Odd Lots - Viktor Shvets On Why There’s No Going Back To Pre-COVID Capitalism

Episode Date: August 6, 2020

In light of the massive disruption to the economy, there’s a widespread view that things have been permanently altered, that fiscal policy must take a more active role in economic stabilization, and that the job of central banks will inevitably change. While this is a trendy thing to say now, the guest on this episode has been anticipating it for a while. Viktor Shvets is a Managing Director at the investment bank Macquarie Group Limited and the author of the new book, The Great Rupture: Three Empires, Four Turning Points, and the Future of Humanity. He explains how the old model of economic growth, which he argues widened inequality by being dependent on the growth in asset values, must give way, and that an attempt to return to to the pre-crisis model will be a disaster.See omnystudio.com/listener for privacy information.

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Saturdays and Sundays starting at 7 a.m. Eastern. Make us part of your weekend routine on Bloomberg Television, Radio, and wherever you get your podcasts. Hello and welcome to another episode of the Odd Thoughts podcast. I'm Tracy Allaway. And I'm Joe Eisenthall. So, Joe, I feel like there's a bit of a consensus emerging that maybe in the midst of the biggest economic crisis in decades and in the midst of a rising death toll from coronavirus, that there might be a greater role for.

for the government. Does it feel like that? Yeah, absolutely. I mean, A, of course, you know, there's a public health crisis, and so it can't really be addressed in a compelling way without some sort of broader government plan. But from an economic perspective, and this is something that we've been talking about a lot, and I think it has huge ramifications, the degree to which government, both in terms of spending and also in terms of thinking about their sort of domestic industrial strategy, this crisis has really brought forth a lot of talk about how important that role is. Right, what the potential role is. And it can fall under a bunch of labels. One of them, of course, is modern monetary theory. So I went ahead and set it. The other one is fiscal stimulus.

exactly how does the government insert itself to try to break our current economic cycle, downward spiral. But I feel like whenever we have these conversations, we talk about there is a role for government, but we don't often talk about what that government itself could and should look like. Yeah, that's absolutely true. I mean, I do think, you know, this is sort of the big question, but what that really looks like, how much should spending be used to permanently provide a safety net, to permanently provide more spending to lower income households?

These are huge questions. I mean, hey, we don't really know if the momentum that we see on government spending will really last. But even if it does, the future feels very wide open on what the new economic consensus could look like. And part of it is stuff like free market capitalism versus central planning from the government. That's kind of obvious. But some of it goes, I think even deeper than that. And we start talking about freedom of the individual and what sort of rights should people have under a government that's trying to guarantee or secure a particular economic future. Yeah, it's kind of a weird point, isn't it?

because there is this growing consensus about the need for more government activity. And yet, you know, at least in the U.S. context, whether it's on the right or the left, you know, just extraordinary amount of skepticism about government in different ways. It's different on either side. But there is this weird tension between how much the government is thought to need to do versus the confidence that people have in government to do anything effectively. Yeah, exactly. So today we're going to be diving deep, deep, deep into that question. And we're going to talk with Victor Schwetz. He's the head of Asia strategy over at McCorrie. He actually has a new bookout, which is all about this topic. It's called The Great Rupure, Three Empires, Four Turning Points, and the Future of Humanities. So I just want to say one quick thing, which is that I wasn't here for that last episode, that interview that you did with Victor last year. So I listened to. it this morning as part of the prep. And I was like, wow, this is a topic. That, the interview that

you guys did was extremely timely in the head of the curve because it felt like you guys were talking about this at the end of last year. Now everyone's talking about it. So that got me super impressed. And I was very, and I'm very excited for this conversation. Oh, thank you, Joe. I do do better on this podcast when you're not here. It's true. Okay. Let's bring on, I'm just kidding. Let's bring on Victor. Victor, it's so good to have you again. Thanks very much, Tracy, and I'm very happy to be here. So one thing I've always wondered, you know, I said you're one of my favorite analysts, but one of the things I really like about your research is there's always a touch of history to it

