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Multipolarity: Episode 13

Tanking Banking, French Toast, Bi Bi's Boo Boo

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[00:02:00] Andrew Collingwood: Coming up this. The post SVB bank run continue. It's been a week of the biggest deposit withdrawals since 1980 from Geneva to Wall Street. Is there a mattress big enough to put all this money 

[00:02:12] Philip Pilkington: behind? The French are revolting, but is Macron's recent trial by fire really about pension reforms or is this just a spark to the cost of living Tinder now laid out all across Europe?

[00:02:24] Andrew Collingwood: Benjamin Netanyahu faces mass protest as he tries to overrule Israel's judges as America's pool of Middle Eastern allies seems to be diminishing by the. How will the state departments play this one back Bebe or bin Bebe? But first 

[00:02:40] Philip Pilkington: tanking banking. Last week we were talking about Silicone Valley Bank, which obviously collapsed due to the fact it had a very large number of idiosyncratic, uh, depositors who had very large deposit holdings that were over the, uh, federally guaranteed limit.

[00:02:56] The F d i sea limit of 250,000. Over the course of this week, and probably the biggest story is that Credit Suis also went down. That's a notable story for a number of reasons. First of all, because Credit Suis is a very large, well-known bank, not in America. So it's obviously not directly tied into the same ecosystem that Silicon Valley Bank went down.

[00:03:19] And the other interesting thing about Credit Suis is that it is one of the two large banks in Switzerland, the other one being ub. And Credit Suisse was actually then gobbled up by UBS in a sort of a buyout bailout where the government backed the merger. And put some sweeteners and so on in to allow the merger to take place.

[00:03:38] Now that's created a banking monopoly in Switzerland, which is an interesting story in and of itself. But I think where the watchers have now started watching is, uh, at least in the last few days, and probably at the end of last week, Is whether there's broader movements in deposits, right? So as we said last week with respect to Silicon Valley Bank, what happened was quite like a, um, classic bank run, the buzz that's been going around, uh, especially online, on Twitter and so on.

[00:04:08] Is, are there broader movements of deposits now out of the banking sector in general? Are we about to see the first kind of post virtual world mass bank run in human history? The technology certainly makes it a lot easier to do, and we can go into that more later because you can move this money very easily from your bank account into, for example, a money market fund.

[00:04:31] But there's been a lot of, of watching. I actually put out a few tweets over, over the past two days trying to get some good metrics on it. There have been metrics shared online, which show it to be the worst background in in history since the data started and there were other metrics going around that said it was business as usual.

[00:04:49] What I found when I dug into it is there's a lot of bad metrics going around and a lot of people trying to sell a certain narrative. But ultimately, I think I put some pretty reasonable numbers together, and I did the analysis properly, and I found that yes, we are experiencing a major event. In fact, over, over the course of the week of the 15th, it's been the, uh, the largest event, uh, since the data starts.

[00:05:13] In a nutshell, we 

[00:05:14] Andrew Collingwood: had Silicon Valley Bank, which was a unique bank. It, it, it service. One particular part of the American economy, the tech startup out of that economy predominantly, and because of the nature of that business though, that industry, Silicon Valley Bank had a a, a large number of beak deposits, way over the $250,000 limit from the Federal Deposit Insurance Corporation.

[00:05:43] Now, That would've been fine in itself because Silicon Valley Bank had dumped a large number of those deposits in very safe investments like mortgage securities and US Treasuries, the US sovereign bonds. The problem came when the US Central Bank, the Federal Reserve started raising interest rates.

[00:06:05] That's also increasing the interest rates on treasuries and mortgage. Backed securities, which essentially pushed the value of those mortgage backed securities and treasuries that Silicon Valley Bank had on its books down. Again, that would've been absolutely okay because the bank regulation in the US allows banks not to realize those losses every quarter.

[00:06:29] They can don't have to market to market. They don't have to market price. Those things, when they're putting in their accounts, they can actually just price them as at par as the price they would get if they were held to maturity. However, when people started withdrawing their money out of Silicon Valley Bank, Silicon Valley Bank then had to sell some of these securities, and then the losses were crystallized.

[00:06:54] Then everybody realized there was big losses and Silicon Valley Bank went into a very fast doom loop and eventually went burst, and the deposits had to be bailed out. This also happened in a number of other sectors, but you are suggesting Phillip, as far as I understand, that we're seeing it across the banking sector, perhaps because.

[00:07:13] You know, the banking sector's offering what, like one and a half maximum percent interest on deposits, whereas you can just dump that into a, you know, a US treasury fund and get four and a half percent. And US treasuries are every bit as safest banks if you're gonna hold them to maturity. I'm not sure if that's the reason, but you are very certain that what we're seeing is a, a steady or maybe like a slow motion bank run, in effect across the whole banking sector.

[00:07:39] I know that Credit Swiss was, again, a fairly specific bank because it'd been in a, a lot of trouble even before. It's, it's the Newmont, uh, last week, you know, I'd lost a. 70% of its share price from a few years ago, as far as I remember. You are fairly certain now what we're seeing is a system, a sector-wide issue with deposits being withdrawn from the system.

[00:08:04] Philip Pilkington: Yeah. I wouldn't say I'm certain we're seeing a broad bank run. What we can say from the data is the data of the week of the 15th. We saw the biggest. Deposit withdrawal relative to assets. You have to measure the two relative to one another. We saw the biggest one on record since 1980. Um, the other big ones were basically in 2008.

