Transcript automatically generated by Descript.
Jacob Shapiro: I sent you some of the work that we’ve done on how geopolitics and multipolarity are affecting investments. And I was pleasantly surprised that we come from extremely different backgrounds and end up with very similar conclusions. But I wanted to give listeners who are not going to go through your essay a chance to get a sense of what you’re talking about because it’s a, I think it’s a really different way of thinking.
dividing time and dividing eras and thinking about the era that we’re in right now and how COVID and all the things that have happened interplay with that. So why don’t we just start very simply first of all, define your terms, like what is the Anthropocene? [00:00:30] Because I don’t think that’s going to be a word that rolls off the tongues of a lot of listeners.
And why is this the first crisis of the Anthropocene? Because I imagine it’s been a while.
James: Yeah, it’s a couple of things. The first one is Anthropocene was coined. This is a good few years ago now and has been a term of art amongst geologists for a period of time. People might have seen last week, there was a sort of dispute amongst the, the body that’s supposed to determine these things and decided, actually, we don’t live in this new [00:01:00] geological period called the Anthropocene.
Scene that we’re going to have to think of a different name for it. There’s quite a serious sort of dispute amongst geologists about this. And it comes from that part of the scientific sphere as a way of demarcating a phase in the Earth’s existence where if you think about the Hollis scene or the Jurassic period or all these sort of great long stretches of time in the earth’s past where the climate and all the different.
So systems that interact around that have looked different and have looked different enough to impact on the geological record. [00:01:30] So you dig into the soil and then the rocks and you find things look different as you go further down. The world looks different in these great long, very long, talking millions of years, typically, periods of time.
The Holocene is a period that, humanity spent most of its existence in. Very recently, there’s been a move towards saying now, because of the impact of probably the last 200 years or so of industrialization in various forms this is now so great that this is affecting the Earth’s biosphere.
It’s affecting various sort of fundamental systems and how we [00:02:00] live. This is going to impact the geological record. Therefore, we’re in a new geological period. Let’s call it the Anthropocene, Anthropos, because people are here. So that was the thinking behind it. That was the attempt to coin the term there.
But as I said it’s open to some dispute at the minute in terms of whether this is truly a new phase in the Earth’s history. And in a certain sense, we don’t really know that until several million years hence, but at the very least, I think it underlines that What has happened in the last 200 years is now producing enough [00:02:30] noticeable impacts, things like an increase in extreme weather events, enough resource limitations that you start to run into in various different ways, enough changes in the Earth’s average temperature, enough of the mass extinction events or events that we’re living through.
This is quite a break in the planet’s history, one way or the other. So that’s where it comes from. The reason it says the first crisis of the Anthropocene is, as it says in the essay, this is something that Adam Tooze, the economic historian, who I suspect your listeners will have come across and quite likely even read today.
[00:03:00] Absolutely everywhere, really. And he’s very good. So fair enough that he’s everywhere, but he had a piece in the Guardian London newspaper right at the start of COVID saying this is the first crisis of the Anthropocene, which is the sort of thing that you give a headline to. But it occurred to me that it’s also worth taking this a bit seriously, that we need to start thinking in terms of not that many economic crises in the past.
This is the history of the last 200 odd years or so. This is how capitalism works. You view it as a good thing. Creative destruction, you [00:03:30] have a boom, then you have a recession, you clear out old things, you get new things in. This is the process of how capitalist development happens.
What was striking about COVID is that you can, build a case where this is a crisis that is impacting on capitalism, that is made worse by the fact that you have this big globalized economy. Had COVID burst out of wherever it burst out from without getting too much into that rather fraught dispute about actual origins, but had it burst out from wherever it burst out from 300 years ago, that This is something that could easily have just burned out in the steps of [00:04:00] Central Asia, this would have been a terrible disease in that part of the world.
And a few people would have died a bit younger than they might have done with mysterious coughs, but it wouldn’t have turned into something that’s an entire global pandemic in the way that we experienced. So it’s shaped by the fact that we have a global system that operates like this, that it’s a crisis of the Anthropocene because of that, because it is something that only fits into a period of time where the impact our economic activity is having on the world is so great that it’s starting to rebound on us.
And that, [00:04:30] is the theme of the essay, that we can’t. really think about economics in the way that we’re used to as something we just do to this inert object of the rest of the world. And maybe it’s changing human society a bit. But really, this is just plastic thing you can go and dump loads of impacts on to.
Increasingly, we’re living in a world where the environment is dominating what the economy does. And whether that’s something fairly grand, like we have, and a major pandemic, or we have an increased incidence of [00:05:00] pandemics of crossovers of various viruses and things into the human population, the rate is clearly picking up, and it appears to be associated with things like climate change.
Whether it’s a grand thing like that, or something fairly mundane, like things cost a bit more than they used to, because we have extreme weather events that disrupt harvests, for example these things are now inescapable, and they reshape how the world economy operates.
Jacob Shapiro: So the first question that I wanted to ask is is why, so like, why would one of the world wars not satisfy the [00:05:30] criteria here where there have been, pandemics in the last 100 years, 150 years that have jumped from animals to humans that warming may have may have caused.
The Spanish flu is probably the one that everybody’s most aware of, but there have been other pandemics. It’s just that people didn’t care about them as much or they weren’t as political or things like that. So what is special about this one is that we’ve reached a tipping point Because we’re at, we can’t get back from the two two degrees warming targets or things like that.
What makes this one, the one that if we’re looking at the last 200 years is this big era that makes it more important, let’s say, [00:06:00] or more, more defining than all of these other crises that we’ve been going through for the last 200 years.
James: It’s a very good question. Look, there have been pandemics for as long as humans have been around to catch diseases of various sorts.
You can go, black death the fall of the Roman empire, the plague of Justinian various influenza pandemics various points over the last 200 years or so. Spanish flu is only the most by now the best known amongst them. What’s distinctive, I think, about COVID is the way it interacts with the social system we have and the kind of globalized [00:06:30] social system we have.
