Multipolarity: Episode 4

Housing Crash 2.0, The Rebalancing Act, The North South Silk Road 

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[00:02:00] Andrew Collingwood: Coming up this week 

[00:02:01] Philip Pilkington: as the housing market finally begins to cool. Are we in for a straight repeat of 2008 or something more like 2008 on? As 

[00:02:09] Andrew Collingwood: the CCP nudges China towards more consumer spending, we'll be asking whether it's a bridge to nowhere or if a gamified approach will discourage the country's overzealous savers.

[00:02:20] And while China plugs on with its Belt and Roads initiative in Russia, a north south trade corridor through Iran to India promises cultural change as much as economic. 

[00:02:30] Philip Pilkington: But first it's foreclosing time again, those of us who are interested in the property market have been watching property valuations rise and rise for the past, I'd say five years.

[00:02:42] It's been quite surprising considering the fact that the last property crash was almost treated like the apocalypse in the west. So we still kind of define the time period. In terms of the 2008 financial crisis, and it's always been very surprising to me that people have kind of taken their eyes off the ball there as the valuations that climb up again.

[00:03:03] Well today they pretty much sit where they did in 2008. I'm talking about valuations, not about house prices because obviously house prices rise with inflation and and incomes and so on. But at the moment, according to the Economist, the United States, uh, real house price inflation adjusted house price, which is a good valuation metric, are just 3% lower than they were at the peak in, in the middle of 2006.

[00:03:25] And Britains are 11% higher than they. In mid 2006. So on its face, this seems to suggest that the housing bubbles have blown up again. And the excuse that I think people who didn't think there was a bubble have are going away. They were effectively saying that these house price valuations made sense because we were in a permanent stagnation or an environment.

[00:03:48] And we'd have, um, zero interest rates or very low interest rates from here till kingdom come. Well, we don't have those interest rates anymore. Mortgage rates are climbing. And these valuations are not sustainable because the people that need to step into the market to buy these properties simply cannot afford the mortgage at these present rates of valuation.

[00:04:10] Right. 

[00:04:10] Andrew Collingwood: So I think that is very interesting of itself because one of the issues it seems to me of the last 40 years, certainly within the west, has been the trend towards diss saving within economies, and we've moved to a more financialized world. Growth has tended to come from taking on greater amounts of debt, and that's been the source of a large number of crises and market blips.

[00:04:36] I'd be fascinated to know whether the same thing's happening because it's been apparent for some, well, certainly within the UK that house prices are, you know, really stretched compared to average wages, and perhaps that was tenable when we had low interest rates, but now interest rates are rising and in fact, It looks like the global economy, so this is not something, let's say Britain or the United States could escape.

[00:05:00] It's the global economy is moving much closer to, or, or, or is moving into not just close to, into an inflationary environment rather than a deflationary or disinflationary environment. And now that's clearly happening. I wonder whether all of these things are just going to snap essentially. And we're going to see a full blown crisis.

[00:05:25] And if that does indeed happen, will it be contained within the financial sector or is it something where last time the unregulated banks, which are, you know, tremendously powerful, have been fooling around with taking on large amounts of leverage to bet on the housing market? Again, they've been creating a range of new products.

[00:05:48] People could also bet we had not just credit default swaps, but things like collateralized debt obligations and then synthetic collateralized debt obligations, which are created from the other side of the, the bets on credit default swaps. And if that sort of thing happens, again, we, you know, the housing market of course, as we've seen, has the potential to have a very negative effect on the financial sector.

[00:06:13] And through that, the real.

[00:06:17] Philip Pilkington: Yeah, I, I kind of started my career, I guess, and started my studies and everything on the back of the 2008, 2009 crash. So it, it colored an awful lot of my life really. So I, I, I went and, and did a kind of alternative economics program because I was interested why economists had got, The 2008, 2009 crash wrong, and the name that came up over and over again was Hyman Minsky.

[00:06:41] Everyone called it a Minsky moment. There was a lot of talk about rediscovering Minsky, but by people who'd never discovered him in the first place. May I add? And, and you know, there, there was a lot of that, and, and Minsky's ideas were about kind of, it was called the financial instability hypothesis. The idea that capitalist finance systems are inherently destabilizing because.

[00:06:59] Proliferate new financial innovations, which ultimately serve just to create speculative bubbles. And so Minsky was kind of the economist of the age. I'm a very large fan of Haim men Minsky's work, and I know personally many of his students, I think I've written what one or two of them before, so I don't wanna diminish at all.

[00:07:16] But the things that stood out to me about the the Minsky moment as it was called, well first of all, they. They didn't actually go deep into Minsky's work. Minsky's work was actually about a lot more than just, uh, financial speculation. He had a, he had a alternative macroeconomic theory worked out, but more than that, I thought the focus on this kind of proliferation of financial innovation and so on, I thought it was a little bit of a smoke show, really.