[00:08:30] There was a, there was another big deposit withdrawal week in during the, uh, the.com bubble. So at the very least, this is a pretty good financial crisis indicator. I would read it as in retrospect, but if this continues, We could have some serious problems. Just to give some sense, in that week of the 15th, it was about 600 billion of deposits were withdrawn from the banking system.

[00:08:56] Now, the banking system's absolutely enormous. I think the overall at the moment in deposits is close over 18 trillion at its peak. So 600 billion relative to 18 trillion isn't very large, and that's what a lot of. Bullish internet commentators were saying. But you can't measure it in that way. Really. You have to measure it relative to the asset base of the bank and how quickly that 600 billion is withdrawal, cuz that's how you get the kind of shock impact, you know, that can really mess with the bank's balance sheet like we saw on Silicone Valley Bank.

[00:09:28] So yes, we have the biggest one on record since 1980. Unless the data from the Federal Reserve is lying, um, we can say that would certain. What we cannot say with certainty is if it continues. Another component of this that's been highlighted now is this, uh, interest rate issue. Obviously, interest rates have shot up, um, because the federal reserves being raising rates, but the banks, for whatever reason, aren't paying these reasonable rates of interest on savings.

[00:09:58] Now, why that is? I don't fully understand. I think the best guess is that these banks have had their business models seriously messed with during the zero interest rate policy era, and they've got used to, for whatever reason, paying these low rates on savings and their entire business model is built around this.

[00:10:18] And so if they raise the interest rates that they're paying on savings and deposits, it will massively interfere with their business model. That will be my guess. But what that means is, as you say, All the saver has to do, even if they're not concerned about the viability of the bank, is take that money.

[00:10:35] And put it in, into an instrument that will yield that. And yes, you could buy treasury bonds with that even more simply, you can put it in a money market fund, which just invests in very short term liquid debt, government debt. And you say, well, the government debt is as safe as the banks. No, the government debt is more safe than the banks because the, the banks only are only backed by the full faith and credit of the US government up to the deposit limit of $250,000.

[00:11:03] Bonds are protected right up, right up to, to infinite in a sense. So if you're willing to buy a bond and sit on it to maturity, it's a hundred percent. Unless the US government defaults, you're getting that money back. Of course, a bond, a 10 year bond, you won't want to, uh, hope to maturity. But if you invest in a money market fund, these are usually three month papers.

[00:11:24] So if you keep your money in that for three months, you'll get your, you'll get your face value back. So what you're seeing is two forces at the same time. Putting your money, transferring it from a deposit into a money market account will pay you more interest and it's safer. So why wouldn't you do this?

[00:11:43] So what's happening is basically two things at the same time, you're being offered either a lower interest rate deposit account or a higher interest rate money market fund or something equivalent or something similar, and the lower interest deposit account pays you less and it's less secure. Whereas the higher interest yielding money market account pays you more and it's more secure.

[00:12:07] So it's actually, it's a no-brainer where you should put your money. And of course, all of this is, is undergirded. By the fact that because of the new kind of banking apps and online banking and mass access to financial products that everybody now has, moving your money from the deposit account into the money market account only takes a few clicks of a button.

[00:12:28] So again, who wouldn't do this? 

[00:12:30] Andrew Collingwood: Right? So it sounds to me that there's one of two options here. Either this isn't really a big deal because the banks can just. Pay more interest. So you know, they could pay people a reasonable level of interest instead of trying to take like 400 basis points difference between their North 0.5% and the four and 5% that the US Treasury is offering.

[00:12:53] They can do that, or you know, they can, you know, the government can make su, you know, Let everybody know that their deposits are cast iron safe and there's nothing to worry about, and they don't have to withdraw their cash, in which case everything ends, it's fine. This is, this seems to me a case of people are just, you know, concerned that uh, banks have maybe some unrealized losses and if everybody withdraws their money, then that's gonna be a problem for those banks.

[00:13:20] And maybe the government can't backstop everybody at every bank, which might be quite reasonable, but, You know, as soon as the government makes a promise, uh, that they will, then that should be saved. Or as soon as the banks start offering a slightly bigger rate of interest, which they should be able to do.

[00:13:35] Banks traditionally don't need that big a spread between the kind of the risk free rate and what they're willing to offer to make some kind of profit. That's not really how banks have worked in the past. Or the other alternatives that you're may be suggesting here, Philip, is that the entire, uh, banking.

[00:13:55] Model, and when I say banking, our commercial, the likes of you and I depositing our money there or getting our wages paid in there. Maybe taking mortgages or loans for cars and the same for businesses. Them getting their revenues paid in there and maybe getting some loans as well that, that kind of side rather than the investment banking side.

[00:14:15] That's all done for now. They just can't attract, or at least it's gonna be a lot smaller because, like you say, I can download any number of apps now for my, uh, my smartphone and get access to money market funds. Ok. Riches can go on and invest in almost any security I want to. I, I can mix up shares and traded funds and bonds, commercial bonds and sovereign bonds as well, and all kinds of things I can get access to now.

[00:14:46] If I can do that, it really gives me, as a consumer much bigger option than sticking my money into a bank, especially like a term deposit in a bank where they pay a fixed rate of interest over a specific period of time. When I can't touch my money, why would I do that when I can just, you know, buy higher yielding instruments, uh, over my phone, which are at least as.

