Multipolarity: Episode 10

Silicon Valley Bailout, All Butter No Guns, The Art of Peace 

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[00:02:00] Andrew Collingwood: Coming up this week, Silicon Valley bailout. As SVB goes under, we pick through the wreckage and play back the black box recorder. It'll take 10 

[00:02:09] Philip Pilkington: years to replace the arms Britain sent to Ukraine. According to the Defense Select committee.

[00:02:14] Should we ask our enemies to wait or does Britain need to retool its industrial? 

[00:02:20] Andrew Collingwood: Finally in news of the miraculous, Iran and Saudi Arabia have broken a historic peace accord. All thanks to China. Are we ready for a world in which the CCP is the new Jimmy Carter, but first 

[00:02:33] Philip Pilkington: Silicone Valley Belays? The collapse of SVB has been quite an unusual event.

[00:02:40] Really, it, uh, looks, uh, a lot different from some of the other, uh, financial crises style events that we've. In recent memory, this is because it's, it's basically taken the form of a, kind of a classic bank collapse. The Federal Reserve hiking interest rates has hit the bond market very hard. SVB had a lot of investments in US treasuries and also mortgage-backed securities, so they've taken a very big hit from the rate rises by the Fed.

[00:03:07] Now that, that's the case across markets, that the interest rate hikes have been hitting asset classes all over the place, equities and bonds, but the, the hit to bonds has been particularly bad. This time around now, it's kind of the second component of the SVB story that makes it very unique and interesting.

[00:03:23] And that's the fact that what we saw was actually kind of like a pretty, uh, classic bank run. We don't typically see classical bank runs before these days because after the 1929 crash, most western countries uh, introduced deposit insurance. And what deposit insurance does is it, it ensures that, that your, your savings effectively are insured.

[00:03:42] Now those insurance levels are only up to a certain limit. So in the UK it's 85,000 pounds, and in the United States it's $250,000. But that's sufficient for most people's normal savings. And because you know that your savings are guaranteed, when you hear about something scary going on at the bank, you don't tend to go and queue up and start shedding at the bank manager asking where your savings.

[00:04:06] Now the issue with SVB is that most, if not almost all of their depositors had deposits that were far higher than the $250,000 deposit insurance. And the reason for this was because, Their clients are, as the name would suggest, s and valley startups or smaller companies. And the way that these, uh, companies finance themselves is they issue large amounts of equity into the market.

[00:04:32] So imagine if they go out and they sell, say 10 million, 50 million, maybe even a hundred million of equity over the course of say, three to six months. And then what they do is they stash that large amount of. As deposits in the bank and they live off that money while they're trying to get up to speed.

[00:04:50] Cuz of course, startups and venture firms don't make money for possibly even for quite a few years, you know, 5, 6, 7, 8 years even. So they, they, they squirrel this away like, like nuts in, in winter, I suppose. And they draw down on the deposits that they've put in the bank. But of course these deposits are much higher than the $250,000.

[00:05:13] So when the whole, so when, when the inve, when the depositors heard that there was something going on with the bank, it was a classic bank run, they panicked and they started pulling their money because their, the deposit insurance didn't cover the, the, the sizable piles of cash. So what's happened with the government, I mean, effectively in the US the Federal Reserve has bailed them out.

[00:05:35] It's, it's waived the $250,000 limit and it. Your, all your deposits are, are insured, so that's, you know, some people are making it out that it's just some small rule change. No, that's, that's a bailout. The Federal Reserve Deposit Insurance Corporation, who is the one that owes them? The, the insured money only owed them $250,000 each Contractually.

[00:06:00] But they, they just gave them a bailout. That money comes, it seems, through some combination of probably money creation and X and, and new levies put on other banks, which presumably will be put through to their customers in the uk. The situation is still actually quite unclear at the time of. Us recording this podcast, it appears h s BBC has bought the Silicone Valley Bank UK for a pound, so that means that they take on all of their assets and all of their liabilities.

[00:06:31] I, I don't, there may have even been further details of this deal at the time while we were recording, but definitely the first thing that struck me. Is that, I don't think that's a particularly good investment, which is why the US Bank wasn't able to be sold, and I'm quite surprised that that Hssbc purchased it.

[00:06:49] I wonder was there a sweetener or something, but there's no point in speculating about it. We'll probably know more soon. The one other thing is the people will hear a lot. There's debate. The reason the people are debating whether the US bailout is actually a bailout is because the, the bank managers and all the CEOs and all that were not bailed out the bond holders.

[00:07:09] The, the stockholders never think we're not bailed out. It was only the depositors, but, you know, it's still a bailout, but that's why there's, there's some pseudo debate I'd say about whether it's a bail later. My response to 

[00:07:21] Andrew Collingwood: this at first was absolute outrage. I also felt that it was the response of the US federal government was going to store up a great many problems for the future.

[00:07:33] But on reflection, I've started to wonder whether this isn't yet another sign of a failed economic system that needs root and branch reform in the west. That the, the neoliberal economic system, which has held sway since at least the early eighties, has essentially run its course. And we are now seeing the morbid phenomena such as bailouts for preferential in-groups.

