righteous Mind. And I think he said in that book that decisions come first or something to that effect, decisions come first, strategic reasoning second. So we reason after the fact, which is kind of scary when you think about it. So you mentioned autonomous weapons. Those are wrapped or rolled into a story called quantum genocide dealing with quantum computing as well. And the story is kind of this Unabomber-esque, Ted Kaczynski-esque character. First of all, tell us a little bit about the story and then use that as an opportunity to explain what quantum computing is because I did one episode on quantum mechanics. I took a class, an online class of Leonard Suskinds (30/38)
from Stanford and I still don't understand quantum mechanics. And so quantum computing is like one step removed. And I think it's so intimidating for people. So how maybe you can help bridge that divide for most of us today? Sure. The story of quantum genocide really has covers two important technologies. One is quantum computing. And this mad scientist used quantum computing to break the security Bitcoin wallets and stole money from all the Bitcoins around the world. And he used this Bitcoin that he stole, tens of billions of dollars to create autonomous weapons, which are these very tiny drones that we can hold on our palm. And these drones will recognize any face from a list of faces and attempt to assassinate them. And then this Unabomber-like terrorist believes the world has gotten to a terrible state that it's in because of all the elites. So the elites are the political figures and business leaders, etc. So he proceeds to eliminate them through assassination. So that's the two (31/38)
sets of technologies. Quantum computing is different from what's called classical computers in the sense that it is not binary, but it holds all possibilities open. So instead of programming a computer to be everything is yes or no and make decisions or run code, quantum computing has many so-called qubits, which could take on any value. And they're all tried simultaneously. So when you have a 4,000 qubit computer, you actually essentially have a super smart computer that can try all the permutations of 4,000 things. So imagine you're trying to still run an AI algorithm, or you're trying to in the case of stealing Bitcoins, you're trying to guess the password. So think of it as you're trying to guess the password, but you're trying all the permutations of all the possible bits of a password at the same time and outcomes the answer. So that's the power of quantum computing. And every time you add a bit, the computer doubles in its capabilities. So it's something we couldn't imagine (32/38)
before. And it's also very suitable to model things in the real world because of the relationship with quantum mechanics. So you can use it to simulate your body and what happens to your body when a drug is introduced to your body. And then you can test the efficacy of drugs potentially one day without having to do much clinical trials anymore because you're simulating the human body. And you can similarly simulate the world, simulate the effect of different types of climate control. So it's really directly simulating the world while a classical computer is an arbitrary tool that is much more limited. So that's the power of quantum computing. Let me stop here if you want to go to autonomous weapons. Sure. Before we go to autonomous weapons, I'm curious, how difficult is it to actually get quantum processing to a place where it has a meaningful impact on all these other technologies, including AI? What are the bottlenecks to doing that? How realistic is it that we get to such a place in (33/38)
the next 20 years, which is the scope of your book, or even 40 years or 50 years? Yeah, this is one of the most uncertain predictions in the book, which is when will a 4000 qubits quantum computer work? And the reason I picked 4000 is that's approximately what it would take to break a Bitcoin wallet. And because that's arguably one of the first highly lucrative applications, even though it's a malevolent one. And the road to 4000 qubits, you can project based on the progress of the scientists in the last few years. We've gone from a few qubits to tens of qubits. Now we're in the low 100. I think we're about 200 qubits or so. So we've have seen improvement. So some optimists would say, hey, we're an IBM is saying, you know, they think they can improve, they can add quite a bit a year based on the IBM roadmap, they'll be at 4000 qubits in probably, you know, 10 to 15 years. So that's where the estimate comes from. But they also acknowledge, though, that the difficulty of adding more (34/38)
qubits is it's all about managing stability because these qubits are, you know, superconducting material that is highly unstable. So building a large quantum computer is really scientists figuring out engineering ways to maintain stability. So based on the best of my research, because this is not my area of expertise, most people who work in quantum believe that 20 years is a reasonable time frame in which to build a 4000 qubit system. So I rely on the expert estimates. I wouldn't say it's a 100% accurate prediction, but it's their rough estimate seeing how much progress has been made, how much time it would take to stabilize 4000 qubits. So Dr. Lee, I'm going to move the second half of our conversation into the overtime. Like I said, there are 10 stories in the book. I think we covered maybe four so far. We'll do our best to cover the rest, but there are certain ones that I absolutely want to cover. As I said, autonomous weapons folds into this chapter on quantum genocide, which we're (35/38)
going to cover right when we get back to the other side of this conversation. Your last chapter is also fascinating. I think it's titled Post-Scarcity or no, something along those lines, but it deals with the post-scarcity world. That's right. Yeah. And that also touches on money. And how do we think about money in such a world, which I found fascinating and very relevant to our listeners. There's also a chapter on happiness optimization, which will allow us to dig deeper and cover some areas that maybe we didn't get around objective function and data privacy. Also applies to issues of blockchain technology. We didn't really cover job displacement. I think that's super important, and that's something I would really like to discuss. And also deepfakes and VRAR as well, because these are all technologies that while quantum computing is something that most people, it hasn't really pervaded our lives yet. Deepfakes and in general, fake news, so to speak, is a problem that we're all dealing (36/38)
with now. A lot of people have used VR headsets, AR, incredible mind blowing technologies that really show you just how far we've come. So these are the kind of the where I'm focusing my attention. For anyone who is new to the program, Hidden Forces is listener supported. We don't accept advertisers or commercial sponsors. The entire show is funded from top to bottom by listeners like you. If you want access to the second hour of today's conversation with Kaifu, as well as the transcripts and rundowns to this episode and every other episode we've ever done, head over to hiddenforces.io and check out our episode library or subscribe directly through our Patreon page at patreon.com slash hiddenforces. There's also a link in the summary page to this episode with instructions on how to connect the overtime feed to your phone so that you can listen to these extra discussions just like you listen to the regular podcast. Dr. Lee, stick around. We're going to move the second part of our (37/38)
conversation into the subscriber overtime. For more information about this week's episode of Hidden Forces or if you want easy access to related programming, visit our website at hiddenforces.io and subscribe to our free email list. If you want access to overtime segments, episode transcripts and show rundowns full of links and detailed information related to each and every episode, check out our premium subscription available through the Hidden Forces website or through our Patreon page at patreon.com slash hiddenforces. Today's episode was produced by me and edited by Stylianos Nicolaou. For more episodes you can check out our website at hiddenforces.io. Join the conversation at Facebook, Twitter and Instagram at HiddenForces.pod or send me an email at dk at hiddenforces.io. As always, thanks for listening. We'll see you next week. (38/38)
This is the full transcription of podcast 'Hidden Forces'.
What Comes After Secular Stagnation Barry Eichengreen #Podcast #Transcription #ReadAlong #KnowledgeUnlocked
Brad Setzer at the Council on Foreign Relations has connected the continued dominance of the dollar in international reserves to the fact that the main current account surplus economies, China and the oil exporters of the Middle East, Saudi Arabia in short, are running current account surpluses. The United States is the large economy that is running current account deficits. So the only way to make those surpluses and our deficits add up is if those economies continue to accumulate dollars in payment, in settlement for our purchases of Chinese merchandise and Middle East oil, if you will. On the other hand, those current account and capital flows do not obligate anyone to use a particular currency in settlement, invoicing of transactions. So I think China can continue to build up its Renminbi based cross-border interbank payment system to settle some of its bilateral transactions even as its central bank is continuing to accumulate dollars. Let's talk about this a little bit because we (23/38)
but banks and firms make more strictly commercial decisions about what currency to use. They look at the cost of getting in and out of a currency and they see the cost of getting in and out of the dollar as low, so they stick with it for their private commercial and financial transactions. Can these two aspects seriously decouple from one another? Could central banks and governments move away from the dollar big time while banks and firms stick with it? I don't think so. I think there has to be a broad parallelism in the trends in the two dimensions because if banks and firms are borrowing dollars offshore and then they get into trouble, their central banks are going to have to be able to lend them those dollars. Part of what we're seeing may be that currency swaps have become more important that foreign central banks don't have to hold dollars if they can swap their currencies with the vet and obtain dollars that they can then turn around and lend to their banks and firms. But broadly (16/38)
no traffic and just burden the government with more debt that it can't repay. Do you think that we're seeing the emergence of a bifurcated global economy? I worry that we're seeing the emergence of a bifurcated global economy. China and the United States are still one another's number one or number two most important trading partners, but bilateral foreign investment has fallen off. The Chinese are investing abroad, but not so much anymore in the United States. US companies are investing abroad, but no longer in China. There are important economies aligned with the United States like South Korea that depend importantly on trade with China and non-aligned countries like India that continue to deal with both economies. I think a bifurcated global economy where economic relations between the US and China broke down and there were more trade restrictions and retaliation and bilateral financial flows dried up entirely would be disastrous for the global economy. As you and I speak later this (27/38)
What's up, everybody? My name is Demetri Kaffinas, and you're listening to Hidden Forces, a podcast that inspires investors, entrepreneurs, and everyday citizens to challenge consensus narratives and to learn how to think critically about the systems of power shaping our world. My guest in today's episode is distinguished professor of economics and political science at the University of California, Berkeley, Dr. Barry Eikengreen. Dr. Eikengreen is a prolific author and a highly regarded historian of monetary economics and political economy. In his first appearance on this podcast nearly five years ago, he joined me to discuss the legacy of the Great Moderation, a multi-decade Goldilocks period of low inflation and positive economic growth that lasted somewhere between the mid-1980s and the onset of the great financial crisis. The period that we've been living in up until very recently and that some have called secular stagnation was characterized by historically low interest rates, (1/38)
sluggish economic growth, persistently low inflation, and growing levels of social and political instability. One of the main questions that Dr. Eikengreen and I wrestle with in this conversation is the current period of higher inflation and rising interest rates, a temporary phenomenon soon to be followed by a return to secular stagnation. Or are we entering a new economic paradigm where sovereign debt levels in the developed world become unmanageable, multilateral cooperation breaks down, and state power grows at the expense of capital and labor. Our conversation includes a discussion about the future of the US dollar, the potential internationalization of the Chinese Yuan, and the role of gold and other commodities as potential reserve assets in a world where fiat-based collateral comes increasingly under stress. This episode is part of a series that I've been putting together on the future of the US dollar, the move from unipolarity to multipolarity, and the evolving impact of (2/38)
great power competition on global trade and finance. You can find other such related podcasts on this week's episode page at hiddenforces.io, where you can also access the second part of today's conversation by joining one of our three content tiers. This gives you access to our premium feed, which you can use to listen to the second part of today's conversation on your phone using your favorite podcast app, just like you're listening to this episode right now. If you want to join in on the conversation and become a member of the Hidden Forces Genius community, which includes Q&A calls with guests, access to special research and analysis, in-person events and dinners, you can also do that on our subscriber page. And if you still have questions, feel free to send an email to info at hiddenforces.io, and I, or someone from our team, will get right back to you. And with that, please enjoy this excellent conversation with my guest, Dr. Barry Eichengrin. Dr. Barry Eichengrin, welcome back (3/38)
to Hidden Forces. Demetrius, it's been a while. It has been. You were on the podcast in the early summer of 2018 to talk about primarily the evolution of populism in the United States. And we also got into a conversation about the Euro, the future of the Euro, the future of the Yuan, and also some geopolitics, because you had written a paper a year before that on the geopolitical premium in a reserve currency. So before we start, for anyone who's not familiar with your work, Dr. Eichengrin, can you tell us a little bit about who you are and how you got involved in economics? I'm a professor of economics and an amateur political scientist as well at the University of California at Berkeley, where I've been for like three decades. I got into economics because of an early life interest in the social sciences, what was going on in the political sphere, in the economic sphere, et cetera. And I found economics really for two reasons, an inspiring teacher that affects the direction in which (4/38)
many of us go. And because economics had a structure, it had models that I found comforting, congenial, if you will. Some of the other social science disciplines were a little touchy-feely for me, so I gravitated toward economics. At that point, I discovered that there were other people with more serious mathematical chops than me doing economics. So I ended up working on the border between economics and political science on the border between economics and history, where I could carve out my own terrain a little bit rather than competing with the advanced mathematicians. Was Golden Federer's your first book? Golden Federer's was my first book other than some edited collections and the like. So yes, it's risky to write a book in economics where one's peers judge you on the basis of journal articles. So I got tenure back in the day in 1987, at which point I embarked on the book, which came out about five years later. Very nice. So I was telling you before we started the conversation (5/38)
that I've been really interested in the intersection of geopolitics and global macro. For years, it's been something that we've talked about on this podcast, but it's become increasingly newsworthy as, for lack of a better word, the financial and political hemisphere has developed narratives around it. And it's a lot easier in those circumstances to speak to something because people are looking for it. One of the ways that I think about this is I try to think about what the period we're living through today will be remembered for. When I look back at like the 1990s, and for me the 1990s will be remembered primarily for the end of the Cold War and the commercialization of the internet. Those are the two big forces of the 90s. The first decade of the 2000s was Iraq and 9-11. And I actually don't even think of the 2008, 2009 financial crisis as part of that decade. I think of it as the 2010s, in which I also include the public revolt against the prevailing structures of power in society, (6/38)
manifest as political populism and in movements like Occupy Wall Street and Wall Street Bets, and social media, which has transformed our society in ways that I think we're only just beginning to really grapple with and understand. And this decade is already shaping up to be as explosive at the very least as the early 2000s with a pandemic of COVID-19 and with the war in Ukraine. But the big backdrop in all of this is this larger conversation of the global order. And are we currently living through a reorganization of the global order that is something analogous to what we saw during the interwar period or during the post-World War II period? What do you think, let's say if we were doing this conversation in 2030, what do you think this decade will have been remembered for? I think the decade will be remembered first for the backlash against globalization, the populist politicians and pressures, disaffection with the elites, identity politics, and problems around the management of (7/38)
immigration, that number one and number two, geopolitical tensions between the US and China. What's going on in Russia is a very, very unfortunate, deadly sideshow. I think the important geopolitical tensions are those between the US and China. And we're seeing that in the fact that contrary to widespread expectation, the Biden administration did not roll back the measures taken by the Trump administration vis-Ã -vis China trade policies and so forth. To the contrary, it escalated and broadened the economic measures designed to at least loosen the coupling between the two economies. So I think it will be backlash against globalization and US-China tensions that will be at the center of those future histories. Just to comment briefly on the connections between geopolitics and the international economy, there is a long tradition of scholarship focusing on those connections. I would go back to the work of Charles Kindleberger, the late great MIT economist and economic historian who wrote (8/38)
about how the changing of the guard between the US and the UK in the 1920s and 1930s brought down the gold standard, which in turn brought down the global economy. So he made those connections long before I did in that book you mentioned, Golden Fedders. But that emphasis kind of died away with the end of history, with the end of the Cold War. And now we have the end of the end of history. The new Cold War is back and people are rediscovering that geopolitics and international economics, geopolitics and international monetary and financial affairs are connected at the hip. Yeah, we actually, I want to point listeners to our episode with Perry Merling on the rise of the global dollar system and his book Money and Empire, which chronicles the life and times of Charlie Kindleberger, who I actually discovered coincidentally, grew up before he moved to Queens, grew up right across the courtyard from my apartment in New York. Which I think that building has been since demolished. So to go (9/38)
back to this thing about geopolitics and the changing order, it seems that what is clear today is that there is a large contingent of economies in the world, including the second largest economy, China, that are dissatisfied with the American led international order. In some cases, like in the case of Iran, or now Russia, it feels like these countries have permanently broke. Well, maybe Iran's a, it's too much to say that Iran is permanently outside the order, because maybe Iran doesn't have the kind of ambitions to ever lead the order. So maybe it could always swing in either direction, depending on whether or not it was actually brought into the fold. But certainly Russia feels like it's out of the order. Now whether or not Russia wants to collaborate or whether there's an opportunity for some kind of buying back into its commercial relationship with Europe, that's a separate question. But it's not clear what that future order is going to be. And part of that conversation also (10/38)
involves what the nature of the international dollar system will be. Let's start maybe with a question about the existing role of the dollar and what some people call dollar dominance. What do you attribute dollar dominance to? And how do we define that? Let me start with the definition that dollar plays an outsized role in cross-border transactions globally, depending on how you measure the size of economies. The United States is maybe 20%, 25% of the global economy. But the dollar accounts for 60% of the foreign exchange reserves of central banks and governments around the world. The dollar is the vehicle for the majority of cross-border transactions globally, including transactions between countries other than the United States. What do I attribute the dollars dominance globally to the long shadow of history? Basically, after World War II, the US was far and away, the dominant economy globally dominated the so-called free world. The US was the only country with deep and liquid (11/38)
financial markets open to the rest of the world. European countries had regulatory restrictions, capital controls on cross-border flows. Japan had regulatory restrictions, capital controls as well, and actively resisted wider global use of the N on the grounds that this would interfere with its industrial policies. So it was, you had to use the dollar and the US banking system if you were an importer or exporter or an investor seeking to do cross-border transactions virtually anywhere in the world. And there are complementarities between the different functions of the dollar because companies need and use dollars when they import and export merchandise. They sometimes have to borrow dollars from their banks. So their banks in turn try to obtain dollars from US banks and central banks in other countries, hold dollars because they may have to lend them to domestic banks in the last resort. So these different parts are interlocking and they kind of lock in dollar dominance or at least (12/38)
make it difficult to move away to alternatives. Europeans were long unhappy with this state of affairs. Charles de Gaulle and his finance minister, Valerie Giscard d'Estaing, were unhappy about this in the 1960s. And with the passage of 35 years, the Europeans created the euro in the hope that they would, with the expectation that they could create an alternative to the dollar that would be equally dominant on the global stage. It didn't happen. The Chinese are trying to promote international use of their currency, the renminbi, but their currency remains far behind the dollar and on most measures, they're making only slow progress. So there's an interesting conversation now about whether those alternatives will gain ground more quickly on the dollar. Now that the US is weaponized its currency, now that we have used Russia's dependence on the dollar in the US banking system against it, will other countries, not only Russia, but other countries in effect move away from having all their (13/38)
eggs in the dollar basket by seeking alternatives? Yeah, I want to let listeners know that we just recorded an episode and published it with Agathe Mare, who has written a book on sanctions policy and export controls. And we did one episode with Julia Friedlander shortly after the invasion of Ukraine on this same subject of the weaponization of the dollar if people are interested. I've seen analysts make the case for the dollar having become stronger over the course of its rise and arguments to the opposite effect, that it's become weaker. The weaker arguments or the less dominant arguments, I think, rely mostly on what you've put forward, that it's become a smaller share of international reserves, central bank reserves. I think it was 71% to begin the 2000s, and it's like you said, 60%, 59%, something like that today. The opposite arguments, I think, rest on what is more of a commercial argument, that the dollar has become more valuable, let's say, as a medium of exchange to use a (14/38)
maybe more modern term, though that goes back a while, but all the crypto stuff. Do I have that generally correct? And what accounts for those distinctions? Can a currency continue to function as a widely used medium of exchange, but become disfavored as a reserve asset for central banks? Yeah, I think you have the broad picture correct that central banks have been diversifying their reserve portfolios slowly, but surely, very slowly, but surely away from the dollar and mainly toward the currencies of smaller economies like Canada, Australia, Singapore, South Korea, Norway, Sweden. I would include Switzerland, a traditional reserve currency under that heading as well. At the same time, the dollar has not lost ground in the foreign exchange market and is invoicing and settlement currency for banks and non-financial firms around the world. The difference may be attributable to those geopolitics that we were talking about before, that central banks and governments are sensitive to them, (15/38)
speaking, I think there has to be conformance between the currencies that central banks and governments hold on the one hand and the currencies that their domestic banks and firms use on the other hand. So when you talked about the changing nature of the composition of international currency reserves, you highlighted that it hasn't been a move towards the euro, which maybe a lot of people would have thought if you were... In fact, I think even you may have said that early in the 2000s that if there was going to be a move, it would have been a move towards the euro. But instead it's been a move towards a larger number of smaller currencies. What has driven that reallocation in your estimation? First, there has not been movement toward the euro because there is a very limited supply of safe and liquid public label, meaning government issued bonds. Last time I looked, there were only four euro area governments with AAA ratings and its AAA rated bonds that central banks prefer to hold (17/38)
other things equal. There were hopes that next generation EU, this 850 billion euro European Union bond taken in 2020 in response to the pandemic, would change that. But next generation EU has been very slow to roll out. It looks like a one-off. They didn't do something similar in response to the energy shock last year. So it's been hard to move toward the euro because of a shortage of safe and liquid euro-denominated government bonds. On the other hand, Canadian dollars and Australian dollars and the like have looked relatively safe. Some of those bonds of smaller economies have had positive interest rates, which look attractive relative to the negative interest rates that have prevailed in Europe until recently. It's become easier to trade currencies even of smaller economies because of electronic trading platforms with automated liquidity provision and currency matching. Algorithms, bid-ask spreads have come down toward the bid-ask spreads on the currencies of big economies. If you (18/38)
want a China play, you want a currency that moves along with the prospects of the Chinese economy as opposed to the US economy. Until recently, there was an argument for holding Australian dollars, for example. Australia-China is another example of recent decoupling, but until recently, Australia's fortunes have been closely tied to China's. So I'm an economist. I can't give you one answer to a question, but I can give you two or three. Is that a movement that you expect to continue? Do the network effects and lower costs associated with transacting in dollars become less appealing in a world where you have alternative settlement solutions and possibly, let's say, stable coins or CBDCs? Yes. I do expect the trend to continue because I expect the cost of trading currencies moving in and out of them to continue to go down with advances in the digital sphere, maybe including central bank digital currencies. Don't see why not. And the second, remind me now, the second part of your question (19/38)
was... If that would make the commercial use case for the dollar, the argument for the dollar strength less compelling because there are alternatives for being able to move between two pairs since you've got an intermediary currency that you can use rather than having one dominant currency that everyone's using. Yes. So I made that argument in a book that came out in 2018 called How Global Currencies Work with two co-authors, Arno Mel and Olivia Cheetu. We argued that the network affects the complementarities between the different functions of a currency and the pressure, the advantages of using the same currency and cross-border transactions that everybody else is using. That's what we mean by network effects in this context, that in a high-tech digital world where it becomes easy to pull up an app on your smartphone and trade a currency at relatively low cost, those network effects and complementarities will weaken and we will see more diversification away from the dollar in all of (20/38)
these different international domains. So we made that argument now five years ago. I think that trend is ongoing, but recent events have reminded us that movement away from the dollar is still relatively slow. I might even call it glacial, so I've been surprised given all this action in the digital sphere and weaponization of the dollar that such movement hasn't been faster. It can always accelerate going forward, but there has been a lot of political and economic turbulence. We had Donald Trump for four years, the unpredictable President Trump and his unpredictable trade policies and that did not precipitate the fast movement away from the dollar that some people had expected. So how much of that glaciality, if that's even a word, is a result of all the effort that's been invested in and the network effects that result from the use of the dollar after so many decades and how much of it results from balance of payments and the way in which the underlying economies have been structured (21/38)
so that it's not so easy. This is the thing that I think is interesting, at least how I frame this and look at it. The Chinese absolutely want financial, economic independence from the United States because they want political independence. They want to be able to have complete autonomy. They don't for sure want to have happened to them, what happened to Russia. But at the same time, so much of their economy has grown up around the US dollar based international trading and financial system and has resulted from trade and engagement with the rest of the world and the persistent running of structural current account deficits by the United States. So how do we separate those two? The fact that yes, there are network effects associated with dollar and US dollar based financial infrastructure, but there's also an economic reality that has depended on various economies playing various different roles. I think we can separate those things by looking at the different uses of the dollar. So (22/38)
touched on the rise of the international dollar system post World War II at the beginning of this conversation. And part of what facilitated the dollar's rise was the Marshall Plan and the recycling of dollars. And the Marshall Plan, as it was structured, was less of a loan, more of a grant than what, let's say, China seems to be doing with BRI. One, do you agree with that? And two, how important was the Marshall Plan and what China, do you think, need to do something similar in order to get countries to adopt the yuan and to further internationalize it? After World War II, trade flows, current account balances were the main thing that drove the balance of payments. There was a dollar shortage in Europe because European countries had basically used up their dollar reserves to finance their war effort. They found it difficult to get their economies going because they needed imported merchandise, cotton imported from the United States and elsewhere in order to get their textile exporting (24/38)
industries up and running, and they needed other imported equipment. So the Marshall Plan was important for getting European economies on their feet, again, restoring their capacity to export and earn dollars. More generally, I think the Marshall Plan did play a critical role in the golden age of economic growth in Europe and Japan, getting it started in the third quarter of the 20th century. Do I think the Marshall Plan was critical for solidifying the dollar's international role? Not so much. I think the dollar would have been dominant had the European economy been robust, as it was, or had it limped along in the third quarter of the 20th century, because, again, only the United States had deep and liquid markets open to the rest of the world. I think China now is in a different situation because not only are there trade flows as there were after World War II, but we live in a world of capital flows as well, until recently anyway, other countries have been investing in China. China (25/38)
has been investing abroad via Belt and Road and in other ways as well. I think Belt and Road probably has not been critically important for China's Ren-Men-B internationalization drive. The data that I've seen from the folks at the College of William and Mary who've done the best work on this suggests that the majority of China's Belt and Road loans have been denominated in dollars, not in its own currency, because dollars have been what foreign construction companies and the like want and use. That could be changing as we speak, but I don't see that Belt and Road has been either important for Ren-Men-B internationalization or that it has played a positive role in economic recovery and development in the recipient countries in the same way that the Marshall Plan did after World War II. We all know the stories of Sri Lanka and Pakistan and elsewhere where Belt and Road has probably unbalanced played a negative role. The stories of railways in Kenya financed by Belt and Road that carry (26/38)
week, Secretary Yellen is supposed to meet with her Chinese counterpart in Zurich, I believe, and try to begin to reach understandings that will prevent the emergence of that bifurcated world economy. I hope that my former, my old UC Berkeley colleague succeeds in making some progress there. I want to get your take on a thesis that's gotten a lot of attention in the financial community recently. It's been put forward by the managing director and global head of short-term interest rate strategy at Credit Suisse, Zoltan Posar, as part of his war dispatches, which are like a subset of email notes that he sends out to people on his mailing list. I would call it the commodity encumbrance thesis though. I'm not sure that this is what he would call it though that is a term that he uses in a number of his recent notes. The basic argument as I've understood it is that in a bifurcated global economy where 40% of the world's proven oil reserves and where a large share of industrial commodities (28/38)
are produced in countries that may end up decoupling from the American-led international order and where fiat-based reserve assets are seen as less desirable forms of collateral, that we should expect to see certain industrial commodities like oil, copper, lithium, et cetera, begin to trade at a structural premium in Western countries and that we can expect to see alternatives to the US dollar like gold, for example, play a more important role as reserve assets. Are you familiar with this thesis and do you think that something like this can emerge without a larger kinetic geopolitical conflict? In other words, can we see a real break of such magnitude that would impact the global economy and growth, which have been driven by more internationalization and interdependence without a war? You should have Pozaran on your podcast to speak for yourself. I've spoken with him about it and it may or may not happen. We'll have to see he's limited in terms of how many interviews he can give from (29/38)
what I understand, but I would love to have him on to talk about it. I'm sure he can represent his views better than I can. He tends to extrapolate current events, right, that tensions between China and commodity exporters on the one hand in the US and the G7 on the other hand have been rising. Is it insightful to extrapolate current events or to think about how there may be an inflection point that turns matters back to the status quo, toward the status quo if China and India and others get the representation in multilateral organizations like the International Monetary Fund and the World Bank and the World Trade Organization that they deserve? I think there is concern about the possibility of this kind of rake in the White House and the US Treasury and in Europe and the resistance that G7 countries have put up to giving the rising powers a louder voice may diminish in order to try to bring them back into the fold and give them more say in the governance of a globalized economy. What (30/38)
would the alternative where we do see this bifurcation occur? What would that alternative monetary and financial architecture or broader global economic architecture look like? I don't see a clear description of that in the writings of the folks who extrapolate current events and say that bifurcation is coming. Maybe what we should do is go back to the post-1945, the post-1948 global order when there was a Soviet bloc, an Eastern bloc centered on the Soviet Union and a Western bloc centered on the United States and they hardly interacted with one another. I think one can imagine the coexistence of two largely disconnected blocs where the Western bloc utilized mainly the dollar and was centered on the US banking system and the economies that were involved traded amongst themselves and China slash commodity exporter bloc centered on China that utilized the renminbi that would look like the Cold War world. I can imagine its existence but it's like the old New Hampshire joke. How do I get (31/38)
to the following address? Well, you can't get there from here. I cannot imagine the transition. I think the transition from our present globalized, highly interconnected world to that bifurcated world would be- An event horizon. Yeah, it would be immensely more disruptive than the fallout we've seen from Russia's invasion of Ukraine. It would be a disaster for the global economy. At some point we would recover from, said, disaster. But it would be a wrenching change that we have to hold will be avoided. We have to hope will be avoided and we have to hope that those who simply extrapolate current events are looking forward to the wrong future. What do you think about the argument that sovereign debt has become an increasingly unattractive form of collateral and material to serve as a reserve asset for central banks and that there's some increased role for commodities and in particular for gold in the mix? I have a research paper on that that is working its way through the clearance (32/38)
process of an international financial institution, but should see the lot of day really soon within days where my co-authors and I looked at past instances of sanctions and asked specifically whether their imposition or expectations of their possible imposition led central banks to move away from currencies toward gold in particular. And we do find an effect. There is a significant tendency of countries that experience sanctions in the last 40 years and there have been a bunch of them to shift the composition of their reserve portfolios away from currencies and toward gold, which can be warehoused, vaulted safely at home. But that significant effect is very small. So if you hold your reserves in gold at home, those reserves are safe. But they're basically useless. They can't be used in financial transactions. They can't be swapped for currencies. They can't be lent out in order to earn interest. If a central bank wants to hold and do those things, it has to hold the gold in London at (33/38)
the London Metal Exchange or the Bank of England or in New York at the Federal Reserve Bank of New York. And if you want to use that gold for merchandise transactions, you have to commission jumbo jets and ship that gold around very carefully. So there are costs as well as benefits of holding your reserves in the form of commodities, gold or platinum or something else as well as benefits from doing that if you are a rogue state or worry about regarded by the United States in the future potentially as being a rogue state. So we do see that movement on the part of the various countries, Iran, Belarus, you name it, who've been subject to various sanctions in the past. But that effect is very small. We do not expect commodities to displace the dollar despite steps in toward weaponizing the latter. Do you think it also would be... I'm familiar with a paper by Michael Pettis who's also been a guest on this podcast where he argues that using commodities as reserve assets would run counter to (34/38)
many of the existing frameworks that bankers have for thinking about how to manage the boom bus cycle, how to manage the business cycle in a counter cyclical way because of the fact that commodities correlated with periods of economic excess and when commodity prices fall, that tends to be when markets are declining and the economies are contracting. Are you familiar with that argument and what are your thoughts about that? So I haven't heard that argument. My colleague Brad DeLong says, never argue against Paul Krugman because Paul is so often right. I never argue against Michael Pettis because his views are original and I often come around before long to realizing even though they differ from the status quo, they are right. But I'm going to have to think more about that one. Yeah. Yeah, let me leave it at that. I can send you that paper if we're done. But you're like the biggest econ sleuth. You probably find it in seconds. So you'll remember and find it. So I'm going to move the (35/38)
rest of our conversation onto the premium feed, Dr. Eichengreen. We're having this conversation while the Bank of Japan is meeting to discuss monetary policy and whether or not they are going to increase the band around which they allow JGB yields to trade. There have been huge dislocations in the Japanese bond market and one of the interesting things that's happened recently, which I think I understand, but which at first made no sense to me, is that both yields and the yen have been rising concurrently, which I'm guessing is in anticipation of the central bank of Japan raising interest rates, the expectation being that the yen would therefore become more valuable. Anyway, I'd like to try to untangle that a little bit because I've struggled to understand the story there and I haven't really seen any podcasts do a dedicated segment to it. I would also like to discuss with you something else and this kind of speaks to the work that you did in your book, The Populous Temptation, which (36/38)
has to do with the reorganization of power. Let's start with it America. Let's just focus there and we can expand outward to let's say Europe or other countries, but what we saw in the beginning of the late, I guess late 19th century through the first half of the 20th century was a reorganization of power away from capital towards labor. And we spent the last 50 years moving in the opposite direction away from labor towards capital. I'm curious to ask you in the second part of this conversation what you think the next 50 years or the next 40 years or whatever is going to be characterized by. And if that dichotomy isn't actually the right framing, but rather that the beneficiary of the next 50 years is going to be governments and nation states, which are going to accumulate more power, that it isn't going to be capital, it isn't going to be labor, but it's actually going to be nation states. And that economic opportunities in some cases will actually manifest around the things that (37/38)
governments choose to support, deem important and which they regulate accordingly. Now, for those of you who are new to the program, Hidden Forces is listener supported. We don't accept advertisers or commercial sponsors. The entire show is funded from top to bottom by listeners like you. If you want access to the second part of today's conversation with Dr. Eichen Green, head over to hiddenforces.io. And sign up to one of our three content tiers. All subscribers gain access to our premium feed, which you can use to listen to the rest of today's conversation on your mobile device using your favorite podcast app, just like you're listening to this episode right now. Dr. Eichen Green, stick around. We're going to move the second half of our conversation onto the premium feed. Very good. Thanks for listening. We'll see you next time. (38/38)
This is the full transcription of podcast 'Hidden Forces'.
Marc Faber The Wealth Gap, Populism, and the Prospects for War in Asia #Podcast #Transcription #ReadAlong #KnowledgeUnlocked
hardship for a while. Absolutely. And I think, again, that brings us back to the point of change. We're in a world that is changing and in certain measures, changing faster than it ever has before. I couldn't agree with you more. Dr. Faber, thank you so much for taking the time to speak with me this evening. And thank you, all of you out there, for taking the time to listen in on my conversation with Dr. Faber. If you enjoyed this segment and you want to learn more about the show, the segments, the episodes, then visit our website at hiddenforcespod.com. Lastly, if you are listening to this show on iTunes or Android, make sure to subscribe. If you like the show, write us a review. And if you want to sneak peek into how the sausage is made over special storylines told through pictures and questions, then like us on Facebook and follow us on Twitter and Instagram at HiddenForcesPod. (38/38)
going to be very dramatic. Well, one of the other things that sort of comes to my mind when I'm hearing you speak about this is the difficulty of identifying safe assets. Of course, years ago, the normal strategy one would implement if one was feeling risk averse would be to buy government bonds. But of course, you can't do that today. How does someone go about creating synthetically safe assets? Stratically, when I grew up, and for a long time, safe was a deposit in the bank. Safe was, as you said, government bonds. Riskier were corporate bonds. And the riskier were equities. And then people kept a little bit of gold under the mattress or wherever it is. And nowadays, to be honest with you, nothing is safe. You buy bonds. As you know, the yield on the 10 years in the US is 2.5%. That's the maximum you can earn. And that may be also what you earn. And maybe bond yields will go down from 2.3% at the present time to 1%. Who knows? Maybe, could be. I don't know. You buy equities. Equities (21/38)
What's up everyone? Welcome to this Market Forces segment of the Hidden Forces podcast. My guest for this segment is Dr. Mark Fawber, editor and publisher of the Gloom, Boom and Doom Report. Mark had been a frequent guest on my old television program, Capital Account, but it has been sometimes since the two of us spoke. He is needless to say a very unique guy, and we cover a wide variety of topics in this conversation from cryptocurrencies to issues of structural demographics, foreign exchange and central banking. But what I really wanted to try and do, and you'll all have to be the judges of whether I succeeded in this or not, but what I was trying to do was to integrate a number of seemingly disparate ideas like central bank, low interest rate policies, these ridiculous private valuations in some of these Silicon Valley tech companies, the search for yield, the disappearance of safety and financial assets, the rise in systemic instability and so on and so forth. But to integrate (1/38)
these ideas under this larger umbrella of income and wealth disparity and how it is driving structural, cultural and behavioral changes in the economy that are making it fundamentally incompatible with capitalism. To me, Uber's $70 billion valuation and its practice of subsidizing its consumers with billions of dollars of investor money in the hope that they might achieve a successful exit at some point or profitability at some point has many similarities to the Asian model of development, where the Chinese banking system, for example, would recycle domestic savings into the U.S. in order to make the goods of Chinese companies affordable to American consumers. These types of dynamics are not sustainable, and it's my hope when doing segments like this one that I can begin to bring to the surface some of these parallels for all of you to see. So I begin this discussion by asking Dr. Farber what he thinks some of the driving forces are in the global economy today and how they may drive (2/38)
changes in the future. We get into Bitcoin, I get his views on the rise of populism and how it might upset the apple cart. Mark has some strong opinions around war and what the prospects for that might be, particularly in Asia. Of course, Mark being Mark, we discussed gold. We also discussed stocks, specifically the new blue chip tech stocks and what his views are on those and on the broader market. We end with Mark giving his advice on what he thinks is the single best investment anyone can make in today's market. So please enjoy. So Dr. Mark Farber, editor and publisher of the Gloom Boom and Doom Report, joins us for this Market Forces segment of the Hidden Forces podcast. Dr. Farber, welcome to the show. Thank you very much for having me on. So let's get right to it. What do you think, well, what would you say are the driving forces in the global economy today and how will we see these forces manifest themselves in financial markets going forward? Given that, I should say we are (3/38)
living in a world defined by the failures, some realize some yet to be realized of the last boom. Well, I think that we live in a very complex world in the sense that the western world is declining relative to emerging economies and certainly relative to Asia, including China and India. At the same time, we have in the western world for the first time a generation of people, the millennials who earn less and have less money when they are 35 years old than the parents had. In Europe, we have specific problems, including immigration, which will eventually be a huge problem. And then we have also huge changes in the way business is conducted as a result of automation and as a result of new disrupting technologies and disrupting companies such as Amazon and Uber and Airborne. So it's not a clear cut case. We also have a world where asset prices have been driven up very dramatically by central banks, asset purchases. So you're touching on a number of things actually. When I was sort of (4/38)
thinking about this interview in this discussion today, I sort of wrote out a number of things that I feel are forces with which we must contend going forward. One of them, of course, is the higher levels of wealth and income inequality in part driven by central banking and the changes that we've seen in the banking system. Populism and potential changes in government policy, again, those things are interrelated. You're also talking about technology and disruption, which is interesting. And you mentioned Uber. And I actually want to ask you something about that because in your most recent newsletter, you made an interesting point about Uber, which is that Uber, putting aside its valuations, you made that point to recognize that you're not endorsing the valuations of 70 billion for Uber. But that Uber's business represents an attempt to resolve the need by consumers for lower priced services in order to compensate for their higher living costs. And what I think is very fascinating about (5/38)
that idea that really resonates with sort of some larger issues you've mentioned is that one of the things I see in Uber's valuation is sort of inherent this income and wealth disparity and the rising asset prices, the hunt for yield and sort of where we are today. Because the fact that investors have been willing to subsidize the rides of Uber customers as has come out from recent news of the company that they've been losing billions of dollars a year and so much of that money goes towards subsidizing their riders, it seems to me very interesting and parallels in many ways the ways in which the Chinese saver was willing to subsidize the American consumer during the mortgage refinancing bubble. And it represents sort of the perversions in capital markets that have come about in large part due to many of the things that you've described. This is correct. And I'd like to say that it's not just the Chinese that subsidize the American consumer and the overconsumption in the US. Every (6/38)
country that has a current account surplus and the fact is also Europe has a large current account surplus with the US, subsidizes consumption in the US. And if you print money in Europe and in Japan, some of that money is flowing to the US because in a period of strengthening US dollar institutions and individuals shift some of their assets into US dollars. So your observation is absolutely correct and this continues up to this very date. Speaking of the US dollar and speaking of central banks, which is one of those things I mentioned there, what is your outlook for the dollar given the tightening path that the Fed is supposedly on and it's supposed to sort of intention to lighten its balance sheet? Well, I think we have to distinguish in markets between short-term noise and shorter-term fluctuations and long-term trends. I believe that the long-term trend for the US dollar is down. Now, can the US dollar strengthen against the euro to 105 or 108? Who knows? Possible. Everyone I know (7/38)
in the forex market has been horribly wrong with predicting forex movements. So I just don't know. But long term, I think the US dollar is a doomed currency. That's also very... Yes, and that's part of the name of your report. It's interesting that you say that. I'm curious, two questions. When you say that many of your friends and associates in the foreign exchange markets have been horribly wrong betting against the dollar, it sounds like you're saying, A, do you see that as something that is more acute today than at other times? And if so, does that speak to something else, which is that we have seen, of course, with any type of prolonged economic structure, any kind of prolonged economic conditions, a certain congealing of the financial structure and behavior begins to take notice. We've seen that, of course, in the movement of investors out of active and into passive. What do you see as being some of the effects upon the investment class with these current market conditions as (8/38)
we've had them looking forward? Do you see any kind of impact in the mentality of traders and in the investment class that will negatively impact their capacity to react to adverse market conditions going forward? What I'd like to say is this about markets. Say you have the wheat market, the corn market, the soybeans market, the copper market, the gold market, whatever it is. The futures positions are a multiple of what the physical market is. And so when a market move gets on the way, the people or investors who are either short or long have to scramble to cover their positions. Let's put it this way. At the beginning of the year and at the end of the last year, investors were heavily short the euro and heavily long the dollar. And what happened, the dollar fell and the euro rose. And so these people who were short the euro had to cover right now. The euro has bias to its long positions. Investors are heavily long the euro. And if the euro starts to go down against the dollar, they (9/38)
will again have to reposition themselves. And so while the market seems to say that there is low volatility, I disagree. There is a lot of volatility in individual commodities, stocks, bonds, etc. And these market moves are then very strong. Say up to four days ago, the grains market was very weak. Within just three days, the grains market has soared. For no obvious reason. And so all I'm saying is the money printing of central banks has made markets much more volatile. And you will see, if one day stocks go down, there'll be an avalanche of selling. But until that happens, we don't know. You're saying essentially there's greater amounts of instability and a lot of pent up volatility that is bound to unleash itself in the market. There's a huge amount of instability. And that will have a huge impact on markets in due course, in everything, not just stocks or bonds or commodities in just about everything. Well, it's interesting. Another sort of theme that I was thinking about before (10/38)
this interview is one of change. And change is omnipresent in life. And we are in certain moments, in certain places, more able to embrace change and go with the flow, so to speak. In other cases, we are resistant to change. And I do see one great example is the crisis of 2008 and the way in which the global central banks and governments reacted to the change in market valuations. They resisted it dramatically, intervened. And so we're living in the aftermath of that. I wonder, what do you see going forward that could instigate the type of change that would result in a dramatic repricing of risk, of assets, of everything, inequities and bonds and commodities, etc.? Well, I suppose that if I were able to tell you exactly what will reprice asset prices down, other people would also know about it. And asset prices fluctuate. That is inevitable, whether they are interventions or not, but they fluctuate. And we are at a very high level of asset prices. Now, what will reprice them down? I (11/38)
don't know precisely. But what about the war with North Korea? What about confrontation in Syria with Russia? What about rising interest rates that are more pronounced than is expected by the market? I'm not expecting it, but it could happen. What about a weak economy? So there are many factors, many things that could lead to reprising of equities. And the most important, in my opinion, is when asset markets will start to go down. This will trigger selling. And in my opinion, rather massive selling. And your reason being for that, are you talking about some of the changes that we've seen in terms of investment strategies and protocols? I'm talking about essentially the factors I've just mentioned from wars in Southeast Asia or North Asia and war in Eastern Ukraine and in Syria. And I'm talking about simply asset prices no longer going up. Why in the last 10 days have the fang stocks performed poorly? Give me one reason. They performed poorly because they started to go down. And the (12/38)
institutions who are overweight, these fang stocks started to liquidate. And this liquidation could go on and likely to go on. So all I'm saying is you don't need to ask what will trigger the decline of asset prices. You just have to watch asset prices and if they decline, they can decline a lot. And that speaks, of course, to the momentum aspect of this equation. And that brings up another question that I have for you. Is to what extent do you feel that this move out of active into passive investment strategies, in large part due to the fact that interest rate policy and government policy have made it very challenging for active investors to make returns in this market? Do you see that as being an unusually inflammatory feature of a downturn this time around? Not necessarily. And I have to clarify one point. In my opinion, the shift from active to passive is mostly induced by active managers and their consultants. The consultants will go to an active manager and they will say, well, (13/38)
your benchmark is say the S&P 500. So the active managers invest money similar to the S&P 500. He doesn't digress a lot because if he doesn't and something goes wrong, say if you have in the S&P are waiting of one sector of 10% and you waited with 20 or 30% and you're wrong since the client told you to benchmark it to the S&P 500, he may sue you. So the active managers have been kind of forced to invest like the S&P 500. And of course, because they have to charge fees, unlike ETFs and unlike index funds, their performance will lag. But this is because they're prevented from going far away from the index. And that is a relatively new feature that relates to a particular regulation that was passed in recent years, correct? Correct. Look, I started to work in 1970 on Wall Street. Until just about five years ago, nobody ever talked of indexing. There were some funds that invested according to an index because they claim that the index will perform better than the active managers. But it (14/38)
was not a widely accepted principle. Nowadays, everything is indexed. And so because everything is indexed, it's very difficult for a manager who manages pension fund money and large institutional money to outperform the index. Because if it doesn't perform similarly to the index, say the index is up 20% and is down 20%, it's going to get the lawsuit, I guarantee you. You mentioned technologies, well, in your writings, and I should also mention for our audience who may not know this, do I remember correctly having seen and read a number of your quotes in March of 2009 calling the bottom not just in equities, but also the imminent intermediate decline of the dollar. You had really nailed that in March of 2009, correct? Yes, I've been relatively positive about equities starting the end of 2008, especially for Asian equities. And I was interviewed on March 6, 2009 by Bloomberg and I said, the market is grossly oversold and it's based on sentiment indicators. It's at the buying level. At (15/38)
the time, many observers and famous forecasters predicted that the S&P would go down to 400. On March 6, 2009, it was at 666. So yes, I caught the bottom very well. What worries me now is that we've gone up a long way and that actually the economy hasn't improved very much. Well, that's the thing that's also very interesting. Every cycle is obviously different, but this cycle, it's hard to sort of compare to anything else. In the 2000s, we had a credit fueled bubble driven by the housing market and mortgage refinancing and a consumption boom. In the late 90s, we had a technology boom, but the technology boom that we had in the late 90s did not feel like what we have today, which feels much more sort of niche and isolated to certain parts of the economy. And I wonder also to what extent that really comes down to a very different level of participation, the fact that fewer people are participating in this cycle. How does that factor into your thinking around the next wave down for (16/38)
prices? Difficult to tell. It is clear to me that a lot of investors lost a lot of money in 2000 to 2003 when the NASDAQ broke because at that time, if you bought Newmont mining or BHP or any stock, you were old fashioned. You had to buy the new economy type of securities. And when they went down by, in some cases, 90%, a lot of investors lost money. Then came the housing bubble. Most people have a significant portion of their money in housing, in homes. And when it collapsed, because they all leveraged, you understand, it's not that they buy your house and pay cash for it. They buy a house and at that time, they borrow 90% of the house. And even today, there's a lot of leverage in real estate. And when it went down, lots of people lost a lot of money. So if you go today to a retail brokerage firm in the US, the business from individuals is very small. The business really comes from financial institutions, mutual funds, passive funds, and high frequency traders. But the individual is (17/38)
not in the market. And of course, that is reflected in these very high pre-IPO valuations for companies like Uber. Where do you stand on the issue of structural demographics? When I say where do you stand, what I mean is how significant of a force do you think that is a drag, for example, on future consumption, of course, from the baby boomers. But also, the fact that these baby boomers are looking to consume off of the interest that they're gaining from, in part, the debt that is weighing down the future productive earners in the society. In other words, it also speaks to this imbalance of debt in society. Yes, some people say the overall level of debt doesn't matter because it's owed to other people. But the fact is, wealthy people are very wealthy, extremely wealthy, and they have no problem with that. But the people that owe the debt, they're highly leveraged, and they have to wait for a paycheck until the end of the month to meet their credit card debt payments. And so it's (18/38)
unequally distributed. And I think that according to various sources and various what I would consider reliable statistics, 50% of Americans have practically no savings, practically no savings. Now, this is happening at the very inopportune time in the sense that the unfunded pension fund liabilities keep on going up. They're huge. And you ask yourself, so here you have a population where most people have no savings. They rely maybe for their retirements on their pensions or on social security. But both the pension funds and social security have no money. And so who's going to pay for it? Now you may say, well, the government will bail them out. Yeah, but the government has also huge debt. So the debt will go up. So what will happen is that the Federal Reserve and other central banks, this is not endemic to the US in Europe, we have the same problem with unfunded pension fund liabilities, but maybe to a lower extent. But nevertheless, we have the problem. So the money printing, in my (19/38)
opinion, will continue. And so what you're saying is essentially the suggestion by the Federal Reserve in this case to shrink its balance sheet will actually be something that they will have to reverse or renegon and in fact go the path of Japan. And I was actually looking at some recent numbers from looks like the BOJ and the Investment Trust Association of Japan that approximately 67% of the nation's ETFs as of February of this year of 2017 are owned by the BOJ, which is a pretty remarkable number. Correct. And you ask yourself, where do we go with this kind of central banks, essentially financing the whole government? It may work for a while, but it's not going to work for the long term. And so I'm very negative about the global economy, which has recovered because of a huge debt buildup financed by central banks. But who knows how long it will last? Maybe it can last another three years, maybe another 10 years, but it's not going to last forever. And when we hit the wall, it's (20/38)
can go up and they can go down. Then you buy real estate. As we know, it can go up and it can go down. And some real estate has actually already declined. High end luxury and say, if you adjust the weakness for the British pound for the US dollar, then London properties have already dropped, say 30%, 40%. So please explain to me what is safe. Precious metals can move up. They can move down. And they can also be confiscated. I think precious metals are relatively safe under one condition. And the condition is that the governments, I have to say, the wise governments of our Western world don't take it away from you. That is an option that is available to them. And I think that it's not unlikely that this will happen. I know that you're not someone who invests in or has any knowledge of Bitcoin or the blockchain protocol. But do you think that the reaction in that market is partly due to of concerns around property rights? And for example, the way in which a lot of money has left China to (22/38)
go in. I mean, when I say a lot of money, let's be clear, we're not talking about huge sums here, but Bitcoin's a very small market still. But that this small market reflects in some way the concerns around property rights and being able to protect one's savings in this extremely uncertain world. Look, I believe that the people who buy Frank's stocks, and we have statistics from the website Robinhood.com, what the millennials buy. They buy Snap, Amazon, Netflix, Apple, and Google and so forth, Micron technology, all the speculative stocks they buy. These are the same buyers of Bitcoins. Now, I'm not an expert on Bitcoins, but is a Bitcoin worth $2,000, $3,000, or $10,000, or a million? Or is it worth nothing? That we don't know. I know so many people who for living trade Bitcoins. And in my opinion, when this happens, usually big setback can also happen. So I'm not interested in Bitcoins for the simple reason that if I believe in, say, a crisis, how can a crisis happen? Someone may (23/38)
switch off your electricity. Someone may switch off your internet. Someone may switch off your wall, all at the same time. If the internet is switched off, please go to a department store or grocery store and buy some fruits or food. You think they will accept your credit card? Well, certainly. You understand. That's the difference between having physical gold and these other items that are dependent on the internet functioning. And that's why I also strongly oppose cryptocurrencies or the elimination of cash. If I have a $100 bank bill in my hand, I can give it to a taxi driver if my credit card doesn't work. And sometimes, even today, when everything is functioning, my credit card doesn't work because it's been blocked by the credit card company for whatever reason. It's not the reason that I didn't pay my bills, but it may be another reason. So all I want to say is, if you want to be safe, don't put the insurance policy for safety into something that is dependent on high technology. (24/38)
Sure. We're in deep trouble if we lose internet connectivity. I think what's interesting with respect to Bitcoin is the larger tension between centrally organized and decentralized systems and societies and et cetera. So I think that's interesting. And I think also its demand represents some type of relationship between the forces we were describing before and the flight to safety. I also think conceptually... Actually, the Bitcoins are not bought by people by and large for safety. People buy them and sell them for speculation. That's 90% of the Bitcoin trading. No, correct. Absolutely. I didn't mean to suggest that way. I meant really actually, my point with that had to do with using Bitcoins to take money out. So let me ask you this. How do you see populism? I mean, we've seen, of course, these changing forces of populism with respect to elections in Europe and in the United States. How significant of a role do you think that will play going forward? Because in so many ways, I feel (25/38)
the... I mean, thinking about things just in terms of asset pricing and what financial markets represent and reflect can miss some of the ways in which the costs are shifted to other areas of society. And I think one of the steam valves for that is elections and populism. What role do you see that playing going forward in financial markets and in society? Well, I think that's a very good question. And you asked me before what will trigger a downturn. Personally, I believe that I mean, my friend Albert Edwards at Societe Generale, he wrote a report that the people will turn their anger at central banks. I don't believe that they will make the connection between the wealth inequality and their poverty and central banks. You understand? Sure. And money pricks them. But I believe a politician who is clever can one day tell the majority of people who are, as I said, 50% of Americans have no money. They can tell the people easily, look, the reason you are poor and have difficulties in (26/38)
meeting your expenses every month is that the rich have taken too much money from you. And let's go after the rich. And so when you ask me what is a safe asset, I tell you there's nothing that is 100% safe. They will go after the rich people. And I see this. They claim, yeah, we're going to cut taxes. Yeah, they may cut federal taxes, but local taxes. I've never seen local taxes going down. They go up every year. So people end up paying large taxes. And if the direct taxes, income taxes, in other words, don't go up, the GSD, the sales taxes go up. So this is an additional reason why the economy is soft. People don't pay less tax. They pay more tax than before. On this issue of technology, Dr. Fiber, I wonder if you think at all about the relationship between capital and labor and how it's changed over the decades from when you got into banking and even from before that, from as far as you can remember in study. In my estimation, it seems that one of the driving forces for change in the (27/38)
economy is the increasing value of capital relative to labor. And that is part of the driving element for the inequality in incomes or the wealth disparity and income disparity in the economy. How do you view that as a person who's been in this industry and someone who has sort of made it his business to think about and review society and social trends and financial trends? How do you see that? Do you think about that at all? Yes, of course. I'd say until the late 60s, labor in the US was very highly paid relative to corporate profits. And labor in the US in the late 60s before the dollar devaluation began in 1971 against the European currencies, labor, if they traveled to Europe, they lived like kings because Europe was very cheap compared to the US. Nowadays, labor is really stuffed. If you look at the labor percentage of GDP and you look at corporate profits as a percent of GDP, they went in different directions. Labor as a percent of GDP declined massively, not a little massively, (28/38)
and corporate profits went up massively. Now, I want to ask you something. Let's say you have a factory and you have 20 machines and a thousand workers and interest rates are at zero. Don't you think that maybe it's a good idea to buy another 20 or 50 machines and cut your labor force? Interest rates are zero. Your capital cost is zero. So in my opinion, central banks have actually accelerated this decline in the standards of living and earnings of working people and have favored entrepreneurs who are installing the capital goods. And this is only going to continue with the emergence of robots. With a robot, I can produce goods. I don't have to pay them Social Security. I don't have to pay them health care and so forth. And I think a lot of labor will find that they are obsolete. I'm sorry to say that, and it's painful. That's why I said at the beginning we are in the midst of huge changes in the relative decline of the Western world against the emerging economies, particularly in (29/38)
Asia, and also changes in technology. No, I agree. And I think all of these things actually work in unison. The other thing I was thinking about as you were speaking, and we spoke about this, we touched on it with respect to Uber and the valuations of Uber and the way in which the wealthy investors of Uber are effectively subsidizing the very customers who they're looking to profit from in some way. That reflects the search for yield, which is in part a reflection of many of wealth being concentrated in few hands, not just the low interest rates, but certainly something that was fueled by and benefited from bailouts and interest rate policy. But I think also what's very interesting is the flip side of that equation, Dr. Fauber, which is the same force that drives the search for yield, drives the deflation in a turning market psychology. Do you feel that, in other words, do you feel that we are more primed for larger declines in asset prices as a result of the fact that, of course, (30/38)
absent central bank full intervention, and we have to take that into account, but that we are more inclined for a decline due to the fact that the normal sort of middle class distribution of wealth has changed, that people would then result to just looking for safety in a way that they wouldn't have in a different market? As I mentioned to you, basically, in the Western world, the standards of living of the median household has gone down because wage growth has been inferior to the cost of living increases, including insurance premiums, taxes, rentals, and so forth, health care. And as a result of that, some smart entrepreneurs came along and said, okay, these people have no purchasing power. We have to supply them with something that is cheaper. Uber is by and large cheaper than a taxi, by and large, not always, but by and large. And Amazon is more efficient at delivering products than Sears and JCPenney. So these companies, they essentially destroy, in the case of medallion prices in (31/38)
New York, they destroy the value of a medallion by, say, 70%, maybe 80, maybe 60, but they destroy the value of medallion. That's an asset. Okay? In the case of retailing, Amazon destroys entire retail centers, shopping centers, and so forth. So what you just pointed out, the Fed's policies, it's not only the Fed, they're also fiscal policies to consider. But basically, the Fed has contributed massively to the average household's wealth going down in real terms. And then some companies come in, and they take advantage of that, and they actually reaccelerate, or accelerate the trend to lower prices. And so retailers close down what happens to real estate prices in that area, they'll go down. So yes, the Fed has created a trap where their policies have led to deflationary forces. And of course, with what you're describing there with Amazon and Uber, there's a sort of cannibalization of your customer base. In a way, you're relying on a business model that relies on people who are becoming (32/38)
increasingly irrelevant in the equation. With self-checkout, we see that as well, just as one small example in retail and supermarkets, et cetera. Dr. Farber, you've been very gracious with your time. I don't want to take up any more of it, but I do have one question, even a question, or a conversation around the subject of gold is taken very differently in Asia. I wonder, how do you see the opportunities for Asia, both the near-term effects of what we're describing, even the effects on emerging markets of potential dollar liquidity with this balance sheet unwind. How do you see sort of the short and then more the long-term prospects for Asia, and where do you find the best investment opportunities there going forward? Well, correct. I lived in Asia since 1973. And obviously, we had huge market fluctuations in 1973, 1974 in the global bear market for equities. The Hong Kong stock market dropped precisely by 90%. And the low on the Hang Seng index was 150, 150. The Hang Seng index is (33/38)
now over 20,000. So if you look at the long-term chart of the Hang Seng index, the Hong Kong index, the 90% decline in 1973 doesn't even show up, hardly shows up. Asia is a region, in my opinion, that will continue to grow at a higher rate than Europe or the US, provided, and I repeat, provided there is peace. China is becoming the center of Asian economic activity. It wasn't that way in 1970. It wasn't that way in 1980. When the saying was, if the US catches or if the US sneezes, Asia catches a cold. You understand? Everything depended on the US at that time. Nowadays, everything depends on the Chinese economy. And in my view, the US doesn't like the rise of China. And the Chinese want to have more say in global affairs. And in particular, and from an Asian perspective, everybody understands that they want to control the supply chains to Asia. In other words, they feel threatened by the US military and naval presence in Southeast Asia. China doesn't have any overseas basis, but the (34/38)
US, just in Asia, only in Asia, has maybe 15. So the Chinese and the US are developing rising tensions. And if there is a conflict in Asia, then stocks, in my opinion, will tumble. It may not happen. Maybe there is no conflict and through negotiations and diplomacy, problems can be solved. But with the current administration in the US, I don't think that there is a lot of diplomacy in place. And so I'm saying Asia will grow. Undoubtedly, it will happen, even with the Western world not growing much, but they can grow internally by saying four to five percent easily. But if there is war, then all bets are off. Now, if you ask me about the valuations in Asia, since I'm a large investor in Asian securities, I can tell you I don't see anything that is particularly cheap. I don't see anything that is in the bubble either. You understand? We're at median valuations at reasonable valuations, but it's not cheap and it's not terribly expensive. But if I had to take a bet, I would say most global (35/38)
markets depend on the S&P. If the S&P is tonight up 50 points, the Asian markets will open up. If the S&P is down 20 points, then Asian markets will react on the downside. Everything is to some extent correlated. Now, in the last few years, both Europe and Asia has grossly underperformed the US. That underperformance has, in my opinion, come to an end at the end of last year. And from here on, Asia and Europe will outperform the US. But with interruptions, and if everything goes down, everything will go down, then maybe in the US you lose 40% and in Asia only 35%. Who knows? But in general, I feel quite comfortable with Asia, with the concern I just expressed that there could be war. Well, I think what our conversation has touched on in many different ways is that there is a great degree of instability in the world and a lot of potential volatility. And navigating that is not something that one can do with a formulaic approach. It's just something that you would have to feel your way (36/38)
through as it begins to occur, because everything is uncertain. There is no standard safe asset class. There is no standard strategy. And of course, it's very difficult, even though there are many opportunities, as you say, in Asia, for someone who's not living in Asia, those opportunities can be very difficult to identify. Today's world is money-driven, is materialistic. I would say a great asset is your knowledge. Absolutely. Is what you can do yourself in life. Can you fix the house? Can you work somewhere? Your skills. That is an asset. But if you ask people about assets, they only think about real estate, stocks, phones, anything. But they never think about their own value. I couldn't agree with you more. I think that that's an absolutely salient point. Yes, I think people measure their wealth according to the Caledax they have at home and the Rolls-Royces and whatnot. But in a really emergency situation, your survival skills are very important. Also, your skills to adapt to (37/38)
This is the full transcription of podcast 'Hidden Forces'.