[00:07:41] Not that it didn't happen, not that it's not important, but it seemed to imply. The underlying problem in 2008 was much more complicated than it actually was. People came away from it with the sense that you couldn't really explain it unless you knew how synthetic credit to full swaps worked. Right. But that isn't actually true because the real problem in the economy of which everything else is just peripheral matter, was the housing bubble in the us, in Europe and certain European countries and elsewhere.

[00:08:11] And actually Ireland shows that the most pure. Because Ireland had the largest housing bubble and relative to the size of the country, the largest ensuing bailout of the era, and it didn't have many of these credit default swaps or synthetic credit default swaps. It was a very simple problem. The banks, by which I don't mean big investment banks like Goldman Sachs, I mean relatively small banks, mainly Anglo Irish was the one that was well known.

[00:08:39] Were just l lending too much. They were lending too much both to residential buyers who couldn't afford the houses, and they were also lending too much to, uh, property developers and property speculators, and they just, they built up a big loan book and that loan. Went to part with, with rising interest rates and with a collapsing home process.

[00:08:58] Many people went into negative equity. The whole thing had to be bailed out. What happened in America, and to a lesser extent, but some extent in the UK with this proliferation of financial products and so on, wasn't actually fundamentally different from that. And I think that's caused a great deal of obscuring now, and it, it focused the regulator's attention, in my opinion, far too much on the proliferation of these financial products and far too little on the reliance of our economies.

[00:09:27] I think you alluded to it on massive debt expansion. On consistent inflating of financial bubbles. It took that away, took that out of the picture, and I think that's what's allowed us to pay no attention as the new housing bubble has just arisen in terms of how this one works, we won't know how it all worked.

[00:09:47] Until, or if it goes down because it's kind of, it's, it's like a minefield. You don't know where the mines are until you step on one. Right? So I have no doubt that a bunch of new, clever mechanisms have come up to facilitate the current price increases. I suspect that it's less so in the residential sector and more so in the fund sector.

[00:10:07] I think a lot of this is being, is being driven by funds, but I, I would not be surprised if many of those funds were borrowing that cash in some. Whether it's in the private credit markets or it's from the investment banks or something, we'll probably find out soon enough. But I think if this crashes and if we take any lanson from it, it's to not focus too much on the complexity and really just look at it as a rather simple problem of.

[00:10:33] Our, our economy's relying on this boom boss cycle in the housing market and the credit cycles that, that gives rise to. And, and if this blows up, I hope this is the, the lesson that we take from it this time, because it's clearly not the lesson we took from it last time. It was very 

[00:10:46] Andrew Collingwood: clear after 2008 that there was something badly wrong with the way that the majority of western economies.

[00:10:54] I think there are some notable exceptions. Countries like Germany for example, and perhaps if we can say countries like South Korea, I guess we can call them the Global West these days, but largely, especially in the Anglo-Saxon countries, but in other countries as well, like Spain and Ireland, both of which had large bubbles.

[00:11:11] There was a, something badly wrong with the, that Western economy ran in that they were far too reliant on financial speculation and not reliant enough on investment. Productive sectors of the economy and at the very least, what these house prices show, especially in the UK where they're so stretched compared with average annual earnings.

[00:11:35] But I'm sure as well in the United States as well, perhaps to a slightly lesser degree, that you know, we're still reliant on. The housing market to keep afloat to the whole economy. We're still relying on the housing market to generate the majority of people's wealth in the world. And, and, and that wealth, of course, as the housing market gets way out of whack with wages, it tends to concentrate wealth in, in the hands of those people who already own houses and deprives those people who are younger and therefore haven't got on the housing ladder an opportunity to create that sort of wealth.

[00:12:09] So I think you're a hundred percent right that it highlights. Things that are going badly wrong with the Western economy, but just to think through this, I guess the classic way that a fall in housing prices and an increase in the number of mortgage delinquencies, I guess they're called in a, in the United States, would be that that damages the balance sheet of banks and the banks then have to try to repair those.

[00:12:34] And one of the ways they do that is by contracting the supply of credit that they give. Not just homeowners, but throughout other sectors of the economy as well. And by doing that, we, you know, you, you reduce the money supply in the economy. Banks need to repair their balance sheet. They stop offering as much debt to.

[00:12:53] The economy at large, and then the economy starts to contract and that then in turn affects people's ability to pay for mortgages and buy houses. I mean, how would you see, I mean, maybe not like a, an almighty crash, but even if this was say, a moderate falloff, I mean, surely at these prices, they can't stay aloft and keep going up forever, so, How would you see that playing out, and how could this affect the broader Western economies?

[00:13:18] Well, 

[00:13:19] Philip Pilkington: again, actually, the mechanism that you're laying out is the one that was most focused on last time. Again, this had to do with the rediscovery of Minsky and so on and so on. I'm, I'm not saying that doesn't play any role, but again, actually the problem is actually much, much simpler. It's simply that the economy becomes addicted to housing investment and the housing investment floats.