and always a touch of philosophy. You're sort of like this philosophy, philosophical analyst, a philosopher king of the cell side, I guess. How did you develop this unique approach? Well, it's a good question. I was born in the old Soviet Union. I sort of grew up in the communist system. I've migrated when I was around 20. I moved to Australia, and I had a very classical, I guess, economics and finance education. I worked in a banking industry for a long time in Russia, in Britain, in the U.S., in Australia, in Hong Kong, in China,

covering variety of areas from stocks and sectors to strategy to politics. And I guess it's sort of amalgamation of what I've learned when I was younger. I used to specialize in Marxism, Leninism, and all the way to a more classical economics and monetarist economics, I guess it's a blend of all of those things have come together. And for me personally, 2000, 2001.com crisis and even more important, importantly, 2008 global financial crisis really brought at home that economics cannot be separated from politics, finance cannot be separated from economics, market signals cannot be separated from people or philosophy. And I guess over the last 10 to 12 years, my views kind of evolved

and hardened and become not just economics and finance, but a bridge between that and politics, philosophy, and most importantly, history. History really educates us and really shapes us. So as I was saying to Tracy, I really enjoyed the conversation that you did last year, because it struck me as just incredibly timely because, okay, here we have this crisis. And a lot of people saying, there's going to be this new rethink about the economic consensus, probably more government spending. You were talking about the rethink, the new consensus last year, even before this crisis. So setting aside the coronavirus, what were you already seeing in terms of the sort of shifting tectonic

plates towards a rethink about what the government's role is in the economy? Why was that already something happening in your view? Well, you can actually go all the way to my first crisis. I was a young analyst in Sydney, Australia in 1987 during the Black Monday. And that's where Greenspan put option for the first time really appeared. And as we've gone through 90s, whether it was 1991, 97, 2001, 2008, 2008, 2015, 2015, 2020, every time we are at the intersection or at T-junction. And the question is raised, should we rebate?

our economies, should we make them much more liberal capitalism economies? The answer universally from people and politics is no. And the reason it's no is because for the last 30 or 40 years, we really were growing much faster than our productivity would allow. And how we finance that is primarily by bringing future consumption to the present. And eventually we hooked ourselves to asset prices. And then when you do that, eventually neither central banks nor treasury departments can tolerate any volatility at all. Zero volatility is your right answer.

But the problem with that is that monetary policies become incredibly, incredibly toxic, and the side effects are extreme. So what I felt for the last five years at least are possibly longer, that we need to change policy tools. Either we allow liberal capitalism to succeed, but that's going to be incredibly painful, because we will need to recognize decades of excesses. Alternatively, we switch the tools. Our public sector is still critical, but instead of using purely monetary levers, they're going to use fiscal levers. They're going to be much more aggressive

in directing and managing cycles than what they were even in the last sort of 30 or 40 years. And the way I tend to look at it, it's like a bridge. We've gone on their bridge in 1987, let's call it, that's your deadline, that's your beginning. For about 30, 40 years, we essentially used monetary levers. The next 20 or 30 years will be essentially fiscal and MMT style policies. What lies on the other side of their bridge 20 or 30 years from now? Nobody really knows. But my guess, it will be nothing like conventional capitalism. We can debate whether it's communism, whether it's feudalism, whether it's a despotism, there is a variety of labels and sort of use you can have. But ultimately, it's not going to be a liberal capitalism. And the

reason for that is very simple. As I said, every time we have a choice, we prefer not to have the adjustment. And so when people say, was Greenspan to blame for it, was Bernanke blamed for it, was Janet Yellen, my answer is no, it's you, it's us, it's people. We, we, we by and large, did not want to have an adjustment and politics delivered what we wanted, which is wealth and income beyond our productivity. So every time we're faced with the crisis or this sort of turning point, it feels like we avoid that adjustment and policymakers sort of turn inwards on themselves, I guess. Can you give us some historical examples that go beyond the 1980s?

Because I think this is the basis of your book. you actually look at three empires, three major turning points, and how those different authorities responded to the turning points. Can you describe that? Yeah, absolutely. Well, if you think of greatest quality that humans have, and that's quality to resist change, nobody wants change. And some societies have been very, very resistant to change. And what the book describes are the reason why China, Russian empire, and the Ottomans really preferred stagnation and no change to embracing new things, exploration, scientific revolution, industrial revolutions.