[00:15:08] There's two options here. Either they get on top of this and offer a bit more interest, or the government steps in and says, don't worry about your deposits. They're all safe. In which case, this crisis over, or the banking model is done for the commercial banking model. Anyway, it's finished. Uh, especially at that scale or, or am I missing something?

[00:15:28] Is there something deeper at play here? Maybe. Ha. Have the interest rates increase to a level where banks are starting to realize very serious losses on, on their investment portfolios on the asset side of their balance sheet? 

[00:15:40] Philip Pilkington: My feeling is something is preventing them from raising those interest rates for depositors.

[00:15:46] We can go around and we can, you know, wave banners and say that it's greedy banks and have a nice Occupy and Wall Street sit-in. The reality of the situation is the banks are probably terrified, and if they thought that they could raise those savings rates on deposits and keep everybody happy, I think they probably would.

[00:16:04] I mean, I'm not certain of that. Maybe the people who say that they're greedy or whatever are correct, but I just don't really buy it. If you're managing a bank, the first thing that you have to do is just keep the doors open, you know, day-to-day stability, and you'll do pretty much anything to stay forth instability, including raising the rates on deposits.

[00:16:23] So it does suggest that maybe there is something deeper at work, and I think it might be what you alluded. That for some reason there are possibly heavy losses already on the books because of the rising interest rates. Or the other possibility is that there's just some structural issue that the banks have gotten very used to these low interest rates, and they've baked it in as being pretty much permanent, and that if they raise the rates that they're paying deposit.

[00:16:51] That they'll fall into net losses, that they won't have any more profits anymore, and then they'll be, then they'll be ized like credit suis. So it feels to me like there probably is some sort of catch 22 playing out in terms of the deposits and the interest rates and so on. The alternative explanation is greedy bankers that don't care about their day-to-day stability of their depositors, that seems unlikely to me, but we'll know with time in terms of the deposit insurance.

[00:17:20] Yes, the Fed could come in and deposit, blanket deposit, the blanket guarantee, all deposits. Now, would that stop people leaving for the more profitable vehicles? It might not actually. We don't know how much of this is fear and how much of this is greed in a sense. But beyond that, stepping in and de and guaranteeing all deposits blanket guarantee on deposits is a big deal.

[00:17:43] I mean, Obviously Yellen and the rest of the crowd bailed out Silicone Valley Bank. We were quite critical of that on. Podcast. Yellen then came out afterwards and said, we are not giving a blanket guarantee to all depositors. Now, I said on Twitter, and I think you said something similar, why would you give a guarantee to this group and not to everybody?

[00:18:06] There was no rationale for it. They. The claim was that Silicone Valley Bank depositors were systemically risky, but that doesn't stand up to scrutiny. I don't think that the regulators want to step in and give a blanket guarantee on deposits. And in one sense I'm pathetic to that. I, we spoke about it on the Silicone Valley Bank episode.

[00:18:25] Capital is not something that the government guarantees. The deposit guarantees are there to ensure that there isn't mass bank runs and to ensure the people with their average savings don't get wiped out. But anything above 250 grand, and frankly, I think 250 grand is a very. Generous deposit guarantee.

[00:18:43] In the UK it's only 85,000 pounds, which actually seems more reasonable to me. Um, anything above that is capital and it's capital that you have to manage. So if we blanket guaranteed depositors, that's forever, that's something we can never walk back, and that really does change the nature of the. The capitalist game in a way that we've never seen before, and I can only imagine how many, how many unforeseen consequences will arrive a arise outta that.

[00:19:12] I can imagine many ways in which shrewd and unscrupulous financial players. Would use that guaranteed deposit system to make money, to make greedy bets to, you know, do all sorts of things. So I do have some sympathy with the regulators here that they don't wanna step in and do the deposit guaranteed.

[00:19:31] Now they may end up doing it anyway, in which case our listeners will know. The rules have changed, but we'll see. I mean, on the other hand, the same regulators who are refusing to raise the deposit guarantee are the very ones that gave us. Of quantitative easing and zero interest rate policy that's leading to the current problems.

[00:19:49] I struggle 

[00:19:50] Andrew Collingwood: to wrap my head around this on several levels. The first thing is that the root cause of this seems to have been that as interest rates shot up and the Federal Reserve really has increased interest rates at a very rapid pace. I think they felt that they were caught well behind the eight ball.

[00:20:07] They had left it too long to raise interest rates and now they're really trying to catch up. So they've, they've shot up at a rare old. However, the Federal Reserve also. Signaled that this is exactly what they wanted to do. They signaled that they were itching to do it. They signaled that they were gonna go very quickly.

[00:20:26] I don't understand how the banks have been caught off guard by this. I understand that banks are required to hold very safe assets like US treasuries, like mortgage backed securities, uh, you know, in order to be as safe as they possibly can be. But there's a very tried and trusted method to get around this, which is to cycle into much shorter term paper when you realize that the Federal Reserve is going to tighten interest rates.

[00:20:52] Now, if I a layman understand and know this, I'm damn sure that you know bankers and in literally tens of millions of dollars a year in, in, in wages and bonuses should understand it as well. I can't quite get my head around how, or. Being caught so off guard by this. The second thing I would say is with regard to Silicon Valley Bank and the uniqueness of that, I read Paul Krugmans opinion editorial column in the New York Times, and he basically argued that case for bailing out the Silicon Valley Bank.

