Multipolarity: Episode 1

The Golden Whale, 2023 in Crystal Balls, All the Chips in China

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[00:02:00] Philip Pilkington: We'll be asking whether they're even over the. 

[00:02:03] Andrew Collingwood: 2023 in the crystal ball. This year, like every year we're faced with a raft, a space of economic forecasts, and the ones for this year are quite downbeat. The managing director of the International Monetary Fund, Christiana, uh, Giorgi has said that a third of the world economy will fall into recession in 2023.

[00:02:29] And even the countries that manage to keep. Will feel as though they're in recession. I've been reading the press about this forecast and they seem to be split into two camps. The first, I think, was nicely represented by Larry Elliot, uh, of the Guardian, who I think is one of the most, uh, interesting, uh, macroeconomics journalists in the UK at least.

[00:02:51] And he argues that indeed things are looking extremely gloomy, Philip. So he points out. In much of the Western world, prices are rising faster than wages. Corporate profits are being squeezed. Um, developing markets are finding their debt burdens unmanageable. We've had the bursting of both the crypto and the tech stock bubbles, which have.

[00:03:16] You know, been holding stock markets aloft for much of the last year or so. Um, central banks are starting to raise rates, and that's having an effect on companies who are used to low interest rates and more, as well as mortgage holders. And we're now in a position where the US yield curve is inverted.

[00:03:36] It's now cheaper to borrow for 10 years than it is to borrow up one on the other side of the ledger. We've got Chris Giles of the Financial Times. He says there's actually reason to be hopeful for the next year, or at least reason to think it. It's not as much doom and gloom as perhaps most people seem to think it will be.

[00:03:56] Um, he says there are two reasons for this. First, that gas prices have, uh, fallen by half. Um, they've fallen by 50% from where they were when the IMF made it forecast. Secondly, China is ending its zero covid policy. So I thought as, um, as our resident, macro economist, Philip, you could discuss this and I certainly think those who are optimistic are living in cloud cuckoo land.

[00:04:23] Philip Pilkington: Gas futures don't mean anything. They're just, um, what financial markets think the future gas price will be. They're, they can be steered in all sorts of ways by politicians talking up and people's gas prices haven't changed. Um, if you've got your bill, uh, your energy bill, you'll know that they haven't changed until those.

[00:04:40] Those prices change. It's all waffle. Frankly, if gas prices do ease a little bit, it will be a sign that there is a serious recession because the only way that they will ease is if we have a serious contraction of demand. Um, I don't even get the logic of looking at gas prices to forecast a recession.

[00:05:00] That's such an odd thing to do. But I would say that even. The last, um, Sangwe, uh, commentators are still pretty optimistic. I saw that. Um, the Financial Times recently published the Consensus Forecasts for 2023, and these are the ones that, you know, they go around and they survey. Tens or hundreds of economists in the market and so on, and they put them together.

[00:05:25] So they tend to give a pretty good average forecast, and they show that they have been coming down throughout the year. But right now, the, the consensus forecasts are pretty much saying that the United States and Europe are going to have about 0% GDP growth next year, and the UK is going to have minus 1% GDP growth next.

[00:05:46] Now that's not a serious recession. A serious recession is anywhere from three to 5%, minus three to 5%, and a really bad recession is, is above minus 5%. Um, or below minus 5%. Uh, so all of these forecasts are really strange and the, what really strikes you is that all of the things that you've mentioned are constantly in the headlines.

[00:06:09] I'd also add to that housing, uh, markets are, are declining, especially the ones that have been fairly robust up until now, uh, such as the Canadian market and the Australian market, which have become sort of known as the invincible housing markets and, and, Cratering now. Um, so with all of these factors with the raising interest rates, the awful inflation, uh, housing markets falling apart, which means construction sector layoffs, obviously, I mean, it has to and, and an energy crisis on top of this.

[00:06:39] Really you should be, I think forecasting a very, very bad recession. I mean, maybe a base case of minus four, minus 5% of GDP next year, or at least minus 3%. And then if things go really awry and we get a financial crisis from the housing market and collapsing and so on, it, it could be even worse. Again, we could see the wor a worse recession than 2008, 2009.

[00:07:01] I'm not saying that everybody has to be that doomy, but minus 1% growth for the UK. Next. The consensus seems to to be a fancy, 

[00:07:10] Andrew Collingwood: to me, two points really that strike me as well. The first is that there is a, a collection of factors, any one of which could cause a recession, cause a minor recession anywhere or big slowdown in growth.

[00:07:24] Uh, the inflation, the corporate profits, the interest rates rise in quite quickly. Um, the falling housing, like all of those things could cause a, a kind of a minor recession or, or, or the sort of recession. A lot of the, um, the professional forecasters are predicting at the moment though, we have all of those things slamming into the markets at once and.

[00:07:48] I also think that we're massively underestimating the possibility of a crisis. I mean, a crisis always has to be figured in to the percentages of you, you know, the likelihoods for outcome, economic outcomes for any given period. And usually the likelihood of a crisis hitting an economy or a financial market or a specific sector is very low.