And it also discusses why Western Europe, which is really a small rain swept peninsula of Eurasia, decided to take a different course in the same sort of 500 years and as a result conquered the world. So we have seen similar degree of resistance in the past. And as I said, some societies really cannot overcome that resistance. And I describe in the book the role the Mongols, for example, played, the role the Black Das played, the role rejuvenation of human spirit in the 15th century played. But whatever the reasons were, Chinese never got off the doomsday highway. Neither did the Russians.

But Western Europe prepared to be flexible, prepared to exchange ideas, views, products, services, explore, change things, and hence Europe won and any European settlement, including the United States, was part of that winning team. The key question, however, now is whether in fact the same recipe for success that ensured that the West is going to be dominant is rapidly changing. And if it is changing, is it possible that for the first time in 500 years, east, is much better structured to the world ahead. And part of that is a role of the government.

Part of that is a role of technology and what role it plays in our daily life. Part of it is financialization that we have done over the last 30, 40 years. And that's really, I guess, the crux of the book. We know what succeeded in the last 500 years. We know why the West was successful and why, you know, Qing dynasty collapsed.

The interesting thing is that are we changing now to a stage that are different rules and a different success formula will apply. I'm Francine Lacquah, an award-winning journalist, and I've got a new podcast, leaders with Francine Lacqua from Bloomberg Podcasts. I've interviewed everyone from heads of state to fashion icons about the news of the moment. But I've always been curious who are these people as leaders. I don't think there's one right way to be a leader. make decisions. A poor decision is always better than no decision. Listen to new episodes every other Monday. Follow leaders with Francine Lacroix, wherever you get your podcasts. One thing I keep coming back to, and I, you know, this is obviously very sort of like

big picture and thought-provoking stuff, but I always sort of end up like coming back to this question in terms of like the market's ramifications of a turn. Like we've had 40 years or whatever of this current economic consensus of almost entirely relying on monetary authorities to stabilize the economy. And now we've gotten ourselves, and even I think Jay Powell has acknowledged this, that is Jackson Hull speech, where it's all about financial conditions. And anytime there's any sort of deflation risk, because of all the leverage that's been built up, the Fed has can't tolerate that and has to cut rates. If we have this big shift, what is the new? sort of, what does that mean for investors? Like, does that fundamentally change from your perspective

how investors should be thinking about portfolio? To answer your question, absolutely, investment strategies are going to change. One of the big paradigms or paradigm shifts that is likely to occur, and one of the big questions that investors will have to consider, is whether we're shifting from a disinflationary climate over the last 20 or 30 years, to much more inflationary. And the reason why investors have such a difficulty deciding what to do is that most market signals have died, or if they have not died, they degraded to a stage that they no longer have any meaning.

So, for example, when people worry about things like yield curve, now, what message does a yield curve convey to the marketplace if central bank determines both quantity and price? The answer is none. Why do we need prime dealers for when in fact central banks determined both price and quantity? Well, the answer, we don't need them. Why do we need commercial banks? Well, the answer we don't. So the problem for investors is the playbook that they've used for decades no longer exist. Market signals don't convey what they're supposed to convey. Reactions in the marketplace are completely different. Again, that's a merger of financialization and technology. And at the same time, they know that the environment is changing. State will be driving and

already is driving most of the business cycles. State will determine capital market cycle. State will determine the winners and losers. Now, at that point, what do you do as a fund manager? How do you position yourself? And the answer is, if you continue on the current path of using primarily monetary policy, interest trades eventually will be negative everywhere because we must generate more and more capital than what we need. What that implies, as interest rates go down, cost of equity goes down. At that point, every company can beat for any project because any project is viable. As they continue to compete, return on projects decline, which means it brings cost of equity even lower.