On a fairly superficial level, this is people are traveling around a lot more and therefore things spread a lot more easily. Not necessarily the case, by the way. If you go and compare something similar, it’s very similar virus, very similar disease the SARS outbreak in East Asia in the early 2000s.
relatively contained at the time and heralded as a great success for the sort of global public health monitoring system, completely opposite this time around, obviously, it wasn’t contained at all, and nothing really works. So there’s an interaction there. And then I think there’s also a [00:07:00] need to think about the interaction with the broader economy.
What didn’t happen? with the pandemic of 1918 was the same kind of process of lockdowns, of shutting things down, of public health interventions in the same way. Now, to be clear, influenza is a different disease. The way that you’re going to get influenza, potentially pass it on to someone else, get sick, possibly die is different to if you get COVID.
The incubation period for it is different. It’s going to move differently through the population. What you had with COVID was a particular kind of interaction with the [00:07:30] economy. with public authorities, with the global public health system, that wrapped up together creates this very peculiar kind of crisis, which I think also, and as the essay indicates, is these particularly now, I think it’s becoming more apparent to everybody, these sort of longer term impacts, some of which are relatively clear and relatively well known.
The supply side shocks and lockdowns have actually lasted really quite a long time. They’re just playing out now. The financial impacts, the fact you’ve got these soaring levels of debt not just in the developed world, but across the world, the fact you have countries [00:08:00] looking, some already tipped over the edge, actually, into debt crises around the world, really a soaring number of them.
These are quite clear. And then I think there’s also this rather unusual bit that this. has an interaction with demography, particularly in the developed world, where we’ve moved quite quickly along that curve that says, Oh, we have an aging and more sickly population, which we all knew was happening.
We seem to move more quickly along it. We now have more people. Britain’s really something of an outlier here, but nonetheless, you see it across the developed world, more people reporting that they’re sick [00:08:30] in various forms after the pandemic than before. So there seems to be these sets of longer term impacts, they’re gonna be quite important, fairly decisive for how the world economy operates going into the future.
Jacob Shapiro: Yeah, but I want to focus in obviously on the soaring levels of debt, because in some ways, that’s the symptom of How the state and how governments really took more control. You make the argument that, central banks have been slowly increasing their control and becoming the center of gravity for the global economy for quite some time.
The loosening of [00:09:00] the reins of those things doesn’t seem to be happening here because protectionism was rising. Before COVID that we had more trade wars and we had the Trump tariffs on China before then, but there definitely does seem to be this acceleration and how this particular crisis is taking us back to a form of state control over the economy.
Or maybe you would make the argument that it’s a form of. relationship between state and capital that we’ve never seen before. So maybe you could talk a little bit about that and especially about the relationship between state capital and labor and how all of these [00:09:30] things are really in flux for the first time, since the Industrial Revolution.
James: I think acceleration is the right way to think about this. There’s a there’s one, I would say, novel element that COVID seems to have introduced, which I’ll come back to, which is particularly around sort of labor markets, but there is for the rest of it, the rise of protectionism, the increased appearance of the state as an economic actor.
After sort of 40 odd years, or at least rhetorically, and then actually in reality, there were governments that would not [00:10:00] talk about industrial strategy. Once upon a time I worked in the treasury in Britain’s finance and economics ministry and industrial strategy was basically banned word.
This was like things not to be spoken about, and that kind of applied everywhere. Now, It was always, there was always a degree to which it didn’t really apply. If you went and talked to anybody who was in defense or military spending, this sort of thing, defense procurement, to be fairly clear, you had implicit industrial strategies of various sorts there, but from a wider set of the economy, that period of the high period of globalization, into the 2000s, it just didn’t, it didn’t [00:10:30] operate like that in the West.
The wrinkle in this of course, is that it did operate like that in China. And that’s one of the, I think one of the factors that is really pushing the shift into greater state intervention across the sort of Western economy. It sees the direct threat of competition from China in the way that’s been reshaped.
More since the crisis of 2008 than COVID in particular, but you can see an acceleration around COVID as forms of control and intervention just become much more much more apparent. The big I don’t know if it’s no, it is. It is a new element. [00:11:00] It’s a sort of novel thing that’s starting to appear, but it’s been there really since 2008 is the role of the major central banks in particular.
The U. S. Federal Reserve as the peak organization in what looks like a reorganization of the dollar system, that instead of the sort of Globalized financial market, relatively loose control, dollars everywhere the same as a dollar anywhere else. You now have suddenly, and you saw it with 2008, and this is a point that Adam Tooze, I think, makes very well, where you had [00:11:30] privileged access to Federal Reserve dollars in the rest of the world.
If you were a country in the central bank that the US government liked you could in the depths of the 2008 crisis, go and get a swap line to the Federal Reserve and have very cheap dollars. That would keep your globalized financial system in the case of, for example, Britain up and running and used to some extent, but more is the promise that it would be there.
That keeps the thing ticking over. That’s used again and used repeatedly and has grown even over the last few years. And you see it notably in the COVID crisis. Now this is a shift in the role of central banks from being something that’s [00:12:00] an adjunct to the financial system, something that looks a lot more kind of dominant and a lot more decisive.
Do you move from. something that looks like a market determined system to one in which elements of political control become much more apparent. And I think the swap lines, that kind of international dimension of who gets access to those cheap Federal Reserve dollars and who does not is one of the more dramatic examples of how that’s been politicized.
Not just dollars, by the way, not just Federal Reserve. You might have seen People’s Bank of China threatening. In fact, they did. Cut their swapline [00:12:30] support for Argentina after Mireille got elected. They said, we’re not going to do this anymore. Now that’s basically a political decision. This isn’t market neutral.
Hey, we’re just handing out Remembe to anybody who needs it. Sort of thing. Anybody can pay for it. That’s a political decision. And it’s the same kind of political decision that the federal reserve is making. So that’s a distinctive thing. That central bank is a powerful new political actor, not just domestically, which we all know about, but internationally, at least for the major central banks, this is something big that they now have.
Jacob Shapiro: Yeah, and also in the context of the Russia Ukraine war, we’ve seen the Fed and we’ve seen [00:13:00] central banks do things that are really unprecedented. And in some ways, they’re following governments. I I remember, you probably know this. China had an African swine fever epidemic in 2018 2019.
