The Munk Debates Podcast - Friday Focus: Bond Vigilantes – Dr. K

Episode Date: October 21, 2022

Friday Focus provides listeners with a focused, half-hour masterclass on the big issues, events and trends driving the news and current events. The show features Janice Gross Stein, the founding director of the Munk School of Global Affairs and bestselling author, in conversation with Rudyard Griffiths, Chair and moderator of the Munk Debates. The following is a sample of the Munk Debates’ weekly current affairs podcast, Friday Focus. The free portion of the program sees Janice and Rudyard discuss what Canada and the world’s advanced economies should take from the financial upheavals in the UK that led to the ousting of Liz Truss as PM. Are the bond vigilantes back? Is Canada at risk of a run on its bonds and dollar? The donors-only second half of the show features Janice sharing the insights she garnered this week from spending some time with Henry Kissinger, one of the great geopolitical analysts of our time. What are Dr. K’s thoughts on AI, China-US competition, and how does this master stateman think the war between Russia and Ukraine end? To access the full-length editions of the Friday Focus podcast, consider becoming a donor to the Munk Debates for as little as $25 annually, or $.50 per episode. Canadian donors receive a charitable tax receipt. This podcast is a project of the Munk Debates, a Canadian charitable organization dedicated to fostering civil and substantive public dialogue. More information at www.munkdebates.com.Become a Munk Donor ($50 annually) to get 72-hour advanced access to the full length editions of Friday Focus and Munk Dialogues. Go to www.munkdebates.com to sign up. Hosted on Acast. See acast.com/privacy for more information.

The following is a complimentary excerpt of this week's edition of the Friday Focus podcast by The Monk Debates. Access full-length editions of each and every episode, along with all kinds of great additional benefits and perks, become a donor to the Monk debates. You can do that for as little as $25 a year, and you'll receive each and every year 50 Friday Focus episodes at full length. It's all available right now on our website. in just a few simple clicks. Triple W. The Monk Debates.com. Look for the Friday Focus option in our navigation bar, the top right of the website. Make your donation and we will send you each and every Friday a link to listen to the full-length edition of this program.

Thanks in advance for your generous contribution. Hello there, Rudyard Griffiths here, Chair of the Monk Debates. Welcome to this, our regular Friday Focus podcast, looking at the big issues. and ideas, moving the public conversation, shaping this extraordinary moment that we're all living through. As always, we're extremely fortunate to have on the program as our exclusive guest, Janice Gross Stein. She's the founding director of the Monk School of Global Affairs, an internationally renowned scholar and author, and she's all ours for the next half hour. Janice, great to be in dialogue with you this Friday, the 21st of October.

And great to be here, Rudyard, in yet another newsmaking week. Yeah. So here's what we're going to do as per the new format for the show, the first half, free, open to anybody to listen. Let's dig into the debacle that was UK politics this week, the resignation of a prime minister in 45 short days. Why did this happen? Maybe more importantly, what does it mean? Is this a tell in terms of the intersection of politics and finance? So we'll get into that. And then the second half of the show for donors only. And again, you can become a donor and get the full-length editions of Friday Focus anytime on our website. Simply go to www.munkdebates.com. Click on Friday Focus on the top right navigation. And you go through a few simple steps and we'll email you right away, a link to the full show.

On that second half, Janice had an opportunity to spend time with somebody who's super interesting when it comes to understanding the world we live in, and that's Dr. Henry Kissinger. So on the donors only second half of the program, we'll get Janice's reflections on what Dr. Kissinger, at almost age 100, is thinking about the world as we see it today. But, Janice, let's begin with the events out of the UK. People know what's happened. You'd have to have lived under Iraq the last week, not to know that the prime minister has resigned Liz Trust.