[00:21:25] Depositors was the same as bailing out Chrysler and Ford during the early days of the financial crisis that basically Chrysler and Ford. There were a key part of the US economy. They had network effects, and if they fell, it wouldn't just be them falling. It would be like a whole industry and support industries that have built around the MO over the decades and I suppose century these days with, I think it was Chrysler and General Motors, not Chrysler and Ford.

[00:21:53] Excuse me. I think Ford didn't need bail, but I might be wrong on that. Anyway, he argued that Silicon Valley was very similar. I think that's a kind of preposterous argument, but that's the argument they're making and I think you are a hundred percent right. They cannot blanket guarantee all deposits.

[00:22:08] That would just create so many false incentives. You would essentially be giving bankers free money with which to play because they would be incentivized to offer the highest interest rates possible to, and take the biggest risks in terms of their investments in order to attract all of this kind of money.

[00:22:27] Would be free essentially, because the federal US government would be guaranteeing it. My final point, and I guess the question is, I don't see how you know where this is going. You know, it seems to me one of those strange slow motion things with the global financial crisis and subprime loans, you understood where the breaking point was.

[00:22:45] You understood the point at which, look, if we don't deal with this, You know, if the government doesn't step in to deal with this, it's going to be the end. Like this is going to be the end. If we don't deal with this, I don't quite understand where that's gonna happen. Like what? Just people are slowly gonna withdraw all of their deposits out of banks, like beyond $250,000 in the US or $85,000 in the uk.

[00:23:08] Like where's it gonna go? And also, how are central banks now going to deal with interest rates? On the one hand, it's like IT banks. Reacting to rising interest rates like divers react to coming up from a very deep dive. Every 10 meters is causing, you know, worse and worse bends, right? It's like every 25 basis points the fed hike up is causing more and more pain with the banks.

[00:23:35] Uh, it seems like caught between our rock and hard place cuz inflation is nowhere near the target level yet. It, it might have started to come down a lot, but are they faced with a choice between just tolerat? Pretty high inflation. Risking let, letting it get out of control, risking inflation expectations, starting to anchor like eight or 10%, which would be a disaster.

[00:23:58] The face of the trust in that, letting the banks suffer even more and causing even more problem with the financial sector, which could lead to economic catastrophe. Is that where we're 

[00:24:08] Philip Pilkington: at at the moment? I've never been much of a fan of Paul Krugman, but I think he's really jumped the shark now. I mean, that argument is transparently absurd, and the only thing I could say about it is I wonder what he'd be making it if Donald Trump was still president, frankly, because it's ridiculous.

[00:24:24] It's absolutely absurd to compare a bunch of startups, 90% of which will fail within three years, just naturally with these behemoth auto manufacturers. That have been around for years and, and have a key kind of role to play in the global markets and so on. On the second point of the, I mean, to use the nerd term, the maturity, maturity of the portfolios of the bank, i e why they were continuing to be in this long-term government debt and weren't recycling into short term paper.

[00:24:58] Um, I think everybody bought into the inflation is temporary narrative. And frankly, I don't really blame this on the banks. I get your point that these are highly paid executives, that they should know better, that they should be more original thinking and so on. But I'm gonna tell our listeners a bit of a secret.

[00:25:19] To a large extent, the banking game is run more by bean counters than by investment minded people. And in the larger institutions, people tend to just run with the pack. Okay? Now that may not be the case around the edges. There's lots of very good people in finance who are very good investors in hedge funds, you know, in, in certain corners of the investment banking world and stuff.

[00:25:41] And they make cool contrary bats, and they come up with ideas of their own. But for the most, The banking sector runs in a herd, and it's just the structure of the industry. It's how they hire. It is what it is. And so the blame really lies for that at the top, once again with the Federal Reserve, because part of their mandate is to manage those expectations.

[00:26:03] When they say they're managing expectations, you can translate that as they're giving marching orders to portfolio managers in all the major banks. That's what they're doing. And they kept messaging that inflation was transitory, and then the Fed decided it's not temporary anymore. And Bob's your uncle.

[00:26:20] Were off to the. The third point, where is it going? Okay. Well, there's a short-term and a long-term component to this. The long-term component could be that the current banking model has been destroyed and that it's been destroyed by Federal Reserve policy. I wrote an article actually this week for the Daily Telegraph, in which I didn't quite argue that, but I at least showed that the policies that have been pursued since 2000.

[00:26:44] Are even worse than their worst critics ever said they were. Everybody. You said that QE and SERP was gonna destroy. The banking system was vindicated. The people who were saying it was gonna create hyperinflation were talking nonsense. They always were and they were not vindicated, but the more reasonable people who said it's gonna destroy the banking and financial sector.

[00:27:04] Have been vindicated in the short term. Where do we get the big blow up? As you say, this feels like death by a thousand cuts while quite death by like seven large cuts. More like, but where do we get the big blow up Look, these problems are as we've outlined them, they're massive stresses on the banking system.

[00:27:21] They're calling into question the basics of the banking model. But I think where the blow ups gonna come, where the real blow ups gonna come is when more, when lending standards tighten. Credit standards tighten and the mortgage market blows up. And I think that's probably gonna happen this year, probably in the third quarter, although I don't like making such a precise prediction.