So it doesn’t affect humans, it affects pigs. And I think one of the reasons, it was not the only reason, but one of the reasons, And it was so reticent to share data about this new virus that had emerged in Wuhan was because they saw how the United States used African swine fever in the context of trade negotiations to push for advantage.
Whereas before, maybe it would have been, oh, let’s [00:13:30] all get together. Let’s figure out how to contain this. Let’s help the We don’t want them starving. The Trump administration was basically like, okay, you get to buy more U. S. pork as part of the phase one trade deal. What other things can we put together?
So I do think there’s a, there’s an element of that there too. Do you feel like the Russia Ukraine, or I guess benchmark for me, how the fed and how the ECB treating Russia falls on the spectrum? Cause I do think it’s one of the things that. Like maybe in passing, nobody thought anything of it because there was the, [00:14:00] certainly in the West, the rally around Ukraine’s flag phenomenon.
But now it feels like doubt is creeping into the West and everybody’s thinking about what did just happen over the last two years? And what does that mean going forward? What has Pandora’s box been open to?
James: No, exactly that. You have this sort of, it’s described as unprecedented in what, February into March 2022, the range of controls and restrictions attempted to be imposed on the Russian economy, and in particular, the Russian Central Bank.
That’s the bit that feels very novel. [00:14:30] If you look at, Iran was something of a test case for this back in 2014 or so, there’s a similar but not quite as comprehensive attempt to corral it with, in the Iranian case, from the American point of view, something You know, substantially more success, I would say, because, of course, what coming out of this two years later is that Russia had clearly prepared for something like this.
The actions of its central bank in moving very rapidly to cope with, freeze and some of its reserves to reroute and to reorganize its financial messaging systems, [00:15:00] the immediate attempt to Russia to find different markets for its oil and gas, China, one of them, India, rather strikingly, another one, the shift into taking payments in different forms of currency, big list of actions that were taken pretty rapidly.
The net results of all of this would appear to be a very substantial signal to the rest of the world that is perhaps not completely an ally of the U. S. might be actively hostile. You don’t need to be actively hostile to suddenly think actually what was going on. sold as the promise of a dollar system in which your [00:15:30] dollar will be as good as anybody else’s, and this is a free and equal global market, suddenly doesn’t look like this because you can have a decision where you’re cut off or an attempt is made to cut you off if you disagree with, in this case Washington in some form.
And that I think is a real incentive for a whole bunch of middle income countries in particular to start to think about what they might do that Gets them out of or at least reduces their attachment to the dollar system. You don’t want to overdo this. This is still more than 80 percent of global trade is invoiced in dollars.
It’s still the prime reserve of [00:16:00] the world, but you can see how the attempt to impose that kind of political. Restrictions and what Russia was doing is producing a blowback over here and also not being particularly successful, actually imposing sanctions on the Russian economy. There’s other things that can be done, which is also something of a demonstration effects there.
That’s part of I think that this shift that’s taking place more generally. I know you talked about it yourself with your various guests that you have not only a sort of dollar sentence, single [00:16:30] Or something like a single unique system with the dollar in the middle of it, you do have something like multipolarity emerging within that multipolar world, you have a kind of tighter control, I would say, by Washington over what those most closely integrated into dollar system can do.
That’s what it looks like and feels is that Yeah, the reach isn’t as far as it used to be for Washington and for the Federal Reserve. But the grip that can be applied and the potential for sort of political decision making and how that system might operate appears to be a lot tighter.
And swap lines are a part of [00:17:00] that positive part of that. Although, of course, it’s quite negative if you say no more swap line for you. The negative aggressive part of that is okay, we can apply these sanctions and other countries, other major economies will also sign up to them and we can then try and enforce them.
Jacob Shapiro: And I haven’t found a good pithy word for how to describe what you’re talking about, because I think you and I broadly agree that de globalization is happening. It might be in its early stages and yes, the dollar is still dominant, but it certainly is happening. But ironically, as you just said, within those regional spheres of influence that are popping up, they’re actually, you globalizing among [00:17:30] themselves more.
So I don’t know whether to call that re globalization or like it’s difficult, but you are seeing on a trade level, on a control level, all these other things. You didn’t mention crypto in the paper, but when you start talking about weaponizing finance and you start, talking about more state control and central bank controls over the global economy in general.
Yeah, I can hear the crypto folks nodding in vigorous agreement to your comments and being like that’s why Bitcoin is going to the moon. How do you put, or how do you map crypto onto Picture that you’re talking about it. Do you think it’s fair [00:18:00] that I guess it’s fair to say that is a reason that people would be searching for a currency that is not beholden to any sort of political means.
But I just wonder, are there any analogs to it? Is this something new? How do you think about it in this context?
James: I hesitate to call it a currency in the usual sense we might think of a currency as something that’s actually viable as on a day to day transactions basis, but as a store of value.
Crypto is starting, Bitcoin in particular, is starting to look like something that can actually work like this. And to the extent that it gets treated as a hedge against inflation, a hedge [00:18:30] against whatever a central bank might decide to do, you can see that, This is operating and is operating on a very broad scale the nearest analog and this is where all the crypto people will, I think this is something like gold that is, it’s not actually much use on a transactions basis anymore, but as a store of value, as a hedge against inflation, as a hedge against what central banks might decide to do in the future.
Governments that matter, it’s pretty good. There are, as we discovered and. Russia discovered with its own gold reserves, there are literal, physical issues about the control and use of gold that suddenly appear if you decide to do something [00:19:00] that the people looking after your gold, in this case, Washington, don’t agree with.
The Taliban had a sort of dramatic, similar experience with some of this. So something that gets you out of what is That element of control can start to look quite appealing and over the longer term, you can see how crypto can function like this, can start to function like this, and clearly already is to a significant extent.
Now, whether that justifies the sort of crazy valuations and whether that means that this will start to over time remove the volatility of crypto [00:19:30] is another thing. But if the system in general is moving in this sort of state led direction, then there’s a clear incentive For some actors, at least to try and get out in that and to hold on to their wealth in some forms and to think about what the alternatives might be on a political level, by the way, I do think the election really is quite interesting as a sort of reaction against that, that if, if generally the system is moving this way, we can try and do something different.