At that point, you reach singularity. There is no returns and there is no cost of capital. Now, what does it do to stocks? What does it do to the bond market? Well, the answer in the case of stocks, some become infinitely expensive. Others just become average and continue to degrade. and its stocks that become infinitely expenses just as quickly can fall down if suddenly they're no longer capable of delivering gross rates. So how your structure portfolio is different. It's no longer

value versus growth. It's no longer value versus quality. It's no longer defensive versus not defensive. It is no longer bear markets or bull markets. We can now have a bare market in the afternoon and a bull market in the morning. Whereas in the past, bare markets would last five, ten years. So it's a completely different environment. Just on the notion of the cost of capital declining, I mean, presumably that sort of hastens the technological shift or the technological advances that have led to or contributed to declining productivity in the first place. So I imagine you kind of get a cycle where the cost of capital goes lower, technology improves. And I,

I guess, dissatisfaction with employment and the general state of affairs kind of increases. Yes, absolutely. The way I'll look at it, financialization is like pouring oil on a bonfire of information age. Technology is a human spirit. It's a human ingenuity. But the speed with which technology progresses depends on the cost of capital. The lower your cost of capital, the faster it grows. And as it grows faster and faster, it starts disintermediating people from fruits of their labor.

It starts disintermediating corporates from their products, their brands, their distribution systems. It starts increasing disinflationary pressure. So the dissatisfaction in a society increases. And what I do, I call it in the book Fujiwara Effect, which is a merger of two hurricanes. One hurricane is a human spirit, which is technology. But the other hurricane is financialization, is what we have done over the last 30 or 40 years. And those two hurricanes continue to merge and reinforce each other and strengthen as we go forward. As I said, one of those hurricanes is the good saying. It's our ingenuity. But the other one is a self-inflicted wound.

We did not have to have financialization. Those two working together, do several things. Number one, they reduce the cost of capital over time. Number two, they accelerate this intimidation of society. Number three, they cause income and wealth inequalities to skyrocket. It creates social, geopolitical pressures. It's quite deadly. And if you think of MMT policies or government policies, the objective of those policies is not to restore liberal capitalism. the objective of those policies to reduce the speed with which we're falling to zero. So here's a question that I thought of earlier, and your answer there sort of reminded me of it, but what is the value of these labels of saying, okay, this is capitalism, this is communism,

this is socialism, this is something else. Do we need to have words, or if we have an economy in which the government plays a much more robust role, and spending money to smooth out the business cycles, whatever it is. Is it important that we label it? Does that necessarily help us understand this? Or could there just be like a blend of different models and kind of free markets, but also with more regulation and so forth? Well, you're absolutely right.

If you think of the United States in 1950s and for a chunk of 1960s as well, it was incredibly constrained society, both economically, financially, and politically. If you think of Europe in 1950s, it was incredibly constrained. Nobody would recognize those societies as liberal capitalism. In other words, the primacy of the private sector, the primacy of the private sector signals, the government essentially stands aside and create an environment in which businesses prosper or fail. That was not 1950s. And so the way I look at it, we're going closer to 1950s and 60s than we are to 1990s.

But there is a twist, and the twist is that technology now allows us to create totalitarian dictatorships that no longer will suffer from shortage of ideas, from shortage of wealth, productivity, or anything else. In the past totalitarian systems such as Imperial China or the Soviet Union, where are sort of places of stagnation, where places of lack of growth, lack of opportunity. The technology now can create societies that are illiberal, some potentially quite brutal, but nevertheless societies that will not suffer from stagnation, a set of ideas, inventiveness, gross or anything else. And that's one of the lessons from the book is to say that as we go over the next couple of decades, it is quite possible that not only we will not have what we recognize as liberal capitalism, that it's going to be much closer to the 1950s since 60s, where the government will be directing capital, where regulatory structures will be much stricter than what they are today. But in addition to that, at least part of the world, that may be big chunks of the world,

will decide that personal freedom is also optional. It is not actually necessary for your success. Can you elaborate on that last point? So not actually necessary for your success, but I guess the question is, is it necessary for your happiness? And if the thing we're trying to solve is, or resolve, is people, relationship with labor and how happy they feel in their jobs, then doesn't that become important? Yes, it does. But one of the things to remember, of course, is that labor is becoming less and less

