Ep 5 - Prof. Russell Napier: The New Rules of Money

Renowned macro strategist Russell Napier joins the podcast to provide a deep dive into inflation, state control, and the future of markets.

A unique look into one of the world’s most respected macro thinkers. So useful, we had to make two episodes. If your serious about your financial future, your money or understanding what is “actually” happening, this is a must listen/watch.

Transcript

SPEAKER_03 0:00

China's debt-to-GDP ratio goes from about 140% of GDP in 2007 to 219. To put that in context, there'll really be nothing like that for any major economy in peacetime. Now it happens during war, but in peacetime, that is really unparalleled for a very big economy. And it has, of course, had a huge and profound effect on global economy, global markets. And we've lived in that era, and to some extent it kept the global economy going in the immediate aftermath of the great financial crisis. But the consequences where China is in debt. It takes us back to that global monetary system and why it stopped working for China really about 10 years ago.

SPEAKER_00 0:38

Welcome to the most important thing. The podcast where leading voices in finance, economics, investment, and geopolitics share the one idea they believe matters most. Renowned broadcaster Ivan Yeats and finance expert Dr. Alan O'Sullivan will uncover for you what actually matters. In a noisy world, clarity is power. Here, we focus on the principles and insights that endure long after the headlines fade. This is the most important thing.

SPEAKER_02 1:10

Now, today's episode of The Most Important Thing features Professor Russell Napier. He's based in Edinburgh and he's a lifetime's experience as an author, an academic, a history in investing, but really his expertise is as a financial historian. And uh I'm really fascinated with this guy. How did you come across him?

SPEAKER_01 1:34

Yeah, again, uh I I read I read a couple of his books earlier on, uh Ivan. So Russell is a very interesting person, okay? Um based in Edinburgh, as you said, he's he's what's called as the keeper of the library of mistakes. So that's that's enough to say. So basically, how do we how do how we should navigate financial markets is through mistakes, and that tells you a lot about it. And how did you come across him? Yeah, so uh followed him following him, Reddy's book. He's got a an a very famous book, um uh Anatomy of the Bear, looking at the uh 1998, late 80s, 90s uh uh emerging markets crisis. Um, but following his writings, following interviews he has done, um just very interesting. And and and in the in the interview, we touch a range of different topics.

SPEAKER_02 2:21

Okay. Now I've heard of sexual repression, but I've never heard of financial repression.

SPEAKER_01 2:26

What is it? Ivan, this is a family show now, okay. In terms of what is financial repression, it's very difficult to talk about financial repression without understanding debt, demographics, and the requirement for governments, central governments, uh, to actually uh control inflation.

SPEAKER_02 2:46

I picked up from him that the root of all evil is excessive state debt. Would that be a fair summary?

SPEAKER_01 2:55

Yeah, I mean, like many of the guests I've spoken to, quite critical of central banks, okay? Central planning in terms, because you're manipulating interest rates, creating asset bubbles. And the problem we have now is the debt has got to such a level that we could be looking at further unconventional policy uh actions like financial repression, which we get into. A lot of people don't understand it, but one big takeaway from this, Ivan, is investors need to understand what financial repression is.

SPEAKER_02 3:25

So let's get into it then. Uh the lessons of financial history from Professor Russell Napier.

SPEAKER_01 3:33

I'm delighted now to be joined by uh Professor Russell Napier. Uh I've got a pretty long bio here. I think Russell needs to get a bit more sleep, but he is the author of the Solid Ground Investment Report for Institutional Investors, co-founder of the Investment Research Portal. Eric has worked in investment business for over 30 years, going back to 1995, advising on asset allocation. He's the author of the Cult Classic, according to the FT, uh, the book Anatomy of the Bear: Lessons from Wall Street's Four Great Bottoms, his second book, The Asian Financial Crisis, 1995 to 1998, The Birth of the Age of Debt was published in 2021. He's the founder and course director of the practical history of financial markets at the Edinburgh Business School. But he's also a practitioner. He's got skin in the game, member of a number of investment advisory committees, and he has uh degrees from uh degrees in law from Queen's University in Belfast and Magdalene College, Cambridge, also a Fellow of the Society of the UK and honorary professor of the University of Stirling and visiting professor at Hurriot Watt University. But interestingly enough, Russell, when I was uh preparing for this, I saw also that you're the part owner of a brewery in Northern Ireland. I don't know if that's still up to date. Uh he grows his own organic veg vegetables and trundles around Scotland in a 1961 Volkswagen camper van. Uh, I presume you like fishing because you fish fishing because you frighten the fishes with flies, and reads too much financial history. Is all that very accurate?