Now, I don’t think for a second, this is going to work. At best, this looks like a plan for the sort of deindustrialization and then [00:20:00] reintegration. As a pure agricultural economy of Argentina. But nonetheless, it’s a political program and you can see some of the reaction developing in lots of different ways to what looks like a centralization of control around some of the major governments in parts of the financial system, in parts of the economy, in a way that hasn’t existed for a long period of time in the west.
Jacob Shapiro: Let’s go down that rabbit hole for a second because I’m curious. Yeah, I don’t think it’s going to work for melee because he doesn’t have the political Power behind him to affect many of the reforms that he’s talking about I mean his first act was to basically go to argentina’s [00:20:30] congress and say hey, I would like emergency powers and they were like great You can go, shove your head in the toilet.
We’re not going to give you emergency powers to do whatever you want but you’re exactly right like argentina has Is an agricultural superpower. It’s sitting on a shale revolution of its own. So it’s going to be, if not an energy superpower, it’s going to be self sufficient in energy in a way that it hasn’t been for decades.
So the need for dollars or whatever is going to be lower because they’re going to have enough energy. I feel like the optimist could look at what’s happening in Argentina and say, okay, this is like Brazil in the early 1990s. There’s going to be some [00:21:00] major changes here, but Argentina is sitting on a lot of advantages.
Do you buy that at all? Or is it just. Argentina is also, it’s been the glittering potential of South America for a hundred years and it hasn’t followed through on it because the political structures haven’t allowed it to. I just, you mentioned Miley, so I thought I’d throw that to you and ask you to explain.
No,
James: I think this is a fair assessment. And there’s a similar pattern across South America in general. One of the sort of underlying parts of this let’s call it de globalization, but at least a shift in how the economy operates is that energy demands. And particular [00:21:30] energy and mineral resource demands in a world that’s constrained on these things can suddenly promote lots and lots of different parts of the world that otherwise we’re looking less happy.
So bits of South America suddenly find themselves with huge reserves of lithium. that is essential for decarbonization and building all those batteries and electric vehicles and all the rest of it. And suddenly this gives them a power and a clout inside, potentially at least inside the system that they want to possess.
Otherwise the same thing goes with Bolivia and natural gas, Argentina with the potential for [00:22:00] fracking and all the rest of it. By the way, one of the mistakes I think people make is It’s the sort of assume that decarbonisation is a one way process that sometimes when people talk about risks from climate change, it tends to be presented as the risk is that we’ll decarbonise and this will make all these fossil fuel assets redundant.
Actually, clearly what’s happening is you’re getting two of these things at once. You’re getting, simultaneously, Joe Biden pushing through the Inflation Reduction Act, so called, with its hefty investments in EVs and all the rest of it. And at the same time, the U. S. is now what, producing more fossil fuel than ever before in its history.
Same [00:22:30] thing with China. On the one hand, yeah, massive investment in EVs and a world leading producer of the things, solar panels, massive effort at decarbonization, at the same time, huge expansion of fossil fuel output. These things all happen at once. You get Bolivia and a few other places Chile, for example, churning out lithium right next to Argentina is going to be churning fossil fuels.
So yes, you can see how that readjustment happens. The particular case in Argentina, and this might be like, if you had to sit down and write without too much concern for civil society or actual. political possibilities. But if [00:23:00] you had to just go and write down a blank slate here’s my free market utopia for Argentina, and we will destroy much of civil society, we’ll wipe out great chunks of the state, we’ll hope for some sort of really substantial write off of that shocking great debt that we’ve got, because That’s a real problem.
And then you start from a blank slate and suddenly you’re selling food all over the world and you’ve got all this shale fossil fuels you can get access to that could look work workable, at least on paper. The problem is you’re not on paper, actually in Argentina, you actually have to deal with all these things.
It’s, it’s a relatively rich economy. There’s [00:23:30] lots and lots of things going on that aren’t just agriculture and producing shale. There’s lots of people attached to those things. There is this bloody great debt that it’s built up over many years and it’s long record of attempting to manage that or fail to manage that.
in various different ways. So if you had a belief that Millais would in fact, be able to impose that kind of blank slate version of history on a whole country you might think this could work to that maximal extent. If he can’t do that. And to be honest, he’s not going to be able to do that.
It isn’t going to fly quite as in the way that he would intend.
Jacob Shapiro: Going back [00:24:00] to the crypto conversation and I’m glad you compared it to gold because the thing that Bitcoin in particular, but crypto in general has is that it has self imposed scarcity. So it has already done the hard part of getting people to believe that it has value.
Gold has had millennia of People using it as a means of exchange or a storage of value before it was used by governments to back reserves and things like that. Whereas, crypto has done this in a remarkably short period of time, gotten people to believe in the promise of it. But the reason that the price keeps going up is because there is imposed [00:24:30] scarcity and I’m not the economist, you’re the economist, but my understanding is that one of the reasons we had to go off the dollar standard is because in global economies where it’s all about.
Or and growing more if you tie the economy to the production of something that is limited to what you can take out of the ground or what it gets divided into or what you can mine from a data center or something like that. Suddenly the currency in the economy are not speaking the same language and you go off the wheels and you have all these crises and.
It doesn’t seem to, it doesn’t seem to me that we can go backwards to a [00:25:00] currency that is backed by gold or crypto or anything else. As you said, debt is skyrocketed. It’s all about growth, the entire, even as we’re talking about some of these changes in the Anthropocene, it’s all about growth and about moving upwards and things like that.
It doesn’t seem to me like there’s any real meaningful, Chance for change absent some sort of cataclysmic World War Three. that too doom and gloom?
James: That’s even more doom and gloom than me. There is, there are yeah, I, one of the things I’m always hesitant about is here comes a cataclysm that will sort everything out.
This kind of way of [00:25:30] thinking, I come from a sort of left wing political background and it’s lousy on the left to think, okay there’s going to be a big crisis and it will resolve stuff. And it’s invariably it doesn’t, or at least things don’t end up how you might want them to be.