[00:08:12] And it really, it's really irrelevant to any forecasts. But at the moment, you know, given the geopolitical situation in Eastern Europe and potentially as well in, uh, Southeast Asia, um, given the fact that there's a ongoing, ongoing military conflict that involves NATO and another nuclear arm, Given all of these things happening in the market, given that we've already seen one bubble burst in crypto, the fallout from from which seems fairly contained, but you would expect there to be other shoes to drop elsewhere in the markets, I would've thought that a crisis should be something that should factor in to most people's forecast.

[00:08:52] I'm not saying completely, but the chances of a crisis aren't approximately zero at the moment. Are they? 

[00:09:00] Philip Pilkington: No, I absolutely agree with you. There's so many potentials for crisis, and the thing is that they're interconnected. I mean, if you, if your energy bill is really high and your mortgage payments go up at the same time, Those two things are inherently related to each other, so I do worry a lot that the people aren't thinking about the interconnections here.

[00:09:22] And it's quite irritating because in 2008, 2009, we saw just how interconnected financial and asset markets are with housing markets, which are connected with employment growth and so on. I, I, I don't really understand why people are, are stubbornly refusing to see the connections between these two things.

[00:09:40] I mean, Just the one that I mentioned on rising mortgage payments at the same time as your energy bill is extremely high. It should be obvious to anybody. I mean, you shouldn't have to be an economist to understand that. When I watched, for example, the, um, the testimony given by the office for budget responsibility.

[00:09:58] In front of the treasury Slack committee here a few weeks ago, they did kind of understand that when it was put to them, they didn't put it in their forecast, but then when they were asked about it, they said, yes, of course, of course, a few very high energy costs and your mortgage rate goes up at the same time.

[00:10:15] It could cause a, a housing crisis, for example. So there are so many interrelated issues here, and it just feels like we're kind of burying our head in. If something really bad happens next year and we get a really serious recession or financial crisis or something like that, I don't think anyone's really going to be that surprised.

[00:10:34] So I wonder even how seriously to take the forecasts. I don't think we're going to be here eight months from now with the economy in crisis and everybody goes, oh, how did we miss that? I think everyone will go, yeah, well we knew 2023 was gonna be a terrible. And when you turn around and ask them, well, why didn't you reflect that in your forecasts?

[00:10:53] I dunno, I suppose you'll get the rub off then, but, uh, it's, it's all a bit odd. Really. We forget 

[00:10:58] Andrew Collingwood: that 2008. It came from one single sector, the housing market, right? And, and specifically a certain sector within the housing market and how the large banks were making money essentially and securitizing that specific sector within the housing market.

[00:11:17] But now we're faced with. Potential sources of crises in multiple nodes of the economy, in multiple sectors of the real economy, in multiple sectors of the financial sector in multiple countries. You know, it's entirely possible to imagine a Eurozone crisis erupting this year, which is something that's, You know, people have been talking about since the last one in 2010, 2011.

[00:11:42] Right. But that's just one of many potential crises. The But the other point I wanted to ask you about, I haven't looked deeply at the IMFs forecasts, but I wonder if they're forecasting. Life to be difficult, but roughly within the same structure as before. Whereas I see 2023 as being the first year of a change of, uh, the terms of trade globally, a change in the way that countries deal with each other, where, you know, one of the big stories for this year is gonna be reshoring and French shor.

[00:12:17] All of this is gonna have a big impact on economies, and at least during the changeover period, it's not gonna be a positive for GDP growth. Not only that, but you've got a geopolitical situation, which is degenerating into blocks rather than a kind of globalized system. That, again, is something that's not necessarily going to be good for the, the global economy.

[00:12:39] And while this is gonna be at the, the ongoing phase this year, I, you know, I wonder whether a lot of. You know, these forecasts for global economic growth aren't taking into account that geopolitical aspect and how that's really going to affect supply chains, profitability, efficiency, all of this kind of thing, which will have a negative effect on 

[00:13:01] Philip Pilkington: overall GDP growth.

[00:13:03] No, absolutely. I think you're, um, absolutely right about that. I mean, that's been, that's been a big theme this year. We've seen that these interventions in the economy, you know, sanctions and so. They tend not to really work out how the ER thinks they will, and they often have rather extreme amounts of blow back.

[00:13:22] I think it could be said, and again, when you look at the foreign policy on geopolitics and so on, we're being told anyway that we're going to get more of this, especially around China, Taiwan, south China Sea. Um, so it's difficult. Again, you kind of come to the conclusion that they're, that they're burying their head in the sand in a way.

[00:13:43] Andrew Collingwood: All the chips in China, one of the key aspects of the change in terms of trade globally has been the United States sudden effort to, to really, uh, hobble China's economic growth. And one of the, uh, pressure points that they've identified is the Chinese ability to get access to microchips and semi conduct.

[00:14:09] They've essentially unilaterally, uh, imposed tariffs and restrictions on a whole range of capital goods, I guess you can call them in that sector, but also the, the goods themselves, the microchips, the wafers, the semiconductors, all of that sector in an effort to slow China's technological process, uh, progress down.