SPEAKER_03 5:04

That is brilliant. I am getting so the brewery bit is still current, doing well, is available. I'll I'll just plug the name Heaney Farmhouse Brewing, joint venture with part of the family of Sheehan Heening. So you're the most of uh your listeners, and I think you can get it. Certainly you in Northern Ireland it's quite easy to get, and I know we sell it south of the border, but I don't know exactly where. So uh anyway, seek it out. So that's the plug-in for that. You're right, I don't get enough sleep, and I do read too much financial history, and I don't catch enough fish.

SPEAKER_01 5:32

Can I just ask where we're going to get into a lot of interesting topics, very uh important in today's new world in terms of monetary policy, uh geopolitics, breakdown of the old the the old order. But just in terms of your own start, in terms of this fascination with financial history, where did that come from?

SPEAKER_03 5:53

Well, I think it comes, Alan, from uh I don't know if ignorance is the right word, but you mentioned at the beginning of this that my degrees are in law. But back in 1989, it was possible to get a job in finance without any formal qualification in it. So I landed a job as an investment manager, training investment manager in Edinburgh. Now there were professional examinations at that time, and I took those professional examinations and passed them, that's what you had to do. But I don't think it really explained to me what I was witnessing in my day job, those exams. And almost by accident I began to read financial history, and financial history did explain what I was witnessing in my day job, what was dancing across. In those days, of course, it was a Reuters screen, now it's a Bloomberg screen. And I thought, well, if taking these examinations, formal examinations, for instance, in economics, doesn't really educate me about what I'm doing for a living. I better find a way to get educated, and I better find a way to get educated quickly. And as I'm looking after other people's money, it'd probably be good if I didn't do that by losing their money. So to me, the route to that was financial history. And then from a very early stage, it was pretty evident that what financial history had is what a formal training in economics slash finance slash investment had taken out, which was an understanding of politics, sociology, philosophy, psychology, which all seemed from little I'd discovered in just a few years I'd been doing it, really rather important in establishing the future direction of financial markets, and yet we're we're lacking in the formal education. So I came to it because of that. There are cynics who say that it's just because you're from uh Northern Ireland that you're interested in history, but I I prefer the former explanation to the latter explanation, and that's why I've become a bit of an evangelist for financial history, particularly this time, this turning point in history, where I think we all know that politics, psychology, philosophy, sociology are important, and yet so few people in the industry are equipped to deal with that because they had that more formal training, and it is certainly possible to leave university with no training in economic or financial history.

SPEAKER_01 7:56

It's very, very interesting. And you know, uh when I was teaching an MBA in Dublin there uh a couple of years ago, had uh one exercise was to look at the similarities between the 1929 Wall Street crash and the 2008 financial crash. And we know that uh, you know, the obvious stuff, the policy mistake, central banks. But I ask always ask students what was the common denominator between 1929 and 2008? And it's human beings, human emotion. It's you know, you you got fear, greed. And I think it's fascinating that somebody like you, the the the lens that you look through things is a lot of it based on the human emotion.

SPEAKER_03 8:35

Absolutely, and that's what we get from financial history. That first book I wrote looked at the bottom of bear markets to see if there's anything in common with the bottom of bear markets and found that there was, and a lot of it was to do with greed and fear, and came up with some indicators as to as to how we know when that green that sorry, that fear is passing. People say to me, why don't you write one about the great tops? Well, I think it's just a hell of a lot more difficult because there's a well, best described uh originally by Schiller and obviously taken up by Greenspan, there's an irrational exuberance at the top, which is exceptionally difficult to know when it comes to an end. So one day maybe I'll try and tackle the human emotions at the top of the market. I think it was much easier to tackle those at the bottom of the market, but to try and proclaim that markets are always efficient, that there is no irrational exuberance. Uh, I think we've, you know, if you've been around for long enough, you realize that isn't the case. So, where do you discover perhaps something not complete and full understanding of those greed and fear, but something about it? It's got to be financial history because maybe psychology, but where else is it gonna be? Just one thing about psychology. A lot of the psychology that I have read, and haven't read a lot, but is the psychology of the individual. And we're talking about group psychology, and that's different. Uh, and from what I've read, is not as well covered, even by psychologists. But the history of the stock market is the history of group psychology, which is different and frankly dangerous, uh, not just in markets.