And there’s a real problem if you’re talking about climate change. I hate it. Yeah, I really did dislike Don’t Look Up, the film where it’s the clever people know the catastrophe is happening, and all these idiots didn’t realize it, and we can all see it’s going to happen, then it happens, then everyone’s dead.
And it’s climate change is nothing like that in actual reality as we experience it. The environmental [00:26:00] crisis is not like that. It’s just kind of things getting more unpleasant and more and more shitty on a sort of daily basis, and sometimes it’s really grim. Sometimes it’s really shockingly bad and awful, and lots of people are killed and lose their houses, their lives their homes.
They’re livelihoods. And this is, that does happen. That’s what extreme weather events can look like. But on a day to day basis, it’s this grind of things not being as good as they used to be. And that’s what it, that’s what it feels like. So partly the essay is attempt to get into the grind, because I think that’s where we are at the minute.
Things could you can run a climate model and [00:26:30] see that yes, there is these chances of hitting various tipping points and things really do go absolutely haywire at some point in the actually not necessarily too distant future. So probably it could happen tomorrow. Let’s say by 2050 by 2070.
That is there. It’s on the spectrum of probabilities, but the most likely the sort of central outcome is that things are just bad and difficult. And that’s where we are. And that’s what shapes the sort of sets of economic possibilities. Now, my own suspicion on that is that therefore you don’t get like an almighty great cataclysm that resolves the extraordinary build up [00:27:00] of debt and all these liabilities that are piled up in the world system.
But you could get a series of debt defaults on lots and lots of different countries. There’s been, what, five or six national defaults since COVID. Various places you might anticipate. Lebanon springs to mind. There’s a couple of others that, have longstanding problems. But the list of countries that are now in debt distress has grown markedly.
So you can certainly see some version of defaults and write offs and restructurings in a more or less controlled fashion happening there. The difficult part is what starts to happen in the West. Because if. It all [00:27:30] the global North developed world where debt is very substantial. And ultimately this is going to depend on growth being pretty substantial to cope with that at some form that is relatively equitable into the future.
That’s going to keep creditors happy and keeps everybody else happy because you’re not having to pay all this debt back. That’s what you’re going to need to deliver. If. If the environmental crisis is playing out roughly, as I’ve described, where everything just gets a bit harder, your prospects for growth in the future suddenly look limited.
And that I think, is if we wind forward 10 or 20 years, [00:28:00] this is where it starts to look problematic with the financial system geared in the way it is, and with the extraordinary powers of debt operating the way that they are. If you cannot produce that growth nominal rate of growth high enough to basically wind away your debt over time.
This is what happens in the West after World War II. That’s your kind of ideal case of getting rid of this sort of stuff. Then you’re going to have to do something else. And either you’re writing off or you’re monetizing it, or you’re doing something that’s going to be disruptive if that growth doesn’t return on the scale that’s needed.
Now, US is doing pretty well at the minute, and there’s a whole [00:28:30] story about why that is. But if you look to Europe, and if you look to Britain, then suddenly that is not happening. And there’s not necessarily the prospects you’d want to see in the immediate future of a return to growth in the scale that you’d want to have, given the scale of debt that’s built up.
Jacob Shapiro: Yeah, bookmark that. I want to get back to that in a second. But I do want to talk about the ecological crisis and how the environment is affecting things. Because I thought one of the most compelling things about doing research on you and reading some of your work was that you weren’t talking about the environmental crisis as something in the [00:29:00] future, that it is literally here.
And let me know if I’m putting words in your mouth or if I’m taking your argument too far, but that one of the reasons you have state interventions at the level that we’re seeing them is precisely because the costs of environmental events is driving things up. Robert Caro is one of my heroes and he talks about, Lyndon B.
Johnson and Franklin Delano Roosevelt and some of the issues that emerged in the United States starting in the 1920s and 1930s and about how at least in sort of old school democratic politics, the Democrats at that time accepted that there were some problems that were too big for the individual to solve, [00:29:30] like rural electrification or like the dustbin.
And governments like FDR’s or Johnson’s needed extraordinary powers or needed new sorts of systems so that the government could come in and provide for these problems that the private market was never going to solve. Because if you left it to the private market, you would just, people would die or people wouldn’t have electricity or things would, things bad things would happen.
Really eloquent of me right there. And I think you’re making the point that, look, all of, whether it’s insurance and property markets, which is something we’ve talked about in this podcast, especially in places [00:30:00] like Florida whether it’s famine in different parts of Africa or the monsoon cycle, driving up food prices and inflation in the Indian subcontinent, we can go down the list.
But it seems to me that what you’re saying is, look, the environmental crisis is here. It may not feel like it besides the grind of I can’t, I’m not looking forward to the 95 degrees Fahrenheit, 100 percent humidity of New Orleans summers. That is about to greet me in the next couple of months, but that it’s already here and that maybe there’s ideologically a reason to push back against state intervention.
But if you [00:30:30] don’t have state intervention compared to a challenge of this scale, like things are just going to blow up. And that sort of puts us in the position that we’re in. Have I taken your argument too far? Or is that a fair way of thinking about how the environment is affecting the global economy?
I
James: think that, I think that’s where it ends up. This is a more or less positive version of it. The relatively positive fluffy version of this is that sensibly and rationally, everybody coming from the 1920s through the second world war, or at least Democrat Party in the U. S. and the Labour Party in Britain and various social Democrats in Europe [00:31:00] realized and won public support for a program that said we must protect people from the ravages of the free market and then you build up social welfare systems and the rest of it.
And that’s the nice rational version of this. The slightly more if you like, irrational, less sort of public spirited version of this is you get something like that, but it still is pretty grim. The insurance market strikes me as the one that, that is, Really, I know you’ve talked about this and it’s so dramatic what’s happening, that you have insurers getting out of places that they now think are [00:31:30] uninsurable to all intents and purposes.
We’re approaching that for a whole set of people, that it is not possible to sell them insurance at a premium that they’ll be able to buy, so they’re not going to sell it. Now, if you’ve done, maybe not EC 101, but EC 201, you get into your second year and they start to teach you about adverse selection and moral hazard and that sort of thing.
