TRIGGERnometry - The Debt Crisis No One’s Talking About

00:00:00.720 We don't seem to be able to live within our means.

00:00:04.860 I mean, we really are in trouble in that aspect of things, are we not?

00:00:07.380 Yes, deep trouble.

00:00:08.780 If you borrow to consume, well, that way lies trouble,

00:00:12.600 and that's what we've been doing.

00:00:14.300 You're finally going to be forced,

00:00:16.240 whether you're China, Europe, the UK, the United States,

00:00:20.300 to do something radical.

00:00:22.740 And this is where Mr. Millet is interesting.

00:00:25.440 Are we headed in a sort of 1920s direction?

00:00:30.660 1930s direction?

00:00:31.960 The ideologies are the same old, same old.

00:00:34.180 It's sort of depressing that we can't come up with new material,

00:00:37.040 but here we are.

00:00:39.160 Those who enter adulthood without a clue about how interest rates work,

00:00:44.320 who don't know what a bond yield is,

00:00:45.900 who've never made an investment in the stock market and never will,

00:00:49.160 those people will have worse lives than the people who get informed.

00:00:54.120 You will be poor.

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00:01:40.880 Daniel Ferguson, welcome back to Trigonometry.

00:01:43.580 Good to be back.

00:01:44.200 You are one, of course, one of our favorite historians to have on the show.

00:01:47.640 And the thing that we want to talk to you about today is money.

00:01:52.700 One of the things you have been prominent in trying to raise attention for

00:01:56.700 and awareness of is the level of indebtedness the Western world is in,

00:02:00.760 particularly as it relates to our military spending,

00:02:02.980 because there are some historical patterns that are very unfavorable on that side of things.

00:02:08.280 We'll get into that.

00:02:09.280 But we thought, you being one of the world's most interesting and prominent historians,

00:02:13.520 the first thing we should talk about is something you wrote about immediately after the financial crisis

00:02:17.540 in your book called The Ascent of Money,

00:02:20.320 which is money, debt, finance.

00:02:23.740 And the best place to start, I think, is right at the very beginning,

00:02:27.380 which is what is money and where does it come from?

00:02:30.760 Well, it's great to be back.

00:02:32.460 When you said we want to talk about money, I thought, I don't owe them anything.

00:02:35.820 In fact, I had the involuntary Scottish reaction.

00:02:37.880 I nearly touched my wallet just to make sure it was there.

00:02:41.500 Money is a very ancient thing.

00:02:45.000 It's the way in which human beings transact that is superior to barter.

00:02:52.100 And so we find thousands of years ago, you know, 2,000 years before Christ,

00:02:59.600 that IOUs are being carved in little pieces of clay in ancient Mesopotamia.

00:03:07.880 And that's really the origins of money.

00:03:10.360 Because if I owe you two silver rings, it's much more convenient to just write that down

00:03:20.200 than for me to say, I think that's roughly three sheep or maybe two and a half goats.

00:03:24.620 So money is just a way of making exchange much smoother than if you tried to do it by barter.

00:03:34.100 I mean, if you've ever tried barter, you'll realize immediately that the difficulty,

00:03:38.240 that sheep and so forth are not that fungible.

00:03:42.960 So that's the key concept behind money.

00:03:45.620 And almost anything can serve as money.

00:03:47.820 When you say money these days, there are still people who think that it's pieces of paper or cloth, banknotes.

00:03:57.080 Those have largely gone extinct in England as far as I can see.

00:04:00.800 But Americans still tend to think of money as dollar bills.

00:04:05.060 Older people will remember coins around metal objects.

00:04:09.200 So that was money for quite a few centuries.

00:04:14.220 But that's relatively recent by historic standards.

00:04:17.260 The first money is, as I said, clay tablets with little inscriptions on them.

00:04:22.900 Shells have been used as money.

00:04:25.760 Large, inconveniently large stones have been used as money.

00:04:30.140 Pretty much anything can be used as money.