We're into a new leadership. It's incredible to think, 45 short days. Why did this happen, Janice? And what does it say about this moment that we're all witnessing vis-a-vis politics, inflation, central banks, you name it. A victim was claimed the political career of Lives Trust down in flames. What a fascinating story because in this soup, of course, the bond markets. And you had a piece on the hub about that, Rudyard, the vengeance of the bond markets,

that hold politicians to account. There is politics. There's always politics. There's the crazy decision-making of the British Tory party. But when I look at this, Rudyard, I think, is this the beginning of the end of Brexit politics? Is this the beginning of the end? when the populist wave that rolled through Britain and took control of that venerable Tory party in the United Kingdom, are we seeing the dying gasps of that?

And if we are, that's a big story. Yeah, I mean, it would be interesting, Janice, the rumors are that Boris Johnson, yes, do not go gracefully into that good night. He has the support of supposedly 60 MPs in the Tory caucus. everyone's saying this Friday that he will be putting himself forward as a candidate against Richie Sunak, who was the more kind of sober buttoned down. Let's get our finances an order candidate who lost to Liz Trust. What do you make of that? I mean, is that a reprise of the Brexit debate, Sunak versus Johnson?

It sure is. I mean, Rishi Sunak, who you just talked about, really annoyed. the Johnson faction of the party because he was the one, it was he who turned on Boris Johnson. They had a critical moment of fecklessness by the former prime minister and said enough is enough. And frankly, if Rishi Sunak becomes the prime minister, that is the end of populism for now in the Tory party. He does not capture that wing of it all. If Boris John, now 60 MP sounds like a lot, but it's not, as you know, Red Yard, as there are so many more seats in the British House of Commons than we have.

And Boris Johnson's being investigated by a House committee. So if Bojo comes back, the story goes on. So this is, I think, one of these hinge moments. And it tells us, it will tell us something. not only but Britain, but about Europe, how far the populist wave is going to run? How long does it take reality to bite? Because the populace are being bitten. There's no question.

Yeah. It's a good way to put it. You almost have to wonder if what we're seeing is a kind of return to reality. And it's a return to reality not just in terms of governments and deficits and the consequences of, in Liz Trust's case, a budget that, you know, a budget that, you know, sparked real worry. about the kind of fiscal health of Britain, its ability to service and pay its debts over the long term, causing that pension fund crisis that we discussed last week.

But, you know, that kind of chimera has gone at the window. And maybe as you're right, the other chimera are these different kind of fantasies of, you know what the Brexiteers always said. What was it, Singapore on the Thames? This idea of unleashing the lion, returning Britain to some kind of competitive, productive, super attractive place for foreign investment.

Boy, Janice, that seems just to be tarnished. It's really hard to see how the Brexiteers, you know, rebuild a case for those sunny up pastures that they were talking about for the last five years. You know, Vajadjad, let's disentangle two streets. of British politics inside the Tory party. They're not often mingle together, but they're not quite the same. The first were the Brexiteers.

You know, Singapore on the Thames, we just need to get out of the bureaucracy of the European Union, cut taxes, pro-growth. You don't have to be populist to take that argument necessarily, because, look, Liz Truss cut taxes for the top earners. There is nothing populist. reducing the tax bill for the top earners. The second part of it is the populist wing in the Tory party, which Boris Johnson actually captured to a much better degree. It's the little guy. It's the little person.

Government is not working for the little person. So he builds this coalition and crashes through labor supporters, the so-called red wall. Well, that's what I think is coming apart at the seams now, the contradictions of the. those two currents. You know, the first one, Margaret Tratcher would have been proud to associate herself with, but not the second.

And that's what I'm watching. Is this the end of the populist streak in the Tory party? And if it is, does it tell us anything about what's going to go on in Italy? In Germany, you know, Europe is a flame with protest right now over high inflation, high energy costs. People are taking to the streets and mixed into those are these two different themes. Inflation, boy, I don't like that. I don't want that. But the government is not working for the little person.