It’s the insurance market. These are Difficult markets to run at the best of times. And what you know is that if you have a situation, there’s a whole bunch of people that you can’t, as a private insurance provider, make a profit from, you will simply not sell it to them. And that will not be insurance that’s [00:32:00] provided.
So then of course you get government intervention. You get a sort of insurer of last resort. DeSantis was signing a bill into law in Florida. Not that long ago, a few months ago to expand provision. And you can see something similar creeping up in Britain. rain rather than extreme heat or whatever.
But that state is there to provide the minimal amount of insurance at a fairly significant expense to a bunch of people who need it otherwise. Leaving, by the way, the private insurance to chase the bit at the top of the market that’s still profitable. So you’re getting the worst of all worlds at this point, right?
You’re getting a private market that’s [00:32:30] like this, incredible sort of elite offer of insurance and perhaps it, tie it into like your health insurance and perhaps they dig around in all your social media usage to work out, to give you a really nuanced, personalized, risk assessed version of that insurance if you happen to be well off.
But if you’re poorer, you’re getting this fairly crappy state provision instead because there’s no money to be made out of it. So this is not a good sort of fluffy, it’s the end of the second world war. We’re going to do the nice rational thing solution. It’s a bodge job. That still works in favor of at least some people are going to [00:33:00] make some money out of this and they’re going to sell insurance to rich people at the top end, and everybody else is getting way of a crappy state provision can be scraped together at the bottom end.
So that feels to me like where a lot of this is going to end up that this doesn’t get you to like, It’s the end of the Second World War all over. Everyone’s going to, the scales are taken from everyone’s eyes. Oh, we have to set up a national health service. We have to expand education provision. I’m parodying a version of the history here.
We have to provide unemployment insurance. Let’s have lots of trade unions. We’re not going to get that. We’re going to get some hideous [00:33:30] mashup of, Decent provision at the top end and everybody else is scrabbling around for whatever they can get elsewhere. And that’s what the government’s going to provide.
Jacob Shapiro: Yeah. And it’s you let the good times roll until a crisis happens and then you’ve realized there is no insurance and it’s going to be a lot harder to rebuild. I think one of the things that keeps people in place is I’m in New Orleans, it’s one of the, from a climate perspective, one of the riskiest places to be in the world and there’s an indomitable spirit here, which is we’ve rebuilt countless times.
Maybe they will, but it’s going to be a lot harder when nobody’s But insurance as [00:34:00] a funny aside, I was in I was in Madison, Wisconsin last week for a speaking event and I was talking with a friend and I was lamenting the increase in my home insurance premiums and my friend is from Peru and he laughed at me and he said, this insurance thing.
thing that you folks in Western markets have. It’s very silly. Like we don’t have insurance in Peru or in some of these other countries. This idea that something’s going to come and save you or prop you up if a crisis happens to you. So I don’t, maybe that’s a uniquely Western, he made me think about that in the sense that maybe insurance is a uniquely Western phenomenon.
[00:34:30] Maybe the economy functioned better without it. I don’t know. What do you think?
James: It’s an option. Yeah, an option. It is to say that’s it. No, no insurance for anyone. There’s no mechanism we can get to for the social risk sharing, which is ideally what you want. It’s one of those ones without sounding too status about it’s one of those ones where the ideal solution is basically there is one insurance provider and it’s probably the government and that’s going to be the risk sharing that we operate and there’s a fair chunk of social life going on.
does have versions of this. What we got in insurance markets on home insurance isn’t like that at all. It’s a mess that’s [00:35:00] emerging there, which is itself, by the way, another one. The reasons for thinking that the path of government debt is going to be upwards. Because what happens if some of those liabilities that the state has now taken on around home insurance As the insurer blast resort suddenly manifest themselves in Florida or wherever it might be that these are huge expenditures, this is suddenly going to have to be met.
And that’s an emergency spending that suddenly allow more borrowing in one form or another. A great part of what is happening at the minute starts to look like. government just taking on more and more liabilities into the [00:35:30] future. This is the big sink for everything that’s going wrong, particularly in the developed world.
And you can keep putting things in there for a long period of time. And it doesn’t seem too bad. You can put all of COVID in there, that’s a huge increase in debt. And you can keep doing that for a period of time and it all seems fine until eventually it isn’t. And that I think is. The closest I’ll get to Oh what does a catastrophe look like?
What does a potential flip into a much worse situation? How does a crisis, really deep crisis of sort of governments and states look like at some point down the line, once they built up so many liabilities that they can’t [00:36:00] plausibly grow or even inflate away properly.
Jacob Shapiro: Yeah, one of the questions I get most often is how much debt is too much debt.
What is the upper limit to where the crisis happens? And in some ways, I think that’s a faulty question because it’s not Oh, we crossed X percentage of debt to GDP. Now there will be a crisis. I know that it doesn’t work that way. But where do you think we are in terms of how debt is going to cause crises?
And I know it’s already causing crises in places like Sub Saharan Africa and Southeast Asia where average sort of British or American listener is not really thinking deeply [00:36:30] about these places. You have to be an economics or a geopolitics nerd to know what’s happening and how the stressors are affecting these different places.
But in some of these developed economies, how much debt can the United States take on? How much debt can the EU take on? Japan has shown us that maybe that figure is a lot larger than People might think it is. So how long can we keep doing this and kicking the can down the road?
James: It’s, there was that paper.
Wasn’t there shortly after the 2008 crisis, the Reinhart and Rogoff paper that got cited across Europe in particular, I remember the [00:37:00] government at the time that, once debt reaches a hundred percent debt to GDP ratio, that’s it for growth. It’s all over. A bit of digging around by a graduate student found that they basically made a spreadsheet error.
The calculations were off. There was no sort of limit like this. It just didn’t there wasn’t a sort of magic number that you crossed and suddenly everything goes wrong. It wasn’t there. It got the numbers wrong. So I think there’s this sort of really awkward thing that, that it’s difficult.