[00:14:31] But in the last few days, uh, users emerged that the Chinese have made some breakthroughs on that, and I saw. On your Twitter account, you were speaking quite interestingly about this, Philip. Yeah, 

[00:14:42] Philip Pilkington: so the report came outta nowhere, really. I mean, I was, I was always very bearish on the chip ban. I thought it was prima fascia ridiculous because it's a civilian technology.

[00:14:55] Banning military technology is hard enough. Uh, just ask the Americans during the Cold War, but banning a civilian technology, which is for sale in every. Is just bizarre. And so I never thought that the chip ban was a very good idea. I never thought it would work, but I didn't think that it would, um, run into the problems that it has so quickly.

[00:15:16] So the telegraph here in London reported recently that Huawei had actually filed a patent for a crucial chip making method. Now there. A lot of details about it, but it appears to have been some sort of extreme ultraviolet, uh, lithography technology. Now, of course, that is the, the key to making chip that, uh, market is dominated by the west.

[00:15:39] A lot of it takes place, uh, in the Netherlands by A S M L is the name of the company. And basically I think the feeling in the microchip space is that if the Chinese crack the, uh, UV lithography. Then they've cracked the whole game really. So that was interesting enough and it really came outta nowhere.

[00:15:57] It does lead you to suspect that they had this in their back pocket for quite some time, and they just played the card when the Americans, um, engaged in the sanctions. Then, um, later, just after that, a, a report came out saying that China were completely shaking up. Their industrial policy related to microchips.

[00:16:15] Now, the headlines on this were negative. I think the, the headline was, uh, battered by Covid China hits pause on giant chip spending aimed at rivaling us. So it sounds like the economy's in trouble. They have to, uh, pump the brakes on their microchip development. But when you read what, what the article was actually about, I didn't get the sense of this at all.

[00:16:34] Basically, the Chinese had been, uh, taking an approach that they called the big fund approach, where they had, uh, about 45 billion in subsidies, that they just threw this at multiple companies, throwing it at the wall and seeing what stock, basically, seeing if, if the innovation would emerge outta that and they'd get the, uh, they'd get the semiconductor independence of the desire.

[00:16:54] But this hasn't happened. And apparently I'd, I'd heard reports of this previous to this report that, uh, chairman Xi Jinping hasn't been happy with the, uh, progress that this has made. And he thinks that it's, um, it's created just a lot of bad incentives, corruption, and so on. So the big fund now has an anti-graft probe, um, uh, set upon it kind of a classic chairman g uh, anti-corruption probe.

[00:17:17] There's usually political machinations going on behind that as well. So I wouldn't read this as a negative at all. I, I think that this is the Chinese recognizing that their old approaches failed and dusting off a new approach. Now we don't know what that looks like yet, but the alternative doesn't make any sense.

[00:17:32] I can't see the Chinese Huawei issuing a patent on, uh, very, very important te. And then a week later or a few days later, China, China just cuts off the funding for this. I mean, that seems absolutely ridiculous. 

[00:17:47] Andrew Collingwood: I think that the whole American approach to this seems, if not ridiculous, very strange. The idea that they can swing in the space of what, half a decade from essentially selling the Chinese.

[00:18:01] Anything that wasn't nailed down. I mean, during the Clinton administration, they were even willing to sell machine tools, which helped the Chinese climb up the ladder of missile technology and they swung from this position, which held true for until relatively recently, perhaps until the beginning of the Trump administration to.

[00:18:21] You know, really atta, you know, declaring defacto economic war. They, you know, they might not have declared it officially in the same way that they have against Russia and Iran, but that's ultimately what it is. And it seems to me though, that it's very strange to imagine that they could restrict Chinese program progress on that given.

[00:18:43] The extent to which China has climbed the technology ladder in the last three decades, and given the size of China, the number of engineers they have, the kind of the intellectual resources they have seems extremely strange to me anyway, to imagine that the Americans would succeed in doing anything other than holding the Chinese back 18 months, two years maybe.

[00:19:05] I mean, I know that you know the. Industry, you know, whether it be the kind of the semiconductor wafers or the construction of the ship chips themselves or. The design of the chips from companies like a MD and, and yeah, it's 

[00:19:18] Philip Pilkington: a, it's a very strange approach. I mean, my, um, my kind of line on it has always been, you know, at one point in history, the Catholic church tried to brand, uh, ban printing technology.

[00:19:29] You know, they wanted a monopoly over the sp, uh, written word. Um, and so they tried to ensure that printing technology didn't spread through Europe. Now, they were correct in their assessment that the printing technology posed. We got their affirmation from. But, um, they were very incorrect in their assessment of how much control they had over it.

[00:19:50] Um, again, highlighting the fact that this is civilian technology, um, it is hard enough to, to, um, hold back military technology from a serious rival. They can engage in espionage, um, they can buy it through a third party country. There are many ways, um, Even during the Cold War, America was never very successful at holding key military technologies back from the Soviet Union.