00:04:32.640 Stephen Colbert once asked me on the Colbert Report, am I in money?

00:04:37.540 And I said, yes.

00:04:39.840 If you want to be a medium of exchange, then you can be money.

00:04:45.840 And I imagine that there is a bit of a transition between barter and money in the sense that an IOU carved in a tablet

00:04:54.480 implies a level of social trust or some sort of cultural adaptation and innovation to facilitate.

00:05:03.140 Is that a fair assumption?

00:05:05.020 It's important for money to work that it should be trusted.

00:05:09.700 And in fact, I think I once wrote in The Ascent of Money that it's trust inscribed,

00:05:16.220 particularly if it's a piece of clay.

00:05:18.900 I mean, its intrinsic worth is almost zero.

00:05:21.680 But if it says that it's exchangeable for two silver rings or three sheep,

00:05:26.660 then you kind of have to believe that a counterparty will agree that that's the case.

00:05:32.240 So there's an element of trust.

00:05:35.380 That is why we don't really encounter money in prehistoric societies.

00:05:40.860 It's something that really is associated with the beginnings of civilization.

00:05:47.240 Of course, today, most money is invisible.

00:05:49.580 It really exists in electronic ledgers of banks.

00:05:55.760 And that's most money today.

00:05:57.900 Relatively small amounts of money consist of banknotes and coins, tiny in some cases.

00:06:03.000 And so most money is, in fact, invisible electronic items in bank accounts.

00:06:09.220 And in fact, most money is created by banks when they credit somebody with an amount of money.

00:06:18.220 We all have to trust banks for a system based on fractional reserve banking to work.

00:06:25.000 You mentioned that The Ascent of Money was written after the financial crisis.

00:06:27.740 That's incorrect.

00:06:28.260 It was written before the financial crisis and published just before the failure of Lehman Brothers,

00:06:33.860 which tells you that I anticipated the financial crisis, which I did, because the book was begun in 2006,

00:06:41.260 at a point when very few people realised a huge financial crisis was coming.

00:06:46.380 But that was my motivation for writing it.

00:06:48.660 I was very confident that a large financial crisis was coming.

00:06:51.680 And at the heart of that crisis was a loss of trust in banks.

00:06:55.880 Also, Jung, you may not remember the lines outside Northern Rock.

00:06:59.140 There were genuine bank runs in Britain and the United States.

00:07:03.180 And so at the heart of modern money is the role of banks.

00:07:08.200 If you lose trust in banks, then you're in a financial crisis.

00:07:12.460 And there's always been a connection between money and precious metals, particularly gold and silver.

00:07:19.960 Why is that?

00:07:22.240 I'm not sure if always is right.

00:07:26.160 Periodically, there has been.

00:07:28.460 Gold is something that has been prized by human beings since time immemorial for the obvious reason that it looks nice and it's extremely durable and it's scarce.

00:07:40.420 These things are quite a combination.

00:07:42.800 So we've valued gold and most civilisations have valued gold, but not always as money.

00:07:49.140 And so gold was valued by, say, Inca civilisation in South America, but wasn't used as money.

00:07:56.100 The interesting thing that happened in the course of history was that people began to use amounts, fixed amounts of gold and fixed amounts of silver for payments.

00:08:08.480 And the sort of classic gold and silver coins are precisely that.

00:08:15.200 But the problem is that because gold is very rare and silver is relatively rare, you can only really use gold and silver coins for quite big transactions.

00:08:24.700 And so you have the problem of, well, what do we do for small change?

00:08:29.200 And hence the need to use base metals to produce coins for smaller scale transactions.

00:08:35.580 But the link that you mentioned becomes hugely important in the course of the late 17th, 18th and 19th centuries when it is decided, beginning in this country, England, to create a fixed relationship between money and gold.

00:08:54.860 It comes to be called the gold standard.

00:08:56.660 And so pounds are defined in terms of a quantity of gold.