[00:08:00] And to get back to the outrage, I think this is absolutely outrageous. The Federal Reserve is increasing interest rates, and it is doing so specifically to squeeze the economy and thereby reduce inflation by reducing demand for good. Everybody feels pain in that situation. Some businesses go bust because they can no longer roll over loans and therefore they have to lay off people and people lose their jobs and their incomes.

[00:08:28] And they're fa and they're faced with a great deal of financial hardship and anguish. Some people have to pay considerably more for their mortgages, and perhaps some people lose their homes. Because of this, the overall economy slows down, and perhaps even contracts. I mean, a lot of fed efforts to get rid of inflation.

[00:08:46] If you look at the past, that have essentially been achieved by creating a recession, so everybody's feeling a great deal of pain from this. Even those people with, you know, s and p 500 tracking funds. Are losing out. Even people who have a bond portfolio themselves are losing out. Everybody's feeling pain, and yet, here comes Silicon Valley Bank and the depositors.

[00:09:09] There are very wealthy people. They're people who have deposited hundreds in some cases, hundreds of millions, and even billions of dollars. If you look at the, the largest depositors within SVB and. They're CEOs, they're the founders of Silicon Valley startups, but they're also venture capitalists, people with significant terms of capital that they invest in these startups.

[00:09:36] And because these people are very well connected within the administration, it's the rich people who are getting the welfare checks at the end of the day. And these welfare checks are going to be paid by the very taxpayers who are also being squeeze. By exactly the same phenomenon that the rich folks are getting bailed out for, and I just found that absolutely outrageous.

[00:09:58] It's actually made me feel quite angry. A group which is connected to the government has a tremendous amount of PR power and media reach using that to get taxpayers to bail them out for their own foolishness. Excess deposit insurance is available, so if you deposit an amount in a bank over $250,000 over the F D I C limit, you can take out insurance against that additional amount for occasions just such as this.

[00:10:28] Everybody knows what the limit is. Everybody understands what the limit is. It's just a foolish, stupid mistake. There are other ways of getting around it as well. You can, for instance, spread out your deposits to mitigate some of the risks, but none of these geniuses did that. And, and, and let's be honest, these startup people aren't, you know, the people who are.

[00:10:48] Starting up Silicon Valley Bank type firms and taking massive sums of money from various rounds of funding, from venture capitalists and dumping millions and millions of dollars into a bank, the not your average mom and pop startup company. These are people who have left jobs at McKinsey and Goldman Sachs and have been educated at Yale and have decided to have a go at becoming mega rich through founding a startup.

[00:11:14] Okay? They're not just your average. Folks. I think the second realization was this has really gone store up problems for the future. Because now essentially what the federal government has said through the Federal Reserve is that all deposits in banks are going to be insured. That you can put any amount of money in IT bank, and the federal government in extremists will pick up the tab.

[00:11:38] If the bank that you've put the money in goes . That seems to be the precedent that's been set. Now whether they want to draw a line under it or not, you know that the next time a bank is, they're having hard times, the depositors will want to be made whole. And they'll just point to this precedent and say, look, why them, but not us.

[00:11:58] And it's difficult to imagine in that situation, the Federal Reserve and the federal government saying no. What that does is that incentivizes risk, bad risk taking. It incentivizes people. To put large amounts of money beyond the deposit insurance maximum into banks that pay higher interest rates because they're making riskier investments.

[00:12:23] You might as well now, because what's the difference? You, you, you put it into a bank that's investing in housing or investing in other forms of very safe, long-term assets and you know, you, you, you accept a very low interest rate on your bank deposit because of that safety. Well, why would you bother anymore?

[00:12:41] Why not just. Dumps the money in some far riskier bank and get a higher interest rate because you know that, you know, in the event of collapse, you're gonna be made whole again. So first of all, I felt a certain degree of outrage. Secondly, I thought that the US by taking this decision, by taking the easy in inverted comments route out, had started a problems for the future.

[00:13:03] But the third thing I thought of was, This is really the death rows of a failed economic model. We've had this neoliberal model based on deregulation, based on releasing the animal spirits of the markets. Based on light touch regulation since at least the 1980s in Britain, we had Margaret Thatcher in the Big Bang financial reforms and her economic reforms in the United States.

[00:13:25] They had Ronald Reagan who went about similar things. Really now I think we're reaching the death rows of that and, and, and the certain morbid phenomena that we can see now. For instance, if you look at emerging economies when they go through crises, You always find that there are ingroups groups that are well connected with the government, who the government tries to protect from the pain of dealing with this crisis and, and the pain of the economic reform that's required.

[00:13:50] You saw it even in Southeast Asia in places like South Korea where IMF really had to put their foot down with South Korea. To get rid of some of the connected kind of mega corporations and chi balls run by very powerful families and to stop the South Korean government protecting them. Same things happened in the past in places like Russia and other emerging market economies.

[00:14:10] Now we're starting to see similar things here, although we don't view it like that. But it's very much the case that this is a well connected group with a, a strong amount of PR power, big media outreach, a big voice, and it's just been protected from the pain that everybody else is having to suffer. And I think that's very much a sign of a dysfunctional, not just a dysfunctional economy, but a dysfunctional economic.