[00:13:40] Construction employ. Okay, so when you look outside of your house or outside of your office building, if you see a lot of builders building and then going to the local shop and spending their money on a sandwich or whatever, that's how the housing market impacts the real economy. And it's when those guys are out of a job that everything goes wrong because then the unemployment rate goes up, spending contracts within the economy as a whole, as those guys go on the do.

[00:14:06] And they no longer have, have money for their chicken sandwich or whatever, and that's pretty much what happens. Again, it's not actually that complicated, the mechanics of the housing bubble, and so if you know that you only need to know a few things about a contemporary housing bubble to know the impact it will have rough impact.

[00:14:26] It will have, first of all, obviously you need to know if it's overvalued, because if the prices can keep going up, the builder stays employed and the chicken sandwich gets bought. Okay. We know that's not the case. Prices are currently now falling in many countries. They've been falling since the summer in the United States.

[00:14:43] Goldman Sachs put out a report at last week showing e extreme declines of around 25% in key cities, just in 2023, so that's already started. It's also the decline has started in places like Sweden, which didn't suffer a housing crash last time around. Arlen's still ticking. Britain has seen four months, four months of decline, and generally speaking, you can sometimes see a month decline in the data and it turns out to be noise.

[00:15:10] It's very rare that you'd see four months decline without a full kind of tilt. The housing market does not behave like the stock market. Well, you'll have up, up days, down days in stock markets. You can even have a down, you know, three month period, and then it can just go, go off to the races again.

[00:15:26] Housing markets don't tend to do that. They tend to be a lot lower volatility. So when you see a, a change in the. It tends to be real. Okay, maybe not this time, but every other time in history, we'll see. I'm gonna bet that every other time in history looks much like this time. So you need to know for the impact of that, how reliant the economies are currently on construction spending.

[00:15:50] And then you measure that relative to 2008, and then you get a sense of how bad it's gonna be. So I did some numbers and stuff on that. They were in the Unheard article. I came away from it saying, In the Western world, we're pretty much as dependent on construction spending as we were in 2008. Now, that's not the case In every single country, the US is slightly less.

[00:16:12] Dependent about 20% less. So we have about 80% the dependence today as they did in 2008, but that's still plenty. That's still plenty. Okay. So overall taking the West as a whole, if all those bubbles go down, then as a whole, it should have relatively the same impact as 2008. In a country like the United Kingdom or like the United States, slightly less of an impact, but not much more.

[00:16:37] The Great Recession was called the Great Recession for a reason, and an 80% great recession is still a very, very big recession. So then the final question is, well, how long before we see this? And again, this is actually relatively predictable, unlike many things in economic. Because residential investment tends to start falling long before the economy goes into recession.

[00:17:02] Okay? So in 2006, 2007, residential investment started falling about eight quarters, so about two years before the recession felt itself. So, You can actually see the fall and then you can say, okay, we'll probably have a recession, a severe recession within a few periods. So how about today? Well, we're, well, in the United States, I'm referring to, we're three quarters in.

[00:17:25] We're three quarters in, so we're three quarters of a year in. So in theory that would mean five, around five quarters to go, and then the economy is should collapse. But there's a caveat to that. The economy today, Is much, much weaker than it was in 2006. In 2006, we are still in the boom times. No one realized that the residential construction spanning had fallen off because we were still having a big party, and the party only ended in 2008.

[00:17:51] We're not in that circumstance today. Today people are watching the newspaper headlines to see if the economy's in a recession or not. Everyone knows the economy's already slu. All over the world right now, and when you don't get a recession, it's because you have 0.1% growth or something ridiculous. So we have a much weaker economy this time, and that means I think that the three quarters, three quarters of a year of residential spending falling that we've seen in the past three quarters since last year, I think we'll probably hit quicker than the last time.

[00:18:25] Don't wanna make a firm prediction on that because that will be a bit of a fool's errand, but maybe next quarter. Maybe the quarter after that, I can't see it lasting much longer. Well, one country 

[00:18:35] Andrew Collingwood: where there have been traditionally lots of builders buying chicken sandwiches has been China, which has been reliant to a tremendous degree on the explosion in the construction sector, but also investment in the construction sector, and in fact, the Chinese model of growth, which has brought them tremendous success with breakneck g D.

[00:19:00] A kind of turbo-charged version of the, of the Japanese and broader Asian growth model, which involved, you know, an undervalued currency, excess savings, financial repression, and then funneling those excess savings toward, uh, specific sectors at low interest rates, and for many years. People have, you know, including in China, I would say, but also from places like the IMF and the World Bank.

[00:19:26] And economists in general have been saying that China really ought to rebalance. And of course recently they've had their own construction sector issues with the the famous ever grande issue. Is it ever grande or ever grande? I should probably know that, but I'm sure listeners will understand what I.

[00:19:43] The Chinese cabinet or pilot bureau has said that it intends to promote a consumption led recovery, and this could well be an effort to rebalance the Chinese economy into something that's much more sustainable rather than the investment led to model that they've been running at with really huge levels of investment as a percentage of GDP and that getting lower returns.