[00:27:41] But I think it's around then. Um, given, if you look at the construction employment and construction investment figures, when that blows the lid, we're gonna get another 2008 stall crisis. Maybe not as large, but maybe larger, we don't know yet. And that will come in on top of this boiling of the frog that we're seeing now.

[00:28:00] And yeah, I mean, Maybe it'll all work out. Maybe things will be fixed by then, but you could well be facing down the mother of all banking crises. 

[00:28:08] Andrew Collingwood: Yeah, and I think what would worry me about that is that there is a lot less political capital and political leeway now for governments to aggressively go in and.

[00:28:19] You know, bail out and ask questions later. You know, of course, Silicon Valley depositors were bailed out, but I think it might have been a different matter if the bank itself had been bailed out. I'm not sure if Britain and the US there's enough political capital after what happened last time, nobody went to jail.

[00:28:37] Everybody got paid that multimillion dollar bonuses and everything went on. Even e even the, the new banking regulations like Dodd-Frank. You know, we're pretty light touch and we're watered down even from there, and I think there's been a kind of a simmering resentment about that that still lingers on today.

[00:28:54] So if in the third quarter as you suggest, give or take a quarter or three, there's another bank in crisis because the mortgage sector blows up, then you know there'll be two sets of people. There'll be one. Set of people who are bankers who have were bailed out before and didn't really change their ways, are paid huge sums of money and, and suffer a lot of kind of simmering resentment against them and their trade and their industry, and they're gonna have battered.

[00:29:22] Balance sheets that they're gonna desperately need to repair, and they might go out of business. And on the other side there's gonna be mortgage holders who are in negative equity, who are defaulting on, on their mortgages, who might be getting kicked out of their family houses, who are under all sorts of difficulties.

[00:29:38] In that sort of situation, it's gonna be extraordinarily difficult for the government in whichever country, whether it be the UK or the US or elsewhere in Europe, to say, yeah, it's the bankers who are, it is gonna be rich people and bankers first. Right. You know, it could be a real situation where there's just not enough political capital to actually bail out the banks or to help them much at all.

[00:30:01] Then we would really be in a situation where we might get ATMs just not working anymore. People not being able to get out money. French toast in France for several weeks now. There have been protests about the President of France, uh, Manuel Macron's. Plans to raise the pension age, I believe from 62 to 64.

[00:30:23] This has been a longstanding issue with the French. The French pension age is lower than those of places like Germany and the Netherlands and the United Kingdom. France has got long-term fiscal issues. Within five or six years, it's debt to gdp. Even under government forecasts is looking at around 120% of GDP for its sovereign debt.

[00:30:49] And one of the ways that successive French governments have thought about getting the country onto a long-term, more sustainable fiscal path has been through lifting the pension age. This is something that a lot of western government. Of sought to do or to look at in the face of aging populations.

[00:31:07] However, this has been particularly unpopular in France. It's been tried a few times and it's been unpopular a few times, and the latest attempt by Macron has been particularly controversial because he couldn't push the legislation through Parliament, so he did it through essentially presidential dec.

[00:31:27] This caused outrage in France and the protests have been going on for several weeks now. It, it seemed to be not quite as intense or as serious as the, or the yellow vest a few years ago, excuse my French pronunciation. However, now in recent days, it really appears to have reached critical mass today.

[00:31:48] There. Around upwards of perhaps as many as a million people around France joining protests of various types. There've been there, there's been a lot of violence involved in this. There've been a lot of scenes are pretty horrific, police brutality, and it, you know, it seems to reach a critical mass in, in France.

[00:32:08] Now, I'm not sure whether this is just biannual. Protest and riot, they, they seem to be a lot more prone to that than we are in Britain, and even perhaps the Americans are. But one thing I sense really is that this isn't just going to be constrained to France. All of the. Certainly all of Western Europe and Eastern Europe as well, probably perhaps even the US as well, have been really struggling with the cost of living.

[00:32:37] First of all, we had inflation caused by, uh, supply chain chain dislocations and some of the the covid policies. And then of course we had Europe's response to Russia's invasion of Ukraine, which. Sanctions on Russia. And of course Russia is the supplier of all kinds of European raw materials which filter through to the whole economy.

[00:32:59] And of course that's really had a big effect on the standard of living in Europe. And I feel that while perhaps the pensions are the kind of the immediate cause of this, I think this has been a long running issue and things are really starting to bubble to the surface. And we might see elsewhere in Europe.

[00:33:18] You know, the proximate cause isn't going to be Russian sanctions, and the fact that I lifted the co cost of living, it might be wages in a specific industry, it might be increased utility bills, it might be changes to employment law. But because people are suffering so much in Europe at the minute with worsening cost of living, they're being hammered from various different directions, high utility bills, high inflation, you know, stagnant wages.

[00:33:44] All of these things are creating a great deal of analytical instability and social instability, I would say. But I think you wrote a article about this in on herds, didn't you? Philip? 

[00:33:55] Philip Pilkington: I don't really trust the pension narrative. It's convenient. Also fits in with the wonderful Anglo prejudice that the French are always burning down.

[00:34:06] Their own country, which is somewhat true, but um, I do think this is different. Let's run over a few things. First of. Are the French more likely to riot and revolt? Yes, they are. R for example, the British, less likely, yes they are. But in Britain right now, we have wave after wave of strikes, very British strikes.