[00:14:37] And I think that's something that we really ought to bear in mind here when we're viewing this story. The 

[00:14:40] Philip Pilkington: stupidity is, is really astounding. I mean, a, as you say, the people who go into this space, at least on paper, are very well educated. You know, they, a lot of them work adjacent to finance stuff.

[00:14:52] There's a big FinTech sector. They're plenty of lawyers are in Silicone Valley, from what I understand, and no one could figure out deposit. I. I mean, not just the, the, the people themselves who were running these businesses and leaving these giant cash hoards, uninsured. But what about Silicone Valley Bank itself?

[00:15:10] I mean, if your key problem as a bank, or not key problem, but if your key kind of constituent is idiosyncratic in a way that you have these giant pools of reserve. 50% of your energy should be like focused on how to stabilize and ensure those reserves in some way. I think the effects that you're talking about are absolutely key.

[00:15:33] Like today, if with the current deposit insurance, if you have say, $5 million, And you go to a slightly dodgy looking bank that's offering you these enormous uh, savings interest rates, you probably kind of shy away cuz you go, well, you know, only $250,000 of this is insured. I'd better not go with this.

[00:15:54] Slightly risky but attractive return opportunity with this kind of slightly dodgy bang. But as you say, well, if you've insured everybody's capital, which is pretty bonkers to me because capital is. Right as it were. It's, it's, it's, it's something that you kind of earn and you have to deploy and you have to manage yourself.

[00:16:13] Now that we've taken away that, and we've socialized capital in that way, of course you can go to the slightly more dubious bank with the higher return. There's no downside to doing so. So the moral hazard here is, is enormous. I, I think possibly even larger than what the 2008 crisis. I suppose the other thing that's really striking, I think you kind of touched on it, that this does really feel like the.

[00:16:36] Of that economic model that you described. A lot of the aspects of that model since 2008 haven't been very functional. We've had economic stagnation, you know, we haven't seen very good wage growth, very good GDP growth, anything like that, but, and even the finance sector has been kind of awful because there's been zero interest rates and markets are very overvalued and returns are.

[00:16:58] But on this little corner of the economy, you had this seemingly thriving, innovative growth tech sector that everyone kind of, you know, paid lip service to and was very deferential toward, and all the people involved in it were kind of like, The geniuses and the people moving society forward. And I don't think it was all bad either.

[00:17:17] I mean, it really did give kind of a, you know, a ray of hope as it were. And that sector itself tended to be very kind of bootstrappy and there was a very, very strong libertarian streak within the sector. You can say that pejoratively, or you can mean it positively. I think pejoratively, there was ideological elements.

[00:17:35] Possibly weren't very realistic and were a little naive, but you know, more optimistically it, it did kind of have a certain, certain land, vital, you know, and it was creating something, or at least it seemed to be creating something. I think that's dead now. I think the people who took those bailouts did so, and I understand why they did so.

[00:17:52] I mean, it was their income. Not so much understanding why the Fed gave it to them, but I understand why they took it. But in taking it, I think it's a poison pill. I, I don't think Silicone Valley will ever be the same again. Even just the hit it will give to the kind of morale to the story that they told themselves about themselves.

[00:18:09] They've lost their innocence. Now they're not the new kid on the block creating something fresh. They're just like the battle bankers that got bailed out in 2008. And yeah, it does feel that like, what? What do we have next? What can we now create? Like the eighties and the nineties, we created this seemingly thriving financial sector that blew up twice first in the.com bubble, but you know, that was manageable.

[00:18:32] It was just a bit of excess. And then spectacularly in 2008, and it's been pretty sluggish. And then we've got the tax sector and that was the new frontier. Well, that's just blew up and they took a bailout. So yeah, it's really hard to see where this kind of goes from here, and it is really kind of the economic story that we tell ourselves.

[00:18:52] So I, I mean, maybe something new will emerge, but it's very, very hard to see where it can come from now. Yeah, it's 

[00:18:58] Andrew Collingwood: amazing the number of genius Libertarians who. Were 100% against government interference in the economy. That was what ruined everything, and the government should just get out of people's business.

[00:19:10] The government should be much smaller, taxes should be much lower, and the government should really only be involved in the enforcement of property rights. And then when it all went pop, all of these principled libertarians running to the government for taxpayer funded bailout, as you correctly said, it stores up all kinds of problems for the future.

[00:19:30] Because it's quite clear that one of the lines that the PR machine was running in the process of trying to persuade everybody that a bailout was justified is that, well, you expect to be able to get money back from a bank that you've deposited in it. It's not like a risky kind of bet when you put money in the bank.

[00:19:49] You expect to get it back. Well, yeah, of course. Good. You know, right. For you and I who get our wages paid into the bank and maybe have a small amount of savings in the bank, but when deposits in the bank run up to tens, hundreds of millions of dollars, then essentially what you're doing is you're loaning the bank money, which the bank then takes and invests on your.

[00:20:15] Whether, whether it's presented like that or not, that's what it is. And like any kind of investment that you make with your capital, that capital is at risk. And that's the foundation of capitalism. You loan out if your capital in exchange for a return on that capital, and if ultimately we're going to backstop that capital.