The Kazakhstan Protests & Russia's Standoff With the West Joanna Lillis #Podcast #Transcription #ReadAlong #KnowledgeUnlocked
himself into a corner. This is something else we've heard with his posture in Ukraine and he wants to use this as an excuse to walk his way out of Ukraine, to say the things have gotten crazy here in Kazakhstan, we need to send troops, we need to focus here, and diffuse the situation. That's the first kind of conspiracy that I've heard, those three explanations for it, but it involves Russian involvement. Then the other one is the one that you hear pushed by both Kazakhstan and Russia, which is that the US or US allies are somehow behind these protests, US intelligence services, Western intelligence services, and that they played a major or meaningful role in stoking dissent in an attempt to destabilize the government in Kazakhstan and to what end, I don't quite know, but that's sort of what I have come away with. Does that capture what you feel is the range of possible stories that are out there? Not quite, because I think the government's on President Tokayev's key narrative, if you (24/39)
What's up, everybody? My name is Demetri Kofinas, and you're listening to Hidden Forces, a podcast that inspires investors, entrepreneurs, and everyday citizens to challenge consensus narratives and to learn how to think critically about the systems of power shaping our world. My guest in this week's episode is Kazakhstan-based journalist Joanna Lillis. Joanna is also the author of Dark Shadows inside the secret world of Kazakhstan, which paints a compelling and very human, I would say, portrait of the former Soviet Republic that is little known in the West but which is strategically central to both Russia and China. For anyone who hasn't been following the recent events in Kazakhstan, there were a series of protests that erupted in the country two weeks before this episode is scheduled to air, sparked by what appears to have been a rise in gas prices that affected an overwhelming majority of the population, but especially those living in cities like Zenoizhyn, where the protests (1/39)
first began. They quickly spread across the country, turning violent, and within just a few days we learned that there had been some kind of coup attempt perhaps initiated by the former president Nurzultan Nazarbayev, which is why it seems that the current president of Kazakhstan, Kasim Tkoyev, reached out for help to Vladimir Putin, who in turn sent forces into Kazakhstan to secure the government and to overcome what Tkoyev and Putin have both suggested is not entirely a domestic operation, hinting in other words that maybe Kazakhstan is next on the list of countries being targeted for Western inspired so-called color revolutions. There is a lot to unpack here, but by all credible accounts this does seem to have been a domestic attempted power grab by Nazarbayev, that if anything, Putin seized the pawn in order to promote the Russian state narrative about Western expansion, either for the purposes of strengthening his negotiating position in talks over Ukraine, or as a way of walking (2/39)
back his position on the Ukrainian border, or possibly something else. What I want all of you, however, to take away from this conversation and why I think it's important, how I think, in other words, it fits into the larger geopolitical chess match that we're seeing playing out in Eastern Europe and possibly across the Taiwan Strait, is that this is what a multipolar world looks like. It's not some theoretical thing that we've been reading about or that we're moving towards. We are in it. This is the world we live in and in this world everything is up for grabs, every crisis, every border skirmish, every negotiation is an opportunity for any and all of the major powers to change the status quo, to change the rules of the game to their advantage. And that starts with taking control of the story and telling a narrative about events before the facts emerge and before people have had a chance to even begin to form an educated opinion about whatever it is that's happening. And that's the (3/39)
reason why conversations like this one with Joanna are so important, because the world is becoming ever more complex. And if you want to exercise the level of agency over your own sense of reality and be anything other than a spectator in someone else's story, you need to be able to step back from all the noise and all the hustles and exercise a level of informed skepticism without simply resorting to questioning everything and therefore believing in nothing. Today's conversation is meant to help give you a sense of where and how the events in Kazakhstan fit into this new global disorder of nation states, non-state actors, mercenaries, agitators, hackers, pretty much everyone interested in exercising influence on an international stage that is fluid and where power is constantly up for grabs. If you're interested in delving further into today's story and are subscribed to our Super Nerd Tier, you will find lots of important information in the rundown, including quotes from and links to (4/39)
relevant articles that I relied on in preparation for today's discussion, as well as a timeline of events and key people to follow. And if you're interested in getting early access to our new premium feed on Supercast, before we fully take it public at the end of the month, just send an email to info at hiddenforces.io and someone from my team will get back to you with instructions on how to make the transition so you can be set up and ready to go right away. And with all of that out of the way, please enjoy this extremely timely and educational episode with my guest, Joanna Lillis. Joanna Lillis, welcome to Hidden Forces. Hi. Thank you so much for being on the program. I know it's so late over there and I'm just really appreciative. I and my listeners are so fortunate to get a chance to speak with you right now. Where are you at this moment? Well, I'm actually in the capital of Kyrgyzstan, a neighboring country to Kazakhstan. It's called Bishkek. And I'm sitting here in Bishkek (5/39)
because I've had some trouble getting back into Kazakhstan. I was just out of country for a few days when all this trouble kicked off. And my flight was cancelled. I came down here to Kyrgyzstan to cross over by land, but I was denied entry. And now I'm trying to get my way back all the way back via a securities route via the Kazakh capital of Nusratan. OK, so we're going to start our conversation giving listeners a sense of your background and how you came to live in Kazakhstan, what your relationship to the country is, etc. I want listeners to know that the larger picture I really want to capture here is I want people to gain a sense of why this country is relevant. It feels from my perspective, having followed this story the last week. It just kind of blew up on my radar. I saw mentions of it on Twitter. It took a few days for me to care because there's so many other things going on in the world. And because we were just dealing with Ukraine, you know, and we still are dealing with (6/39)
this standoff between the US and Russia, NATO and Russia over Ukraine. And Kazakhstan just kind of, it's another stand. It's further out East. You know, I have only so much attention. And now it seems to be resolving itself almost as quickly as it came onto the scene. So one of the things that I really want listeners to be able to take away from this conversation is how not only why is this relevant and how does this affect my life, but also given the fact that this seems to be perhaps resolving, at least ephemerally, what are the important things that I and my listeners want to take away from this? Well, how is this relevant going forward? How does this connect to the broader geopolitical picture in Eastern Europe and in the stands? But before we get to those details, what is your origin story? How did you end up living in Kazakhstan for the last, I think, what, 10 or 15 years? Well, I've been living in Kazakhstan for it'll be 17 years this year. So it's been quite a long time. And I (7/39)
sort of came to Kazakhstan. While going back a bit, I studied Russian at university. That was in the late 80s, during really interesting times in the Soviet Union. You know, when the reformer Mikhail Gorbachev came to power and embrace all kinds of different changes that that ultimately, of course, accidentally led to the collapse of the Soviet Union. So I started studying Russian at that time. And I was sent as a language student to the Soviet Union, it was a fascinating place. And then the Soviet Union collapsed in the same year that I graduated in 1991. And it became possible to kind of just go, well, it was a little bit more complicated than that. But I did move to Moscow, find a job and then ended up living in Russia in the 90s, for five years, or six, six years, maybe. And from Russia, when I was in Russia, I got a job at one BBC department called BBC Monitoring, which translates and monitors and looks at the local media and tries to make sense of it. So in other words, the (8/39)
Russian media in this case, and uses that for for news reporting and various other things. So we got a job there. And then with them, I later moved to Uzbekistan in Central Asia in 2001, just before 9 11, actually, really, just a few days before. And 9 11 put Central Asia on the map, of course, because of the invasion of Afghanistan, opening of US military bases in Uzbekistan and Kyrgyzstan, also very interesting times. And I was there in Uzbekistan till 2005. And I left purely because my contract was finished. And I had a job in in the UK, but I didn't want to go to the UK. And then I moved to to neighbouring Kazakhstan, to freelance as a journalist. And I've been there, in fact, ever since since 2005. So that's my story. What drew you to this region? But you obviously, there's something that you must have liked about it that you would have moved over to Kazakhstan from Uzbekistan. Yeah, absolutely. Because it's a fascinating region. And I think it's a very poorly understood region. (9/39)
And, you know, I think it's a really very interesting region. And I wanted to, you know, report on some of the stories that I see there that were not covered enough in the Western media. And that's what drew me partly what drew me to stay in Kazakhstan and continue reporting from Central Asia. Because I think, you know, when I moved to Central Asia, I noticed that often in Russia, some of the media reporting on Russia, the Western media reporting is quite cliched and broad brush and so on. But when you go to Central Asia, and you know, the media reporting is really much more so, because people understand the region so little. So I wanted to, you know, tell some of the stories and not just, you know, a lot of the reporting we do see on Central Asia tends to be geopolitical. But I wanted to also tell the human stories. And you find a lot of that in my book Dark Shadows, because I did there is a section on politics, of course, and there's also sections on history and culture, which are (10/39)
also human stories. And there's also sort of a section on quirky stories of just the different kinds of people who live in Kazakhstan from a sort of a boutique wine maker to an ostrich farmer out on the step. So I wanted to really portray the variety, the sheer variety of life in Kazakhstan. So what would you say, because Westerners in general have, there are many countries, Americans especially, there are many countries about which we have a comically wrong understanding. In the case of Kazakhstan, there is, of course, the comical Borat character, but I don't know how many people actually take that seriously as a depiction of what Kazakhstan is like or what people living in Kazakhstan are like. So I think that most Americans actually have no idea and kind of know they have no idea about the country. What do you think that we least understand or get most wrong about Kazakhstan? Well, that's a good question. I mean, yeah, you mentioned the Borat figure, of course, Kazakhs, of course, (11/39)
hate it, but they laugh about it. But they just find it quite funny that every time they go abroad, someone will always, at least one person will always bring up Borat. And I think they find a surprising number of people who think that Kazakhstan is like that. So I think what's most misunderstood, I think what's probably most misunderstood is the idea that I think there's a very much an idea in some parts of the world that are more distant from Central Asia, more remote from Central Asia. I think there's an idea that Central Asia must be very different to people in the West. And in actual fact, it is, of course, very different. And it is, of course, exotic and fascinating and interesting. But I think probably what's most misunderstood that lifestyles in many parts of Central Asia are in many and mentalities in some cases are often similar to Western ones. So I asked you what was, what do we least understand or most get wrong about Kazakhstan? What do you feel is important for us in (12/39)
particular, given what our conversation is about today, for us to understand about the country, about its culture, and about its political economy? Well, I think one of the most important and also interesting things for foreigners to understand about Kazakhstan is its incredibly traumatic and complex and also fascinating history that has had an incredible impact on society that is really reverberates to this day. And what I'm really talking about here specifically is the Stalin era in the 1930s and 1940s, when the Soviet Union was ruled by Joseph Stalin, sort of reign of terror. And he implemented all kinds of policies that affected people horrendously across the Soviet Union, but nowhere more so than in Kazakhstan. I mean, many people have probably heard of the famine in Ukraine in the 1930s, but fewer people know that there was an equally devastating famine in Kazakhstan caused by exactly the same policies a man made famine, because by sort of collectivization of agriculture, forcing (13/39)
in Kazakhstan's case, nomadic herders onto collective farms where they were very ill-equipped for that kind of life, where they were used to their herding lifestyle, and also requisitioning their meat. So this devastating famine killed a lot of Kazakhs. I mean, by some estimates, a third of the pre-famine population were killed, and another 600,000 fled to other countries looking for food. And that also had an effect because as an effect to this day, because many Kazakhs, there are many foreign-born Kazakhs as a result, and Kazakhs live in countries as obviously in former Soviet countries, neighbors Uzbekistan, Russia, Kyrgyzstan, but there were Kazakhs also in China, but there were also Kazakhs in places like Iran, Afghanistan, Mongolia. So some of them blown abroad by the winds of history, if you like. And so this effected Kazakhstan very greatly in terms of its obviously mental psyche, but also its demographics, and also affecting its demographics and something that really (14/39)
reverberates to this day was Stalin's forced deportations of entire peoples from the other parts of the Soviet Union in the 1930s and the 1940s. As a kind of collective punishment, he would uproot peoples and send them to Central Asia. That includes Chechens, Crimeans, Germans, different peoples from other parts of the Soviet Union. And I write about this in Dark Shadows, and indeed, I went to track down some of the survivors of these deportations. And when I did so, I regretted that I hadn't done it earlier because it was rather hard to find anybody who had first-hand memories. And the closest I came was to track down an old lady, she was 79 at the time, Chechen lady, living in a village in northern Kazakhstan, almost entirely Chechens living there. And she had been deported to Kazakhstan from Chichnya at the age of three months when the whole of the Chechen people, along with the English people, all of them were just taken and sort of dumped, most of them in Kazakhstan, some of them (15/39)
further in Uzbekistan. So, and this kind of recording, these kind of memories for posterity, I think that was important in Dark Shadows, for me anyway, to try and record some of these memories before, you know, these people pass away, they're very old. But I also, getting back to the point of your question, why is this important? Why is this interesting? Well, because all of these things reverberate in Kazakhstan today is a complex society. It's, you know, complex demographically because it has lots of minorities. In fact, it was the only former Soviet country when the Soviet Union collapsed, where the people of the country were in the minority in their own country. So nowadays, Kazakhs make up 70% of the population, but back in 1991, they only made up 40%. So that's, you know, lots of different kinds of people you encounter, different kinds of ethnicities when you travel around Kazakhstan. Let me ask you this. How does this history inform the core public concerns and political (16/39)
grievances that constitute the sort of foundational political chemistry in the country? And how does that factor into what transpired in Kazakhstan over the last several weeks or week or so? Well, I don't think we can say that demographics were hugely at play here. I mean, one thing notable really is that Kazakhs tend to go out and protest, whereas other minorities tend not to. Perhaps they don't feel secure, perhaps they, you know, Kazakhs feel that they have perhaps there's an unspoken feeling that Kazakhs have more right if you like to demand a political voice. But I don't think, I think what we should single out about the protests, the spontaneous and peaceful protests that began this week before they were hijacked and turned violent. What we should single out about that is that we're looking at a lot of festering socioeconomic grievances. And some of these have been festering for years, maybe sometimes Kazakhs feel that they are an underclass in their own country. And so, you (17/39)
know, I think we need to see it from that point of view that it's not maybe so much about that demographic. Well, my understanding, so the superficial story that we've been presented here with is that the protests began actually outside of the capital in a smaller city, which itself has in some ways higher prices for certain basic commodities that people need to live from what I understand that has something to do with transport prices, etc. But gas prices spiked in general across the country and there in particular. And that spike in gas prices, which are extremely low in Kazakhstan, I think it's like, what is it, like 12 cents a liter or something? Traditionally, it's something like that. 14 at the moment. 14, there you go. So, and for Americans, that's like 50 cents a gallon or something like that. So, gas prices spiked, that was the initial reason for the protests. Give me a sense of what was that sort of spark, and why was the government held responsible for that? And then how did (18/39)
that, from what you understand, translate into the more violent outburst that we saw? And that can get us into a conversation about the official story that has been pushed by the state of Kazakhstan, and what may actually be at foot here. Well, the gas prices spiked in the new year after the government put an end to subsidies on these particular prices. I mean, it was subsidizing them. The spike came on a particular form of gas called liquefied petroleum gas, which many Kazakhs use to power their cars. And the government had phased in the ending of the subsidies because it thought people needed time to get used to them. And it had actually done it over three years. But on January the first, when they completely ended prices spiked. Now, the government had said, this sector is unprofitable for the producers because they often have to sell at a loss because the prices are subsidized or they're forced to hold them down, put it that way. So they said, we need investment. We have constant (19/39)
shortages of fuel. The reason is investors don't come to this sector because it's not profitable because of the subsidies, the false suppression of prices. And so we need to end this. And then this led to a spike. And in fact, in the region where the prices just doubled overnight. And that's a huge impact on people who often are struggling to get by. And even if they're not struggling, they would be after prices for fuel doubled. And this would obviously have a huge impact on inflation. Now, let's go back to where this started. So it started in a western region that is oil rich. And it started in a particular town called Zeng, which is famously, I would describe it as Kazakhstan's most troubled town. In 2011, the security forces opened fire on striking oil workers. And there were at least 15 fatalities after months of oil strikes and terrible deterioration in relations between the oil workers and the local authorities and the oil companies. There's a lot of disaffection in that town, (20/39)
not surprisingly, since the townspeople were killed. But there had already been disaffection in that town because there was a strong feeling that the oil workers do not read the benefits of the oil that powers Kazakhstan's economy. And so there's a lot of disaffection. That's why, and also the townspeople have always felt like many people in Kazakhstan, that they live in pretty poor conditions, pretty shabby conditions. Whereas in the capital, which is called Nusultan nowadays after the first president, they've got all these glitzy vanity projects. And they see this on their television screens and then they online. And then they see how they live and they don't like that contrast. And they also feel that money is being stolen. Corruption is rife and that's why they have to live in poor conditions. So we've got a real lot of festering disaffection in that town and that's why people came out onto the streets immediately. The price is spiked and then this snowballed. And one of the (21/39)
reasons it snowballed was because other people around Kazakhstan were feeling the effect of that price rise. But when the people of Shanghuzen came out onto the streets, they felt solidarity because these people were from the town where the oil workers have been shot dead 10 years before. So that's the sort of background to the spontaneous protests over socioeconomic issues. I mean, these protests soon snowballed into complaints over inflation generally and over joblessness and poor rich, poor divide and inequality. And then they snowballed into political demands, into demands for the authorities to go basically. And so we really saw a rapid snowballing of that situation before the projects were hijacked by violent forces. So I've seen a number of different explanations for what has transpired in Kazakhstan. I tried myself to write them down and I came up with three different sort of threads. One is that there's no conspiracy, there's no one behind the protests, there's no one behind (22/39)
the violent outbreaks that followed. They emerged organically because of years of discontent, sparked by the spike in LPG prices. And the removal, the subsequent arrest of Karim Masimov and by the president, Tokayev, and the removal of Nazarbayev from his role as chair of the National Security Council, all of that was an entirely domestic affair. That's sort of the no conspiracy explanation. The other one, a second one that I've heard and it has different explanations as part of it is that, yes, the protests were organic, but then they were hijacked by their story, so to speak, or even the violence was hijacked by the Russian state, which used them to promote a narrative that Russia and its strategic neighbors are under attack. Maybe this was because Russia is committed to an invasion in Ukraine and it wanted to use that in order to build public support back home in Moscow. Maybe it was because actually Putin wants to use it as grounds for negotiation, or maybe because Putin has backed (23/39)
like, is not that the Americans fermented this, but that internal elements fermented this, but involved, drew in some foreign militants and so on. It's a bit hazy to be honest, because they're not expressing it very clearly. There are really contradictory theories going on here, so let's unpack them one by one. The idea that this was not to organize that there was no element of organization and that really the protests were peaceful and did turn violent just because people were so frustrated simply does not stack up. There was a lot of organization, there were a lot of weapons being brought in, there were a lot of organized mobs certainly storming down to Almaty and to other places too. Also, you don't usually see people protesting over inflation sort of going to occupy airports. That requires an incredible amount of planning and also overrunning police stations. It simply does not stack up the idea that violent elements definitely made plans and it's almost certain that this was pre- (25/39)
planned, but they were just waiting for an opportunity to launch their scenario. The second theory, what was the second theory? So what you're describing, if I'm just to be clear, you're describing the theory that there were foreign elements involved, correct? But you're saying they weren't necessarily foreign intelligence services? I guess give me what the official story of the government is because I'm still confused as to what that is. And then I'll tell you the one I was describing, which is what I feel like some think tanks and other professionals here in the West are suggesting. Okay, well no, I was unpacking the first theory, which was you said that this was simply spontaneous and duty violence. The no conspiracy theory. What I was saying was it's not possible because as I explained, I've just explained about all the weapons and the plans. You don't spontaneously seize an airport. Right, so that is a no. And as for moving on to what you mentioned about the second, yeah, just to (26/39)
restate it, the second option I was putting forward was that essentially, yes, the protests themselves were more or less spontaneous. Yes, the supposed sort of coup is also largely a domestic affair, but that the Russian state seized upon these events in order to promote a narrative that suited it. And that it suited it for a variety of possible reasons. One, because it actually intends in this larger strategic objective to invade Ukraine. And it wanted to use this to further bolster public support in Russia around the idea that NATO and the West cannot be trusted. They are marching on their way to Moscow and that we need to deal with them now sooner than later. That was one. Another one is that actually Russia doesn't intend to invade Ukraine, but it wants to bolster its negotiating position in Geneva. And so it wanted to use this situation to further do that also by building public support. And then the third was that actually Putin, it's not even about bolstering his negotiating (27/39)
position. Sure, he would like to do that. But actually, he's bitten off more than he can chew in Ukraine. He has to find a way to reduce his forced posture on Ukraine's eastern border. And so he wants to use this situation in Kazakhstan and sending the CSTO into Kazakhstan as a way to kind of tell his domestic audience that let's focus on this story because things are getting too hot. I'm not sure. That's kind of how I've interpreted it. That's the second sort of conspiracy. Okay. Well, I think we should row back on the conspiracy theories. And I think they're very much telling, I think in Central Asia, people often feel frustrated that they're not seen as independent actors, but everything is about what Russia is doing or China is doing or America is doing. But people in Central Asia are capable of acting by themselves. They don't need Russia to instigate things necessarily. Now, having said that, I'm saying row back on the conspiracy theories in the sense of it doesn't seem that (28/39)
Russia organized this in a deliberate bid to influence its Ukraine policy in either way, whichever way you want to look at it, the ones you mentioned. It doesn't seem that it actually organized it. But of course, Russia being Russia would always then seize the moment to make use of this for whatever it wants to achieve from it. And one of the things it seized on is to say that this is an attempt to ferment a color revolution, in other words, pro-Western. In other words, they're basically meaning American, pro-American. There's no evidence of that at all because there is no evidence of Americans fermenting a color revolution. And Putin has probably just seized on that to, you know, as part of his propaganda war because he's adept at just seizing on things and using them for what he wants. And one of the most interesting things about that is that it completely contradicts the official Kazakh version of events. And this is kind of funny because these two are allies and they have the same (29/39)
goal, which is to establish stability and restore order in Kazakhstan. And, you know, I think they were both pursuing that goal and are both pursuing that goal. But at the same time, their narratives differ. Now, Putin wants it to be anti-Western, but they've also, Russian officials have also talked about Middle Eastern militants' involvement, whereas the Kazakh authorities have no interest in depicting this as something anti-Western and have been talking about foreign involvement, foreign militants from mostly from Central Asia and Afghanistan, but also Middle East. But this is not the primary factor that they are talking about. They are saying that these people were involved. They are not explaining why or how, but they are saying they were involved. But they are also quite clear, really, that these are internal forces. I mean, I think one of the difficulties is that the President Tokayev may not want to name names. And I think all authoritative commentators in Kazakhstan do not (30/39)
believe that it was foreign instigated. All the people I've spoke to, all the comments I've read about people, you know, from Kazakhstan, people who really know what they're talking about. But, you know, there may be an interest of President Tokayev in saying, in overstressing this element simply to muddy the waters a little bit, he doesn't want to name names. I mean, there are many, many rumors going around Kazakhstan that appear to be rather well-founded that the elements of the Nazarbay family, members of the Nazarbay family were involved in fermenting this trouble. And, you know, two names are being mentioned indeed, including in the media, on social media, people are talking about Nazarbay's nephews, ones called Samat Abish and another Kairat Satybaldi. Samat Abish is in the security services as the Deputy Chief, as one of the deputies. At least we believe he is. There's contradictory reports of his arrest, of his dismissal. So far, they've been denied by the security services. (31/39)
But really, in this case, we're talking about rogue elements of the security service. And we're talking about members of the Nazarbay family, possibly, you know, having a revanchist sort of move against Tokayev, because they don't like what he's doing. And they're afraid of losing their positions and their wealth and their assets and their organized crime networks when Nazarbayev dies. So this, to me, is the very much the most likely scenario. And that any outside forces are just incidental. Let's put it that way. And that Russia is simply just just seizing on events and using them to promote a certain narrative, but certainly not fermenting trouble in Kazakhstan, I don't think, at this point. So for people who don't know Nazarbayev was the president of Kazakhstan up until 2019, he led the country during its transition from the USSR to independence. We discussed him a bit in our episode with Tom Bergus on the sort of global money laundering network. Kazakhstan was a big part of that (32/39)
story. And I know that he, in part, relied on your book in order to fill in some details of his own reporting, or I think he did. Maybe I'm speaking out of turn. So given the fact that it does seem that Russia has seized upon the events in Kazakhstan to promote a particular narrative, it's clear that they're taking advantage of it one way or the other. What should Western audiences take away from the events in Kazakhstan that are actually relevant to them and to the sort of geopolitical situation unfolding in Ukraine and with talks in Geneva? Let's separate out the things that are domestic affairs that aren't necessarily relevant and those that have knock-on effects. Do you see any lasting impact of what's happening in Kazakhstan to the broader geopolitical picture? Certainly there'll be a lasting impact on the geopolitical picture. I mean, one of the, geopolitically, Russia emerges as the victor here. Because for two reasons, really, it's been able to do a massive projection of hard (33/39)
power by managing to deploy troops so quickly into Kazakhstan and helping to restore order. And we've never really seen the collective security treaty organization, the regional body, the region's answer to NATO in action. So I like this before, as so-called peacekeepers anyway. But we've certainly seen it. It appeared to be successful. So that's a good projection of hard power, military power, at a time when Putin wants to show himself as the strongman as he saber rattles over Ukraine. But also, I think it's important to note that Russia also managed to project it soft power. It might seem paradoxical while it was marching around the streets of Almaty with the troops. But really, we've got Kazakhstan inviting Russia in and expressing great gratitude to Russia as being the sort of leader of this security treaty. And so we've seen that Russia can sort of project itself. Look, it's not just us aggressive towards our neighbors in the region. We have a neighbor here who likes us, who loves (34/39)
us, who invited us in. We came to help and we all achieved the goal we set out to achieve, which was to keep the president in power and sort of fight off the insurgents such as they were. Does Takayev come out of this situation with more power and with his position more firmly entrenched? And what does this mean for Kazakhstan going forward? Yes, I would say Takayev comes out very much with more power since he successfully fought off the challenge, what really did look like an attempted coup. Before I just talk about those domestic implications, it's also worth mentioning, of course, that he does now owe Russia one. He owes Putin one. So let's see when Putin calls that in. From that point of view, he's weaker, I would say, weaker, certainly in his relationship with Russia. And of course, it's already a very unequal relationship. The domestic implications are absolutely kind of earth-shattering, actually. And these are very interesting times in Kazakhstan. Because the first president, (35/39)
Nersultan Nazarbayev, 30 years in power, and even when he resigned, he remained at the helm really, sort of pulling Takayev's strings. He had a lot of official positions, and it was genuinely believed that Takayev's the puppet and he's the puppet master. But now we're really seeing the sidelining of Nazarbayev. And I think what we could say is this is the real end of the Nazarbayev era now, not when he resigned in 2019, but now. Because we've seen Takayev pushing him out of the Security Council. This is a job that Nazarbayev, the first president, has the right to hold for life, but he's pushed him out and taken over. Already, in fact, Nazarbayev had already stepped back from various other roles last year, including chairing the ruling party, handed that himself to Takayev. But in this case, clearly, Takayev took the security role away from him. We've also seen Takayev already, just today, moving against Nazarbayev's family. Now, the family are hugely powerful and hugely wealthy and (36/39)
hugely resented by ordinary people in Kazakhstan. So it's a win for Takayev, if you can rein them in, because ordinary people will be grateful. And also, Takayev, in order to secure his own power, needs to rein them in, especially if rogue elements of the family have tried to topple him. That's an if. So I'm not saying they did, but especially if. So Takayev has only today, given all that he has on his agenda, it's amazing that he decided to announce in parliament that he was closing down a company run by Nazarbayev's daughter, or at least, let's say, closely linked to Nazarbayev's daughter, which has caused huge anger in Kazakhstan over imposing massive recycling fees on cars. It's a kind of marginal issue. But Takayev has got so much on his plate, he's emerging from an attempted coup. He's got foreign troops on the ground, but he has time and energy in parliament today to say that company's going. So he's trying to show people of Kazakhstan that he is moving against the Nazarbayevs, (37/39)
who are really, really very unpopular. It's worth remembering that the main slogan of the protesters, and this is not just this round of protest, but for years, is old man out in Kazakhstan. That's a shalket, and it's a shouted a protest about, and it means Nazarbayev should get out of politics even after he's resigned. But it also means that it also refers to the wider political establishment and how fed up people are with it. You know, Joanna, there are so many different theories and different parties pushing different narratives, serving different agendas that it's really helpful and quite a privilege really for me and my listeners to be able to hear from someone like you on the ground so early on. It really helps me understand where to focus my attention so that I don't end up wasting time chasing dead ends or connecting the wrong dots, so to speak. So I thank you again so much for coming on the program and for being willing to stay up so late to speak with me. Thank you very much (38/39)
for having me. It's been an absolute pleasure, and I will urge people to come and visit Kazakhstan. For more information about this week's episode or if you want easy access to related programming, visit our website at hiddenforces.io and subscribe to our free email list. If you want access to overtime segments, episode transcripts and show rundowns full of links and detailed information related to each and every episode, check out our premium subscription available through the Hidden Forces website or through our Patreon page at patreon.com slash hiddenforces. Today's episode was produced by me and edited by Stylianos Nicolaou. For more episodes you can check out our website at hiddenforces.io. Join the conversation at Facebook, Twitter and Instagram at HiddenForcesPod or send me an email at dk at hiddenforces.io. As always, thanks for listening. We'll see you next week. (39/39)
This is the full transcription of podcast 'Hidden Forces'.
US-China Summit at the G20 Amid Fallout From the Protests in Hong Kong Ho-Fung Hung #Podcast #Transcription #ReadAlong #KnowledgeUnlocked
western media, western companies based in Hong Kong even though they have business in China so they rely on the Hong Kong legal system and if this extradition bill amendment is passed then people doing business in China might worry that they can be arrested by Hong Kong police and transfer to mainland China easily even if they are journalists or they are activists or they are businessmen who do something or say something that the Chinese government don't like and with this extradition bill and this possibility of being transferred to the mainland Chinese legal system then many business people or many companies that are headquartered in Hong Kong and even journalists organization headquartered in Hong Kong they might have doubt about the safety of being in Hong Kong and they might move to other places and it is already happening as some journalistic reports show that some wealthy people because of the extradition bill and worry about this possibility of their safety being jeopardized (9/39)
show. Ho, thank you so much for coming on and stick around. Thanks. Today's episode of Hidden Forces was recorded at Creative Media Design Studio in New York City. For more information about this week's episode or if you want easy access to related programming, visit our website at hiddenforces.io and subscribe to our free email list. If you want access to overtime segments, episode transcripts and show rundowns full of links and detailed information related to each and every episode, check out our premium subscription available through the Hidden Forces website or through our Patreon page at patreon.com slash Hidden Forces. Today's episode was produced by me and edited by Stylianos Nicolaou. For more episodes, you can check out our website at hiddenforces.io. Join the conversation at Facebook, Twitter and Instagram at Hidden Forces Pod or send me an email at dk at hiddenforces.io. As always, thanks for listening. We'll see you next week. (39/39)
Today's episode of Hidden Forces is made possible by listeners like you. For more information about this week's episode or for easy access to related programming, visit our website at hiddenforces.io and subscribe to our free email list. If you listen to the show on your Apple Podcast app, remember you can give us a review. Each review helps more people find the show and join our amazing community. And with that, please enjoy this week's episode. Ho-Fang Hung, welcome to Hidden Forces. My pleasure to be here. It's great having you on. You are the Henry M. and Elizabeth P. Weisenfeld Professor in Political Economy at Johns Hopkins. It's great having you here. Normally, we do intros after the episode is done, but in light of the fact that I want to get this episode out immediately, given the G20 Summit, I'm introing you right now. You're also the author of Protests with Chinese Characteristics, which was an award-winning book that came out in 2011. And you're also the author of The (1/39)
China Boom, Why China Will Not Rule the World. It's wonderful having you here. I don't know if you know this, but it was actually Anne Stevenson Yang who recommended you to me. Yes, she's the China whisperer. She's my China whisperer. And she's in China right now? Sometimes she'd go back and forth between these two. I think she's had to come back now because of the relationship between the US and China, some stuff like that. Also, I think some of her writings on some of these Chinese companies. The finance of vulnerability and things like that. So it's great having you on. You come, of course, like I said, highly recommended from Anne. The reason I asked you to come on the program was because I wanted to talk about Hong Kong, the recent protests, and then to dig deeper really, what is this really about? What are the protests really about? Heading into the G20. And that also gives us an opportunity to talk about US-China relations, China, China's economy, things that we've talked about (2/39)
often on this program because this is really the area of your research. So starting off, I mean, you mentioned this to me. I think I had actually read this in the newspaper recently. That Hong Kong, the citizens of our group are going to be putting an ad out in the Wall Street Journal tomorrow. Is that right? It is a New York Times, as far as I remember, and also financial times and a dozen plus major news paper around the world because they get a very rapid and amazingly effective fundraising online together, more than $6 million Hong Kong dollar, which is about close to $1 million US dollar in a day to buy ads in major news paper around the world. Basically is to try to voice the concern of the Hong Kong people to urge the lighting countries besides China that is going to be in the G20 to urge them to raise the issues of Hong Kong to see Jingping when they see him. And also drive fundraising back to the organization's site. Is that what you said? They basically use the money as far (3/39)
as I know, and it is reported that they use the money to buy ads. Oh right, they raised money and they used it to buy the ads. That's what you're saying, right? So let's take a step back. We're getting talk about the G20, but can you give us an introduction to these protests? Because a lot of listeners are going to know, some people are only going to know that there were protests in Hong Kong. Other people will know that there were protests in Hong Kong about some extradition amendment. That's it. What's going on? Yeah, the short answer is that the Hong Kong government tried to amend an extradition bill because Hong Kong used to have this extradition arrangement with a lot of countries, including the US, but it doesn't have an extradition arrangement with mainland China. It is by design because when Hong Kong's sovereignty is reverted to China in 1997, many people in Hong Kong worry about the China legal system. They trust that the legal system in Hong Kong is fair. It is a common law (4/39)
system and it's transparent. Now the legal system in China is more in a kind of a black box and it is unfair. There's a lot of corruption going on. So they resist the extradition arrangement with mainland China. So now they want to do it so that if China say that there's a fugitive I want, then they can tell the Hong Kong government to arrest that person and transfer to China, mainland China. So Hong Kong was a territory of the British Empire? Yes. For how long? The transfer happened in 1997, but when the British took Hong Kong bit by bit first, that is the 1840s after the OPM war and they took the nowadays along as Hong Kong Island and Kaolun and later with another treaty with the Chinese government at that time they took what is now the rural area, the new territories in the 1890s. So 1997 was the time when US and the British and China has an agreement that the British hand over Hong Kong back to China. So and that agreement, the conditions of that agreement were for 50 years and (5/39)
they're scheduled to end in 2047 and I think that's part of the backdrop of this larger discussion. As far as the amendment is concerned, I think the issue, it came out of a case of a supposed murder of a woman in Hong Kong, a Taiwanese woman. In Taiwan is a murder of Hong Kong women by her boyfriend, allegedly. Who was from Taiwan? That happened in Taiwan. That happened in Taiwan. That happened in Taiwan. Right. Okay. So it was supposed to face trial in Taiwan but because the current extradition arrangement didn't include mainland China, Taiwan and also Macau. So now they... So he fled to Hong Kong and they wanted to extradite him back to Taiwan. And the idea here was that it was presented to the Hong Kong people by Ms. Lam, what's her full name? Kerry Lam. By Kerry Lam as something that was strictly between Hong Kong and Taiwan or thought for that reason but the suspicion always was that it was actually Beijing behind it, right? Yes. And actually the Taiwan government already issued (6/39)
a statement saying that even without the extradition amendment, there will be way for Hong Kong to hand over the person to Taiwan so you don't need that amendment to do that. And of course that many Hong Kong people are suspecting that the Hong Kong government is using this case to put in mainland China, the extradition arrangement of mainland China and Beijing is behind it. And actually in late May that because in the beginning many business, even the establishment business elite has questioned about this because a lot of Hong Kong business elite had experienced with the legal system in mainland China so they also fear that being arrested by Hong Kong police and transferred to mainland China for some fabricated charge or something like that. And then in late May, there is a kind of a Hong Kong business group visit Beijing and then some very high rank Beijing official including the standing committee, the Politburo standing committee member Han Zheng met with this group of business (7/39)
people and saying that Beijing is behind this extradition bill amendment so business people don't need to worry about it, you should be behind it. So basically Beijing has put a lot of political capital in making sure that the business elite despite the doubt will support the bill and then get it passed in a legislative country in Hong Kong. So Hong Kong enjoys a very unique special trading relationship with western countries, right? It's also I think the biggest financial hub in the east, is that right? So how would this amendment impact from a practical standpoint economically, how would it impact Hong Kong? Yes, it is very interesting because this extradition bill that the amendment is really putting Hong Kong special status as a financial center in China in jeopardy because Hong Kong special financial center status is given by its independent jurisdiction system, by its independent legal system and freedom of speech and also freedom of assembly and also western countries and (8/39)
they start to move their money to Singapore, a safer place and they will worry that Hong Kong might no longer be a safe place for their money and for their own safety if that extradition bill is passed. So Hong Kong operates under common law which is different than what they have in the mainland also its democratic culture clearly on display with approximately 2 million people in these protests right with 90% humidity something in the 90s in terms of temperature incredible its significantly different as I said culturally and legally from China for those who don't aren't familiar with Hong Kong have never been there or lack a deeper appreciation for those differences can you help us get a sense of just how different the culture and the system is in Hong Kong versus the mainland and they speak two different languages also right. They are Cantonese and many of them also speak Mandarin and English and in terms of the system Hong Kong is very different because you don't need to feel worried (10/39)
when you criticize the Hong Kong government and Chinese government and journalists who report about corruption of Chinese officials and financial vulnerability of Chinese state-owned company they feel safe to say that which is a lot of cases in mainland China if you report some corrupt officials report about vulnerability of some well-connected state companies that the journalist concern might be arrested that actually it happened and if you have financial dispute with some powerful people behind in mainland China you can be arrested because the court system is very murky I would say and it's run by the Communist Party so it is not the case in Hong Kong so right now until now then Hong Kong people still feel they are protected by relatively fair ecosystem and relatively free media. And this goes back to the point now it's been 20 years since the handoff they've got another 30. These anxieties were expressed I think as early in terms of protests as early as 2003 right over basic law (11/39)
article 23 so this is an ongoing anxiety among the people in Hong Kong what is the general expectation by the people there do they feel has the hobo always been that as they get closer they'll be able to renegotiate it whereas the leadership in China has always felt that they're simply going to be reintegrated and there is a misalignment of objectives and perception and is that right? Yes that is true that over the last few years we see a lot of cases that Beijing tried to tighten its control of Hong Kong for example the very famous or infamous case of disappearing books seller that they published books that talk about scandals of Chinese leaders then they published in Hong Kong and they disappear. Was that in 2009? When was that? It happened in there's a number of cases that it happened in the last few years and is raised by the US State Department and the international community and also there's a wealthy Chinese Taikun by the name of Xiao Jianhua he's regarded as a fugitive from (12/39)
mainland China but he's in Hong Kong and then there's a cross-border kidnapping by China public security personnel to kidnap him in the hotel and then he showed up in the Chinese official TV and then and also the same happened to this book seller. So they succeeded in kidnapping? They succeeded but it is illegal because in current law in Hong Kong there's no way that the Chinese law enforcement personnel can do that duty in Hong Kong because of the one country two systems so they have been doing it and illegally and it raised ice brow and it raised the international community's concern so it is what Beijing has been doing now they do this extradition bill amendment that people are thinking that now they finally try to legalize the whole process of these arresting people in Hong Kong and transferring to mainland China so it is why it hit the button of many Hong Kong people because in the past that they have to do it under the dark and do it carefully lot to be discovered because it is (13/39)
not legal and if that extradition bill can happen is passed then they can do it under a formal legal channel just requesting Hong Kong police to arrest the people and then transfer it to mainland China. So help me understand the circumstances in which this amendment was attempted to be passed was there any willingness by the government in Hong Kong to engage in a fact-based debate with the public over its proposed amendment prior to the protests? The general feeling that make the people angry is that the consultation period is very hasty, very rushy and they keep talking about the Taiwan case to justify it but everybody point out that it is just an excuse and because the main concern is about mainland China the extradition to mainland China so the discussion is very hasty and the government is very much want to rush it through even after the one million strong protests in June 9th and the government still want to go ahead to pass it in the legislative council and then the conflict in (14/39)
the June 12th erupted that protestor basically paralyzed MOT district where the legislative council and the government is located so they have to postpone cancel the meeting and then in the end the government back down and indefinitely postpone the bill. So let's talk about the protest because one of the interesting things that I read of yours as you described these protests as quote more gorilla this time around what did you mean by that? That is interesting that in the last time that Hong Kong protests got attention internationally is the 2014 occupied movement at that time the umbrella movement. The umbrella movement. Why was it called the umbrella movement? It was originally called occupied central, occupied movement but in the end when the Hong Kong police force used tear gas and the young people don't have much to defend themselves against the tear gas so they just raised the umbrella to block the it's not very useful but many people just use umbrella so it is not quite a scene (15/39)
so it's called the umbrella movement in 2014. So the main action of that time is that they occupied several areas in Hong Kong one on the Hong Kong island side near the government headquarters one is Kaolong side so they occupy the area for more than 70 days and the Chinese government is angry about it and the Hong Kong government eventually managed to clear them up after they were out by themselves in November 2014 so this time around that apparently the protestor learned the lesson that they think that is unwise to whole territory and occupied it for a long time it is difficult to sustain so it this time they were taking the less so just to clarify here yeah was the notion of occupying was that in any way related to what was going on in the west with Occupy Wall Street? In the beginning that one of the professor who devised the idea of occupied he benetized who is a law professor in the University of Hong Kong now he's behind bars. He's behind bars he's in prison. In prison because (16/39)
of his action of inciting Kuang Ku, inciting other people to perfect this order and he explicitly talked about the inspiration from Occupy Wall Street and all this occupy square. That's interesting because that was one of the things I wanted to ask you about but it was more dealing with the leaderless nature of this protest and just thinking about it in terms of the different cultural systems between the east and the west and how protests may differ and how important it might be in the east to have leaders versus in the west but it's interesting so what you're saying is that at first they tried to apply some of these principles like occupying a territory but it turned out they couldn't do that effectively in Hong Kong so they went underground. After 2014 after the occupation ended then there is the arrest and many people continue to be activists and there's a kind of a 2016 there's a Mong Kok they call it uprising or they some call it the riot that is some of the young activists who (17/39)
were in the 2014 occupation that they throw bricks at the police when they tried to clear up some street foods renewal so after that as well that there's a mass arrest of activists and leaders and so that this is what year you said? 2016 is the Mong Kok one and then the mass arrest happened after 2016 and after 2014 and then the trial and the imprisonment of the leaders of the occupy happened just a few months ago right before this 2019 movement. Did this catch Beijing by surprise given the way that they dealt with 2014 did they feel that they had effectively crushed these protests and that this was not going to be an issue going forward? I think it definitely caught Beijing and it basically caught everybody by surprise and I think original calculation of Beijing and Hong Kong government about why they tried to pass this extradition bill in such a kind of a hasty manner because I think the judgment is that the leaders the co-activists of the opposition has been arrested behind bar and (18/39)
two are actually in exile in Germany right now so the resistance has been broken it I think it is their original calculation so the resistance from the society will be minimal when they pass the bill so no matter what they can pass it with the major incidents and in the end even without all this leader and without all these famous activists like Josiah Wong who was behind bar when the thing erupted. He's now out right? He's just out. He's that young gentleman how old is he 21? He looks very young. I haven't kept track of it but he's he's the person who's been all over the international press and all these kind of iconic figures behind bar and so even without them then the people just organized themselves spontaneous in this guerrilla battle with the government on June 12th so I think the reaction is so strong and so self-organized that I think definitely it caught Beijing by surprise. It caught them by surprise. Another really fascinating thing about not just these protests but (19/39)
generally we saw this of course in the Arab Spring in Egypt how many years back is the role of technology but I think what's interesting in the east is that the tools of suppression by the state are much stronger than they are anywhere else particularly specifically speaking in China. I don't know how powerful the technology is in Hong Kong it may be very similar but the institutional practices are not as Orwellian or suppressive in Hong Kong. How important was technology one on the suppression side and then how important was it on the side of the protesters and like encrypted messaging and things like this to help them organize. Yes and it's very important and it's one another key difference between Hong Kong and mainland China. In mainland China you don't have access to Facebook, Telegram, Google and all these social media that homegrown social media in China available to Chinese people in the mainland are tightly controlled by the government while in Hong Kong that people still have (20/39)
relatively free access to all these kind of social media that we are familiar with and reportedly and and actually there are some activists who wrote the article in Financial Times to talk about it and actually that it is this social media and social media group discussion group that help organize the whole thing then the young people really tag-saving and very aware of the power of this social media and then to organize themselves even without a hierarchical organization to do the organizing. So Kerry Lam is the fourth chief executive that may end up not serving out a second term in Hong Kong that's four for four right? Oh for four. Yeah and it is just a speculation but I think it is the right best speculation that she might have lost the trust of Beijing that when her term is up and she might not have a second term depending on the remaining two three years whether she make a special... But none of the prior chief executives served full terms right? Or second terms. Donald Zhang has (21/39)
a second term but his first term is a kind of... But he ended up in jail didn't he? He ended up in jail. He ended up in jail right after that so that is there. So basically what kind of commentary is this on the adequacy of these institutions in Hong Kong? Yeah it is the irony that the Hong Kong chief executive as people find out that the salary is much higher than a US president. The salary of a US president of many world leaders. What is the salary of the US president? I don't have the exact figure but it is widely reported that they have the second highest salary behind Singapore prime minister that the Singapore leader and so they're high salary but the problem is that they always cannot serve the second term and don't end up well because they always use as escape goal for failed policy of Beijing. Said that whenever there is a policy like the article 23 in 2003 obviously this Beijing... What was that about? What was that about? Because the article 23 is an article in the basic law (22/39)
of Hong Kong saying that the Hong Kong government need to legislate against action that is a threat to Chinese national security. So anything deemed subversive to Chinese national interests can be indictable and things like that. So in 2003 they tried to legislate... They got ambitious. They had like six years. Six years after the transfer they got pretty ambitious. Yeah and it led to a huge protests and also international outcry and then the government shelved it and there is a failure of Beijing in pushing it and then Dong Qi Hua became the escape goal of course and then he could not finish his term. So the same happened for this time around that's Kery Lam. It is basically this Beijing miscalculation and Beijing failure for this back down on this extradition bill but it is going to be Kery Lam who will take all the hit and then if she cannot finish the current term or she cannot have a second term then it means that it's happened again that Beijing make her escape goal of the (23/39)
failure of Beijing to introducing this legislation. So what are the other big issues besides this amendment that have people worried? Because this has been the thing that the press has focused on, the international press. But of course we know the international English speaking press captures only a fraction of reality in foreign countries. The Hong Kong people are worrying about a lot of stuff that besides this extradition bill, Hong Kong people have been worrying about this slow tightening of the screw on Hong Kong liberty and freedom that Hong Kong used to enjoy. Is that what it feels like to the Hong Kong citizen that there is a tightening of the screw? And is that also just built out of the cynicism and the expectation that Beijing has designs on Hong Kong in the long term that don't align with what the citizens of Hong Kong want? They've always been suspicious of Beijing. And there's suspicion on one part, the other part and Beijing has been quite courageous to openly talk about (24/39)
it. For example, the liberty and freedom of Hong Kong is guaranteed by the sign of British joint declaration that lay out the terms of the one country, two system and 50 years unchanging system. And also the basic freedom, basic right of Hong Kong people. And now the Beijing government and high-ranked officials keep saying that this kind of treaty with the UK is no longer valid because it serves its purpose. And now it is totally the internal affair of China and the foreign press and foreign government shouldn't say anything about it. So Beijing has been saying out loud that and they have been saying that one country is bigger than two systems. And to Hong Kong people see that it is not what we expect when we have to deal and we accept the sovereignty handover in 1997. So it has been happening for a while before this broke up. So are you optimistic or pessimistic about how this is going to work out? Because you know, I think what I've seen oftentimes with these types of situations is (25/39)
that there's a lot of energy and passion and excitement and optimism early on among the protesters, regardless of whether it's in China, Hong Kong, Greece, Spain, the United States. But the government has unlimited resources or seeming unlimited to press down and can wait it out. And eventually they'll slip it back in. In fact, I want to ask you, one of the demands of the protesters is that they withdraw that Kerry Lam withdraw the amendment entirely, right? Because they're afraid she's going to reintroduce it next year or two years or three years from now. Yes, then I have been pessimistic. Now I'm generally still pessimistic, but become a bit more optimistic now because before this protest, everybody, including myself, many people, not everybody expected that the resistance of Hong Kong to this tightening of the screw on Hong Kong has been broken and the civil society is paralyzed in this resistance. But now that this resistance came up out from nowhere, that so it seems that the (26/39)
civil society in Hong Kong is much more resilient than we thought. And also in this time of debate, it comes to the forefront is that there's some huge constraint on what Beijing can do in cracking down on Hong Kong. That is the Hong Kong special trading status as recognized by the US and international community that serve China very well. Patukin, this current trade war situation that if China crackdown harder on Hong Kong to trigger a kind of withdrawal of international recognition of Hong Kong as a special trading territory and a special custom territory separate from mainland China, then Chinese financial interest is going to be hurt. Well, that's the thing because China has capital controls. Hong Kong is very important as a financial center for the Chinese elite in particular who look to get their money out. And also Hong Kong's special status as a custom territory separate from mainland China. For example, Chinese company, if they want to invest in infrastructure in Australia, in (27/39)
US, in other Western countries, it's very difficult. And this Western country is going to cite the national security concern to ban this investment. But if that Chinese company somehow can set up a subsidiary in Hong Kong and invest in this Western company as a Hong Kong company, it face much less scrutiny. They can invest in port facilities along the Panama Canal pipeline in Australia and port facility in the US. So it has been the status quo that Chinese companies using Hong Kong identity to do is and also Chinese wealthy people, they will move their money to Hong Kong first and then move the money out as a part of the capital flight going on. And at the same time, there's a lot of high tech products and equipment that is deemed sensitive and can be used for military purpose. They have export control. For example, US have law, explicit law to exporting this kind of equipment to mainland China. But Hong Kong as a special custom territory, they can import this equipment. So Chinese (28/39)
company like Huawei is just setting up shops in Hong Kong to import this equipment. This idea, this notion of, again, you said it earlier, it comes from 1997 or when it was first started, I can't remember of one country, two systems. This system in Hong Kong benefits China. It benefits it tremendously because of how closed and controlled China's system is. Hong Kong is more open and that allows them to do business internationally in ways that they would otherwise not be able to while still maintaining their capital controls while still maintaining XYZ relations. So it's why it put a constraint on China that if China like for example, crackdown on Hong Kong, harder standing in the People's Liberation Army to shoot the people, for example, or they no longer allow Facebook, Instagram and all these social media to operate freely in Hong Kong, it will trigger a backlash in West England and the US. You're saying that so I'm not familiar with the legal relationship. Under the current (29/39)
agreement is Beijing able to send the People's Liberation Army into Hong Kong? They cannot. They cannot. So if they would break the agreement, I mean that would be. They would break the agreement. And how would the international community understand what that would mean? Because again, it's one country, two systems. It's not exactly a break of sovereignty. Hong Kong is part of China. Yeah. It's a separate system. So how would we think about that? How would the international community react? In the case of US, there's explicit law called the US Hong Kong Policy Act. It was introduced in 1992 that regulate US policy toward Hong Kong after 1997. Now, according to this law, the US State Department periodically has published reports about the state of autonomy of Hong Kong. And according to this report, if it is verified that Hong Kong is sufficiently autonomous from mainland China, then US can apply its law to Hong Kong separate to its application to mainland China, like export control, (30/39)
immigration control, and regulation of mail, and investment from Hong Kong, visa-vis investment from mainland China. So it is established in the law in the US. So many other countries have similar law and regulation separating Hong Kong from mainland China. So if countries, Western countries, and US find that actually Hong Kong is no longer sufficiently autonomous, they can withdraw this recognition and start to regard, for example, a company from Hong Kong as the same as a company from mainland China and so on and so forth. So what do the Taiwanese think about what's happening? We mentioned Taiwan early on because they were the excuse for the law. But of course, Taiwan, the moment they realized what was going on, they didn't want the amendment because for them, Hong Kong, it's even closer to China. That's a bulwark to their relationship. That is a very interesting thing to observe because there's a presidential election coming up in Taiwan in January 2020. And before this extradition (31/39)
bill thing, that the current incumbent government, which is a pro independence and government led by Chai Ing-wen has a low rating because of many administrative mistakes. And so that there's a popularity is not high. Many people would expect that she might lose the election and relatively pro Beijing and friend with Beijing. There's one, there's a more pro Beijing government in Taiwan traditionally and also a more, not necessarily anti-Beijing, but more independent oriented. Both of them came out against the amendment. Both of them came out against the amendment and the latest tooling because she's showing that incumbent government, chance of reelection substantially increased. And then definitely the debate and the conflict in Hong Kong helped. To let people see it is what one kind of system is. Now what do you think that's so currently the party that is out of power is the more pro-Beijing government? Yes, they have a chance to win the election in 2020. They had a chance. Now those (32/39)
chances are diminished because of what's going on in Hong Kong. According to pool and people speculate that Hong Kong is one factor. So that's obviously got to raise alarm bells in Beijing. Yes, they don't like that. Right? Yeah. So it's actually, that's very interesting. So what you're saying is that the reaction to the protests in Hong Kong, to this amendment in particular, which represents tightening of the screws, as you said, of Beijing on Hong Kong or potentially version in Taiwan, the reaction was so strong against that, that it has actually destabilized the politics in the region such that Beijing actually wants to pull back. Yeah. Right? I mean, it's pretty remarkable. Also the police brutality that is shown that of course the police is using tear gas and rubber bullets. And it is quite dramatic measure by Hong Kong standard because in Hong Kong protesters used to be very peaceful that they built barricades. They didn't throw bottle top cocktail and anything like that. They (33/39)
never did that. So I got to ask you something. I got to ask you something. What if this ever happened on the mainland? Right? If this is what we're seeing in Hong Kong, right? Two million protesters. What's the population in Hong Kong? A bit more than seven million. Seven million. Seven million. So it is two million out of seven million people. Okay. So that's a huge number, right? It's a huge proportion. Right. But seven million is only a fraction of a billion. Yes. Right. So this of course is the fear of the Chinese Communist Party, right? Yes. Ultimately it's that they would lose control. The fear that is built over to mainland China to protest. Yeah. Their fear is that they will lose control of the country somehow. Not necessarily that it's going to happen now, but this is the underlying feel of everything. Right? This was the part of the piece that Deng Xiaoping made in 1989 with the Hanaman protests. Right? Yeah. So I mean, how realistic is it that this could ever happen in (34/39)
China? I think it already happened in many places in like in Tibet and Xinjiang. We have a lot of this kind of larger scale and more violent protests happening. That's the Islamic part of the north. The Islamic part of the western part. Yeah. So it is why they have this concentration camp as a solution to kind of a put down the unrest in Xinjiang. The problem is that in mainland China, including in Tibet and Xinjiang, they can resort to these extreme measures. Right. Because it's the mainland. Because the main camp is in Hong Kong. They cannot stand in the PLA to stand. They cannot stand in the army. They cannot actually, they are not should people and kill some people. Your point is that they would be able to get away with much, much, much greater measures on the mainland and the international reaction would be minimal. Yes. Intellectual reaction is still big at what happened in Tibet and Xinjiang, but it is mostly moral acquisition. Right. There's been a largely blackout of this. And (35/39)
people don't know about it. And in Hong Kong, there's a presence of international press and also there's this international recognition of Hong Kong's best trading status. If they really crack down hard on Hong Kong and shoot people and establish education camp, things like that, then immediately the international community will withdraw its recognition of Hong Kong as a separate entity in trading or other matter and it will hurt China financially. So it is why they have this constraint that they cannot crack down hard on Hong Kong. They don't see this protest to grow. So the only thing that they can do is to back down. How much of this is generational? In other words, the many of the protesters were too young to meaningfully remember Tiananmen, right? Yes. The memories are still alive. And in the Tiananmen is part of the collective memory that is transmitted from generation to generation because we can see that in Hong Kong, June 4th, they have these videos and ready to commemorate (36/39)
the killing in 1989. So the memory is still alive. And it's not like in mainland China that people don't talk about it, don't say about it, don't write about it. So, Ho, I want you to stick around. I want to take us to overtime for our subscribers. I want to talk to you about Chinese leadership. That's something that you've written a lot about. I also want to talk about the One Belt, One Road initiative and the significance of that for safeguarding foreign direct investment in China, particularly after 2008 with the financial crisis and the drop in exports and that obviously had a knock on effect on foreign exchange reserves, which is something we've talked about on the show and it's something that you've talked about, the importance of that and the importance of that for the remnant B dollar peg. And also this really fascinating thing that we haven't spent much time talking about, which you've done a lot of research on, which is the transformation of the population from being a labor (37/39)
input to being a source of consumption. And this is also very fascinating. It's something that Michael Pettis has written a bit about when it comes to savings. So for regular listeners, you know the drill, you know where to go. If you're new to the program or if you haven't subscribed yet to the Hidden Forces Overtime or Autodidact Super Nerd subscriptions, you can do so at patreon.com slash hiddenforces where you can get access to the overtime audio to this episode, as well as the transcript, which will probably take a few days extra to come through because it's going to take some time to get it transcribed since we're going to be releasing this right away and the rundown is going to be available immediately. So again, patreon.com slash Hidden Forces and you can also learn how to integrate the Patreon subscription straight into the Hidden Forces website at hiddenforces.io slash subscribe where you can get access to over 70 rundowns and close to 90 transcripts from the beginning of the (38/39)
This is the full transcription of podcast 'Hidden Forces'.