critical. Both marginal utility and marginal returns in labor has been declining for two decades, and that decline is accelerating. Many professions no longer exist anything like what they used to 20 or 30 years ago. Over the next two decades, whether you are truck driver, whether you're a plumber, whether you're a PhD in computer science, you will feel the same pressure of irrelevancy or the same pressure that you're no longer contributing what you used to contribute. So one of the things that societies are trying to understand is what is a role of labor? In industrial age in the 1920 century, it was very straightforward. Labor was a critical productivity driver and needed to be trained and skilled to a higher and high level to grow productivity. In the 21st century,

that is no longer so. Labor is no longer the key productivity driver. The same happens with capital. If you think of 1920 century, capital generally was scarce. It needed to be allocated carefully to whatever utilization people want to do. That's why we have a DCF model and capital asset pricing model. Most of our activities, we're highly capital-intensive. Today, most of our activities

are not capital-intensive at all. We have a surplus of capital. We are drowning in capital. We have at least five-tenth times more than we need, and that's as a result of our financialization. And at the same time, as I said, the need for capital is declining. And so cost of capital continues to fall.

But in addition to that, the nature of capital is also changing. In the past, it was a hard capital. It was roads, factories, machinery, plant. Today, it's mostly intangible capital. It's IT, software, digital capital, social capital. Now, the hard and soft capital have different properties, and they behave differently. And so you're fine compared to industrial capital.

what you can argue in industrial societies, not only labor or nature of labor changes dramatically, but in addition, nature and demand for capital also changes. Now, if you don't have free labor selling services in a free market in order to maintain their upkeep and life expenses, and if you don't have capital as a critical part of your system, it is no longer capitalism, as we know it. Now, you can call it variety of ways. As I said, you can put various labels. And eventually, different countries will find different relationships, but they will be different.

So if you are a human being, how do you find happiness? If it's not through work, if it is not through money, if it is not through power, what gives you happiness? And can society deliver that happiness? That's where you go into the ideas of universal or basic income guarantee. that's where you get into ideas of how educational and skilling systems are going to change. That's where you go to many other ideas of building a different society funded by the state, because private sector will never fund any of that and will never be prepared to do so. And that's why the way I describe it, whether you look at MMT, whether you look at perpetuals,

whether you look at other Neo-Kerzian models, whatever your model is, the objective of the government is to reduce the pace at which we go to zero. It's not to create inflation. It's not to reflate the debt away. It's not to inflate the debt away. It is purely to reduce the speed with which both value of capital and labor declined. You can get the news whenever you want it with Bloomberg News Now. I'm Amy Morris. And I'm Karen Moscow here to tell you about our new on-demand news report delivered right to your podcast feed. Bloomberg News Now is a short five-minute audio report on the day's top stories. Episodes are published throughout the day with the latest information and data to keep you informed. Yes, there are other products like this

from a variety of news organizations, but they usually rerun their radio newscasts throughout the day. That's not what we do. We create customized episodes that can only be heard on Bloomberg News Now. don't wait an hour to publish breaking news. When news breaks, we'll have an episode up in your podcast feed within minutes. So you're always getting the latest stories and developments. Get the reporting and the context from Bloomberg's 3,000 journalists and analysts we're all over the world. Listen to the latest from Bloomberg News Now on Apple, Spotify, or anywhere you listen. So you said companies will never step in to provide those sorts of services, things like teaching people new skills that might be essential in this new technology-driven age.