[00:20:11] Or Yuan spent on the investment. And again, Philip, this is something that you've written very interestingly about 

[00:20:17] Philip Pilkington: this week. Yeah. I think probably to get the most out of this, we'll have to go into a little bit of Chinese economic history. It's not why that sounds exciting. It's should. It's exciting for me.

[00:20:27] I hope it's exciting for, I know it's exciting for you too. And No, really, I live for this, Philip. I live for it. You live for a Chinese economic, it's 

[00:20:36] Andrew Collingwood: kind of like esoterica is just 

[00:20:37] Philip Pilkington: wonderful. Okay, well, we'll go esoteric on the Chinese economic history. So most people don't know that much about Chinese economic history actually, and even recent Chinese economic history.

[00:20:47] And that's why I think they tend to make very poor. On China, and I can say that as somebody who made poor calls on China for years until I studied Chinese economic history. So the proof in the pudding is in the eating. And I guess that makes me the pudding. So basically the, the, the Chinese, it's broadly well known.

[00:21:06] The China was communist up until, uh, the seventies, and there were reforms in the seventies and in the eighties, which transitioned it to a market economy over. And then typically people think China goes to the World Trade Organization and gets into the World Trade Organization, then bang, China appears outta nowhere, and it becomes the world's largest economy.

[00:21:24] Arguably not quite. There were a few things in between, and I think the most important period that's that's widely ignored is the 1990s and China. So in the 1990s, China didn't have many particularly good exports. China did export very, very low, low range stuff to the west. You may have seen some of it in the mid nineties on supermarket, Charles, but not much of it.

[00:21:48] And actually I think China did a lot of knockoffs at the time. I think they were actually engaged in sort of, in sort of piracy in a sense. I think they made knockoff semiconductors as well. I'm not a hundred percent sure about that, but there was a lot of knockoffs coming outta China and it spoke to a very, very different economy than the one we see today.

[00:22:04] Basically, the Chinese government strategy in the 1990s was just to invest as. As possible, just invest, invest, invest, and see what came out of it. And China basically had a massive inflation and a massive bubble in the nineties that blew up at the very end of the nineties. And all the death that had been issued by these communist party banks went into crisis and they had a sort of a financial crisis.

[00:22:29] But because it's a state directed system, it was quite easy for them to absorb that debt. They set up things called asset management companies, which are strange. Named if you work in finance. I have actually worked for a real asset management company, and that is not the business that they're usually in, but that's what they called them and they basically were like the bad banks that we saw in 2008, 2009, that, or the bad bank concept.

[00:22:52] We saw bad banks in places like Ireland. We didn't see them everywhere, but it was a bad bank concept to move to stuff off balance sheet. The Chinese were very good at that in the late nineties, and then that opened up a new period of development, which is. Basically the George Bush Jr. Era in the US and that's where the modern China we think about came into being where they've seated to the World Trade Organization and they, they engage in these enormous mechanical trade policies with the West and they build up huge current cancer surpluses.

[00:23:21] And they become dominant. Everything's made in China. At that point, ev, ev, everything that's not high tech is made in China. That comes to an end in 2008. People are still harping on probably the Trump election caused it, but people have this fixed idea in their mind that China is still somehow reliant on trade.

[00:23:37] That hasn't really been true since 2008, 2009. Its current account surpluses never really came back after that, what China did was they switched back to the nineties model, the investment led model, and they're just building, building, building, and they're issuing loads of debt and they're issuing and they're issuing loads of debt.

[00:23:55] And that's really been the mechanism by which they've grown since then. So now what they need to do is move into a new phase. I, I kind of think of that investment led period from 2000. Until today, roughly as being a kind of a holding period. They've been building a lot of property. They've been building a lot of roads.

[00:24:14] Some of it's been very constructive. Some of it may end up being ghost estates or something like that. I don't think people think there's gonna be some spectacular bubble burst. Michael Pettus has been saying this for years. I think they'll manage it just like they did in the late nineties. This is a centrally controlled system.

[00:24:29] They can just take all that. Throw it in a black hole and move on. That's just the way the system works. But they need to form a new basis of spending in the economy that doesn't rely on building bridges to nowhere. That's a little bit of an unfair characterization given how much really good stuff that they've actually built, but there have been bridges to nowhere, there's no doubt about that.

[00:24:48] And so in order to do that, They need to step back and figure out how to booth consumption, because consumption is very low in China, the saving rate is very high. So that's the challenge that they 

[00:24:58] Andrew Collingwood: face today. Well, you mentioned Michael Pettis, and one of the things that Michael Pettis has said is that transferring from an investment led or an export led economy to a consumption led economy is actually tremendously d.

[00:25:13] I mean, Japan hasn't really fully managed it now, and it's a, it's, it's a really awkward and difficult and grinding process. And of course the common idea is that China could invest, for instance, in a social safety net, some form of welfare state because people are less inclined to spend money because.