[00:20:37] So you always repaid the princip. Well, you're changing the entire rules of the game and certainly now with the banking sector, as you correctly pointed out, the rules have changed completely. It seems to be the case that people are going to move towards less reputable banks because you case now about the risk involved and you know, I think they've stored up pulse sorts problems.

[00:20:57] But of course the second part of this is, as you say, it seems as a certain apathy. These people who are. Self-congratulatory are very happy with themselves in a lot of ways, who tend to believe in their intellectual prowess, and to the extent where it, it verges on, you know, being, you know, conceitedness at times seem to be just not sharp.

[00:21:20] Kind of blunt tools, people who let themselves fall into this sort of circumstance. Organizations where this sort of deposits are, are, are commonplace. It really doesn't feel like an, the avant guard, the, the, the tip of the, of the economic sphere, the, the kind of, the bleeding edge of economic innovation.

[00:21:42] It, it doesn't feel like those sorts of sharp minds are involved in. And as I said earlier, I do feel it's, it's a, it's a morbid phenomena of a economic model that's long pasted sell by date and is really just waiting to be put out of its misery by the next model. 

[00:22:02] Philip Pilkington: Yeah. One thing probably to consider as well, given the nature of the podcast we run.

[00:22:08] Is the impact on international relations? I think it can't really be overstated that tech in the past 10 years or 15 years has played an integral part of forming partners and alliances. American Tech has a pre presence all over Europe and as a presence in the uk. It has a presence in places like Israel.

[00:22:28] It's a real kind of alliance network and there are lots of global tech events every year. The tech summit famously in. And so tech is a real kind of international meeting hub for the western world. And often if you're getting in inducted into the club of the Western world, your tech sector will start to grow.

[00:22:46] Even. Even Ukraine's tech sector has started to grow prior to the war and even after the war. And the big promise to Ukraine after the war is that they'll become an international tech hub, whether that's realistic or not. So this is kind of a, this is a very important geostrategic sector in a way, not because they're.

[00:23:04] New apps that are gonna help the West overcome its adversaries. I did hear some of that on Twitter. That's, that's, uh, I, I don't buy it, let's put it that way, but I, maybe there were those applications in the past, but I think those technologies are now well developed and that they're going further and further down the consumer chain with the products that they've been producing for the past few.

[00:23:26] In terms of the networking effect it has all over the world. Tech has been huge and what has happened with the collapse of Silicone Valley Bank is the discrediting of the sector. Now that doesn't mean sector will disappear. Hopefully it will reform and it won't have as much fraud and the good tech companies can can maintain.

[00:23:43] And with this deposit thing, I think you're getting at it there. There's a reek of unprofessionalism about all this really amateur stuff. Not consulting lawyers, not looking at the rules properly. A whole sector doing that and a well financed one at that, making the kind of mistakes that, you know, a small building company might make.

[00:24:01] It's very hard. But, so, so hopefully they can kind of level up in that regard and, and, and, you know, it'll keep rolling, but I just can't see it being the kind of lever of, of really an exercise, a lever of, of soft global power. A very important one for the. And I think that's disappeared now. I think all that, all that money that flowed from Gulf States and Middle Eastern countries and stuff into the tech sector and all that desire to be part of the tech world, I think that'll fade 

[00:24:30] Andrew Collingwood: after this.

[00:24:31] I think it's very difficult to overestimate the extent to which the American leadership in the tech world, whether it be computer, Whether it be telecommunications and networking systems, whether it be computers themselves, and then later social media where American leadership, America's ability to be the first to market in all of those sectors gave it a huge amount of soft power from the 1990s onwards.

[00:24:59] But these days, although I agree, I did see some people say that these are the companies producing the apps that are gonna help take on China and Russia. I'm not sure in a camera filter that makes you look like a Disney princess while you're singing to your TikTok followers. Is necessarily gonna be taking on China 

[00:25:22] Philip Pilkington: all butter, no guns, 

[00:25:24] Andrew Collingwood: something else that's not going to be taking on Russia and China is the British Army or not for 10 years at least.

[00:25:32] Apparently this week the British Defense Select Committee, which is the British equivalent of a kind of a congressional committee, heard that it was going to take 10 years to 

[00:25:44] Philip Pilkington: replace. 

[00:25:47] Andrew Collingwood: Material that the UK armed forces had sent to Ukraine over the last year. Now British, the British Armory was already running quite low in a joint exercise with France and the United States.

[00:26:04] A year or two ago, Britain ran out of its entire national stockpiles of. Ammunition in about eight days. But even to get back to those levels, the United Kingdom is now looking at 10 years to replace the material that's been sent to Ukraine. And this, this is a really quite staggering development that Britain's had problems with procurement.

[00:26:27] It's taken a very aggressive and quite bellaco foreign policy line. We have individuals like Tobias Elwood and Parliament screaming. To lead a coalition of the willing to take on Russia, and yet at the same time, they're running their stockpiles of material down to approximately zero. 

[00:26:47] Philip Pilkington: Yeah. I think this kind of can be tied back into the story about SVP really because.

[00:26:52] This is a fundamentally economic problem. Britain just does not have the manufacturing capacity. If you rewind back to 1970, British manufacturing made up about 30% of gross value added. I mean, that's somewhere close to China levels, you know, I mean, really, maybe not one in three, but close to one in three people got up every day outta bed and went to work in an industry, British people who, who made their wealth to entrepreneurs and capitalists, and so.