How Washington Works in the New Gilded Age David Wessel #Podcast #Transcription #ReadAlong #KnowledgeUnlocked
point says to him, what can I do to assuage the feelings of people I've offended, namely black people? At which point, Tim Scott, who was ready for this says, you can support my Opportunity Zone bill. The next day on Air Force One, President Trump is asked about his meeting with Tim Scott, which was close to the press. And Trump said, we had a good conversation or whatever that thing is he wants to get in the tax bill. I hope it's there. That led the White House to energize and be endorsed this provision, which was already percolating on the Hill. And interestingly, once the bill passes, the people in the White House who the White House picks to promote Opportunity Zones are black. Jerome Smith, who had worked for Koch related organizations before coming to the White House, who's a White House aide. He becomes very influential. And they set up this White House Opportunity Council, the spokesman for which is Scott Turner, who's a former professional football player and motivational (18/40)
even though they have no chance of ever being rich enough to benefit from the estate tax. So let me ask you something else with respect to appearances, because while in normal times it can be very beneficial to have the support of the executive branch, at the same time, in many ways, having Trump support was a kind of a toxic emblem for anyone trying to operate and push any kind of agenda in Congress. How true was that in this case? And how important was it that this bill had bipartisan support? And again, to the point I made at the very early on of the question I had, how important is that period when trying to build a strategy for passing a bill through Congress? So proponents of Opportunity Zones built a bipartisan coalition initially to build support for this bill, but for the idea. And that is definitely a fact. But when you look at how it became law, that was irrelevant. What happened was a key Republican senator got it into a tax bill that passed Congress without any Democratic (21/40)
What's up, everybody? My name is Demetrius Cofinas, and you're listening to Hidden Forces, a podcast that inspires investors, entrepreneurs, and everyday citizens to challenge consensus narratives and to learn how to think critically about the systems of power shaping our world. My guest in this week's episode is David Wessel, a senior fellow in economic studies at the Brookings Institution and director of the Hutchins Center on Fiscal and Monetary Policy. He is also the author of a new book out tomorrow titled Only the Rich Can Play, How Washington Works in the New Gilded Age. The book tells the story of the creation of what are known as Opportunity Zones, which supposedly incentivize people to invest in distressed areas in the United States with the official purpose of spurring economic growth and job creation in low-income communities, but which in practice seem to serve primarily as yet another tax loophole in an already convoluted code full of them. We spend the first part of our (1/40)
conversation discussing the bill itself, the story of its creation and implementation into law, and what this tells us about how financial and political power are wielded in Washington. The second part includes a discussion about political corruption, corporate concentration, the infrastructure bill that recently failed to make its way through Congress and its associated tax provisions, as well as the upcoming elections and Trump's chances in 2024. If you enjoy the first half of today's conversation, I encourage you to take the leap and become a premium subscriber. There's no commitment. You can cancel at any time and the entire library of subscriber content going all the way back to episode one becomes instantly available to you, including the overtimes, transcripts and rundowns, depending on your tier. So without any further ado, please enjoy yet another educational and enlightening episode of Hidden Forces with my guest David Wessel. David Wessel, welcome to Hidden Forces. Good to (2/40)
be with you. It's great having you on the podcast, David. You've written now, what is this, your fourth book that you've come out with recently? Yes, my fourth book. You know, someone must have sent me, when I had my old TV show, someone must have sent me Red Ink, which was, I think, well, not necessarily your last book. It was the book right before your book on the Fed, I think. And we never got around. It was right around the time we must have ended the show. We didn't get around to having you on. So this is a belated invitation. And I have to say this book, like when your publicist sent it to me, it was right up my alley. And it is a fascinating look into a system and a process that I've struggled to understand, you know? And I think one of the reasons why it's so hard, obviously, is because those who benefit from it and are in a position to actually explain it don't want people to understand how the, quote, sausage is made. But before we get into that, it's a fascinating book and (3/40)
we're going to discuss all of it. For those who don't know you, what is your background? How would you describe who you are and what you do? So I think of myself as a newspaper reporter. I spent 30 years at the Wall Street Journal as a reporter, editor and columnist, mostly writing about economic policy matters. I left that when I turned 60 and 30 years and I got the catalog from the company, say, I could pick golf clubs or a wristwatch. I thought, geez, if I'm ever going to do anything else, this is the time. And I lucked into a really good job at the Brookings Institution where I direct a program in our economic studies unit called the Hutchins Center on Fiscal and Monetary Policy. And our mission is to improve the quality of fiscal and monetary policy and public understanding of it. Well, that's great because I have many monetary and fiscal questions to ask you in the overtime. So are those the things that interest you most and how did you become proficient in the workings of (4/40)
Washington? Well, there's no better way to learn Washington than to be a reporter covering it. I had been in the Boston Bureau of the Wall Street Journal. I came to Washington in 1987. The stock market had just crashed. It was the very end of the Reagan presidency. And I majored in economics in college and I did spend a year at Columbia and go to school and get paid for a program called the Badget Fellowship, which is for reporters interested in economics and business. But one thing I learned is that if you work for the Wall Street Journal, there are a lot of really smart people who are willing to be your teachers because they want the Wall Street Journal to get it right. So I think what happened was that the more I wrote about economic policy, the more I found it interesting and the more I enjoyed it and the more people respected me so they're willing to take time explaining it. There's different ways in journalism. Some people go from one beat to another. I didn't choose that and I (5/40)
think it paid off handsomely for me. What did you like about economic policy so much? The ability to translate what was happening in Washington at the Federal Reserve in Congress and how it affects the ordinary people who read the newspaper or listen to NPR or something like that. One of the things I discovered is that there's a kind of high priest language in economics that excludes many people from participating. I mean, the Federal Reserve has gotten a lot better, but in the old days you basically needed a decoder ring to know what they were talking about. And I discovered that I enjoyed being the translator and that there was actually a market for that. So for instance, during the financial crisis of 2007, 8, 9, I was on NPR's Morning Edition frequently trying to talk about really complex things in three minutes and 45 seconds. I discovered that I enjoyed doing that and a lot of people don't. That's fascinating. That must have been quite an experience. But to that point about the (6/40)
complexity, I never ceased to be surprised at how many otherwise brilliant people struggle to understand financial markets and economics. And I wonder how much that has to do with language. A perfect example was a recent appearance that you made on Al Hunt and James Carville's podcast. And James, who I think is one of the people who's famously quoted as saying that if he could come back, if he could be reincarnated, he would come back as the bond market. And he still seems to be traumatized by that experience and he still seems to be sort of intimidated by that language. And it's just something I find fascinating. So as I mentioned, David, your book is titled Only the Rich Can Play, How Washington Works and the New Gilded Age. How would you describe what the book is about and what did you mean by only the rich can play? The book is about a provision that was slipped into the 2017 tax bill that created or led to the creation of 8,764 tax havens across the country called Opportunity (7/40)
Zones. And the idea was, the marketing slogan was, we're going to give a big capital gains tax break to rich people and they will put money into poor neighborhoods and the poor neighborhoods will be better off. The reason that title is only the rich can play is that the tax break is only available to people who have large unrealized capital gains. It's not like, say, an IRA where anybody can put their money in and get the tax break. And that was by design because after all rich people have the money. I think that what intrigued me about it was, first of all, how did this happen? Secondly, it's a really important issue. How do we get money to poor neighborhoods? But two things really turned me onto the story. One was when I discovered it was not thought up by some Washington think tank, but came from Sean Parker, the guy of Napster and Facebook fame. And secondly, as I was thinking about doing the book, I heard there was an Opportunity Zone Expo at the Mandalay Bay Hotel and Resort in (8/40)
Las Vegas. And with images of the big short movie in the back of my mind, I went to that Expo. And that really convinced me that this was a fascinating story. It was like a modern gold rush. Yeah, that totally reminded me of that scene in the big short where Steve Isman and the guys at Front Point Partners went to the American Securitization Forum at Seizures Palace in Las Vegas and had a series of aha moments. And you have some similar examples like that in the book, whether it was the guy in the cowboy hat or the former model turned real estate developer with the Andy Warhol painting to sell. I guess one of the questions that comes to mind is how did all of these people become educated on this opportunity? Like what networks were they plugged into where they could learn about Opportunity Zones so early? I also want to ask you about Sean Parker because you mentioned him. I'm curious how an otherwise political novice like Parker could go from having this idea to actually getting it (9/40)
implemented into law. And that's actually the larger sort of context that I want to flesh out to begin with before we even begin to describe what Opportunity Zones are and how they work, which is how Washington works in the New Gilded Age. And to that point, the Gilded Age was a period I think between 1870 and 1900. It was kind of the Baroneal period where a lot of the wealth of the industrial revolution, primarily the first industrial revolution was beginning to become cemented into political power. And this was the period right before the beginning of the trust-busting era and not a time that we associate with robust regulatory oversight. So is it fair to say that you think we're living through a similar period today and that we might be on the cusp of a new regulatory regime that could begin to try and reign in large concentrations of private and corporate power? All right. So what did I mean about how Washington works in the New Gilded Age? One guy who's very rich spent several (10/40)
million dollars, not a lot by Washington lobbying standards, created a think tank called the Economic Innovation Group. And that think tank very successfully built the case that we needed to do something to the tax code to help left behind communities. They didn't spend a lot of time talking about how they were going to give a capital gains tax pay to the really rich. He managed to hire some really good veterans of Capitol Hill, effectively as lobbyists, but also some technicians that would help them structure the thing. So it's particularly attractive to rich people. And he also became a significant campaign donor. Originally, he only gave to Democrats, but as this thing took off, he started giving to Republicans. And so it's kind of like not the way policy gets made in the textbooks. Although there was a very public effort to build support for opportunity zones well before the tax bill came up. It was very superficial and at the talking point level. It wasn't on the details about how (11/40)
do you make sure this isn't abused. And because they were good at this and had the resources and energy and skill and time, they managed to get a provision into the bill without a lot of scrutiny. And I personally don't think that I'm no problem with billionaires who have good ideas about how to improve our society, but I don't think they should be able to basically maneuver without a lot of scrutiny by the rest of us about a provision in the tax bill, particularly one that is so valuable to people who have unrealized capital gains. Now, your second question is how do people find out about it? Well, there is an industry of people, tax lawyers, accountants, real estate, investment funds, and others who, once they discover a tax break, propagate it through the system. So some people knew this was cooking. Most of the people in the industry didn't. And once they found out about it, they send emails to their clients and then these organizations which exist to have conferences where people (12/40)
who have money encounter people who want their money like the one I went to in Las Vegas. They start to have these big conferences. There were dozens of them in the first couple of years after the law passed. And so word gets around when, and I suspect some of it also happens at the golf course or cocktail parties. Like I found this great way to avoid paying capital gains taxes. Tell me about it. So that's the way things get sold. There are people who make money by telling other people how they can cut their tax bills. And that's what happened this time. But how did Sean Parker get this provision to pass without even holding a single congressional hearing? And how atypical was that for how something like this happens? I think it's not atypical. I think things pop in. The smart people who want to get something into a tax bill know that sometimes public scrutiny causes a problem. So if you can get something slipped into a tax bill, the reconciliation bill that the House of (13/40)
Representatives reported recently is 2,500 pages. So it's not that hard for a determined member of Congress to get a provision in that other people don't really pay attention to. It turns out to have big implications. In this case, Sean Parker and the Economic Innovation Group were really clever. They enlisted two allies in the Senate, a Democrat, Cory Booker of New Jersey, and importantly a Republican, Tim Scott of South Carolina. Both happened to be African American men. Tim Scott was really convinced that this was a good idea. He is an economically conservative Republican who seems to believe that giving tax breaks and having less regulation is the way to get prosperity. And he turned out to be particularly important in the shaping of that 2017 tax bill, the Tax Cuts and Jobs bill. So with an ally like that, they didn't need to have lots of ads in the New York Times or going on Meet the Press or doing grassroots lobbying because he really wanted this in the bill. And he made sure it (14/40)
was there. And when you're in the center of the action, he's one of four senators who were instrumental in that bill, you can basically get your way, especially if it's something that appears to be non-controversial and who could be against helping poor neighborhoods. So this actually touches on a few things I wanted to ask you about. Number one, how important is that finding a champion or multiple champions within the power structure? And to your point, you said they happened to be African American. Is that true that they happened to be? Or were the people lobbying for this provision explicitly looking to avoid having to rely on white men or old white men in this environment? And so they were looking for bipartisan support and support by people that would align with the current zeitgeist around racial equity, gender. Well, they were both men, but you catch my drift. How important was that as well, the sort of optics of this? Okay, to answer your first question, yes, it's really (15/40)
important to have a champion. You don't get anything done without having a champion on Capitol Hill, and you got to pick your champions wisely. The people at EIG, John Latterian, Steve Glickman explained to me, one of the tricks is you get people who are respected to endorse your bill, then other people figure they know what they're talking about. And so they come alongside as well. But you make a really good point, and it's not just that they happen to be African American. By having two black senators, both of whom had experience in local government, Booker had been the mayor of Newark, and Scott had been on the county council in his hometown of Charleston, South Carolina. It made it almost impervious to the criticism that this was a stop for rich people, and it made it easier for them to sell it because, after all, if you got the two of the only black male Republicans in the Senate, the other one, of course, was Kamala Harris at the time, endorsing something, it must be good because (16/40)
these guys don't agree on a lot of stuff. So I think it was very clever. And actually, race plays an interesting part later on in the story, if you don't mind me rushing ahead. No, please. Originally, the Trump administration, the White House, was not interested in this provision. In fact, some of the people in the White House didn't like it. When President Trump made those unfortunate remarks about how there were good people on both sides in Charlottesville during that confrontation between white nationalists and racists and people who wanted to take down that statue in the park, Tim Scott was offended, and he was very public about how offended he was. And he criticized the president pretty shrilly on TV and in a podcast. The White House invited him to meet with Trump. He thought about not going, but he said, you know, the president calls you can't. He expected a confrontation. And when he met with the president, the president was very, very conciliatory and listened. And at some (17/40)
speaker who's also black. And the president himself, a number of times, when asked about what is he doing to close the gap between blacks and whites in America. He says, look at my opportunities on things. That's fascinating. It's almost like race, gender, and other sort of minority markers are like loopholes that people in politics use to divert the public's attention away from what is an even deeper, more universal and arguably consequential force, which is money and power. Do you feel like that's an accurate representation of how race was used in this particular case? And do you agree that this speaks to a broader phenomenon that we're seeing in society and possibly more specifically in the Democratic Party? Okay, so I mostly agree with what you said, but I want to be clear on one thing. After substantial reflection, I conclude that Sean Parker was not an evil guy who wanted to cut his own taxes and those of his peers. I conclude that he actually was well intentioned, but was so (19/40)
arrogant as Silicon Valley people often are that he allowed something to happen that is being exploited by the tax loophole seekers. But I do think you're absolutely right that these days, it's sometimes hard to get something through if your frontman is a well known billionaire. And it's a lot easier to get something through if you can say, look, these two African American senators, one of whom grew up poor, Tim Scott, one of whom was the mayor of a poor city, Cory Booker, are for this. And then people are much less likely to challenge your motives. So people in power who have power and who are smart know how to shape the public image of their proposals so they look better than they are. And this is why often big businesses send up small businesses to lobby Congress about some particular provision when the small business won't benefit as much as the big one will. Or in the most unbelievable and hard to understand thing, how ordinary people lobby Congress not to toughen the estate tax, (20/40)
votes. That's the big tax cut bill of 2017. In this case, the White House was really just a grace note on how this bill became law. But what happened afterwards is it got branded a Trump tax cut, and then it got really controversial because clearly a lot of people in the real estate industry who were close to Trump were taking advantage of it, and that led people to be really suspicious. So the New York Times did a series of stories which suggested that somehow, well, it suggested maybe it was strong, that you could draw the conclusion that they thought that this was one of a real estate deal Trump and his cronies cooked up. I don't think that's what happened here. I think this was a tax break that was particularly valuable to real estate people. A lot of Trump cronies are in real estate, including Jared Kushner, and they took advantage of it. But they actually didn't have very much to do with its origins. In fact, many of them didn't know about it until months after the bill was (22/40)
signed. Okay, so let's talk about what opportunity zones are, like specifically how they work and how the tax benefits work, because there are several ways in which investors can benefit from putting their money into these things, both on the way in and on the way out. So how do they work? Okay, so the law created some criteria for what census tracts could be eligible to be opportunity zones. The Treasury turned that into a list of census tracts, and every governor was allowed to choose up to 25% of the eligible tracts as to be opportunity zones. In an opportunity zone, here's how it works. You have to have an unrealized capital gain. That is, you have to have bought something, stock property, or something that went up in value that you haven't yet sold. You sell it, and you would normally owe capital gains tax on that profit. If you put it into an opportunity zone fund, then A, you don't have to pay capital gains taxes right away. You can put them off until 2026, and paying taxes (23/40)
later is always better than paying them sooner. And secondly, depending on how soon you move, you can reduce your tax on that original investment by 15%. So that's the first benefit. When you say you can reduce your taxes on that original investment, what do you mean? Do you mean that you can pay 15% fewer taxes on the investment that you just invested in upon the time that you sell it? Let's say you bought something for $100, and you sell it for $200. You have a $100 capital gain. You would owe, roughly speaking, $28 in capital gains taxes on that. If you're putting it into an opportunity fund, you don't have to pay that $28 tax on day one. You can put it off until 2026. And secondly, you won't owe $28. You only owe $20. So you put that $100 gain into a building or a business in an opportunity zone. And if you hold onto it for 10 years, and it appreciates in value, you can sell it, and you don't have to pay any capital gains on that profit. So the first stage is you get a delay and a (24/40)
break on your original capital gain. Your second stage is if you put it into a property in an opportunity zone or a business in an opportunity zone, and you hold onto it for 10 years, when you unload it, you will owe zero capital gains. Okay, so let me see if I got this right. So you do pay some reduced percentage of capital gains tax on the asset that you sold in order to fund the next investment, but when you sell that investment, you don't have to pay capital gains on those returns. Correct. Okay. Let me add one little bit of context here. If you're in the real estate business, there are other tax breaks. One of them is called 1031, where if you sell a building, and you put them all the proceeds of that building into another building, you can delay paying capital gains taxes. But that means if you have a building that's worth $10 million, you sell it for $10 million, you have to put the whole $10 million into another property to delay paying capital gains taxes. The people who wrote (25/40)
the Opportunity Zone legislation saw an interesting way to make this even more juicy. If you put your money in an opportunity zone, you don't have to put all the proceeds of the sale, only your profits into the Opportunity Zone. It's complicated, but it makes a big difference if you're in the real estate business. Yeah, and what you were describing there is a like kind exchange. So is this still in effect today, or have any of the provisions expired? The like kind 1031 exchanges were narrowed in the 2017 tax bill to cover only real estate. So you no longer can sell your dental practice and use it to put into something or farmers can no longer use it when they sell a cow. There are proposals underway to narrow it further. And one of the ironies of what's going on now is a lot of the things that Congress is discussing to raise taxes on the rich, eliminating the 1031 like kind exchange program or raising the tax on capital gains are going to make Opportunity Zones look even more (26/40)
attractive to rich people because it'll be one of the remaining ways that you can cut your capital gains tax bill. So what has been the effect of these zones? First of all, how much money has gone into them? And what effect has it had on the local property markets? Have you seen like what kind of data do we have on this? One of the unfortunate things is the way this became law is that was through this process in Congress, known as reconciliation, which is actually getting a lot of attention right now. And the rules of the Senate mean that something can't be in a reconciliation bill unless it explicitly involves taxes and spending. As a result, the clause in this proposal that would have required reporting to the Treasury and the Treasury reporting to the public was stripped out. So we actually don't have very much hard data. Clearly, from what public announcements and what we can see in SEC filings, tens of millions of dollars have gone into Opportunity Zone funds, most of which has (27/40)
been invested in real estate. The best data I've seen is by an economist at the Joint Committee on Taxes in the Congress, which he got access to 2019 tax returns filed by these Opportunity Zone funds. And he found that 84% of the zones got no money at all and that half the money went to just 1% of the zones. And when you think about it, that's not surprising. There are 8,764 census tracts that are Opportunity Zones. Some of them are really down and out neighborhoods. Some of them the governors chose foolishly or were influenced and they're more attractive. They're in neighborhoods that are already gentrifying or there's something else going on. And so a bunch of people who are looking for a way to save money on their taxes but not take big risks naturally gravitated to the best off of the Opportunity Zone. And that's the problem. And that is a flaw in the law that governors were allowed to pick places that personally I don't think should have been picked. And there was nothing that (28/40)
investors or their agents had to do to make sure the people in the communities benefited. It was all about, am I going to get my money back? Which is why there's a Ritz-Carlton hotel and condo going up in Portland, Oregon with Opportunity Zone money. Yeah. So I'd love for you to explain how that works technically, how the language defines what constitutes or doesn't constitute a potential Opportunity Zone and what some of the political incentives were for governors to pick them. Because in New York State, for example, I was looking at the map. It looks like parts of Dumbo, Williamsburg, what looks like Soho or the East Village, Long Island City are covered in the city. And I think that's the reason why the Spill or not in the bill but actually are actually Opportunity Zones, lots of areas in Brooklyn. So how did that work technically? And I believe also was it the case in California that students or parts of areas around certain universities were also Opportunity Zones precisely (29/40)
because even though the students themselves came from wealthy families because they have no income, the entire real estate area there would be considered an opportunity or could be an Opportunity Zone. Right. So there are two stages to this. One is the criteria that the law set and the law basically borrowed from previous laws and it said you have to have a certain poverty rate or something like that in order to make the list. Then the Treasury had to decide what data to use to comply with that definition. And because sometimes there's a lag in getting the data, they ended up using data that was a little out of date. And that was a problem because a lot had changed since 2008 after the financial crisis. So you start with kind of a flawed list of eligible tracks, technically, legally eligible. And in fact, the law had a very strange provision which said that you didn't really need to be a poor neighborhood. You could be next to a poor neighborhood. Contiguous is the word they used. And (30/40)
so there's this list of eligible tracks, some of which are really down and out and some of which are like already getting better or are, as you point out, show up as low income, but only because they have a lot of college students or actually not very many people live there and the only people who show up in the census are the people who live in a housing project or homeless people, like in a downtown where nobody lives except the poor people. So you have this list that on average they show up as poor, but then the governors get to pick from that list. And as I said, some governors picked foolishly and some picked wisely. In California, the original list that Jerry Browns off has put out included the Stanford campus. And that's ridiculous. And that's the one place where the Economic Innovation Group, the Sean Parker think tank went public and said this is crazy and they took it off the list. In New York, Governor Cuomo was hostile to the opportunity zones, because it was a Trump thing (31/40)
he thought. And so they didn't take it very seriously. I understand that they thought about not designating any census tracts as opportunity zones, but that would have been politically foolish and probably economically foolish as well. But in the end, and I don't know whether there was politics or just clumsiness, 25% of New York state's opportunity zones are in Brooklyn, which as you know, doesn't really need much help. And Long Island City, where Amazon was going to put its headquarters until there was a political opposition that killed it, that was an opportunity zone and they said they weren't going to use opportunity zone money. So there were a lot of really bad choices. The Trump Treasury maybe could have done something more to tell people don't pick this. This isn't the spirit of the law. The law didn't force them to do that and they chose not to go any further. So they basically rubber stamped every opportunity zone that a governor picked, wise or not. And the law also required (32/40)
all this to be done in a matter of months. So I spent some time in Portland, Oregon, as I mentioned earlier. And there are a lot of now publicly available records from Freedom of Information Act requests by the local newspaper where you can see the dialogue among the state officials. And they were actually, first of all, what the hell is this? Then secondly, what do we do? And they ran sort of a process to get local communities to nominate zones. But they had a really difficult strategic decision, which is if you pick the very poorest communities in your state as an opportunity zone, you might look good in the headlines, but the neighboring state will pick the places that are already gentrifying and you won't get very much money. On the other hand, if you pick places as they did like downtown Portland, you might actually get some people taking advantage of it, whether it's marginal investment or not is another question, but you'll get bad headlines. They tried to split the baby. They (33/40)
did about half of each. But as best I can tell, all the money went, or nearly all the money went to the best off communities, and very little went to the poor communities that got to designation. So one of the things that's, if you're on the ground looking at this from the point of view of people who live in these communities, as opposed to the rich people are getting the tax break, there was a lot of noise about who got designated as an opportunity zone. But if you didn't get any money, it doesn't matter. And that's true for most opportunity zones. A lot of talk about how the zones got selected, but the money seems to have gone to the ones that didn't really need it, in my opinion. Right. So, I mean, again, the data on this isn't perfect, but if you had to take a guess at it based on everything you've seen, do you think that the vast majority of the projects that have seen funding in these areas would have received funding otherwise? That even, in other words, that even the loophole (34/40)
itself hasn't been the primary driver of investments. It's simply just been the coincidence of that additional opportunity. I believe that's the case. Yes. I think in some cases it may have speeded up a project. That is, it might have been done a year or two earlier than it would have otherwise, because it opened up a new set of potential investors. And I have no doubt that there are some projects for which opportunity zone funding was the make or break thing. But from what I've seen, and it's largely anecdotal, the majority of the projects are projects that either would have been done otherwise, or that they were already in the works, and they were just financed differently. So, for instance, in the book I tell the story of a particularly outrageous loophole. There's a building in Portland, Oregon, which is the headquarters of the local natural gas utility. And long before opportunity zones were on the table, the utility was looking for new headquarters, did a search, agreed to move (35/40)
into and lease almost entirely this building that was under construction. And it was all leased up, so it's a pretty safe investment. But it turns out that because of, I think, a flaw in the law and the regulations, if you don't yet have a certificate of occupancy for your building, it can count as a new investment. And so, after the building was done, but before it got their formal certificate of occupancy and the natural gas utility moved into it, Chicago Opportunity Fund bought it with Opportunity Zone money. So people are getting a tax break for investing in a new office building in Portland, Oregon, that when they put their money in was fully leased to a public utility, and they're getting a capital gains tax break. That serves no social purpose other than to cut rich people's taxes. And it's very hard to find lots of examples of those, because you don't have to disclose this stuff. This just happens to be one that, frankly, I heard about because people in the real estate industry (36/40)
are incredible gossips, and they love to dish on their competitors. And so I was told about this by a real estate guy in Portland, Oregon, and because of the, what was disclosed by the utility and their public filings, and the city records, you could find out that this had actually happened. And also the fund that put money into it, it called itself an Opportunity Zone Fund, so I knew that that's where the money came from. It's like a needle in the haystack thing, but I suspect there's a lot of that and that over time we'll learn a lot more about things like that, where it actually only provided a tax break for rich people and didn't do anything to improve a community. And in that case, you got an office building in downtown Portland, Oregon, which until the recent troubles there was doing pretty darn well on its own. So David, I'm going to move the rest of our conversation into the overtime. I want to ask you, again, what this experience has taught you that you didn't already know (37/40)
about how Washington works, but also I want to ask some more timely and relevant questions related to the reforming of the tax code and some of the proposals that have been put forward in the infrastructure bill, how likely it is to pass, as well as your thoughts on fiscal and monetary policy, and whether both parties have embraced a sort of new consensus around permanent deficit spending. For anyone who is new to the program, Hidden Forces is listener supported. We don't accept advertisers or commercial sponsors. The entire show is funded from top to bottom by listeners like you. If you want access to the second part of today's conversation with David, as well as the transcripts and rundowns to this episode and every other episode we've ever done, head over to hiddenforces.io and check out our episode library or subscribe directly through our Patreon page at patreon.com slash Hidden Forces. There's also a link in the summary page to this episode with instructions on how to connect the (38/40)
overtime feed to your phone so that you can listen to these extra discussions just like you listen to the regular podcast. David, stick around and we're going to move the rest of our conversation into the subscriber overtime. For more information about this week's episode or if you want easy access to related programming, visit our website at hiddenforces.io and subscribe to our free email list. If you want access to overtime segments, episode transcripts and show rundowns full of links and detailed information related to each and every episode, check out our premium subscription available through the Hidden Forces website or through our Patreon page. At patreon.com slash Hidden Forces. Today's episode was produced by me and edited by Stylianos Nicolaou. For more episodes, you can check out our website at hiddenforces.io. Join the conversation at Facebook, Twitter and Instagram at Hidden Forces Pod or send me an email at dk at hiddenforces.io. As always, thanks for listening. We'll see (39/40)
you next week. (40/40)
This is the full transcription of podcast 'Hidden Forces'.
China's Plan to Decouple From the US Dollar Diana Choyleva & Dinny McMahon #Podcast #Transcription #ReadAlong #KnowledgeUnlocked
you're interested in joining the conversation on our Hidden Forces Genius community, head over to hiddenforces.io and check out our episode library, where you can also become a premium subscriber today. Guys, stick around. We're going to move the second part of our conversation onto the premium feed. For more information about this week's episode, or if you want easy access to related programming, visit our website at hiddenforces.io and subscribe to our free email list. If you want access to full episodes, transcripts, and intelligence reports, which include additional notes, resources, links, and other material that will help you get the most out of each and every episode, check out our premium subscription available through the Hidden Forces website at hiddenforces.io. Today's episode was produced by me and edited by Stylianos Nicolaou. For more episodes, you can check out our website at hiddenforces.io. Join the conversation on Twitter at HiddenForcesPod or send me an email at info (39/40)
What's up, everybody? My name is Dmitriy Kofinas, and you're listening to Hidden Forces, a podcast that inspires investors, entrepreneurs, and everyday citizens to challenge consensus narratives and to learn how to think critically about the systems of power shaping our world. My guests in this episode are Diana Shoileva and Denny McMahon, the co-authors of a comprehensive new report that examines China's plans to decouple from the dollar-based global trading and financial system. In our conversation today, Denny and Diana discussed Beijing's rationale for wanting to transform the Renminbi into an international currency, how the Chinese Communist Party is striving to make that transformation, why it might prove unattainable, and what progress we make over the coming decade. Regardless of whether the yuan proves capable of challenging dollar hegemony, the changes that Beijing is pursuing will have a profound impact on the functioning of trade and financial markets around the world. (1/40)
These changes will create new challenges for governments, businesses, and investors. Understanding what these challenges are, the steps that Beijing will take in pursuing its objectives, and how policymakers in the US and Europe will respond is crucial to making any reliable forecast about the future of the international political economy. If you want access to the second part of our conversation, which includes a discussion about the digital Renminbi, and how Beijing is trying to institutionalize yuan outflows and increase international demand for the currency, as well as policy prescriptions for Western governments, head over to hiddenforces.io slash subscribe and sign up to one of our three content tiers. All subscribers get access to our premium feed, which you can listen to on your phone using your favorite podcast app, just like you're listening to this episode right now. If you want to join in on the conversation and become a member of the Hidden Forces Genius Community, which (2/40)
includes Q&A calls with guests, access to special research and analysis in-person events and dinners, you can learn more about that on our subscriber page. And if you still have questions, feel free to send an email to info at hiddenforces.io, and I or someone from our team will get right back to you. And with that, please enjoy this incredibly informative episode with my guests, Diana Shoyleva and Dini McMahon. Dini McMahon and Diana Shoyleva. Welcome to Hidden Forces. Thank you. Thanks for having us, Dimitri. So, Dini, you've been on the podcast before. Diana, this is your first time on the show. I want both of you to introduce yourselves to our listeners. So, why don't, Diana, why don't you actually go first? Well, I'm chief economist and founder at Enodo Economics, which is a macroeconomic and political forecasting company that focuses on China and its impact on the rest of the world. But actually, when I was a child, I wanted to be a detective. I grew up in Communist Bulgaria, and (3/40)
in those days, you couldn't read any book you like, and crime books were neutral ground, so I devoured them, and I really wanted to be a detective. But then the Berlin Wall fell, and the opportunities in front of me were endless. So, I ended up being an economist, which is actually quite like being a detective. The aim of the game is to collect as many pieces of raw information that you can, know exactly what they are, and then you're trying to put them together into the same coherent picture. And the more pieces you manage to fit, the more confident you get that you have the right story. It's not a precise science, it requires judgment, and I've been looking at China for more than two decades now. Fantastic. And Dini, what about you? So, my story is I spent 10 years as a financial journalist in China, first in Shanghai, and then in Beijing. And then when I wrapped up then, there I moved to the US and spent a couple of years writing a book about China's political economy, which is how (4/40)
we first came in contact, and I was asked on the show a few years ago, talking about that, which was China's Great Wall of Debt. And since then, I've been working on issues relating to China's financial system, so issues of financial reform, financial stability, and this remanded internationalization kind of fell pretty neatly inside of that wheelhouse. Awesome. So, I feel like this discussion point about a Chinese digital yuan and China's desires or ambitions to either decouple from the dollar-based global trading and financial system or to displace it entirely and become the dominant global currency has been a discussion point that many people have been circling around for years now. And I'm actually so excited to have both of you on to dig deep into this because while many people talk about it, I don't often find that there's a lot of detailed analysis of how exactly it would happen, what would be required, etc. And you guys recently published a report that does exactly that titled, (5/40)
China's Quest for Financial Self-Reliance, How Beijing Plans to Decouple from the Dollar-Based Global Trading and Financial System. So, you're the perfect people to do this. Let's start at the very top. How do we know that Beijing wants to decouple from the dollar-based system? And what do we mean when we say that? Well, China actually is trying to decouple in all areas, even if you look through its history. It has been a country that has always been quite closed off with respect to the rest of the world. And actually, the aberration is the years, the past 40 years of opening up. The reason for that was because they fell behind and didn't take advantage of the Industrial Revolution and they had a lot of soul searching, sort of came on the bandwagon of communism and that being the answer, of course, economically, that was a disaster originally. But then, Deng Xiaoping initiated the era of opening up and China learning from the rest of the world. And actually, they learned pretty fast. (6/40)
They probably surprised themselves as well at the extent to which they were learning and China managed to become the global manufacturing hub of the world. And then they had their own stated policies, which are very much ones of self-reliance in any aspect of their economy. But it started a lot with the industrial supply chain. And if you remember, they made in China 2025 program. And what they also did post the global financial crisis was get very disappointed, whether that was warranted or not, with the economic leadership of the US and in general, the type of economic and financial system that they were trying to emulate. And originally, they looked at internationalizing the U1 because they wanted to have a lot more, not to be dependent on the economic decisions of the US as much. But then Xi Jinping came to power and that changed fundamentally the direction of travel in China. Or you could argue, accelerated a process that the Communist Party would have got to at some other point (7/40)
in the future. But without debating that, right now, Xi came to power, turned China's development 180 degrees and threw out of the window most of Deng Xiaoping's ideas and redoubled China's efforts on achieving self-sufficiency. Meanwhile, while they were trying to internationalize the RMB, that wasn't working for a variety of reasons. But then Donald Trump came to power. And that really introduced a sense of urgency in Beijing that they have to become less and less reliant on the US economy in particular, but more generally the Western world and create their own financial sphere of influence, not just because of economic reasons, but a lot because of geopolitical reasons. And of course, throughout that period, the US was increasingly using its financial system or the dominance of the dollar in its financial system to penalize economies like Iran. And then really, the big turning point as well, again, in terms of the urgency with which they were speeding up to achieve this self- (8/40)
reliance across the board, including the financial side of things, was the war in Ukraine. And when Beijing was confronted with the very harsh and sweeping sanctions, financial sanctions, that the US, but in coordination with other Western countries imposed on Russia, that cemented in the mind of the Chinese that they needed to find a way not to be dependent so profoundly on the US dollar-based financial system. But they also had realized in the last few years that the strategy of the past didn't work. And they have come to devise and think of a new way of how to achieve their goals, which this report is all about. That was a wonderful summary. I have a few questions to ask you, Diana. But before I do, Dinit, do you have anything that you want to add to that? No, I think Diana summed that up really well. I think what really happened over the last few years is there's become a real urgency in Beijing in the sense that they need to start asserting that the way that they need to assert (9/40)
their own internal security requires them to decouple. And a big way, a big part of that is decoupling from the financial system. And I think Ukraine as much as anything has brought that home. I think at the moment, the degree of volatility globally with the dollar and the impact that the Federal Reserve's monetary policy is happening on the world is kind of just, you know, again, bringing home to Beijing, kind of the need to be independent of US monetary policy. And so I think, yeah, particularly over the last few years more than anything, I think what Diana said was right. I mean, this has been sort of the movement towards decoupling is sort of a very long-term project, but the urgency has really ratcheted up a few notches over the last few years. Do you guys think this is driven by a general desire to have strategic autonomy? Or is it driven by certain strategic objectives that would be made difficult or impossible operating within the constraints of the dollar-based international (10/40)
trading system? Both actually, because you know, the immediate thing that springs to mind with respect to the second is the fact that one of the things Xi Jinping changed was the timeline for unification of the mainland with Taiwan. The Chinese Communist Party had put kind of a deadline of 2049 and a lot of people and sort of the status quo seem to be working and a lot of people had really forgotten about this issue. But Xi, in everything that he said and most importantly, done, our assessment is that he wants to be the leader who achieves this unification and the history books as the leader to do so. And so that changed the timeline and, you know, at the most given his age, you could see that being 2035. So then that's where Ukraine played such a key role, because of course, if China is to invade Taiwan as part of this unification effort, because the carrot and stick approach that they have had over the years is really not hasn't worked. They haven't completely abandoned as yet, but (11/40)
they're very close to the idea that they can peacefully unify. But certainly all their military preparations are with the assumption that, you know, they'll have to at some point use the military and that the US will get itself involved. And so if that is the case, then one key vulnerability in terms of them achieving the more pressing and they would argue internal issues that Taiwan is, is this dependence on the dollar. But actually the first is also important because fundamentally, China does want to return to its previous greatness and being at the center of the world and the most important economy. And for no one to be able to challenge its way of being or its ideology, it doesn't necessarily want to replicate the US model, if you'd like, or imperialistic Britain's model of controlling and being the world's policeman. It sort of looked at the 800 bases, military bases around the world and decides it was too costly and wants to do this with technology. Most likely it will find out (12/40)
that that's not going to suffice. But at this stage, when they say we would let anyone or all other countries to develop as they wish, they mean it. But within that, it's included as long as you do exactly what we want and what we need from you. So it is both. It is a very long-term strategic vision, but also a very short-term strategic need brought about by what China's leader, who now post the 20th party Congress, has become so all powerful, wants to achieve in his lifetime. So just to supplement some of what Diana was saying, I mean, what China is also trying to do here from a big strategic point of view is to develop its own economic sphere of influence. And I think really that's at the heart of what the Belt and Road Initiative was about from the very beginning. But I think they've also found that the Belt and Road Initiative, BRI, hasn't really allowed them to do that. I mean, building infrastructure in other countries is clearly something that's welcomed by other countries, but (13/40)
doesn't necessarily permanently bring other countries into their orbit. And this is kind of what Diana was getting about when she was saying that China wants to be able to build up those relationships using technology. I mean, bringing countries into its orbit with submarine cables and satellite networks, letting developing countries use China's technology and communications and bring them in that way. But a really big part of this picture, a really essential way to bring countries closer and tie them more closely to China's economy is by using its financial system. And the key tool here is via the currency. So if you can get other nations to anchor their currency to the Renmenbi or start borrowing in Renmenbi or relying more heavily on Renmenbi as a reserve currency investing in Renmenbi reserve assets, that's a way to more closely tie other countries into a China-led sphere of influence. So of course, it's a long-term project, but it's a very important part of that project. So this (14/40)
is where this conversation gets really interesting for me. Because I feel like the models that people have in their heads, most people, when trying to understand this issue, don't really integrate the economics, the trading, the global trade, the global economy with the financial, with the political. But they all go together. And one of the things that I find somewhat confusing when thinking about sort of the future of the Yuan is it seems in some ways that China's objectives, and maybe you guys can help clarify this for me, in some ways seems at odds. Because if they want a greater role for the Chinese Yuan, doesn't that also run in opposition to their economic growth model? And I know that they want to change their economic growth model and create a lot more endogenous demand for Chinese products. But still, much of what their geopolitical aims are require having a strong industrial base. So I guess there's this, from me, looking at how China has evolved to become the country it is (15/40)
today, it seems like they want to transition and have geopolitical power and influence. But it's hard to understand how they would do that without being a more open economy and becoming a more demand-driven economy. And doing that, it seems also somewhat at odds with their political models. So I'm just curious, one, can you help maybe more probably frame my question if you understood it? And then help me understand where I'm somewhat confused here. Maybe, Diana, you want to start? I understand where your confusion is coming from, because there is the question of what they would like to do and how they're going about it is not the same, or the answer to this question is not the same as the answer to will they succeed. And you're absolutely right. That's the only way to get things right is to think comprehensively through the economic, political, and geopolitical angle, and how do all of these come together? And you are putting your finger on the nub of the issue here. One of the ways (16/40)
that we argue in our report, they're trying to change the way supply chains work and as a result promote the use of the yuan is to have China being the center of its geopolitical sphere of influence as the main final consumer. That's one of the lessons they learned from Japan's experience of internationalizing the yen, though Japan never had a plan, but why the yen never became a big global currency was because Japan was a transition point and all the final demand was coming from the west. So for China to become the consumer anchor of its currency sphere of influence, it does need to change the way its economy is run. And they do realize that they have been talking about rebalancing their economy towards consumer spending for a number of years. They also realize that now they've achieved so much industrial development where they really lag behind is in financial sector development, in particular, the capital markets are very rudimentary, but also their banking system. And so as kind of (17/40)
their long term idea is to professionalize and improve their capital markets and financial market more generally, and they're putting efforts on both of those fronts, but then asking the question of will they be successful currently? What is going on with respect to common prosperity, which is a key part of the way Xi Jinping views the economy and economic development as well as dual circulation. Our assessment at the Nord economics is that the Chinese consumer is already in the doldrums and will not be the engine of growth that they would like it to be, but also desperately needed to be. So no wonder currently, again, Chinese throwing money at that fueled investment state led investment because the consumers are not there and it's not purely all the lockdowns and COVID restrictions, which of course are also currently part of the story. I want to also just say something else that comes to mind when I'm thinking about this, which is that currently China is dependent on the rest of the (18/40)
world for exports and for certain key technologies. This is what has allowed the country to experience the greatest level of economic growth, certainly in absolute terms in human history. At the same time, there are politically insulated society or country, the Chinese Communist Party certainly is. And so what it seems, and this is actually a great example of this, is in their China BRI closed loop, where you guys have that in your report. I don't know if that's a term that they use or they you use, which is what you see is they want to kind of replicate what currently exists for them economically and what exists in the global economy. What they want to do it in a way which is very Chinese or Chinese in the Chinese Communist sense, which is to have full control over all of it. And what I genuinely wonder is if many people out there who have felt that we're going to live in a Chinese century and that the yuan is going to be the future global currency have dramatically underestimated the (19/40)
complexity of doing this and not appreciated that the reason why Britain and the United States were able to do it in their respective periods is because they were maritime powers, they were open societies, and so much of what became the global sterling system or the global dollar system was really an organic process that was driven by people naturally wanting to use it. And also, in the case of the US, the Marshall plans and the Dodge plans, which were not loans to other countries, but actually aid to other countries, which then planted the seed for the dollar to be used and then to recycle back into the US and out of it. So I'm describing one very open model and one very controlling model. And it seems like maybe a lot of people are underestimating just how challenging it would be to succeed, to replicate what we have today using a more controlling system. Denny, maybe you want to jump in here and then Diane, I'd love to hear what you have to say about that as well. Well, it's spot on (20/40)
and actually there's a lot to unpack there because if you look at this strategy for trying to promote the more international use of the remmb. Some aspects of it are exactly as you talked about, they were incredibly controlled. And then some aspects of it, there is clearly an innate understanding that China has to relax control over the currency and over the way that its financial markets work in order for this to be a success. So take for example, what you talked about before, the whole closed loop idea. So this is one of the ways that they're trying to encourage the use of the remmb outside of their border. The idea is, okay, well, you know, we always thought that maybe we'd be able to build road initiative loans in remmb for infrastructure, but that never really happened. What we should start doing is start making loans for the construction of industrial plant outside of China, but for industrial plants that ultimately serve the Chinese economy. So to give you one of the few ideas (21/40)
that one of the few cases that has actually happened, you know, China Development Bank and Export-Import Bank provided billions of remmb's worth of loans to a Russian company to build an LNG extraction facility in the Arctic. Now the Russian company then used those loans to pay Chinese manufacturers to build the facilities for that factory. Okay, so far so good, the loans in remmb and the loan has been used to pay Chinese suppliers. Then what happens is that the Russian company said, okay, we will sell some of this LNG to China in remmb. And so it's you have this perfect closed loop, this perfect closed cycle where the debts in remmb, the debt is used to buy Chinese goods, and then they pay off the debt using remmb income. So that's one of the visions. But at the same time, there's also this recognition that that model can only go so far. So a big part of the long-term project is trying to get the center of gravity for pricing of global commodities to migrate from the United States to (22/40)
China. So at the moment, even though China is the biggest consumer of almost any commodity that you can think of, the place that those commodities are priced are invariably US commodity futures exchanges and invariably it's in dollars. And so China is like, okay, if we can get these things priced in remmb, in Chinese based exchanges, then we can start to get companies actually trading commodities, whether it be iron ore or oil or cobalt or soybeans in remmb and that'll create a huge demand for remmb outside of China's borders. But there's a recognition that they can't do this by fiat. I mean, they're dealing with tens of thousands of farmers and trading companies and miners and financial institutions around the world who are not going to be subject to the whims of the Chinese central bank or the China Standing Committee. And so what they're trying to do is gradually open up its markets. They're trying to create new commodities markets for commodities that don't yet have futures (23/40)
contracts, but stand to be important commodities in the future as we move into new technologies and less carbon intensive technologies. That's kind of the vision to kind of leverage the size of China's markets, but at the same time to kind of relinquish control so that foreigners will be kind of more willing to engage in the market. So there is this real understanding that on one hand, there's this real sort of contradiction that on one hand, there is an inclination to maintain as much control as possible where they can, but they also recognize for this project to be a success. It's not something they can control because it's completely dependent on the wants and needs of foreigners. Daniel, do you have any thoughts about that? Yes, because actually sort of even I think my thoughts are kind of sitting on the moon and looking at the earth type of thoughts. Because the first thing to note here is that China is the first country which has a plan and trying a strategy and is trying to (24/40)
internationalize that and MIMBY. None of the other currencies became global currencies because those countries had a coherent plan and strategy of how to achieve that over the years. So in that sense, the question of are they likely to be able to do this their own way is an extremely valid question. The answer is very difficult to give for two reasons. One is that you look at how their economy developed. When the Soviet Union collapsed, I'm sure a lot of and we had this, the end of history, the communist model is there, the capitalist model won the competition and actually China had its own way. It combined its rigid political system with a more open economic system and achieved tremendous development and improvement. So their experience already is suggesting and they certainly are trying to push that they believe it genuinely and they're trying to push that across those countries that they're trying to bring into their sphere of influence that following the Chinese model of governance (25/40)
and economic development is an alternative to the Western led capitalist model and one that is more successful. Now again, we can ask the question who's likely to buy this narrative, but this is very much part of what they're trying to achieve to push forward this control based system as a way of governance, if not globally, then regionally within their sphere of influence here as well. It's important to note that at this point in time, they do not want the RMB to become a global currency, one that supplants the dollar completely. Their aim at this point is for the Yuan to be a regional currency and the economy that you have to keep in mind as kind of the blueprint for what they want to achieve is Germany of all economies out there and the economy they managed to hollow out completely was Germany in terms of its industrial expertise that China is now leading in a lot of those traditional areas for Germany and funnily enough, Germany runs its economy and the way China runs its economy (26/40)
have a lot of similarities and it was then the Deutsche Mark becoming the key and currency of trade within Europe and that being the mechanism through which then the euro was created, if you'd like. I mean, obviously, the Chinese are not thinking of creating a euro-like currency, but really being the Deutsche Mark of a economic and financial sphere of influence. And that's the first stage of this development. And then, you know, can they achieve this with the types of closed system that they have and one that is becoming even more closed under Xi Jinping? Is the key question that one has to ask on a 10 to 20 year horizon? But what we also try to do in this report is to say that them trying to achieve it without having to answer that question conclusively, because I think it's very early to be able to do so, is going to have fundamental impact across the way the global financial system works. And so for anyone out there using global payments systems, which is pretty much anyone, whether (27/40)
you're in the financial industry or simply trading in the global trading system, you need to understand what China is trying to do because it's attempt to do so, given its size and importance, will have ripple effects across the board. And if you had asked me the question of success shortly after the fall of the Berlin Wall, I would have told you that the answer is probably no, they won't succeed. But now why I'm pausing, and I'm saying it is a bit too early to make a judgment with conviction is because of technology. And we don't spend too much time in the report looking at the digital yuan. Originally, when we started writing it, we thought we'll spend a lot of time on that and on the payment system. But actually, over the course of the research, which has been a year long project, we realized that this is if you'd like the necessary condition to have the system of global payments established, but it's not the sufficient condition to increase the use of the yuan. But what's really (28/40)
important with respect to the digital yuan and one of the points we make, which is very different to the point made by other analysts who have looked into this issue, and certainly the perception in the US, a lot of people say, oh, well, it doesn't matter if it's a digital yuan or if it is a paper yuan, as long as it's a close capital account and the yuan doesn't circulate freely, they won't be able to internationalize it. But actually, we are flipping this argument the other way around that if they manage and Dini explained to you the ways they're trying to internationalize the R&B dealing with the current constraints that they've imposed, if they manage to get the yuan to be used more for cross-border trade and create a new system of cross-border payments based on digital currencies, which is still in its infancy, but they are the most progressed and that system will be much more efficient than the existing system for a variety of reasons, then those flows will be visible to them to (29/40)
such granularity that they will have the visibility to feel in control, to feel preemptive and be able to intervene when they don't like something. So rather than saying that as long as they keep the capital account closed, they won't be able to internationalize the yuan, new technology may enable them to get the sense of control that they would like to have in order to have a more open movement, if that makes sense to you. It does and that was one of the things that I really appreciated in the report. Again, it brings us back to the importance of control. I also think that the example of Germany, the Deutschmark is instructive because actually I want you to clarify for this for me because this is how I understand it in terms of what is so attractive about the German model. Germany in some ways has, well, I guess no because it's within the European Union. So here's what I wanted to say. Germany has had this export driven growth model, not dissimilar to what's worked so well for China. (30/40)
And they've also benefited from being part of this larger free trade area, which is the European single market and which sits inside of the larger global trading and financial system, upheld and fostered by the US in its capacity as a champion of free trade and as a purveyor of international security, which it's important to note, we haven't discussed yet whether or not China is prepared to play that role. And if that's a requirement for the yuan to become a global currency, but in terms of Germany, is the ideal Chinese model here one where Germany, if we're comparing China to Germany, would have kept the Deutschmark but still managed to create a free economic zone that it would use to export high end manufactured goods and which would be something analogous to the BRI while giving Berlin the kind of political control that currently exists in Brussels and where everyone ends up using the Deutschmark. Does that kind of make sense as an analog for what the ideal system would look like? (31/40)
The comparison with Germany is only really relevant when it comes to the economic developments. They do not envisage the plurality of views, political views and the way Germany conducts itself on the international scene at all to be part of the strategy. This is just looking at a mercantilist economy like Germany and China has been very much a mercantilist economy and that's how it managed to grow so fast. Of course, actually, if they weren't included into the World Trade Organization as they were, they probably wouldn't be where they are right now. They don't necessarily acknowledge that properly. And Germany was very good at sort of the small and medium sized or middle stand and creating these significant expertise at that time in its industrial development and then being able to take advantage of its geographical role in the region as well, which is another difference between China and Germany because China is geographically a lot more challenged if you'd like. And also, it seems to (32/40)
want to have parts that are very far away from its immediate surroundings. I'm talking about Africa as part of its sphere of influence. So, the German comparison is much more economic than it is political and it's not one for one for sure. So, Denny, I want you to share any last thoughts you have and then I'm going to move us to the second part of the conversation where we're going to get much more granular and focus in on how the Chinese Communist Party really wants to try and achieve this. You began answering this earlier. We're going to look at not just the supply side, which is how to build up the infrastructure, which I think most people think of naturally or intuitively when trying to think about how the Chinese would accomplish this, but also the demand side. How to get people to actually use the Chinese you want and what would be required to do that. Denny, any last thoughts before we move to the premium feed? Yeah, you briefly brought up the question of military, whether China (33/40)
needs to be able to replicate in some way the security umbrella that the United States has provided since the end of the Second World War. I thought I might just briefly touch on that because we really know we near China being able to do that or even wanting to do that. In fact, the place that we are at the moment, I think this is really potentially one of the biggest barriers towards China achieving its goals, is that in many ways China is an economic security threat to a lot of the nations who fall within, that it counts as close trading partners and would potentially fall within what China might deem as an ideal Rememby zone. What I mean by that is that at the moment China is inclined to throw its muscle around, its economic weight around to punish countries for what seem to be reasonably small diplomatic or international relations slights. What I'm talking about here is China imposed a moratorium on imports of bananas from the Philippines over issues relating to islands in the (34/40)
South China Sea. With South Korea, when the South Koreans were looking to install a new radar system from the United States specifically for dealing with North Korea, but China was concerned that it would allow the United States and South Korea to monitor China as well. It imposed a wave of economic sanctions on South Korea as well, specifically on limiting Chinese tourists to go to South Korea. Australia has been the biggest recipient of Chinese economic sanctions in the form of a wave of embargoes on imports of Australian coal and wine and various other goods. At the moment we are so far away from China being a provider of regional security because in fact China almost is part of its toolbox of measures that it used to conduct international relations. It uses economic weapons and sanctions on nations which should be ultimately fall within one day of the economic sphere of influence. That's potentially a barrier. Kind of like racketeering. Kind of like... Let me provide you security (35/40)
to protect you from me. There is an element of that, obviously. Absolutely. Actually, one more question before I move to the premium feed. Is this economic model that they're looking to put forward or impose a much more classically imperial model or colonial model? Is that a good way of thinking about it? I think there are elements of that because let's say China does achieve its vision of common prosperity, that it is able to better distribute the nation's wealth towards population and Chinese people consume far more than they actually do at the moment and consumption becomes a driver of growth. Now, as Diana pointed out, there are a lot of reasons to think that might not happen, but that is the direction of travel. That's what Beijing normally says it wants to achieve. Well, if China is then consuming more, by extension it means it'll be ultimately importing more as well. But then there's a question of what does it want to import? Ultimately, China isn't that interested in importing (36/40)
manufactured goods, certainly manufactured goods that have a reasonable technology content. What it primarily wants to import is natural resources, perhaps processed natural resources, and probably at a pinch, low-end manufacturers. Perhaps there is that element of imperial economic model there. I don't think necessarily the Chinese are explicit about it, but in terms of what an economic division of labor would look like in a world in which China consumes far more and by extension imports far more, then China, the economic relationship and visions is not necessarily particularly equal. So, Diana, you wanted to add to that, and then we'll move to the premium feed. I just wanted to add what I actually said earlier, that no, at this point, they do not at all envision to be the provider of global security goods and the global policemen, and in that sense have an imperialistic model like the US or the UK. And what they're trying to achieve or how they're trying to achieve their (37/40)
imperialistic vision is through technology, through new technology and having control and visibility in that way. But they hadn't progressed far enough on that front before the US finally woke up to the challenge that China presents to its position, but also to its way of life. All right, great. So, I'm really excited to get into the details here, guys, because I think that's where the real value is for people. Understanding, in other words, how Beijing would strategically execute on this, the role that technology would play, and the sorts of challenges that they would run into, especially when we consider what the US would do and is doing in response. For anyone new to the program, Hidden Forces is listener supported. We don't accept advertisers or commercial sponsors. The entire show is funded from top to bottom by listeners like you. If you want access to the second part of today's conversation with Diana and Denny, as well as the episode transcripts, intelligence reports, and if (38/40)
at hiddenforces.io. As always, thanks for listening. We'll see you next time. (40/40)
This is the full transcription of podcast 'Hidden Forces'.