[00:25:34] You know, they're worried that they're gonna have to pay for the sort of things that in the Western world would be covered by various forms of social security. But Pettus argues that even that sort of thing might be extraordinarily difficulty. The examples he gives are kind of mass subsidies for various forms of consumption, whether it be kind of locally made, high tech goods or cars.

[00:25:54] This sort of thing isn't necessarily going to move the needle at all. And I wonder whether, you know, we look at the example of Japan. And we see the effect of Japan's switch from a export driven or investment driven economy to a consumption driven economy. So in 1970, Japan accounted for only 7% of global gdp.

[00:26:18] Now, 20 years later, because of the sort of business model that China's now been following, Japan actually accounted for 18% of global gdp. But now, 20 years later, it by 2000, or not now, but by 2010, 20 years later, that was all the way back down to 8% as they moved away from this investment and export driven approach.

[00:26:42] And I think now it's way down again, it's, it's down to about 6%, which is lower than it was in 1970. So this process is not easy. Philip Pilkington is it? And it's something that. You know, the Chinese, Chinese administrators seem to have a pretty good reputation in the West for planning and long-term thinking and public administration in general.

[00:27:05] But I guess similarly to demographics, it's not an easy thing just to flick a switch and change habits and change structures and, and shift the powerful interests that grow within certain economic models, and that would lose out if that economic model changed. Then there's. Cautionary Tale of Japan sitting just the other side of the North China Sea, right?

[00:27:30] Or the East China Sea, I 

[00:27:31] Philip Pilkington: should say. I don't think it's an easy problem to solve. Certainly not. Is it more or less challenging than other large problems that we discuss on this podcast? I'd say less actually, than a lot. Okay. So first of all, to take the, the causes of, of the high savings rates and the low consumption rate, it's what you.

[00:27:51] It's mostly probably the lack of a welfare state. And the reason for this is because of the reforms that we referred to earlier, the transition from communism to capitalism. The welfare state was built into the Chinese communist system. If you worked on a factory, in a factory, you'd live on the factory compound.

[00:28:10] Your healthcare will be administered in the factory. Your children will go to school in the factory grounds, and if you retired, you'd retire on the factory grounds. It's a communist model, and they did the same with collective farming. And when those state owned enterprise and communal models were, uh, dissolved, there was nothing really to replace it.

[00:28:30] And the strategy that the Chinese developed became known as the iron rice bowl. And the iron rice bell basically meant job security. Just make sure everybody has enough money and there won't be a problem. It was very successful in terms of poverty reduction clearly, but it's caused this problem where everyone worries about the future cuz there's no obvious fallback and so they save a lot.

[00:28:51] I think there's a few things to be said about that. First of all, if they just manage to boost their their welfare system, that should take away a lot of that anxiety. At the same time, boosting your welfare system actually mechanically boosts consumption. Okay. Why it mechanically boost consumption?

[00:29:08] Because there are two types of government spending in the macro economy, economic accounts, the national accounts. One is government investment. That's building roads, building hospitals, and the other others call government consumption. And government consumption is precisely that. Welfare spending, okay.

[00:29:22] Social welfare, all that kind of thing. If you build that system, you will raise consumption. If you're giving people with children a little bit of money every. That money will presumably be spent. Right. So could I 

[00:29:34] Andrew Collingwood: just interrupt there? I, I hate to get all libertarian about this, but if you provide for a welfare state, is that not simply provided through tax that consumers ultimately pay themselves anyway.

[00:29:47] So now they've got, Hospital that they can go to if they, they get very sick, or if they lose their job in a capitalist society, then they've got, you know, a little bit of doll money. So they're not made destitute because they're factory closed, but ultimately they pay for that in tax. So it's not necessarily something that is adding more to the economy.

[00:30:07] Right. 

[00:30:08] Philip Pilkington: No, it, it, it is, and you can think of it in two ways. If it's done through deficit spending, which I think is the way that they should do this, then it's new money created effectively. I mean, the government issues bonds, the bonds usually end up at the central bank. New money's created, spent into the system.

[00:30:24] But even if they don't do it through deficit spending, which wouldn't make any sense, cuz remember they're trying to raise the level of domestic spending, so they should deficit spend. But even if they decide to go the fiscally conservative, And borrow. They'll be issuing, they'll be, they'll be taxing people, which will be o they'll have to offset that.

[00:30:41] And so what you'll effectively be doing is reducing the savings. If you currently are, are saving half your money and then I raise taxes on you substantially. You'll want to maintain your living standards so you won't be saving as much. Your savings will be the first thing to go on your tax. Okay. So either way that they do it, it will boost domestic consumption.

[00:31:01] And in theory, actually, I wouldn't say in practice, but in theory the government could do all of this. It could forcibly increase consumption. There are ways of doing that. I don't think it's the ideal, but they couldn't theory do that. And I don't think Patterson other people understand that it, it will be an unusual way of doing it though, and probably wouldn't be, uh, fully advised.