[00:27:21] Made their wealth mainly out of industry, and what we've seen is a complete shift away from this to the extent that now manufacturing makes up less than 10%. Of gross value added. And of course there are people who make their fortune amount manufacturing famously, um, Dyson, but they're rare. They're much rarer relative to people who make their money out of finance or out of tech, right?

[00:27:45] We've re geared the whole economy toward this kind of financial model with a kind of tech supplement. And neither of these things can really do much when confronted with the hard realities of war. I mean, even at the start of the Ukraine War, I remember there was great hope. For technology making this huge difference to how war was full.

[00:28:05] At the extreme end, people were almost fantasizing about a kind of a terminator war where there were machines fighting it or something like that on our side anyway, because we assumed Russia didn't have the, the same capacities, but even at the more reasonable side. I remember at the very start of it, there was a lot of talk about switchblade drones, which are kind of, they loiter and they're loitering, music munitions I think they're called, and they, they loiter in the sky and then when they see a.

[00:28:29] Piece of artillery or something, they fly in and they suicide run the, the, the vehicle. I think there was actually a genuine hope that these new. Relatively cheap tech, high technology products would be able to completely redefine the battlefield in a way that you'd pretty much deny the capacity for stuff like tanks and artillery to operate, because these things would just be everywhere and they'd be unbeatable.

[00:28:53] Well, that hasn't proof the case. This is a, this is a tank in artillery war, and nobody talks about switchblades anymore. I, I haven't heard it even mentioned, and nobody's pretending that this war is about particularly high te. Of course through the tech technological component, insofar as reconnaissance, drones have been proving really, really important.

[00:29:13] But the, but it only operates relatively the reconnaissance. Drones have meant to come back of much more primitive kind of blood and iron technologies like artillery, which has been around since the canon really. And tanks, which are a slightly more recent invention, but still a hundred years old. We've retooled our economy in such a way to create this boom.

[00:29:34] Tech, finance, economy. And then you know, when you turn around and you want to actually try and be a serious military power, you realize that you, you simply can't. 

[00:29:44] Andrew Collingwood: I have never understood the logic of the high tech drone wars folks who believe that that might give a country like Britain an advantage.

[00:29:54] Look, if war becomes ultimately, Robots and drones and various unmanned vehicles. Then the winner is going to be the person or, or, or the nation that can produce the most drones and robots and unmanned vehicles. And that aims Britain with its small manufacturing sector. But I think again, how, how, how can I put this without using naughty words, the poorest state of public administration and the failure of our economic model and the people who run that economic.

[00:30:28] It's been well known for years, perhaps decades, that Ministry of Defense procurement is dreadful. It is at least as bad as the sort of issues that they're facing at the moment in the Pentagon with their procurement and some of the failures of their big programs. Perhaps it's even worse to give listeners an idea of the sort of scale.

[00:30:50] We've also had cuts to military budgets at the same time as we've been fighting a counter insurgents who won the cold tails of the United States in Afghanistan and Iraq. We've also had some really big ticket items that have come to you. For instance, the construction of two very large aircraft carriers, the purchase of fifth generation fighter jets in the form of the F 35 from the United States.

[00:31:14] And as well a replacement for Trin, which is the system of missiles launched from submarines that forms the entirety of Britain's nuclear deterrence. So all of these big ticket items have come. You've had a very poor quality of procurement, a lot of big mistakes, a lot of money wasted on projects like Ajax, which is a kind of infantry fighting vehicle or or medium armor project.

[00:31:40] And at the same time, you've had cuts while we've been fighting. Counterinsurgency war. So politicians knew all of that. They, they understood all of that. The British army now is down to about 70,000 troops. It could not put a single division in the field of battle. It could maybe scrape together two brigades to fight in the field.

[00:32:05] So, you know, we're talking about 10,000 men perhaps, that it could put at the sharp end of any conflict. It would probably last a week or so in any conflict before it ran out of ammunition. And at the same time, our politicians have paired this with increasingly be coast language when it comes to dealing with Russia, and even more bizarrely China on the other side of the world where we have very few interests at all.

[00:32:32] So they've been doing this, they've finally got a war. They've dumped almost all of the material towards Ukraine now. They have very little. And they're left scratching their heads. Now, the interesting thing about this, or the very dangerous thing about this is that for probably about eight to 10 years now, the United States has been getting increasingly irritated and increasingly frustrated with its European NATO allies for not pulling their weight within nato, very few of the countries were spending the minimum 2% level of gdp.

[00:33:09] On their militaries. Britain was one of the few, although that was done with a fair bit of creative accounting. The United States, now it's very plain for anybody to see, is getting increasingly nervous about China. It will sooner rather than later, be forced to start swinging. Its manpower, its material, and its focus towards the Asian theater.

[00:33:34] And that's going to leave Europe increasingly left alone to fend for itself. And just at that time that Britain really needed to be beefing up its armed forces and expanding the size of its armed forces, so it could play an active role within the European defense structure or within the defense of Europe.