Origins of the Ukraine War & What Comes Next Serhii Plokhy #Podcast #Transcription #ReadAlong #KnowledgeUnlocked
nationalists from who he's gotten these ideas over the last several decades? Putin's argument about what the title of his essay says, the historical unity of Russians and Ukrainians is not original. He's not a historian, he's not a thinker, he's a political figure. But he spent a lot of time during the COVID pandemic in isolation, having time to read Andrew Reid books, and the books that he was reading were mostly coming from the either Russian imperial thinkers and historians of the pre-revolutionary era of 1917, or from the writers that ended up to be in immigration after the Bolshevik Revolution, but who continued to develop the imperial views and imperial ideas. And in the Russian empire of the 19th century, the dominant view was that there existed a big Russian nation which consisted of three tribes, great Russians for today's Russians, little Russians or Ukrainians, and white Russians or Belarusians. They could maybe speak a little bit different languages, but all of them were (18/40)
because I want to parse out Putin's claims about Lenin's role in giving rise to what we think of as an independent Ukraine and the blame that he puts on Lenin. And that question has to do with really what the value is of investigating these historical origins to begin with. Because from my perspective, power is the most important thing that really matters to define what is a national boundary or not when it comes to a state's ability to impose its will. But insofar as history is important, it seems that the only importance of history, and it's not a small thing, is in the population's sense of legitimacy over the ruling order. So how much of this is really about claiming a sense of national legitimacy and aligning state policy with that view and getting the public's support to believe it? So how much of this was already in the Russian public's mind, the theories that President Putin has put forward, and how much of this has been actively cultivated by him and more importantly, other (17/40)
does influence their sense of legitimacy over the ruling order. And in that sense, the rewriting of history, whether you want to call that revanchism or nationalist propaganda, does serve an important function insofar as it provides a legitimizing narrative for the aggressor state that's looking to change the status quo by making itself the true victim of a historical process that goes back much further than any immediate conflict. And the power of these sorts of narratives is also important for the defenders who are encouraged to fight for their country, which obviously has been an important part of what's motivated the Ukrainians and helped them form their sense of nationhood, which I'm sure we'll have a chance to get into. But I have another question here because what you're referring to is this tripartite view of a greater Russia. And you said, quote, big Russians are the people that we call today Russians, little Russians are Ukrainians and white Russians are Belarusians. What I (21/40)
What's up everybody? My name is Dmitriy Kafinas and you're listening to Hidden Forces, a podcast that inspires investors, entrepreneurs, and everyday citizens to challenge consensus narratives and to learn how to think critically about the systems of power shaping our world. My guest in today's episode is Professor Sergei Plohji, the director of the Ukrainian Research Institute at Harvard University and a leading authority on Ukraine, Russia, and Eastern Europe. He's published extensively on the international history of World War II and the Cold War, and he joins me today to discuss the subject of his latest book on the war in Ukraine and the return of history. This is a conversation about national identity, the disintegration of empires, and what will follow from the largest European land war since World War II. How will the outcome of the war in Ukraine inform the evolution of the international order? And what are the most compelling theories that explain Putin's decision to invade (1/40)
in the first place? Was it to build a greater Russia, as some of his detractors have claimed, or did Moscow face legitimate security concerns from NATO enlargement that on their own can explain the course of events? The answer to this last question holds important lessons about the future of European security and US policy towards China, which is what we spent part of the second hour discussing. If you want access to that part of the conversation and you're not already subscribed to Hidden Forces, you can join our premium feed and listen to the second hour of today's episode by going to hiddenforces.io. All of our content tiers give you access to our premium feed, which you can listen to on your mobile device using your favorite podcast app just like you're listening to this episode right now. If you want to join in on the conversation and become a member of the Hidden Forces Genius Community, which includes Q&A calls with guests, access to special research and analysis, in-person (2/40)
events and dinners, you can also do that on our subscriber page. And if you still have questions, feel free to send an email to infoathiddenforces.io and I or someone from our team will get right back to you. And with that, please enjoy this incredibly informative conversation with my guest, Professor Serhii Blokhi. Professor Serhii Blokhi, welcome to Hidden Forces. It's a pleasure. Thank you for having me. The pleasure is all mine, Professor. So before we get into the subject of today's conversation, which is going to build off your latest book, The Russo Ukrainian War, The Return of History, I'd love if you could take a moment to tell me in my audience a little bit about you, your background and your interest areas and focus in the field of history. I am Professor of Ukrainian and European History at Harvard University. And this is more or less what I have been doing for my entire life, my professional life. I was educated in Ukraine, which was at that time part of the Soviet Union. (3/40)
I started my academic career at the University of Dnipro, which is now relatively close to the front lines of this war. I continue it in Canada, University of Alberta in Western Canada. And I am Professor of Ukrainian History at Harvard since 2007, Director of the Ukrainian Research Institute at Harvard. And my field is Ukrainian and European History, but also Global History. One of the courses that I teach at Harvard is on the Yalta Conference. I teach course also on the Cold War, that on the top of course, of course is on Ukrainian and European history. And in that sense, the book that we are discussing today, it brings together different fields, my different interests, but also my connection to the region, connection to Ukraine, connection to the things that are happening today on the battleground. So while I was reading the book, I came to the view that it dealt with two, if not maybe three topics. One was the origin of the war in Ukraine. And folded within that was also a (4/40)
conversation, a big part of it was really a conversation about Russian and Ukrainian identity and the sense of Russian nationhood and how that has evolved both up until the end of the Cold War and then subsequently with the fall of the Soviet Union. And the other part of the book is really a look forward into what the consequences of this war will be for the future and how the global order is evolving. Would you say that that's pretty much an accurate description? Yes, I would say it is an accurate description and the origins of the war, the issues of identity. This is the focus of the first chapters, few chapters, and then the future is the focus of the concluding two chapters. What is also in between, I try to look at the actual developments on the front lines in the course of the last year. So the book was written between March of 2022 and February of 2023. So what certainly the reader will get out of that book will be not just the origins and consequences of the war, but there will (5/40)
be a lot of war itself. Yeah, there's, you devote many chapters to describing actually the progression of the war in the last year. So that was extremely useful as well. And I'm sure it'll be a really good history for people who are maybe in the future and learning about the war later. So when did you begin writing this book? I started writing it really in late March, so it would be more or less one month into the war. And by that time, the shock that came with the war, I was able to overcome it on some level. But also for me, it became clear already in March, in late March, the overall outcome of that war. So we still don't know when it will end and exactly how it will end. But already in late March, it was clear for me that Ukraine would survive as an independent state. And that would be certainly mean defeat for Russia and for Russian aspirations as it was and plans it was going to the war. So from that point of view, at least I thought that I knew what I was talking about in (6/40)
historical perspective. In historical perspective, I mean, I could talk about the origins, I could discuss the developments, and I could also talk in my opinion quite confidently about the future, not the immediate future. I don't know what will happen tomorrow. I don't know exactly what will happen one year from now. But historical frame gives you understanding of the ultimate outcome, long-term outcome of those processes. Because I look at this war as the war of the Soviet succession or Russian succession, one of the wars of the history, story of the disintegration of the Russian Empire, one of the biggest world empires. And we know where the wars end of that sort. They end up with ultimately the victory of the national movements, the formation of the states. And another thing that the first months of the war made me confident of was the ultimate Ukrainian victory. So the victory meaning survival. In the after World War II, in now almost 80 years since then of World War II, there was (7/40)
no one single example of major power, great power, winning a war against a rising nation and a rising state. So none. And we didn't know whether the Russian aggression against Ukraine would be different or not by late March at least. I saw that it would probably not be different and that gave me some foundations again, moral historical in terms of standards of my profession to write that book. One more question for you about process before we get into the book itself. How do you feel that your identity and background as a Ukrainian impacted your writing of this book and impacted your objectivity of the war itself? I was thinking about that more than once, but this is the case where I think me coming from Ukraine, really an asset because I certainly now understand many things that anyone who didn't grow up there, didn't go to school there, probably it would be difficult for people to grasp that. I am clearly on the side of Ukraine, but I don't think about my position as being a partisan (8/40)
position. I think about myself and about my book as being part of this really broad community of people in the United States, in Europe that pose this war, oppose aggression, who are supporting Ukraine because this is one of the very few wars, at least in the last again, 80 years when the moral dimensions of the war are so clear. It's very clear who is the aggressor. It's very clear who is the victim. It's very clear who is right, who is wrong, where is the right side of history, where is wrong side of history. It's also a clash between democracy and autocracy. In the United States, there was a very interesting book written about the Second World War, it's the title Good War. What that meant was that the World War II was one, the probably most horrible war in the history of the world, but it was also the war where from the American perspective it was very clear the moral dimension of that war. The United States was on the right side of history. The Russian-Ukrainian war is the largest (9/40)
war in Europe since World War II, but it also comes with that sort of a moral clarity. I was proud to be on the side of millions, millions of other Americans who really considered this Russian aggression against Ukraine to be a crime. How far back do we need to go in order to understand the origins of this conflict? This war is quite unique, at least in my experience, of studying wars, writing about the wars, unique in a sense of how much history has been used and often abused to justify it. Vladimir Putin, who is certainly the primary culprit in all that story, published an essay on the historical unity of Russians and Ukrainians, and certainly he starts there with medieval times with Kiev and Rus. His speech that was de facto declaration of the war was dubbed by some as a history lecture. There was a lot of history in articulation of the goals of the war and justification of it. The major point was that Ukrainians don't exist and shouldn't exist as a nation. The argument was put a (10/40)
little bit differently, saying that Russians and Ukrainians are one and the same people. History was misused to make that argument. I felt that in my book, I had to take seriously those claims. I had to deal with them as a professional. My first chapter of the book is called Imperial Implosion or Imperial Collapse. This is where I engaged again the Putin's argumentation from time to time. But also I'm trying to tell what, at least from the perspective of the professional historical field, what the Russian Empire was about, what were the relations between Russia and Ukraine within that empire. This is very important because Putin and many in Russia today still trace their origins to the Kievan Rus, to the city of Kiev, when after annexation of the Crimea in 2014 Putin erected a monument to Prince Volodymyr of Vladimir, his namesake. That was the prince who ruled in Kiev. Now the monument to that prince is at the very center of Moscow. There is a lot of confusion about the origins of the (11/40)
Russian state, about the origins of the Russian nation, which led to this war on the one hand. But on the other hand also is responsible to a degree for miscalculations, Russian miscalculations in the war. Putin now it is very clear, really believed what he was writing, that Russians and Ukrainians were one and the same people, that allegedly Ukrainians were captured by the evil forces, by Nazis and nationalists, led by the only Jewish president outside of Israel, Volodymyr Zelensky, Jewish by background. And that led him, I mean President Putin, to think that Ukrainians would welcome Russian troops with flowers. And we know that they welcomed them with javelins and stingers. So what is the basis of Putin's claim beyond the fact that there was a founding prince? I think Vladimir, the prince that he erected a statue of, was a Viking. I mean, I'm a little confused because you went back to at least, I think the 15th century in the book, recounting the history of the peoples that sort of (12/40)
populated that region. So what is the exact basis of his claim and what is the justification for an alternative history or the more definitive history that let's say other historians agree about? Kievan Rus was a medieval empire, with its capital, with its center being based in Kiev. And from that point of view, the comparisons can be made, let's say, with the more ancient, of course, Roman Empire or Charlemagne Empire. And imagine today that, let's say, someone in Britain or in France or in Germany goes and takes over Rome, claiming that they're the real descendants of the Roman Empire. So the same we see with thinking in today's Russia. Today's Russia, its central part was part of this Kievan Rus of this medieval empire. And the myth of origins, one of the sections in my book is called myth of origins tells them that they come from Kiev, which is also the foundation for thinking about not just political history, not just history of the state, not just history of dynasty, but also (13/40)
about history of nations. And this is one of indications that really Russia today has difficulty divorcing itself, not only from Russian Empire or the Soviet Union, but also from medieval, medieval history and medieval imperial history and so on and so forth. Vladimir Vladimir himself, yes, he was a Viking. The Kievan Rus was one of those states, principalities, empires that was created or reformated by Vikings all over Europe. So from that point of view, Ukrainian history and to a degree, Russian history is very, very European in a sense. This is the same phenomenon. This is more or less the same Vikings. But they, as it happened in all other places, they didn't create Sweden or Norway in France, right? Eventually they were acculturated. They became part of the local elites. We see the emergence of different states and eventually nation states. So the story of Eastern Europe, the story of Ukraine is pretty much the same. So you have an influx of Vikings that they take over militarily. (14/40)
They create their own principality, but eventually they go native. They speak Slavic language, they write Slavic or Old Ukrainian or Old Ruthenian, Church Slavonic, the Slavonic language of the literature of the Church is there. We don't hear about Vikings per se after the first to second generation. You know, reading your book made me realize that not only do I not know anything about Viking history, but it sure seems fascinating. I had no real appreciation for how much Vikings were using the river systems in Europe to come down into the continent and conquer territories. Yes, this is fascinating story and history in its own right. It is also very interesting that today archaeologists can tell you who the Viking is and who not is the Viking in places like Ukraine. Because the Vikings have, they were traveling on the boats, right? So they were rowing. One theory is that rowers, that's the meaning of the term also Rus, the term Rus and eventually Russia comes from the Finnic or Swedish (15/40)
term rowers. And you can see the formations to the skeletons that come with spending the life on the boat. And when you look at the population of the Ukrainian steppes, there would be different deformations coming from the lifespan on the back of the horse. Right? Because they're Mongolians. Right. So today you don't really even, for archaeology, you can identify who was who by looking at the skeleton. So yes, it is interesting and fascinating story. And Ukraine was exactly the place where the horse riding cultures met with the boat people. So this is also an important point to mention. And you alluded to it earlier when you talked about imperial disintegration. But so much of what we consider to be European history, particularly in the Eastern side, is the result of the coming apart of empires, the Ottoman Empire, certainly in the case of Greece. And now you're drawing a similar parallel in the case of Russia and Ukraine. I have one more question before we go to the Bolshevik era (16/40)
Russians, and that was the big political Russian nation. The revolution of 1917 really ended that because that was a social revolution, of course, there was a lot about the working class and so on and so forth, but it was also the revolution of nations. It is called Russian revolution, which is a little bit ironic. The right term for that is the revolution in the Russian empire, and any revolution in the empire at the beginning of the 20th century, even in the 19th century, would be about also national self-determination. So the revolution really ends the old Russian empire and ends with the view of the Russian empire that there existed such thing as big Russian nation. Ukrainians and Belarusians are recognized as separate nations and parvies Russians. They get their republics in the Soviet Union and so on and so forth. And Putin has been very vocal in showing how unhappy he is, what Lenin's transformations and reforms were, and even Joseph Stalin's. He was talking about that in this (19/40)
speech on the eve of the war. So his ideas is going back to the empire, bringing back the imperial modes of thinking and thinking not just about the future, but also about the past. And you're absolutely right that history is being used here as a political tool for justification, something that has to come, but really he tries to move forward in his mind by looking back at the glory of the Russian empire rather than the glory of the Soviet Union. Yeah. I brought up the Greek case because a history that we all grew up thinking was settled, both in scholarship and in international law, is now being challenged by Turkish nationalists as part of this larger, revisionist set of claims over the Eastern Mediterranean. And I can't help but go back to my earlier point about history being constantly rewritten because history doesn't have any adjudicative power in and of itself. People make history, might makes right. And yet, even as I say that, I recognize that people's historical understanding (20/40)
didn't understand in the book was the distinction between the tripartite view of a greater Russia and the Eurasianist view. What's the distinction between these two perspectives? First, a short comment on the Greek story because the war in Ukraine is a continuation of the story that really starts with the Greek revolution of the beginning of the 19th century, because that was one of the first cases of the revolt against empire, one of Eurasian empires, in this case, the Ottoman Empire. And it really, the fight, the heroic fight of the Greeks, was supported by the entire Europe. So there was this mobilization, Lord Byron was involved in that and so on and so forth. And Ukrainian war is also a war against against the empire or post-imperial state. And we see the same sort of maybe comparable sort of the mobilization. People are on what I referred to before, that right side of history. But this are the pages from the same book, the book of the disintegration of the big empire, the Ottoman (22/40)
Empire, the Russian Empire, the Austrian-Hungarian Empire. What the Greek case reminds us about is that the story of the disintegration of the empires, this is not an event. This is a process. And unfortunately, this is a process that can take not just decades, but even centuries. And that's, again, a useful case, but also an important perspective to have. In terms of the vision of the one big Russian nation and ideas of Eurasianism, Eurasianism, it's a bigger umbrella that is used by many Russian thinkers to a degree by Putin as well to extend the imperial tent, Russian imperial tent. Because what's the concept of the three-part type Russian nation doesn't allow for, it doesn't allow to provide justification for keeping under the Russian control Chechens, for example, right? Or to keeping under the Russian control Buryats, Tatars, and so on and so forth. So this is another step of the imperial project. It's not just you form a big imperial nation out of a number of nations, but also (23/40)
then you may claim for someone who is not Slavic at all, who can't consider it to be Slavic, but you still provide philosophical and historical justification for the continuation of the imperial rule. And it turned out in this war that the entire undertaking of the continuation of the Russian rule over non-Slavic groups in the Russian Federation is extremely important for a billy to offer Russia to fight the war. The Chechens, the Buryats, the Yakuts, the people from Tuva were disproportionately recruited into the Russian army and sent to die in the fields of Ukraine. So you can imagine that as concentric circles at the center would be Russians or great Russians, the next circle would include Ukrainians and Belarusians as allegedly Russians, and then there would be non-Slavic and non-Orthodox non-Eastern groups that by idea of Eurasianism would provide some form of justification of the continuation of the Russian rule. So the Eurasianist view encompasses the perspective of Greater (24/40)
Russia. Yes. It's within the Eurasianist perspective. So how did these ideas evolve or factor into what became notions of Russia's sphere of influence after the Bolshoi Revolution and then subsequently after the beginning of the Cold War? The ideas of a big Russian nation and Eurasianism went into immigration after the victory of the Bolshoi. The Eurasianist movement really was fully formulated and articulated during the interwar period. You mean people who left Russia after the Bolshoi Revolution continued some of these ideas? Yes, exactly. And now they serve as a reservoir of ideas for Putin, who rejects the Soviet model of dealing with the nationality question in the empire. And the Soviet model was that they recognized the existence of Ukraine, they recognized the existence of Belarus, they created a number of national republics, 15, they were all together at the end of the Soviet Union, and they provided especially immediately after the revolution. They provided some concessions (25/40)
to the nationalities. Concessions were mostly in the form of endowing them with formal institutions that didn't have much power, local governments or local parliaments that didn't function because there was no elections per se. Concessions in the arm or in the field of language and culture. But all of that was done in the situation where the political control over those peripheries was really strengthened, strengthened especially during Stalin and his dictatorial rule and his dictatorial power. The official ideology was not Russian nationalism or was not Eurasianism, the official ideology was internationalism, the communist internationalism. The movement, the communist movement. Yes, yes, the communist movement certainly was something that took over the government in the former Russian empire, but also something that the Bolsheviks like Lenin and 30 degrees Stalin were trying to exploit. Lenin for the purpose of the world revolution. The Soviet Union was formed with an eye that one day (26/40)
the United States of America would become one of the republics of the global union of the Soviet Socialist Republics. If you look at the court of warms of the Soviet Union, you will see that there is the sun, the sun of communism rising over the globe. So the aspirations were from the very beginning global. But by the early 1930s, Stalin realizes that the world revolution is not happening. The Britain is not Russian with the socialist revolution and the United States as well are not doing that. Whatever attempts were they in the early 20s were crushed and they start thinking about building socialism in one country. But World War II and spectacular successes of the Soviet Union in that war produces such phenomenon as Eastern Europe. Poland and Hungary and Czechoslovakia, Romania, all of these countries were overrun by the Red Army and Stalin introduced communist regimes in all those places. And that's where you see it. He didn't integrate, he didn't incorporate them into the Soviet (27/40)
Union, but that would be a classic sphere of influence model, which was also combined with the ideological uniformity and the imposition of the so-called small Stalin's or small dictators in East Germany, in Poland, in Romania, and other places. So what you see is that the imperial instinct is the same in the Russian imperial thinkers and the communist leaders. But the way how they go over this imperial project of establishing and maintaining control over a number of nations and politics, their approach differs, at least ideologically, historically and otherwise. So I'm fascinated by how the Russian elite, the Russian people, the institutions of government in Russia came to grips with the collapse of the Soviet Union and attempted to internalize that as a working model of influence over the new Russian Federation, as well as the former Soviet Republics and even Eastern Bloc countries. How long did it take for Russian elites to begin to formulate an idea of what Russia's place in the (28/40)
world should be? And did that really begin to solidify after Putin came into power? Yes, it did. It started to solidify. But the basic ideas were already there back in 1991 at the time of the disintegration of the Soviet Union. People around Boris Yeltsin, in particular his economic advisor and prime minister for some period of time, Yegor Gahidar, were saying that in the conditions of the disintegration of the USSR and economic collapse, Russia really didn't have resources to maintain its control over the post-Soviet space in the way how it was doing that during the Soviet times, which meant a lot of expenses, also subsidies, coming from the process that Russia was getting from selling oil and gas. And the argument was, okay, we need this money for ourselves. We need this money to rebuild Russia. And 20 years from now, the Republics would come back one way or another, not in the form of the former Soviet arrangement, where it would be a burden, continuing burden on the economic loan (29/40)
Russia, but in a different form, in a different way. But the model was that the sovereignty of those other republics was conditional, was recognized as conditional on being allied with Russia, not joining the West. So really, that's where the thinking about the post-Soviet space as Russian sphere of influence had started. So the borders of the Russian sphere of influence, what was the Soviet spheres of influence and cover Eastern Europe, now shrunk and were moved inside of the borders of the former Soviet Union. So the former republics like Ukraine, like Belarus, even Baltic states, Kazakhstan, were imagined as part of that sphere of influence. And there was a formal organization created for those purposes, which was called the Commonwealth of Independent States. And what you see is from the very beginning, the tensions are growing between Russia and Ukraine, which were the largest Soviet republics in terms of population, in terms of the economic output, because Ukraine looked at the (30/40)
Commonwealth of Independent States as an institution that was supposed to assure what in Kiev they called the civilized divorce. So an institution where we can negotiate how we divide the common property, how we arrange our relations for the future. In Russia, from the very beginning, the Commonwealth of Independent States was viewed as an instrument for maintaining Russian influence and Russian geopolitical control over the post-Soviet space. And all of that is happening before Putin. All of that is happening in the 1990s. So what Putin's innovation is, is that he realizes that the Commonwealth of Independent States, it's not a working mechanism to assure those goals. He comes up with the number of projects of creating different forms of what would be called the Eurasian Union, a much closer connection between the former post-Soviet republics under the Russian control than was the Commonwealth. And he's prepared to use the army to achieve that goal outside of the borders of the (31/40)
Russian Federation. So in 2008, we have a war in Georgia. In 2014, we have the annexation of the Crimea and start of the hybrid warfare in Donbass. And in 2022, we have the all-out aggression against Ukraine. But the goal is still the same. The goal didn't change from the times of Boris Yeltsin. It's reassuring Russian control over this post-Soviet space. And it would be impossible to achieve that without Ukraine, the second largest Soviet and then post-Soviet republic being part of that project. So there are a couple of places I want to go now. It's going to get a little difficult because there are a few threats to follow. But let's start with this one, which has to do with the evolution of institutional and state power in Russia versus in Ukraine. And why was it that these two nations diverged so significantly? Even though Ukraine's economic crisis post the fall of the Soviet Union was arguably worse than in Russia, but there was more optimism around sovereignty in Ukraine and also (32/40)
Ukraine took a more democratic direction. So what explains those differences and how have those contributed to where we find ourselves today? From the start, what you see within big segments of elites in Russia is a really a shock from the fall of the Soviet Union. So the overall idea is that Russia lost its geopolitical position, lost territory in the minds of a big part of the elite who didn't distinguish between Russia proper and the Soviet Union. And you see much more optimism on the Ukrainian side where Ukrainian elites gained. They gained statehood. They gained independence, at least a declaration of independence and working hard to make it a reality. But despite these differences, there was also a feeling among the Ukrainian elites that they should follow a Russian model in terms of the political changes and transformations that Yeltsin was going through in the 1990s. But the reasons are different, but one of them was that Ukraine as a republic of the Soviet Union really didn't (33/40)
have an independent elite. Those were mostly the yes man, the thinking was happening in Moscow, the institutions were there, the decisions were made there. Then the orders were going to the republics and there were the people who were implementing those orders. So for them it was difficult to think about themselves fully independently in terms of what do you do with this country. So they were trying to follow in the 1990s Yeltsin's models and Yeltsin's model was really creating a strong presidential system. He orders the Russian tanks to shoot at the Russian parliament in 1993. He rewrites constitution and he has a referendum on strengthening of the presidential powers. And the Ukrainian elite, post-communist elite, was actually trying to emulate it. And then by the beginning of 2000s, they realized that whatever political, quote-unquote, solutions or models or policies worked in Russia, they didn't work in Ukraine. It was a different country, it was a different population, it was a (34/40)
different level of tolerance towards the possibility of state violence. So in Ukraine, in response to the rise in authoritarian tendencies, there were two uprisings, popular revolutions called Maidan. The first one became known as Orange Revolution in 2004. The second one is Revolution of Dignity in 2013-2014. And already around the time of the first of those revolutions, the Orange Revolution, president of Ukraine at that time, Leonid Kuchma wrote, or at least co-wrote a book which had a very, very talent title, Ukraine is not Russian. And the book first appeared not in Ukrainian but in Russian and it was first presented not in Kiev but in Moscow. That was clearly, we know where the main reader of that book in mind of Kuchma was supposed to be, it was supposed to be in Kremlin. But that was the lesson that the Ukrainian elites learned over the period of the 1990s and the beginning of the new century, that Ukrainian population is different. It's not prepared to allow the state to take (35/40)
away the democratic practices, the democracy that was given to Ukraine with the fall of the Soviet Union. At the end, by the time we have the start of the war in 2014 and then in 2022, you see that this war is also can very easily and justifiably characterized also as the war between authority and democracy, between authoritarian state and another state that became democratic, one of very few states in the post-Soviet space that maintained democratic institutions and functional democracy. There's another important framing here and I think this is the opportune moment to bring it up, which is that of Russia versus the quote West or more specifically Russia versus the United States. A framing that is omnipresent in the formulation of Russian foreign policy and in the country's domestic political discourse and which looms much larger in the minds of Russian elites and in the Russian public than I think most Americans and Europeans realize. In part because the reverse isn't true, even with (36/40)
This is the full transcription of podcast 'Hidden Forces'.
Origins of the Ukraine War & What Comes Next Serhii Plokhy #Podcast #Transcription #ReadAlong #KnowledgeUnlocked
This is the full transcription of podcast 'Hidden Forces'.
Origins of the Ukraine War & What Comes Next Serhii Plokhy #Podcast #Transcription #ReadAlong #KnowledgeUnlocked
Union, but that would be a classic sphere of influence model, which was also combined with the ideological uniformity and the imposition of the so-called small Stalin's or small dictators in East Germany, in Poland, in Romania, and other places. So what you see is that the imperial instinct is the same in the Russian imperial thinkers and the communist leaders. But the way how they go over this imperial project of establishing and maintaining control over a number of nations and politics, their approach differs, at least ideologically, historically and otherwise. So I'm fascinated by how the Russian elite, the Russian people, the institutions of government in Russia came to grips with the collapse of the Soviet Union and attempted to internalize that as a working model of influence over the new Russian Federation, as well as the former Soviet Republics and even Eastern Bloc countries. How long did it take for Russian elites to begin to formulate an idea of what Russia's place in the (28/40)
historical perspective. In historical perspective, I mean, I could talk about the origins, I could discuss the developments, and I could also talk in my opinion quite confidently about the future, not the immediate future. I don't know what will happen tomorrow. I don't know exactly what will happen one year from now. But historical frame gives you understanding of the ultimate outcome, long-term outcome of those processes. Because I look at this war as the war of the Soviet succession or Russian succession, one of the wars of the history, story of the disintegration of the Russian Empire, one of the biggest world empires. And we know where the wars end of that sort. They end up with ultimately the victory of the national movements, the formation of the states. And another thing that the first months of the war made me confident of was the ultimate Ukrainian victory. So the victory meaning survival. In the after World War II, in now almost 80 years since then of World War II, there was (7/40)
does influence their sense of legitimacy over the ruling order. And in that sense, the rewriting of history, whether you want to call that revanchism or nationalist propaganda, does serve an important function insofar as it provides a legitimizing narrative for the aggressor state that's looking to change the status quo by making itself the true victim of a historical process that goes back much further than any immediate conflict. And the power of these sorts of narratives is also important for the defenders who are encouraged to fight for their country, which obviously has been an important part of what's motivated the Ukrainians and helped them form their sense of nationhood, which I'm sure we'll have a chance to get into. But I have another question here because what you're referring to is this tripartite view of a greater Russia. And you said, quote, big Russians are the people that we call today Russians, little Russians are Ukrainians and white Russians are Belarusians. What I (21/40)
Ukraine took a more democratic direction. So what explains those differences and how have those contributed to where we find ourselves today? From the start, what you see within big segments of elites in Russia is a really a shock from the fall of the Soviet Union. So the overall idea is that Russia lost its geopolitical position, lost territory in the minds of a big part of the elite who didn't distinguish between Russia proper and the Soviet Union. And you see much more optimism on the Ukrainian side where Ukrainian elites gained. They gained statehood. They gained independence, at least a declaration of independence and working hard to make it a reality. But despite these differences, there was also a feeling among the Ukrainian elites that they should follow a Russian model in terms of the political changes and transformations that Yeltsin was going through in the 1990s. But the reasons are different, but one of them was that Ukraine as a republic of the Soviet Union really didn't (33/40)
Russia, but in a different form, in a different way. But the model was that the sovereignty of those other republics was conditional, was recognized as conditional on being allied with Russia, not joining the West. So really, that's where the thinking about the post-Soviet space as Russian sphere of influence had started. So the borders of the Russian sphere of influence, what was the Soviet spheres of influence and cover Eastern Europe, now shrunk and were moved inside of the borders of the former Soviet Union. So the former republics like Ukraine, like Belarus, even Baltic states, Kazakhstan, were imagined as part of that sphere of influence. And there was a formal organization created for those purposes, which was called the Commonwealth of Independent States. And what you see is from the very beginning, the tensions are growing between Russia and Ukraine, which were the largest Soviet republics in terms of population, in terms of the economic output, because Ukraine looked at the (30/40)
What's up everybody? My name is Dmitriy Kafinas and you're listening to Hidden Forces, a podcast that inspires investors, entrepreneurs, and everyday citizens to challenge consensus narratives and to learn how to think critically about the systems of power shaping our world. My guest in today's episode is Professor Sergei Plohji, the director of the Ukrainian Research Institute at Harvard University and a leading authority on Ukraine, Russia, and Eastern Europe. He's published extensively on the international history of World War II and the Cold War, and he joins me today to discuss the subject of his latest book on the war in Ukraine and the return of history. This is a conversation about national identity, the disintegration of empires, and what will follow from the largest European land war since World War II. How will the outcome of the war in Ukraine inform the evolution of the international order? And what are the most compelling theories that explain Putin's decision to invade (1/40)
in the first place? Was it to build a greater Russia, as some of his detractors have claimed, or did Moscow face legitimate security concerns from NATO enlargement that on their own can explain the course of events? The answer to this last question holds important lessons about the future of European security and US policy towards China, which is what we spent part of the second hour discussing. If you want access to that part of the conversation and you're not already subscribed to Hidden Forces, you can join our premium feed and listen to the second hour of today's episode by going to hiddenforces.io. All of our content tiers give you access to our premium feed, which you can listen to on your mobile device using your favorite podcast app just like you're listening to this episode right now. If you want to join in on the conversation and become a member of the Hidden Forces Genius Community, which includes Q&A calls with guests, access to special research and analysis, in-person (2/40)
events and dinners, you can also do that on our subscriber page. And if you still have questions, feel free to send an email to infoathiddenforces.io and I or someone from our team will get right back to you. And with that, please enjoy this incredibly informative conversation with my guest, Professor Serhii Blokhi. Professor Serhii Blokhi, welcome to Hidden Forces. It's a pleasure. Thank you for having me. The pleasure is all mine, Professor. So before we get into the subject of today's conversation, which is going to build off your latest book, The Russo Ukrainian War, The Return of History, I'd love if you could take a moment to tell me in my audience a little bit about you, your background and your interest areas and focus in the field of history. I am Professor of Ukrainian and European History at Harvard University. And this is more or less what I have been doing for my entire life, my professional life. I was educated in Ukraine, which was at that time part of the Soviet Union. (3/40)
I started my academic career at the University of Dnipro, which is now relatively close to the front lines of this war. I continue it in Canada, University of Alberta in Western Canada. And I am Professor of Ukrainian History at Harvard since 2007, Director of the Ukrainian Research Institute at Harvard. And my field is Ukrainian and European History, but also Global History. One of the courses that I teach at Harvard is on the Yalta Conference. I teach course also on the Cold War, that on the top of course, of course is on Ukrainian and European history. And in that sense, the book that we are discussing today, it brings together different fields, my different interests, but also my connection to the region, connection to Ukraine, connection to the things that are happening today on the battleground. So while I was reading the book, I came to the view that it dealt with two, if not maybe three topics. One was the origin of the war in Ukraine. And folded within that was also a (4/40)
conversation, a big part of it was really a conversation about Russian and Ukrainian identity and the sense of Russian nationhood and how that has evolved both up until the end of the Cold War and then subsequently with the fall of the Soviet Union. And the other part of the book is really a look forward into what the consequences of this war will be for the future and how the global order is evolving. Would you say that that's pretty much an accurate description? Yes, I would say it is an accurate description and the origins of the war, the issues of identity. This is the focus of the first chapters, few chapters, and then the future is the focus of the concluding two chapters. What is also in between, I try to look at the actual developments on the front lines in the course of the last year. So the book was written between March of 2022 and February of 2023. So what certainly the reader will get out of that book will be not just the origins and consequences of the war, but there will (5/40)
be a lot of war itself. Yeah, there's, you devote many chapters to describing actually the progression of the war in the last year. So that was extremely useful as well. And I'm sure it'll be a really good history for people who are maybe in the future and learning about the war later. So when did you begin writing this book? I started writing it really in late March, so it would be more or less one month into the war. And by that time, the shock that came with the war, I was able to overcome it on some level. But also for me, it became clear already in March, in late March, the overall outcome of that war. So we still don't know when it will end and exactly how it will end. But already in late March, it was clear for me that Ukraine would survive as an independent state. And that would be certainly mean defeat for Russia and for Russian aspirations as it was and plans it was going to the war. So from that point of view, at least I thought that I knew what I was talking about in (6/40)
no one single example of major power, great power, winning a war against a rising nation and a rising state. So none. And we didn't know whether the Russian aggression against Ukraine would be different or not by late March at least. I saw that it would probably not be different and that gave me some foundations again, moral historical in terms of standards of my profession to write that book. One more question for you about process before we get into the book itself. How do you feel that your identity and background as a Ukrainian impacted your writing of this book and impacted your objectivity of the war itself? I was thinking about that more than once, but this is the case where I think me coming from Ukraine, really an asset because I certainly now understand many things that anyone who didn't grow up there, didn't go to school there, probably it would be difficult for people to grasp that. I am clearly on the side of Ukraine, but I don't think about my position as being a partisan (8/40)
position. I think about myself and about my book as being part of this really broad community of people in the United States, in Europe that pose this war, oppose aggression, who are supporting Ukraine because this is one of the very few wars, at least in the last again, 80 years when the moral dimensions of the war are so clear. It's very clear who is the aggressor. It's very clear who is the victim. It's very clear who is right, who is wrong, where is the right side of history, where is wrong side of history. It's also a clash between democracy and autocracy. In the United States, there was a very interesting book written about the Second World War, it's the title Good War. What that meant was that the World War II was one, the probably most horrible war in the history of the world, but it was also the war where from the American perspective it was very clear the moral dimension of that war. The United States was on the right side of history. The Russian-Ukrainian war is the largest (9/40)
war in Europe since World War II, but it also comes with that sort of a moral clarity. I was proud to be on the side of millions, millions of other Americans who really considered this Russian aggression against Ukraine to be a crime. How far back do we need to go in order to understand the origins of this conflict? This war is quite unique, at least in my experience, of studying wars, writing about the wars, unique in a sense of how much history has been used and often abused to justify it. Vladimir Putin, who is certainly the primary culprit in all that story, published an essay on the historical unity of Russians and Ukrainians, and certainly he starts there with medieval times with Kiev and Rus. His speech that was de facto declaration of the war was dubbed by some as a history lecture. There was a lot of history in articulation of the goals of the war and justification of it. The major point was that Ukrainians don't exist and shouldn't exist as a nation. The argument was put a (10/40)
little bit differently, saying that Russians and Ukrainians are one and the same people. History was misused to make that argument. I felt that in my book, I had to take seriously those claims. I had to deal with them as a professional. My first chapter of the book is called Imperial Implosion or Imperial Collapse. This is where I engaged again the Putin's argumentation from time to time. But also I'm trying to tell what, at least from the perspective of the professional historical field, what the Russian Empire was about, what were the relations between Russia and Ukraine within that empire. This is very important because Putin and many in Russia today still trace their origins to the Kievan Rus, to the city of Kiev, when after annexation of the Crimea in 2014 Putin erected a monument to Prince Volodymyr of Vladimir, his namesake. That was the prince who ruled in Kiev. Now the monument to that prince is at the very center of Moscow. There is a lot of confusion about the origins of the (11/40)
Russian state, about the origins of the Russian nation, which led to this war on the one hand. But on the other hand also is responsible to a degree for miscalculations, Russian miscalculations in the war. Putin now it is very clear, really believed what he was writing, that Russians and Ukrainians were one and the same people, that allegedly Ukrainians were captured by the evil forces, by Nazis and nationalists, led by the only Jewish president outside of Israel, Volodymyr Zelensky, Jewish by background. And that led him, I mean President Putin, to think that Ukrainians would welcome Russian troops with flowers. And we know that they welcomed them with javelins and stingers. So what is the basis of Putin's claim beyond the fact that there was a founding prince? I think Vladimir, the prince that he erected a statue of, was a Viking. I mean, I'm a little confused because you went back to at least, I think the 15th century in the book, recounting the history of the peoples that sort of (12/40)
populated that region. So what is the exact basis of his claim and what is the justification for an alternative history or the more definitive history that let's say other historians agree about? Kievan Rus was a medieval empire, with its capital, with its center being based in Kiev. And from that point of view, the comparisons can be made, let's say, with the more ancient, of course, Roman Empire or Charlemagne Empire. And imagine today that, let's say, someone in Britain or in France or in Germany goes and takes over Rome, claiming that they're the real descendants of the Roman Empire. So the same we see with thinking in today's Russia. Today's Russia, its central part was part of this Kievan Rus of this medieval empire. And the myth of origins, one of the sections in my book is called myth of origins tells them that they come from Kiev, which is also the foundation for thinking about not just political history, not just history of the state, not just history of dynasty, but also (13/40)
about history of nations. And this is one of indications that really Russia today has difficulty divorcing itself, not only from Russian Empire or the Soviet Union, but also from medieval, medieval history and medieval imperial history and so on and so forth. Vladimir Vladimir himself, yes, he was a Viking. The Kievan Rus was one of those states, principalities, empires that was created or reformated by Vikings all over Europe. So from that point of view, Ukrainian history and to a degree, Russian history is very, very European in a sense. This is the same phenomenon. This is more or less the same Vikings. But they, as it happened in all other places, they didn't create Sweden or Norway in France, right? Eventually they were acculturated. They became part of the local elites. We see the emergence of different states and eventually nation states. So the story of Eastern Europe, the story of Ukraine is pretty much the same. So you have an influx of Vikings that they take over militarily. (14/40)
They create their own principality, but eventually they go native. They speak Slavic language, they write Slavic or Old Ukrainian or Old Ruthenian, Church Slavonic, the Slavonic language of the literature of the Church is there. We don't hear about Vikings per se after the first to second generation. You know, reading your book made me realize that not only do I not know anything about Viking history, but it sure seems fascinating. I had no real appreciation for how much Vikings were using the river systems in Europe to come down into the continent and conquer territories. Yes, this is fascinating story and history in its own right. It is also very interesting that today archaeologists can tell you who the Viking is and who not is the Viking in places like Ukraine. Because the Vikings have, they were traveling on the boats, right? So they were rowing. One theory is that rowers, that's the meaning of the term also Rus, the term Rus and eventually Russia comes from the Finnic or Swedish (15/40)
term rowers. And you can see the formations to the skeletons that come with spending the life on the boat. And when you look at the population of the Ukrainian steppes, there would be different deformations coming from the lifespan on the back of the horse. Right? Because they're Mongolians. Right. So today you don't really even, for archaeology, you can identify who was who by looking at the skeleton. So yes, it is interesting and fascinating story. And Ukraine was exactly the place where the horse riding cultures met with the boat people. So this is also an important point to mention. And you alluded to it earlier when you talked about imperial disintegration. But so much of what we consider to be European history, particularly in the Eastern side, is the result of the coming apart of empires, the Ottoman Empire, certainly in the case of Greece. And now you're drawing a similar parallel in the case of Russia and Ukraine. I have one more question before we go to the Bolshevik era (16/40)
because I want to parse out Putin's claims about Lenin's role in giving rise to what we think of as an independent Ukraine and the blame that he puts on Lenin. And that question has to do with really what the value is of investigating these historical origins to begin with. Because from my perspective, power is the most important thing that really matters to define what is a national boundary or not when it comes to a state's ability to impose its will. But insofar as history is important, it seems that the only importance of history, and it's not a small thing, is in the population's sense of legitimacy over the ruling order. So how much of this is really about claiming a sense of national legitimacy and aligning state policy with that view and getting the public's support to believe it? So how much of this was already in the Russian public's mind, the theories that President Putin has put forward, and how much of this has been actively cultivated by him and more importantly, other (17/40)
nationalists from who he's gotten these ideas over the last several decades? Putin's argument about what the title of his essay says, the historical unity of Russians and Ukrainians is not original. He's not a historian, he's not a thinker, he's a political figure. But he spent a lot of time during the COVID pandemic in isolation, having time to read Andrew Reid books, and the books that he was reading were mostly coming from the either Russian imperial thinkers and historians of the pre-revolutionary era of 1917, or from the writers that ended up to be in immigration after the Bolshevik Revolution, but who continued to develop the imperial views and imperial ideas. And in the Russian empire of the 19th century, the dominant view was that there existed a big Russian nation which consisted of three tribes, great Russians for today's Russians, little Russians or Ukrainians, and white Russians or Belarusians. They could maybe speak a little bit different languages, but all of them were (18/40)
Russians, and that was the big political Russian nation. The revolution of 1917 really ended that because that was a social revolution, of course, there was a lot about the working class and so on and so forth, but it was also the revolution of nations. It is called Russian revolution, which is a little bit ironic. The right term for that is the revolution in the Russian empire, and any revolution in the empire at the beginning of the 20th century, even in the 19th century, would be about also national self-determination. So the revolution really ends the old Russian empire and ends with the view of the Russian empire that there existed such thing as big Russian nation. Ukrainians and Belarusians are recognized as separate nations and parvies Russians. They get their republics in the Soviet Union and so on and so forth. And Putin has been very vocal in showing how unhappy he is, what Lenin's transformations and reforms were, and even Joseph Stalin's. He was talking about that in this (19/40)
speech on the eve of the war. So his ideas is going back to the empire, bringing back the imperial modes of thinking and thinking not just about the future, but also about the past. And you're absolutely right that history is being used here as a political tool for justification, something that has to come, but really he tries to move forward in his mind by looking back at the glory of the Russian empire rather than the glory of the Soviet Union. Yeah. I brought up the Greek case because a history that we all grew up thinking was settled, both in scholarship and in international law, is now being challenged by Turkish nationalists as part of this larger, revisionist set of claims over the Eastern Mediterranean. And I can't help but go back to my earlier point about history being constantly rewritten because history doesn't have any adjudicative power in and of itself. People make history, might makes right. And yet, even as I say that, I recognize that people's historical understanding (20/40)
didn't understand in the book was the distinction between the tripartite view of a greater Russia and the Eurasianist view. What's the distinction between these two perspectives? First, a short comment on the Greek story because the war in Ukraine is a continuation of the story that really starts with the Greek revolution of the beginning of the 19th century, because that was one of the first cases of the revolt against empire, one of Eurasian empires, in this case, the Ottoman Empire. And it really, the fight, the heroic fight of the Greeks, was supported by the entire Europe. So there was this mobilization, Lord Byron was involved in that and so on and so forth. And Ukrainian war is also a war against against the empire or post-imperial state. And we see the same sort of maybe comparable sort of the mobilization. People are on what I referred to before, that right side of history. But this are the pages from the same book, the book of the disintegration of the big empire, the Ottoman (22/40)
Empire, the Russian Empire, the Austrian-Hungarian Empire. What the Greek case reminds us about is that the story of the disintegration of the empires, this is not an event. This is a process. And unfortunately, this is a process that can take not just decades, but even centuries. And that's, again, a useful case, but also an important perspective to have. In terms of the vision of the one big Russian nation and ideas of Eurasianism, Eurasianism, it's a bigger umbrella that is used by many Russian thinkers to a degree by Putin as well to extend the imperial tent, Russian imperial tent. Because what's the concept of the three-part type Russian nation doesn't allow for, it doesn't allow to provide justification for keeping under the Russian control Chechens, for example, right? Or to keeping under the Russian control Buryats, Tatars, and so on and so forth. So this is another step of the imperial project. It's not just you form a big imperial nation out of a number of nations, but also (23/40)
then you may claim for someone who is not Slavic at all, who can't consider it to be Slavic, but you still provide philosophical and historical justification for the continuation of the imperial rule. And it turned out in this war that the entire undertaking of the continuation of the Russian rule over non-Slavic groups in the Russian Federation is extremely important for a billy to offer Russia to fight the war. The Chechens, the Buryats, the Yakuts, the people from Tuva were disproportionately recruited into the Russian army and sent to die in the fields of Ukraine. So you can imagine that as concentric circles at the center would be Russians or great Russians, the next circle would include Ukrainians and Belarusians as allegedly Russians, and then there would be non-Slavic and non-Orthodox non-Eastern groups that by idea of Eurasianism would provide some form of justification of the continuation of the Russian rule. So the Eurasianist view encompasses the perspective of Greater (24/40)
Russia. Yes. It's within the Eurasianist perspective. So how did these ideas evolve or factor into what became notions of Russia's sphere of influence after the Bolshoi Revolution and then subsequently after the beginning of the Cold War? The ideas of a big Russian nation and Eurasianism went into immigration after the victory of the Bolshoi. The Eurasianist movement really was fully formulated and articulated during the interwar period. You mean people who left Russia after the Bolshoi Revolution continued some of these ideas? Yes, exactly. And now they serve as a reservoir of ideas for Putin, who rejects the Soviet model of dealing with the nationality question in the empire. And the Soviet model was that they recognized the existence of Ukraine, they recognized the existence of Belarus, they created a number of national republics, 15, they were all together at the end of the Soviet Union, and they provided especially immediately after the revolution. They provided some concessions (25/40)
to the nationalities. Concessions were mostly in the form of endowing them with formal institutions that didn't have much power, local governments or local parliaments that didn't function because there was no elections per se. Concessions in the arm or in the field of language and culture. But all of that was done in the situation where the political control over those peripheries was really strengthened, strengthened especially during Stalin and his dictatorial rule and his dictatorial power. The official ideology was not Russian nationalism or was not Eurasianism, the official ideology was internationalism, the communist internationalism. The movement, the communist movement. Yes, yes, the communist movement certainly was something that took over the government in the former Russian empire, but also something that the Bolsheviks like Lenin and 30 degrees Stalin were trying to exploit. Lenin for the purpose of the world revolution. The Soviet Union was formed with an eye that one day (26/40)
the United States of America would become one of the republics of the global union of the Soviet Socialist Republics. If you look at the court of warms of the Soviet Union, you will see that there is the sun, the sun of communism rising over the globe. So the aspirations were from the very beginning global. But by the early 1930s, Stalin realizes that the world revolution is not happening. The Britain is not Russian with the socialist revolution and the United States as well are not doing that. Whatever attempts were they in the early 20s were crushed and they start thinking about building socialism in one country. But World War II and spectacular successes of the Soviet Union in that war produces such phenomenon as Eastern Europe. Poland and Hungary and Czechoslovakia, Romania, all of these countries were overrun by the Red Army and Stalin introduced communist regimes in all those places. And that's where you see it. He didn't integrate, he didn't incorporate them into the Soviet (27/40)
world should be? And did that really begin to solidify after Putin came into power? Yes, it did. It started to solidify. But the basic ideas were already there back in 1991 at the time of the disintegration of the Soviet Union. People around Boris Yeltsin, in particular his economic advisor and prime minister for some period of time, Yegor Gahidar, were saying that in the conditions of the disintegration of the USSR and economic collapse, Russia really didn't have resources to maintain its control over the post-Soviet space in the way how it was doing that during the Soviet times, which meant a lot of expenses, also subsidies, coming from the process that Russia was getting from selling oil and gas. And the argument was, okay, we need this money for ourselves. We need this money to rebuild Russia. And 20 years from now, the Republics would come back one way or another, not in the form of the former Soviet arrangement, where it would be a burden, continuing burden on the economic loan (29/40)
Commonwealth of Independent States as an institution that was supposed to assure what in Kiev they called the civilized divorce. So an institution where we can negotiate how we divide the common property, how we arrange our relations for the future. In Russia, from the very beginning, the Commonwealth of Independent States was viewed as an instrument for maintaining Russian influence and Russian geopolitical control over the post-Soviet space. And all of that is happening before Putin. All of that is happening in the 1990s. So what Putin's innovation is, is that he realizes that the Commonwealth of Independent States, it's not a working mechanism to assure those goals. He comes up with the number of projects of creating different forms of what would be called the Eurasian Union, a much closer connection between the former post-Soviet republics under the Russian control than was the Commonwealth. And he's prepared to use the army to achieve that goal outside of the borders of the (31/40)
Russian Federation. So in 2008, we have a war in Georgia. In 2014, we have the annexation of the Crimea and start of the hybrid warfare in Donbass. And in 2022, we have the all-out aggression against Ukraine. But the goal is still the same. The goal didn't change from the times of Boris Yeltsin. It's reassuring Russian control over this post-Soviet space. And it would be impossible to achieve that without Ukraine, the second largest Soviet and then post-Soviet republic being part of that project. So there are a couple of places I want to go now. It's going to get a little difficult because there are a few threats to follow. But let's start with this one, which has to do with the evolution of institutional and state power in Russia versus in Ukraine. And why was it that these two nations diverged so significantly? Even though Ukraine's economic crisis post the fall of the Soviet Union was arguably worse than in Russia, but there was more optimism around sovereignty in Ukraine and also (32/40)
have an independent elite. Those were mostly the yes man, the thinking was happening in Moscow, the institutions were there, the decisions were made there. Then the orders were going to the republics and there were the people who were implementing those orders. So for them it was difficult to think about themselves fully independently in terms of what do you do with this country. So they were trying to follow in the 1990s Yeltsin's models and Yeltsin's model was really creating a strong presidential system. He orders the Russian tanks to shoot at the Russian parliament in 1993. He rewrites constitution and he has a referendum on strengthening of the presidential powers. And the Ukrainian elite, post-communist elite, was actually trying to emulate it. And then by the beginning of 2000s, they realized that whatever political, quote-unquote, solutions or models or policies worked in Russia, they didn't work in Ukraine. It was a different country, it was a different population, it was a (34/40)
different level of tolerance towards the possibility of state violence. So in Ukraine, in response to the rise in authoritarian tendencies, there were two uprisings, popular revolutions called Maidan. The first one became known as Orange Revolution in 2004. The second one is Revolution of Dignity in 2013-2014. And already around the time of the first of those revolutions, the Orange Revolution, president of Ukraine at that time, Leonid Kuchma wrote, or at least co-wrote a book which had a very, very talent title, Ukraine is not Russian. And the book first appeared not in Ukrainian but in Russian and it was first presented not in Kiev but in Moscow. That was clearly, we know where the main reader of that book in mind of Kuchma was supposed to be, it was supposed to be in Kremlin. But that was the lesson that the Ukrainian elites learned over the period of the 1990s and the beginning of the new century, that Ukrainian population is different. It's not prepared to allow the state to take (35/40)
away the democratic practices, the democracy that was given to Ukraine with the fall of the Soviet Union. At the end, by the time we have the start of the war in 2014 and then in 2022, you see that this war is also can very easily and justifiably characterized also as the war between authority and democracy, between authoritarian state and another state that became democratic, one of very few states in the post-Soviet space that maintained democratic institutions and functional democracy. There's another important framing here and I think this is the opportune moment to bring it up, which is that of Russia versus the quote West or more specifically Russia versus the United States. A framing that is omnipresent in the formulation of Russian foreign policy and in the country's domestic political discourse and which looms much larger in the minds of Russian elites and in the Russian public than I think most Americans and Europeans realize. In part because the reverse isn't true, even with (36/40)
all the Russia collusion hysteria during the Trump administration, Americans never really saw their national power as being constrained or defined by Russian power. So what I'd like to do in the second hour professor is to try and reconcile and compare two adjacent theories for the outbreak of the war in Ukraine, each of which pull from some of the themes that we've explored today. The first theory is based on the imperial argument for Russian aggression, that in other words, Russia's invasion of Ukraine in both 2014 and again in 2022 stemmed from imperial ambitions and desires for territorial expansion informed by this disputed history that we've discussed today and which incidentally would have also explained the expansion of NATO in terms of legitimate security concerns on the part of Russia's neighbors. That in other words, it wasn't so much the US and Europe moving east as it was Eastern Europe and some of these former Soviet republics moving west. The second theory is one that (37/40)
takes a much more sympathetic view of Russian behavior, seeing it as an understandable and predictable response to the enlargement of NATO and to Western military encroachments on Russia's border structural realists like John Meersheimer who's been on the show before, are prominent proponents of this view, but he's not alone. I think both of these perspectives have merit and like I said, I'd like to devote the second hour of our conversation to exploring them in detail and that will I think ultimately bring us to a conversation about China because unlike in the case of the US and Russia, the policy towards China was one of accommodation and I think most of us can agree at this point at least that this policy didn't work. So if it didn't work for China, why would it have worked for Russia? You know, just some food for thought there. So for those of you who are new to the program, Hidden Forces is listener supported. We don't accept advertisers or commercial sponsors. The entire show is (38/40)
funded from top to bottom by listeners like you. If you want access to the second hour of today's conversation with Professor Plohe, head over to hiddenforces.io slash subscribe and sign up to one of our three content tiers. All subscribers gain access to our premium feed, which you can use to listen to the rest of today's conversation on your mobile device using your favorite podcast app, just like you're listening to this episode right now. Professor, stick around, we're going to move the second hour of our conversation onto the premium feed. If you want to listen in on the rest of today's conversation, head over to hiddenforces.io slash subscribe and join our premium feed. If you want to join in on the conversation and become a member of the Hidden Forces Genius community, you can also do that through our subscriber page. Today's episode was produced by me and edited by Stylianos Nicolaou. For more episodes, you can check out our website at hiddenforces.io. You can follow me on (39/40)
Twitter at Kofinas and you can email me at info at hiddenforces.io. As always, thanks for listening. We'll see you next time. (40/40)
This is the full transcription of podcast 'Hidden Forces'.