[00:34:27] The sort of strikes that you always see in Britain when people get pushed beyond the limit strikes, the civil servants, strikes of unionized public sector workers and so on. So this isn't just a purely French thing. The second point to. Is that some of the most shocking scenes that we've seen so far were not in Paris or in any major city, and they were not related to the pension fund, to the pension situation.

[00:34:51] They were in San Saline, which is a rural district in Western France, and they were not, um, about the pension reforms. They were a about of reservoir. The, the local authorities wanted to build a reservoir in the local area. To irrigate local farms, and there was apparently local opposition to this, and it turned into a massive riot.

[00:35:13] So why is that? Why are all these riots sparking off with these, as you say, proximal causes? Pension. Pension reforms. Okay, fine. Yes. 1995 A, a Shairaq government tried to bring in pension reforms that was shut down. I get it. Pension reforms are difficult in France, but number one, they shouldn't result in a giant riot.

[00:35:34] And number two, the reservoir has nothing to do with that. Okay, so what are the commonalities here first? Commonality that, that, that. Stands out is that the really violent stuff seems to be the result of far left agitators that's been pretty well established and the Jean Daria have been clearly communicated.

[00:35:54] There's plenty of evidence for it, but that just pushes the question one, back. Leftist agitators are always in France. It's a big thing in France. It's also a big thing in Germany. Usually they can't whip up a mark. Why are they able. Quip up mob now, and I think that comes down to the cost of living crisis that you said.

[00:36:14] So there was a poll taken across Europe in September, 2022, and in this poll majorities across all four countries that were polled. That was UK, France. Poland and Germany said that they were worried about social unrest ranging from 57% of people thought there'd be social unrest in the UK to 75% in Poland.

[00:36:38] So if you poll the average European right now, they will say, yes, I'm concerned about social unrest. And of course they said why they're concerned about social unrest because of the cost of living decline that they were experiencing. And in this poll only. Person in 25% of the French population said that they were comfortably dealing with the cost of living crisis.

[00:37:00] So to me, this speaks volumes. And then when you take this data point and you read it back into the events in France, it makes a lot of sense. The protests against the pension reforms were not the first protest. Since October, there have been regular protests with tens of thousands of people showing up, often organized by unions.

[00:37:21] Protesting the cost of living crisis in France. It's right there. The papers just don't really cover it. You have to go on kind of World Socialist website or whatever to read about them. But you can see the pictures, you can see the video. There's tens of thousands of people there. They're peaceful, they're fairly Orly, but that's what's going on.

[00:37:38] So this is, this feels to me like it's a stirring resentment among the people of. And it happens to catch fire in France first because of the idiosyncrasies of France, first of all, because of their serious opposition to pension reforms, which is has provided a kind of a spark to this. And second of all, because the French are more likely to 

[00:37:59] Andrew Collingwood: riot.

[00:38:00] I actually think that's a hundred percent the right analysis. We shouldn't forget that yesterday as of recording, Germany had its biggest strike in years now, the German. Worker through the German unions is really seen as a, as an exemplar when it comes to industrial relations. They are not prone to strikes.

[00:38:22] They're excellent at negotiating with the industries for whom they work. And yet here we are. You know, they swallowed the hearts, two reforms under shroder. They've swallowed relatively stagnant wages for years and years, and yet here we are on a Monday this week, Germany has a huge strike. It's because since the very early nineties, so I don't think that.

[00:38:46] I think it would be unfair to say that, oh, the French are complaining that they have to retire at, you know, that they're not gonna be able to retire at 45. It's really not like that. Whatever their proximate cause is, whether it be industrial relations between airports and workers, or raising the pension age or.

[00:39:05] I think that what we have to remember is that workers, since the financial crisis of 2008, have really suffered very stagnant wages. E even as economies have grown, wages have remained absolutely stagnant. And yet now we have a reemergence of inflation, which is squeezing people yet farther. And on top of that, we had the European.

[00:39:26] Response to the war in Ukraine, which led to higher energy prices, high utility bills, probably higher food costs as well. And you know, after so many years of being squeezed, the workers really being hammered at the moment. And I think that's ultimately what is leading to this groundswell of protests, not just in France, but across Europe.

[00:39:47] And I don't think that this is gonna be remain constrained. France, I, I think this is gonna continue spreading outward and we are in for a period of political and and social instability. 

[00:40:00] Philip Pilkington: Bbs, boo boo. 

[00:40:01] Andrew Collingwood: We're not just seeing protests in Europe. There are also big protests in Israel at the moment as well for the pilkington, but I guess for a quite different 

[00:40:08] Philip Pilkington: reason.

[00:40:09] Yeah, I mean these are definitely not related to the ongoing rolling energy crisis as far as I know. And cost of living crisis, as far as I know, there is no energy crisis, or at least no dramatic. Protests are over, uh, judicial reform. The basics of this are that they want to greatly soften the ability of the Supreme Court to engage in judicial review, which is of course when a court looks at laws passed.

[00:40:36] By the Parliament and says, uh, these are illegal. These are not in keeping with our constitution or our basic laws. I think they have basic laws in Israel, and so the law doesn't stand, so they want to put in place a mechanism by which, by getting a majority of votes, the um, Israeli parliament can overcome any aspect of judicial review.