[00:33:55] Just at that moment, it's now, not only is it not going to be able to expand, but it's looking at 10 years. To, to, you know, just to get back to the level that wasn't big, big enough to begin with. It's almost boggles the mind to think that politicians who genuinely believe they can run the country, could allow this sequence of events or, or follow this combination of policy positions.

[00:34:26] It's really quite staggering. It's quite staggering from an administrative point of. It's staggering for a logical point of view, and it's certainly quite dangerous from a geostrategic point of view and a security point of view. 

[00:34:40] Philip Pilkington: Well, if they're going to solve the problem, it's going have to be from the ground up.

[00:34:44] Um, the fact of the matter is that if Britain was faced with a war on its own right now, there wouldn't be any way to turn. They couldn't turn to the manufacturing sector like they did in World War II and or in World War I and they turn around and they. Oh no. We need to create, you know, this many tanks, this many rifles, so on.

[00:35:04] There wouldn't be the productive capacity there. If Britain wants to get serious about this problem, which it should, it needs to reestablish its manufacturing base, and that should actually be the priority over reestablishing military power because it logically precedes it. If you don't have a manufacturing base, you cannot build the military power that you.

[00:35:24] So they'd need to focus all in on this. That would require kind of taking a little time, maybe a decade or so. Focusing inwards a little more. So I think that will be the path that Britain would have to go down to get serious about this. But it'll be long, it'll be pretty arduous, and it will be complicated and difficult.

[00:35:41] But who knows, maybe the, maybe the tech guys, the engineers that work in the technology firms know that they might not have as many job opportunities, might actually, you know, start a factory or something that might be a good use of, uh, brain power. That 

[00:35:54] Andrew Collingwood: would be nice. It would also be nice if, uh, Britain followed such a wise course as.

[00:35:59] Start looking inward and solving its own problems, but I think it's extraordinarily difficult for any of our politicians these days to resist playing Winston Churchill on the national schedule. At least a bad impersonation of Winston Churchill. They seem to forget that actually he was ruthlessly realistic.

[00:36:18] And did deals with all sorts of unsavory characters and indeed took losses where necessary. They forget the realism of Winston Churchi. They remember only the rhetoric and make bad impersonations of that rhetoric, 

[00:36:34] Philip Pilkington: the art of peace. 

[00:36:36] Andrew Collingwood: China has broken a deal between the seemingly irreconcilable nations in the Middle East, Saudi Arabia, and Iran.

[00:36:43] The Saudis and the Iranians have had a long running rivalry for decades now, and in recent years there's been a complete breakdown in relations, but China has broken a deal between the two parties to reestablish diplomatic relations. Which is not only a great coup for China itself as a peacemaker and, and, and, and a 

[00:37:05] Philip Pilkington: newly active player 

[00:37:07] Andrew Collingwood: within the global diplomatic scene, but it's also looks as if it might lead to a shift in the power makeup of the Middle East, which of course, given its importance with regards to hydrocarbons, which the global economy still relies upon, no matter the dreams of the green revolutionaries is still a a, a.

[00:37:28] Region of cardinal importance 

[00:37:30] Philip Pilkington: to the world. I don't know what your reaction to this was, but my, my jaw kind of dropped to the floor. I mean, it's tempting to kind of take the win of gonna say, you know, you're listening to Multipolarity and we're pretty aware of these issues and we are, I think we are. I didn't see China pulling off a diplomatic coup of this size in such a short period of time.

[00:37:52] I thought it would take a lot longer for something like this to happen. I mean, we have to remember. That this isn't just as simple as two countries that maybe don't like each other or don't see eye to eye, and then, and then a third party coming along and saying, look guys, you've had your squabbles, but it's better if you make up and, and, and I'm the bigger player in the room and, and I'll make it worth your while in various ways.

[00:38:15] This is the whole power dynamic in the Middle East. The, the effectively the American plan for the past few years at least, has been to get, to, get, to keep, to keep its two key allies on side, which are Israel and Saudi Arabia, but also to try and get them to forge ties. Now, that's no easy thing because Saudi Arabia is obviously a, a Sunni Muslim country, and Israel is a Jewish state and.

[00:38:42] Without going too much into it. The two religious groups don't always see eye to eye, and those Muslim countries often aren't too appreciative of Israel being in the region. So to try and get those two to merch together is. Is even in itself a kind of a difficult task. But if, if that could be achieved, it could counterbalance the weight of Iran, which is a massive, very large country.

[00:39:05] And in fact, if, if the Federers ever came off Iran, it would probably be quite a promising country. So China coming in and making Iran and Saudi Arabia friends again, completely destroys the American plan effectively for the Middle East. And it didn't, you know, blow up of its own accord. A third party rival came.

[00:39:25] And did this deal. I was, I, as I said, I was blown away. I, if you'd asked me three weeks ago, I'd have said, oh yeah, maybe five years time or something like that, maybe three years time. I mean, it, it happened that quickly. It's absolutely phenomenal. I mean, there's a lot to say about it. Um, I suppose to start with, why did it happen?

[00:39:43] I mean, look, Iran's position is relatively weak. It's it, it is still, despite the emerging mul multipolar world, it is still quite isolated because of the American sanctions that have been applied to it and poor relations with most Western states, Saudi Arabia, it isn't that isolated, but it has become more.