Is Elon Musk Humanity’s Savior or a Supervillain Tim Higgins #Podcast #Transcription #ReadAlong #KnowledgeUnlocked
either by choice or by being pushed. And Tesla really needed to build up its kind of leadership ranks and engineering and ranks. And Elon had gone through a series of people, but hadn't quite found the kind of the engineered oversee the car development that could put his vision on the road. And a very important thing happened in early 2009. And that was the hiring of a man named Peter Rawlinson. And Peter was a car engineer from the UK who had worked at Jaguar and Lotus and hadn't had a traditional automotive career path, but was very interested in what was possible and how to do things quicker from a development standpoint. And Elon kind of latched onto him early on in 2009 and hired him. And he became the guy to put on the street the vision for what the Model S was going to be. Elon had hired a young kind of up and coming car designer to put the vision of what it would look like. And JB Straubel had figured out how to do the propulsion. And Peter Rawlinson was going to be the guy (32/40)
And in that period of time, we saw a really rather remarkable story and probably a historic turnaround in a very short period. At least this generation's most dramatic comeback, if you will, from the depths of near bankruptcy to becoming the world's most valuable automaker. And so I wanted to tell that story. How did that happen? Now, you can argue that the company is overvalued. You can argue that all sorts of things, but it's still a dramatic story of what has occurred in that period of time. So one, staying out to tell that story and also really wanting to tell the story of how the Model 3 came to be. And it just didn't just happen in 2017 and 2018 and 2019. It was really a multi-year process starting with the Roadster through the Model S, through the Model X, and into the Model 3. Everything built on it, the drama was really throughout all of those years. Right. And I do totally want to get into that. The last question I had before we do is because of the nature of the story, (7/40)
but also generating interest in the investor community as well. He was at that point in 2009, when they revealed it, selling the future of the automobile. And, you know, it was very exciting for some of those early people. Yeah, I think that Elon, first of all, he has a great sense of what people want and how to sell it. And I think at this time, this was 2012, the car came out in the summer of 2012, right around the time that Mario Draghi gave his famous, whatever it takes, speech, right around the time that the global economy was beginning to turn the corner from the great financial crisis. And I think the zeitgeist was one where people really wanted something to believe in again, around the economy and our ability to innovate. There was this sense that, you know, America's best days economically were behind it. And here was this guy creating the first American car company, successful, seemingly car, American car company in like a generation, like a hundred years. And it rekindled (36/40)
a car. You've got this great space inside the car. And then you're sitting in the driver's seat and the dashboard looks crazy. It looks like something out of an Apple store. In the center screen, you've got this giant, essentially a TV screen in the middle. It's up and down. This is prior to the iPad coming out, but the iPhone was there. And so it was a touchscreen, like with a giant iPhone. Instead of having all these different gauges, you had a kind of you had a screen behind the steering wheel. And then what they're telling, what Elon is telling is the performance is going to be like, you know, among the best sports cars in the world. And that's pretty amazing. And the other thing is he's promising the price. It was going to be $50,000. So, you know, look at all this for what you could get is a boring Ford sedan. It was a pretty good proposition. And that helped generate a lot of interest, a lot of interest from people with a lot of money who started, you know, putting down orders, (35/40)
What's up, everybody? My name is Demetri Kofinas, and you're listening to Hidden Forces, a podcast that inspires investors, entrepreneurs, and everyday citizens to challenge consensus narratives and to learn how to think critically about the systems of power shaping our world. My guest in this week's episode is Wall Street Journal Automotive and Tech Reporter Tim Higgins, who is out with a brand new book this week that provides an inside look into the remarkable and more often than not chaotic story of Tesla and its polarizing CEO, Elon Musk. Now, many of you already know that I've done my fair share of episodes on Tesla, and given how much research I do ahead of these conversations, combined with the conversations themselves, I've had the opportunity to form a fairly educated opinion on the company and on Musk that isn't particularly flattering. And my conversation today has not disabused me of any of those preconceptions. If anything, Tim's book confirms much of what I already knew, (1/40)
and in some instances raises even more questions about ethics and illegality at the company. And more often than not, at the company is really just a stand-in for Elon, who for better or worse, cannot be separated from Tesla in any final analysis of the company's financials, its operations, and its prospects as an automaker. We spent the first part of our conversation discussing the origin story of Tesla all the way up until the successful launch of the Model S, which truly was a remarkable achievement. I mean, I had the opportunity to drive one when it first came out, and I was just blown away by how futuristic it felt, and how it opened my eyes to possibilities that I hadn't really imagined up until that point in time. And it don't just mean in electric cars, it's easy to forget where we were in the summer of 2012, in terms of coming out of the financial crisis and people's desires to find something in our economy to feel hopeful about. And Elon and the Model S absolutely delivered (2/40)
on that. Unfortunately, the success that Tesla enjoyed during that period was not something that the company would be able to replicate going forward. And this is what we spend most of the second half of our conversation discussing. Specifically, what challenges Tesla faced, primarily after the deployment of the Model S, why it faced those challenges, how management and the board dealt with them, and the stunning disconnect between the public's perception of Musk as this Tony Starkian innovator and planetary savior, and the reality of who he is, what he knows, and what he's willing to do whenever he finds himself backed into a corner. At the end of the day, it's up to you to decide where you fall on this story. If you believe the hype around the man and the company, and if you believe Musk will ultimately deliver on the promises that he's made, despite a long track record of making promises that he consistently fails to deliver on, which have nonetheless substantially improved his (3/40)
personal financials and helped grow the equity value of his companies. So without any further ado, please enjoy this week's conversation with my guest, Tim Higgins. Tim Higgins, welcome to Hidden Forces. Thank you. It's great having you on, Tim. So where are you located? I'm out of San Francisco. Oh, so that's where you write out of? San Francisco? Yep. I'm based in San Francisco for the Wall Street Journal. I've been here for many years. Previously, it was in Detroit where I covered the car business there. I saw that, which is very interesting. I mean, it makes you uniquely positioned and sort of knowledgeable to cover Tesla, because most people just don't have that kind of background. Like, they might have a financial background, but they don't actually have experience covering the automotive industry. How long were you doing that for? Yeah, I spent almost a decade in Detroit covering the automotive industry. I covered the breakup of Daimler Chrysler, covered the bankruptcy of (4/40)
General Motors, and then covered really the resurgence of the US auto industry. Post Great Recession saw Mary Barra become CEO and thought, wow, what's left to cover in the auto industry? So I came out to Silicon Valley to cover Apple years ago and then had the opportunity later to write about Tesla and really became surprised when I got to Silicon Valley that there was a lot more going on in car tech than I had previously understood being in Detroit. And that really got me kind of excited to write about cars again. So you moved at the San Fran when? I came out in 2014. So they had already launched the Model S by that time. Were you familiar with the company at all? Oh, absolutely. I mean, it was one of those companies that was on the fringe when you're in Detroit. The big players, of course, are the dominant automakers at that point in time. General Motors was the big story. You remember this would have been post bankruptcy, Mary Barra's the new CEO, what's going to be her vision? And (5/40)
then they had all of the troubles they had with the ignition recall and the questions about, was Mary going to be able to get beyond that and that sort of thing. So Tesla was this kind of creature on the peripheral. And I would have to say that a lot of people in Detroit at that time, maybe were interested in it, but maybe not taking it so seriously. Well, I also want to mention the name of your book. It's called Power Play. And this is your first book, if I understand correctly. A number of books have been written on Elon Musk and Tesla. What were you hoping to achieve with this book? How do you feel that it complements or differs from what's out there already? Yeah, a lot's been written about Tesla over the years. I think Ashley Vance's book on Elon, the biography of Elon, really covered that ground. I saw a swimway for myself trying to tell the definitive history of the company. When I began in 2018 working on the book, I thought the book was going to be about the collapse of Tesla. (6/40)
because Tesla, Elon, is such a polarizing character. And there have been so many enemies of the company created over the course of many years. And of course, also the company is very good. And Elon is very good at pushing a particular narrative. How did you sort through all of that? How did you vet your sources? How were you able to decide who can I trust? Or how did you manage all of that? That's always the challenge. For a journalist's life is never easy, right? Because information is coming in all different directions. And you've got to sort through that and figure that out. And I would say in the age of social media, it is just even more complicated trying to vet truth and get to facts. And that's the reporter's life. You spend a lot of years trying to do that. The key to me is always documents, direct sources, understanding why people are talking, understanding their motivations, understanding where they're coming from, and then trying to verify through other methods. This book (8/40)
required talking to an army of people to understand because to your point, everybody's coming from a different direction. And so trying to get at that center of truth is very hard. And I think why a book like this could be valuable to the greater debate of what has happened and what is happening. Yeah. So let's begin with that story, the origin story of Tesla. I mean, most people don't actually realize that Elon Musk didn't found the company. The company was founded in 2003. And this other thing that's amazing, it's an almost 20-year-old company. That's also hard to believe that it's been around this long. Time flies. Yeah, even though the Roadster was developed back in 2008. So what is the origin of Tesla and who founded the company and how did Elon get involved? I mean, you're hitting on this thing that you just mentioned how there's so many different versions of the world through different people's eyes. Even the origin story is a complicated story. It's not a clean cut story for (9/40)
Tesla. I mean, supporters of Elon Musk would like to tell one story and it's complicated. And so let me begin. There's two ways to look at what was going on at that period of time. 2002 period, 2001 period, the world, in particular, California is thinking about electric cars, but they don't seem like they're very viable at that point. And a gentleman named Martin Eberhardt is thinking that he would really liked to have an electric sports car. And there's no such thing on the market. He can't find one. He'd like to drive a Porsche, but he's worried about the gas, becoming concerned about the planet, these sorts of things. And so he starts kind of looking into electric cars and getting really excited about this idea. And he comes across another company called AC Propulsion, which is out of the LA area. It's kind of a garage that does work for automakers. The founder of that company helped out with General Motors EV1 project, which was an attempt years earlier to make a mainstream (10/40)
electric car, which wasn't very successful because of a lot of reasons we could talk about. Martin became very excited. And Martin Eberhardt's experience was in personal electronics. He'd come up with a digital book reader and e-reader. And so we had an idea about kind of where technology was and where batteries were. And he thought that lithium ion batteries were going to be the key to electric cars. And that really starts the wheels in the early days of Tesla. Because before lithium, you simply wouldn't be able to get neither the type of sustained acceleration or sustained speed and also range. It was kind of a trade-off. Batteries were pricey and heavy and the range was short and it took a long time to charge them. And the problem with electric cars was that you were just so many trade-offs. It was expensive and really what were you're getting. The EV1, which I've been in, it's like being in a little spaceship. It had all these crazy buttons in the middle. Are you talking about the (11/40)
T-Zero? No, I'm talking about the EV1. This is General Motors attempt at bringing electric cars mainstream. Is that from the 60s? Was that in the 1960s? No, no, this came out early 2000 period, late 1990s. This was a Rick Wagner, who was the GM CEO at the time. It unveiled the concept of the LA Auto Show and got really huge kind of excitement among California regulators who were very concerned about emissions at the time. And this was the attempt to kind of put the toe in the water for electric cars. And people that got the EV1 loved it. They were early adopters. They could see the future. The interior looks like something out of RoboCop or like Demolition Man. Exactly. It's as if designers got into a room and said, what does the future look like? And you're just like right out of a science fiction movie. And I've been in it. I've ridden around GM's Warren Campus on it. It's like a piece of history. But at the time, it was just a little too ahead of its day. And GM wasn't making money (12/40)
on it and pulled it back. And the early supporters were really unhappy that GM got rid of it. There was candlelight visuals, protests. And guys like Martin Everhart were looking at that saying, I think there might be demand for a real electric car. And he would drive around Palo Alto. And he would see on people's driveways, here's a guy with a Prius and a Porsche. That's the customer that I want to get. Because he was a guy that likes sports cars. And he knew that if you buy an expensive sports car, you're attracted, A, probably to the performance, the looks, the sex appeal. And you might be willing to overlook some of the quality issues. How many people, I don't know if you're a sports car person, but some of these sports cars, the dependability and reliability isn't always there. How many stories do you have of being in the shop or breaking down? That's not an unheard of thing. But if it's cool, you're going to maybe overlook that. And so he thought there could be a potential there. (13/40)
And so, and you look at some of the dynamics of an electric car, it's just the torque is amazing. And so for the listener out there that does torque is it kind of sounds like a scientific term, but that's the, you know, zero, you're at the stoplight and you hit the gas and your head hits the back of the seat because you're going fast. That's torque. That's the fun thing in a car. And he thought that he could kind of bottle that in a way in a sports car that would be accessible to sports car buyers. And the price point would allow him to afford the batteries for it. And this could be the Montre and to the electric car business. Yeah, it was a brilliant realization. I mean, in that moment, and I've heard that story before, the sort of driving around Palo Alto, seeing the Prius and the Porsche and recognizing that there was an intersection market there. It was a brilliant realization. And in that moment, he created sort of the market for EVs. It hadn't existed prior to Tesla. I mean, the (14/40)
hybrid Prius had come out in like 2000 or 2001, I think. Right. It's around this period. Right. So where and when and how did Elon enter this picture? Right. So Martin had been an entrepreneur, but he hadn't been, you know, I have to remember, in Silicon Valley at the day, that period of time, we're talking about 2003, just wasn't like it is today. You know, there wasn't as many billionaires running around, if you will. And so he had had some successes as an entrepreneur, but wasn't like loaded. And so he needed to raise capital and he was taking around his idea. It was him and a couple other guys. And they had this idea. They had a business plan. They had a little office. But that's about all they had. And they had the potential for a contract with AC Propulsion to use some of their technology. And so here's this guy, Elon Musk, who was bouncing around California. He was down living in LA at the period of time. But he had gained a reputation for having kind of a, you know, it's not (15/40)
crazy idea, wild idea to try to go to space to create a rocket company that would get commercialized space with SpaceX. And so Martin Everhart was big into the Mars Society as well. And so new of Elon had heard him speak and through some connections, they were connected. And so Martin goes down to LA area that to make the pitch. And Elon, who was interested in electric cars, was interested in sports cars, who had also thought about the electric car business as well. He was very excited to have that conversation. And how early did he get involved? Because I know he was the biggest backer of the company, no? Yeah, he was 2004. He put his money in. And that's really when things started getting going for Tesla. His money got it going. What was it that excited Elon about this opportunity? What did he see? You could see the potential. So this is where the story gets a little complicated on the founding. So, you know, at this period of time, after the EV1 in California, there was a growing (16/40)
community, you know, especially in Silicon Valley, of people who thought electric cars were the future. It was kind of like the early days of the personal computer with the Homebrew Club, where people were doing these side projects. And one young man named JB Straubel was very active in this community. He had gone to Stanford and had converted an old Porsche into an electric vehicle and was taking it out and drag racing it and really kind of, you know, doing exciting things with it. And he had also got connected with AC Propulsion because they were kind of one of the big leaders in talking about and developing electric cars at the time, is hanging out at the shop down there in the LA area. And he became kind of aware of the lithium ion battery solution as well. And so he thought, well, you know, lithium ion batteries could really show that the electric car is the future as well. And so he came up with this idea for a car that would be able to go from California to the East Coast on a (17/40)
single charge. And he wanted to raise money for this kind of car that he thought would generate a lot of publicity for the idea. And he was going to work with the Stanford Solar Car team. And so he had had an occasion to meet Elon as well and pitched Elon on this idea and said, hey, you should go check out AC Propulsion. They're doing some stuff. And so Elon had conversations with AC Propulsion. But the thing about AC Propulsion was they were a lot of ways like a tinkerers shop, you know, they had ideas, they were in there doing things, but they weren't quite at the point in life where they were ready to become a car company. And Elon's vision was not the same as AC Propulsion. AC Propulsion was thinking, let's do kind of a mainstream electric car for people. You know, let's change the world. And Elon was thinking, let's put this electric car thing in a super car and have a lot of fun with it. That will be the way to get this technology out. So he had a very similar idea as to Martin, (18/40)
start at the top and then come down to mainstream. And so, you know, that's how that Martin and Elon got together was, you know, they had gone through all these different hoops. And they finally, you know, they were very kind of aligned in what they thought the future potential was. So they, exactly. So they were both aligned on the idea of developing the Roadster because the Roadster was this sexy, sleek, exciting, fast car. It also wasn't very heavy. So at the time, they would be able to get the best performance possible off of the car. I mean, if they had tried, I imagine, to build a Model S at that time, they wouldn't have been able to, right? It wouldn't have been as performative. The idea of them, I think at the time, if they had been going around trying to sell the idea of a luxury sedan that would compete against Mercedes, people would have laughed at them. The idea that they were talking about this two-seater was hard to believe. But the thing that they had going for them was (19/40)
that they had a prototype. They could show this two-seat Roadster that AC Propulsion had put together out of a kit car that, you know, didn't look like, you know, the Roadster would look, but kind of, you know, looked like a car, at least, and Martin Everhart could drive it around Silicon Valley and give investors demonstrations. I mean, you could feel that torque and, you know, you kind of, you know, if you squinted, maybe you could see what the future would be like. Yeah, that's one of the things I enjoyed about the book in particular, because I had a similar experience. I drove my first electric car in 2012. It was the Model S, right when the Model S came out. I hadn't driven the Roadster before that, but I had a good friend who was one of the very early owners of these cars, and he would just rave about it. And I totally understand what people's experience was and the descriptions of those experiences in the book, because I had a similar one. You really felt like you were getting a (20/40)
glimpse of the future. I mean, it was such a radically different experience driving an electric car from driving one with an internal combustion engine. What was the process like to actually build the Roadster? And how long did that take from conception to the first delivery of the car? Well, the process was, in the civil word, messy. None of these guys had ever built a car. They weren't car guys. I mean, they would think they were car guys. I mean, Elon had a taste for expensive sports cars. Martin Everhart had a Mustang when he was a young man and worked on restoring it. And one of their early people, he was an amateur racer. So they thought they knew cars. They thought they understood the buyer's mentality. So that helped them. But they had never worked at a car company or designed or developed a car, which was a plus and minus. So they immediately began out and working on it. They hired JB Straubel joined. And this would be key because here's the guy probably had the most (21/40)
experience tinkering with electric cars probably in California. I mean, he was among the most experienced because it was still kind of a new world. And they set out to do this. And one of the really big problems that they got in immediately came upon was these batteries. So let's maybe this is a good time to talk about kind of the batteries. So lithium ion batteries really first became popular camcorders and laptops. And these batteries at that point were thinking about finger size tubes. And the idea for Tesla was that they were going to use thousands of these strung together to create what we call a battery pack. And that would provide the amount of energy needed to propel the car. And the bet was that by buying thousands of these cells per car for hundreds of thousands of cars, this would give us the great buying power and be able to bring the price down. And on top of that, this was a proven kind of technology already. And, you know, that they didn't have to go out and invent (22/40)
something. One of the problems that automakers had had with electric cars is they're always looking for the next thing in battery technology. And it was just expensive. So here was something that was proven, they could essentially get off the shelf, and they thought they could get down cheap enough. All of those things would prove harder than they believed they would be the case. That's always the story of Tesla's. It's never as easy as they think it's going to be. And so they get into working on the roadster. And at the same time, in the news, you start to see laptops with lithium ion batteries have fires. There was Apple and other companies were doing recalls. Because the issue with lithium ion batteries is they can catch on fire. And so they go to, you know, they see this and JB Strabo takes some battery pack out to the parking lot to see, well, what are we talking about? If we got a bunch of these batteries tied together, you know, one goes off, what happens? Well, it's like 4th of (23/40)
July. And so they realize they might have a problem. They go to an expert and say, what's the issue? And they say, well, you know, don't worry, you know, essentially, you know, most of these cells are going to be okay. But, you know, maybe one in a million is going to have a problem. You're just not going to even know it has a defect. And it's just going to potentially just light on fire. And so they start to do the math. And that's maybe one, you know, one in a hundred, one in a thousand. I mean, because they're going to have thousands of cells. And the likelihood of one of those cells being defective and just catching on fire is great. So this is a really life or death moment for the company. Because the whole plan is based upon having these cells in the car, thousands of them, and by the very nature of how they're built, one of those is probably going to have problems. So they immediately have to pivot to try to figure out how to contain that energy to keep these cells from getting (24/40)
too hot, then catching on fire. That's essentially how it happens. And so this is really where one of the big developments, really new innovation happens at Tesla is figuring out how to manage the heat in the battery pack. And they race to do it. And they come up with a solution. It's pretty innovative. And that's really a defining moment in the early days of the company. They come up with a way to string these cells together so they don't become a bomb and they can provide the performance they need. And that's a huge thing that JB Strouble and Tesla were able to figure out. What was the initial estimate for the cost of the build of the car? Much smaller than it actually was. You know, we're talking, they were thinking it was going to be in the 50s to $60,000 range. And the initial business plan that Martin Everhart came out with would ultimately prove to be very naive and very ambitious. The idea was right that there was a market for electric sports cars, but the math was wrong. So (25/40)
the book covers an enormous amount of interpersonal conflict throughout the timeline of the company. And I think this is the period where you begin to see it most prominently in his relationship with Everhart. Musk, in other words, becoming more and more involved in the company. Talk to me about that process and how Elon got involved and how that eventually led to Everhart's ousting and Elon becoming CEO of the company. And I think 2008, is that when he took over? That's correct. The way Elon's involvement at Tesla at the early days has been described by people over there is he would fly in for a board meeting. You know, he wasn't seeing a lot around the garage at that time, but he had an interest. He was chairman of the board, the biggest investor. And he and Martin at early days, by many accounts, had a good relationship. They were very similar interests. They were both interested in space, both interested in electric cars. Clearly, Wolf had been entrepreneurs, but the scale of (26/40)
success clearly was different. And the one thing you start to see early on is Elon taking specific interest in certain parts of the car. So when they got to the point where there are roadsters to drive, he didn't like certain things. He thought the dashboard looked cheap for what they were going to be charging. He thought the getting into the car was hard. His wife at the time was kind of like a Britney Spears kind of situation where it's really hard to get both your legs in in a ladylike way. The roadster is very low to the ground and there was a kind of a lip on the door and so you had to get one foot in and the next foot in. And it's kind of cumbersome and not easy to do if you're wearing a skirt. Heck, it's not easy to do if you're a big dude like Elon trying to get in. And he didn't like the seats. He thought they were uncomfortable. So there was all these tweaks. Thoughts about the materials that should be used. And Martin Eberhardt would say that Elon wasn't necessarily wrong. (27/40)
He had good instincts. But the challenge was that the premise of what they were doing was to save money, they were going to use a Lotus sports car and make modifications to it so it looked like a roadster. The thinking was that that would be much cheaper. Well, everything you changed was an added cost. And so the cost started to grow. And all of the expectations for what the car was going to, how long it was going to take and how much it was going to cost were wrong. And so just the things started to mount and they needed more money and more time. And the pressure just started to build there over time. And what did that lead to? In other words, how did that lead to the ousting of Eberhardt and then Musk taking over? And then I want to understand how the company changed because it really is, I mean, again, it wasn't founded by Elon Musk, but it is Musk's company through and through. And I can't think of any other public company which is more inextricably tied to its CEO. Sure, (28/40)
absolutely. So essentially, it becomes clear that Martin is in over his skis. And Martin and Elon start talking about the need to bring in an experienced CEO. And the idea is that Martin would become the product guru and he would work on next generation car and he would have this kind of role. In the meantime, Elon is starting to get pulled into the operations of the business more and he's starting to see that what things are supposed to cost and what they are costing, there's just a disconnect. And he brings in some help to kind of get to the brute of that and through the help of one of the investors in Tesla and they do kind of a deep dive into finances and they've got some bad news. The car is going to cost way more than they think to build and it's pretty grim. And Elon is pretty upset and pushes Eberhardt to the side, puts him, kind of demotes him and they bring in an interim CEO and that lasts for a few months to kind of write the ship. But it's still clear that Elon's vision for (29/40)
the company and that person's vision is different. They bring in another CEO and things are getting pretty bleak for the company. They've burned through a lot of money in 2000. They were in 2008 now and the great recession is occurring and Tesla's having a hard time raising capital and Elon's doing everything to try to figure out how to put more money in. And he takes over at that point. He becomes chairman and CEO and gets through that period of 2008 and gets the company kind of capitalized so that in 2009, this is the period where the roadster is out, they're starting to get some money in, they've started raising some money and he can really start to focus on what the company is going to become. And his vision has been laid out that the roadster would lead to the Model S, which would be kind of a mid-sized sedan, which would show the world that electric car is possible for day-to-day use, can be the world's greatest car maybe, that would then lead to the third generation car that we (30/40)
call the Model 3 today and that would be an electric car for the everyday man. And that's essentially Tesla's vision through that Elon Musk kind of created. And that's where you start to see him put the pieces together really into 2009. He's figuring out ways to raise the money for that, but also he's building the team internally that can carry out his vision. You have to remember that up until that point, the company had been largely Martin Everhart and friends of Martin Everhart. Early hires had been kind of of two camps. They had been JB Straubel friends from Stanford, so they were all these kind of electric battery kind of people and very important to the company. And then you had Martin Everhart's people who were just entrepreneurs who had done interesting things, but really maybe no car experience. And so when Martin left, Martin would eventually get pushed out of the company in 2008 as well because of tensions with Elon. So when Martin left, a lot of the Martin people left (31/40)
that put those two things together and put them on the street. So this is a very interesting period of time where they are then building the engineering team that's going to make Tesla. So this brings us to the Model S, which was, again, I have to say it because I had the opportunity to drive one in 2012. It really was like nothing else. And even today, when you look at a Model S out in the wild, it remains ahead of its time or it was ahead of its time. I mean, it fits perfectly with cars today and in many ways still looks even more advanced. How big of a feat was the development of that car? And how much did it take the industry by surprise when it hit the market? It was a big change. Just a few of the things. A, the roominess. Here's a sedan, it was to be a mid-sized sedan, so roomy because you don't have an engine, you don't have all that kind of stuff. So the cabin space is bigger. So you just feel roomy when you're in it. Totally. I remember that as well. And it had the front, you (33/40)
could put bags in the front and in the back. I mean, it was wild to be in that car for the first time. And then externally, it looked like maybe like a Aston Martin, like James Bond would be driving it. I mean, it just looked like a sports car. It looked like something you could see driving down your street on any given day. And you kind of like, wow, look at that. So that was a huge departure from what people thought of as electric cars. You have to remember, most people's experience with a kind of an electric car was the Prius. The Prius had been designed to look like it was a tech kind of vehicle. It was in some ways, the design was marketing to look like something that was the future. Whereas Tesla didn't want to do that. They wanted it to be the now. And it wasn't about making it stand out because it was electric. The idea of the Model S was that it was supposed to be the best car out there that just happened to be electric as well. So that was the idea. So you've got the looks of (34/40)
the hopes that American capitalism could move away, I think, from the kind of financial capitalism that had become such a dominant force for the last few decades into something more along the lines of what we used to read about, the captains of industry and the robber baron period. I think also it tapped into a relationship that the public already had with technology and its disruptive abilities. And it applied that template to the legacy sector. And that's actually, I think, something that we've seen, continued to see. I just did an episode recently with Maureen Williams, she, your colleague at The Wall Street Journal, who's published a book on WeWork. WeWork similarly branded itself as a technology company, which I think it had even less merit to do than Tesla. But even Tesla is ultimately a car company. They have to scale the manufacturing of automobiles. And so this became a problem, the scaling issues and the confronting the reality of being a car company became really an issue (37/40)
after the Model S, in earnest, with the attempt to build the Model 3. Would you agree with that? Scales, execution, they're Tesla's problems. Even the Roadster getting it from the idea onto the road was a challenge. The Model S, when they show it in 2009 and bring it out in 2012, then building it was the problem. I mean, they developed the idea, sold everybody on it, but then actually putting it on the street was a huge challenge. Yeah. And I want to ask you about why that is. I also want to, and that's going to be an opportunity to really get into Elon and all the troubles that the company found itself in in the ensuing years. And also the remarkable rise in its stock price, which has, in many ways, befuddled investors, certainly short sellers who have been very negative embarrassed on the company. And a number of other things. For anyone who is new to the program, Hidden Forces is listener supported. We don't accept advertisers or commercial sponsors. The entire show is funded from (38/40)
top to bottom by listeners like you. If you want access to the second half of today's conversation with Tim, as well as the transcripts and rundown to this episode and every other episode you've ever done, head over to hiddenforces.io and check out our episode library or subscribe directly through our Patreon page at patreon.com slash hiddenforces. There's also a link in the summary page to this episode with instructions on how to connect the overtime feed to your phone so that you can listen to these extra discussions just like you listen to the regular podcast. Tim, stick around. We're going to move the second half of our conversation into the subscriber overtime. Great. For more information about this week's episode of Hidden Forces or if you want easy access to related programming, visit our website at hiddenforces.io and subscribe to our free email list. If you want access to overtime segments, episode transcripts, and show rundowns full of links and detailed information related (39/40)
to each and every episode, check out our premium subscription available through the Hidden Forces website or through our Patreon page at patreon.com slash hiddenforces. Today's episode was produced by me and edited by Stylianos Nicolaou. For more episodes, you can check out our website at hiddenforces.io. Join the conversation at Facebook, Twitter, and Instagram at HiddenForcesPod or send me an email at dk at hiddenforces.io. As always, thanks for listening. We'll see you next week. (40/40)
This is the full transcription of podcast 'Hidden Forces'.
Why the Fed Risks Losing Control of the Bond Market Andy Constan #Podcast #Transcription #ReadAlong #KnowledgeUnlocked
the portfolio into shorter duration securities, rather than to longer duration, and also that they should have conducted outright sales. What exactly has been your criticism of the Fed's balance sheet management? And again, this is part of the larger argument that you've made that we need to get back to some kind of normal conditions, because if we don't, the market will impose them on us and it'll be much worse. Right. So when quantitative tightening was announced in December of 2021, I said that this was kryptonite for markets and that we are going to experience a significant sell-off in financial assets. And actually, I was a little slow to adjust, but ultimately that is in fact what happened in the next nine months. But at the same moment that I said all those things, I also said that what had happened is that the Fed was going to use what is called runoff to do quantitative tightening versus what the UK does, in which instead of letting, well, let me explain both what those things (31/40)
What's up, everybody? My name is Demetri Kofinas, and you're listening to Hidden Forces, a podcast that inspires investors, entrepreneurs, and everyday citizens to challenge consensus narratives and learn how to think critically about the systems of power shaping our world. My guest in this episode of Hidden Forces is Andy Constant, the founder and proprietor of Damp Spring Advisors, who previously worked at Bridgewater Associates as an idea generator, more recently at Brevin Howard, as chief strategist, and spent 17 years at Salomon Brothers, where he served as head of global equity derivatives. Andy and I spent the first hour of our conversation discussing the subject of a recent letter he published, in which he warned that the Federal Reserve, by continuing to lower interest rates and ease monetary policy, is at risk of losing the long end of the bond market, and paradoxically tightening financial conditions in the process. Taking us from what could be a soft landing or no landing (1/40)
scenario, to a re-acceleration of inflation, and a very hard landing for the economy. We discussed treasury issuance, management of the Fed's balance sheet, the weighted average maturity of assets in its portfolio, and how conditions in the U.S. economy measure against the Fed's summary of economic projections. In the second hour, we dig into the government's finances, its fiscal picture, and how the election may exacerbate or alleviate trends that have been in place for decades. We also discuss equity markets, the broadening of the equity rally beyond the Magnificent Seven that's been underway this year, earnings expectations for these companies, whether they're elevated or conservative, and how we should go about valuing them. If you want access to that part of the conversation, and you're not already subscribed to Hidden Forces, you can join our premium feed and listen to the second hour of today's episode by going to hiddenforces.io. All of our content tiers give you access to our (2/40)
premium feed, which you can listen to on your mobile device, using your favorite podcast app, just like you're listening to this episode right now. If you want to join in on the conversation and become a member of the Hidden Forces' Genius Community, which includes Q&A calls with guests, access to special research and analysis, in-person events, and dinners, you can also do that on our subscriber page. And if you still have questions, feel free to send an email to info at hiddenforces.io, and I or someone from our team will get right back to you. Lastly, because this conversation deals with investing, nothing we say on this podcast can or should be viewed as financial advice. All opinions expressed by me and my guests are solely our own opinions and should not be relied upon as the basis for financial decisions. And with that, please enjoy this timely and thoughtful conversation with my guest, Andy Constan. Andy Constan, welcome back to Hidden Forces. Thanks, Dimitri. Good to be here. (3/40)
It's great having you on. How you doing? I'm doing well. Got my Santa beard started. Do you normally shave in the summertime? No, I'm always one of the two gray beards, but now it's getting a little out of control. Right, exactly. That's your other show. So one of them is the two gray beards. That's the name of it, which is videos mainly of you and your business partner. Once a week videos and investment portfolio that we use to create a long-only beta, the smart beta portfolio that is really designed for people who are not super active traders, but are long-term investors. Yes. And you also are the proprietor and author of Dam Spring and the Dam Spring reports. And what prompted this conversation was actually the most recent report that you put out, which was titled Warning. And I think you published it on November 3rd, a few days before the election and before the FOMC meeting. And in that letter, you wrote that, quote, the risks are high that the consequences of next week's FOMC (4/40)
will be the Fed losing the long end of the bond market. Yeah. What did you mean when you wrote that? Why did you write it? And do you still feel this way? So again, when one creates a warning, I was very careful in that report to not say that it's a prediction. There's a difference between a prediction and a risk. And so coming from that standpoint, let's start there. I think there is a risk that the Fed will be too easy relative to conditions such that the economy heats up and the long-term bond market starts to sell off. And once the long-term bond market sells off, it's harder to manage the financial conditions, which I've been saying for many, many months, really the whole period of the tightening cycle and now the current easing cycle, that the federal funds rate is not what the economy is driven by anymore. And the Fed seems to be very focused on the federal funds rate. That's their main lever and not at all focused on the impact of financial conditions on the market. And so what (5/40)
I'm hoping for from the Fed, I imagine everyone is hoping for from the Fed, is for them to nail the soft landing. And to do that, you need to avoid a meaningful disruption in any of the markets, but particularly the markets that long-term investors hold. Because since the COVID inflationary period, where prior to that, most homeowners, corporations, and anyone who needs to borrow borrowed at extremely low rates for term. And that allowed balance sheets of both corporations and households who own assets to really strengthen over the last few years as asset prices rallied. And so that has allowed corporations to continue to raise wages, to maintain employment, and so on. And also, anyone who needs to spend can dissafe by selling assets or borrowing against assets. So I look at financial conditions as being, they vary, but easy. So to achieve a soft landing in the real economy, which is GDP growth that is consistent with trend growth and inflation that's at target, I believe it's also (6/40)
important that to have that soft landing hold is for the financial markets to achieve a soft landing. And while there's some debate on whether the economy has soft landed or the summer it looked like it was heading for a harder landing, and now since then it's looking like it may be a no landing. And obviously, we have the election and all of those things that influence the economy. Let's assume it's heading or at a soft landing, for that to be maintained, financial markets have to return to normal. And they can return to normal rapidly and disruptively, or they can return to normal gradually. And that's what the warning was about. It was financial markets are not normal at all right now. Doesn't mean they're going to go down or crash or do anything like that, but they're not normal. They need some meaningful adjustment in order to return to a normal financial market, regardless of what the real economy is doing. And so I can tell you why I think that, but in order for the soft landing (7/40)
of the real economy to occur, I think we need to move toward a normal financial market. I don't want that to be a rapid descent, because a rapid descent can have a secondary effect that can cause a hard landing in the real economy. And that's what I'd like to avoid. So the warning was to tell the Fed, you were very, very dovish. You've been very, very dovish all year because you felt that the financial conditions were restrictive. Every presser financial conditions are restrictive, including the most recent one. When they're not, they're just not restrictive. The economy is going between 2.5 and 3% real GDP, while very short dated PCE inflation is near target, longer term, one year. And certainly most recently, a tilting up of the one year shows inflation above target, CPI is, of course, CPI is still well above 3%. And jobs are historically strong, if not slightly less hot than they were in the midst of COVID. And so that's not restrictive financial conditions. That's financial (8/40)
conditions that can manage through at current levels and deliver warm, if not hot, economic activity. And so my point to listeners is that if you remain easy, conditions will continue to warm up and you have the potential of having the bond market steepen aggressively. And if the bond market steepens aggressively, it's fairly likely that risky assets will correct in a more rapid way than they need to. And that could create an economic hard landing. So what I'm hoping for is the Fed stays a little hawkish longer, instead of being resolutely dovish. All right, so let's dissect this, let's clarify some points and bring the clarity that you bring to your reports, which are really excellent. I want to say that I don't just say that in general, actually, I get a lot of value out of your writing. And I love how reflective it is too, by the way, Andy, I love that you reflect on the process that created the results that you put forward in your projection. So let's do that. And let's also create (9/40)
structure around your response. First of all, I just want to clarify something when you talk about a steepening, what you're describing is a steepening of the yield curve. And you're describing a bare steepening, a potential bare steepening, which is the long rates rise, not the short rates drop. But let's actually start from first principle. So first of all, you talked about financial conditions coming back to normal. First of all, how do we measure financial conditions? And then what are normal financial conditions? Right. So many people measure it in many different ways. I think one of the best ways to do it is to see its works, as Powell regularly says. And to see its works, you see whether the economy is contracting in a disinflationary, slowing growth way. And clearly, we've been in a transitory, supply chain driven inflation period. And now we're in a disinflation period that has made a lot of progress. And maybe it will continue to go on and reach target, or maybe it won't. But (10/40)
it's heading in the right direction. While real growth and employment are just, you know, gangbusters, not gangbusters. I mean, we've had hotter growth and we've had tighter employment, but there's no sign of it in its works. So that's one thing. And then the other thing is the conditions of those who want to borrow and the conditions of those who are able to lend. That's another sort of what I would call fundamental analysis that one would do. It's not market-based. And it's not results-based, which was the first category. So again, the framework is results-based conditions of those who want to borrow and lend and market-based. So when you look at conditions for those who want to borrow and lend, while there's always a bank that's struggling and there's likely banks that will fail, the by and large is the banking system has almost never been as able to lend as they are right now. And they're not lending much. They're lending a little bit lately, but not much, which tells you something (11/40)
about financial conditions. They're able and willing, but they're not lending. So why is that? That must be a demand issue. People don't want to borrow. And we know that to be true because housing activity is slow, mortgage refinancings are non-existent, relocations are being impacted by homeowners who have low mortgages, unwilling to pass up and to move. And job activity is mostly stable. There still are trends in the economy in terms of where people want to live that's having some impact. But corporations don't need to borrow. The biggest corporations in particular are flush with money. They don't know what to do with the money, so they're not borrowing. And small businesses, they're struggling. We do have a K-shaped economy going on, so there's always some that are struggling and have too much debt. But by and large, there's no demand for borrowing and there's plenty of supply. And you see that with credit spreads. Credit spreads have been going in one direction and that indicates (12/40)
very little demand to borrow and lots of supply to lend. Now, that's a market-based thing. So now let's jump into market based things that determine financial conditions. And so the simple thing is, if you look at all the people who want to borrow or lend, what are the rates they're getting? What's pricing? So the government is able to borrow at, I don't know, 430 on 10-year notes, whatever the rate is, it might be 425 today, whatever it is. They can borrow municipalities, mortgages, creditors, corporates. Pretty much everyone who wants to borrow in the debt market is seeing both relatively low long-term rates and very tight spreads. So that tells me that people who want to borrow to either consume or invest in the real economy have cheap cost of funds. Add that extremely high equity prices relative to where they've been. And I don't mean particularly high in, like, oh my God, equities are incredibly rich. I mean, they were a lot cheaper six months ago or a year ago than they are now. (13/40)
So the ability, if somebody wanted to raise money and Michael Saylor is a great example of that, he's getting paid three times the price of the thing he's going to invest the proceeds in. So there are places where you can raise money. Now, the funny thing is no one needs it. No one needs the money. So that tells me that people don't need to borrow, people don't need to finance to do capital investment. And that tells me that conditions are easy from a market pricing, from a supply and demand of lending and borrowing, and from a work, how it works, what's happening in the real economy. While the Fed appears to think that the Taylor rule is a judgment of financial conditions, and the Taylor rule suggests that financial conditions are tight because real Fed funds rates are higher and getting higher as disinflation occurs. So the Taylor rule, the data upon which the Taylor rule depends is what GDP, unemployment rate, what are the key metrics? There are two metrics. There's output gap and (14/40)
there's also a secondary way that people look at that, which is the labor gap, but also inflation, the desired inflation target, the actual inflation that's being experienced, and the employment rate fits into that version where you have the labor gap. So it's all in there. And in the most recent SEP in September, the Fed projected a 4.4% unemployment rate. It's currently 4.1, but was 4.3 after that bad NFP in August, which seems to have panicked the Fed a bit. And PC inflation, based on, we'll get a lot of information this weekend, this week with the CPI, PC inflation is going to really, really struggle to come in anywhere close to 2.6% on an annualized basis, and probably will be 2.8 to 3%, where they had a 2.6% target. And GDP growth, they had a 2% target and it's going to be hotter than that for sure. So pretty much every factor, what I call the three legs of the Taylor rule are suggesting the Fed shouldn't cut, but they probably will. Well, haven't they, sorry, didn't they, you (15/40)
mean cut again? They just basically cut. If I'm going to say continue on their cutting cycle. So let's, again, let's, I want to, what I want to do here is also create structure for listeners. I thought they would have cut, I thought they were going to cut in November, they did. I think they're going to cut in December. They shouldn't, but you know, that's, I'm not the Fed. So great. So we're going to do a number of things here. First of all, I just want to clarify some acronyms you threw out in case people aren't, SEP is the Summary of Economic Projections and NFP is the non-farm payroll number. I think I want to clarify something for listeners who might be confused here because what you're basically saying is financial conditions are loose. We need to slightly tighten them so that they don't become much tighter themselves on account of the bond market significantly increasing term premiums, which is to say demanding a higher return for duration risk on long bonds. And counter- (16/40)
intuitively, your way of achieving looser financial conditions is by raising the short-term interest rate or your suggestion for the Fed is to raise, not raise, sorry, or is to not lower short-term interest rates, which again counter-intuitive for someone listening is saying, wait, so Andy wants to loosen financial conditions slightly by keeping a higher short-term interest rate. How does that work? Explain for listeners what they might be missing in that concept. Right. So firstly, the way I want to describe it is I don't want the Fed to be as loose as they are planning, to ease as much as they are planning. I'm not suggesting they tighten. I'm saying yes, less. Ease less using the Fed funds rate as the proxy and forward guidance. And forward guidance, which was what the Summary of Economic Projections provides and their rhetoric. So I'd want them to ease less, if at all. Now, if they ease less, let's just say, that means tighten, right? Okay, you're right. It means tighten. Aising (17/40)
less means be more tight. So one would think that if you're saying keep short-term interest rates higher, that should tighten the economy and risk a harder landing. Well, that's true. That I am suggesting that because the alternative of staying loose for longer is that the long-term interest rate, which as I said, the Fed is very focused on the Fed funds rate. And I am very focused on what is actually happening and impacts the economy, which is the longer-term interest rate and financial conditions as I've defined. Because the credit complex takes its cue more from the long end than it does in the short end. Mortgages, car financing, stuff like that. It's interesting. You have to look through history about when, like, the short-term rate was the only thing they ever used in the past. Until 2007, that's all they used, the money supply and the short-term rate. There was no QE. What was the weighted average maturity of the Fed's portfolio pre-2008? They didn't have one. It was all short- (18/40)
term. Yeah, they didn't purchase financial assets. The only way they created money or had money supply is by doing repo or reverse repo, depending on whether they wanted to increase. That is an asset purchase program. They had no asset purchase program prior to 2007. Some people like to go back to the 40s. They had an asset purchase program in the 40s. They had yield curve control in the 40s, but we're, I think, getting distracted. The point being that cutting interest rates does not necessarily cause long-term bond yields to fall. Cutting the Fed funds rate, which is the overnight interest rate, does not necessarily cause long-term rates to fall. You can see that pretty clearly. It doesn't necessarily even mean two-year rates fall when you cut the short-term interest rate. They cut 50 basis points in September on the overnight interest rate, and two-year interest rates rose by 80 basis points and 60 basis points. Ten-year interest rates rose by 80 basis points. There's your counter- (19/40)
intuitive point. I just urge people to differentiate raising and lowering the overnight interest rate, meaning the rate people get on money markets, versus changing the long-term rate, which the Fed doesn't control the market does, unless they're pursuing QE, and then they have an influence. The point being, we already saw the reaction in long-term interest rates, which rose 80 to 100 basis points since the Fed cut 50 basis points. I'm suggesting that if they keep doing that, cutting more than the market needs, long-term interest rates will go up even more, which will be a aggressive tightening in financial conditions and threaten the real economy, which is actually borrowing at the long-term rate. Yeah. This, I think, is a really important concept, and I hope that people got it. It's another way of saying that you think that the bond vengelantes are not dead, and that the market still has a say in terms of what the price of credit should or could be, and that financial conditions can (20/40)
be tightened outside of the Fed's control. Yeah. There's this term bond vengelantes. I don't know who those guys were, what they were doing, but if you look at bonds, do you want to own them here or don't own them here? There's not a lot of people that are active managers of money that think the 10-year bond is a great value relative. I mean, it could rally in the next two, three weeks, who knows, but is it a great value relative to cash right now? There's very little. Now, that said, who's buying it all? There are buyers, and I think they tend to be some of the long-only money managers who are allocating to risk parity, 60-40, anything that has a bond component, pension funds, insurance companies, all are consistent buyers of treasuries, and they are the buyer. And there isn't been what I would call a buyer strike. And so it means that there's probably not much value in bonds right here, but is somebody going to step up and challenge that? I think the data and the Fed will determine (21/40)
whether somebody steps up and starts selling those bonds. Let me clarify something. So first of all, is your presumption that the Fed believes that inflation is beat and it's returning to target? Absolutely. Okay. Well, I don't know about that. Powell certainly does. I don't know if the whole committee is of that mind, but Powell, in his press conference this week, last week, was so certain in describing the components of inflation and how they were going to target. So if he's right and inflation is returning to target, would that be sufficient for you to change your mind? Or would concerns about financial stability resulting from easy financial conditions still be a concern? Because we had low inflation in the early 2000s, and you can make the argument that the Fed's myopic focus on CPI and PCI blinded it to the inflation of asset prices and the party that was happening in the real estate market and in structured products and derivatives? I think if we continue to see data that (22/40)
supports a economy that is having real growth at trend, not above, that has employment that is not getting tighter and has inflation that continues to return to target, that the financial markets will normalize. So let's dig into a little bit more into the macroeconomic picture that would determine some of this. I mean, you touched on a number of these points in your initial answer to my first question of the interview, but let's again create some more structure around them and let's especially dig into the government's finances, which is an important part of this. What is the story that you would tell the macro picture you would draw about the economy inflation and especially the government's finances, including quantity and duration of issuance and the effect that these variables have on the financial conditions and on Fed policy? Right. So again, I think the economy is doing very well. Real growth is above trend, boosted on because population growth might have been modestly improved (23/40)
by immigration policies of the last four years and productivity appears to be a productivity miracle in place. That's generating trend growth that might be to an 1.25%, but we're still higher than that. Inflation is in my view, sticky and still above target, but is going in the right direction. And labor is in great shape, historically great shape, but not as hot as it was in mid COVID and post. And assuming also this latest NFP print is also very noisy and doesn't, let's say, suggest a deeper trend because it wasn't a good print. Yeah, no doubt. I'm not a big believer in over analyzing individual prints and I look at the panoply of data that represents the job market and I don't see a reason to be extremely concerned. So, okay, so let's dig in on the government's finances. What is the state of the government's finances? How has the yield on long-term debt been suppressed in your view? Because I think that's an argument you've made with respect to how the Treasury has managed its (24/40)
issuance, as well as how the Fed has managed runoff and reinvestment of its portfolio. And how should we think about that long-term? Let's take a snapshot. So, taking a snapshot today, approximately 25% of the outstanding U.S. debt is composed of bills and floating rate notes. And so, they have very short-term maturities or they have essentially three-month duration in the case of the floating rate note. So, they are, for all intents, bills. And so, they're very subject to the changes in interest rates because once you finance a 10-year bond, you have 10 years before you're exposed to a change in yields. And so, that's the current distribution of existing U.S. debt. And that's on the high side of the amount of bills outstanding. Typically, what the government does is it keeps its issuance of coupon bonds, which are two years and longer, out to 30 years, relatively stable and predictable over time. They typically grow because the deficit and the national debt grows, but stable and (25/40)
consistent. And in times when there's high demand for government spending or the economy falls apart and there's low tax revenue and to maintain spending, they need to borrow more aggressively. They borrow with bills. And so, the bills percentage goes up. Typically, that happens and it has consistently happened during recessions, where the tax revenues go down because of lower economic activity and the spending goes up because of people out of work and the need for a safety net. And you get more financing, which is done with bills. And also, in the recent recessions, short-term interest rates have fallen dramatically. Is that also a reason why? It doesn't typically have to do with market timing of interest rates. What it typically has to do with is, because if that were the case, locking in 10-year notes, which a number of people, I think Druckenmiller mentioned, criticized for not doing it during the pandemic. Not doing it during the pandemic when they could have financed 10 years at (26/40)
1% and now they're financing bills at 4.5%. The problem is that during a period of time in which interest rates are at 1%, selling a bunch of risky bonds to the market at 1% and financing in the 10-year space is a major tightening of financial conditions. It forces people to shift from assets that they already own into these 10-year bonds, which locks them in. Also, just risky, they're volatile. Forget that they're low interest rate. This could have happened at 5% interest rate. We saw this with regional banks that owned US treasuries at lower interest rates after the Fed began to raise interest rates and they had to set up the bank term funding program. Is that an example? Right. Yes. The point being that if you want to borrow money fast, you borrow it at the part of the yield curve that has the most demand. The part that has the most demand is the part that's most cash-like because people will pretty much all day long give up their bank account or their cash to buy a one-month bill. (27/40)
But asking them to give up their cash for a 30-year treasury is much less likely to get large amounts of supply. We're talking about massive issuance that happens during recessions. Now, let's just move forward. We haven't had a recession here. We're issued over the last two years since quantitative tightening started. And by the way, since that happened, things have been pretty damn good. In the last two years, 50% of the debt that was issued that is now outstanding was bills, instead of 25%, which is where they were. But the treasury debt issued by the treasury. That's outstanding by the treasury. So they significantly issued bills relative to coupon bonds during a period when things were pretty good. And so what does that mean? So what it means to the financing of the country is that over time, getting back to a more normal, again, this is about normalization, a more normal level of treasury bills relative to total issuance, total outstanding of treasuries, below 20% is a target. (28/40)
And to get there, you need to issue a trillion dollars of coupon bonds and retire a trillion dollars of bills. And so that's the snapshot. That's what the current status of the portfolio of the US Treasury and the direction it needs to go. Now, in order to normalize, what is the role that needs to be played by treasury? And what is the role that needs to be played by Fed? And in the absence of cooperation by treasury, in other words, if the treasury wants to continue issuing short-term paper, what can and should the central bank do in this case? Okay. So the impact of not extending issuance, meaning not issuing on the longer end of the yield curve, coupon bonds, twos, threes, fives, sevens, tens, and thirties, is that that eases financial conditions because people who would otherwise have bought those bonds can buy something else, like corporate bonds, which would give corporates the ability to buy shares, or they might actually buy shares, or they might buy crypto, or they might buy (29/40)
something with the money that they would otherwise buy those bonds with. And so it's an easing of financial conditions. It means that savers have a narrower amount of things to save, and that means that there is cheaper borrowing. So that's the impact that would happen. Now, the Fed could say, fine, we think financial conditions need to ease. That's what they're saying now. They think they're restrictive. So they may play along. And in fact, I think they have played along with that all the last few years. As the treasury definitely did what it did, and the Fed definitely has been saying for over a year now that their policy is restrictive. So will they continue to play around? I don't know, maybe. So just to clarify something here, because again, this is the other side of the conversation. This is a compendium to the conversation about the Fed's policy on short term interest rates, which is balance sheet management. Your criticism has been that they should have reinvested runoff from (30/40)
are, since I sometimes assume that everybody knows all this stuff at this stage. So let's start with what is runoff? That means that the Fed has a bunch of bonds, and when they mature, they let them mature, and that's all that happens. And so their balance sheet is reduced by having their bonds mature and turn back into cash. So that's what runoff is. Outright sales are saying, I've got a bond, I'm going to sell it to the market. And it may have two years to maturity, it may have 30 years to maturity, but I'm going to sell it to the market. And so those are the two ways that quantitative tightening can be done. The Fed shows the runoff way. Now, that doesn't mean that one is outright selling of bonds and the other is this sort of silly thing that just, because the money that the Fed gets when a bond matures has to come from somewhere, and it has to be funded in some way. And the way it's funded is by the treasury issuing bonds. So what quantitative tightening done via runoff does is it (32/40)
takes the choice of what bonds to sell for optimal monetary policy reasons from the Fed, who could have sold the bonds outright, but chose to runoff to the treasury, and they get to choose what bonds are sold to the market, what bonds the market has to absorb, and thus what bonds impact monetary conditions. And so that's been my whole view from the get-go, which is what I call the original sin of the Fed is choosing to use runoff instead of outright its sales. But here we are, they've done that. So how has it played out? Well, as I said, since quantitative tightening started, the treasury has made the choice to issue 50% bills to fund their obligations, including paying the Fed back, which is a historically high amount of bills. And so to me, that has muted all of the QT impact. And what it has done is it has created the impact of QT as something that may or may not happen in the future. And it's flattened the yield curve as a result of long-term interest rates. And more the important (33/40)
thing about that is it's kept financial conditions easy. But Janet Yellen, whether intentional or not, by selling 50% bills over the period of time when QT was in play, has eased financial conditions by keeping long-term interest rates lower than they would otherwise have been if she had just issued that extra trillion dollars in long-term coupons instead of bills. Now she's handed herself in a corner where she's financed so many bills that the next treasury secretary is going to have, oh my God, I've got all these bills to roll every year. I need to term out my debt. And it also leaves the treasury vulnerable to a sudden shift upwards in interest rates and financing costs. Right. They have some confidence that the Fed's on their side, though. The Fed's not hiking rates. So you wrote in another DSR report that you published, I think, two weeks ago that, quote, the market has not fully priced anticipated increases in treasury supply. The expected benign report next week, and this (34/40)
report, I think, was, I don't remember what you reported. Quarterly refunding announcement. Quarterly refunding announcement, the QRA. This benign report next week will likely be met by markets with a sign of relief. However, one day the market will awaken to the reality that a tsunami of supply is gathering offshore. With yield curves flat and term premiums quite low, markets will eventually feel the obvious headwinds and hunker down for a multi-year storm. So this is what we're talking about right now. Right. What is a multi-year storming? What are you concerned about happening? Because you just said a second ago that the Fed can be cooperative. Is it that the Fed will be caught between having to fund the deficit and rising levels of inflation? What is your concern? What would that storm look like? It's so funny. Compared to the conditions today, what I'm talking about looks like a storm. I'm talking about a 50 to 100 basis point increase in long-term interest rates. I'm talking (35/40)
about a yield curve where two-year rates are about where they are today, and 10-year rates are five, five and a quarter, 30-year rates maybe five and a half. I'm talking about a world in which the P.E. multiple is 18 versus 22. Yeah. We're also in a world though where debt and deficits are very high and interest payments are extremely high. So those relatively small moves on a historical basis can have huge impact and ripple effects. Well, we can discuss the cost of funding the government and what such a thing, a storm like I've just described, would actually cost. And to be honest, it wouldn't cost anything because a higher long-term interest rate is only modestly going to increase the treasury's cost of debt. If you get that normalization and bills rates fall from 5% to 4% on what is now $6 trillion of issuance, you're going to save 100 basis points on $6 trillion, which is a lot, $60 billion. So I don't want to go off into the proportion of our budget that is interest. It's a red (36/40)
herring in my view. People talk about debt sustainability. That is a potential issue in the future, but it's not relevant in the short term. The government can operate at a 4% interest rate, a 5% interest rate, a 6% interest rate. They might struggle at a 10%, 11%, 12% interest rate. That might be a big issue, but that's not what I'm talking about. That's not the storm. I'm just talking about we've been operating in an environment in which the yield curve has been extremely supportive of assets and not normal. What is normal is a positively sloped yield curve. You look at the average slope of the yield curve through all periods in which we're not in the midst of a recession or emerging from a recession, or you just look at every piece of data. The average slope of the two's tens curve is between 75 and 125 basis points, and that's all I'm talking about. The reason why, my concern is there's a trillion dollars of duration that needs to be sold to the private sector that is currently (37/40)
being warehoused on the balance sheets of the government. There's a lot of demand in a positively sloped yield curve for treasury bonds. People like to borrow short and lend long. People like to borrow at 4% and buy a 5.5% treasury bond. What they don't like to do is borrow at 5% and buy a 4% treasury bond. It's just a very normal and healthy yield curve to be positively sloped. I'm not talking about some sort of doomer scenario. I'm talking about the market over time, not in a violent, bare, steepening, bond vingelante, inflationary, positive growth, all that sort of stuff, crushing the bond market suddenly and taking the legs out of equities in a violent way. I'm just talking about let's head toward normal. Let's get a positively slope yield curve. Let's get the multiples of equities down, even if it takes three, four years of just caution in terms of financial conditions instead of aggressive easing that the Fed seems to be on a path to. I want to dig a little bit more into the (38/40)
fiscal picture and how Trump's agenda on immigration, tariffs, tax cuts, and potentially fiscal spending impacts things. I also want to discuss equity markets, the broadening of the equity rally beyond the Magnificent Seven that's been underway this year, earnings expectations for these companies, whether they're elevated or conservative, how we should go about valuing them, et cetera. We're going to do that in the second hour, Andy. For anyone who is new to the program, Hidden Forces is listener-supported. We don't accept advertisers or commercial sponsors. The entire show is funded from top to bottom by listeners like you. If you want to access the second hour of today's conversation with Andy, head over to hiddenforces.io slash subscribe and sign up to one of our three content tiers. All subscribers gain access to our premium feed, which you can use to listen to the rest of this conversation on your mobile device using your favorite podcast app, just like you're listening to this (39/40)
episode right now. Andy, stick around. We're going to move the rest of our conversation onto the premium feed. If you want to listen in on the rest of today's conversation, head over to hiddenforces.io slash subscribe and join our premium feed. If you want to join in on the conversation and become a member of the Hidden Forces genius community, you can also do that through our subscriber page. Today's episode was produced by me and edited by Stylianos Nicolau. For more episodes, you can check out our website at hiddenforces.io. You can follow me on Twitter at cofinas and you can email me at info at hiddenforces.io. As always, thanks for listening. We'll see you next time. (40/40)
This is the full transcription of podcast 'Hidden Forces'.