SPEAKER_01 9:58

Yeah, very we could we could speak all day about that stuff. But in terms of getting into the meat of our discussion, right? I I in in previous interviews I've heard you talk about imbalances a lot. It's kind of the starting point between your distinction of the symptom and the disease. I'd I'd like you to, if you if you can explore a bit more on the imbalances that you're talking about, please.

SPEAKER_03 10:20

Sure. Well well, one of the assumptions of economics really is equilibrium, or there's a movement towards equilibrium, or things move towards equilibrium. Uh that's a useful theory, uh, but in practice we have massive disequilibriums, and move back to equilibrium can be exceptionally painful. Now, I hardly need to say that to you, Alan, given what happened to Ireland and it's you know, this move back to equilibrium, which is a thing that economists bandy around, can change the whole nature of a society as it as it swings back. So the move to equilibrium is what really interests me, or sorry, the how far we get away from it. So the imbalances are how far we are from an equilibrium. And therefore, our go with assumes that we have to get back to that equilibrium and then the path back to it, or what you might do to try and slow it down or or stop it. So the disequilibriums that I see in the system, first of all, I I believe they already stem from one thing, which was the decision by the People's Bank of China to manage its currency relative to the United States dollar, which we'll no doubt come back to. But the equilibriums that stem from that are effectively far too much debt in the world. That has been assumed because that decision by the People's Bank of China effectively decoupled the risk-free rate in the developed world from the growth rate. I also believe the euro has created a lot of imbalances. I don't think that's really up for debate. Some of those have been unwound, whether it's in Ireland or Greece or or uh or Spain. Uh, but the biggest imbalance still with us, which is France, which is now hitting the headlines, but has a debt to GDP ratio and debt metrics, which are way out of kilter with its major partner, Germany. So that is it, that is uh behind all of that. You have the inequality, which is partially a product of this level of debt and uh gearing and its impact on on asset prices. So all of it, if it's true, if I'm right, it all relates to that global monetary system, which is not something I think you hear too often. People give attribute other reasons uh for this imbalance, uh, but I think that's the key source of the imbalance. And of course, the problem seems to be that the cornerstone of this monetary system is is falling apart, which financial history tells us does happen, and maybe happens every 30 to 40 years. And guess what? It is 30 to 40 years since the last one. And yet, and yet I read the front page of the newspapers and it's talking about next quarter's earnings, next quarter's GDP. And somewhere in the back of the paper, it's there's lurking stories on structural change, but still the focus is on the short term, and that is the greatest cause of misery amongst men and women of finance, is a focus on the short term.

SPEAKER_01 12:55

You you have to question why. I mean, the uh the commentators and opinion writers in in the FT they're not stupid, right? They do know what's going on, you would assume. Is it distraction? Is short term a distraction from you know, if people really knew what the reality would they get up in the morning? I mean, anybody that has studied financial history, and I'd like maybe if you don't mind, because some of our audience will be young graduates, mightn't have the expertise, but just a kind of a quick whistle stop tour back to I think even like if you look at the gold standard then in World War One, World War II, but from Bretton Woods, we had the dollar at this at the center of the global monetary system. So I'd like you to speak also of your your period between 1994 and uh up to 2000, up to now, which you which is the non-system you refer to. Maybe give give listeners a flavour of what that's about, please.