[00:40:58] Now, this speaks to a. Broader change in Israeli society. Obviously the Netanyahu government is a conservative government backed by ultra conservatives of the Ultra-Orthodox Jews and so on. And interestingly, part of the bill, as I understand it, or at least a, as part of the reform package that they're discussing, they were considering letting, uh, rabbinical courts, this is kind of traditional Jewish religious courts act as arbitrators in civil matters using Jewish religious.

[00:41:30] If both parties consent, and I think that that kind of puts the feeling on it. So I think the judicial reforms themselves were being set up, were tilted in such a way. That the increasing power of the religious communities and very conservative communities in Israel are concerned that if they get the right level of votes in the country, that the country won't be allowed to change in the direction that it wants to change or that they want it to change.

[00:41:59] Them being the majority, obviously, because the judges would shut it down. So the independent newspaper here in the uk, obviously it's quite left wing and liberal and all that, but they had, they had a, an Israeli rider. She says that Israel is bitterly quote unquote, Bitterly, maybe even irreparably, divided an identity crisis coming to a head.

[00:42:20] And that it's really an existential question for the Israelis. So really you have these two groups in Israel, liberal Israelis, who tend to be quite like westerners in a lot of ways. Um, live in the cities mostly, and the conservative and even ultra-conservative elements. These people are the ones having all the children and they're trying to steer the country in the direction that they want to go.

[00:42:42] I think it's strange. 

[00:42:44] Andrew Collingwood: The reforms are sometimes somehow called anti-democratic. In fact, they're the opposite there. They're actually pro-democratic. They're actually putting more power in the hands of the elected representatives and less power in the hands of the Supreme Court, right? As far as I understand, I'm not an expert on Israeli constitutional law, but that's the way I see it.

[00:43:05] I think they are potentially, uh, maybe anti-liberal in that sense because, you know, you, you don't want your parliament to be able to vote itself out of existence in favor of a generalism. Okay. So there's that concern as well. It's the idea of having a Supreme Court and. Basic or constitutional law, depending on where you are, and the ability of a Supreme Court to strike down legislation, but it's certainly quite pro-democratic.

[00:43:33] It gives much more power to the Parliament, which is the elected representative of the people. What I found really interesting about this though, is that of course there was the, you know, the issue with the elections and the coalitions and the reelections just recently. In Israel at the moment, you do have a growing and large number of the ultra-Orthodox people who are for want of a more delicate term out breeding the rest of the country by a prodigious rate.

[00:44:02] So it is in future, going to be a much more conservative and a much more religious, less secular country. I'm not surprised to hear that some people in Israel feel that the country is going through an identity crisis. You know, Israel, like where are you going? Like what sort of country are going to be, what's really interesting from a multipolarity point of view though, is this, uh, I'm guessing that the current c.

[00:44:30] In Israel isn't necessarily to the liking of the foreign policy blob in Washington, or the type of liberal metropolitans who run foreign policy across the Western world. I think in America, anti-Israeli sentiment has taken. A lot longer to catch up among liberal progressives as it has in Western Europe, where for many, many years now there's been a quite almost zealous, I would say, anti-Israeli, a feeling among.

[00:45:04] Certainly the, the far left, but increasingly also the liberal metropolitan progressives as well are quite pro-Palestine and anti-Israel. And, and this kind of Israeli politics really infect a lot of that. Whereas in America, because of, of the power of the Israeli lobby, it's taken the American metropolitan liberals a fair bit of time to catch up to that.

[00:45:25] But I've sensed over the last couple of years, certainly since Biden's been in power, a big cooling off. In relations between. Uh, the Democratic Party and Israel as a concept, and I don't think they necessarily like Netanyahu from a, from a personality perspective. I suspect he doesn't get on so well with Joe Biden on a personal level.

[00:45:52] And what seems interesting is the big, uh, the big media in America, the, the, the kind of the papers of record, the Washington Post, New York Times, you know, we do seem to be getting into the stage now where the US. You know, I think naturally they want to support the sorts of liberal people who are fueling these 

[00:46:11] protests.

[00:46:12] Philip Pilkington: I honestly would fear that these protests could, or if not these protests, a continuation along this trajectory could be the Khashoggi moment that created an outrage against the Saudis. It really did damage to the relationship between the west, especially America and the Saudis. And you know, since then the Saudis have effectively left the West Iph sphere of orbit, and they're joining the BRICS and so on.

[00:46:38] These kind of diplomatic matters are very, very sensitive, and they have to be handled with a great degree of sensitivity. You say that you've, um, picked up, um, you know, anti, definitely anti-conservative Israel, maybe even anti-Israel sentiment in America among the American liberal left. I think you're absolutely right.

[00:46:58] I think it actually goes back to Obama. Um, it was stewing there for a longer time, but you're right, it wasn't there as forcefully. As it has been in Europe, but I think Obama, or at least the Obama era, opened the box on that whole question. And I think things have been in kind of stasis or equilibrium because the way the world's set up, uh, that, you know, Israel, we're an ally, Israel, we're extremely happy with the way.

[00:47:23] Politics was going in the Middle East at least. You know, they thought long term and if the Republicans got enough influence and if the Iran deal never went through, there was a path there for them that they saw. All that ended two weeks ago, we spoke about it on the show. The Chinese are brokering these new relationships, most notably between Iran and Saudi Arabia, and obvious.