But why do you think that is? Because I know there are some visions of our future, I mean Margaret Atwood's books kind of spring to mind, or one of them does, where she envisions companies as taking over the role of the government and providing security services, health services, educational services for their respective employees, because governments won't stand. step in to do it. So why are you convinced that it's going to be governments and not corporate entities that take this on? I basically said not so much take it on, funded, pay for it. If you think of Bell Labs, Bell Labs in 1950s, 40s, 56 is invented almost everything we use today. Bell Labs were private, but they were fully funded by the federal government. Federal government

in the US in 1960s used to spend 2% of GDP on basic scientific research. Today, that number is down to 0.6.7%. And even that is grossly exaggerated because a lot of federal funding is really applied. So the way I look at a private sector, private sector never invents. Private sector innovates. And there is a big difference. And so inventions always have to come from the public sector. Innovation, always have to come from the private sector. And so you have a combination of the two. I mean, one of the classic questions is, if a private company discovered, a private pharmaceutical company, discovered that a certain product or a certain drug works incredibly well, but it will benefit their competitor, not themselves, would they develop that drug? And the answer largely is no. So there

is a whole range of activities from community support to basic income guarantee, consumption support, to some of the infrastructure, to basic scientific R&D, things like rescuing NASA and NIH and CDC and the rest of it. That is a role for the government. And the government does it generally better than the private sector. So this idea that whatever problem you have, that private sector solution is always the best, is really a relatively new idea. It only came in in late 70s. If you go back to 50s and 60s, neither John Maynard Keynes nor John Galbright felt that there was a huge difference between the private and public sector. So when I talk about public sector, what I mean, they're going to initiate it. They're going to fund it. They're going to find,

they're going to create regulatory structures around it to encourage and sometimes compel the private sector to participate in those projects in and in those endeavors. I think the time of creating British Leyland or British Steel or nationalizing Amtrak, that sort of time is gone. I don't think anybody will try to do that. But the private sector will be corseted. It will be regulated. Capital will be directed in a certain fashion. and the government increasingly will be doing it. But as I said, the alternative is, if you continue to use monetary tools, the way we have done over the last 30 or 40 years, disinflation will get stronger.

Growth will get narrower and weaker. Income and wealth inequalities will continue to rise. Eventually, societies will simply blow up. And so there is really no choice but to adopt a different strategy. You probably remember in one of my reports, I outlined two or three alternatives. One is a war. War is capable of destroying access capital, access resources. The other one is to send some of the resources to another planet and basically exit the existing system.

But the only other third alternative to me is a more aggressive stance by the public sector. I don't think private sector is capable anymore. of actually reversing what occurred over the last four decades. This is such great stuff, and I have like a million thoughts. But, you know, sort of big picture. And I mentioned at the beginning that you anticipated a lot of the debates. The mainstream is having today in the coronavirus crisis last year during your last interview. This area of the government funding basic research, obviously,

another area that's coming back into vogue with the hunt for a vaccine and all the money that's being spent there. In general, would you say this crisis has mostly just accelerated the trends and accelerated your thesis about where things were going? Absolutely. And that's what I find. Every time we have a crisis, we have acceleration. If it goes through history and you say, why didn't people do things that they were supposed to do? If you go to Alexander I, the first, Tsar of Russia in 1801, he knew served them was a bad thing. He knew it was holding back Russia. Why didn't he do something about it?

And generally speaking, people don't do things unless they have to, unless there is absolutely no alternative. And what happens, every time we come to this T-junction, every time we have come to intersection, we need to make a decision. And so the importance of fiscal policy has already been on the horizon for at least the last five or six years. In fact, look at it, for the last five years, we've been tolerating much high deficits than we would have tolerated 10 or 15 years ago.

In fact, the markets were encouraging high deficit. So this shift from monetary to fiscal policy has already been on the go at least the last five or six years. What coronavirus has done to fiscal policy is what global financial crisis in 1987 have done to monetary policy. It accelerated it. And does it mean that we are ready at a stage that people are prepared to accept a very close coordination of fiscal and monetary policy, a fusion or a merger of fiscal and monetary policy into MMT or something else? Well, the answer is no. As you earlier on said, Joel, people are reluctant to accept that the core premise of their livelihood. In other words, private sector is dominant.

It's always better to have wealth's creators. private sector solution always better, that to change that takes time. And so the way I look at it, we probably need another crisis. It doesn't matter whether it's man-made or nature-made. It doesn't really matter where it comes from. And the next crisis will happen sometime over the next two, three, four, five years. And when it does happen, that all the ideas we're discussing now, whether it's a regulatory changes, educational changes, healthcare changes, MMT and how the government gets funded, all of that will fuse. It's like a broken bond.