SPEAKER_03 13:52

Yeah, well I will a little tip on reading the Financial Times or any other newspaper, start on page four. That's my tip. Uh for writing that first book, I had to read lots of Wall Street journals. The problem is not that journalists don't understand this stuff, it's the order in which they put it down on the page. So I found lots of information in the 1921, 1932, 1949, 1982 Wall Street Journal that probably said things were getting better, but it wasn't in the first four pages. In the first four pages, there was the uh there was the the drama, you know, and and and and the drama is usually the lead the latest piece of data. So there are absolutely stuff in the Financial Times and other newspapers that are germane to this issue, but they tend to be further back and journalists order based upon demand. And we all do that, so they're not unique in that. So start at page four and read backwards, and actually sometimes you end up with a very different story than you do if you start on page one. So that's a tip. Uh, in terms of the global monetary system, I think perhaps the most interesting thing about it is even if you picked someone with a long career in finance and asked them what is it what is it, they wouldn't know. Because it doesn't have a name, and it's quite interesting that something without a name is seen not to exist. So, as you mentioned, historically they had names. There was the gold standard. If you were in China, there was a silver standard that was arranged in uh uh in 1943, they arranged the Bretton Woods Agreement, so it had a name. Bretton Woods Agreement ends in 71, and then there's kind of all sorts of other attempts. There's a snake, there's a Smithsonian, but all of these have in common a bunch of men, and they were all men, sitting in a room trying to work the whole thing out. And then one day we woke up and kind of there was nothing there. And uh and then people say, well, if if there's no bunch of men sitting in a room working out, it doesn't exist. But it does exist, uh, and it has existed because China, following a devaluation of its exchange rate in 1994, decided to manage its currency relative to the dollar, moving more on towards a basket, but that was dominated by dollars and dollar proxies. And fundamentally, what that did is it drove uh huge surpluses in China as they mobilized a grossly underutilized workforce. I don't like to use the word peasants, that's the word the Chinese news. I would call it agricultural labor, was brought into the workforce. Fastest mobilization of labor in the history of the planet, uh, that drove up those surpluses. But the crucial thing is, the absolutely crucial thing is that if you don't let your currency adjust in a situation like that, you A end up accumulating foreign currency reserves, which is government bonds of foreign nations, particularly the dollar, about two-thirds initially, was dollars. You're a non-price sensitive buyer of those securities, so that's the so-called risk-free rate, and you tend to distort the risk-free rate. Uh, but crucially in China, really different from any other uh economy we'd seen in a system like this, a lot of the domestic liquidity created in doing that went into creating more and more production, i disinflationary additions to capacity. Whereas historically, in certain and certain certainly in something like the Bretton Woods Agreement, some of that would have gone into domestic inflation and consumption, and China would have lost its competitiveness relatively quickly given the amount of domestic money that was being created as you intervened to buy foreign currency reserves. Remember, when you buy the reserves, you're just making up your domestic currency, you're creating it from scratch. But it took a very, very long time for that to feed into Chinese inflation because the Chinese banking system funneled it into more production, and so the imbalance grew and the imbalance grew and the imbalance grew uh and one of the consequences. Well, if debt is cheap relative to growth, people take on more debt, so debt to GDP went up. And for America in particular, uh stock market went up. And people listening to this will probably be fairly familiar with things called the Schiller PE or the cyclically adjusted PE. And that is very, very close now to its all-time high. So so that's a sort of brief history, very brief history, of monetary systems, but crucially why there has been one since 1994, what's at the core of it, and then we could maybe the imbalances it's created, and then maybe what the consequences would be if it simply wasn't there one day.

SPEAKER_01 18:04

I just think uh your work is fascinating, Russell, because uh everyone talks about Bretton Wood's Nixon shock in August 71, uh maybe even the Plaza Accord, but you don't hear really anything about China's fixing the currency to the dollar and how it kept maintained that that um peg there. In terms then of the unintended consequences or maybe intended consequences there of that, asset bubbles uh for for example. I mean, you mentioned deflation in the West, because you know China was just pushing all these cheap goods, uh so we've got a mixture of exported deflation from China, and then we have uh these asset bubbles and and debt. Are these the imbalances you're talking about in relation to stock price in relation to asset bubbles and and debt also?