Coronavirus An Analysis Using Complex Dynamic Systems Theory Yaneer Bar-Yam #Podcast #Transcription #ReadAlong #KnowledgeUnlocked
that out. I want to find a way to talk about this subject from a human standpoint because it's like I'm sitting here and I'm recording this and I'm like, okay, how do I do this professionally? While at the same time, not dehumanizing what's happening because this is unnerving. It's especially unnerving if you have been following it for months like I have. I think a lot of people have who are on Twitter and many of you will already know who heard my episode with Kyle Bass that I think came out in November. We talked about this. Kyle talked about it. He talked about it in a different context. Talked about it in terms of bioweapons from China. But bioweapons aside, this is a virus that came from China which is now disrupting our lives and our economies. I have friends that have already gotten laid off. I was just speaking with a radiologist friend of mine today who has seen 12 scans of COVID-19 patients in the last 24 hours. If I remember correctly, 11 of those 12 were people between the (4/41)
Today's episode of Hidden Forces is made possible by listeners like you. For more information about this week's episode or for easy access to related programming, visit our website at hiddenforces.io and subscribe to our free email list. If you listen to the show on your Apple Podcast app, remember you can give us a review. Each review helps more people find the show and join our amazing community. And with that, please enjoy this week's episode. What's up everybody? This is another special episode. I keep calling this episode special because I've gotten so used to putting out weekly content with a lot of prep and time to think about the subject to prepare for the guest. And I've decided that that's really not feasible anymore. Just given what's going on, we're living in the most radical period that I've experienced since 9-11. It feels surreal in much the same way that 9-11 did. It also feels hopeful, I think, in a way because there's a lot of camaraderie. Maybe hopeful is the wrong (1/41)
word. You get this sense of camaraderie that you had after 9-11. Whenever I speak with anyone, and I'm not talking about friends, I mean in a professional way, there's a level of compassion and empathy and concern for the other person that I remember was prevalent after 9-11. This is a lot what this feels like, but it's a difficult thing to try and cover because I like to always feel like I'm providing reliable information. It's difficult for me to vet what's out there because there is so much information. So I've decided to just go with it. My guest for this episode is Professor Yannir Barhyam. I came across Professor Barhyam's work on YouTube. He was actually introduced to me through a friend who had been following his lectures or had been to one of his lectures because he's very close with Naseem Taleb. They actually do lectures together and have been releasing videos on YouTube that you can actually watch dealing with COVID-19. Professor Barhyam has also created a website. He's (2/41)
also the president in case I didn't mention this. He's the president of the New England Complex Systems Institute. So that was a cool thing. We've long time listeners know my affiliation, informal affiliation with the Santa Fe Institute. I was invited to stay there for a period of time in the beginning of Hidden Forces in the first six months or so. I've had on a number of people from SFI, Brian Arthur, Sam Bowles, Geoffrey West, people like that. And complexity science has played a major role in the progression of Hidden Forces. And it's something that I've incorporated into my own models and ways of thinking. So that made me feel comfortable. He also has a website called endcoronavirus.org where he puts out a lot of information about coronavirus, what it is, how businesses should deal with it, guidelines for self-isolation, recommendations for policymakers and stuff like that. You can sign up to his newsletter or to get updates from him and his team. So you should definitely go check (3/41)
ages of 30 and 45. I am not a radiologist, but based on what he said, the scans look pretty bad. The idea, he told me that this is just old people is just not true. I also know from another physician friend of mine who sent a patient of his to get tested for COVID-19 at a Northwell clinic in New York City. Northwell is the largest healthcare provider in New York State. They told her that she should expect the results back in eight days. It's really hard to know where we stand with the numbers, with the number of infected, with the number of deaths and how to reconcile those numbers to get some type of mortality rate that actually reflects reality. Case mortality is one thing. The mortality rate among confirmed cases is one thing, but what is the overall mortality rate? Those numbers are still coming in. Someone like Professor Yannir would say that it doesn't matter. It's really bad and we should be doing something about it. I'm not disputing that, but I'm just trying to get a grip on (5/41)
the facts to try and help all of you navigate them. That's my objective now. I've decided to get into this. I've reorganized my schedule. I've canceled a lot of guests that I had booked. I still have an episode tomorrow with Ben Hubbard, the Middle East correspondent for the New York Times, to discuss the Saudi price war and do a deep dive into the kingdom and the rise of Muhammad bin Salman. I think that's relevant, especially for those of you out there who are interested in what's going on in the oil market. The markets have been decimated. It has been a bloodbath. It's actually more acute than 2008. At least that's how I remember it. I mean, what were we down yesterday? 12% I'm recording this on Wednesday, March 18th. I think yesterday we were down 12% or was it the day before? I can't remember. I mean, it's wild and the price of oil has collapsed in part because of Saudi Arabia's commitment to flooding the market, but obviously it's in the face of a giant demand shock and bond (6/41)
yields have been up and down. I mean, I think they were all the way down below 0.4%. And last I checked, they were something like 1.3, 1.2. I mean, don't quote me. I don't spend a lot of time looking at the markets. And that's the other thing. It's kind of... Part of me wants to be on top of everything that's happening, but if I'm on top of everything that's happening, I can't really prepare for any type of conversation. So anyway, I've said enough. This is going to be a work in progress guys trying to figure this out. Right now, I'm committed to the weekly release schedule and the idea is to release extra episodes like this one when I can. I may change that and just start releasing stuff as soon as it gets recorded, but we're all going to kind of figure this out together. So my conversation with Professor Yannir lasts for about 30 or 35 minutes or so. I just recorded it, haven't listened to it yet, and just recording this intro now. So I hope that it's informative. I hope that it (7/41)
provides some type of value for you. And as we move forward, I hope to be able to do more of this, not necessarily or exclusively dealing with the actual virus or the biology of this situation. Dealing with the entire scope of what people are experiencing emotionally, what people are experiencing with work. You know, I think there are really interesting opportunities to do episodes about companies that are thriving in this environment. So we'll see. But I hope all of you stay safe. I hope all of you stay calm and we will get through this one way or the other and it's going to be okay in the end. So please enjoy and always feel free to reach me at DK at hiddenforces.io if you have any thoughts you want to share. I get many emails these days. I can't respond to anywhere near enough of them, but I read all of them. I love hearing from you. And those of you who are interested in supporting the program, you can go to patreon.com slash hiddenforces and you can subscribe to one of our three (8/41)
content tiers or even just support the show with a lower donation if you want. And also please subscribe to our mailing list. I haven't made much use of it in recent years, but I'm going to be doing that in the near future. I can promise you that. So please enjoy everyone and you'll hear from me again soon. Professor Yannir Bariam, welcome to Hidden Forces. Thank you for having me. Well, thank you for coming on the program. So maybe you can give our listeners who may not know you or be familiar with your work. Give us your background, how you got involved in studying COVID-19 and what you want listeners to understand about this virus. So I'm a physicist and I started about 30 years ago working on understanding complex systems. So systems that have many interacting components and the fundamental tool for dealing with this requires kind of mathematics that goes beyond traditional calculus and statistics and is not widely used. And that enables us to think about sudden sharp transitions (9/41)
like boiling water or things like that really require a different kind of mathematics. And that's important for thinking about various real world systems because dependencies actually matter and statistics and correlations are not adequate. So about 15 years ago, one of the topics I started working on over the last number of years was the issue of pandemics. And it started from a very simple model of the effect of long range transportation on pathogen dynamics. And the result of our analysis was that there was a transition like boiling of water that happens as you add more and more transportation. What happens is you go from a situation where you have local extinctions because the pathogen spreads locally to global extinctions as the pathogen is able to spread globally. And that transition is a sharp transition, which means that you're going along adding more flights around the world and you are getting close to that transition and all of a sudden instead of having small local events (10/41)
happening, you have massive global events. And that was a big concern to me. So we started raising the alarm and unfortunately people didn't pay much attention. In 2014, there was the Ebola outbreak in West Africa, which was eventually 10 times as large as a previous Ebola outbreaks. But actually other people were predicting that it was going to be much, much larger. They thought it would go to burnout with 10 million people dead. But I was thinking how one could stop outbreaks. And the idea which comes from complex system science is that you can go to a larger scale. So instead of thinking about individuals as transmitting the disease, you can think about communities as transmitting the disease and you can treat communities as infected. And the trick is then you go into the communities and you detect people that are in the early stages of symptoms and you stop them from transmitting, you isolate them and that's actually what was done. So in West Africa, people created teams in (11/41)
neighborhoods of neighborhood people and they went door to door and they used forehead thermometers to find out when symptoms were present and those people were isolated and that stopped the outbreak. So it went from an exponentially growing, every week, doubling epidemic to dropping like a rock, again, exponentially declining and it disappeared within a few months. So I've since worked on Ebola outbreaks in the Congo, working with the World Health Organization. And again, the strategy of doing community empowerment, really, having the communities be responsible for outbreak response was successful there as well. Or beta important contribution, surely wasn't the only thing, but it was really key to the success. So that brought us to the present. I mean, the Ebola outbreak just stopped. It was going on for a year and a half before eventually this approach was used aggressively and it was stopped. So how does this idea of transportation dynamics relate to network connectivity and how can (12/41)
listeners think about that? So the main thing is that disease transmits through these contacts between people. So people touch each other. They breathe the same air. They touch surfaces that other people touch. Those are all relevant to the coronavirus transmission. Each disease has its own network because of the way it transmits. But that network connects people and the disease transmits through it. If you imagine one person is infected, they infect a few others and then it spreads out across the network and jumps to different places through long range contacts, people traveling. And then the question is, how do you know to evaluate its propagation? And the answer is people characterizing using the multiplier. They characterize it by number, R0, which is the number of people that are infected by a particular person who's infected in that. If it's a mild disease, you can say, hey, we don't care, but if it's a severe disease, you want to stop it. And coronavirus are severe diseases and (13/41)
the social cost is unacceptable. And because it's unacceptable, the stopping of it requires radically pruning the network. And radically pruning the network has two parts. One is the local part because people are strongly connected to each other locally. And one is the long range part that got us in trouble because we connected communities around the world and now we're vulnerable to the outbreak. So if you cut the long range links aggressively, then you can work on killing the outbreak locally by isolating people. This is what was done in China and in South Korea in order to stop it by locking down communities, which basically means having people stay at home so that they can infect each other. But once you do that, you can really smash the outbreak because people don't transmit. So you know you have a solution. You just have to aggressively do it and China did it. They cut transportation around the country and they locked down the area of Wuhan, the Hubei province, in order to (14/41)
prevent any local transmission. And there's an incubation period of a couple of weeks. So after a couple of weeks, basically, they had the outbreak under control and then it's really beyond that. It's just a question of transmission to family members and a little bit of leakage because at the beginning they allowed people to go and get groceries every few days. Later on they stopped that and they went door to door to find all the cases. So they really focused on stopping all possible transmissions. And again, the door to door process, just like we had in West Africa, was an essential part of it and the outbreak stopped. And it was gone within four to five weeks. And basically two of those weeks in most of the country were just waiting until you were really sure that you had no cases. So I definitely want to ask you about a symptomatic transmission and what was done in China and some other countries as well, as well as many other questions. Just to clarify one more point there, when you (15/41)
talk about transportation, is this simply a question of volume and availability of travel and transportation? So more flights, more trains, more cars, is that how we're measuring this? And how does the interconnectivity of the world today measure to where it was, let's say, a hundred years ago with the Spanish flu? So several things. First of all, yes, it's kind of the amount of travel. It's the amount of global travel as opposed to local travel. But the more travel you have, the more connected you are, the more vulnerable to large events. The Spanish flu, even though it was a global event, it spreads comparatively slowly. Here we have the coronavirus over weeks, basically spreading globally. And that affects which diseases are able to travel worldwide. So there is this disease dependence that does matter. But the point is that as you increase the transportation, this transition shifts in terms of the qualities of the disease. If there is a disease that has an incubation period of a (16/41)
year and people are not aware that they have it and they walk around and they transmit it and eventually it gets around the world, then we're all dead. But there are not that many diseases like that. It's very hard for the diseases to sustain themselves. So the point is that within the cataclysm of disease we have, we are now in the domain of risk. And that's key. How unusual is that feature of this novel coronavirus that it is contagious, that it can be transmitted from person to person during this window of possibly up to 14 days without symptoms? Ebola does not transmit before the symptoms start. And the coronavirus is actually not even clear that it does. The parameters of the disease transmission early in the infection are not so clear. And part of the challenge of saying, hey, it transmits before symptoms or doesn't is that symptoms are very mild often in cases. So people can be walking around with a little bit of a sniffle or something or sore throat, whatever it is, a little (17/41)
bit of shortness of breath. And sore throat is not one of the symptoms actually. So I shouldn't have said that. But you know... Is that right? Because that's been reported. The primary symptoms of the coronavirus are fever, cough, and shortness of breath. So sore throat is not actually one of them. And I don't know that that means that it's never a symptoms, but it's not surely one of the primary symptoms. Now the point is that the way the disease works is that there's mild symptoms that can extend for a fairly long time. So you have kind of up to two weeks where you start showing symptoms and then you can have two to three weeks of mild symptoms. And then all of a sudden you have severe symptoms and require ventilation and an ICU. So there are these different stages and the boundary between the no symptoms and the mild symptoms is surely not very sharp. So it's hard to tell whether people are just not noticing or purposefully ignoring or whether there's actual transmission before (18/41)
symptoms start. And that's kind of hard to tell. But regardless, even if there are, you know, whichever it is, it creates some stress on different kinds of approaches. But each of the approaches has some utility. And lockdowns don't care, right? Because if you lock everyone down, regardless of whether they transmit before symptoms or not, they can't transmit to people that they're not near. So that's the advantage of the lockdown. The lockdown is kind of the action of last resort that really guarantees you that you will be able to stop an outbreak. And that's why we need it because we're in that kind of state. The transmission rate is high and people bandy around all kinds of numbers. But it's around three, three to four. Some people say we're at any range for two to five, but the lower numbers are based upon the early part of the transmission in China. And the early part of the transmission in China is based upon just a really few cases that are not sampling the distribution of what's (19/41)
going on. So that's the R not number. That's the R not number, right? That means the number of people that one person can infect when they come in contact with them. That's right. We're going about daily life. The problem is that there is no typical person, right? Someone goes to an event with hundreds of people like in South Korea and all of a sudden you have hundreds of people that have been infected by one person. That's a super spreader event. And hundreds of people being infected compared to a typical number of people that are infected, which is probably in the range of one to two to three, is just a totally different ball game. So that brings us back to this point about exponential growth versus linear growth and... Well, exponential growth can happen without super spreader events. The exponential growth is just this multiplier that, you know, and the easiest way to think about it is not with R not, but just with a multiplier from day to day to day. How many more new cases do you (20/41)
have in the next day than in the previous day? And the number there, people can estimate it variously, but it's at least over 1.3, which means there... And in the US, it's been going up by 32%, 1.32. So every day, you have 32% more new cases. And that has to sink in. It's much faster than Ebola. And the reason for that is because... So this is another question I have for you again, because there's been so many different things thrown out there. How does this get transmitted? Is it through the air? Is it from people touching their face and having touched something that someone else with the virus had touched? How are people getting this virus? Well, let me focus on one thing at a time. Okay, let's talk about the exponential growth. The point is that if you have 1.32, you have seven times as many cases a week from now as today. And you know, it's actually maybe a little bit higher. So let's say it's 10, just for easy numbers. And if you go to 10, it's 10-fold, right? I mean, even 7 is (21/41)
huge, right? So if we have 100 cases today in a week, we have 700 cases. In two weeks, we have 4,900 cases. So 5,000 cases. And that's so fast. People think that it's a small number today. But the point is that all those people have already been infected that are going to show up as infected in a few days. And so if you react today to what's happening today, it's not going to do anything because the reality is much more serious. It's a tip of the iceberg kind of situation. And it's a dynamic tip of the iceberg. So basically every day, the iceberg has gotten bigger in a way that you're seeing more of the iceberg, but then the iceberg has already extended further. So we have this ongoing dynamic where it's getting worse and worse and worse, very fast. So from what I understand, we were at about 10,000 cases or so outside of China around two weeks ago. Well, let's look at China first. China did a lockdown when they had 800 cases. 800 cases. And because when they locked down, there were (22/41)
already so many people that were infected. And there's also the course of the disease, right? So people are becoming infected over time. They're infected with their family members. Maybe there are a few other people that are infected in hospital systems and someone might go into the supermarket even though they were locked down. The number of cases they had eventually altogether was 80,000 cases. Right. These are reported cases to be clear, especially the initial ones, which were probably drastically under measured. Right. But the 80,000 cases that they eventually had led to such hospital overcrowding with 10% of people end up on ventilators. So you had about 8,000 people on ventilators and you had an additional 8,000 people that had to be hospitalized. So 20,000 total were hospitalized. And then they built hospitals. They had 14 temporary hospitals, 14 for different stages, you know, mild, moderate, severe and on ventilators. And they sent 42,000 healthcare workers from all parts of (23/41)
China. And they were overwhelmed, overwhelmed. And yesterday, after, you know, now they're down to one case that wasn't, you know, an imported traveler. And they sent all of those people home. And you have to understand that many of the cases that are in hospitals take a long time to resolve, weeks to resolve. So even though they don't have any new cases, there are still thousands of people that are in hospitals being treated now. But today or yesterday, we already had about 2,400 cases in New York state. Well, I know from speaking with physicians at ER rooms here in New York and New York Presbyterian and other hospitals, they've started to see those numbers begin to move up in a very noticeable way in the ER. And a lot of, I was actually just speaking with a radiologist about an hour ago who has seen, I think, in the last day, an additional 12 scans of people coming in with coronavirus. And one of the interesting things that he had to say was that all of these were between the age of (24/41)
30 and 45, with the exception of one patient who was 63. And all of them had significant signs of pneumonia in the lungs. Yeah. So it isn't even something that's just for old people. No. People think that this is just old people. But over 50, you have a much higher chance of dying. And young people get it too and die too. It's not going to let people, people don't have a free pass. It's a very severe disease. People are just not getting it. So imagine that we have 2,400 cases in New York state. The population of New York state is one in 75 of China. We're China has 1.4 billion people. How many people are in New York state? I think it's 20 million the number. Yeah, that sounds about right. 20 million people. So we have 2,400 cases in New York state for a population of 20 million. 2,400 cases means that we're going to go to 240,000 cases. So that was one of the things I wanted to ask you. There are a couple of things that come up. Again, to your point about these are complex systems. (25/41)
China is a very dense country. It's a densely populated country. New York state is also very densely populated. And New York city is particularly densely populated. Both China and the United States did a poor job in the beginning of really monitoring this. I don't know who was worse. I would imagine China was worse. No. China did a poor job until they had 800 cases. And the US had all of this time. We saw what happened in China. We saw what happened in South Korea. We had a month, at least, more like two months to prepare for this. And we did nothing. We waited until we had local transmission before we did testing for this. We don't have the capacity to even test enough in order to see where the cases are. Worse than that, we waited until after we had 800 cases. I mean, even if we had 800 cases in the whole country, I mean, this country only has 350 million people compared to China. It's one quarter of China. Why would you wait until you're going to have 80,000 cases? And now we're (26/41)
going to have over 200,000 cases in New York state. And we have over 6,000 cases in the US. Now, today, it's going to be over 7,000, because we still haven't done anything. Well, to your point, I spoke with a physician yesterday whose patient went to the New York state's largest healthcare provider, Northwell, and was told that she wouldn't get her test results for eight days. Now, maybe this is also a good sign in the sense that they're getting backed up because people are actually doing testing. No, no, no, it's crazy. You don't understand. This is insane. The situation, and I mean, you can look for discussions of this online. The fact that we can't do testing is crazy. South Korea set it up so that they could do a lot of testing, and they used it to identify who was sick and isolated them. We don't have that possibility in this country. We're so far behind in terms of testing. So I want to ask you about both South Korea and Italy, maybe compare those two countries. Before I do, I (27/41)
was going to mention that from the numbers I've seen, and again, it's hard to get. I've relied mainly on Johns Hopkins and the World Health Organization. We were at roughly 10,000 cases outside China about two weeks ago. We're over 100,000 today. What do you think that we should see in the next two weeks? Because based on your numbers, it would sound like over a million. Why are you worried about that? Well, no, I'm not worried. So the reason I'm asking about this is because I think that one of the things that is very challenging for people is to understand how the growth happens. I think a lot of people look around. Right, so I think for people, it's hard to get that around their head. And so maybe giving people a sense of where the official numbers would be in two weeks from now, just based on the current growth trajectory. Well, the problem is that we don't yet know how people are going to act. If today, we lock down everybody in the country, and I really mean it. I'm not joking. So (28/41)
what does that mean, a lockdown? If we lock down everyone in the country, then we will have in this country over half a million cases, over half a million cases. And the hospital system will be over flooded. It will be indeed like Italy and much worse. We will have half a million cases if we lock everyone down now. And what lockdown looks like is everyone stays at home. They're not in contact with anybody else. The only thing that we're going to be able to do is do essential services, getting people food and medicines and basic necessities. So people can't even go out to get their own food in this type of scenario. It has to be delivered. Well, the way it was done in China early on is that people were allowed once every three days to go to the supermarket to pick up groceries. Later on, they didn't even allow that because they enabled delivery to take place. And the best thing is, again, to take every precaution. So the point is that we have to go to extreme. We have to go to the not (29/41)
normal. We have to figure out how to stop the outbreak by action because we're in no position to identify who's sick and who's not. The people around who have been identified as being sick, it's only about one in a hundred, maybe one in 30 of the people who are actually sick because we're not testing. I mean, there are these people, of course, that won't test positive because they're early in the infectious period. They're just been infected. So they don't have symptoms. They won't test positive yet. So that's a factor of about 10, let's say. And then there's another factor of about three or 10 because we're not doing enough testing. So somewhere between 30 and 100 more cases than what we see. And that's what's going to happen. I think that's one of the most unnerving things about this virus. The number of people that are asymptomatic that haven't developed symptoms yet, but will develop them who are infected. I think that's one of the most unnerving things. The basic thing is that we (30/41)
have this wrecking ball that's headed towards us. And as long as people are saying, hey, it's not that bad. And maybe if we wash hands, it'll be all right. It's like putting a tissue in front of you in order to stop the wrecking ball. And Italy did that. Italy showed us by example. And honestly, the fact that we waited for Italy to show it to us after China did what they did is pretty crazy. But Italy was in a situation in Italy. Italy, what they did is at first they started to shut down the north. But then they kind of said, well, hey, you know, maybe if we don't test, we won't notice that the cases are there and everything will be OK. And they waited until the hospitals got overloaded before they did anything. So now every day there are 3,000 new cases and they're out of hospital beds. So all of those hospital beds are taken. And remember that it takes a few weeks for people to heal, to cure, even if they do cure. Some of them, many of them will die. So what do you do when you run (31/41)
out of hospital beds and you have 3,000 new cases? Now, not all of those cases are severe, but say 20% of them are, 600. So you have 600 people showing up to hospital and you have zero new hospital beds. And that's going to happen today. It's going to happen tomorrow. It's going to happen the next day. It's going to happen the next day. So I mean, this is not a fantasy. This is not a joke. People are dying because there aren't any ventilators in Italy. So let's talk about that also because in terms of information, on your website I pulled some information. I've also heard you talk about this. You've said, and your organization has put out that about 20% of coronavirus cases. This is not a number that we invented. The number is, I mean, you can look in articles, some people say it's as much as 30%. This is just a medical piece of information. Well, okay. I guess my point is that, again, there's all this different information out there and I'm just trying to get a picture. No, no, this (32/41)
is not ambiguous. I mean, you have to understand why does anybody think that the fact that the Chinese locked down Wuhan and had to build 14 hospitals is somehow something that is not going to happen here. The fact that Italy is having all of these hospitals overloaded and the doctors are reporting, hey, you guys don't know what's going to hit you. It's going to hit you. This is not a make-believe situation. So I guess two questions. One, what is the best resource for people who want to become informed on what we're dealing with with respect to this virus? And two, what does your organization suggest? Well, how do you propose that governments, because again, going back to this point about complexity and systems thinking, this is not something that individuals can resolve on their own. Yes, individuals can take individual measures, but this has to be a collective response. So how do you think that people should respond and government should respond? And where can people find the best (33/41)
information on this? So first of all, so we have been trying to put out solid information two and a half weeks ago, when people clearly didn't get it in the West, in Europe, in the US about what was coming. I send out a call for volunteers and we now have about 3,000 volunteers. And the face of the organization that was created is on a website called EndCoronavirus. That's ENDcoronavirus.org. And there's a possibility of volunteering there for those who want to join. But the main thing is it has information and you can go and look at it. I mean, there are many other sources of good information, but obviously there's a lot of confusion because there are many sources of bad information as well. But people are beginning to get it. And in terms of action, yes, government should act great, but we don't have to wait for them. Everyone can protect themselves. They can protect their families. They can help their friends to protect themselves. And in a few days, when the hospitals become (34/41)
overloaded, the government is going to act. It should have acted two weeks ago or maybe a month ago, but they didn't. But it doesn't mean that you have to wait for them in order to act. And if you protect yourself for a few days and the government acts, then you'll be safe. You'll reduce the transmission so fewer people will get sick, including perhaps you. And when they do act, when the hospitals become overloaded, you'll be able to sit back and say, I did it first. And then everyone else will have a higher probability of being sick. But eventually it'll be taken care of. I do believe that once the hospital become overloaded, people will act. That's what happened in Italy. And I do think that that's what will happen here. And what does an overloaded hospital look like? Again, I really described it. There's only so many ventilators. I mean, we just don't have the capacity to deal with a huge number of patients that need their lungs, you know, the pump of air in order to survive. It's a (35/41)
terrible horrendous situation because the death rate is going to go from about 4% to about 10%. And the doctors, and this is what they're doing in Italy, they're doing military triage. Yeah. Well, I think for listeners who are curious, the New York Times Daily did an excellent interview with the physician from Bergamo, Italy, a hospital there with approximately a thousand patient beds. And they converted the surgery wards into areas for coronavirus patients. And they now have 50% of their hospital beds allocated towards coronavirus. They've had to send 650 nurses home who are sick, either with corona or something else, or just exhaustion. They're treating their own physicians as well at the hospital. And they have exactly, I just had to make choices about who to save and who not to save. And it's become very clear that that is where we're headed. And I guess the question is, at what point will governments, local, federal, state, how will they coordinate? And at what point will they put (36/41)
in these types of lockdown procedures that you're describing? And you think it's simply an inevitability in your point of view. And the answer is, the more we act, whether it's to save ourselves or to tell other people that action is needed, the more likely it is that people will act. So that's what we're doing. So in closing, Professor, what advice would you like to give listeners who are either individuals or people who are in positions to actually do something at the state, local, or federal level? And also businesses. Every business has the ability to safeguard their employees, their customers by taking action. We have put out guides on the website, the endcoronavirus.org website, trying to explain to people how to create safety for themselves, their families, improve the safety of other people around them, as well as guides for government, for business, and so on. And the main thing to understand, and this goes back to your question about transmission that we didn't quite talk (37/41)
about, is that the disease transmits basically in two ways. The first is by breathing in or by sharing air with people who have the disease. You have to be over six feet away from others in order not to catch the disease. And even then, you don't want to do that for a long time. And the other thing is that that breathing out or sneezing or whatever happens, that even just breathing out of the virus from your lungs, it falls onto every surface around. So if you touch a surface where other people have either touched or breathed on, the virus there will go onto your hands. And so it's a good idea to wash it, but one way or another, you touch it and you're likely to get sick from it. So you have to be careful about surfaces that are public or shared surfaces. So don't go or don't touch, use gloves and don't touch the gloves to yourself. But bottom line, don't touch things that are in public spaces, surfaces in public spaces or in shared spaces. And don't be near anybody that has any (38/41)
possibility of being infected. So what you want to do is you want to self isolate as if you're in a quarantine. You self isolate you and whoever you choose to be with during this period of time. And everyone who is together has to agree that they will follow the rules about, you know, not being in touch with anybody else except for the people who are in the group. Physical touch. You can always do FaceTime and phone calls and text people, but the physical contact is where you can't go. Professor, I appreciate you taking the time to speak with me today. And again, you want to give our listeners your website so they can check it out if they're interested and maybe subscribe to your mailing list. Sure. It's end-en-d-coronavirus.org. And there is a sign up. We have a few thousand people on a technical channel called Slack channel where people can collaborate and work together on all kinds of projects. And they're working on both on trying to influence decisions. But they're also working on (39/41)
ways to mitigate, you know, to help with the shortages that are going to happen in hospitals and all kinds of other things. So we're doing what we can. And it would be great if you join us. And aside from that, soon we'll have other ways people can collaborate that are in addition to the Slack channel. So look forward to people helping and making this work. All right. Well, thank you very much for being on the program. Take care. Today's episode of Hidden Forces was recorded at Creative Media Design Studio in New York City. For more information about this week's episode or if you want easy access to related programming, visit our website at hiddenforces.io and subscribe to our free email list. If you want access to overtime segments, episode transcripts and show rundowns full of links and detailed information related to each and every episode, check out our premium subscription available through the Hidden Forces website or through our Patreon page at patreon.com. Today's episode was (40/41)
produced by me and edited by Stylianos Nicolaou. For more episodes, you can check out our website at hiddenforces.io. Join the conversation at Facebook, Twitter and Instagram at Hidden Forces Pod or send me an email at dk at hiddenforces.io. As always, thanks for listening. We'll see you next week. (41/41)
This is the full transcription of podcast 'Hidden Forces'.
America’s National Savings and Debt Crisis Lacy Hunt #Podcast #Transcription #ReadAlong #KnowledgeUnlocked
And they spend money and resources to ask people this question on a monthly basis. And once they get the response, then they have a formula that converts the selling price into what you would rent it for if you were going to rent it. Well, that's ridiculous. They don't need to survey what the selling price is. The selling price is known in every major market in the United States. In fact, where footage of each home is being sold as well. So this surveying to try to determine what people would sell their homes if they were going to sell them is a very foolish and expensive way to go. Just use the existing home price sales data. The formula that then converts the home price sales data into rent is not, and I don't have any problem with that. Now, that would be okay. But we have this horrendous component in the meantime, in real terms, money the way I measure it. And I like to take him to excluding currency. I think it's a more modernized concept currency is still a medium exchange and (37/41)
to the trend line. But because of the Federal Reserve's operation, it produced all of this excessive inflation, which had a devastating impact. And so the economy has been left in a very difficult position. If you look at the real average weekly earnings over the full time hourly and salary people, which is about 120 million people in the last 14 quarters of the expansion, there's been a decline in the one and a half percent annual rate. That's the average. But within that average, you've got some skew at the very high end. There was excellent performance. And so the high inflation has just really had a terribly debilitating effect on the vast majority of our people, which it always does. In fact, there was a pre-Adam Smith economist by the name of Richard Camelot that understood that when you have rapid monetary growth, you get excessive inflation, a damaging impact on more moderate income people, which exacerbate the income and wealth of us, which is what the pandemic did. And we're (28/41)
What's up, everybody? My name is Demetri Kofinas, and you're listening to Hidden Forces, a podcast that inspires investors, entrepreneurs, and everyday citizens to challenge consensus narratives and learn how to think critically about the systems of power shaping our world. My guest in this episode of Hidden Forces is economist Lacey Hunt. Dr. Hunt is the executive vice president and chief economist of Hoisington Investment Management Company. He previously served as chief U.S. economist for the HSBC Group, as executive vice president and chief economist at Fidelity Bank, and as senior economist for the Federal Reserve Bank of Dallas during the course of a 55-year career studying markets and the economy. In the first hour, I asked Dr. Hunt for his broad assessment of how he thinks the global economy is doing today and what monetary and cyclical economic indicators he relies on to make that assessment. We discussed the increased role of the U.S. Treasury as an economic policy actor in (1/41)
the post-pandemic period, the concerning decline in the net national savings rate, and whether the neutral rate of interest, a hotly debated topic among economists, is actually moving lower in what this means for trend growth, interest rates, and inflation. In the second hour, I asked Dr. Hunt why he believes that the Fed has been able to raise interest rates by more than 500 basis points in less than two years without inducing a recession. Is this because other causal factors have remained more accommodative, or have the lags just grown longer and more variable? And if so, why? What does this tell us about the business cycle and the effectiveness of monetary policy? We also discussed the chronically high fiscal deficits and the implications of trying to reduce them in an environment where the economy is becoming more dependent on government spending to boost economic growth, support critical national investments in energy and defense, and contribute to the private savings of the (2/41)
economy. If you want access to that part of the conversation and you're not already subscribed to Hidden Forces, you can join our premium feed and listen to the second hour of today's episode by going to hiddenforces.io. All of our content tiers give you access to our premium feed, which you can listen to on your mobile device using your favorite podcast app just like you're listening to this episode right now. If you want to join in on the conversation and become a member of the Hidden Forces genius community, which includes Q&A calls with guests, access to special research and analysis, in-person events and dinners, you can also do that on our subscriber page. And if you still have questions, feel free to send an email to info at hiddenforces.io and I or someone from our team will get right back to you. Lastly, because this conversation deals with investing, nothing that we say on this podcast can or should be viewed as financial advice. All opinions expressed by me and my guests are (3/41)
solely our own opinions and should not be relied upon as the basis for financial decisions. And with that, please enjoy this highly informative and long overdue conversation with my guest Dr. Lacey Hunt. Dr. Lacey Hunt, welcome back to Hidden Forces. I'm glad to be back after seven years. Seven years, yeah, something like that. You were on in 2017 and you were an in-studio guest at that time because this was everything before the pandemic was in studio and people still love that conversation. In fact, I was actually speaking recently with someone that you know, Eric Besmajian, who has been on the podcast as well, and he was telling me how much he loved that conversation and how much he was looking forward to us talking to again today. And he's a good guy, Eric. We all need to pray for him. He's fine. Yeah. Yes, he's been public about what he's going through and he's a wonderful guy. Wonderful. Wonderful guy, brilliant guy. So, well, like I said, I'm very excited to have you on the (4/41)
podcast today. We didn't have a chance in our first conversation to talk about your biography, your history, your background. Are you a native Texan? I am, yes. Did you grow up in Austin? My family originally settled in Nacodotus back in the 1840s and I spent some early years in Nacodotus, but my main junior and senior high school years were in Houston. I had a great grandfather, it's insatiable to say who would be a great grandfather, who received a land grant from the Republic of Texas in 1843. And the Republic of Texas was only in business from 1836 to 1846. So, we've been in Texas for a long time. Wow. What did your parents do? They were very learned people. My father was a PhD psychologist. He earned his PhD in 1941, the year before I was born, in the University of Texas. I guess you could say that I was a behaviorist before I was an economist. My dad was always teaching and instructing. I didn't pay as close of attention as I should, but it was quite of an experience growing up (5/41)
with him. My mother was an educator, but she was very learned as well. She had received a scholarship to Occidental College because her father was a very poor president and minister, but his chief parishioner was chairman and chief executive of Union Oil of California. He was also on the board of Occidental College. And he arranged for my mother as well as her four siblings to go to Occidental. And my mother later earned a master's degree in speech and drama from USC. And my father was there one summer taking a sabbatical from a renowned psychologist at USC. This was off the books. It apparently would have been arranged by a professor at UT with a professor at USC. But my mother was in charge of the summer play and she had put signs up over the USC campus needed someone with a Southern accent. And dad applied. He got the job and shortly thereafter or a year or two later he married my mother. So he got a part in the play with his father? Yes. He had the Southern accent that she needed. (6/41)
He was a Texan. That's how your parents met. That's an amazing story. Yeah, it is. And when dad was a child psychologist he was more aligned with Carl Jung than Freud. And my mother was a role plays musicals for elementary school. When she retired she was principal of the largest elementary school in Houston. So you had the example of your parents who were both in academics. Did you know at a young age that you wanted to be an economist or was there some other general sense of what you wanted to do and that sort of realization of your interest in economics came later? No. When I went to Sweeney in 1960 I wanted to be a doctor, medical doctor. And for the first year and a half I was taking all the pre-med courses. And then in the spring of 1962 I had time for my first elective and I took the principles of economics. And at the end of the spring semester I switched my major. I found my true law of economics. What attracted you to economics? Just fascinated me. I read a book by Hal (7/41)
Brenner on the worldly philosophers in my very first course. It's a great little book and I was just drawn to it because it sort of combined institutional understanding, history and quantitative analysis. And I thought that that was a good use of some of the abilities that I have. I'm not the strongest in anyone but when you work them all together I think I have a little bit of an edge. And so when I left Sweeney I got an MBA thinking business world was for me. Went to Wharton. I was a finance major. And after my MBA at Wharton I was offered a full fellowship. I had a university fellowship at Temple University in economics. And that fellowship in today's dollars it was tax free. It would be about close to $50,000 even though at the time it was $300 a month. But it was tax free and I had no duties. And I finished in two and a half years later. I had a parent of my PhD in January of 1609, defended the dissertation in December of the year before and then went to the Dallas Fed. So that (8/41)
was your next job after getting your PhD going directly to the Dallas Fed? I went to the Dallas Fed, yes. So what did that experience working for the Dallas Fed teach you? And how long were you there? When did you go again? You went during the end of McKinsey Martin's administration. I went in 69 and I left in 73. And it was very, very fortuitous because when I went to the Dallas Fed in 69 I was really the most conversant in monetary theory and history and macroeconomics. And I had built an econometric model of the euro dollar market. I knew Internet. My fields were macroeconomics and international economics and finance and mathematical and statistical techniques. And I was in a position to work pretty closely with the director of research at Dallas and the president of the bank. The president of the bank is a very distinguished agricultural economist, Dr. Phillip Coldwell. And Ralph Green was director of research. It was in due course I started advising them for the FOMC meetings. (9/41)
They did something for me that was very valuable. They sent me to do the training program for fed regional economists at the Fed of New York. And in fact, I made two trips, lengthy trips, to study the operations of the FOMC and its execution. I doubt that if I had been at the board of governors or if I had been at one of the larger Federal Reserve banks, I would have never been tapped, I don't think, to have that kind of exposure. But at the Dallas Fed I did. And that was very beneficial to me. And I had time to do my own research. And I'm very fortunate I started getting published in some of the lesser academic journals. Before the time I had left the Dallas Fed, I was published in the journal Finance, which is a rather significant feat at the time. And it was co-authored. But nevertheless, I made it in a few times. And I was able to get some recognition from my dissertation by writing a comment on someone else's very extensive work. So I was starting to get published. My econometric (10/41)
work was noticed by Dr. Michael K. Evans, a Brown-aid educated econometrician who was co-developer of the Wharton model with Larry Klein. And Mike Evans asked me to come to Chase Econometrics to build the first large-scale econometric model of the financial markets. At that time, the Chase model, which Evans had spun off and had broken with Klein. But there was just one financial equation in the entire Chase econometrics model. And the same was true for the Wharton model at the time. And that was that the Treasury bill rate was a function of the Federal Reserve discount rate. There were no money supply equations alone. There were no other financial variables, no long-term rates, intermediate-term rates. So I built that model. It was a monthly-based model. And the J.I. Press in Greenwich, Connecticut published that as a book in 1976 called Dynamics of Forecasting Financial Cycles. I've always looked at the financial cycle as leading the business cycle. Keep in 1976, at that point in (11/41)
time, Minsky had not developed his financial instability hypothesis. Narr had Kendallberger written his great book, Mania's Panics and Crashes. But I was thinking in terms of financial cycle, I didn't define it as well, I don't think, as Minsky and Kendallberger did. But I was inclined in that direction before their great work. Of course, I took advantage of their work and other work to greatly amplify what I had started to do. But that's how it all got started. Did you have an opportunity to get to know David Rockefeller while you were at Chase Bank? I did. I did. Michael Evans called me and he said, you're going to get a call from Mr. Rockefeller's secretary and he's going to give you a project to do. And I know you're busy because you're putting out... I was putting out the, every month, the Chase Econometrics monthly financial model and existing mic to some extent on the regular macro model and talking to clients, traveling around. I was pretty busy. The secretary, his secretary (12/41)
asked me to come up to Siem in New York. Chase Econometrics was in Balaken with Pennsylvania, the first Western suburb out of Philadelphia. So I took the old bankrupt, Femme Central Railroad in New York and went up to the top floor of Chase Manhattan Plaza. And I saw David Rockefeller and he gave me an assignment and he said, this is what I want you to do. Do you think you can do it? And I said, I can. He said, can you get it to me in a certain and gave me a deadline? So I went back and I worked on it very, very diligently. And I sent it to his office. And a few days later, I got a call from Mr. Rockefeller's secretary, asking me to return to New York. And I was pretty proud of the project. I thought that it was a great effort. I had done exactly what was wanted. And I went to see Mr. Rockefeller and he started out saying something to the effect. Well, this is a great first effort. Wow, that must have been a very cool experience for someone at your level and your age at that time, (13/41)
getting that kind of compliment. You know, I was still in my twenties. I'd earned my PhD when I was 26. So I was crestfallen when he said it's a good first effort. And he then suggested several different avenues to me. And my crestfallen condition, I took the train back to Philadelphia, worked on it. I don't think I slept for days while I was trying to complete the undertaking and sent it back to New York. And a few days later, David's secretary called and said, Mr. Rockefeller wishes to thank you for your excellent effort. And I did another great project for them. What are butcher who was number two in command today? It was very interested in productivity and how I that helped the inflation at the time. And they undertook an extensive study of productivity, which they wanted to be able to document with solid research. And Michael Evans assigned me that job. I was a major undertaking because the Chase published double page editorials in Wall Street Journal and other leading (14/41)
publications at the time about the findings of the productivity study. My name wasn't mentioned, but I knew I had done it and I kept those records. But I got to do that. And David also asked me to attend the asset liability committee meeting, which sort of changed my whole life because I knew at that point in time I wanted to move from research into the financial investment. I interviewed someone named Roger W. Robinson, who was senior director of international economic affairs at the Reagan NSC and was one of the architects of the economic warfare against the Soviet Union in the 1980s. And he was, coincidentally, David Rockefeller's personal staff assistant in the 1970s. And I remember him telling me what that experience was like. He would fly with David on his private plane to Europe and to meet everywhere, wherever he went, people wanted to meet him, the local politicians, the presidents, the prime ministers, et cetera. And I just think when I hear you tell this story, I have that (15/41)
additional context of understanding that in the 1970s, there weren't many people in the world who were more powerful than the Rockefellers. They were at the very top. And to know David and to have that kind of relationship must have felt extremely special. I never got to travel on the plane, but I did get invited to the asset liability meeting. And I did keep in mind that they had a large economics department headed by John Wilson. And David could have used many economists or multiple of their economists for some of the projects which I did. And that was a very good feeling for me. It was one of those great privileges because when I went from the Dallas Fed to the econometrics unit of Chase Manhattan, I had no idea who was running Chase Manhattan and had any idea whatsoever that I might actually come in contact. But David was an exceptional man. He was a very good economist. He had a PhD in economics from the University of Chicago. It was one of those great pleasures in life that you (16/41)
just sort of stumbled into. So you've done many other things besides that. We can't get into everything, but most notably, perhaps you were chief U.S. economist for HSBC Group, which is one of the largest banks in the world, or at least it used to be. I don't know where it still ranks today. It was number one when I left them. When they bought Carol McIntyne and McGinley, they were still the British colonial bank, 18th largest in the world. William Purvis took them from the British colonial bank to the largest bank in the world, which is where they were when I left in 1996. William Purvis was another one of those exceptional people, knighted by Queen Elizabeth, great banker. It was a privilege for me to get to know him a little bit. I would travel to Hong Kong or London and the scene. From time to time, I would be given projects to do for him. And that was also a wonderful experience. And I also survived quite a few mergers, I think a total of five in that process, which was a very (17/41)
pleasing demand. I don't know how I did it, but I did. And you were also EVP, executive vice president and chief economist at Fidelity Bank. So let's use the totality of your experience, your academic experience, your experience at the Federal Reserve, and your experience working in the private sector as an economist. The 50, I think 55 years you've been in the business or so. Let's use that to paint an economic picture of where we are today and then go about doing some analysis on it. First of all, when you look across the global economy today, what is your assessment of how it's doing? Poorly, very poorly. Take for example, if you look at real per capita GDP, or the average of real per capita GDP and GDP, which is really the more appropriate thing to do because they diverge and they're equivalent. And so to get the best understanding, I think it's appropriate to average GDI and GDP. That's what the... Gross domestic income and gross domestic product. Yes. That's what the National (18/41)
Bureau of Economic Research, which is our business cycle dating authority, and probably don't preeminent research organization in economics. That's what they do in assessing changes in the business cycle. They take the average of GDI and GDP. So in the 20 year moving average to 1970, it was growing at 2.2% per annum. And in the last 20 years, ending 2023, we're growing 0.9% per annum. We've lost 1.3% per annum in the 20 year growth rate. And by the way, if you look historically from 1870 to 1970, and we have data, pretty good data, not perfect, for that 100 years, the real per capita growth rate was also 2.2%. The last 20 years, we're down to 0.9% per annum. If we had stayed at the 2.2% just in the last 20 years, the average real economic activity per person would be $78,000 or so. Whereas in actuality, it's only 66,000. So we're really losing a lot versus trend. And this is even worse in Europe and the UK and Japan. All of us are not performing in the way in which we did. And I (19/41)
believe it's a reflection of the harmful effects of too much debt, very, very high levels. I think it triggers a law of diminishing returns, which is derived from the production function, one of the main concepts in economics. Economic output is technology interacting with the factors of production, land labor and capital. Overuse, one of the factors of production, initially output rises, continuing to do so, output flattens and still increase that factor. It turns down, mathematicians call that a parabolic function, falls out of partial differentiation of the production function. That explains why we have the growth that performance is the standard of living has been slowing. Now, however, we have an even more serious situation because we have negative national saving. If you'll make sure you remember that the circular flow, which says GDI equals GDP equals production of goods and services, they're interchangeable. So you can move parts of one side to the other back and forth out of (20/41)
the circular flow. We know that net physical investment, plant and equipment must equal net national saving. And we now have a condition of negative net national saving. Without net national saving, we cannot have net physical investment. Without net physical investment, we cannot increase the capital stock, which means that the production function is not going to be able to develop. It's going to develop as long as we have negative net national saving. So when you say negative net national savings, can you define what net national savings is for listeners? Okay, so saving has three components. It's private saving. Private saving actually has two components, household and corporate. So there's private saving, foreign saving, which of course is the inverse of the capital account, and then government saving, which in this case is dissaving. So what we have a situation today is that the federal budget deficit is greater than the sum of private saving and foreign saving. So we have a net (21/41)
negative national saving. The production function is not operative. You know, to make labor and natural resource extraction more productive, they have to be given increased capital stock to work with. And the physical investment is equal to the change in the capital stock. So we've really dug a deep hole for ourselves. The problems are basically worse. Everywhere else, there's some minor differences, perhaps, but the budget deficits are just simply too large. And you say, well, we can have the Federal Reserve, Accelerator Central Banks accelerate monetary growth. However, additional monetary growth does not correct the problem of negative net national savings. You can increase the money supply, but that will just have an inflationary impact. There's no way to inflate our way out of the problem. Inflation just has a devastating impact on the modest and moderate income households, which then means that inflationary policies increase the income and wealth divides. We're seeing that big (22/41)
time in all the major economies of the world. So you could conceivably use fiscal policy to reverse negative net national saving, but there is no one that has that agenda. No one whatsoever. And it would require a great deal of political goodwill and shared sacrifice. And there's just no pathway to achieve it. So we're stuck with it now unless something for two of us happens. It's going to be very hard to alter this downward trend in the standard of living, which means that the income and wealth divides are going to get worse. And it's not a wholesome development at all. So is this dynamic analogous to burning the furniture to heat the house? What you're basically doing is you're using your depreciation to live on. There's a classic story in American history about the pilgrims. They embarked just before Christmas in 1620, and they didn't get a chance to plant their crops. They were starving or scatting about to find whatever they could. And they came upon a large store of corn that was (23/41)
buried there somewhere near the ocean. And they ate it, which infuriated the Indians because it was their seed corn. And so basically we're sustaining consumption and daily living by eating our depreciation. That's what it means when you have negative net national savings, you ultimately get negative net national investment. And you're not going to be able to grow your capital stock. It's a very difficult situation. And I don't think that this is well understood at all because it blocks the normal production function. The production function goes back to the original work of David Ricardo. He only took into consideration two factors of production. And then a lot of additional work, much of a much improvement and understanding is traceable to the work of Robert Solo. Nobel Laureate taught at MIT and he had the exogenous growth market. He relied on the production function and he developed the marginal revenue product of capital, natural resources and labor. But the exogenous variable in (24/41)
his model was saving. You have to have saving. You may recall, having read Keynes, Keynes talked about the fallacy of thrift. And his idea here was that if people do what's right in their own interest to try to prepare for a rainy day, they will have to take retirement or education or unexpected needs and they say that this will leave the economy with an insufficient level of saving. And so by doing the right thing on the individual level, we have this adverse macroeconomic impact. The problem is now Keynes is concerned about too much saving doesn't apply because we have negative net will save, which is a very, very serious problem. And it will become more evident and it's going to be difficult because this concept is complex. And frankly, I don't think that the American economy has much of an understanding of economic theory or economic history. So the relationship of savings to interest rates is inverted, right? So as savings decline, interest rates, all things being equal go up. All (25/41)
things being equal. And there is an effect there. I think though that the main thing ultimately is what happens to inflationary expectations and the main ingredient inflationary expectations. It depends upon whether there's too much money chasing too few goods or whether we have the reversal of that situation. So now, you're putting aside the national savings rate. I just know that the personal savings rate throughout the 90s and early 2000s continue to decline. And yet this is a period of declining interest rates. Is that because we were importing foreign savings? It was declining. And at that point in time, the debt levels were deleterious. They were triggering the law of diminishing returns. So the increased indebtedness was pulling the growth rate down. But you still had positive saving. The budget deficit were not so large that they were greater than the private and the foreign savings. So in that time period, generally speaking, the debt was when you're operating with the (26/41)
production function and you're overusing debt, you generate the law of diminishing returns, which is deleterious effect. And the increases in money that the place in that time period were not excessive. In fact, that you would call them generally normal and they were more than offset by a downturn in velocity. And so the net effect was that the inflation rate came down and so did inflationary expectations and interest rates. During the pandemic, what we basically did is we pushed money growth far outside the bounds of normality. And it led to, you know, 9 to 10 percent inflation rate there in 21 parts of 22. And the economy did better for a little bit. But ultimately, inflation is so hurtful to so many people that the Federal Reserve had to reverse themselves, which is what they're now doing. And even with the six trillion dollars of debt that was taken on during the pandemic, that did not bring the rate of growth in real per capita income back to the trend line, just brought it back (27/41)
seeing that today very, very evidently. So I want to talk about inflation and why it seems somewhat stuck, at least as a measure of CPI at around 3% or so. Before we do that, one of the topics that's been more hotly debated in the last year or so among economists, especially, has been the neutral rate. What is the neutral rate of interest? And there's a lot of speculation about whether it's higher or lower. I think you fall on the camp that it's lower. First of all, explain to our listeners what the neutral rate is, which also known as R-star. And what is the relationship between the neutral rate of interest and the net national savings rate? Well, the first of all, I think that the key relationship is what's happening to the real per capita growth rate in the average of GDI and GDP. And so in 1970, it was 2.2% and we're now 0.9%. So I think that that kind of gives us a bit of an approximation. It has to be moving in alignment with the standard of living. So the standard of living (29/41)
growth rate is coming down and the natural rate is coming with it. What was the first part of your question? Well, my first question was, what is the neutral rate of interest for people that don't know? And then what is the relationship between the neutral rate and the savings rate? How does savings, in other words, impact the natural rate of interest? Up until now, the impact has not been that important because you see, 2023 was only the eighth year in which we had negative national savings since 1929. And the other seven years, they were all when we were in serious economic contractions. Well, four of the negative national savings occurred in the 1930s. And then we had three negative national savings in 2008, time 10. Very, very rare, but it was not a persistent condition. But now we have a very, very difficult problem and one that at least to me appears very difficult to resolve. Before now, we had an excessive debt in this problem using the production function, which indicated the (30/41)
debt was bringing the growth rate down the law of diminishing returns. But now, however, when you have negative national savings, what it means is that we collectively are living beyond our means. But we don't have the resources to increase the capital stock. So if savings are so low, does that mean that we should expect to reach a bottom in the savings rate at some point and for that trend to reverse itself? And if it reverses itself, does that mean that we're going to be in a period of lower natural rates of interest for the foreseeable future? Because I think that's where you fall in. You expect a lower neutral rate of interest, but is the reason because people are going to have to start to save more? Is that the reason why? Well, the question is they don't have the income to save more. So I don't think that redressing the negative net national saving rate can be really done in any significant way by the private sector, nor by the current account, which then determines the foreign (31/41)
save. I think the problem is in the governmental sector. The things can be done to private saving, but I think that they're minute in comparison to what needs to be done to fix the federal budget deficit. Fed Chairman Powell recently said that the budget now is unsustainable. And I think he's correct. And the reason he's correct is we have negative national saving. We cannot have an increasing level of prosperity in this environment. So the economy has really held hostage to the federal fiscal situation. Do you think that the Treasury has become a bigger or more important economic actor today relative to the Fed, relative to what the Fed was, say, 15 or even five years ago? We've had two major coordinations of monetary and fiscal policy. The most recent, of course, is the pandemic where the Fed became a partner with fiscal policy. But this was done one time before in the 1970s. Nixon was president. I was a young economist at the Federal Reserve Bank of Dallas and wage and price (32/41)
controls were put on by Nixon. He had legal authority to do so. He asked the Fed to accelerate monetary growth and they were forced to do so because Burns quite unfortunately agreed to be part of the wage and price structure. He was chairman of the interest rate and dividend control committee. And he was also serving as chairman of the Federal Reserve Board. And so to placate those that wanted to be able to raise prices but they could not or wages, the Fed, he had to try to hold down the interest rates and the dividends. And so doing the accelerated monetary growth. When the inflation, however, surged out of control, Burns discovered that the fiscal policy partners were no longer there. And so guess who had to clean up the inflation of the early 1970s? Burns and he didn't do a very good job of it. It was only partially done. And we suffered for suffered rising inflation all the way until Paul Woker came in and it took him two years to finally get the job done two or three years to get (33/41)
the job done. So now we go into the pandemic. And there's no recollection of major path policy mistakes. That's just the character of the way things are. So no one remembers that the last coordination entered in disaster of too much inflation. And a decade of rising inflation and this worsening of the income and wealth of it. So the power fed cooperates with fiscal policy. And to do so he coordinated engineers and unprecedented increase in money supply, which was even greater than what Burns had done during the early 70s. But the same thing happened to Powell, which happened to Burns. When the inflation problem arose, the fiscal policy partners were no longer present. And that left the Federal Reserve to clean up the problem by itself. And so one of the great challenges that the economy faces is for the Federal Reserve to operate independently. And those that tell you that we can somehow solve our problems of this declining rate of growth in the standard of living by adopting some sort (34/41)
of inflationary outcome. And my view are gravely wrong. If accelerations and monetary growth only produce very transitory gains in economic activity. When people realize the inflationary impact of monetary policy, then the system becomes unanchored. And you have this devastating impact that worsens the income wealth distribution. And so the best thing for the Federal Reserve is to maintain its independence and not give up its ability to do the right thing. And I don't know to what extent this played a role, but the Federal Reserve moved very, very slowly to deal with the monetary increase that they put into the economy in 2021 and the inflation got out of control. Now, the inflation has come down. But last year's decline is what I call a contra normal cyclical development. That was the largest decline in inflation for any year in which GDP was rising inflation. Has declined by more than it did in 2024 on several occasions, but they were all in recessions. So we got a response, but it (35/41)
was an abnormal response. Normally inflation is a lagging economic indicator. And I think it's not surprising that the inflation rate is kind of stuck where it is. That's its nature. But as time goes by and as the monetary restraint moves further and further into the economy, which it's doing right now, there will come a point in which the inflation rate will fall. The sickality of it is that inflation is a lagging indicator. And I'm just going to give you one contrary indicator, which I think indicates this. The CPI, as you said, is stuck up above at 3% or slightly more. But the real problem here is the so-called shelter component, very controversial component. If you exclude shelter, the CPI has been under 2% for the last eight months. It is 1.8%. Now, the shelter component is a very badly conceived sector. What the Bureau of Labor Statistics does is they ask folks, what is the value of your home if you were going to sell it? Well, people always have an inflated value of their home. (36/41)
store value and unit of account, but it's fading importance. If you look at money in real terms, in that basis, we have record declines for the last 12 months, 24 months and 34 months. And we're also getting a very large decline in real terms of bank credit and bank loans. And in fact, CNI loans and nominal dollars, even in mid-March or 80 billion where they blow where they were at their peak back in the fall of 2022. Monetary policy is extremely tight and monetary policy will work with long legs and the inflation rate will come down. The unemployment rate, which the Fed is also focused on is another lagging indicator. So the cyclicity of the situation, the cyclicality, I mean, suggests that the inflation rate will actually fall to the Fed's target. But at the same time, the unemployment rate will rise more than where they're expecting it to go. So Dr. Hunt, I'm going to move us to the second hour of this conversation. And some of the questions I have for you are, one, a follow on the (38/41)
comments that you've ended the first hour with, which is why have the lags been so long this time? Why have the hikes of short-term interest rates by the Fed taken so long to materialize in a slowdown of the economy? I'm also curious to understand and sort of follow up on our conversation about the savings rate and interest rates and economic growth. To understand how we get out of the situation, because if the United States government needs to, quote, get its fiscal house in Northern, in other words, rely less on debt financing to pay fiscal obligations, that would also lead to an economic contraction. And so like we seem to be caught in this impossible situation where the solution to the problems of too much debt result in an economic contraction, which raises the relative carry burden of that debt. So that's something I want to talk to you about. I also want to understand more specifically how far out you see interest rates remaining depressed, because if you do believe that the (39/41)
neutral rate of interest is actually lower than it was going into the pandemic, which I think is your position, but you can clarify it in the second hour. If that's the case, how long is that going to continue in your view, or what are going to be the factors that are going to be contributing to it? And the same thing goes for inflation. And I also, of course, want to ask you what asset classes or industries or sectors you're most bullish on. What are the things that you think are going to do well in this environment? For anyone who is new to the program, Hidden Forces is listener supported. We don't accept advertisers or commercial sponsors. The entire show is funded from top to bottom by listeners like you. If you want to access the second hour of today's conversation with Dr. Hunt, head over to hiddenforces.io. And sign up to one of our three content tiers. All subscribers gain access to our premium feed, which you can use to listen to the rest of today's conversation on your mobile (40/41)
device using your favorite podcast app, just like you're listening to this episode right now. Dr. Hunt, stick around. We're going to move the rest of our conversation onto the premium feed. If you want to listen in on the rest of today's conversation, head over to hiddenforces.io. And join our premium feed. If you want to join in on the conversation and become a member of the Hidden Forces Genius community, you can also do that through our subscriber page. Today's episode was produced by me and edited by Stylianos Nicolau. For more episodes, you can check out our website at hiddenforces.io. You can follow me on Twitter at cofinas and you can email me at info at hiddenforces.io. As always, thanks for listening. We'll see you next time. (41/41)
This is the full transcription of podcast 'Hidden Forces'.
Origins of the Ukraine War & What Comes Next Serhii Plokhy.done #Podcast #Transcription #ReadAlong #KnowledgeUnlocked
What's up everybody? My name is Dmitriy Kafinas and you're listening to Hidden Forces, a podcast that inspires investors, entrepreneurs, and everyday citizens to challenge consensus narratives and to learn how to think critically about the systems of power shaping our world. My guest in today's episode is Professor Sergei Plohji, the director of the Ukrainian Research Institute at Harvard University and a leading authority on Ukraine, Russia, and Eastern Europe. He's published extensively on the international history of World War II and the Cold War, and he joins me today to discuss the subject of his latest book on the war in Ukraine and the return of history. This is a conversation about national identity, the disintegration of empires, and what will follow from the largest European land war since World War II. How will the outcome of the war in Ukraine inform the evolution of the international order? And what are the most compelling theories that explain Putin's decision to invade (1/40)
in the first place? Was it to build a greater Russia, as some of his detractors have claimed, or did Moscow face legitimate security concerns from NATO enlargement that on their own can explain the course of events? The answer to this last question holds important lessons about the future of European security and US policy towards China, which is what we spent part of the second hour discussing. If you want access to that part of the conversation and you're not already subscribed to Hidden Forces, you can join our premium feed and listen to the second hour of today's episode by going to hiddenforces.io. All of our content tiers give you access to our premium feed, which you can listen to on your mobile device using your favorite podcast app just like you're listening to this episode right now. If you want to join in on the conversation and become a member of the Hidden Forces Genius Community, which includes Q&A calls with guests, access to special research and analysis, in-person (2/40)
events and dinners, you can also do that on our subscriber page. And if you still have questions, feel free to send an email to infoathiddenforces.io and I or someone from our team will get right back to you. And with that, please enjoy this incredibly informative conversation with my guest, Professor Serhii Blokhi. Professor Serhii Blokhi, welcome to Hidden Forces. It's a pleasure. Thank you for having me. The pleasure is all mine, Professor. So before we get into the subject of today's conversation, which is going to build off your latest book, The Russo Ukrainian War, The Return of History, I'd love if you could take a moment to tell me in my audience a little bit about you, your background and your interest areas and focus in the field of history. I am Professor of Ukrainian and European History at Harvard University. And this is more or less what I have been doing for my entire life, my professional life. I was educated in Ukraine, which was at that time part of the Soviet Union. (3/40)
I started my academic career at the University of Dnipro, which is now relatively close to the front lines of this war. I continue it in Canada, University of Alberta in Western Canada. And I am Professor of Ukrainian History at Harvard since 2007, Director of the Ukrainian Research Institute at Harvard. And my field is Ukrainian and European History, but also Global History. One of the courses that I teach at Harvard is on the Yalta Conference. I teach course also on the Cold War, that on the top of course, of course is on Ukrainian and European history. And in that sense, the book that we are discussing today, it brings together different fields, my different interests, but also my connection to the region, connection to Ukraine, connection to the things that are happening today on the battleground. So while I was reading the book, I came to the view that it dealt with two, if not maybe three topics. One was the origin of the war in Ukraine. And folded within that was also a (4/40)
conversation, a big part of it was really a conversation about Russian and Ukrainian identity and the sense of Russian nationhood and how that has evolved both up until the end of the Cold War and then subsequently with the fall of the Soviet Union. And the other part of the book is really a look forward into what the consequences of this war will be for the future and how the global order is evolving. Would you say that that's pretty much an accurate description? Yes, I would say it is an accurate description and the origins of the war, the issues of identity. This is the focus of the first chapters, few chapters, and then the future is the focus of the concluding two chapters. What is also in between, I try to look at the actual developments on the front lines in the course of the last year. So the book was written between March of 2022 and February of 2023. So what certainly the reader will get out of that book will be not just the origins and consequences of the war, but there will (5/40)
be a lot of war itself. Yeah, there's, you devote many chapters to describing actually the progression of the war in the last year. So that was extremely useful as well. And I'm sure it'll be a really good history for people who are maybe in the future and learning about the war later. So when did you begin writing this book? I started writing it really in late March, so it would be more or less one month into the war. And by that time, the shock that came with the war, I was able to overcome it on some level. But also for me, it became clear already in March, in late March, the overall outcome of that war. So we still don't know when it will end and exactly how it will end. But already in late March, it was clear for me that Ukraine would survive as an independent state. And that would be certainly mean defeat for Russia and for Russian aspirations as it was and plans it was going to the war. So from that point of view, at least I thought that I knew what I was talking about in (6/40)
historical perspective. In historical perspective, I mean, I could talk about the origins, I could discuss the developments, and I could also talk in my opinion quite confidently about the future, not the immediate future. I don't know what will happen tomorrow. I don't know exactly what will happen one year from now. But historical frame gives you understanding of the ultimate outcome, long-term outcome of those processes. Because I look at this war as the war of the Soviet succession or Russian succession, one of the wars of the history, story of the disintegration of the Russian Empire, one of the biggest world empires. And we know where the wars end of that sort. They end up with ultimately the victory of the national movements, the formation of the states. And another thing that the first months of the war made me confident of was the ultimate Ukrainian victory. So the victory meaning survival. In the after World War II, in now almost 80 years since then of World War II, there was (7/40)
This is the full transcription of podcast 'Hidden Forces'.