[00:20:16] I don't know who's got it into their heads that they can press the stop button on a major am, uh, developing economy with, uh, with such a talent and so on. I mean, China, whatever you think of their governing system or nothing like that, it's an incredibly impressive, uh, feat that they've. In the past two decades in terms of their economic development.

[00:20:36] I just think that the Americans especially are way overestimating their economic power, but also what's possible to do with economic policy. I think they really think that the sky's the limit on what they can do, and I think it's a, it's a poor assessment of their own economic strength, which has frankly dwindled in the past 20 years.

[00:20:57] But it's also a poor assessment. What you might call prudential policy, uh, wisdom. There seems to be a lack of wisdom here, especially with respect to the fact that you think some economists would turn around to the American policy makers and just say to them, you know, we've never really managed to restrict.

[00:21:18] Technology to another country, even military technology, this probably won't work. And of course, what's happening now is that as with all of these misguided sanctions policies, it's backfiring because China is building out its own semiconductor industry. So the West used to. Have the advantage of selling this stuff to the Chinese and it made money from us and the Chinese were perfectly happy to let that be our comparative advantage, as the economists say.

[00:21:45] But now we've just torn that up. We say, we don't want to build these for you anymore. And they say, well, we'll build them ourselves. And how long do you think it's gonna be before Huawei are selling semiconductors at a far lower price than other companies? This is what the Chinese are brilliant at cloning technology and selling it.

[00:22:04] Andrew Collingwood: Can I play devil's advocate for a moment, Philip, right? So let me try to put together an argument for you for America's actions and, and say they make sense because of this and see what you have to say. So let's imagine you're America. You understand that. We're probably approaching something like the fourth industrial revolution.

[00:22:25] I know that's an overused phrase, but let's just run with it for now. And we're, we're approaching a point in, in economics where a whole range of new technologies is going to emerge and it's going to improve productivity and efficiency and change the way we do things and, and, and change entire economic models and sectors and those.

[00:22:47] New technologies are going to be things like machine learning, artificial intelligence, the internet of things, telecommunications, um, cryptography. All of these kind of things are going to, are going to emerge and work together. Uh, biotechnology as well, I should have added to that and medicine, but they all require large amounts of computing power.

[00:23:11] So perhaps the American argument would be, Look, we know we can't send China back to, you know, the pre-com computing age. We know that we can't, you know, hold China back for too long. But if we can keep them like. Say two to five years behind us, or two to three years behind us, that gives us a crucial advantage as these tech, these new technologies develop.

[00:23:36] It gives us a crucial advantage in artificial intelligence, in machine learning and in, uh, genetic medicine and all of these things that require big computing power. And by doing that, We'll get there first in exactly the same way as we got to computers first, in exactly the same way as we got to the internet first.

[00:23:55] And once we're there first, we'll have the big plays in the market. And not only that, we'll get to, to set the industry standards and the terms of trade and the governing rules around these industries, and therefore we'll win and we'll be set up for. You know, the last three quarters of the, of, of the 21st century, just as we were the last quarter of the 20th century.

[00:24:20] I mean, is that not an argument for, for taking these? I think that's 

[00:24:23] Philip Pilkington: exactly what they do. Chinese economy, the American policy makers are thinking, I don't think that they think that they're sending China into the dark age. I think that they're doing exactly what you say they're, they're doing, that, they're trying to ha keep it back just a couple of years to lag it in a way.

[00:24:37] I mean, the first thing to ask is, Well, how, why do you think it's gonna work? Are there any examples of doing this in history? No. Every example in history is the technologies cloned. It's always cloned. It's always cloned. I mean, we cloned gunpowder from the Chinese, for example. It's not, doesn't always even go in one direction.

[00:24:56] We clone gunpowder from the Chinese the West did. There was no keeping gunpowder away from the west. The chi, if that was the strategy of the Chinese, Empire back then, it was a ridiculous strategy. Um, so this stuff has never happened. I mean, you can name other examples of it. The, the, the Germans were the first to access, uh, very good rocket engines, for example.

[00:25:16] Yeah. We, we got our hands on them. Um, and the Soviets did too. Um, this always happens, and again, that's what military technology, which shouldn't theory be easier to keep back. So I just think it, it just, it just shows a real lack of prudential judgment on the part of the people that are. Are coming up with these policies.

[00:25:35] I, I think they're, they kind of think they're God and they're not. They, they don't have a lot of control over these things. Meanwhile, China and Russia are playing a totally different game because I think what you're saying is correct. They want to lag this and they see it as a military thing. They think that there's gonna be some, uh, new wave of warfare coming out of these extremely high speed chips.

[00:25:56] I, I think the war in Ukraine is teaching us that, that that probably isn't the case. That warfare remains a pretty primitive game and looks pretty much similar to, um, what it looked like when machine guns and artillery, uh, Aircraft were invented, but um, but even if it, even if it's true, they're, they're, they're not playing the game in a, in a realistic way.

[00:26:16] I mean, the fact of the matter is that China and Russia have in some sectors superior military technology to the United States. I, I'm talking about hypersonic missile technology, which is extremely important if you understand, um, the vulnerabilities of especially naval vessels to this kind of technology.