SPEAKER_03 18:58

Yeah, those are the bubbles, and the mistake of the West was to not respond appropriately to this. So you will know that there is a mantra among central bankers that deflation is the greatest evil. And that's because of what happened in the in the 1930s. But deflation, I think, should be defined more correctly. Deflation, to the extent that it is a fallen cash flow of the household sector or the corporate sector, is indeed a dangerous thing, particularly if you're indebted. It does take you back into 2932 uh depression uh and ultimately into a world war. So you can see why they were frightened of it. But the deflation that was coming to the West was actually import price deflation. That's what was dampening inflation, risking the pushes into this deflation, uh broader deflation. Uh, and therefore, I don't think the central bankers really had to be as wary of it as they as they were. So short-term rates were kept far too low because of this fear of deflation, and it shouldn't have been a fear of imported price deflation. So I guess what we all know, no matter how many years you had in practice in this business, is if the discount rate is too low relative to the growth rate, then you're probably going to get a higher stock market. And that is and that is what happened. So it's not just that China put that in play. There was a misunderstanding of the consequences of it. I should add one other thing. I mentioned this at the end of my second book, an incredible speech by Bill Clinton when he was president uh in October 1998 at the IMF meeting in Washington, D.C., saying that we needed to reform the global monetary system, that something had to be done, that it was evident that there were already imbalances. And if those imbalances weren't sorted out, uh it would come to pass that the people of the developed world would pay a high price for that, and there would be a pushback against that, which would threaten the very existence of democracy. Now talk about precient. Uh so at that time, Clinton realized there were maybe other things going on, but he realized that the foundations upon which the thing rested was likely to produce dangerous imbalances in wealth, debt, and sort of income, and that something should be done about it, and nothing was done about it. Absolutely nothing was done about it. Now you can criticize the politicians at the time, but it's very difficult to drag up political capital for something which seems so theoretical, but actually was so fundamental. So there would maybe a previous generation, people like Paul Volcker, who kind of understood where this would take you to. But for most politicians in their electoral cycle, there was really no political capital to be drained up to do this. And also it would have involved taking on China and trying to form a more balanced relationship with China. Well, for whatever reason, it wasn't done. And now here we are with these risks, not just to to wealth, but risks to uh stability, political stability, democracy, etc.

SPEAKER_01 21:48

Yeah, it's very interesting. I mean, a common theme that has run through my conversation so far has been really the failure of political economy, the failure of polit the political infrastructure in terms of Getting re-elected is the is the most important thing, let's say, for for for politicians. And an alternative to that, really, if there is such a thing, I don't know, like uh restricted term limits, that type of thing, is that even feasible? But I'd like to get back to that just in terms of the debt then. So we roll forward then, Russell, from 94-95. We could we run forward to present day and we get this. Another thing that was really surprising for me was the level of total debt to GDP China has relative to the US and and even uh the UK, India. Maybe talk about that in the context of how we get out of all this.

SPEAKER_03 22:40

Yeah, so I lived through and worked through the Asian financial crisis in Hong Kong, and and what became apparent then is that we didn't really know how much debt there was in the system. And I say we as investors, policymakers didn't know either. So what happened after that is the Bank of International Settlements got the task of computing the total amount of debt in the system because we really didn't know what it was. And really since 1998, they've been publishing that every year. So we now have a very good series since 1998 of the three key components of debt in an economy: the government, the household sector, and the non-financial corporate sector, and non-financial because we assume the financial system is lending to the other three. Now, when you read your newspapers, you will often see this huge mistake, even in the highest quality newspapers, where it will say, for instance, the uh the debt of the United Kingdom is almost 100% of GDP. And that's complete nonsense. What it should say is the government debt of the United Kingdom is almost 100% of the GDP. That's a very accurate statement, but for some reason they just used the word debt. Uh to work out, and who knows this better than the people of Ireland, to work out the debt of a nation, you don't look at the government debt. I think the government debt to GDP of Ireland in 2007 was roughly 33%. Well, that wasn't what got Ireland into trouble. What got Ireland into trouble was the debt in the private sector. So if we're going to do this analysis, we absolutely have to look at both piles of debt. So when you hear people refer to government debt, they say, oh, it's the worst since World War II. But you're absolutely right. When you look at the total debt, it's worse than World War II. Differs from country to country, but for many of the biggest countries in the world, particularly the United States of America, that is the worst it has ever been. So that's let's talk about some of those uh numbers. If you take the total debt of America relative to GDP, that's private and public, that's about 250% of GDP. The UK is about 234% of GDP, but China's 294% of GDP, and France, which we think we will keep coming back to, uh, is uh roughly 320% of GDP. Japan, most people know, is the worst at 390% of GDP. So the number that keeps getting bandied about was really terrible, it's 100% of GDP. That's correct. I mean, you need to be concerned when government debt gets there. But we absolutely need to look at these other numbers. And if you're looking for countries that are grossly undergeared with really low numbers, basically you end up in the emerging markets ex China. And I think that's probably a legacy of the Asian financial crisis. A whole generation scarred by having too much debt was really rather conservative after that, which is another lesson from financial history, is that there tends to be scars left, and a whole generation is impacted by those scars. But for a generation, not in Ireland, but for a generation in many countries, particularly America, more debt was a good thing.