[00:40:02] Particularly since the killing of the journalist Jamal Khashoggi. But that really created an analyst on the part of the west against the Saudis. Now it never roasted level of making a kind of a quasi rogue state like Iran. So really the interesting question is, why did Saudi Arabia decide to say, sorry, America.

[00:40:21] We're not playing by your rules. We're gonna play by China's rules. Look, all you can do is infer from recent behavior of the Saudi. My impression is the Saudis have become annoyed with the developed world. They don't like the moral lectures. No matter how we feel about the Khashoggi killing, I find it pretty horrifying.

[00:40:41] It, you know, they see that as basically their business and if we wanna protest against that as far as they're concerned, you do that through diplomatic channels. You don't make a big song and dance with it in public, and you don't try and portray the country as a, as a barbarian kingdom or something like that, which is kind of how the media.

[00:41:00] So they've kind of tired of it in that sense, but that's not enough to, to push them completely outta the orbit. They've clearly made a calculation here and they've said this is the way of the future, and that's the way of the 

[00:41:13] Andrew Collingwood: past. I think you're right. I think what's interesting about this is that actually it's probably one step on a longer term trend.

[00:41:23] So the first thing to say about this is, The big winner from the United States' Invasion of Iraq in 2003 was in fact, Iran. Saddam Hussein had held together Iraq, which is a truly multicultural nation, and he'd held it together with an iron rod, and Hussein was essentially a bull walk against the spread of Iranian power into the Arabian Peninsula.

[00:41:54] Once Iraq was split a. And Hussein's iron Grip removed that allowed Iran to gain a huge amount of power within Iraq. Iran is now the most powerful foreign state within Iraq, and it wasn't before the great results. The main results of the Bush invasion of Iraq was to greatly empower Iran. So that's the first thing to.

[00:42:23] The second thing to say is that since the invasion of Iraq, the Middle East, Has essentially been roiled in chaos. It, it's created tremendously hard times. Local regional powers such as Iran, Syria, Saudi Arabia, Qatar, even Turkey, Egypt, have all been involved in this fanatical, multi fronted, multi-sided civil war, and it's likely that they're all starting to reach a point of exhaustion at the same time the United States through.

[00:42:58] Shale gas and oil drilling. It is not fully energy independent. It still needs certain cracks of oil. It, it still can't produce all of the various blends of oil it needs for different cracks of oil products, but it's essentially now a net exporter of oil. And the Arabian Peninsula is becoming less important, especially as the green transition happens.

[00:43:25] The Americans are less focused on that green energy transition, but it's still happening to a certain degree. So there's all, there was bound to be an American drawback from the region gradually, and all of these things are happening at the same time that China is becoming an increasingly important customer.

[00:43:44] For the oil exporters in the Middle Eastern region. So I think one important thing to say about this is that it's a step on a process that's going to shift the region away from America's pocket, which is where it was. America was the only game in town for many decades in the middle. What it said went, and it wanted Saudi Arabia as its ally, and it wanted to keep Iran down.

[00:44:15] It's not like China's going to take over. It just means that that countries like Saudi Arabia, like Qatar will balance between various powers in the future. I think though that this is really a big. Strategic defeat for the United States. It paints China as a highly responsible member of the global community, which is not something that the United States wants at the moment for global and PR views.

[00:44:40] As I said earlier, Iran, uh, the United States has wanted to keep Iran down since the Iranian revolution. The, the us, us' whole Washington has really pushed for regime change. It's sanctioned Iran. It's tried to crush its economy. I mean, perhaps no country other than Cub. Has suffered more under the of the United States over the last 40 years.

[00:45:05] But specifically at the moment, the US really wanted to keep Iran pinned down with domestic strife, with rival we with the Saudi Arabia, with Civil War in Syria, which obviously Iran has serious interests in through Hezbollah and also it's, it's a great ally and Assad, it wanted to keep Iran pinned down with all of these things.

[00:45:27] To prevent it from helping Russia as it has done in the conflict in Ukraine. So this is a really big loss for the United States strategically, and it'll be interesting to see how they respond to that, because in exactly the same way that the US hopes to pin Russia down in a sort of bear trap in Ukraine and weaken it.

[00:45:50] Well, at the moment, Ukraine is also pinning down the United States to a certain. It can't shift men in material across to Asia to to focus on its real rival, which is China. It's taken its eye off the Middle East to a certain degree. And it's, you know, really focused on one area of the world at the moment, and the US is, is almost as pinned down as Russia, I 

[00:46:14] Philip Pilkington: would say.

[00:46:15] You know, I think that's a great point and it's worth emphasizing because no one makes it. I'd go further than that. I think America is more pinned down than Russia. Well, not Russia per se. Obviously Russia's completely focused on this war. But if we see this as kind of a broader struggle of American unipolar hedge money against an emerging multipolar.

[00:46:35] Multipolarity has been unleashed by the Ukraine war. Meanwhile, as you say, the US is completely focused on Ukraine. I think you're absolutely right. They pushed for a strategy of pinning down their rivals, and they managed to pin themselves down. The other thing I'd say is I think moving forward, the one to watch here is Israel, right?