Yeah, it's interesting if you kind of play a counterfactual history. Imagine Brexit hadn't happened because what's bizarre right now. And you can say it's kind of unfair is that you can look at the mainland economies of Europe, especially Italy you just mentioned, but also a lot of the big. powers, France, Spain, others, you know, arguably they're just as financially sick as the UK in terms of high inflation, sluggish growth, the real risk of an inflation sparked by this energy crisis, I think the inevitability of a bad recession in the Eurozone. Yet their boring costs didn't go up. Their pension funds weren't pushed to the breaking point because of leverage and other

things that they'd taken on. And why is that? Because they've, in a sense, socialized risk. They've come together in this thing called the European community that creates one of the world's largest contained markets that has something called the euro, which is maybe not of a reserve currency status to the U.S. dollar, but it has some of the same exorbitant privileges, which is you have to borrow a lot cheaper than maybe your actual credit rating suggest you should borrow. Imagine if the UK had remained in the Eurozone. They wouldn't have

had this run on their bonds. Their currency wouldn't be plunging, importing more inflation, creating this vicious circle. This seems to be, you know, I got a lot of friends who are big Brexiteers and they probably won't like me saying this, but it seems to be Janice. You can have these luxuries. You can have modern monetary theory, you know, blasting out of Brexit to create, you know, Singapore on the Thames, all these great lofty, magical castles and kingdoms that you can build in your mind and then subject on the public. But boy, it feels like we're moving into a new reality. It seems like the return of reality.

And you kind of want to be in a big club. You want to either be in Europe or, you know, have the U.S. dollar as your currency or be part of some big structure because that's what's going to protect you from all these winds forces they're buffeting us at this moment. Absolutely right. I don't think Britain would find itself in the situation. It is in outrudgered if there hadn't been Brexit. There's no question.

It took that insulation out of the system. Lawrence Summers, absolutely wonderful praise to describe Britain. He said, boy, this looks like an emerging market that is becoming a submerging. And, you know, how sad, really. to describe the UK that way. But in the long sweep of history, Britain's been struggling with low growth and low productivity for 40 or 50 years.

And you start with Margaret Thatcher, who blames it on the unions and bureaucracy and then you switch the conversation. It's all the fault of the EU and stupid regulation. But fundamentally, this is an economy that is not, keeping pace with the productivity of some of the others. And I think this is the last round.

And that's why to me, it's such a significant week, the last round where you blame it on somebody else, but they are out of excuses in the kingdom. You know, just to add, this was the most incompetent performance. You can't take the incompetence out of this story. I mean, to fund, you know,

to propose tax cuts and have no way to fund them, you've got to be a super special finance minister or chancellor of the exchequer to go public with that. So when I read your piece, read you to bet the bond bandits coming after the United Kingdom, that was enabled by just frankly, sheer incompetence. There's no question about it. In a previous decade of Tory governments, you know, doing massive deficit spending. So just in the remaining moments of this segment, just let's bring it back to Canada. I think there's a kind of warning here. And I did write about it in the hub today that, you know, we have to acknowledge that what

happened in the UK over the last couple of weeks is kind of an object lesson for other small economies that don't have the exorbitant privilege of a reserve currency that might be not as productive as they wish, that might have slower economic growth and lower productivity. Who am I talking about? Unfortunately, I'm talking about Canada. And I think just as the UK was kind of vandalized by the bond vigilantes over the last couple of weeks, boy, Janice, I'm worried here.

I'm worried that Canada could be a target. If we put a wrong foot fiscally over the next period of time in this era of soaring rates, higher boring costs, and high inflation, let's say to do something we might all agree is important. I don't know, a massive new public expenditure on health. care, tens of billions of more, again, an important issue dealing with climate change. You can go through the list. There's a lot of things that we got to get done here in Canada, but the risk reward seems to have completely changed. And I do have a concern here that Canada could put a foot wrong and we could find ourselves in a debt and currency crisis just as bad or worse than the

United Kingdom. So I'm not as worried as you are, Redyard, because we have competent officials. We have a competent governor of the Bank of County. He may not be popular, but he's competent. And he understands in a very deep way what we have to do. And that's why he's, you know, he's raising rates, which is a very unpopular policy at a time of high inflation. And we have a government, And we have a, you know, a Department of Finance and ministers that I think behave far more responsibly than the UK crowd. That was, they were off the, they were off the range. I mean, literally for the minute I saw the first act of that show, you knew that was going to crash.