[00:31:20] So that's the kind of question the, the, the, the goal and how to get there is clear. And I think the Chinese understand it. I'm not sure if they always understood it, but they definitely understand it. Now. The other thing that I'd raise is kind of more micro level. It's the, there's probably a generational component to this.

[00:31:38] The people who are currently s uh, scared to go out and spend like Westerners are people who've lived in that transitionary period and who've, who've kind of been brought up in an environment where they should be kind of saving a lot and everything. But I don't think that's where the consumption's gonna come from.

[00:31:53] Marketers know that you always target the younger people. That's really where the consumption comes from. It's the newer generations of Chinese that will spend the money. If they do it right, these people will have access to the social safety net immediately so that anxiety will be taken away. But you also see shifts in the way Chinese consume and so on.

[00:32:12] I, I don't know if anyone else uses Ali Express. I've often ordered things from it. And one of the most striking things about Ali Express is they, is they've gamified shopping, they've, they've turned the whole shopping experience into a game where you collect coins and everything. It's almost like playing one of those video games on your phone.

[00:32:29] And they've done this because clearly Chinese people really like these games and they also like a gambling gambling's, a big thing, may young and so on in China. So there's a big gambling element to this too, and that's a really clever thing to do. Now, that's not conscious, that's just the marketers at Ali.

[00:32:45] Realizing that there's a way to get Chinese people to spend more money, and that's to tie it to their love of games and gambling. But that's exactly what they've done. And, and, and the capitalism's produced that, not any state plan or anything like that. So I wouldn't bet against Alibaba's. Capacity to figure out how to sell stuff to the Chinese people.

[00:33:05] So I think there's gonna be a big generational shift here that they're probably gonna get it together on the social spending. They'll alleviate the anxiety, um, on the younger generation. And this younger generation will be the alley express generation and they'll start buying. I, that's a big prediction, but I don't see any serious hurdles to any of that happening.

[00:33:24] As I said, if I was a policymaker faced with the consumption problem in China, Versus some of the problems we face in the west, such as yawning, trade deficits, lack of manufacturing, reliance on speculative bubbles that we talked about earlier. I'd much prefer to be the Chinese policymaker. It's far clearer how to get from A to B there, whereas solving some of the problems that we have in the west, they're solvable.

[00:33:46] But if there's a lot more moving parts to them is my feeling 

[00:33:49] Andrew Collingwood: right? It seems much less painful to deal with a, um, undervalued currency and a trade surplus so that suddenly. You know, your population terrible as it may be, are going to have to live richer because they can afford to buy more stuff than it is to have the opposite problem and try to deal with that where you've got, you know, you're gonna have to break it to folks that they've been living high on the hog for far too long and those days are over.

[00:34:15] It's interesting that you should mention this because I mean, you mentioned, you know, in the nineties they had one model in the two thousands they had another, which kind of ended around 2008, 2009, and since then they've moved back to a nineties model. Now if they invent another model over the next decade or so and really push consumer spending to much higher levels, that's going to be the sort of thing that really insulate China from the rest of the global economy.

[00:34:41] The United States are heading towards a greater and greater spectrum of sanctions to try to squeeze the Chinese economy, but I would've thought that moving towards a more consumption model, especially when combined with the fact that they've diversified their trade away from the developed markets and to a wider range of countries, is the sort of thing that's going to help insulate Chinese growth from the, from the wider Western economy.

[00:35:07] Philip Pilkington: Yeah, a hundred percent. I mean, you've nailed that. The, the, the thing I keep telling people about China, like especially kind of China bears, which I was for a year, I really believe the pest stuff. I thought it was all gonna blow up until I. Understood the thing better. And the thing I keep saying to them is, look, there's a plan there.

[00:35:23] And it's actually a pretty consistent plan. It's pretty coherent. And I wouldn't bet against that. And people can go, oh, well you're pro-China. That's what you get on Twitter. I'm not pro-China, I don't live in China. I don't care, to be honest. But they have a plan. And if you don't take that plan seriously, You're kind of fooling yourself.

[00:35:37] I think you're absolutely right. They're gonna move toward a more balanced trade, more so focused on the global south. If the West chooses to reject trade relations with them personally, I think that's a mistake, but it seems to be the way we're going and then they'll move to a more consumption oriented economy.

[00:35:52] But I think this kind of ties in slightly indirectly to something I think you've been looking at, which is a, a potential for a huge shift in how trade is actually physically done in the. 

[00:36:05] Andrew Collingwood: We spoke just now about the way that China is trying to, or, or, or maybe not trying, but is certainly is a byproduct building up greater insulation between itself and the Western world.