Whether you're 25 or 45, your bond takes time to fuse. That's exactly what's going to happen. And I think at that point in time, everybody will accept it. And when people say it's going to be terrible, it's going to be hyperinflation, no, it doesn't need to be, or it's going to be a runaway wasteful spending. Again, it can be, but it doesn't have to be. And in fact, I would argue for bulk of the population, it's probably going to be a much better world. And that's the idea to reduce social tension. The whole purpose of shifting policy tools is to quieten societies down and reduce the degree of geopolitical or social tension.

Do we really need another crisis and for, I would love like a longer break from crisis. Can we maybe wait like 10 years for the next one? Yes, I usually say to my clients that, and I think we mentioned in the book as well, that if I could just go back to 1980s and liberal capitalism that I used to enjoy so much, I will do it. But the problem is you can't. You can't go backwards. You can only go forwards. And remember, my comparison, the bridge, we're on the bridge, we pass the first part of the bridge, which was monetary.

We are now the second part of that bridge. That bridge will go on for several decades. As I said, at the end of that bridge, a different world looms. And one of the things I discussed in the book, what that world would look long, what will be the right policies to make sure that it's not disruptive enough for all of us, that we don't have war, we don't have conflict, we don't have extreme inequalities. And so we're on that bridge. Now, on that bridge, the life will change gradually more and more.

As I said, a number of policies will change. Clearly, taxation policies will change massively, whether it's a corporate taxation, whether it's closure of the loopholes, whether it's rules regarding CEO compensation, whether its ability to do share-buy-backs. There will be other rules that will change, capital gains tax, wealth taxes, mentioned taxes. And a lot of those taxes will be livid, not to finance government. I think the government will get financed mostly through central banks. as what's happening today, I think all of those policies will be introduced to make a fairer

society. So in other words, the way I look at it, baby boomers, like myself, wanted to be independent. Baby boomers wanted to tell the government, we don't want you, leave me alone, let me do what I want to do. And baby boomers created Ronald Reagan and Maggie Fatcher and Milton Friedman and the rest of it. The new millennian and Z generations are are different. They're asking for different things. They're looking for different things. And so what you find, the new generation values fairness. Their value equality. Well, the older generation value choice, freedom, efficiency. Now, those two concepts are in conflict. And remember, in the U.S., within the next five, seven years, millennials and Z generation will be the electoral majority. And when they are,

fairness and equality will really trump efficiency, and I don't mean to use the word Trump, but really will exceed efficiency, freedom, choice, all the things that baby boomers and ex-generation really believed in and loved. And it's not going to be easy for a number of people who are somewhat older to accept that the world has changed. But by the way, the same happened in 1950s. As I said, if you go back to 1950s, if you have a different view, you could be sacked from your job. If you go back to 1950s, if you do not believe in ideology of the United States, you can be deported or you can lose your job. If you have any devious, either political or sexual or whatever or religious, again, you did not have a good life.

And so there were many periods in the past that those sorts of generational changes created societies that strove to be fairer, more equal, but gave you. less freedom, less opportunity. And that's a question in the book, is to say, between changing generations, between technology and financialization, how much freedom can we keep? Just going back to the markets right now, so I'm looking at a chart of the S&P 500, and we're not that far away from the pre-March peak in the market. When you see what's happening in global markets, in asset prices. How does that fit into your framework of thinking about things?

Well, you have to remember that we're still financialized. We're highly financialized. Globally, the debt to GDP is in excess of three to one. In a number of countries, it's as high as five to one. But if you think of value of financial instruments, not debt, real financialization is at least five, ten times, Now, that's why interest rates cannot go up, but it also means that we're all committed to asset prices. Consumer decision, whether to splash or to save, corporate decision, whether to do share buybacks

or to do investment, are now increasingly driven by asset classes. Now, what that implies to policy makers, central banks, treasury departments, ministries of finance is that you can't allow holistically defined asset prices to contract. Because as soon as you have those contractions, real-life impact for people living under the cloud of finance are going to be terrible, are going to be devastating. And so what you do, you make sure that Humpty Dumpty stays on the wall. And the only way to do it is to continue to generate more liquidity than what you require, more capital than you require, and at the same time, very rapidly act to suppress any sign of