But there is a bigger problem here, which is inflation. Inflation inflicts real damage on a broad swath. of people, people become truly angry at their government as they see food prices going up and they have to struggle to pay heating bills. That's what you're seeing in Europe. So the push on government to compensate people and it's enormous. That's where economics and politics fuse. And yet, when you compensate people for the real damage that inflation is inflicting, you may, make inflation more resistant and harder to bring down. So across the democratic world right now, we're in a tough struggle.

And it's unpredictable because here's the two worlds we could end in. Here's the two worlds that play out. You so infuriate the public that you get a right-wing populace search. And to some degree, you're seeing that in the United States. States right before the midterms, right? Or you really clamp down on inflation and you ask people to bear the pain. That's a tough policy for democratic governments to fall. So that's why I think you're right to put your finger on this. What we won't have is incompetence, though, of the kind that Liss trust brought to government. That was, you know, I'm still stunned. You can see, I'm looking back on

that's not I'm saying, that's a record break. Yeah, and I think Christopher the liberal government has maybe had a moment, a Damascus moment. They're back on the road towards some kind of fiscal probity after, you know, posting really not only record deficits during COVID, but let's be honest, almost a kind of modern monetary approach before the pandemic of unprecedented deficit and debt financing. And with higher rates, that just becomes very, very, very. difficult. We're going to be now servicing our national debt because we both mostly borrowed at the short end, unfortunately, of the bond market to the tune of tens and tens of billions of dollars in new debt servicing costs, which again, you know, if we go back to the battle 90s,

we really have to be careful here, can push out really important public expenditures. So I think, like it or not, we're headed into some form of austerity. It may not be the austerity of explicit it cuts, but it's going to be the austerity of a reallocation of government expenditures, unfortunately, to deal with all the debt that we've larded on. And it's a shocking statistic, but, you know, Canada, if you take our corporate, our government, our household debt, you add it all up and you divide it by the number of people in the country, so the per capita debt, it's greater than Greece, and it's only behind Japan. We're number two in the world at over 350%

you know, debt on a measured on a per capita basis. So we have a debt problem. We engaged in a long extended debt binge in this country. And unfortunately, we've talked about it before in the show. I'm not saying anything new to our listeners.

There's a painful reckoning, a painful workout that we're going to have to go through that higher rates and inflation unfortunately is forcing on us. Okay, let's put a pin in now in the first half of the show, bye to our complimentary listeners. Thanks for joining in. We'd love to have you come on the back half of the show to enjoy a kind of insider conversation that Janice is going to give us.

She had an opportunity this last week to spend some time with Dr. Henry Kissinger one-on-one, a really interesting person who has almost now a century of life experience on the big issues and forces transforming our world. We'll have that right after this break for our paid to monk donors. If you want to become a donor and get the second half of this show in your podcast feed each and every week or on our website, go to our website now, triple w the monk debates.com and follow the links in our navigation for Friday Focus and we'll get you signed up for as little as $25 a year, 50 cents an episode. It's the best deal in town. Back after this break. Thanks for listening to this excerpt of the Friday Focus podcast to get full-length editions of

each and every episode of this program. Simply go to our website, www.w. The monk debates.com. Click on the Friday Focus tab in our navigation on the top right of the site. Make a donation as little as $25 a year of 50 cents an episode and we'll send you not only the full-length editions of each and every Friday Focus podcast, but all kinds of special offers, perks, access to events, and additional content. Again, you can do that right now by becoming a donor to the Monk Debates at triple W. Monk Debates with an S.com.