[00:46:54] Israel is a, is is the most dependable ally of the United States in the Middle East. They've lost Saudi Arabia, which wasn't as dependable as Israel to begin with, but it does seem that they've lost the Saudis. Now you think, well, they'll never, they'll never lose the Israelis. I've, I've been sensing some sourness in the American Israeli relationship for quite a long time.

[00:47:17] I, it, it mainly seems to run along kind of almost culture war lines. Israel does tend to elect these quite conservative right wing governments. I mean, Netanyahu is. Is a very conservative politician and his, his coalition members tend to be even more conservative. Again, they tend to be very Orthodox or even potentially ultra-orthodox, although I think some of them don't vote.

[00:47:38] And they really see the Zionist state as a, as a real kind of almost theological proposition. And that makes American liberals very nervous. They, they don't really know what to make of it. Um, and that's Fred's Dan to kind of everyday Americans, I mean, Some American Jews are very conservative and they're very supportive of Israel.

[00:47:55] They tend to be Zionists, they tend to be practicing Jews, but others tend to be more secular, or even if they're not fully secular, they go to kind of li liberal, liberal temples and so on. And their support of the Israeli state is, is very tepid. So that's been going on for quite some time. This could be the stroll that breaks the camel's back.

[00:48:13] I saw reports that a very senior unnamed Israeli officials were were saying, really? Shocking things about, I mean, first of all, they were livid about the deal because it, it completely interferes with their regional strategy. And then they went on to say, you know, this is because America's weak, America is weak and this is why this happened.

[00:48:33] And we are very angry at that. And then here's the interesting thing. Apparently they said, but we're going to continue to try to pursue better relations with the Saudis. And the way I read that is they're hedging their bets. That, that, that's a very clear line of communi. You are weak. We cannot rely on you anymore, and we're gonna continue to try and build a relationship with this person, even though they've kind of tossed you under the bus.

[00:48:59] That'll be the one to watch in the 

[00:49:00] Andrew Collingwood: future. I think that's absolutely right and I think, uh, lots of the blame of this really ought to be laid at defeat of the neo-conservative slash liberal universalists. Dominate foreign policy circles in the United States, but also the metropolitan liberal class. What, what we in Britain would call the chattering class, or perhaps the Manhattan Charity auction set, so you can kind of condescendingly refer to them as, because these folks tend to view morals as being the most important, or morality and their morality specifically.

[00:49:40] As being the most important factor in foreign policy. They tend to believe that if it's a nice government, if it's the sort of government with domestic policies that we like and we think are nice, then everything will just be fine at the end of the day. But if it's a awful government that we dislike, well that's a problem and we'll always be their enemies.

[00:50:00] And unfortunately what tends to happen is they tend to be very vociferous in the criticism of governments whose domestic policies they. Now a great example of this is Saudi Arabia. Nobody cared that Saudi Arabia was using, uh, their own and US and British weapons. To absolutely destroy Yemen in a truly brutal war.

[00:50:23] Truly brutal war that some people have said verges on genocide within the region. But as soon as a Washington Post journalist was murdered, allegedly by the Saudi government, khashoggi, it ultimately that, that, that caused outrage within those circles, and that's when the insults. Equally because as you correctly say, Benjamin Netanyahu is very conservative and his coalition partners are even more conservative.

[00:50:51] So the, the, the metropolitan liberals who tend to, you know, dominate in the media, who dominate in foreign policy circles, they're starting to turn off Israel as well. And of course, This is not the way to run a sensible foreign policy. It's not the way to run strategy. Saudi Arabia was an important ally.

[00:51:14] Israel was an important ally, but they're all fallen by the wayside. The other side of this, of course, is as we said, As America is pinned down, or let's not say pinned down, let's say focused on Ukraine to a certain extent, and as Ukraine a a as the United States is probably taking a little bit less interest in the Middle East anyway, because of its reducing importance in terms of the world economy over the long term, then it is of course natural for those countries.

[00:51:44] To start making their own deals because if they don't have the, you know, the baddest boy in the neighborhood at their back, then it's perhaps nice to make friends with the people they didn't get on with previously because they haven't got the United States backing them up in the way that they did.

[00:52:00] We've seen the opposite effect in Eastern Europe, where quite small countries, for instance, in the Baltic, Have taken very aggressive lines towards Russia, very maximus and absoluteness lines toward Russia and Ukraine did as well because they did have the United States at their back. And this has caused a certain degree of conflict within the region.

[00:52:24] So perhaps now that as the United States withdraws and as it as its influence in the region in Netanyahu's terms weakens, perhaps then we'll see some quite mature and quite pragmatic deals done between, uh, nations and powers that previously didn't like each other. I would also say that Turkey, Is moving is inching towards concile reconciling with the Assad regime in Syria, and it's also increasingly improving relations with Saudi Arabia as well.

[00:52:58] So we might get a lot of these sort of agreements over the next year or two in the Middle East and it'll certainly be very interesting times. 

[00:53:07] Philip Pilkington: Yeah, I mean, maybe even the Manhattan Dinner party set will be so distracted by their venture capital investments that they might not interfere.

[00:53:20] Andrew Collingwood: You've been listening to Multipolarity Subscriber Follow for Fresh episodes every week.