It’s one of the ones where you’re not really going to know it until it happens. It’s this grim business, like Wile E. Coyote running off the [00:37:30] cliff. You keep going for a long period of time as long as you don’t look down. And there’s an element of that where not looking down, the capacity to not having to look down, was really significant for the U.
S. for a very long period of time. This is what the period, Since coming off the coming out of the Bretton Woods system in the 1970s, gives you was not like collapse the dollar, whatever it actually gives you this weird new power of having a currency to a huge extent, you can produce an enormous scale, you can borrow an enormous sale.
And for as long as the rest of the world wants your currency, as long as it’s the [00:38:00] foundation of what you’re doing. What the rest of the financial system looks like you have this incredible capacity to run up debt and that’s the U S has exploited. And it really doesn’t matter which government is actually, no, that’s not quite fair.
I think Clinton and George Bush senior had some goals at trying to reduce that debt, but in practice, you would just got this sink and you’re just going to use it and use it. And that works fine for as long as you have a U S dollar system, which has this incredible capacity that spreads across the world, everybody else wants to be a part of, which is precisely what seems to be coming to a halt around about now.[00:38:30]
right? That reach is not what it used to be. So there’s a clear tension, I think, building up there, the capacity of the US, the Federal Reserve, the dollar centered system to continue relying on that inordinate privilege to go wasn’t it back in the 60s, talking about this, to produce the dollar, to rely on the rest of the world, wanting the dollar, wanting dollar based assets to have this as the foundation of fundamentally a global system.
If that’s in question, Then you start to think it starts to become more apparent that there will be some [00:39:00] limits to what you can do to treat this borrowing as a sort of sink of every liability you can think of, that every crisis you can think of can just be dumped into this liability, endless liability of the federal balance sheet in effect.
And the same goes similarly for other developed countries. Britain at this point, without saying it’s going to suddenly plunge into a debt crisis, something like this is not a very happy economy, not by a long way. Close to 0 percent GDP. per capita growth for the last 15 years or so.
It’s quite extraordinary what’s happened and the set of failures that [00:39:30] happened, and the way in which political decisions have made those failures worse for a long period of time, which Brexit is currently one of the more obvious ones. This is a place that is not built to grow and is not built, therefore, to deal with the debt in a way that we would like to deal with it, which is you grow, you have a bit of inflation, the debt gradually wears down over time.
This is some way that looks like. on the list of if you take the next 10, 20 years, some reasonable period of time, it’s on the list of places it’s going to hit a major political and economic crisis [00:40:00] around the fact that it cannot simply carry on running its liabilities and running its balance sheet on government as a sink for everything that goes wrong forever.
Jacob Shapiro: Yeah. I want to read one sentence from your essay that like really stuck with me and ask you to talk about a little bit more. So I’m quoting you here. So the process of competitively driven accumulation that gave capitalism it’s broadly productivity improving dynamic for 200 years is instead being pushed towards forms of rent seeking and the useless hoarding of wealth in place of increasingly costly and risky productivity [00:40:30] improving investment.
First of all let that hit you in the face listeners. And second of all, Tell me why things like artificial intelligence or the energy transition or automation and things like this can’t give capitalism that second wind and embedded within my question. And I, one of the critique is a little bit strong, but one of the sort of things I found myself saying in the back of my mind, as I was reading, I’ve heard about material constraints and we’re running out of food and we’re running out of energy for hundreds of years.
And maybe this is the time. [00:41:00] But like going back to Malthus, like we have always seemed to figure out how to produce more and how to find more and how to get more out of the ground than we have before. So again, like you’re making the argument, okay. Like it’s been a nice run, but no longer. So it’s a two part question, really like talk to me about things like the energy transition.
Because those look like maybe compelling sources of growth going forward. And then on the back of that why do you think now is this unique moment where maybe the Malthusian economics finally asserts itself that [00:41:30] we have finally gotten a little bit over our skis?
James: A couple of things.
The energy transition in particular there’s a, it’s a very good recent book by Brett Christopher, it’s called The Price is Wrong, that sort of goes into some of the details around this is that the forms of technology you have for the energy transition for decarbonisation are not particularly well suited to produce obvious returns for private capital.
So you end up with problems like, for example, take China, it’s very windy in the north, but electricity is [00:42:00] needed in the south. It is therefore costly and difficult to get electricity produced by wind from the north of the country to the south. There’s a sort of constraints on how far you can expand some of this and still expect to make a private return.
Now, that doesn’t mean government can’t step in at some point, but then you’re back into this broader question of if we have issues to deal with and crises to deal with, it’s likely government will turn up and try and patch things up in some sense. So that feels to me like. One part of the problem that the technologies itself do not lend themselves to the kind of forms of accumulation and profit [00:42:30] generation we’ve seen.
And actually you can see already, you can see what’s happening with Orsted, for example, the wind turbine manufacturer, you can see what’s playing out in the attempt to Transition to wind energy in the US where you’re running into like serious issues of how is this producing a return? Can you guarantee this into the future?
Is it enough to warrant the kind of investments you want to make? So that I think is playing out in the energy transition there. There’s then the harder bit further down the line, which is that we’ve built, we built, God knows how many cars for a very long period of time and most of the people in the global north who want a car now [00:43:00] have one and potentially there’s a large number of other people who want a car and don’t have one.
If we’re going to build EVs, the material requirements of doing this are different to if you’re going to build internal combustion engines. And that means you have to go to different places, dig out different things, turn them into different things like lithium for batteries is the most obvious one. And there are hard resource constraints and that you’re going to run around the world trying to find this.
And there are certain parts of the world that control access to those resources. And in particular, refining of those resources, because you take lithium. China doesn’t quite have a monopoly on the refining of [00:43:30] lithium, but it’s getting up that way. 78 percent or so. It’s the, this therefore is particularly in a world where states are starting to act strategically in the economy and the way we’re seeing, it’s not like there’s this sort of endless bounty of the marginal production is always possible without affecting costs and actually marginal production.
The fact you’re producing one more electric vehicle might, in fact, start to drive up the cost of producing another electric vehicle beyond that. And that, I think, is the economics of the resource constraints that start to appear here. If you take AI and actually let’s treat artificial intelligence, because it’s [00:44:00] not actually artificial intelligence.