SPEAKER_01 25:27

And what's all what's also uh very interesting was the the scale of how quickly China in particular has amassed this total debt to GDP since 2007. I remember looking at a chart you had uh in the US it between 1950 and uh post-World War II, 1950 to present day, uh 150% uh total debt to GDP up to what you I think it was 230% or something like that you said. Whereas China, it only took was it uh 12-14 years between 2007 uh to get to nearly 300%? So in we see the property bubble in China, we see uh what's happened there, but so I suppose naturally going on then, Russell, how does China get out of this situation? And I suspect you're going to talk about printing money. Uh, how does China get out of this? And what are the repercussions of that for the rest of us?

SPEAKER_03 26:28

Yeah, so so just the starting point, you're absolutely right. So China's debt to GDP ratio goes from about 140% of GDP in 2007 to 290. To put that in context, there'd really be nothing like that for any major economy in peacetime. Now, it happens during war, but in peacetime, that is really unparalleled for a very big economy. And it has, of course, had a huge and profound effect on the global economy, global markets, and we've lived in that in that era. And to some extent it kept the global economy going in the immediate aftermath of the great financial crisis. But the consequence is where China is in debt. It takes us back to that global monetary system and why it's stopped working for China really about 10 years ago. And if you look at that line of debt to GDP, you'll see it begins tipping up really more dramatically around 2014. And it's around then that the China's intervention to hold down its exchange rate actually turned into something quite different because it was more holding it up rather than holding it down. That'll that'll surprise listeners to this, because they always associate China with those massive external surpluses, which I absolutely do run in the current account, but they've had a problem with their capital account since 2014. And when you net those two figures off, China's foreign exchange reserves have not been growing since 2014. And if your central bank balance sheet, which is largely the assets, are largely foreign currency assets, if that doesn't grow, then you're not growing the liability side of that balance sheet. And the liability side of that balance sheet is money. In unique form, it's created by central bankers, but money nonetheless. And therefore, China had to find another way of growing from 2014 onwards because its growth in money was slow by its historic standards. High by our standards, slow by historic standards. And that is where debt comes in. So it became much easier in that world to just simply take on more and more debt, whether you're the private sector or the public sector, and then we see the escalating debt to GDP. So back to why the system we have today is not working. It's not just that it's not working for, if you like, the developed world with the debt there, it's not working for China, because China finds itself in a situation where its nominal GDP growth is too low, its debt to GDP growth is escalating. And as you point out, one thing you know as a financial historian in an age of fiat money is if a country has too much debt, it it prints its way out. You can make that forecast with a high degree of confidence, because the alternatives are even worse. If you're a politician anyway, the alternatives are even worse. So it's not just China, I think, that's going to have to print its way out. There are many other nations in the world with high debt to GDP. So China needs to get the flexibility to print its way out, and you don't have that flexibility if you're targeting exchange rate stability, which is still that legacy policy which which China has had now for really most of its uh post-World War II period, but particularly and importantly since it joined the global trading regime in really from 1994 onwards.

SPEAKER_01 29:29

So we we get on then maybe to your financial repression theory. Um I know you've been sp speaking about this for a long period, and I mean rightly so, because the debt was still very, very high even a couple of years ago. Even a decade ago, decade ago, it was obvious that the debt was unsustainable, and we've we've kicked this can down the road. We seem to be at a tipping point now. Can can you talk to this financial repression uh bic uh what what you mean by that?