[00:36:15] It's not so reliant on Western consumption and, and free trades to Western countries as it was maybe even five or 10 years ago. But the other thing that China's trying to do, it's trying to build up alternative logistics routes so that it's able to trade outside the control. Primarily of the United States because obviously the United States is the ultimate guarantor controls the world's main sea lanes and it controls the world's maritime choke points and Chinese goods have to go through several of those maritime choke points to get to market, and the raw materials that China needs also need to go through those maritime choke points as well.

[00:36:53] So China's been building famous. The Belt and Road Initiative, which is an effort to build its own means of getting its goods to market and getting the raw materials it needs. But that's not the only initiative around the world. For instance, Russia around and India have been working on for some time now on what's called the International North South Transport Corridor.

[00:37:19] Now, if you are a Russian producer and, and, and you want to. You know your goods to market and, and they need to go buy containers normally to get from Russia to. You would have to leave port in St. Petersburg, go through the Baltic Sea, and then through the Straits of Denmark, and then down past Belgium in the Netherlands through the English Channel around the Bay of Bisque, through the Straits of Gibraltar, all the way through the Mediterranean Sea, through the Sues Canal, through the Red Sea, into the Arabian Sea, and then to Mumbai.

[00:37:50] It's a, it's kind of big loop, and not only is it a big. But of course in places like the Baltic, the Straits of Denmark, the English Channel, the Straits of Gibraltar and the Suez Canal, it's also, you know, open to the influence of NATO countries. So increasingly now that's becoming an, an issue for Russia.

[00:38:10] So the three countries, India, around and Russia are developing this north, south corridor. I know people aren't looking that it's not visual, but I think it's quite easy to imagine a traveling by rail southwood from Moscow through vulgar grad, famously known as Stalingrad. Then to Ashan, which is a big port on the Caspian Sea, crossing the Caspian Sea by boat as far as Iran, and then crossing around by train and then again going to ports in Iran, which can eventually take it across the Arabian Sea to mum.

[00:38:43] Now this, this route will be considerably faster, considerably faster than the existing route. It'll be more efficient and given the increasing trade between India and Russia. It's, you know, I think it's gonna have tremendous impact on the way that trade's done. And again, it'll be insulated Russia from control of the West.

[00:39:05] Yeah. 

[00:39:05] Philip Pilkington: I find this fascinating. I don't know much about this. I really haven't tracked kind of emergence of new trade route and so on. I knew a little bit about Belton Road. I understood a little bit bit of that, but I, I didn't know about this and it seems really, really interesting to me because it seems like historically, how would you even put it?

[00:39:23] Civilization has sort of spread through trade routes in a way. Everything spread through trade routes like diplo diplomacy, economic activity, and Yeah, culture and civilization and so on, and this trade route. Go through countries that you usually wouldn't actually think are that popular or, or that important, rather, Iran being one.

[00:39:42] I mean, Iran's usually kind of dismissed as a, as a sort of a rogue nation, you know, has suffers immensely under sanctions, makes its own cars. They're probably not very good quality. You know, it's kind of seen as a little bit of a joke troublesome, but a little bit of a joke. But it seems to me that these new formations, if you're actually running.

[00:39:59] Trade between Russia, which is a major economy, and India, which is a major economy in these peripheral countries. It seems like it could have spillover effect in those countries and for those countries that are very unpredictable right now, but that seem kind of like, they probably be very positive for the countries themselves.

[00:40:18] Do you get that sense? I mean, the 

[00:40:19] Andrew Collingwood: first thing to say about this is these sort of new trade routes, they require investment. So, for instance, Iranian ports are going to need linking up to Iranian rail networks. Those ports themselves will need a more throughput capacity as this sort of trade route grows.

[00:40:35] And it'll be the same probably with Ashan and Russia and you know, perhaps less so Mumbai. So that's the first thing to say. There's more investment available within these countries, and quite often that investment, for instance, in this case, I'm guessing the investment will come from Russia or perhaps India as well, which has already been helping Iran build out some of these port facilities.

[00:40:56] Is India's thirst grows as its economy grows. The second thing, of course it does, is it builds up links. Between two countries, because if suddenly two countries are linked by a far more efficient trade route, then it becomes economically more rational for them to start trading more together. So, for instance, India's importation of crude oil.

[00:41:21] Since the Western sanctions, the, the import of crude oil from Russia has gone through the roof. And that's ultimately going to lead to far closer relations between Russia and India because suddenly they're much more important to each other as nations. So I think one of the things that these new trade routes can do is can reshape the diplomacy and alliances.

[00:41:42] I mean, why is, why was Gibraltar always a big issue for Britain? Well, I controlled the entrance to the, uh, Mediterranean. Why is the sous canal so important? Well, for similar reasons. Why is the Hall of Africa important? Similar reason. So what One of the things that we see is diplomacy is often driven not just by, not just by resources.

[00:42:02] So the classic example being the United States' interest in the Middle East. But it's also driven by control of these key areas. Now, if they're bypassed or changed or suddenly become irrelevant, for instance, if airships, if the Hindenburg came back in, a whole fleet of Hindenburg suddenly became the most efficient way of transporting goods.