It’s an expansion of what we’ve already doing with the data economy. It’s impressive, but it’s an expansion of what we’re doing already. The resource constraints of that start to look fairly fairly dramatic that in terms of water usage in a world where we know water resources are coming under pressure, in terms of energy usage in a world where we know energy usage is, it’s got energy supply is coming under pressure, suddenly you’re going to hit some material and you are starting to hit some material resource constraints on that.
I was really struck by your guest a few [00:44:30] weeks ago talking about this in terms of of access to natural gas in the U. S. and the Biden administration’s decision to Hold the construction of export terminals, which in one level, I think in the short term, this is like it feels like an attempt to hold down the domestic price, the rather nice paper in the National Bureau of Economic Research, but two weeks ago, the opening up the US market to the global market actually increase the domestic price of gas as you can anticipate.
So therefore, hold that off a bit, you can oversupply the domestic market, keep the price down, and there’s an [00:45:00] election coming up. But the longer term thing about Hold actually, who is going to have access to the energy resources needed to run all the massive data centers that we expect to be building.
That, I think, is like a version of that resource constraint around who’s getting the data and who’s generating it. More generally, and this is a more speculative point, but it’s perhaps one for me to go back and think about. Look, I just think Robert Solow got it right, what, 30 years ago. How come I can see the IT revolution everywhere except in the productivity statistics?
What is the actual gain to [00:45:30] productivity consistently from the incredible investments we’ve made in various forms of data technologies for a long period of time? There are periods where it seems somewhat clearer, 1990s into the 2000s. For the last decade or so, Coinciding, probably not entirely coincidentally, with the end of Moore’s Law and the very rapid expansion of the capabilities of processing power, that doesn’t seem to hold and work in the same way.
Now, it may well be possible to do something fundamental to get out of what seems to be a physical barrier and what you can actually start to get out of a computer chip. For [00:46:00] instance, quantum computing changes to von Neumann architectures, all sorts of, fairly wild things you might be able to do.
But we don’t actually have those yet in the usable form, or at least in the usable and commercial form. And therefore we’re stuck at the minute with sets of technologies that look very resource constrained. They were putting an awful lot of money into, but aren’t necessarily very good at producing the kind of growth that we want to see out the other side.
Jacob Shapiro: Yeah. You talked about the useless hoarding of well, that’s the useless hoarding of data, like all these different data centers and all the power requirements that they have, and it’s monetized. It’s [00:46:30] already ping ponging back and forth through the system, not empowering folks to do things for cheaper access to data or for cheaper internet rates and things like that.
I forget the name of Bill Gates’s company that is trying to build small modular nuclear reactors. But there was an article, I think in the FT just today, it’s Tuesday. About how, Oh, they’re going to break ground soon. First reactor in 2030, or you go to Amazon and some of these others that are literally trying to build their own power facilities to try and power their own data centers, clearly telegraphing on the world that you’re talking about.
I’ve, we’re almost at [00:47:00] the hour point. I don’t want to take too much of your time, but let me close, let me close by just asking you this question. There’s been a lot of food for thought in this podcast and a lot of doom and gloom, but I’m actually not a doom and gloom person.
person by trade. Are there any countries or are there any sort of silver linings? Are there any places that are positive, you think? Or is it just we’re so globalized and the ship is all headed in one direction and it’s just A hierarchy of bad options, and hopefully you’re on the less bad option.
I’m looking for something to hang my hat on. What’s good out there?
James: I think recognizing the [00:47:30] hierarchy of bad options is quite a good start. Just having some sense that you might not be able to get the absolute best that you would have wanted, but at least having a sense of what is the least worst and going for that seems quite viable.
I’m trying to think of what is useful here. The fact that decarbonization is happening, I think. ought to be a positive in some senses, the fact you are trying to reduce the future damage of churning out loads of greenhouse gases ought to be ought to be something positive. There are issues with that connected to changes in resource use and resource intensity of the technologies we’ve got, but there’s [00:48:00] something there.
One of the positives I thought was, and potentially coming out of COVID really, was just a reshaping of how people think about their lives, partly because a load of us were just forced Yeah. And I don’t think it’s a bad idea to do it because If if or for if you can, you can just be more in a conversation about things.
Is that okay? And in, I think I’ve said this before, I think it’s so important to be aware of things and making sure that you’re aware of the challenges that you’re facing, and just making sure [00:48:30] that you may be and I think, if you can do it. positive there. That one of the responses to crisis is a recalibration of the list of things that people find worthwhile and things they might want to do.
And the positive for the rest of us with a load of this stuff is if you want a really quick, one of the low hanging fruits, relatively cost free options on how to decarbonize rapidly and reduce resource use rapidly. Reductions in working time, having more people retired, having more people not trooping off and commuting every day to get into work to sit in what is usually a very energy and [00:49:00] efficient office.
And getting them sitting at home instead and maybe going to the park or going to the library or whatever the hell it is that people do with their free time. It’s like that actually starts to feel like a positive. So if there’s some sort of silver lining there, that recalibration, that shift in how people think about work and what we might do with work, I think it starts to look like the positive in all this.
Jacob Shapiro: You’re really, what you’re really saying there is the power of labor to dictate their hours or the quality of the labor that they do and what they get paid for it, right? That’s what you’re saying.
James: Yeah, totally. No. I’m in favor of tight labor [00:49:30] markets. The tighter, the better, given what’s happened with, the shift towards returns to capital versus returns to labor across much of the developed world in the last 40 years or so.
Tight labor markets are good. More lorry drivers retiring, more people deciding that they’re age 50 and they’re going to go and do something different. It’s not just going to be in office all day long is good. large numbers of sick people not getting the care they need. Not so good, but broadly speaking, it’s not a bad idea if we have some tight labor markets and a bit more powerful labor.
Jacob Shapiro: All right. James, we scratched the surface. I had a lot of fun. I hope that you’ll agree to come back on, but [00:50:00] thanks for making the time and we’ll talk to you soon. Okay.
James: Brilliant. Thank you.