[00:26:34] And the US isn't. Pouring absolutely everything into developing hypersonic missiles. Instead, it's engaging in these like silly bands of technology. Like it's really, really strange. The moment the old us, I mean the US and the Cold War, the moment that they saw Russia test that hypersonic missile technology, they would've been all hands on.

[00:26:57] To, to, to, uh, to create, um, rival technology and they haven't been. So I think there's real dysfunction at the heart of this real laziness. And then somebody who probably is trying their best, frankly, with a, with a fairly bad, uh, deck of cards that they've been with a fairly bad hand of cards that they've been, uh, given.

[00:27:17] They are trying their best. But, um, I, I really find. Stretches credulity to think that any of this stuff would've worked, and I think the US just needs to get real about the way the world works and frankly, the way it's always worked. 

[00:27:32] Andrew Collingwood: The golden whale. Well, one of the ways that Russia, and I'm sure China in the background and several of the other BRICS countries are responding, is looking.

[00:27:43] Uh, alternative ways to organize trade outside the US system out away from us, control away from the prying eyes of the US Treasury Department and. I noticed, uh, recently that there's been a tremendous amount of central bank gold buying. Now that might simply be central bank gold buying. Sometimes a cigar is just a cigar.

[00:28:07] However, given the torque recently of an alternative, uh, reserve currency, or at least an alternative currency to use as a unit of trade, I wonder whether the, the gold bangers at all related to. 

[00:28:22] Philip Pilkington: 2022, I think is going to be seen as a very, very big year for the global monetary system. It all started with the seizure of the reserves by the United States, the Russian reserves after Russian invaded Ukraine.

[00:28:37] And I thought that this was one of the most shocking things I'd ever seen. Um, It really, it was actually one of the, uh, events that, that made me start reconsidering what the world was going to look like in the next five years. I thought this is really reckless behavior. I'm not alone. I know people in the investment banking sector were saying similar things.

[00:29:00] There were notes out, I can't remember if it was Goldman or JP Morgan put out a note shortly after all this happened, so I wasn't alone. Basically, um, what the US did. Was, it took all of the reserves dollar, US dollar reserves that the Russian Central bank had built up. Um, and technically that's a very easy thing to do.

[00:29:20] Because foreign reserves sit in your banking system. So if, uh, if the United Kingdom has Russian reserves, all those Russian reserves are at the Bank of England. So technically it's a very easy thing to do, which kind of speaks to what the relationship is. It's a trust relationship. Reserves are a trust based asset.

[00:29:39] All monies a trust base are that all financial assets are trust based assets at a very deep level. But if you seize reserve, You're effectively defaulting. I mean, the Russians actually said that the Russians, when it was seized, said the US is defaulting on the obligations that they owe us. And people kind of dismissed it at the time, but technically they are correct.

[00:29:58] A reserve seizure is a default of a sword, and so, Fool me once. Shame on me. Fool me twice. Shame on you. It's the other way around, doesn't it? You get what I'm saying. I've pulled a George Bush there. Apparently he mangled it even worse than me. So I, I'm, I'm somewhat above, uh, George Bush Junior. So the reserve seizure basically.

[00:30:20] Is not going to be repeated because Russia aren't gonna fall for that again and no other country is too. So what's effectively happened is that the US have weaponized their financial system. They've said they've given a clear message to countries, which is something like this. You can hold us dollars in reserve.

[00:30:39] There are great currency to hold in reserve, which they are. But if we really don't like your foreign policy, we're going to take those reserves. And at that point, every country in the world has to look at their foreign policy on the one hand and their reserve assets on the other. And they have to balance the two things.

[00:30:57] And I think that's basically what we're seeing now. So the headline in the newspapers recently in the Financial Times, Was that central banks are buying the most physical gold that central banks have ever bought since 1967. And just to give some context, the run on Gold in 1967 was at a time when the Bradon Woods system, which was the US dollar backed by gold, the old system that emerged after World War II was on its last legs and last time Central Banks rushed to buy gold in 1967.

[00:31:34] Four years later, the Global Monetary system collapsed. Breton Woods collapsed, and the dollar was taken off the gold. 

[00:31:42] Andrew Collingwood: That's quite portentous. So let's really run through a little bit of history. You know, in the beginning you had all currencies were backed by gold or combination of gold and silver, depending on how we wealthy the economy was.

[00:31:56] But certainly for the big ones, like you know, the Britain and its Sterling and the United States and the Frank, they were all backed by gold. And when countries traded with each other, You know, the currencies because they were all pegged at a certain level to gold that made trade fairly secure and ultimately trade imbalances played out or, or, or balanced out by transfers of bilateral transfers of gold from one country to another, which either reduced the backing of gold or increased it and forced governments to raise or lower interest rates and so on and so forth.

[00:32:32] Then after the, the second world, I mean, the gold standard broke down as many of our most more informed listeners will know of. First of all, during the first World War and then during the Great Depression as well. And then after the, after the Second World War, you had Breton Woods, which instituted a new system where the dollar would be pegged to gold, and then all of the major trading currencies would be in turn, pegged to the dollar.