[00:47:45] The wedge that, uh, that America tried to drive between Iran and Saudi Arabia. I mean, it was part of American foreign policy as a kind of a divide and conquer and make sure that Saudi's on your side and that the other major power in the region isn't. But the Israelis love this deal, and I think we mentioned when we discussed it, Recently that there were leaks from, uh, Israeli diplomats and so on, which said to the, uh, Americans, you know, you guys are weak.

[00:48:12] You've lost control over the foreign policy in this region, and so on. So the Israelis are already raging about new geopolitical formations in the Middle East, and now what's happening is the entire western media. A great deal of the Western media are lining up behind these, frankly, anti-government protests.

[00:48:31] I mean, I saw that Benjamin Netanyahu, the Prime Minister there, Said in a televised speech that he was putting away the judicial reforms, walking them back because he wanted to prevent an Israeli civil war. That's if, even if he's using slight rhetoric there, if that's how much the Israeli leadership are spooked by these protests, they see them as a threat to the state.

[00:48:54] So the West needs to be really careful about it, how it handles these situations. They've already lost Saudi Arabia. To something like this. In fact, something far less dramatic because although the killing of a journalist is horrible, it's not a threat to a state anywhere. If the Israeli party in power currently sees those kind of protests as serious civil unrest and a threat to the Israeli state.

[00:49:19] Then they could lose interest in people who start backing those kind of protests in their country. I think it's really time for Western countries to step back and start questioning how much they want to not interfere, but at least get involved in or take positions on domestic. National issues within allied countries, especially allied countries in such difficult regions, and who've just experienced massive diplomatic upheavals all around them.

[00:49:48] Yeah. I don't think 

[00:49:49] Andrew Collingwood: it's too hard to imagine the Israelis panicking a bit at the moment because maybe panicking is too strong a word, but starting to look extremely concern. About the situation because you've had a, a Saudi Iranian Deon, which is really the, the biggest shift because the ongoing conflict between Saudi Arabia and uh, Iran was what was tearing apart that the region after the US.

[00:50:19] Invasion of Iraq, but then you've also had a Saudi, Syria, Deon, which makes sense because Syria is the biggest ally of Iran and Saudi Arabia was involved in various ways in the Syrian civil war. Uh, as we mentioned a couple of weeks ago on the pod, the Russians have been working very hard to, to build better relations between the Saudis and, and, and the Syrians, but also crucially the Turks and the Syrians.

[00:50:45] So it, you know, if, if you had some sort ofan. GaN and Assad or whoever comes after GaN and Assad, then really the whole region would be stabilized to a great degree. All of the issues that had led to the to, to the division and violence of the Arab part of the region would be solved. Now while you know the.

[00:51:10] Muslims were fighting among themselves that was fairly beneficial to Israel, that kept Israel reasonably secure in relation to a unified and peaceful Arab world. But now that seems to be changing very swiftly and at the same time and at the same time, it seems that. The, you know, the, the liberal metropolitan wing of American politics is also starting to cool on Israel and, and come more toward the European position on Israel.

[00:51:40] Which is another big issue. So it's reasonable to imagine the Israelis thinking, whoa, this is not looking good for us at all. And on top of that, you have this, these huge protests, which I'm sure they're not. And I'm, and I don't mean to imply that they are, so don't take this the wrong way, Philip, but they do resemble to a reasonable degree, a lot of the color revolutions in Eastern Europe, which brought down governments and changed whole politic.

[00:52:07] Um, political systems in Eastern Europe. I'm pretty sure that this is not a color revolution, but it's the same sort of people protesting about a similar sort of issue and they have in the past brought them down. So I think that really the west, it has to be a lot more delicate in dealing with this situation than it has been with other situations, I would say, because it is reasonable to think that the Israelis.

[00:52:32] Getting a little bit nervous about the situation that's unfolding around them. And, uh, Israel is a nation that's acutely aware of a relatively precarious strategic position, far more so than we have in Britain or America. We probably couldn't possibly comprehend, uh, that the way that they feel in terms of their security.

[00:52:53] So, It is something that we're going 

[00:52:56] Philip Pilkington: to have to deal delicately with. Look, the fact of the matter is a great deal of Middle Eastern strategy of the West was lost just in the past month. And if Israel is ever lost, if they turn around to, you know, China, because China's the big deal maker in the region now, and maybe China can get them a deal where they can get so, Reasonable vis-a-vis Iran or whatever.

[00:53:21] If they turn around and they do that, the Middle East is over. It's closed for business to the west completely. It already may be partially closed, at least for the next few years, but it'll be closed for business. And no matter what people think about green flying cars, we're still reliant on hydrocarbons.

[00:53:38] We've just cut. Russian hydrocarbons. Okay. They're not flowing into the west anymore. Are we going to flow cut off the Middle East as well? Maybe not cut it off, but are we going to not have any influence in that region because we care so much about domestic politics in Israel? A country that many of us have never even visited before.

[00:53:59] I'm sure it's a beautiful country, but that's the reality of it. It's, as you say, you're not taking aside in Israel, I'm not taking aside in Israel, it's not my country. I just think that this is hubristic. Actually. I think it's hubristic and it's dangerous and people need to pump the brakes a little bit and we need to separate.

[00:54:16] Our domestic politics from our foreign policy and our, our diplomats and our, our foreign ministries and so on, need to put more effort into, to separate those two things because the rest of the world isn't going to be like us. No matter how much we want it to be.

[00:54:55] A victory.

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