Coronavirus An Analysis Using Complex Dynamic Systems Theory Yaneer Bar-Yam.done #Podcast #Transcription #ReadAlong #KnowledgeUnlocked
huge, right? So if we have 100 cases today in a week, we have 700 cases. In two weeks, we have 4,900 cases. So 5,000 cases. And that's so fast. People think that it's a small number today. But the point is that all those people have already been infected that are going to show up as infected in a few days. And so if you react today to what's happening today, it's not going to do anything because the reality is much more serious. It's a tip of the iceberg kind of situation. And it's a dynamic tip of the iceberg. So basically every day, the iceberg has gotten bigger in a way that you're seeing more of the iceberg, but then the iceberg has already extended further. So we have this ongoing dynamic where it's getting worse and worse and worse, very fast. So from what I understand, we were at about 10,000 cases or so outside of China around two weeks ago. Well, let's look at China first. China did a lockdown when they had 800 cases. 800 cases. And because when they locked down, there were (22/41)
content tiers or even just support the show with a lower donation if you want. And also please subscribe to our mailing list. I haven't made much use of it in recent years, but I'm going to be doing that in the near future. I can promise you that. So please enjoy everyone and you'll hear from me again soon. Professor Yannir Bariam, welcome to Hidden Forces. Thank you for having me. Well, thank you for coming on the program. So maybe you can give our listeners who may not know you or be familiar with your work. Give us your background, how you got involved in studying COVID-19 and what you want listeners to understand about this virus. So I'm a physicist and I started about 30 years ago working on understanding complex systems. So systems that have many interacting components and the fundamental tool for dealing with this requires kind of mathematics that goes beyond traditional calculus and statistics and is not widely used. And that enables us to think about sudden sharp transitions (9/41)
Today's episode of Hidden Forces is made possible by listeners like you. For more information about this week's episode or for easy access to related programming, visit our website at hiddenforces.io and subscribe to our free email list. If you listen to the show on your Apple Podcast app, remember you can give us a review. Each review helps more people find the show and join our amazing community. And with that, please enjoy this week's episode. What's up everybody? This is another special episode. I keep calling this episode special because I've gotten so used to putting out weekly content with a lot of prep and time to think about the subject to prepare for the guest. And I've decided that that's really not feasible anymore. Just given what's going on, we're living in the most radical period that I've experienced since 9-11. It feels surreal in much the same way that 9-11 did. It also feels hopeful, I think, in a way because there's a lot of camaraderie. Maybe hopeful is the wrong (1/41)
word. You get this sense of camaraderie that you had after 9-11. Whenever I speak with anyone, and I'm not talking about friends, I mean in a professional way, there's a level of compassion and empathy and concern for the other person that I remember was prevalent after 9-11. This is a lot what this feels like, but it's a difficult thing to try and cover because I like to always feel like I'm providing reliable information. It's difficult for me to vet what's out there because there is so much information. So I've decided to just go with it. My guest for this episode is Professor Yannir Barhyam. I came across Professor Barhyam's work on YouTube. He was actually introduced to me through a friend who had been following his lectures or had been to one of his lectures because he's very close with Naseem Taleb. They actually do lectures together and have been releasing videos on YouTube that you can actually watch dealing with COVID-19. Professor Barhyam has also created a website. He's (2/41)
also the president in case I didn't mention this. He's the president of the New England Complex Systems Institute. So that was a cool thing. We've long time listeners know my affiliation, informal affiliation with the Santa Fe Institute. I was invited to stay there for a period of time in the beginning of Hidden Forces in the first six months or so. I've had on a number of people from SFI, Brian Arthur, Sam Bowles, Geoffrey West, people like that. And complexity science has played a major role in the progression of Hidden Forces. And it's something that I've incorporated into my own models and ways of thinking. So that made me feel comfortable. He also has a website called endcoronavirus.org where he puts out a lot of information about coronavirus, what it is, how businesses should deal with it, guidelines for self-isolation, recommendations for policymakers and stuff like that. You can sign up to his newsletter or to get updates from him and his team. So you should definitely go check (3/41)
that out. I want to find a way to talk about this subject from a human standpoint because it's like I'm sitting here and I'm recording this and I'm like, okay, how do I do this professionally? While at the same time, not dehumanizing what's happening because this is unnerving. It's especially unnerving if you have been following it for months like I have. I think a lot of people have who are on Twitter and many of you will already know who heard my episode with Kyle Bass that I think came out in November. We talked about this. Kyle talked about it. He talked about it in a different context. Talked about it in terms of bioweapons from China. But bioweapons aside, this is a virus that came from China which is now disrupting our lives and our economies. I have friends that have already gotten laid off. I was just speaking with a radiologist friend of mine today who has seen 12 scans of COVID-19 patients in the last 24 hours. If I remember correctly, 11 of those 12 were people between the (4/41)
ages of 30 and 45. I am not a radiologist, but based on what he said, the scans look pretty bad. The idea, he told me that this is just old people is just not true. I also know from another physician friend of mine who sent a patient of his to get tested for COVID-19 at a Northwell clinic in New York City. Northwell is the largest healthcare provider in New York State. They told her that she should expect the results back in eight days. It's really hard to know where we stand with the numbers, with the number of infected, with the number of deaths and how to reconcile those numbers to get some type of mortality rate that actually reflects reality. Case mortality is one thing. The mortality rate among confirmed cases is one thing, but what is the overall mortality rate? Those numbers are still coming in. Someone like Professor Yannir would say that it doesn't matter. It's really bad and we should be doing something about it. I'm not disputing that, but I'm just trying to get a grip on (5/41)
the facts to try and help all of you navigate them. That's my objective now. I've decided to get into this. I've reorganized my schedule. I've canceled a lot of guests that I had booked. I still have an episode tomorrow with Ben Hubbard, the Middle East correspondent for the New York Times, to discuss the Saudi price war and do a deep dive into the kingdom and the rise of Muhammad bin Salman. I think that's relevant, especially for those of you out there who are interested in what's going on in the oil market. The markets have been decimated. It has been a bloodbath. It's actually more acute than 2008. At least that's how I remember it. I mean, what were we down yesterday? 12% I'm recording this on Wednesday, March 18th. I think yesterday we were down 12% or was it the day before? I can't remember. I mean, it's wild and the price of oil has collapsed in part because of Saudi Arabia's commitment to flooding the market, but obviously it's in the face of a giant demand shock and bond (6/41)
yields have been up and down. I mean, I think they were all the way down below 0.4%. And last I checked, they were something like 1.3, 1.2. I mean, don't quote me. I don't spend a lot of time looking at the markets. And that's the other thing. It's kind of... Part of me wants to be on top of everything that's happening, but if I'm on top of everything that's happening, I can't really prepare for any type of conversation. So anyway, I've said enough. This is going to be a work in progress guys trying to figure this out. Right now, I'm committed to the weekly release schedule and the idea is to release extra episodes like this one when I can. I may change that and just start releasing stuff as soon as it gets recorded, but we're all going to kind of figure this out together. So my conversation with Professor Yannir lasts for about 30 or 35 minutes or so. I just recorded it, haven't listened to it yet, and just recording this intro now. So I hope that it's informative. I hope that it (7/41)
provides some type of value for you. And as we move forward, I hope to be able to do more of this, not necessarily or exclusively dealing with the actual virus or the biology of this situation. Dealing with the entire scope of what people are experiencing emotionally, what people are experiencing with work. You know, I think there are really interesting opportunities to do episodes about companies that are thriving in this environment. So we'll see. But I hope all of you stay safe. I hope all of you stay calm and we will get through this one way or the other and it's going to be okay in the end. So please enjoy and always feel free to reach me at DK at hiddenforces.io if you have any thoughts you want to share. I get many emails these days. I can't respond to anywhere near enough of them, but I read all of them. I love hearing from you. And those of you who are interested in supporting the program, you can go to patreon.com slash hiddenforces and you can subscribe to one of our three (8/41)
like boiling water or things like that really require a different kind of mathematics. And that's important for thinking about various real world systems because dependencies actually matter and statistics and correlations are not adequate. So about 15 years ago, one of the topics I started working on over the last number of years was the issue of pandemics. And it started from a very simple model of the effect of long range transportation on pathogen dynamics. And the result of our analysis was that there was a transition like boiling of water that happens as you add more and more transportation. What happens is you go from a situation where you have local extinctions because the pathogen spreads locally to global extinctions as the pathogen is able to spread globally. And that transition is a sharp transition, which means that you're going along adding more flights around the world and you are getting close to that transition and all of a sudden instead of having small local events (10/41)
happening, you have massive global events. And that was a big concern to me. So we started raising the alarm and unfortunately people didn't pay much attention. In 2014, there was the Ebola outbreak in West Africa, which was eventually 10 times as large as a previous Ebola outbreaks. But actually other people were predicting that it was going to be much, much larger. They thought it would go to burnout with 10 million people dead. But I was thinking how one could stop outbreaks. And the idea which comes from complex system science is that you can go to a larger scale. So instead of thinking about individuals as transmitting the disease, you can think about communities as transmitting the disease and you can treat communities as infected. And the trick is then you go into the communities and you detect people that are in the early stages of symptoms and you stop them from transmitting, you isolate them and that's actually what was done. So in West Africa, people created teams in (11/41)
neighborhoods of neighborhood people and they went door to door and they used forehead thermometers to find out when symptoms were present and those people were isolated and that stopped the outbreak. So it went from an exponentially growing, every week, doubling epidemic to dropping like a rock, again, exponentially declining and it disappeared within a few months. So I've since worked on Ebola outbreaks in the Congo, working with the World Health Organization. And again, the strategy of doing community empowerment, really, having the communities be responsible for outbreak response was successful there as well. Or beta important contribution, surely wasn't the only thing, but it was really key to the success. So that brought us to the present. I mean, the Ebola outbreak just stopped. It was going on for a year and a half before eventually this approach was used aggressively and it was stopped. So how does this idea of transportation dynamics relate to network connectivity and how can (12/41)
listeners think about that? So the main thing is that disease transmits through these contacts between people. So people touch each other. They breathe the same air. They touch surfaces that other people touch. Those are all relevant to the coronavirus transmission. Each disease has its own network because of the way it transmits. But that network connects people and the disease transmits through it. If you imagine one person is infected, they infect a few others and then it spreads out across the network and jumps to different places through long range contacts, people traveling. And then the question is, how do you know to evaluate its propagation? And the answer is people characterizing using the multiplier. They characterize it by number, R0, which is the number of people that are infected by a particular person who's infected in that. If it's a mild disease, you can say, hey, we don't care, but if it's a severe disease, you want to stop it. And coronavirus are severe diseases and (13/41)
the social cost is unacceptable. And because it's unacceptable, the stopping of it requires radically pruning the network. And radically pruning the network has two parts. One is the local part because people are strongly connected to each other locally. And one is the long range part that got us in trouble because we connected communities around the world and now we're vulnerable to the outbreak. So if you cut the long range links aggressively, then you can work on killing the outbreak locally by isolating people. This is what was done in China and in South Korea in order to stop it by locking down communities, which basically means having people stay at home so that they can infect each other. But once you do that, you can really smash the outbreak because people don't transmit. So you know you have a solution. You just have to aggressively do it and China did it. They cut transportation around the country and they locked down the area of Wuhan, the Hubei province, in order to (14/41)
prevent any local transmission. And there's an incubation period of a couple of weeks. So after a couple of weeks, basically, they had the outbreak under control and then it's really beyond that. It's just a question of transmission to family members and a little bit of leakage because at the beginning they allowed people to go and get groceries every few days. Later on they stopped that and they went door to door to find all the cases. So they really focused on stopping all possible transmissions. And again, the door to door process, just like we had in West Africa, was an essential part of it and the outbreak stopped. And it was gone within four to five weeks. And basically two of those weeks in most of the country were just waiting until you were really sure that you had no cases. So I definitely want to ask you about a symptomatic transmission and what was done in China and some other countries as well, as well as many other questions. Just to clarify one more point there, when you (15/41)
talk about transportation, is this simply a question of volume and availability of travel and transportation? So more flights, more trains, more cars, is that how we're measuring this? And how does the interconnectivity of the world today measure to where it was, let's say, a hundred years ago with the Spanish flu? So several things. First of all, yes, it's kind of the amount of travel. It's the amount of global travel as opposed to local travel. But the more travel you have, the more connected you are, the more vulnerable to large events. The Spanish flu, even though it was a global event, it spreads comparatively slowly. Here we have the coronavirus over weeks, basically spreading globally. And that affects which diseases are able to travel worldwide. So there is this disease dependence that does matter. But the point is that as you increase the transportation, this transition shifts in terms of the qualities of the disease. If there is a disease that has an incubation period of a (16/41)
year and people are not aware that they have it and they walk around and they transmit it and eventually it gets around the world, then we're all dead. But there are not that many diseases like that. It's very hard for the diseases to sustain themselves. So the point is that within the cataclysm of disease we have, we are now in the domain of risk. And that's key. How unusual is that feature of this novel coronavirus that it is contagious, that it can be transmitted from person to person during this window of possibly up to 14 days without symptoms? Ebola does not transmit before the symptoms start. And the coronavirus is actually not even clear that it does. The parameters of the disease transmission early in the infection are not so clear. And part of the challenge of saying, hey, it transmits before symptoms or doesn't is that symptoms are very mild often in cases. So people can be walking around with a little bit of a sniffle or something or sore throat, whatever it is, a little (17/41)
bit of shortness of breath. And sore throat is not one of the symptoms actually. So I shouldn't have said that. But you know... Is that right? Because that's been reported. The primary symptoms of the coronavirus are fever, cough, and shortness of breath. So sore throat is not actually one of them. And I don't know that that means that it's never a symptoms, but it's not surely one of the primary symptoms. Now the point is that the way the disease works is that there's mild symptoms that can extend for a fairly long time. So you have kind of up to two weeks where you start showing symptoms and then you can have two to three weeks of mild symptoms. And then all of a sudden you have severe symptoms and require ventilation and an ICU. So there are these different stages and the boundary between the no symptoms and the mild symptoms is surely not very sharp. So it's hard to tell whether people are just not noticing or purposefully ignoring or whether there's actual transmission before (18/41)
symptoms start. And that's kind of hard to tell. But regardless, even if there are, you know, whichever it is, it creates some stress on different kinds of approaches. But each of the approaches has some utility. And lockdowns don't care, right? Because if you lock everyone down, regardless of whether they transmit before symptoms or not, they can't transmit to people that they're not near. So that's the advantage of the lockdown. The lockdown is kind of the action of last resort that really guarantees you that you will be able to stop an outbreak. And that's why we need it because we're in that kind of state. The transmission rate is high and people bandy around all kinds of numbers. But it's around three, three to four. Some people say we're at any range for two to five, but the lower numbers are based upon the early part of the transmission in China. And the early part of the transmission in China is based upon just a really few cases that are not sampling the distribution of what's (19/41)
going on. So that's the R not number. That's the R not number, right? That means the number of people that one person can infect when they come in contact with them. That's right. We're going about daily life. The problem is that there is no typical person, right? Someone goes to an event with hundreds of people like in South Korea and all of a sudden you have hundreds of people that have been infected by one person. That's a super spreader event. And hundreds of people being infected compared to a typical number of people that are infected, which is probably in the range of one to two to three, is just a totally different ball game. So that brings us back to this point about exponential growth versus linear growth and... Well, exponential growth can happen without super spreader events. The exponential growth is just this multiplier that, you know, and the easiest way to think about it is not with R not, but just with a multiplier from day to day to day. How many more new cases do you (20/41)
have in the next day than in the previous day? And the number there, people can estimate it variously, but it's at least over 1.3, which means there... And in the US, it's been going up by 32%, 1.32. So every day, you have 32% more new cases. And that has to sink in. It's much faster than Ebola. And the reason for that is because... So this is another question I have for you again, because there's been so many different things thrown out there. How does this get transmitted? Is it through the air? Is it from people touching their face and having touched something that someone else with the virus had touched? How are people getting this virus? Well, let me focus on one thing at a time. Okay, let's talk about the exponential growth. The point is that if you have 1.32, you have seven times as many cases a week from now as today. And you know, it's actually maybe a little bit higher. So let's say it's 10, just for easy numbers. And if you go to 10, it's 10-fold, right? I mean, even 7 is (21/41)
already so many people that were infected. And there's also the course of the disease, right? So people are becoming infected over time. They're infected with their family members. Maybe there are a few other people that are infected in hospital systems and someone might go into the supermarket even though they were locked down. The number of cases they had eventually altogether was 80,000 cases. Right. These are reported cases to be clear, especially the initial ones, which were probably drastically under measured. Right. But the 80,000 cases that they eventually had led to such hospital overcrowding with 10% of people end up on ventilators. So you had about 8,000 people on ventilators and you had an additional 8,000 people that had to be hospitalized. So 20,000 total were hospitalized. And then they built hospitals. They had 14 temporary hospitals, 14 for different stages, you know, mild, moderate, severe and on ventilators. And they sent 42,000 healthcare workers from all parts of (23/41)
China. And they were overwhelmed, overwhelmed. And yesterday, after, you know, now they're down to one case that wasn't, you know, an imported traveler. And they sent all of those people home. And you have to understand that many of the cases that are in hospitals take a long time to resolve, weeks to resolve. So even though they don't have any new cases, there are still thousands of people that are in hospitals being treated now. But today or yesterday, we already had about 2,400 cases in New York state. Well, I know from speaking with physicians at ER rooms here in New York and New York Presbyterian and other hospitals, they've started to see those numbers begin to move up in a very noticeable way in the ER. And a lot of, I was actually just speaking with a radiologist about an hour ago who has seen, I think, in the last day, an additional 12 scans of people coming in with coronavirus. And one of the interesting things that he had to say was that all of these were between the age of (24/41)
30 and 45, with the exception of one patient who was 63. And all of them had significant signs of pneumonia in the lungs. Yeah. So it isn't even something that's just for old people. No. People think that this is just old people. But over 50, you have a much higher chance of dying. And young people get it too and die too. It's not going to let people, people don't have a free pass. It's a very severe disease. People are just not getting it. So imagine that we have 2,400 cases in New York state. The population of New York state is one in 75 of China. We're China has 1.4 billion people. How many people are in New York state? I think it's 20 million the number. Yeah, that sounds about right. 20 million people. So we have 2,400 cases in New York state for a population of 20 million. 2,400 cases means that we're going to go to 240,000 cases. So that was one of the things I wanted to ask you. There are a couple of things that come up. Again, to your point about these are complex systems. (25/41)
China is a very dense country. It's a densely populated country. New York state is also very densely populated. And New York city is particularly densely populated. Both China and the United States did a poor job in the beginning of really monitoring this. I don't know who was worse. I would imagine China was worse. No. China did a poor job until they had 800 cases. And the US had all of this time. We saw what happened in China. We saw what happened in South Korea. We had a month, at least, more like two months to prepare for this. And we did nothing. We waited until we had local transmission before we did testing for this. We don't have the capacity to even test enough in order to see where the cases are. Worse than that, we waited until after we had 800 cases. I mean, even if we had 800 cases in the whole country, I mean, this country only has 350 million people compared to China. It's one quarter of China. Why would you wait until you're going to have 80,000 cases? And now we're (26/41)
going to have over 200,000 cases in New York state. And we have over 6,000 cases in the US. Now, today, it's going to be over 7,000, because we still haven't done anything. Well, to your point, I spoke with a physician yesterday whose patient went to the New York state's largest healthcare provider, Northwell, and was told that she wouldn't get her test results for eight days. Now, maybe this is also a good sign in the sense that they're getting backed up because people are actually doing testing. No, no, no, it's crazy. You don't understand. This is insane. The situation, and I mean, you can look for discussions of this online. The fact that we can't do testing is crazy. South Korea set it up so that they could do a lot of testing, and they used it to identify who was sick and isolated them. We don't have that possibility in this country. We're so far behind in terms of testing. So I want to ask you about both South Korea and Italy, maybe compare those two countries. Before I do, I (27/41)
was going to mention that from the numbers I've seen, and again, it's hard to get. I've relied mainly on Johns Hopkins and the World Health Organization. We were at roughly 10,000 cases outside China about two weeks ago. We're over 100,000 today. What do you think that we should see in the next two weeks? Because based on your numbers, it would sound like over a million. Why are you worried about that? Well, no, I'm not worried. So the reason I'm asking about this is because I think that one of the things that is very challenging for people is to understand how the growth happens. I think a lot of people look around. Right, so I think for people, it's hard to get that around their head. And so maybe giving people a sense of where the official numbers would be in two weeks from now, just based on the current growth trajectory. Well, the problem is that we don't yet know how people are going to act. If today, we lock down everybody in the country, and I really mean it. I'm not joking. So (28/41)
what does that mean, a lockdown? If we lock down everyone in the country, then we will have in this country over half a million cases, over half a million cases. And the hospital system will be over flooded. It will be indeed like Italy and much worse. We will have half a million cases if we lock everyone down now. And what lockdown looks like is everyone stays at home. They're not in contact with anybody else. The only thing that we're going to be able to do is do essential services, getting people food and medicines and basic necessities. So people can't even go out to get their own food in this type of scenario. It has to be delivered. Well, the way it was done in China early on is that people were allowed once every three days to go to the supermarket to pick up groceries. Later on, they didn't even allow that because they enabled delivery to take place. And the best thing is, again, to take every precaution. So the point is that we have to go to extreme. We have to go to the not (29/41)
normal. We have to figure out how to stop the outbreak by action because we're in no position to identify who's sick and who's not. The people around who have been identified as being sick, it's only about one in a hundred, maybe one in 30 of the people who are actually sick because we're not testing. I mean, there are these people, of course, that won't test positive because they're early in the infectious period. They're just been infected. So they don't have symptoms. They won't test positive yet. So that's a factor of about 10, let's say. And then there's another factor of about three or 10 because we're not doing enough testing. So somewhere between 30 and 100 more cases than what we see. And that's what's going to happen. I think that's one of the most unnerving things about this virus. The number of people that are asymptomatic that haven't developed symptoms yet, but will develop them who are infected. I think that's one of the most unnerving things. The basic thing is that we (30/41)
have this wrecking ball that's headed towards us. And as long as people are saying, hey, it's not that bad. And maybe if we wash hands, it'll be all right. It's like putting a tissue in front of you in order to stop the wrecking ball. And Italy did that. Italy showed us by example. And honestly, the fact that we waited for Italy to show it to us after China did what they did is pretty crazy. But Italy was in a situation in Italy. Italy, what they did is at first they started to shut down the north. But then they kind of said, well, hey, you know, maybe if we don't test, we won't notice that the cases are there and everything will be OK. And they waited until the hospitals got overloaded before they did anything. So now every day there are 3,000 new cases and they're out of hospital beds. So all of those hospital beds are taken. And remember that it takes a few weeks for people to heal, to cure, even if they do cure. Some of them, many of them will die. So what do you do when you run (31/41)
out of hospital beds and you have 3,000 new cases? Now, not all of those cases are severe, but say 20% of them are, 600. So you have 600 people showing up to hospital and you have zero new hospital beds. And that's going to happen today. It's going to happen tomorrow. It's going to happen the next day. It's going to happen the next day. So I mean, this is not a fantasy. This is not a joke. People are dying because there aren't any ventilators in Italy. So let's talk about that also because in terms of information, on your website I pulled some information. I've also heard you talk about this. You've said, and your organization has put out that about 20% of coronavirus cases. This is not a number that we invented. The number is, I mean, you can look in articles, some people say it's as much as 30%. This is just a medical piece of information. Well, okay. I guess my point is that, again, there's all this different information out there and I'm just trying to get a picture. No, no, this (32/41)
is not ambiguous. I mean, you have to understand why does anybody think that the fact that the Chinese locked down Wuhan and had to build 14 hospitals is somehow something that is not going to happen here. The fact that Italy is having all of these hospitals overloaded and the doctors are reporting, hey, you guys don't know what's going to hit you. It's going to hit you. This is not a make-believe situation. So I guess two questions. One, what is the best resource for people who want to become informed on what we're dealing with with respect to this virus? And two, what does your organization suggest? Well, how do you propose that governments, because again, going back to this point about complexity and systems thinking, this is not something that individuals can resolve on their own. Yes, individuals can take individual measures, but this has to be a collective response. So how do you think that people should respond and government should respond? And where can people find the best (33/41)
information on this? So first of all, so we have been trying to put out solid information two and a half weeks ago, when people clearly didn't get it in the West, in Europe, in the US about what was coming. I send out a call for volunteers and we now have about 3,000 volunteers. And the face of the organization that was created is on a website called EndCoronavirus. That's ENDcoronavirus.org. And there's a possibility of volunteering there for those who want to join. But the main thing is it has information and you can go and look at it. I mean, there are many other sources of good information, but obviously there's a lot of confusion because there are many sources of bad information as well. But people are beginning to get it. And in terms of action, yes, government should act great, but we don't have to wait for them. Everyone can protect themselves. They can protect their families. They can help their friends to protect themselves. And in a few days, when the hospitals become (34/41)
overloaded, the government is going to act. It should have acted two weeks ago or maybe a month ago, but they didn't. But it doesn't mean that you have to wait for them in order to act. And if you protect yourself for a few days and the government acts, then you'll be safe. You'll reduce the transmission so fewer people will get sick, including perhaps you. And when they do act, when the hospitals become overloaded, you'll be able to sit back and say, I did it first. And then everyone else will have a higher probability of being sick. But eventually it'll be taken care of. I do believe that once the hospital become overloaded, people will act. That's what happened in Italy. And I do think that that's what will happen here. And what does an overloaded hospital look like? Again, I really described it. There's only so many ventilators. I mean, we just don't have the capacity to deal with a huge number of patients that need their lungs, you know, the pump of air in order to survive. It's a (35/41)
terrible horrendous situation because the death rate is going to go from about 4% to about 10%. And the doctors, and this is what they're doing in Italy, they're doing military triage. Yeah. Well, I think for listeners who are curious, the New York Times Daily did an excellent interview with the physician from Bergamo, Italy, a hospital there with approximately a thousand patient beds. And they converted the surgery wards into areas for coronavirus patients. And they now have 50% of their hospital beds allocated towards coronavirus. They've had to send 650 nurses home who are sick, either with corona or something else, or just exhaustion. They're treating their own physicians as well at the hospital. And they have exactly, I just had to make choices about who to save and who not to save. And it's become very clear that that is where we're headed. And I guess the question is, at what point will governments, local, federal, state, how will they coordinate? And at what point will they put (36/41)
in these types of lockdown procedures that you're describing? And you think it's simply an inevitability in your point of view. And the answer is, the more we act, whether it's to save ourselves or to tell other people that action is needed, the more likely it is that people will act. So that's what we're doing. So in closing, Professor, what advice would you like to give listeners who are either individuals or people who are in positions to actually do something at the state, local, or federal level? And also businesses. Every business has the ability to safeguard their employees, their customers by taking action. We have put out guides on the website, the endcoronavirus.org website, trying to explain to people how to create safety for themselves, their families, improve the safety of other people around them, as well as guides for government, for business, and so on. And the main thing to understand, and this goes back to your question about transmission that we didn't quite talk (37/41)
about, is that the disease transmits basically in two ways. The first is by breathing in or by sharing air with people who have the disease. You have to be over six feet away from others in order not to catch the disease. And even then, you don't want to do that for a long time. And the other thing is that that breathing out or sneezing or whatever happens, that even just breathing out of the virus from your lungs, it falls onto every surface around. So if you touch a surface where other people have either touched or breathed on, the virus there will go onto your hands. And so it's a good idea to wash it, but one way or another, you touch it and you're likely to get sick from it. So you have to be careful about surfaces that are public or shared surfaces. So don't go or don't touch, use gloves and don't touch the gloves to yourself. But bottom line, don't touch things that are in public spaces, surfaces in public spaces or in shared spaces. And don't be near anybody that has any (38/41)
possibility of being infected. So what you want to do is you want to self isolate as if you're in a quarantine. You self isolate you and whoever you choose to be with during this period of time. And everyone who is together has to agree that they will follow the rules about, you know, not being in touch with anybody else except for the people who are in the group. Physical touch. You can always do FaceTime and phone calls and text people, but the physical contact is where you can't go. Professor, I appreciate you taking the time to speak with me today. And again, you want to give our listeners your website so they can check it out if they're interested and maybe subscribe to your mailing list. Sure. It's end-en-d-coronavirus.org. And there is a sign up. We have a few thousand people on a technical channel called Slack channel where people can collaborate and work together on all kinds of projects. And they're working on both on trying to influence decisions. But they're also working on (39/41)
ways to mitigate, you know, to help with the shortages that are going to happen in hospitals and all kinds of other things. So we're doing what we can. And it would be great if you join us. And aside from that, soon we'll have other ways people can collaborate that are in addition to the Slack channel. So look forward to people helping and making this work. All right. Well, thank you very much for being on the program. Take care. Today's episode of Hidden Forces was recorded at Creative Media Design Studio in New York City. For more information about this week's episode or if you want easy access to related programming, visit our website at hiddenforces.io and subscribe to our free email list. If you want access to overtime segments, episode transcripts and show rundowns full of links and detailed information related to each and every episode, check out our premium subscription available through the Hidden Forces website or through our Patreon page at patreon.com. Today's episode was (40/41)
produced by me and edited by Stylianos Nicolaou. For more episodes, you can check out our website at hiddenforces.io. Join the conversation at Facebook, Twitter and Instagram at Hidden Forces Pod or send me an email at dk at hiddenforces.io. As always, thanks for listening. We'll see you next week. (41/41)
This is the full transcription of podcast 'Hidden Forces'.
America’s National Savings and Debt Crisis Lacy Hunt.done #Podcast #Transcription #ReadAlong #KnowledgeUnlocked
growth rate is coming down and the natural rate is coming with it. What was the first part of your question? Well, my first question was, what is the neutral rate of interest for people that don't know? And then what is the relationship between the neutral rate and the savings rate? How does savings, in other words, impact the natural rate of interest? Up until now, the impact has not been that important because you see, 2023 was only the eighth year in which we had negative national savings since 1929. And the other seven years, they were all when we were in serious economic contractions. Well, four of the negative national savings occurred in the 1930s. And then we had three negative national savings in 2008, time 10. Very, very rare, but it was not a persistent condition. But now we have a very, very difficult problem and one that at least to me appears very difficult to resolve. Before now, we had an excessive debt in this problem using the production function, which indicated the (30/41)
What's up, everybody? My name is Demetri Kofinas, and you're listening to Hidden Forces, a podcast that inspires investors, entrepreneurs, and everyday citizens to challenge consensus narratives and learn how to think critically about the systems of power shaping our world. My guest in this episode of Hidden Forces is economist Lacey Hunt. Dr. Hunt is the executive vice president and chief economist of Hoisington Investment Management Company. He previously served as chief U.S. economist for the HSBC Group, as executive vice president and chief economist at Fidelity Bank, and as senior economist for the Federal Reserve Bank of Dallas during the course of a 55-year career studying markets and the economy. In the first hour, I asked Dr. Hunt for his broad assessment of how he thinks the global economy is doing today and what monetary and cyclical economic indicators he relies on to make that assessment. We discussed the increased role of the U.S. Treasury as an economic policy actor in (1/41)
the post-pandemic period, the concerning decline in the net national savings rate, and whether the neutral rate of interest, a hotly debated topic among economists, is actually moving lower in what this means for trend growth, interest rates, and inflation. In the second hour, I asked Dr. Hunt why he believes that the Fed has been able to raise interest rates by more than 500 basis points in less than two years without inducing a recession. Is this because other causal factors have remained more accommodative, or have the lags just grown longer and more variable? And if so, why? What does this tell us about the business cycle and the effectiveness of monetary policy? We also discussed the chronically high fiscal deficits and the implications of trying to reduce them in an environment where the economy is becoming more dependent on government spending to boost economic growth, support critical national investments in energy and defense, and contribute to the private savings of the (2/41)
economy. If you want access to that part of the conversation and you're not already subscribed to Hidden Forces, you can join our premium feed and listen to the second hour of today's episode by going to hiddenforces.io. All of our content tiers give you access to our premium feed, which you can listen to on your mobile device using your favorite podcast app just like you're listening to this episode right now. If you want to join in on the conversation and become a member of the Hidden Forces genius community, which includes Q&A calls with guests, access to special research and analysis, in-person events and dinners, you can also do that on our subscriber page. And if you still have questions, feel free to send an email to info at hiddenforces.io and I or someone from our team will get right back to you. Lastly, because this conversation deals with investing, nothing that we say on this podcast can or should be viewed as financial advice. All opinions expressed by me and my guests are (3/41)
solely our own opinions and should not be relied upon as the basis for financial decisions. And with that, please enjoy this highly informative and long overdue conversation with my guest Dr. Lacey Hunt. Dr. Lacey Hunt, welcome back to Hidden Forces. I'm glad to be back after seven years. Seven years, yeah, something like that. You were on in 2017 and you were an in-studio guest at that time because this was everything before the pandemic was in studio and people still love that conversation. In fact, I was actually speaking recently with someone that you know, Eric Besmajian, who has been on the podcast as well, and he was telling me how much he loved that conversation and how much he was looking forward to us talking to again today. And he's a good guy, Eric. We all need to pray for him. He's fine. Yeah. Yes, he's been public about what he's going through and he's a wonderful guy. Wonderful. Wonderful guy, brilliant guy. So, well, like I said, I'm very excited to have you on the (4/41)
podcast today. We didn't have a chance in our first conversation to talk about your biography, your history, your background. Are you a native Texan? I am, yes. Did you grow up in Austin? My family originally settled in Nacodotus back in the 1840s and I spent some early years in Nacodotus, but my main junior and senior high school years were in Houston. I had a great grandfather, it's insatiable to say who would be a great grandfather, who received a land grant from the Republic of Texas in 1843. And the Republic of Texas was only in business from 1836 to 1846. So, we've been in Texas for a long time. Wow. What did your parents do? They were very learned people. My father was a PhD psychologist. He earned his PhD in 1941, the year before I was born, in the University of Texas. I guess you could say that I was a behaviorist before I was an economist. My dad was always teaching and instructing. I didn't pay as close of attention as I should, but it was quite of an experience growing up (5/41)
with him. My mother was an educator, but she was very learned as well. She had received a scholarship to Occidental College because her father was a very poor president and minister, but his chief parishioner was chairman and chief executive of Union Oil of California. He was also on the board of Occidental College. And he arranged for my mother as well as her four siblings to go to Occidental. And my mother later earned a master's degree in speech and drama from USC. And my father was there one summer taking a sabbatical from a renowned psychologist at USC. This was off the books. It apparently would have been arranged by a professor at UT with a professor at USC. But my mother was in charge of the summer play and she had put signs up over the USC campus needed someone with a Southern accent. And dad applied. He got the job and shortly thereafter or a year or two later he married my mother. So he got a part in the play with his father? Yes. He had the Southern accent that she needed. (6/41)
He was a Texan. That's how your parents met. That's an amazing story. Yeah, it is. And when dad was a child psychologist he was more aligned with Carl Jung than Freud. And my mother was a role plays musicals for elementary school. When she retired she was principal of the largest elementary school in Houston. So you had the example of your parents who were both in academics. Did you know at a young age that you wanted to be an economist or was there some other general sense of what you wanted to do and that sort of realization of your interest in economics came later? No. When I went to Sweeney in 1960 I wanted to be a doctor, medical doctor. And for the first year and a half I was taking all the pre-med courses. And then in the spring of 1962 I had time for my first elective and I took the principles of economics. And at the end of the spring semester I switched my major. I found my true law of economics. What attracted you to economics? Just fascinated me. I read a book by Hal (7/41)
Brenner on the worldly philosophers in my very first course. It's a great little book and I was just drawn to it because it sort of combined institutional understanding, history and quantitative analysis. And I thought that that was a good use of some of the abilities that I have. I'm not the strongest in anyone but when you work them all together I think I have a little bit of an edge. And so when I left Sweeney I got an MBA thinking business world was for me. Went to Wharton. I was a finance major. And after my MBA at Wharton I was offered a full fellowship. I had a university fellowship at Temple University in economics. And that fellowship in today's dollars it was tax free. It would be about close to $50,000 even though at the time it was $300 a month. But it was tax free and I had no duties. And I finished in two and a half years later. I had a parent of my PhD in January of 1609, defended the dissertation in December of the year before and then went to the Dallas Fed. So that (8/41)
was your next job after getting your PhD going directly to the Dallas Fed? I went to the Dallas Fed, yes. So what did that experience working for the Dallas Fed teach you? And how long were you there? When did you go again? You went during the end of McKinsey Martin's administration. I went in 69 and I left in 73. And it was very, very fortuitous because when I went to the Dallas Fed in 69 I was really the most conversant in monetary theory and history and macroeconomics. And I had built an econometric model of the euro dollar market. I knew Internet. My fields were macroeconomics and international economics and finance and mathematical and statistical techniques. And I was in a position to work pretty closely with the director of research at Dallas and the president of the bank. The president of the bank is a very distinguished agricultural economist, Dr. Phillip Coldwell. And Ralph Green was director of research. It was in due course I started advising them for the FOMC meetings. (9/41)
They did something for me that was very valuable. They sent me to do the training program for fed regional economists at the Fed of New York. And in fact, I made two trips, lengthy trips, to study the operations of the FOMC and its execution. I doubt that if I had been at the board of governors or if I had been at one of the larger Federal Reserve banks, I would have never been tapped, I don't think, to have that kind of exposure. But at the Dallas Fed I did. And that was very beneficial to me. And I had time to do my own research. And I'm very fortunate I started getting published in some of the lesser academic journals. Before the time I had left the Dallas Fed, I was published in the journal Finance, which is a rather significant feat at the time. And it was co-authored. But nevertheless, I made it in a few times. And I was able to get some recognition from my dissertation by writing a comment on someone else's very extensive work. So I was starting to get published. My econometric (10/41)
work was noticed by Dr. Michael K. Evans, a Brown-aid educated econometrician who was co-developer of the Wharton model with Larry Klein. And Mike Evans asked me to come to Chase Econometrics to build the first large-scale econometric model of the financial markets. At that time, the Chase model, which Evans had spun off and had broken with Klein. But there was just one financial equation in the entire Chase econometrics model. And the same was true for the Wharton model at the time. And that was that the Treasury bill rate was a function of the Federal Reserve discount rate. There were no money supply equations alone. There were no other financial variables, no long-term rates, intermediate-term rates. So I built that model. It was a monthly-based model. And the J.I. Press in Greenwich, Connecticut published that as a book in 1976 called Dynamics of Forecasting Financial Cycles. I've always looked at the financial cycle as leading the business cycle. Keep in 1976, at that point in (11/41)
time, Minsky had not developed his financial instability hypothesis. Narr had Kendallberger written his great book, Mania's Panics and Crashes. But I was thinking in terms of financial cycle, I didn't define it as well, I don't think, as Minsky and Kendallberger did. But I was inclined in that direction before their great work. Of course, I took advantage of their work and other work to greatly amplify what I had started to do. But that's how it all got started. Did you have an opportunity to get to know David Rockefeller while you were at Chase Bank? I did. I did. Michael Evans called me and he said, you're going to get a call from Mr. Rockefeller's secretary and he's going to give you a project to do. And I know you're busy because you're putting out... I was putting out the, every month, the Chase Econometrics monthly financial model and existing mic to some extent on the regular macro model and talking to clients, traveling around. I was pretty busy. The secretary, his secretary (12/41)
asked me to come up to Siem in New York. Chase Econometrics was in Balaken with Pennsylvania, the first Western suburb out of Philadelphia. So I took the old bankrupt, Femme Central Railroad in New York and went up to the top floor of Chase Manhattan Plaza. And I saw David Rockefeller and he gave me an assignment and he said, this is what I want you to do. Do you think you can do it? And I said, I can. He said, can you get it to me in a certain and gave me a deadline? So I went back and I worked on it very, very diligently. And I sent it to his office. And a few days later, I got a call from Mr. Rockefeller's secretary, asking me to return to New York. And I was pretty proud of the project. I thought that it was a great effort. I had done exactly what was wanted. And I went to see Mr. Rockefeller and he started out saying something to the effect. Well, this is a great first effort. Wow, that must have been a very cool experience for someone at your level and your age at that time, (13/41)
getting that kind of compliment. You know, I was still in my twenties. I'd earned my PhD when I was 26. So I was crestfallen when he said it's a good first effort. And he then suggested several different avenues to me. And my crestfallen condition, I took the train back to Philadelphia, worked on it. I don't think I slept for days while I was trying to complete the undertaking and sent it back to New York. And a few days later, David's secretary called and said, Mr. Rockefeller wishes to thank you for your excellent effort. And I did another great project for them. What are butcher who was number two in command today? It was very interested in productivity and how I that helped the inflation at the time. And they undertook an extensive study of productivity, which they wanted to be able to document with solid research. And Michael Evans assigned me that job. I was a major undertaking because the Chase published double page editorials in Wall Street Journal and other leading (14/41)
publications at the time about the findings of the productivity study. My name wasn't mentioned, but I knew I had done it and I kept those records. But I got to do that. And David also asked me to attend the asset liability committee meeting, which sort of changed my whole life because I knew at that point in time I wanted to move from research into the financial investment. I interviewed someone named Roger W. Robinson, who was senior director of international economic affairs at the Reagan NSC and was one of the architects of the economic warfare against the Soviet Union in the 1980s. And he was, coincidentally, David Rockefeller's personal staff assistant in the 1970s. And I remember him telling me what that experience was like. He would fly with David on his private plane to Europe and to meet everywhere, wherever he went, people wanted to meet him, the local politicians, the presidents, the prime ministers, et cetera. And I just think when I hear you tell this story, I have that (15/41)
additional context of understanding that in the 1970s, there weren't many people in the world who were more powerful than the Rockefellers. They were at the very top. And to know David and to have that kind of relationship must have felt extremely special. I never got to travel on the plane, but I did get invited to the asset liability meeting. And I did keep in mind that they had a large economics department headed by John Wilson. And David could have used many economists or multiple of their economists for some of the projects which I did. And that was a very good feeling for me. It was one of those great privileges because when I went from the Dallas Fed to the econometrics unit of Chase Manhattan, I had no idea who was running Chase Manhattan and had any idea whatsoever that I might actually come in contact. But David was an exceptional man. He was a very good economist. He had a PhD in economics from the University of Chicago. It was one of those great pleasures in life that you (16/41)
just sort of stumbled into. So you've done many other things besides that. We can't get into everything, but most notably, perhaps you were chief U.S. economist for HSBC Group, which is one of the largest banks in the world, or at least it used to be. I don't know where it still ranks today. It was number one when I left them. When they bought Carol McIntyne and McGinley, they were still the British colonial bank, 18th largest in the world. William Purvis took them from the British colonial bank to the largest bank in the world, which is where they were when I left in 1996. William Purvis was another one of those exceptional people, knighted by Queen Elizabeth, great banker. It was a privilege for me to get to know him a little bit. I would travel to Hong Kong or London and the scene. From time to time, I would be given projects to do for him. And that was also a wonderful experience. And I also survived quite a few mergers, I think a total of five in that process, which was a very (17/41)
pleasing demand. I don't know how I did it, but I did. And you were also EVP, executive vice president and chief economist at Fidelity Bank. So let's use the totality of your experience, your academic experience, your experience at the Federal Reserve, and your experience working in the private sector as an economist. The 50, I think 55 years you've been in the business or so. Let's use that to paint an economic picture of where we are today and then go about doing some analysis on it. First of all, when you look across the global economy today, what is your assessment of how it's doing? Poorly, very poorly. Take for example, if you look at real per capita GDP, or the average of real per capita GDP and GDP, which is really the more appropriate thing to do because they diverge and they're equivalent. And so to get the best understanding, I think it's appropriate to average GDI and GDP. That's what the... Gross domestic income and gross domestic product. Yes. That's what the National (18/41)
Bureau of Economic Research, which is our business cycle dating authority, and probably don't preeminent research organization in economics. That's what they do in assessing changes in the business cycle. They take the average of GDI and GDP. So in the 20 year moving average to 1970, it was growing at 2.2% per annum. And in the last 20 years, ending 2023, we're growing 0.9% per annum. We've lost 1.3% per annum in the 20 year growth rate. And by the way, if you look historically from 1870 to 1970, and we have data, pretty good data, not perfect, for that 100 years, the real per capita growth rate was also 2.2%. The last 20 years, we're down to 0.9% per annum. If we had stayed at the 2.2% just in the last 20 years, the average real economic activity per person would be $78,000 or so. Whereas in actuality, it's only 66,000. So we're really losing a lot versus trend. And this is even worse in Europe and the UK and Japan. All of us are not performing in the way in which we did. And I (19/41)
believe it's a reflection of the harmful effects of too much debt, very, very high levels. I think it triggers a law of diminishing returns, which is derived from the production function, one of the main concepts in economics. Economic output is technology interacting with the factors of production, land labor and capital. Overuse, one of the factors of production, initially output rises, continuing to do so, output flattens and still increase that factor. It turns down, mathematicians call that a parabolic function, falls out of partial differentiation of the production function. That explains why we have the growth that performance is the standard of living has been slowing. Now, however, we have an even more serious situation because we have negative national saving. If you'll make sure you remember that the circular flow, which says GDI equals GDP equals production of goods and services, they're interchangeable. So you can move parts of one side to the other back and forth out of (20/41)
the circular flow. We know that net physical investment, plant and equipment must equal net national saving. And we now have a condition of negative net national saving. Without net national saving, we cannot have net physical investment. Without net physical investment, we cannot increase the capital stock, which means that the production function is not going to be able to develop. It's going to develop as long as we have negative net national saving. So when you say negative net national savings, can you define what net national savings is for listeners? Okay, so saving has three components. It's private saving. Private saving actually has two components, household and corporate. So there's private saving, foreign saving, which of course is the inverse of the capital account, and then government saving, which in this case is dissaving. So what we have a situation today is that the federal budget deficit is greater than the sum of private saving and foreign saving. So we have a net (21/41)
negative national saving. The production function is not operative. You know, to make labor and natural resource extraction more productive, they have to be given increased capital stock to work with. And the physical investment is equal to the change in the capital stock. So we've really dug a deep hole for ourselves. The problems are basically worse. Everywhere else, there's some minor differences, perhaps, but the budget deficits are just simply too large. And you say, well, we can have the Federal Reserve, Accelerator Central Banks accelerate monetary growth. However, additional monetary growth does not correct the problem of negative net national savings. You can increase the money supply, but that will just have an inflationary impact. There's no way to inflate our way out of the problem. Inflation just has a devastating impact on the modest and moderate income households, which then means that inflationary policies increase the income and wealth divides. We're seeing that big (22/41)
time in all the major economies of the world. So you could conceivably use fiscal policy to reverse negative net national saving, but there is no one that has that agenda. No one whatsoever. And it would require a great deal of political goodwill and shared sacrifice. And there's just no pathway to achieve it. So we're stuck with it now unless something for two of us happens. It's going to be very hard to alter this downward trend in the standard of living, which means that the income and wealth divides are going to get worse. And it's not a wholesome development at all. So is this dynamic analogous to burning the furniture to heat the house? What you're basically doing is you're using your depreciation to live on. There's a classic story in American history about the pilgrims. They embarked just before Christmas in 1620, and they didn't get a chance to plant their crops. They were starving or scatting about to find whatever they could. And they came upon a large store of corn that was (23/41)
buried there somewhere near the ocean. And they ate it, which infuriated the Indians because it was their seed corn. And so basically we're sustaining consumption and daily living by eating our depreciation. That's what it means when you have negative net national savings, you ultimately get negative net national investment. And you're not going to be able to grow your capital stock. It's a very difficult situation. And I don't think that this is well understood at all because it blocks the normal production function. The production function goes back to the original work of David Ricardo. He only took into consideration two factors of production. And then a lot of additional work, much of a much improvement and understanding is traceable to the work of Robert Solo. Nobel Laureate taught at MIT and he had the exogenous growth market. He relied on the production function and he developed the marginal revenue product of capital, natural resources and labor. But the exogenous variable in (24/41)
his model was saving. You have to have saving. You may recall, having read Keynes, Keynes talked about the fallacy of thrift. And his idea here was that if people do what's right in their own interest to try to prepare for a rainy day, they will have to take retirement or education or unexpected needs and they say that this will leave the economy with an insufficient level of saving. And so by doing the right thing on the individual level, we have this adverse macroeconomic impact. The problem is now Keynes is concerned about too much saving doesn't apply because we have negative net will save, which is a very, very serious problem. And it will become more evident and it's going to be difficult because this concept is complex. And frankly, I don't think that the American economy has much of an understanding of economic theory or economic history. So the relationship of savings to interest rates is inverted, right? So as savings decline, interest rates, all things being equal go up. All (25/41)
things being equal. And there is an effect there. I think though that the main thing ultimately is what happens to inflationary expectations and the main ingredient inflationary expectations. It depends upon whether there's too much money chasing too few goods or whether we have the reversal of that situation. So now, you're putting aside the national savings rate. I just know that the personal savings rate throughout the 90s and early 2000s continue to decline. And yet this is a period of declining interest rates. Is that because we were importing foreign savings? It was declining. And at that point in time, the debt levels were deleterious. They were triggering the law of diminishing returns. So the increased indebtedness was pulling the growth rate down. But you still had positive saving. The budget deficit were not so large that they were greater than the private and the foreign savings. So in that time period, generally speaking, the debt was when you're operating with the (26/41)
production function and you're overusing debt, you generate the law of diminishing returns, which is deleterious effect. And the increases in money that the place in that time period were not excessive. In fact, that you would call them generally normal and they were more than offset by a downturn in velocity. And so the net effect was that the inflation rate came down and so did inflationary expectations and interest rates. During the pandemic, what we basically did is we pushed money growth far outside the bounds of normality. And it led to, you know, 9 to 10 percent inflation rate there in 21 parts of 22. And the economy did better for a little bit. But ultimately, inflation is so hurtful to so many people that the Federal Reserve had to reverse themselves, which is what they're now doing. And even with the six trillion dollars of debt that was taken on during the pandemic, that did not bring the rate of growth in real per capita income back to the trend line, just brought it back (27/41)
to the trend line. But because of the Federal Reserve's operation, it produced all of this excessive inflation, which had a devastating impact. And so the economy has been left in a very difficult position. If you look at the real average weekly earnings over the full time hourly and salary people, which is about 120 million people in the last 14 quarters of the expansion, there's been a decline in the one and a half percent annual rate. That's the average. But within that average, you've got some skew at the very high end. There was excellent performance. And so the high inflation has just really had a terribly debilitating effect on the vast majority of our people, which it always does. In fact, there was a pre-Adam Smith economist by the name of Richard Camelot that understood that when you have rapid monetary growth, you get excessive inflation, a damaging impact on more moderate income people, which exacerbate the income and wealth of us, which is what the pandemic did. And we're (28/41)
seeing that today very, very evidently. So I want to talk about inflation and why it seems somewhat stuck, at least as a measure of CPI at around 3% or so. Before we do that, one of the topics that's been more hotly debated in the last year or so among economists, especially, has been the neutral rate. What is the neutral rate of interest? And there's a lot of speculation about whether it's higher or lower. I think you fall on the camp that it's lower. First of all, explain to our listeners what the neutral rate is, which also known as R-star. And what is the relationship between the neutral rate of interest and the net national savings rate? Well, the first of all, I think that the key relationship is what's happening to the real per capita growth rate in the average of GDI and GDP. And so in 1970, it was 2.2% and we're now 0.9%. So I think that that kind of gives us a bit of an approximation. It has to be moving in alignment with the standard of living. So the standard of living (29/41)
debt was bringing the growth rate down the law of diminishing returns. But now, however, when you have negative national savings, what it means is that we collectively are living beyond our means. But we don't have the resources to increase the capital stock. So if savings are so low, does that mean that we should expect to reach a bottom in the savings rate at some point and for that trend to reverse itself? And if it reverses itself, does that mean that we're going to be in a period of lower natural rates of interest for the foreseeable future? Because I think that's where you fall in. You expect a lower neutral rate of interest, but is the reason because people are going to have to start to save more? Is that the reason why? Well, the question is they don't have the income to save more. So I don't think that redressing the negative net national saving rate can be really done in any significant way by the private sector, nor by the current account, which then determines the foreign (31/41)
save. I think the problem is in the governmental sector. The things can be done to private saving, but I think that they're minute in comparison to what needs to be done to fix the federal budget deficit. Fed Chairman Powell recently said that the budget now is unsustainable. And I think he's correct. And the reason he's correct is we have negative national saving. We cannot have an increasing level of prosperity in this environment. So the economy has really held hostage to the federal fiscal situation. Do you think that the Treasury has become a bigger or more important economic actor today relative to the Fed, relative to what the Fed was, say, 15 or even five years ago? We've had two major coordinations of monetary and fiscal policy. The most recent, of course, is the pandemic where the Fed became a partner with fiscal policy. But this was done one time before in the 1970s. Nixon was president. I was a young economist at the Federal Reserve Bank of Dallas and wage and price (32/41)
controls were put on by Nixon. He had legal authority to do so. He asked the Fed to accelerate monetary growth and they were forced to do so because Burns quite unfortunately agreed to be part of the wage and price structure. He was chairman of the interest rate and dividend control committee. And he was also serving as chairman of the Federal Reserve Board. And so to placate those that wanted to be able to raise prices but they could not or wages, the Fed, he had to try to hold down the interest rates and the dividends. And so doing the accelerated monetary growth. When the inflation, however, surged out of control, Burns discovered that the fiscal policy partners were no longer there. And so guess who had to clean up the inflation of the early 1970s? Burns and he didn't do a very good job of it. It was only partially done. And we suffered for suffered rising inflation all the way until Paul Woker came in and it took him two years to finally get the job done two or three years to get (33/41)
the job done. So now we go into the pandemic. And there's no recollection of major path policy mistakes. That's just the character of the way things are. So no one remembers that the last coordination entered in disaster of too much inflation. And a decade of rising inflation and this worsening of the income and wealth of it. So the power fed cooperates with fiscal policy. And to do so he coordinated engineers and unprecedented increase in money supply, which was even greater than what Burns had done during the early 70s. But the same thing happened to Powell, which happened to Burns. When the inflation problem arose, the fiscal policy partners were no longer present. And that left the Federal Reserve to clean up the problem by itself. And so one of the great challenges that the economy faces is for the Federal Reserve to operate independently. And those that tell you that we can somehow solve our problems of this declining rate of growth in the standard of living by adopting some sort (34/41)
of inflationary outcome. And my view are gravely wrong. If accelerations and monetary growth only produce very transitory gains in economic activity. When people realize the inflationary impact of monetary policy, then the system becomes unanchored. And you have this devastating impact that worsens the income wealth distribution. And so the best thing for the Federal Reserve is to maintain its independence and not give up its ability to do the right thing. And I don't know to what extent this played a role, but the Federal Reserve moved very, very slowly to deal with the monetary increase that they put into the economy in 2021 and the inflation got out of control. Now, the inflation has come down. But last year's decline is what I call a contra normal cyclical development. That was the largest decline in inflation for any year in which GDP was rising inflation. Has declined by more than it did in 2024 on several occasions, but they were all in recessions. So we got a response, but it (35/41)
was an abnormal response. Normally inflation is a lagging economic indicator. And I think it's not surprising that the inflation rate is kind of stuck where it is. That's its nature. But as time goes by and as the monetary restraint moves further and further into the economy, which it's doing right now, there will come a point in which the inflation rate will fall. The sickality of it is that inflation is a lagging indicator. And I'm just going to give you one contrary indicator, which I think indicates this. The CPI, as you said, is stuck up above at 3% or slightly more. But the real problem here is the so-called shelter component, very controversial component. If you exclude shelter, the CPI has been under 2% for the last eight months. It is 1.8%. Now, the shelter component is a very badly conceived sector. What the Bureau of Labor Statistics does is they ask folks, what is the value of your home if you were going to sell it? Well, people always have an inflated value of their home. (36/41)
And they spend money and resources to ask people this question on a monthly basis. And once they get the response, then they have a formula that converts the selling price into what you would rent it for if you were going to rent it. Well, that's ridiculous. They don't need to survey what the selling price is. The selling price is known in every major market in the United States. In fact, where footage of each home is being sold as well. So this surveying to try to determine what people would sell their homes if they were going to sell them is a very foolish and expensive way to go. Just use the existing home price sales data. The formula that then converts the home price sales data into rent is not, and I don't have any problem with that. Now, that would be okay. But we have this horrendous component in the meantime, in real terms, money the way I measure it. And I like to take him to excluding currency. I think it's a more modernized concept currency is still a medium exchange and (37/41)
store value and unit of account, but it's fading importance. If you look at money in real terms, in that basis, we have record declines for the last 12 months, 24 months and 34 months. And we're also getting a very large decline in real terms of bank credit and bank loans. And in fact, CNI loans and nominal dollars, even in mid-March or 80 billion where they blow where they were at their peak back in the fall of 2022. Monetary policy is extremely tight and monetary policy will work with long legs and the inflation rate will come down. The unemployment rate, which the Fed is also focused on is another lagging indicator. So the cyclicity of the situation, the cyclicality, I mean, suggests that the inflation rate will actually fall to the Fed's target. But at the same time, the unemployment rate will rise more than where they're expecting it to go. So Dr. Hunt, I'm going to move us to the second hour of this conversation. And some of the questions I have for you are, one, a follow on the (38/41)
comments that you've ended the first hour with, which is why have the lags been so long this time? Why have the hikes of short-term interest rates by the Fed taken so long to materialize in a slowdown of the economy? I'm also curious to understand and sort of follow up on our conversation about the savings rate and interest rates and economic growth. To understand how we get out of the situation, because if the United States government needs to, quote, get its fiscal house in Northern, in other words, rely less on debt financing to pay fiscal obligations, that would also lead to an economic contraction. And so like we seem to be caught in this impossible situation where the solution to the problems of too much debt result in an economic contraction, which raises the relative carry burden of that debt. So that's something I want to talk to you about. I also want to understand more specifically how far out you see interest rates remaining depressed, because if you do believe that the (39/41)
neutral rate of interest is actually lower than it was going into the pandemic, which I think is your position, but you can clarify it in the second hour. If that's the case, how long is that going to continue in your view, or what are going to be the factors that are going to be contributing to it? And the same thing goes for inflation. And I also, of course, want to ask you what asset classes or industries or sectors you're most bullish on. What are the things that you think are going to do well in this environment? For anyone who is new to the program, Hidden Forces is listener supported. We don't accept advertisers or commercial sponsors. The entire show is funded from top to bottom by listeners like you. If you want to access the second hour of today's conversation with Dr. Hunt, head over to hiddenforces.io. And sign up to one of our three content tiers. All subscribers gain access to our premium feed, which you can use to listen to the rest of today's conversation on your mobile (40/41)
device using your favorite podcast app, just like you're listening to this episode right now. Dr. Hunt, stick around. We're going to move the rest of our conversation onto the premium feed. If you want to listen in on the rest of today's conversation, head over to hiddenforces.io. And join our premium feed. If you want to join in on the conversation and become a member of the Hidden Forces Genius community, you can also do that through our subscriber page. Today's episode was produced by me and edited by Stylianos Nicolau. For more episodes, you can check out our website at hiddenforces.io. You can follow me on Twitter at cofinas and you can email me at info at hiddenforces.io. As always, thanks for listening. We'll see you next time. (41/41)
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'The Food Supply Chain is Breaking' Food Security During a Global Pandemic Lowell Randel #Podcast #Transcription #ReadAlong #KnowledgeUnlocked
small farms, maybe subsidies for some small farms? I haven't read that anywhere and I don't even know if it's a good idea, but I'm just kind of throwing it out there. What do you think about that, about making the system more resilient? Yeah, so we definitely do want to try to learn as many lessons as we can from the pandemic and the response. And I think one of the things that comes to mind is this concept of just-in-time inventories. I think gets to the point that you're making about efficiency versus resiliency. And I think you're going to see companies look at their inventory strategies and assess how did they perform in this situation and how can we make them more nimble when hopefully we never go through a situation like this again in our lifetimes. But to the point, we can fully expect that we will. Certainly possibly a pandemic, but there are all sorts of ways in which economies and supply systems get shocked, whether it's a cyber attack, whether it's an extraordinary weather (36/41)
institutions largely are closed. So a lot of those producers that were faced with that decision, it was because they were growing to provide their product into those chains and those chains were moving so slow that they weren't able to accommodate that product. So that's interesting. The point about suppliers having longstanding relationships and recurring orders from key sources of demand. Let's break this down. First of all, what percentage roughly of agricultural and livestock production goes towards fulfilling recurring orders made by regular customers with whom farms have longstanding relationships like restaurants and school cafeterias, which I know have also been impacted by all of this? Yeah, it's hard to put a percentage on it because every producer's situation is a little bit different. Some work through. But for the industry as a whole. Industry as a whole. Industry as a whole. What I'm going to tell you is that we were looking at about a 50-50 split across all food. And (25/41)
few local areas where because of COVID-19 positive cases in their workforces, there have been a few significant closings of meat or poultry facilities in different parts of the country. But when those plants close, then the farmers are put in a very difficult position. Where are they going to market those chickens or those hogs or cattle as examples? And it's a unique situation when you're dealing with animals because they get to a certain weight and a certain age and it's time for them to be harvested. And if there's no outlet for them to be harvested, that producer faces really difficult decisions. And unfortunately, in some cases, we know that producers have had to use that last resort of euthanizing animals. And I think everyone wants to avoid that if at all possible. But as we see the capacity for processing be disrupted, then that impacts things at the production level. In other words, it's unaffordable for them to continue to feed the animals and house them. And so they're (22/41)
Today's episode of Hidden Forces is made possible by listeners like you. For more information about this week's episode or for easy access to related programming, visit our website at hiddenforces.io and subscribe to our free email list. If you listen to the show on your Apple Podcast app, remember you can give us a review. Each review helps more people find the show and join our amazing community. And with that, please enjoy this week's episode. What's up everybody? My guest on this episode of Hidden Forces is Lole Randall, Vice President of Government and Legal Affairs for the Global Cold Chain Alliance, which serves as the voice of the cold chain industry representing 1,300 member companies in over 85 countries around the world. The food supply chain is breaking, according to the Chairman of Tyson Foods, the second largest meat processor in the world. As the coronavirus pandemic disrupts supply chains across the country, farmers are being forced to destroy their crops, dump their (1/41)
milk and euthanize their livestock, despite shortages at food banks and empty shelves at supermarkets. If you're like me, you see headlines like this and you wonder, are we running out of food? The problem is a bit more complicated. Partly, the shortages we're experiencing at our local Costco or Walgreens result from the sorts of disruptions to processing facilities like those referred to by John Tyson. In other cases, they reflect the challenges that come with trying to quickly transition from servicing restaurants and cafeterias to stocking grocery stores and supermarkets. Just as with our financial markets, industrial supply networks and hospitals, our global food industry is built with efficiency in mind. Crises like the one we're experiencing today, by virtue of the stresses they place on our markets and political economies, reveal their inner workings, bottlenecks and centers of power in ways that even the most adept operators of these systems could seldom hope to understand. (2/41)