[00:32:59] But a combination of the US running their economy hots through tax cut, the Kennedy tax cuts, and then the increased spending on Vietnam that made it extremely hard for the US dollar to maintain its peg against the, against the price of goals. And ultimately that peg was released as well and all currencies became free floating.

[00:33:22] So currencies floated against the dollar and the dollar also free floated. It was no longer packed. So since then we've had this free floating currency, you know, arrangement. And for many years now because of the increased debt the US has taken on and, and sort of the congressional, uh, impass over the debt ceiling and government shutdowns and things like that.

[00:33:45] Uh, but also increasingly because of US foreign policy, um, there's been talk about the potential to replace the US dollar as the global reserve currency, as the global unit of. But this is, you know, it's always been more torque than action. I think, uh, especially as there's very few of the currencies in the world with the kind of, you know, market liquidity needed and the, the, you know, the number of safe assets and the kind of the light touch rule of law that the US has.

[00:34:14] But I guess, you know, since the US seized Russian assets, that's now gone into overdrive and there is talk. If not a new reserve currency, then a new unit of trade. And perhaps the way to do that would be to introduce something like the IMFs special drawing receipts, the SDRs, or perhaps like John Maynard Cain's Banco.

[00:34:35] And perhaps we'll talk about the banker a little bit later because I think that's an interesting way to arrange trade, but. Something along those lines. And inevitably it would have to be backed with something and perhaps it might be backed with gold. So maybe this is a sign that these countries are, are kind of drawing in enough gold, uh, to be able to, uh, have such, you know, the new version of an sdr.

[00:34:59] I mean, is that something that you suspect 

[00:35:01] Philip Pilkington: might be happening? A lot of the talk around this is speculation on what the plan is by the countries that, as you say, Increasingly want another reserve currency. I think the desire is now there and it's reached a a a a pitch now, which I think it is realistic.

[00:35:19] But I don't think that there's actually a concerted plan, and I suspect that the way this will play out, if indeed the dollar is going to decline as the single reserve currency, it may still remain a reserve currency, but if it declines as the single reserve currency, I think it'll be an evolutionary in gradual process.

[00:35:36] So I wouldn't read the The central buying gold as being the beginning of a new gold standard of the BRICS country. Launching some sort of a new reserve currency that may end up happening, but I don't think it's the plan now. Maybe I'll eat my words on that. And it does happen, and it turns out it was the plan all along possible, but I don't think it is.

[00:35:56] I think that this is a scramble. I think what you're seeing now is a bunch of countries waking up to the dangers associated withholding dollars, and that unfortunately have been created by this, uh, reserve seizure. And I think there was discontent anyway, the dollar was seen as having what was once called an exorbitant privilege and so on In terms of, Buying free stuff effectively.

[00:36:20] We can talk about that shortly, but I think that they're scrambling. I think these countries are scrambling. They're filling their coffers with anything that isn't dollars. But the stuff that what's happening now may eventually evolve into the beginning of the new system. So I think it's worth thinking about for a moment who.

[00:36:39] The countries that are doing this. In November, there was a huge, uh, what's called in markets a whale buyer. Uh, whale buyers are basically mysterious entities that enter financial markets. And you, you see them buy, you see a lot of price action and very large purchases, and everyone in the market goes, there's a whale in, um, who is it?

[00:37:02] You know, this is, To call whale hunting is the joke, you know, and so you see the huge volume purchases, you see the impact on price. It can only be a couple of entities. It can only be a sovereign player, a country, or it can be a very, very large investment bank. Or it can be a, a very devoted. Medium sized hedge fund or something.

[00:37:22] So anytime you see whale activity in a market, a whale hunt begins. So basically, uh, nobody knew who this whale buyer was in November and in, uh, December, it was revealed that it was China. China was the whale, but China's not alone. There were other buyers in the market too, and some of them include the uae, Turkey, Uzbekistan, Kazakhstan, India, and Qatar.

[00:37:48] Now, what do all these countries have in. They're all what I'd call BRICS curious. They're all countries that have expressed some interest in joining the BRICS Plus Alliance. So I do wonder if, if, if this isn't the start of something big, I'm not saying that these gold purchases are part of a grand plan.

[00:38:08] But I think that there are these countries now articulating, um, their desire in concrete, practical form to supplant the dollar as the only reserve currency. One more thing to note. There was one country that was way ahead of the game. On these gold purchases, and it was Russia. Russia started buying these gold purchases after the 2014 intervention in Crimea when some sanctions were imposed on Russia, not the sort of sanctions we saw in 2022, but some sanctions and Russia started accumulating gold reserves consistently between 2014.

[00:38:45] And 2022. Now, the really interesting thing is when they stopped purchasing that gold, they stopped purchasing that gold in mid-January 2022, less than six weeks before they invaded Ukraine. That is a plan. I'm not saying that's a plan to create a gold backed ruble or to, um, try to create an alternative reserve currency, but Russia have a game plan, which is to replace the dollar, and the other countries are now playing catch up with.