SPEAKER_03 29:58

Yeah, so when debt is too high, there are a limited number of options to be taken by politicians. And it's a social problem, it's a political problem, so it will be politicians. So they are austerity, default, hyperinflation, financial repression, or really high real rates of growth. Now the last one, of course, is the one that we would all hope for. Of course, that would be best for everybody, but at the minute it doesn't seem to be there, and that seems to be an issue with productivity. So I'll leave that one. I would say ultimately that high rates of real growth are not really within the gift of politicians. They tend to relate to innovation, productivity, innovation driven by the private sector. Anyway, we'll leave it and hopefully that one turns out and then go back to the other four. So austerity, well, there is no appetite for austerity. Uh as you know, France has been debating its so-called austerity budget now for quite a long time and uh and not really coming, and it's brought down several governments now on a very minor tightening in fiscal policy. Uh it was tried in the United Kingdom with George Osborne and he left office, and the moral of the story is don't do austerity. You've got default. Well, we learnt with Lehman Brothers and also with Greece that if you if you know one man's liability is another man's asset, so you leave great big holes in balance sheets if you do default, so it's a difficult way to go. It's not necessarily going to bring you to a land flowing with with milk and honey. And then there's hyperinflation. And uh you often see people banding around, well, they'll go for hyperinflation. But if you look, as a historian, you look at the history of hyperinflation, it's really obvious that hyperinflation comes after you've stolen people's savings. Uh, stolen is a strong word. Manipulated might be a better word. Clipped might be another word. You know, we all there are great words for what you do here. But you know, uh the Weimar Republic happens because Germany doesn't have any private sector savings, because it's already destroyed all those savings in funding the First World War. Uh similarly with Zimbabwe, there's a prolonged period before an independent Zimbabwe gets to hyperinflation, because at first it has to try and steal or manipulate the savings of the people. Uh so financial repression, let's be just clear what it is, it's forcing savers to own government bonds at yields that reduce their purchasing power of those savings. Now, if we wanted to talk just about financial repression, I think we'd need a whole other podcast because there are a legion of different bits of legislation that are necessary to do this. You have to make some assets less attractive to make that one asset more attractive. Uh, and no doubt we'll get into uh some of that. Uh but that's effectively it, and it's easier than it's ever been because so much of the private wealth of a nation, liquid wealth of a nation, is held within regulated financial institutions. And uh, let me give you one tangible example rather than this just being a theory. The British government will pass, I think it's got to be four weeks away now, something called mandation. And mandation will give the power to a British government minister to mandate where certain savings institutions are putting their capital. So that's your capital, that's your savings. And of course, the focus at this stage is on funding a British investment renaissance and industrial policy that so many nations now have. But it's a part of mandation that could have uh recommending more ownership of government bonds. And the financial repression thing is not something I've just made up, it is what was done uh really in the post-World War II era. So we're looking back to an era where, as we mentioned, debt to GDP was very high coming out of the war. We're looking at what was done, this is what was done, and as a financial historian, it gives us something of a guide to what's coming on. I've been speaking about it for far too long, uh Alan, but actually it manifests every day. Every day, someone will send me an email going, uh, I see it, I can see it, this is happening, it's happening over here. Uh, and of course it is happening, it is happening slowly, but it really accelerates if government bond yields get to a level which they consider to be unacceptable, unreasonable, or about to catapult them from office. So it can be, it's uh the famous Hemingway quote. I mean, how do you go bankrupt first slowly and then quickly? Well, it's the same with financial repression, I think it's first slowly uh and then quickly.

SPEAKER_01 34:06

I hope you're enjoying uh the episode with Professor Russell Napier. I think I'm gonna start reading the Financial Times from the fifth page and work backwards. It's a good tip. In terms of what's coming up next time in part two, we're gonna go into more detail on what exactly Russell Napier means by financial refresh and how that is gonna impact, likely impact the asset allocation decisions, where you should put your money uh for the next decade and decades ahead. So we talked about that as well, and lots, lots more. So stay tuned for part two coming up next week with Professor Rustin Napier on the Most Important Thing podcast. Thanks for tuning in.