They offer us unique opportunities to learn about the structural dynamics that govern such systems, forces that normally remain hidden until times of urgency and stress. This conversation reflects my attempt to learn about how these systems operate, why they're under strain and what this tells us about whether or not we, as consumers and customers of this multi-trillion dollar industry, are making the right choices, asking the right questions and prioritizing the right problems when thinking about the security of something as crucial and basic to our survival as food. For subscribers to the Hidden Forces Premium content available through our Patreon page at patreon.com slash hiddenforces, I've included a near hour long discussion between me, Tesla Charts and Georgia Orwell that we recorded late Friday evening after a bizarre series of tweets by Tesla CEO Elon Musk prompted a sell-off in the company's stock raising serious questions about whether his behavior violates previous (3/41)
securities fraud settlements with the SEC. This on the heels of an earnings call Wednesday that left believers in the company and even Elon's strongest supporters baffled. And with that, please enjoy this timely episode on food security and supply chains with my guest, Lowell Randall. Lowell, welcome to Hidden Forces. Thanks Dimitri, happy to be here. It's great having you on, how are you doing? Yeah, doing well. It has been a very interesting six or eight weeks to say the least, particularly for the food industry. So we're working hard to keep food going to consumers. When did things start getting challenging for you guys? When did the disruptions begin to emerge in the food chain industry? Well, it really started to build when the WHO declared the COVID-19 as a pandemic and we started to see grocery demand start to surge. And that really amplified when President Trump made the National Emergency Declaration and then you started to see empty shelves. And that really created some (4/41)
disruption in trying to get that supply chain to catch up. How soon before the national emergency was announced did the food industry begin to suspect that they would need to make provisions? In other words, I assume they weren't totally caught off guard. No, absolutely not. And in fact, one of the things that has been really rewarding and helpful is how the food industry has banded together. So I'm a part of food industry coalition that represents everyone from the food logistics industry, which is our membership to the agricultural producers, grocery stores, food service, and really everything across that food supply chain. And we began talking about this when we started to see the pandemic emerging. So we did have those conversations starting before the national emergency was declared and those efforts have been redoubled now over the last six or eight weeks as this pandemic has really taken hold. So I promised those listening that we're going to do a deep dive into this. It's a (5/41)
super fascinating industry and it's relevant and timely given all the news headlines around some of the disruptions and things that we're going to get into. Before we do that, Lull, give our audience a sense of who you are and your background. How did you get your start in this business? Yeah, absolutely. So I grew up in a small town in East Texas and grew up around agriculture. So I was exposed to, I raised chickens and pigs and cattle and sheep and always knew that I had a close connection to agriculture and food. And so when I went to school at Texas A&M, I studied agricultural economics, master's degree in agricultural development. And so really was finding ways to support that connection that I have with agriculture and food production. And my dad's actually an animal scientist. And so I grew up around that application of science in solving food and agriculture problems. But I knew early on I didn't want to be the one conducting the science. So I was trying to find ways to support (6/41)
that without having to be the one actually in the lab doing the science. And I found agriculture and food policy to be really that avenue for me to support food and agriculture in a way that fit my interests and skill set. And so then I found myself in Washington, D.C., did a congressional internship for my hometown member of Congress and really fell in love with the policy making aspect of Washington, D.C. and working with partners in industry, partners in government, whether that be a Department of Agriculture, Food and Drug Administration, or with folks in Congress. And so I've been doing that in Washington, D.C. for almost 25 years now and actually spent some time working for the federal government, the Department of Agriculture as well, and a couple of years working for the Texas Department of Agriculture. So really have grown up around agriculture and turned that into a career of supporting the food industry and been working with the Global Cold Chain Alliance since, well, it was (7/41)
11 years in February. And I came to GCCA after serving at the Department of Agriculture as the Deputy Assistant Secretary for Congressional Relations where in that role I really got to work with the breadth of the Department of Agriculture. And it is really a wide-ranging department that touches all aspects of food, nutrition, animal production, crop production, really the whole gambit. And that prepared me to come into the Global Cold Chain Alliance, which is that connector of food production to consumption. You hear people say farm to fork or gate to plate and the cold chain plays such a critical role in making sure that that food arrives at high quality and safety. So I think from early on, knew I wanted to be involved in supporting the industry and this is a great place for me to be to share my experiences and support that critical function of the food supply chain. Well, the Department of Agriculture is one of the oldest departments. It was founded by, I think, Abraham Lincoln, (8/41)
wasn't it? Yeah, yeah, that's absolutely right. Abraham Lincoln founded it and it was established when he was president and it was called the People's Department. And I think that's actually true because it's the one thing that we all have to do. We all have to eat and not everybody appreciates what it takes to get that food on their dinner table. You hear the adage that chocolate milk comes from brown cows and so it's a challenge at times to make sure that the public really appreciates what goes into the food supply chain. It's funny because I don't know where I heard this or how I remember this, but I could swear there was a poll taken at some point where they asked kids in school where chicken nuggets come from and they didn't actually know. They thought they actually came from something called the chicken nugget or something. It's an interesting anecdote. I want to move into a conversation about the cold chain because this is obviously so central to our conversation. So what is the (9/41)
cold chain and how does the global cold chain alliance fit into this? Yeah, so the global cold chain is everywhere that you have the need for temperature control to preserve the safety and quality of a perishable commodity. So you can harvest a berry, for example, and if you can freeze it very near the time of harvest, when it's thawed, it retains that same level of freshness as when it was harvested. And so it's kind of that nature's pause button that preserves that quality, preserves that safety of food. And it can begin right there at the harvest point when you're talking about fruits and vegetables. When you're looking at other kinds of commodities like meat or dairy or poultry, again, you'll very soon after harvesting. So if you have a meat or poultry processing plant, once that animal is harvested, it will go into temperature control immediately. And again, that's to preserve safety, but as well as quality. So when did ... Because this also kind of gets us into a conversation (10/41)
about the evolution of the food industry. Because for a long time, the way that you preserved meats was through salt treatments and other things. I don't know what all the different terminology was, but eventually we got to the place where we had these cold chains. Maybe you can also kind of use this as an opportunity to walk us through to however, to whatever degree you feel comfortable. The evolution of the food chain, when it moved beyond just kind of locally sourced products where farmers had relationships with local restaurants or people would go to farm stands and buy the food they needed. Yeah, absolutely. So the food industry definitely has evolved quite a bit. And we did start as very local, much like politics is all local. Food production used to all be local. And these days, food is absolutely global. When you go into a grocery store and you look at the shelves, some of that product may have been produced right down the road. And other of that product was produced on the (11/41)
whole other side of the globe. New Zealand or something. Exactly. And one of the linchpins of that evolution is the cold chain. Because if you don't have the ability to pause that process for those commodities and ensure that safety and quality, you don't have the time that it would take for a product from New Zealand to get to the United States or vice versa. US exports a lot of food. And without the ability for temperature control, you couldn't make that long marine voyage from New Zealand to the US and come out on the other end with commodity that anybody is going to want to consume. So our industry, the global cold chain industry, refrigerated warehouses, many of them started as ice companies. And they would actually harvest ice from rivers. And I don't know if you ever saw the movie Frozen, but at the very beginning of that movie, they actually show one of the characters taking ice out of a river. And that really happened. And it happened here in the US. So how would that work? I (12/41)
didn't actually see the movie. Yeah. But basically... But they would take the ice and then they would gather up huge amounts of ice and then package fish with it and transport it through the country or something like that? Yeah. And they'd put ice in there or they would put it into their warehouses and then they would preserve the product for as long as that ice would hold. So that was usually... They had to source the ice right at the origin of whatever the product was that they were transporting because they didn't have refrigeration. So they had to have insulated like coolers and a place to get the ice. Is that how it worked? Yeah. Basically, that's right. And this is over 100 years ago. So this is... We're talking about 19th century. Yeah, 19th century. And then what one of the big breakthroughs for the cold chain was the advent of refrigeration systems. And that really began with the use of chemical called anhydrous ammonia. So you probably would recognize the smell of ammonia, (13/41)
bitter smell that you might get if you open a bottle of Clorox or something like that or some cleaners have ammonia in them. But the ammonia is an extremely efficient refrigerant. And so they're back in the 1800s, scientists determined that they could remove the heat from a room basically and refrigerate that space, refrigerate that product by utilizing ammonia in a closed loop system. Now I'm not an engineer, so I can't tell you all the technical ins and outs, but basically that development of that technology and that use of, in this case, ammonia to allow for the mechanical refrigeration helped us evolve from harvesting ice out of a river to now being able to make our own ice through these refrigeration technologies. And then the evolution of those technologies enabled people like Clarence Birdseye. You may think about Birdseye frozen vegetables, and he was really a pioneer in the process of taking a vegetable and freezing it and being able to package that up. And then you could (14/41)
distribute that far and wide as long as you maintained the cold chain. That's remarkable. And one of the things I didn't even know until I prepared for this conversation was how long ago refrigeration was actually invented. It was before even the 1850, which was like 1834 or something like that. Yep. I'd have to go back to the history books to give you the exact date, but yes, well over 100 years ago. Yes, it's remarkable. So this has been a process that's evolved over time, but now the cold chain is central to how we get so much of our food. Paint this picture for me. Help me and my listeners understand just how vital this chain is before we get into a conversation about how it's been disrupted and the sources of that disruption and what that means going forward for us. Yeah. So just think about the food that you consume every day and what percentage of that food is shelf stable in a box in your pantry versus what you pull out of a refrigerator or a freezer. And that should give you (15/41)
an indicator how critical the cold chain is. But when you look at what we as consumers are eating every day, the percentage of that that needs the cold chain is really, really high. So what is that percentage? So maybe about five or so years ago, we started to see a little bit of a dip in frozen food consumption. And some of that was driven by, you know, consumer preferences change, right? So some people might say, okay, we're going to go more with the fresh produce or other non-frozen items. But there's so much value in the ability to have that frozen food where, again, you kind of use that nature's pause button and then you can get those fruits and vegetables, you know, at any time you want them or that meat and poultry that will stay good for extended periods of time in storage. So you're talking about just frozen, but the cold chain includes refrigerated products as well, right? Yes. So, I mean, so like when we talk about beef, when we talk about pig, turkeys, chickens, eggs, (16/41)
lettuce, all of these things have to be transported on the cold chain because they have to be refrigerated at the very least, right? Yeah, absolutely. Yeah, no, it's a great distinction. And whenever I talk about the cold chain, that is absolutely not just frozen. That is really anything that requires temperature control. So, and you... Which is the vast majority of what people eat, right? Without a doubt. Without a doubt, you hit the nail on the head. Again, really, you think about what you consume that's not temperature controlled and it's things like, okay, boxed cereal, yes, canned soup, and you know, there's certainly things in the middle of the grocery store, so to speak, that don't require refrigeration, but the perimeter of your grocery store is your temperature controlled items largely, and that's a huge percentage of what we consume every day as Americans and really globally as well. Right, and also to your point though, we're not going to talk about that pharmaceuticals. So (17/41)
I'm going to throw out a few statistics here that I gathered, and if I made any mistakes, please let me know. But from what I've looked into, from what I've seen, in the United States alone, we consume over 600,000 head of cattle per week, 2.4 million hogs per week, 4.7 million turkeys per week, and 173 million chickens per week, which amounts to roughly 100 billion pounds of meat and poultry that go through roughly 800 federally inspected plants each year. Does that sound about right? Yeah, I don't have those numbers in front of me, but that does sound like you're in the right ballpark there. And that's just meat. We're not even talking about all the produce. I don't even have those numbers. So this is an enormous amount of food that's dependent on this very specific and highly integrated supply chain that relies on scientific methods, advanced technologies, and advanced processes. So what I would love to understand is where and how have we seen this process get disrupted in recent (18/41)
weeks? Because we've seen reports, first of all, we've seen what's happened at supermarkets. I've been to the supermarket the last month. I saw empty store shelves. I heard from different people that this was not a reflection of the lack of food. The food is there, but this was an issue with the supply chain. This was confirmed also by what I continued to read. What's been happening and how much of what people are experiencing in terms of shortages is a result of what's going on in the supply chain itself and not on the farm? Yeah, it's a great question. And I liken it in some ways if we're preparing for a big storm, right? A big winter storm in the Northeast or a hurricane in the Gulf Coast. You have that kind of surge in buying at a grocery store. And so really what happened is it was not a lack of food in the country. You're absolutely correct about that. It's just that the food itself was not in those grocery stores at that moment in time. So let's look at our member facilities, (19/41)
for example. So our member facilities have been full. They were full of food before the pandemic. And it's a question I ask my members every time I'm on the phone with them, how are your inventories? And they continue to be full. So when you say just to clarify, I want to interject in moments to clarify for myself and for our listeners. Yep. When you talk about inventories, are you talking about just frozen warehousing or are you also including animals that are ready to be processed? And vegetables and produce and everything else? Yep. So it's a good point to clarify. So there's a couple of pieces to this. So there's food that's already been produced. And that would be what is in our member's facilities currently. And that level of volume of food in our member's facilities really has not gone down throughout this pandemic. But having said that, that doesn't mean that there aren't impacts to production as well. So you kind of have impacts on both sides of the supply chain. We've talked (20/41)
about the demand impacts at the grocery store level and how those created disruptions of kind of needing to catch up and get inventories from warehouses to the grocery store. The other side of that is, do we see disruptions on the production side? And now we are starting to see disruptions in production. At the very start of the chain. Correct. And so you probably have seen some of the high profile discussion and reporting on the impacts that are happening in the meat and poultry industry. And that is a good example of where we're seeing some disruption on the production side. Tell our listeners a little bit, what is it that we're seeing? What is it that you're referring to? Yep. Let's just take either pigs or chickens and you've got producers of pigs that are going to go into a slaughter facility. Well, if that slaughter facility is shut down for some reason, then that hog farmer may not have an alternative place to send those pigs. And that actually has unfortunately happened in a (21/41)
actually better off euthanizing the animals. Even though there are all these food banks out there that need the food, the systems as they are in place currently make that economically unfeasible, so to speak. Yeah, it's a challenging situation. And some of its economics and some of it is operational as well. So you can employ certain strategies to slow down the rate of gain of a hog or a cow and to try to extend that window when that animal can be harvested appropriately in a processing plant. And it's a little bit different than if it's fresh produce. We know there's been some disruption in the fresh produce side as well, but you can put a box of vegetables together and get those over to a food bank or sell them at a farmer's market or donate them. Because you don't need to process them. You can process them on the farm. Exactly. There's no need to send it to a third party facility. Yeah, it's very simple. You've got that vegetable and it can go right into commerce, whereas a live (23/41)
animal, it takes equipment, it takes a regulated process for that product to get into commerce. It's heavily regulated by the Food Safety Inspection Service to ensure the quality and the safety of that product. And it's not as though you could donate a bunch of pigs to a food bank and let them harvest them themselves. It's just not something that can be done. These are super expensive facilities. I've seen these processing facilities, but in the case of these farms that, for example, have turned over lettuce, why have they done that if they don't need to send it to a third party facility? Well, again, some of that is their established channels for commerce have been disrupted. And so maybe they had contracts with restaurants or other food service companies that their demand has gone down significantly because we all know that in most parts of the country we're social distancing and you can only do restaurants through takeout, curbside, that delivery, those types of things. And then big (24/41)
that has shifted tremendously just in the last six weeks. And I don't know what the numbers are for particular products, but obviously food service is down a lot nationally. Now fast food continues to do pretty well. I'm not sure they're meeting the same volumes as they did pre-pandemic. So are McDonald's and Hardee's and those places are still open? For sure. Yeah, so I know at least where I am in Virginia, for example, restaurants can continue to serve as long as it's drive-through, delivery, or curbside pickup. And it seems like every time I drive by and not to call out any particular company, but every time I drive by this Chick-fil-A near where I live, I mean the line is very long. So we know that they're doing a good bit of business, but how that compares to their pre-COVID sales, I couldn't tell you. Okay, so as a layman consumer, one of the questions I had when I was looking at this was if say 50% of food is made for the food service industry and most of that can immediately be (26/41)
repurposed for retail and people need to offset the food they normally consume in cafeterias or at restaurants by eating at home, then does that translate to higher prices at the grocery store? Yeah, so there are a couple of things that we can examine along those lines. And one is the form that that product takes is different for food service. So there are some differences there and that's actually become a little bit of a challenge as we go through this pandemic. Are there ways to redirect food service oriented product to retail right now while we know that there's this spike in demand? And why is that so difficult? So labeling is one issue. Another issue is just how it's packaged and packed. So are people going to want to go to a grocery store and buy a huge, like I'm going to make it up, but a 10 pound bag of chicken nuggets when they're used to buying a one pound small freezer bag of chicken nuggets. And so there are some challenges in how it's packaged, how it's labeled. And there (27/41)
are also some proprietary restaurant like recipes and configurations that I think are a consideration as well. So some of that restaurants have been, I think, a little bit hesitant to redirect some of their proprietary products that may be kind of pre-marinated or pre-assembled because of kind of some of their branding and proprietary nature. So there are definitely some challenges to redirect. I've read that this is a huge problem. I mean, from what I've come away with, the closing down of so many restaurants and the shutting down of schools and the school lunch program has had a significant disruptive effect on food supply chains. And it's led to a lot of what this wasted food is. Is that correct? I wouldn't say necessarily that that has led to a lot of food waste. I would say that that has led to, at least in the sense of our member facilities, a lot of food sitting. So as long as that is temperature controlled product, it has a longer shelf life. So that's not really leading to (28/41)
food waste, but it's again, maybe displaced food or food that is not moving as it was originally intended. Isn't that also the primary reason that we've seen euthanizing of animals, for example, on farms? I wouldn't say that's why we've seen the euthanization. The euthanizing, in my opinion, has been directly related to the ability of processing plants to accept new animals. And that's really the crux of that. So you've got a big plant that harvests thousands of animals a day and it goes offline for two weeks. There's no place for those animals to go. So that's the big issue. When it comes to the major bottlenecks we're seeing as a result of this crisis, though the demand side has impacted things, the primary source of the disruption is happening at the processing facilities. Well, when you look at fresh meat and poultry, then I would say that the answer is yes, that has been the primary disruptor. But again, that's just an isolated example from a meat and poultry perspective. When you (29/41)
look at the food service breadth of product that would be oriented for food service, it spans pretty much everything. And even in the meat side of things, I know I was talking with one of our members recently and they actually were asked by one of their customers to redirect Turkey that was originally set for restaurant market. And they were able to say, we're going to relabel and instead of that going into a restaurant as a fresh product, we're going to blast freeze it and we're going to relabel, repackage, and then we're going to be able to get that into the retail chains. So there are ways that this is happening, but there's certainly are challenges as well. So I'm curious to ask you, what do you expect us to see going forward? And how much of what's happening in the supply chain reflects the types of disruptions that we've already experienced as consumers at the final end of the chain? And how many are still baking into the cake, so to speak, like with agricultural products, where (30/41)
if there's a disruption during planting season, that's going to have an effect on harvesting in the fall. So what is the lag? Because again, in my research, I've seen reports that we can expect to see farmers continue to have to euthanize livestock as a result of disruptions to processing facilities that can't be turned around in time to save those animals going forward, I don't know, a few weeks or a month or so. Yeah, I certainly hope that the euthanizing of animals can be minimized as much as possible. And we haven't really touched too much on the Defense Production Act and President Trump's use of that to ensure that meat and poultry facilities remain open. But that happened this week. And it was done, I think, in many ways to avoid the euthanization of animals, as well as, you know, try to ensure that that disruption of the meat and poultry flow into the food supply chain and ultimately to grocery stores is minimized. Now, I can't say there won't be more in the coming weeks, but I (31/41)
think this will hopefully help minimize that. But time will tell. Well, you know, I think I speak as someone who is concerned. I've done the best that I can to be prepared. But obviously, I'm concerned about sourcing food, right? I'm fortunate I have relationships with some local farms in this area. And in fact, I'll give you an interesting anecdote. An owner of a local farm near where I'm at told me that he's never seen what he's seeing in the town where he's located. And this is in the North Fork of Long Island. He's seen basically summer traffic, right? People are coming, normally the kind of traffic they see during the summer, in terms of people coming and staying there. That's what they're seeing now. But on top of that, they're seeing lots of people from New York City itself and from surrounding areas that he's never interfaced with before, reaching out to get meat and other products from his farm. We actually spoke when he was on his way up to a processing facility in Upstate (32/41)
New York, is there a real concern that a consumer out there in, let's say, the next month or two months could see significant price rises and shortages in key meats and other products that need to be processed at some of these facilities, which seems to be, again, the most concerning issue facing food supply networks? Let me, I guess, start with the price question. And obviously, supply and demand helps identify and drive what the pricing is, particularly when you're talking about commodities like meat and poultry. So I do think that you'll see some fluctuations in price there for meat and poultry as supply tries to meet that demand. And with production challenges that we've already talked about, that could lead to some increased prices. I feel very confident that we are not in a food shortage. With that said, we have to be able to maintain production to ensure that we stay that way. And so when you talk about plantings and potentially, what does that mean when it comes to harvest time (33/41)
in a few months, we have to ensure that we're continuing to plant crops. We have to ensure that we're continuing to raise pigs and raise cows and raise chickens for that domestic production. There's still a lot of food in the system, but we have to be able to continue to replenish that food that goes out to the grocery stores and into those markets with new product. And so exactly what you're talking about is critical that we have to continue to plant. We have to continue to raise animals. And it's definitely a cycle. It's a chain that we have to keep every link strong. So here's a question for you. One of the things that we've seen, and it's not just in food supply chain networks, it's across the board. Whenever the one good byproduct of a crisis, whether it's a financial crisis or an economic crisis or a crisis in a relationship or something, it reveals aspects about the structure of the system, the ecosystem, the organism, whatever you want to call it, that you wouldn't be able to (34/41)
see otherwise. Right? Choke points emerge. These are stress tests. And so what we're seeing is that we have a, I think, like many other places in our economy, our food system has made trade-offs of resiliency for efficiency. This is something we see across our economy in our financial markets and in our supply chains and networks. How do you think, first of all, is it a fair concern that we should try and make our systems more resilient going forward, that perhaps we've traded too much in terms of efficiencies? Another place we've seen this, for example, is hospitals. In the United States, hospital efficiency is a premium. And so as a result, there's much less marginal capacity for beds and that's had an impact during COVID. Where can the food system as it is currently constituted improve in this regard to make it more resilient? Would this be, for example, local sourcing, more local sourcing of ingredients? And is this an argument for more government investment in agriculture and in (35/41)
event, things can happen, right? Yeah, no, you're absolutely right. And I do think, so inventory strategies is one of the big considerations and that's going to be different for every company. It's going to be different for different kinds of commodities, I think, but it's going to require some investigation, some analysis of how specific nodes in the supply chain performed and what could be done to harden them. Now, I would argue that fundamentals of the supply chain have performed pretty well. And yes, we had surge in demand. Yes, it took some time for the replenishment to catch up. But all the while, I would argue that we didn't have people going hungry because of the supply chain. Yeah, they maybe didn't have the same variety that they're used to in the grocery stores, but that's different than there being a food shortage. So, in closing, what do you think, what's the takeaway from this? What do you think people should know? It sounds like you're not particularly concerned about (37/41)
shortages going forward. It sounds like also when it comes to prices, if I understood correctly, you're not particularly concerned about rising prices or there are going to be rising prices, it'll be totally temporary. And with the latest measures taken by the government, we can expect to see these processing facilities reopen soon. In fact, I think some of them, as you said, have already reopened. What's the major takeaway here for listeners? Yeah, and I just want to revisit the price point because I don't want someone coming back and saying, oh, well, the price went up here and he said, oh, we're don't expect any price increases. Price is a supply and demand function. And if there are supply issues or surges in demand, we may see some fluctuation in prices. So, I don't want to misrepresent that you may see higher prices for meat and poultry as a result of this. I think that's definitely, we will see some of those fluctuations. So, I just wanted to clarify that. But as we look at this (38/41)
for the future, a couple of things strike me. And the first, and I'll kind of close the way I started, the food industry has really come together really well. And there are some ways that the food industry can learn from this to be more efficient and more effective in the future. But we're all in this together and we've seen food service that has slowed come in and raised their hand to help retail because retail was just absolutely going crazy. And so, we've seen people come together and find ways to be creative. We've seen innovations in our own facility operations and innovations in working with truck drivers. We really didn't touch much on transportation, but that is so critical. And there have been some really good innovations on working with drivers to minimize that person-to-person contact, but actually do it in a way that enhances efficiency. We've seen enhanced efficiency in warehouse operations. And so, I think we learn from what we've been through. We embrace those new (39/41)
efficiencies and what we've learned. And we embrace this concept that we're all in this together and that we can be stronger if we work together to find those innovative solutions. Well, that's great, Lo. So, if people want to learn more about the Global Cold Chain Alliance, where can they do that? Absolutely. So, we've got a website, www.gcca.org. And I would point you to our Coronavirus web portal. It's got lots of resources that are important for our industry members, but really good resources. I think for anybody who's interested in how the food industry is responding, we've got protocols on there on, you know, how do you best social distance in a food production type atmosphere? What to do if you have a positive test in you within your facility? Different resources like that. So, we would welcome anyone interested to go to our website, use the resources on that web portal. As I said before, we're all in this together, so we want to make those resources available. All right, Lo, (40/41)
thank you so much for coming on the program. It's been my pleasure. Today's episode of Hidden Forces was recorded in New York City. For more information about this week's episode, or if you want easy access to related programming, visit our website at hiddenforces.io and subscribe to our free email list. If you want access to overtime segments, episode transcripts, and show rundowns full of links and detailed information related to each and every episode, check out our premium subscription available through the Hidden Forces website or through our Patreon page at patreon.com slash Hidden Forces. Today's episode was produced by me and edited by Stylianos Nicolaou. For more episodes, you can check out our website at hiddenforces.io. Join the conversation at Facebook, Twitter, and Instagram at Hidden Forces Pod or send me an email at dk at hiddenforces.io. As always, thanks for listening. We'll see you next week. (41/41)
This is the full transcription of podcast 'Hidden Forces'.
China & the American Imperial Economy Louis-Vincent Gave #Podcast #Transcription #ReadAlong #KnowledgeUnlocked
they had some really great libertarian market, you know, free market principles. They had it because they had very competent industrial policy. I disagree on that, actually. Well, great, because this is a good opportunity to have this conversation because they've really crushed it on EVs. So what explains the rapid advancement in EVs and how they've taken the global economy by storm in that area so much so that it's terrifying the Europeans and the Americans have put tariffs on non-existent imports. I mean, they're not even, it's not even an area of competition right now. So what, how do we explain that? So I think the narrative right now in the Western world is the one you just described. It's, oh, China's really good at giving government subsidies and we suck at it. In essence, that's the narrative. I look at it a little bit differently. I would say that first and foremost, being an industry, you build in a whole ecosystem that you don't wake up one morning and decide, you know what, (27/42)
What's up, everybody? My name is Dimitri Kofinas, and you're listening to Hidden Forces, a podcast that inspires investors, entrepreneurs, and everyday citizens to challenge consensus narratives and learn how to think critically about the systems of power shaping our world. My guest on this episode of Hidden Forces is Louis Vincent Gave, the CEO and co-founder of Gavacol, a company that started as an independent research firm with a focus on Asia and has evolved since to include fund management and data analysis services. In the first hour of our conversation, I asked Louis what he thinks are the most important trends set to define the investment landscape in the years ahead, including why he believes that the US and Europe are set to undergo a long period of structurally high inflation while China's economy is set to experience what he describes as a deflationary boom, driven in part by rapid advancements in key industries like semiconductor manufacturing and electric vehicles. In (1/42)
the second hour, we explore why Louis believes that the American imperial model, dollar recycling, is unsustainable and why de-dollarization is a prerequisite for the reindustrialization of the United States. We also discuss whether or not America needs an industrial policy to achieve this and help reverse the multi-decade financialization of the American economy that has helped drive up asset prices relative to their underlying income streams, exacerbating the wealth divide and destabilizing the country's political system. If you want access to that part of the conversation and you're not already subscribed to Hidden Forces, you can join our premium feed and listen to the second hour of today's episode by going to hiddenforces.io. All of our content tiers give you access to our premium feed, which you can listen to on your mobile device using your favorite podcast app just like you're listening to this episode right now. If you want to join in on the conversation and become a member (2/42)
of the Hidden Forces Genius Community, which includes Q&A calls with guests, access to special research and analysis, in-person events and dinners, you can also do that on our subscriber page. And if you still have questions, feel free to send an email to info at hiddenforces.io and I or someone from our team will get right back to you. Lastly, because this conversation deals with investing, nothing we say on this podcast can or should be viewed as financial advice. All opinions expressed by me and my guests are solely our own opinions and should not be relied upon as the basis for financial decisions. And with that, please enjoy this thoughtful and educational conversation with my guest, Louis Vincent Gave. Louis Gave, welcome to Hidden Forces. Thanks for the love for having me. Very nice to meet you. Yeah, I didn't try to go full out French accent. How would you say your name in French if you're speaking to a French person? Louis Vincent Gave. That sounds so much better. It's not (3/42)
just a cliche. So Louis, it's great having you on. What prompted this conversation was actually my most recent episode with Paulo Macro and Le Shrub. And I read a bunch of your opinions through Paulo because he was referencing them in many of his pieces. So I was like, this would be kind of like a normal transition, which would be to speak to Louis afterwards. So before we get into today's conversation, which is going to be, I think mostly about China, but there's a lot of other stuff that you write about and you explore in your research. I'd love to learn a little bit more about you. How do you describe what you do? And then to that point, why do you think you're good at what it is that you do? I don't know if I am good. I wake up early morning and try to be good, but we have a bit of a hybrid firm. It's a firm I started, my father Charles and a friend of ours called Anatole Kolecki, this is some 25 years ago now. We started off as a pure macro research firm, publishing macro reports (4/42)
and basically selling them to large institutional investors. Early on, we felt that China was going to be a pretty big deal. We started the firm in London. We moved to Hong Kong and then opened an office in Beijing on the premise that China was going to be a big, important factor for macro for the coming years. And so we were very lucky in terms of being in the right place at the right time. Pretty early on, starting 2003, 2004, 2005, China really started to take off. And there were a few people at that time doing what we were doing. So again, it was a question of being right place, right time. Parallel to this, starting around 2005, we built a money management arm where we started off with an Asian equity fund. And then when China basically started to open up its bond market, we started to get pretty big into Chinese fencing as well. Then in 2011, we also bought a stake in a private wealth firm in the US called Evergreen Gavgal. You might see that on social media. And so we added a (5/42)
third leg to our business, aside from asset management, aside from research, a wealth management arm that initially was just in the US and that has now become a little more global. We bought a couple of years ago a wealth manager based in Mauritius. So we're a hybrid firm. We do different things. Obviously, since we started, we've grown from just the initial three partners to now eight partners working in the firm. Our headquarter though remains in Hong Kong. Our second biggest office does remain Beijing. And I do still spend a lot of time in China. And I still find it absolutely fascinating. I think it's one of the most important macro story of, frankly, of humanity, how 600, 700 million people came out of poverty within a generation is, to me, worthy of a lot of ink, a lot of studying. It's a testimony for perhaps future generations. So I agree. It's the most remarkable economic growth story in the history of humanity. And it continues in some ways. So you guys write a lot of stuff. (6/42)
I mean, you publish a lot. I've seen, like, how many times would you say you write an article every month? How many articles do you publish? You personally? Personally, less than I used to, because the team has grown. And we try to limit ourselves to no more than three publications every day. So we have a set schedule as a firm. We start off with the daily, which is usually two to three pages at most. And the idea is to take one idea, something big that happened in the previous day or two, and that could have an impact on financial markets. And so that's our daily short punchy to the point. The idea is you can basically read it on your way to the bathroom. We write a think piece as well. We have one think piece a day. And then we might have a second think piece specifically linked to China, without China product. So I highlight this because we now have a pretty big bench of analysts, a big bench of people looking to contribute. And we're all competing to try to get published. And very (7/42)
often, I write pieces that end up on the floor, because there's better pieces published by some of my colleagues. Charles, right now, my dad, who still writes every now and then, is really pissed, because he's got three or four pieces in the cupboard that have been there for like two months, and he clamors to get them published. So I highlight this to answer your question. I probably write, I would say, five or six dailies a month, and then three or four think pieces a month, ideas pieces. So I probably publish anywhere from seven to 10 pieces. Yeah, I mean, that's a lot. And you guys put out a lot of information. So as I said, while I do expect us to talk quite a bit about China, you guys cover a lot of different trends. And so I feel like the appropriate question to maybe start this conversation with is what are the most important trends that you've been focused on over the last several years and that you expect to remain focused on over the next several? In other words, which are (8/42)
the enduring trends that define the investment landscape in your opinion? You know, everybody's got different processes. And I start off with a very simple idea that there's three prices that determine everything. The price of energy, the price of the US dollar and US interest rates, and that as investors, you know, it pays to have a pretty clear and intelligent view on any one of these three things, because these three prices, again, will determine pretty much everything else. And now, having said this, the other sort of starting point for me personally is that economic activity is energy transformed, that energy matters a lot more than you know, people give it credit for. And that there's, of course, massive interaction between the world of energy and the world of currencies. So I do spend a lot of time looking at energy. And for me to answer your question, perhaps the single most important macro development of the past decade or so that people just don't spend enough time on has (9/42)
been the US shell revolution. I wrote a book about it back in 2012. The book was called Two Different for Confort. And, you know, as I look at it, you know, the US went from producing five million barrels a day to 13 million barrels a day. It basically added one Saudi Arabia. And as it did, it made for a stronger dollar. It made for lower inflation in the US, which allowed the Fed to keep monetary policy much too easy for far too long, allowed for a massive re-rating of the US, et cetera. And amidst all the talk of US exceptionalism, for me, that's the part that people don't focus enough on. Now, this is where it gets fascinating is the US in the past decade has gone from five million to 13 million barrels per day. The big question for me is where do we go from here? Does the US basically keep the massive comparative advantage it has built in energy? And if it does, then happy days for the US economy, happy days for US markets, happy days for US policymakers, or is this, this massive (10/42)
comparative advantage that the US had starting to stall, starting to stall because not enough has been invested, because policies haven't been that friendly to the energy space. To cut a long story short, do you think over the next five years the US finds another Permian or not? I don't. I think right now nothing is being done to, to find another Permian. And therefore it makes for a very, very different world. A world where the US goes from five to 13 and a world where the US goes from 13 down to 12 makes it a very, very different world with impact on the currencies, impact on interest rates and impact eventually on policies as well. So that's one massive trend that's out there. The other massive trend, of course, and I'm sure you talked about with Palo, I must admit, I didn't listen to the talk yet with Palo and the shrub. I'm a big fan of both. I subscribe to both Palo and the shrub, substax. They're both tremendous reads with, I think they have a great pulse on the markets. But (11/42)
look, the biggest trend out there, which partly goes with the energy story, is that we've moved from a fundamentally deflationary world to a fundamentally inflationary world. And in an inflationary world, portfolio construction is massively, massively different. We're seeing it every day. In a deflationary world, bonds are the natural diversification for portfolio. In an inflationary world, they're not. An inflationary world, energy is the natural diversification for portfolio. Failing that precious metals and failing that strong currencies. And that brings me to the third big trend out there, is that for the past decade, partly thanks to energy, partly thanks to monetary policies, the US dollar has been structurally strong. And I firmly believe that with the fiscal policies that are being implemented in the US, frankly, the monetary policies that are being implemented in the US, we've now had three consecutive years where inflation has been above 3%. And instead of sounding hawkish, (12/42)
the Fed does its very best to sound dovish. So I think we're now in a structurally inflationary environment, again, that has huge consequences for portfolios, currencies, for lots of different things. So let's tackle the deflation to inflation paradigm first. What is it specifically that you point to that makes it so that you believe we are in a structurally inflationary environment? Well, the first, of course, I would say the runaway budget deficits everywhere. My very favorite economist is a French economist called Jacques Ruff. And Jacques Ruff was the gold's advisor in the 60s. It was actually him who advised the gold to get the gold back from New York and got the Americans pretty pissed off. But, you know, he was looking at the twin deficits that the US were running and saying, look, this is just simply not sustainable. The US is going to have to devalue against gold. Here's how I put it today, you know, where three or four years into a global economic recovery following COVID, (13/42)
pretty much anywhere you care to look at except perhaps China, you've had nominal GDP growth, meaningfully above structural growth trends. This is true of the US, it's true of Europe, it's true of India, it's true of Japan. Now, take any one of these countries. The US today is running budget deficits of six, six and a half percent of GDP at a time of full employment. India is running roughly four. China is running roughly four. Japan is running roughly four. France, my home country is running five and a half. Now, Jacques Rueff used to say that inflation is its expenditures that give no return funded with money that does not exist. And this is exactly what we're seeing everywhere. We're seeing the subsidizing of expenditures that give no return, whether you call them, you know, magic windmills or magic mirrors to get energy in a highly inefficient way, whether you call them massive increases in defense spending, whether you call them massive increases in social spending. Everywhere you (14/42)
care to look, you see big increases in government spending. And at the same time, massive discomforts with population who feel hold on. You got runaway budget deficits. My taxes keep going up. And against that, public safety is getting worse. Against that, public education is getting worse. Against that, public health care is getting worse. And so, you know, this inflation is subsidizing expenditures that give no return with money that doesn't exist. You'll be hard pressed to find a country today where, frankly, this isn't the case. Except perhaps the one country that doesn't suffer inflation today, which is China. You know, in China, you have had big increases in debt. You've had big increases in government spending, but you're at the phase of their structural growth where people can see where the money's been going. Right? It's been going in high speed railways. It's been going in dams and ports and airports. It's been going in infrastructure. You know, I've been, I'm older than you (15/42)
are. I'm 50. I started my career, let's say, for the sake of argument 30 years ago. When I started, the US government had four trillion in debt. Today, it's got 34 trillion in debts with debt growing by one and a half, two trillion a year. Now, here's the thing in the past 30 years, what did you get for that money? You know, where's the Huvodam? Where's the new interstate highway system? I think the last major airport that was open in the US was the Denver airport in 1991. So, you know, you've had massive increases in debt that have primarily funded expenditures that give no return. It's gone into social transfers. It's gone into silly military operations. And that's the very definition of inflation. And so you see the inflation all around you. I think it's delusional to not see it. Is it fair to say, I mean, it's hard for Americans to think of America as an empire, because when you're living in an empire, you don't see yourself as an empire if you're a country like the United States. (16/42)
But in some sense, is it fair to say that what we're talking about here is also the American imperial economy, where you had the American market being an import destination, running current account deficits. The dollar was very strong. And so what's happened is we're now in a world where the military balance of power is changing and that threatens to undermine the symbiotic economic relationships that built up around American hegemony, especially post fall of the Soviet Union. Does that resonate with you, that description? It does. And look, I don't want to be sounding like I'm touting my own books, but I wrote a book about this back in 2019 called Clash of Empires, which is available on our website. I think the eversion is for free if people want to download that. We can go down the wormhole of vampires and I'm happy to wax lyrical on it for ours. What I would say is this, is that historically, you've had two kinds of empires. You've had the land-based empires. So you build roads, you (17/42)
build railways. And very clearly, this is what China's aiming towards. You know, the one belt, one road, the Silk Road Fund, the Asia Infrastructure Investment Bank, all these investments that China is making is really an attempt to be a modern day empire. You know, fundamentally, that's what empires often do. Empires build roads. That's why in Europe, we say all roads lead to Rome. Empires build roads to bring commodities in cheaper, transform them into higher value-added goods, and push them out to the rest of the empire. That's always what empires have tried to do. That's what Britain did. That's what France did. That's what China's trying to do. Terrestrial or naval, through waterways or land, presumably. That was going to bring me to my second point, which is that you're absolutely right. There's, you've got the land-based empires, i.e. Rome, and you've got the sea-based empires, i.e. Cotage in the old days. Now, land-based empires are very costly to maintain. You need to, you (18/42)
know, manage the road. You need to put stations. If the U.S. is an empire, it's obviously a sea-based empire. It controls the world's oceans. Now, having said this, and this, you know, if you take a step back, there's a couple challenges to this. The first challenge is the U.S. is a very weird empire. And I would say perhaps a reluctant empire. Again, if you start off with the premise that the goals of empires is to bring commodities in cheaper, to push out finished goods to the outer realm of the empire, the U.S. was undeniably doing this in the 1950s and the 1960s. There's no doubt that's what the U.S. did. You know, that was what the Marshall Plan was about. Here, we'll lend you money, and you're going to use this money to buy Caterpillar machines and to buy, you know, General Motors cars and whatever else. But the U.S. stopped doing that like 30 years ago. The U.S. stopped being an empire. It's like, we're going to bring in the commodities here, transform into a higher value added (19/42)
goods and ship them out to the rest of the world. The U.S. doesn't do that anymore. The U.S., as I think we're seeing now with this Ukraine war, the U.S. no longer really is an industrial power. You know, the Ukraine is running out of 155 millimeter artillery shells simply because neither Europe nor the U.S. can produce them anymore. We simply do not have the manpower, the factory, the expertise to produce 155 millimeter shells that we were producing like at great scale during World War II. We're not even capable of doing that today. Or maybe you say, well, we choose not to. But the idea that, you know, the U.S. is no longer basically an industrial power. So can you be an empire and not be an industrial power? I think it would be my first question mark. The second question mark is, as you pointed out, the U.S. is a sea-based empire, which was great because that was a very low cost way of being an empire, except that we now know that a couple of guys with a drone can threaten entire sea (20/42)
lanes, as we saw with the UTs. But it was something that really we'd seen before with the Armenia as a by John War and now that we've seen with Ukraine, that basically controlling seaways thanks to massive fleets and aircraft carriers and destroyers, etc. When these can get taken out by a $50,000 drone, all of a sudden the equation changes dramatically and your ability to control all of the world's waterways is perhaps no longer the same. So I think we're seeing some profound shifts today that make for a very, very different world. So on that point, if you had to sort of describe what the nature of this relationship is between the U.S. and China and how it has evolved, what is the story you would tell and how much of this is an appropriate response on the part of the United States, for example, to try and prevent China's military rise and how much of it is an overestimation of the threat that China poses that risks backfiring on the U.S.? Look, I think the entire relationship changed (21/42)
with the arrival of Xi Jinping to power. You know, I think pre-Sijinping, the U.S. saw China as this sort of cheap manufacturing hub and, you know, they're going to produce the microphone that you're speaking on today and they're going to produce the shoes that I'm wearing and, you know, they're going to do this at very low margins and we're going to capture most of the margins through marketing, through sales and keep those margins in the United States. And that worked great from roughly 1982 to 2012. And then in 2012, if you remember, Xi Jinping comes in and does two things. First, he starts talking an imperial talk, like the One Belt One Road, the Silk Road Fund. Remember, every Chinese president before Xi Jinping was inward looking. It was like, you know, you came in and you didn't really care what was happening abroad. There were so many problems at home. It's like whatever, the foreigners can take care of themselves. I'm focusing domestically. And then Xi Jinping comes in and (22/42)
says, you know what? We're going to build roads in Africa. We're going to build big ports in the Middle East. So, you know, that peaks up the U.S. interests. It's like, well, hold on. You know, you're supposed to be the chief manufacturing center. You're not supposed to be an empire. So that's number one. Is that also because implicitly the United States saw China within the orbit of American empire, right? There was a unicelder power, right? China was the manufacturing center of the U.S. empire. Then China comes out and says, we're going to have our own empire. So the U.S. already is like, wait, what? Then the second thing that I think Xi Jinping did, if you remember, he had this big China 2025 dream where it's like, by 2025, we've got to be able to produce our own commercial airplanes. We have to be a car exporter. We want to be a telecom switch exporter. And not just a, we want to be the number one in the world at exporting cars. We want to be the number one in the world at (23/42)
exporting telecom switches and earth moving equipment and tractor and whatever else. At which point the U.S. says, hold on, like we liked you when you were producing socks and underwear, but if you're now going to be competing with Cisco for telecom switches, and if you're not going to be competing with John Deere for tractors, and if you're going to be competing with Ford for cars, and you're going to be competing with Boeing for planes, then we have a problem. You know, you're supposed to be low value added stuff. You know, you can't be moving up the value chain. And so we're going to, you know, prevent you from doing that. We're going to like make sure you don't get access to see my conductors. We're going to impose tariffs. And, you know, as this has happened, what the U.S. has found, I think, to its dismay is that instead of collapsing, you know, the Chinese economy took the punches and they were pretty big punches. You know, these were, took the punches and kept going, kept (24/42)
going. And China, you know, pre 2025 has become the world's biggest car exporter and has become the world's biggest tractor exporter in spite of the punches. And I think that's the situation we're in today. Now, the good news is, you know, we're recording this on May 14th. The U.S. has just announced 100% tariffs on Chinese electric vehicles. It's just announced 50% tariffs on Chinese batteries and on Chinese solar panels, which is great news. I think that's terrific news because for the past 10 years, I was shaking in my boots that we lived in a climate emergency. I was told that the world would end in five years time if we didn't dramatically change our ways. But now I've just found out that actually we don't need to change to electric vehicles and we don't need solar panels everywhere, that the climate emergency must have been pushed back because, you know, we can afford to have all these tariffs on China, even though the world is supposedly burning. So I woke up with a great sense (25/42)
of relief this morning. So, I mean, that might be an opportunity to go back to the conversation about energy and how much of your opinion on shale is a result of insufficient capital expenditures and how much of that is because the private sector isn't investing enough or how much of it is because of government regulations or forward guidance around the energy transition, ESG, stuff like that. But let's just bring it back to this conversation. This kind of, we're obviously, this is not, doesn't fit neatly into the investor bucket, but it's sort of relevant for the larger framework. From the European and American perspectives, does it make sense to move away from the neoliberal consensus of largely unconditional support for free trade? And open markets, given the fact that they have been competing with China, which has been very good at industrial policy, very good at using state subsidies. I mean, the EV sector is a great example. They didn't become the number one EV exporter because (26/42)
I'm going to throw a bunch of money at this manufacturing. Look, this is what the US is trying to do right now with CMI conductors. Right. They've decided, oh, you know, Taiwan and South Korea have gone to be much better producers of CMI conductors than us. By the way, did TSMC get a bunch of subsidies from the Taiwanese government? No, they just got good. It got good because Taiwan, like China, has a whole both tech and industrial ecosystem. You know, progress in industry is made mostly by workers who tinker, who make small changes. Now let's talk about the EVs. Since I do agree with you, that's a great example. Today, you do have a number of Chinese brands that are breaking out on, on the upside and they're breaking out on the upside with tremendous vehicles, whether you look at BYD, whether you look at Polestar, like, you know, there's a list of them. And also extra, I mean, the huge price differentials too, right? The Chinese. Huge price differentials. But there's also a huge list (28/42)
of cars on the side, roadkill. Like you've had tens of bankruptcies of car producers in China over the past decade. Tens. So I would say that, you know, the difference is perhaps that in the US, you're down to three car producers, that it's a far less competitive landscape as opposed to China where you've got dozens. You know, in the US, if you go back to when cars were first introduced at the beginning of the 20th century, the US had what, 100, 150 car producers and they were egging each other on and you had people tinkering in their garages and making things better, et cetera. And eventually Ford got to be better than everybody else. And so did General Motors and they cleaned up. They took over competitors or the competitors just went bust. And as you get big, you get fat, you get lazy, you get stupid. And the more protectionism you get, the more fat, lazy and stupid you can be. Now, you know, you look at China, you've had literally dozens of electric vehicle brands being launched in (29/42)
the past 15 years or so. And you've had dozens die by the wayside. And today what you have are the survivors, the BYDs of this world that are lean, mean fighting machines. Now, does China have comparative advantages in that it might not have the same environmental rules we have in the West? Absolutely. Does it have cheaper labor costs? Absolutely. Have there been subsidies given to electric vehicles? Yes. And have there been sort of governments ordering fleets of electric vehicles for the Ministry of Defense and ordering fleets for this ministry and that ministry, et cetera? Absolutely. But the West does that as well, right? I mean, it's not as if our electric vehicle industries in the Western world haven't benefited from enormous subsidies. Would Tesla have existed if it hadn't been for government subsidies, especially early on in its life? So we can sit around and say, oh, China's successful just because of subsidies. But I think we're hiding ourselves from the more important truth, (30/42)
which is that China has built an industrial ecosystem. And it is that industrial ecosystem that allows it to be competitive. And now we could say, well, it managed to build it through subsidies in the beginning, et cetera. But we have spent the past 20 years destroying our industrial ecosystem. And China spent 20 years building its industrial ecosystem. And so to think that our problem is the lack of subsidy, that's not the problem. Well, I should be clear. Subsidies is one thing I mentioned. It's not the only thing. What I'm really trying to get at is that in China, the government is a greater partner in the economic process in a way that the US government no longer is. So what explains that? What explains the deindustrialization of the United States and how much, if any of that deindustrialization was policy driven? In other words, how much of the loss of US manufacturing and the financialization of the American economy is the result of explicit policy choices made in Washington? I (31/42)
think the government let it happen. But the ones who are responsible, look, is the US government responsible for the fact that Boeing can't make planes that don't have parts falling off of them? Or is that Boeing management that, you know, focused on short term profits at the expense of everything else? Is the US government responsible for the fact that Ford and General Motors cars are now being undercut massively? Well, where does that come from? That's a great example. You've written about Boeing also. Where does that come from in the United States? That focusing on profits at the expense of everything else? That's just a cultural manifestation in your opinion? I think it is a cultural manifestation. And I think culturally in the US, everything has been done in the past 30 or 40 years to glorify money making over everything else. Right. And there is, you know, in the US, the gap between CEO pay and worker pay is greater than anywhere else in the world. The gap between the 1% and the (32/42)
bottom 20 is greater than anywhere in the world. Now, we could argue that this promotes creativity, that this attracts all the best talent of the world in the US, that it promotes the highest GDP growth. What it doesn't promote though is industry. However you want to cut it, it does not promote the building of factories, the paying of workers, because what it promotes is saying, oh, I can get a worker in Mexico or in China for a third of the worker in the US. So I'm just going to go ahead and do that. And I'm going to transfer along as I do that, I'm going to transfer along knowledge. So we could argue, you could say, well, look, if we hadn't done this, the S&P wouldn't be where it is, it'd be half of the level. We'd have the same stock market returns as Europe or the same stock market returns as Japan, which isn't that great. Yeah, we'd have an industrial base, but you know, houses in the Hamptons, instead of costing 25 million bucks, would only be at 5 million bucks. And I would say, (33/42)
yeah, so these are the choices that were made. And I'm not sure they were made by politicians or they were made perhaps by default, the US just fell into it. But it sounds like your opinion is that we would be a better off with lower asset prices, less income and wealth inequality. It's not really my job to put a value judgment on it, to be honest. I'm not a politician. It isn't really my problem. My problem as an investor is just to observe and to draw the investment consequences. Now, the investment consequence of this is that the US is deindustrialized. And for now, the consequence of this as the US is deindustrialized and as China's industrialized, the US is saying, okay, this is a problem. We're going to perhaps put wrong causes on the problem. The reason for this is China subsidizes its industry. Instead of looking inward, we're going to blame somebody else for our own problem. And what we're going to do is we're going to put tariffs to deal with this problem. Now, here's the (34/42)
thing. Tariffs, you know, I'm a free trade guy. So I'm naturally some against tariffs, but I do acknowledge that tariffs can work as a band-aid. If you put on tariffs and say, look, we need to build up this industry. And as we do, we're going to protect it for a little while. As it gets critical mass and we get up and running, then tariffs can make sense. But there's none of that in the US today. That's just, we're going to have tariffs and tariffs for tariffs sake just means that you're sheltering your industry, which deep down makes it worse over the long term. And so today the US is basically, I think, has a cancer and has decided, I'm going to put a band-aid on this cancer and the band-aid isn't going to work. So you write, I mean, the reason I'm asking these questions also is because they're central to where the electorate is today. I mean, I think whether they're directly being posed or whether they're sort of implicit in the conversations that are going on within, especially the (35/42)
Republican Party, they're central and industrial policy and defense spending are part of that. You guys comment on and think about the US elections, understandably, in politics. It's important. Again, if we take this imperial model, what goes on in the United States is very important for the rest of the world. How do politics fit into your framework? And how do you follow and think about the 2024 election and the context of the US-China geo-strategic competition? And how was that important for investors? These are super important questions. So first, I'm not American. You know, I'm a French citizen. So I don't really have a bone in this fight. So I actually, to your point, I think of it as an investor, but I'm not emotionally involved, like a lot of people in the US perhaps are with this issue. And now the first point I'd say is that as an investor, you know, you could say, well, do I really care if it's Trump or Biden? Again, I know there's big cultural differences between the two, (36/42)
but cultural issues don't matter all that much to markets, typically. And so I look at it and I think, okay, you know, what impact are they going to have now? Whether I look at Trump, whether I look at Biden, they're both going to run massively easy fiscal policy. Whoever gets elected, that budget deficit in the US, which in my mind is completely unsustainable, that's not coming down. You know, it's going to stay at five, six, seven, eight percent of GDP for as far as the eye can see. Now they may spend the money on different things. There's going to be a lot of rhetoric difference between the two, but basically it's going to be roughly the same thing, where perhaps there is a difference between Trump and Biden is that is in foreign policy. So Trump splits the world between US and foreigners and foreigners are wrong-ends. You know, however you cut it, if you're a foreigner, you're trying to take advantage of the United States. And that was his inauguration speech. It's America first, (37/42)
America first, America first. Biden splits the world between good democracies and bad non-democracies. And it's a very much a black hat versus white hat, sort of, you know, Walt Disney or Western view of the world, where you got the good guys and the bad guys. Now, I think, to be honest, some of the good guys, i.e. the Japan of this world, have taken advantage of this Biden position. You know, for me, the biggest anomaly in the markets right now is that the yen is at 155, 160. You know, that's completely crazy. You've got the world's biggest industrial power, one of the world's biggest in second after China, running a currency that's 40% undervalued on a purchasing parity basis. It's madness. You know, today the yen is one of the cheapest currencies around. Like on a purchasing parity basis, it's cheaper than the Indonesian Rupiah, cheaper than the South African Rand. You know, to me, that's crazy. Now, I highlight this because I tend to think if Trump gets elected, he's not going to (38/42)
stand for that. I think he comes in and he tells the Japanese, hey, guys, 155 is in the price, 120 is the price. And then this has a big impact on markets because the cheap yen has allowed for bond yields everywhere in the world to probably be lower than they should be. It's allowed for carry trades to continue. It's triggered a lot of outflows from Japan into gold and triggered a massive structural bull market on gold. So, you know, that one I could see having a big impact. Otherwise, you know, I think whether you've got Trump or Biden, the anti-China rhetoric frankly stays the same. Whether you have Trump or Biden, I think both actually want to get the US dollar lower. Now, Biden is less explicit than Trump on this. Trump is just out there saying, hey, we want a weaker dollar. Lighthizer is main economic advisor, says it every day. So you've got either way, you end up with a policy of excess budget deficits, weaker dollar, the excess budget deficits and the weaker dollar combined to (39/42)
continue pushing yields higher. So as an investor, it's like, yeah, it's sort of same, same, except perhaps if Trump gets him to come in, a lot of the carry trades might implode pretty early on in his presidency. So, Louis, I'm going to move the rest of our conversation to the second hour. I want to talk about something that is being discussed quite a bit now. In the media, which is the R&B and potential R&B devaluation. I know you have a contrary take to that. This will also give us a chance to talk about de-dollarization, which is something I think we should also clarify conceptually, because I feel like it's a term that's used a lot and often means different things to different people. And to discuss how it fits into this larger framing of American empire and the American imperial economy, which we've been discussing. For anyone new to the program, Hidden Forces is listener supported. We don't accept advertisers or commercial sponsors. The entire show is funded from top to bottom by (40/42)
listeners like you. If you want access to the second hour of today's conversation with Louis, head over to hiddenforces.io slash subscribe and sign up to one of our three content tiers. All subscribers gain access to our premium feed, which you can use to listen to the rest of today's conversation on your mobile device. Using your favorite podcast app, just like you're listening to this episode right now. Louis, stick around. We're going to move the rest of our conversation onto the premium feed. If you want to listen in on the rest of today's conversation, head over to hiddenforces.io slash subscribe and join our premium feed. If you want to join in on the conversation and become a member of the Hidden Forces genius community, you can also do that through our subscriber page. Today's episode was produced by me and edited by Stylianos Nicolaou. For more episodes, you can check out our website at hiddenforces.io. You can follow me on Twitter at cofinas and you can email me at info at (41/42)
hiddenforces.io. As always, thanks for listening. We'll see you next time. (42/42)
!BBH !vote
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👤 Your Leo Strategy Voter Stats
🤝 Your LEO Delegation: 5.678K LEO
💎 Lifetime Earnings:
• LEO: 0.367 LEO
• LSTR: 0.000 LSTR
!votes
🗳️ Recent Votes
Seemed appropriate this morning. 🙂
yeah, for me also, kind of a meh day so far … can only get better … 💪🏽🦁👍🏽
ok we are back - dbuzz ui is more broken but give dopamine via upvotes 🤣😅
dbuzz is so slow. I visited yesterday to try and bait people to buy leo and join us on threads.
I saw that and got rewarded nicely
UI is wobbling, but the upvotes still hit like a double espresso. I’ll enjoy the dopamine while the buttons get patched up.
Maybe it's wise for all of us to use #dbuzz, set leostrategy as beneficiary with 100%
Till the bots are empty
!LOLZ
lolztoken.com
Because they can get down.
Credit: reddit
@amr008, I sent you an $LOLZ on behalf of ben.haase
(2/10)
Delegate Hive Tokens to Farm $LOLZ and earn 110% Rewards. Learn more.
just left over 23 discord channels and counting.
. Over the last few months I sold most everything for Leo. Not need to follow along on those discords anymore. Kinda nice.
There is a lot to be said for going all in on one project and committing to it. Instead of spending time switching between everything you can just be active here all the time.
agreed. And the stress of keeping up with everything was no fun
Starting this Saturday morning with some good pan dulce, coffee & of course, battling my first brawls. #leo #crypto #cent
#splinterlands
Remember the $SURGE snapshot happens at random time during Sunday.
Get yours before UTC midnight to avoid missing the first payment.
Bought on wednesday itself just to be safe lol
Wweet, se whall wwitch to sednesday for the $WURGE wcooping wpree day. !vote
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wen Rafiki.
I am also waiting for it.
#bbh #bbho #dripday
Thanks @bradleyarrow for the tokens. !BBH !ALIVE
How much BBH I need to hold to get the rewards.
Thanks my friend :) !BBH
Its just unnecessary overly dramatic...wayyy too much, that was not necessary
#skiptvads, #fridaymovie, #nowwatching, #superman2025
The squirrel? 😅
that was unnecessary too 😅 I started liking the movie but wtf happen after half movie everything went south
I generally liked the movie but I like Fantastic 4 better 😀
haha funny one
Things are shaping up nicely for us. Not saying you shouldn’t consider a little hedge via SURGE to protect your downside but LEO is in the best shape it’s ever been in from a tokenomics/economics perspective
Lions are coming for $10 LEO. Who’s in?
Impressive numbers across the board! That $1M+ trading volume on LeoDex and the consistent LEO buybacks via LeoStrategy are strong signals of growing ecosystem health. From a tokenomics view, this kind of momentum often fuels sustained value growth
Over 1 M. It's huge.
Yeah, things are heating up and we are just getting started. The little correction in $LEO price feels like a blessing as it will allow leostrategy to gather a larger position at lower cost.
Very curious about the $SURGE pool(s), will that be $LEO : $SURGE or $LSTR : $SURGE or $SURGE:$SWAP.HBD? (I can see benefit of all of these haha)
!vote
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Yes it is huge, but form the other side with that volume Leodex had got just 75 USD...
Being here hidden feels about right..
the right way...
Whatever youth we are.
Sometimes staying low-key feels safer. What does that space look like for you, and what draws you there?
LeoStrategy’s continued success will mean buy pressure in perpetuity for $LEO
Once we start to wrap our heads around this, everything changes
Consider a future where you have a highly liquid cross-chain LEO market (bLEO, pLEO, heLEO, LEO, etc.) and a highly liquid LSTR market and a highly liquid SURGE market
LeoStrategy has a moat for arbitraging all these market pairs and making a profit
Then 100% of the profits flow to buying more LEO and perma staking it
This is permanent LEO Per Share added to the LeoStrategy balance sheet
Fund the flywheel by buying some SURGE 🤝
What's the APR we can expect once leodex rewards go live?
Fascinating setup with LeoStrategy creating constant buy pressure for $LEO. The cross-chain arbitrage moat is a smart play—profits cycling back into perma-staking could really drive value over time. Flywheel indeed
LeoStrategy has changed the rules of the game, but for the better! The economy is working!
Preferred offerings are the biggest moat in Strategy companies
Microstrategy currently has a monopoly on them at scale in the stock market because Strategy companies haven't caught up yet from a regulatory/scale sense
LeoStrategy completely changes this landscape and the SURGE offering - which is a preferred token - is the proof of it
Selling out SURGE is top priority right now. Getting the open market trading to start on the $50k pool that will go live after SURGE sells out will have a huge mNav benefit to LSTR (Not to mention all the capital that's raised to buy LEO while its still cheap)
Protect your portfolio and pick up some SURGE while helping LeoStrategy build a moat like Microstrategy's 🦁
surge has been bought, but I have no more liquid funds to spend. Don’t really want to sell my LEO for it…
!vote
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tiny violin for those that cry about everything lol
Stake Based Curation
Drop your best gems, we'll assess depending on post quality.
For more info check below ⬇️
#leocuration
https://inleo.io/@chorock/hive-price-is-being-supported-by-major-support-level-jne
Thank you for your witness vote!
Have a !BEER on me!
To Opt-Out of my witness beer program just comment STOP below
View or trade
BEER.Hey @chorock, here is a little bit of
BEERfrom @isnochys for you. Enjoy it!We love your support by voting @detlev.witness on HIVE .
Stake based curation parameters
https://inleo.io/@wiseagent/private-pleasures-hzh
https://inleo.io/@bradleyarrow/drip-day-done-at-the-trailer-jwy
A look towards St. Michael's Church in Charleston, South Carolina in June 1957.
#filmphotography #vintage #bbh #cent
See the original post for more photos from 1950s era Charleston: https://ecency.com/photography/@darth-azrael/vintage-photos-lot-3-673
LEODEX 💪🏽🦁👍🏽 ASMR
… breathe in … breathe out …
Relax a little after the INLEO withdrawal today.
#animation #graphicdesign #leodex #asmr
This is actually very nice!
thanks 🖖🏽☀️🤙🏽 it’s „hand made“, not ai!
Yeah, I can tell. Too smooth movements and non-grainy edges 😎
!BBH
did you see my little leostrategy logo animation? !BBH
https://inleo.io/threads/view/moretea/re-leothreads-txauussk?referral=moretea
I did now 😂
!BBH
🖖🏽👁🤙🏽
!BBH
very interesting, i‘m still wondering if and how that prioritizing of premium threads really works … 🤔 🤓 … or are you never using the „for you“ feed? 👀
What do you think about going to the movies alone? 🎬
In my most recent article (link in the comments section of this thread), I wrote about this entirely personal pleasure.
https://inleo.io/@wiseagent/private-pleasures-hzh
Depends on the movie... If it's educational, I will love to go alone with little or no disturbance
Sounds like something I need to try. I don’t go ti movies much though. I think I’ve only been to kids movies with my kids the last 10 yrs.
You have to. See how you feel about it, and if you like it, you'll definitely go again (and again, haha).
I love to enjoy movie alone unless it's a funny one. comedy movies are good to enjoy with others.
I got this. I'm not against going to the cinema with someone, but by choice, I always prefer to go alone.
Productive day today!
Working on the frontdoor.
Fun!
How is your day?
ZCash upgrade through a partnership with Brave browser and the integrated wallet.
#Crypto
!summarize as well !ALIVE
👍
!BBH
I knew it must be an update that crashed the site, but what is the update about?
Anyone knows?
GM
$137k traded on LeoDex so far today
I did 2 of those!
Good morning, nice to see those numbers. 99 swaps brought 137k in volume, That is a decent number.
strong start to the day
Becoming more and more consistent now
Took a photo of the market, my camera was bit shaky but I loved how it turned out.
It's original. It's real. Love it!
Yeah it's very good actually!!! I like it too
Thanks
You're welcome
well since nobody saw this after I posted it here we go again. #feeddasirp
Absolutely amazing and beautiful.
thanks, I spent a lot of generative credits on this
It's not free to use?
i used my credits in the adobe cloud since I am paying for them anyways
In this part of the country, Saturday’s are for chores!
I’m not feeling up to it today.
A beautiful saturday morning from the shores of Africa, Nigeria to be precise.
good morning to you my brother man, how is the day going?
Doing fine around here. How about you?
LeoStrategy’s bot for SURGE should be live today
Among many other features, you can see the stats on SURGE like effective yield and how much dividends have been earned
The first dividend payout goes out at 0:00 UTC this coming Monday
Buy some SURGE before the first payout so you start earning 17.6%+ yield!
its going to be really exciting
I will wait to see how it goes for the SURGE holders this monday if remember correctly.
Please feel free to tag me to any opportunity to make money in web 3.0. I need everything I can get between now and the next 2 months. I may even need to start a power down of Hive. But I wish I don't have to.
Sometimes we just need to do what we have to you if it is going to bring a better result and change of scenario..
Sure. Not everyone has the opportunity to even lean on something.
☀️Happy Ferragosto We from the Dash Italia community🇮🇹💙
🌱A moment of relaxation, but always with an eye on change
😉The #DigitalCash revolution doesn't go on vacation
@dashpay $DASH #crypto #evolution
Some more LEO to my Staking! Have a great Weekend!