[00:39:15] Yeah, 

[00:39:16] Andrew Collingwood: I think that it's widely appreciated in markets. Russia's got an extremely good, uh, financial and economics team. Nabu El Elvira Nabu. The, uh, governor of the Russian Central Bank was way ahead of everybody else on inflation while all the Western. Central banks were saying that inflation was transitory.

[00:39:39] Um, Nabu was, uh, smashing interest rates through the roof and trying to crush inflation because she said it very much wasn't transitory. I think the interesting thing about the story that you tell there is actually that. Changes in this sense often ha can happen accidentally. Nobody plans to return to the gold standard or nobody plans to have a, a kind of an alternative to the dollar per se, but one just emerges And it's easy to imagine a situation where inflation remains chronically high in the west, uh, certainly for some time in the way that it was in the seventies, and debt also remains extremely.

[00:40:22] Political instability internally within, uh, both Europe and the United States increases in, uh, intensity. And at the same time, the United States acts in an increasingly aggressive way in terms of its foreign policy. It's easy to imagine. Then suddenly these countries that have accumulated significant amount of gold reserves, almost defacto then have their currency backed by gold.

[00:40:49] You know, obviously not deur and that have to be changes put in place to actually legally back a currency with gold. But still, it's, um, you know, in a, you know, it's, it's almost in the land of the blind, the one-eyed man is, uh, king and in that sense where perhaps investors or, or or serious producing countries, countries that either produce large volumes of commodities or, or large volumes of manufactured good.

[00:41:15] You know when they're looking for somewhere to park their large current account surpluses, it might start making sense for them. To look to these countries that have accumulated large amounts of gold. I mean, these things can kind of emerge and, and, and progress almost by accident. 

[00:41:31] Philip Pilkington: I, I totally agree. I mean, for the record, I'm not a gold bog.

[00:41:35] Warren Buffett says it well. Gold has no intrinsic value to it. It's. It's, I mean, it's rare. That's, and it looks kind of nice, but it doesn't really do much. I mean, it's involved in some manufacturing processes and so on, and it's used for parts and certain things, but really it's ornamental, it's jewelry, it's, it's, you know, what's widely liked.

[00:41:53] But I have to say in the past year, I've become far less of a gold. Bear, and by bear I don't mean I'm making a call on the price. I, I haven't looked at the gold market in a few years, but by bear I mean I'm less skeptical of gold as an asset. In a sense. I'm less skeptical of people's motivations for choosing gold because Kanes was a, you know, a very rationalistic type of person and he, he, he saw what Buffett saw.

[00:42:20] And I believe it too, that there's no reason that gold should. The, uh, the money of choice. But I think what this year has taught me is that maybe, as you say in the, in the land of blind, the one-eyed man is king. If everything isn't working, going back to something that, you know, and that's worked in the past is actually a very rational thing to do.

[00:42:43] So I think, I think, I mean, I've. I've, I have to say it's been somewhat humbling for me being a, being a barber of AIC guy, but it, it does make sense that you'd rush for gold, um, because in the worst case scenario that you outline, if there is serious instability in the Western economies, Major financial crises continued, um, foreign policy and geopolitical instability, and continued economic weaponization of the financial systems of the west, which I really hope doesn't happen because it is not good for our countries and it's not good for our foreign policy either.

[00:43:15] But if it continues to happen, Cuddling up to gold, which we, you know, we know and love from centuries, for centuries is actually not a terribly irrational thing to do. That said, I, I still think that if a reserve currency emerges, it probably won't be purely gold backed. I think, um, I think it probably the, the noises that the BRICS plus countries have made is for a kind of commodities backed currency, and I think that seems.

[00:43:43] That seems more, um, realistic to me. And it also seems, it makes more sense because the thing is that a lot of these BRICS plus countries are actually big commodities producers. Obviously Russia's one of the biggest oil producers in the world, Saudi Arabia, who've made some noises about. BRICS Curiosity recently are, again, one of the biggest oil producers.

[00:44:03] Brazil is one of the biggest producers of iron ore, so backing them and tying them in some way to commodities would make a lot of sense. I not in so far as pricing, the currency, uh, works, although there is some sense to that. The, a lot of these currencies are priced off the commodity that they're based on.

[00:44:21] So the Russian ruble can be predicted with the oil price. The Brazilian rail can be predicted with the iron ore price. So there. There is some valuation anchor there relative to the commodity, but I think more important than that, it gives them credibility, it backs it, it backs them with these, with these commodities that these, that these countries permanently produce.

[00:44:41] Brazil, may have great gold reserves today and terrible ones in 10 years. That's what happened to the, to the US Britain wood system. Fort Knox was full of gold at the start of the system. Um, and James Bond villains were envious to break. By the end of the sixties, Fort Knox was, was empty, pretty much empty.

[00:44:59] So tying it to a commodity that you actually produce is a, is a more permanent arrangement, I think. But it comes with, um, with, uh, problems of its own. I mean, you can't, commodities prices are very volatile. So tying, uh, a currency's value to them could, uh, introduce a lot of volatility. But there are some solutions to that, um, that I can think of.