volatility or spreads. And given that finance has different rules to economies, people saying that finance and economics are the same thing, they are not. They're completely two different beasts. Eventually, finance cannot survive without the economy, but for years, decades, they do not obey the same rules. And so the objectives of central banks is not specific level of S&P. The objective is to reduce volatility and shrink the spreads. And because cloud of finance is based on digits, it's not based on factories or roads. You can change narrative in a matter of seconds. That's why we have the fastest bear markets and the fastest bull markets right now. Because you can change the narrative. You can change communication in a matter of seconds. And that's why I said earlier,

we can have a bear market in the afternoon and a bull market in the morning. Because none of it is real. It's bits in the sky. It's numbers. But those numbers are very important. If you don't look after them, what you're fine is that people that leave on the ground going to work, feeding their children, living in their houses, they're going to suffer. And so to me, central banks are caught in an impossible dilemma that people are demanding wealth, they're demanding income, financial markets, demanding growth, and they must deliver because the alternatives will be far, far worse.

And so the only way out of this dilemma, either you allow productivity to mushroom massively, and we believe it's going to take several decades before productivity will sustainably rise. So that's not really an option. Alternatively, you change the policy tools. Instead of using monetary tools, you start using fiscally oriented tools,

which much more focused and less wasteful. Although, as I said earlier, you can scrub anything, and fiscal tools, particularly in combination with monetary, are very dangerous. And not many countries can actually pursue those policies. Victor, absolutely fantastic having you on the show as always. I love that there's an analyst out there

who's sort of thinking these big picture questions about what our political systems and monetary and economic systems might and could and should look like and how they sort of fit into, I guess, the meaning of human life, making people happy. Thank you again. Thank you very much. Thanks, Victor. That was fantastic. Joe, did you enjoy that conversation? I'm glad you got to. to play into one of the Victor Schwetz interviews. That was so good.

I kind of like, I'm glad I missed the last one so I could just like listen to the old one and be a fan and then get really excited about this one. It was great. And I feel like nobody has sort of as well as he can tie all of these big themes together because there's a lot going on. Obviously, politics is one. The financialization of the economy is another,

this sort of accelerant effect of the inequality. derived from our focus on monetary policy, the sort of MMT ideas of leading more on fiscal. And I think he really pulls them all together extremely well, especially his point about sort of generational attitude changes and how that affects the policy mix that voters are going to prefer, just great stuff. Yeah. And I think what I really like about the way he's thinking about things is it's sort of, it brings the focus back to politics, which I think.

think has always been my one criticism of MMT is that if we agree that, you know, the only thing binding government debt is inflation, the government still has to make a decision about issuing new debt and where it's going to spend it. So it always comes down to politics. Yes. history in some respects. And I feel like Victor's starting point is always politics and history and how that feeds into economics. So I really like that framework. No, I completely agree. I think, you know, to some extent, markets have always been, they're downstream from politics and that an attempt to separate them has always been very arbitrary. But I think Victor is right that going forward, that link is going to be extremely clear to people.

What will the next stimulus bill look like? What will the next president, if we get a different president, if it's Biden or even if it's Trump, whatever, what will they decide in terms of permanently changing how we trade, permanently changing the tax code, thinking about fiscal transfers? These things are going to be really real. And if you want to understand them,

you have to be sort of a big consumer of political analysis. Yeah, absolutely. Well, we'll have to get Victor back on in a year's time to discuss what's happened in the interim. But should we leave it there for now? Yeah. Okay. This has been another episode of the Odd Thoughts podcast. I'm Tracy Alloway. You can follow me on Twitter at Tracy Allaway. And I'm Jill Wisenthall. You can follow me on Twitter at the stalwart. Follow our producer, Laura Carlson at Laura M. Carlson. Follow the Bloomberg head of podcast, Francesca Lisek. at Francesca today, and check out all of our podcasts at Bloomberg onto the handle at podcasts. Thanks for listening.

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