[00:42:26] Then that would change kind of military and, and, and diplomatic relations. I mean, perhaps then trade winds and the jet stream would become more important than these key maritime routes, right? So it's exactly the same situation with the opening of these new trade routes of which this north, south trade corridor is one of the more important ones, I think.

[00:42:45] Are you going to see new alliances, new diplomatic relations building? And new parts of the world becoming 

[00:42:51] Philip Pilkington: much more important. Yeah, it's really interesting. I, I'm glad you kind of raised energy there because it seems to my mind, as someone who hasn't thought about this too much, to be kind of part of a general theme, that it's kind of a return to kind of physicality in a way.

[00:43:05] I mean, we've been thinking about. And what we talk about on here, an awful lot of the time we're talking about sometimes military power, which is actually more abstract than people think, because you know, you have to theorize what can destroy what and whether missiles are important, this stuff. And then finance is obviously highly abstract, but this is much more physical.

[00:43:22] And it kind of reminds me a little bit of energy, as you were saying, on the energy because you're allowing physical stuff into your. Geographical region, I mean, effectively that that's the goal. And similarly, you know, bringing the oil in and actually physically doing stuff with these, with these physical things.

[00:43:35] And I think it kind of speaks as well to like the potential for, I've been calling it on Twitter, kind of a great divergence where we see very different rates of growth. Rates of price increases and so on in the various parts of the world, especially the ones that try and separate themselves from others through blocks, which is what we're increasingly seeing, unfortunately, in my opinion.

[00:43:55] But I mean, in India, the most striking thing at the moment, for example, is their inflation rate is less than 6%. While the European inflation rate is over 9%, and of course the reason for this is because in India's getting the cheap oil and Europe's starved of gas, these things have have a real impact because we can kind of think of India as an underdeveloped economy with a lot of corruption and a lot of problems, and a lot of that's true, but at a certain point, If the prices are substantially lower in India, the energy inputs, the general price level and so on, it will be a more attractive place for people to go and build a factory than in Europe.

[00:44:33] I mean, at a certain point that that calculus just makes sense. Maybe it's not right now, but it could be. And if you stitch India into an entire trade network, a physical trade network, It's brand new and developing. I can see that becoming an increasingly powerful or attractive prospect for businessmen and so on.

[00:44:50] So I, I think this, this kind of speaks to what we often kind of say. The West currently is doing things, it's putting up barriers and so on. It's trying to stop things. It's trying to ban things, it's trying to sanction things and these barriers themselves. Seem to be creating the conditions for these regions to develop and grow.

[00:45:08] It's very striking. Couldn't 

[00:45:09] Andrew Collingwood: agree more. I mean, one of the interesting, more interesting statistics is that Russian crude is through Baltic ports increased 50%. From December to January, and at the same time, Indian imports of Russian oil have grown five times between February last year and November last year.

[00:45:28] So suddenly India is benefiting from a huge amount of crude oil that's much cheaper than that which Europe is buying. It's a great competitive advantage. Now imagine this new trade route, which shaves days and days and days off the transport time, and it's much less expensive. You know, again, that's, you know, that demand is going to or, or that demand is going to create a push for new trade routes, and those new trade routes are going to create savings and that's going to create competitive advantages, and it's also going to create new diplomatic ties as countries tie into each other and link with each other in that kind of classic trades and diplomatic theory.

[00:46:09] I also think though, that it has a geostrategic impact. Ultimately the greatest nightmare of the United States. It's not kind of China taking Taiwan necessarily. It's not who controls a corner of Southeast Ukraine. The ultimate nightmare of the United States would be an integrated Eurasian land mass, a land mass where perhaps not necessarily under one political control, but where they traded with each other.

[00:46:37] You know, largely with each other rather than the world. And they were physically integrated through logistics and trade routes that the US Navy couldn't touch us. Power at the moment is ultimately founded on its control of the maritime trading routes. It's always been, as a rule of thumb, generally cheaper to transport things by water than by land.

[00:46:58] So it controls these maritime trade routes and, and importantly, it controls maritime bottlenecks. Now sudden. You have much greater integration, uh, within the Eurasian land mass. Much better logistics through through the Eurasian land mass, and that facilitates greater trade and also political and diplomatic integration within the Eurasian land mass.

[00:47:20] Then US power would ultimately disintegrate and the US would be an island. Off you, you know, the main mass of the world. And it would ultimately be more of a terms taker than a, you know, somebody who, uh, dictates terms. Now that's a long way away. It really is a long way away. I don't mean to say we're heading in that direction or we're getting close, but if it does happen, it would start in this way.

[00:47:45] It would start with new trade corridors, because ultimately a trade corridor that goes south from Moscow to Ashan and from there across the Caspian Sea and from there through Iran to India. It's very difficult for anybody to interfere with that. Certainly much more difficult than it is in the Baltic.

[00:48:02] So I think these developments are really. Paying attention to both for their individual effect, but also for their long-term strategic effect.

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