[00:45:19] Technical solutions, but I think that would be, That would be the logical way for them to go Yuan, unless they wanted to go with a bank arrangement, uh, like the one you mentioned. Perhaps we can talk about that. But, um, that, that, that usually requires a kind of global buy-in. So I'm not sure what a bank arrangement would look like in a world that, uh, is as fragmented as are seem to be coming.

[00:45:40] Andrew Collingwood: I think that the nice thing about potentially having a commodities currency back to the basket of commodities, for example, Or even gold for that matter. Um, I mean, again, I'm really not a Gold book at all. I, I, I, but I think one of the potentially good things about that situation, and I suppose this gets back to Kane's idea of the Bangor.

[00:46:05] Is that one of the major problems, you know, on a secular macroeconomic level of the last 30 years, really since the Asian financial crisis of 1998 and the, and the Russian sovereign default, uh, shortly thereafter. Is that there's been tremendous imbalances that have built up around the world in terms of trade between individual countries.

[00:46:29] So you, you know, you've got China and uh, uh, and, and Germany and, uh, a lot of the Southeast Asian countries, uh, building up huge. Current account or trade surpluses. And then you've got the United States and much of Western Europe, apart from Germany, uh, with these really hefty and chronic, uh, trade deficits and current account deficits.

[00:46:51] And I think pa, perhaps one of the advantages of moving back to gold to a certain degree is that it would really force a lot of countries, um, It would force upon all countries a way of, of kind of keeping these imbalances in check so that, you know, eventually, you know, your peg can't last that long with that level of trade imbalance.

[00:47:16] And I think that was the beauty of. Keynes Bangor, and again, I hope we have an informed listenership, but for those who don't know, Keynes, instead of, uh, wanting the u the US dollar, which the Americans wanted as the reserve currency and the unit of international trade and, and the currency that was pegged to gold, to which all of the currencies were pegged, Keynes wanted to introduce a unit of international trade and, and a unit of reserve, uh, called the Bang.

[00:47:44] Uh, and the bank hall would essentially, uh, you know, allow all, you know, all trades to clear itself and. He would also through that system force, not just trade deficit countries, as happens at the moment, but also trade surplus countries to bring their current account into balance again, the current and the capital account into balance.

[00:48:08] And by doing that it would, it would make it much easier for the. You know, for bilateral trade to rebalance itself. So for instance, in the Eurozone crisis recently, it wouldn't just have to be, say Spain and Italy and Greece, grinding down on wages, grinding down on costs to try to bring their competitiveness back in line with Germany so they can bring their trade balance back in line.

[00:48:33] Germany would also be expected, uh, you know, to inflate a little bit and to give its population a better standard of. Right, which is commensurate with its trade and current account balance. And by that the rebalancing could happen a lot better and a lot less painfully. And I wonder whether, I mean, this is real pie in the sky stuff, of course, but perhaps a breakdown of some sort of the current system.

[00:48:59] Um, might allow something a little bit more rational to emerge. 

[00:49:03] Philip Pilkington: I mean, you'd like to hope so, but you know, the banker always required very large scale global buy-in. That's the reason it didn't work. The Americans said we we're not having that. It requires continual buy-in too because some, some aspects of how it functions can feel a little bit unfair.

[00:49:20] No, it's not economically unfair, but it feels kind of morally unfair, I guess. And unfortunately, as we saw in the Eurozone crisis with Germany sometimes, uh, Countries are apt to confuse moral in economics, right? That's right. 

[00:49:33] Andrew Collingwood: Like, they, like, they see a look, we've got a trade surplus that's because of our virtuousness.

[00:49:39] Right. And, uh, uh, like why should we close that gap that it's w it's working, we've gotta trade surplus. Why should we change? 

[00:49:46] Philip Pilkington: Right. And so the bank system would kind of take, uh, take that money and recycle it into the poorer country. I mean, it's a, it's, you know, it requires a lot of goodwill on everyone's part.

[00:49:56] And, uh, Goodwill is at. Is that a premium these days? It's not, uh, there's a lot of bad will in the world today, so muddling through seems to be the more likely outcome. And you're right. If some sort of a gold standard reemerged or commodities back standard, it would, uh, readjust trade in a more. Aggressive way, shall we say, in a less forgiving way.

[00:50:20] And we would be the ones, the western countries who run the trade deficits will be the ones that would suffer from that, not the trade surplus countries. So it'll be interesting to see how it plays out. 

[00:50:31] Andrew Collingwood: Well, the Western countries having to do the suffering and the adjustment, I'm sure is not at all attractive to Russia and China and Saudi Arabia and Qatar and those countries.

[00:50:41] Right? It's not what they want at all. 

[00:50:43] Philip Pilkington: No, no. I'm sure they, uh, have our best interests at heart, but, uh, perhaps we should have our best interests at heart and realize. The precarious of the situation that we're in.

[00:50:59] Andrew Collingwood: You've been listening to Multipolarity Subscriber Follow for Fresh episodes every week.