00:09:03.780 This is one of Isaac Newton's many contributions to our civilisation.

00:09:09.780 At the same time, there were other systems that defined money in terms of a quantity of silver and systems which did both, biometallic systems.

00:09:19.660 So for much of modern history, the kind of history that tends to get taught in schools in the 18th and 19th centuries, say at the time of the American Revolution, the French Revolution, going right through the 19th century, the time of Britain's rise to imperial dominance.

00:09:33.260 We are in a world where there are fixed legal relationships between money and precious metal.

00:09:42.900 And so you can go to the Bank of England and say, I got this banknote that says £100 on it.

00:09:51.600 I'd like the requisite amount of gold.

00:09:54.200 So that was the kind of system that, for a period of centuries, became very dominant, persisted through into the early 20th century.

00:10:05.380 It was suspended during wartime for reasons we can get into.

00:10:09.540 And it finally entirely broke down after World War II.

00:10:13.180 It had a kind of afterlife as the Bretton Woods system when only the dollar had a relationship to gold.

00:10:18.920 And then in 1971, Richard Nixon severed that final link.

00:10:22.640 And since 1971, there's been no link between precious metal and money, except that central banks like to keep in their reserves some quantity of gold.

00:10:34.820 And before we get into that, because I think that's very important to the conversation that we are having,

00:10:41.280 I would like to delve into a very interesting story you told in the book, which is a man called, I think it's Francisco Pizarro.

00:10:48.480 And his journey from Spain to South America and creating a form of currency.

00:10:57.980 So the dream, if you were in medieval Europe, was if only we could find some more gold, because there just wasn't that much.

00:11:07.980 And indeed, part of the problem for medieval economies is just there doesn't seem to be that much gold or silver.

00:11:14.820 And these relatively underdeveloped agricultural economies, that produces some interesting innovations.

00:11:21.880 One of them is the bill of exchange, which is another form of IOU, only this time on paper,

00:11:27.960 where Merchant A says, I'll pay you, Merchant B, X amount in three months' time.

00:11:35.440 And these IOUs, bills of exchange, were tremendously important, particularly in the period after the Black Death,

00:11:41.880 when there's a serious labour shortage in Europe, and there's also a chronic shortage of precious metal.

00:11:48.960 So what do you do in a world where there isn't enough gold?

00:11:52.780 Go and find some, obviously.

00:11:54.400 And it's pretty clear that there isn't much in, say, England, not famous for its gold mines.

00:11:59.260 And so a lot of exploration, a lot of what sends men and ships around the world, across the Atlantic or around the Cape of Good Hope in the other direction,

00:12:09.100 is the search for gold.

00:12:10.760 And interestingly enough, the Spaniards strike it rich in Central and in South America.

00:12:17.800 They find substantial deposits of precious metal in what today's Bolivia, Peru, Mexico.

00:12:27.980 And that is enormously good news for the Spanish or Castilian Empire, which acquires not only the territory and the people living there as a result of the conquistador's success,

00:12:40.000 but also it accesses all the mineral rights.

00:12:43.300 I mean, there is literally a giant mountain of solid silver, Potosi, which I remember visiting when we filmed the television series of A Sense of Money.

00:12:53.020 There is a television version, by the way, for those who've lost the power of reading books.

00:12:57.360 You can find it all, it was all stolen by YouTube, the intellectual property brazenly, nicked.

00:13:04.620 So the series of A Sense of Money shows you the silver mountain, the great mountain, great mine of Potosi,

00:13:10.160 which is one of the principal sources for bullion, for gold and silver.

00:13:14.780 And those were then sent from Spain's empire in the Americas all around the world,

00:13:21.940 principally to pay for the incessant wars that the Spanish kings fought in Europe and elsewhere.

00:13:29.800 I think this is taking us partly towards the modern conversation we want to have,

00:13:34.520 but I also think it's an important conversation to have from a historical perspective as well,

00:13:38.300 which is the leap from I owe you for this thing that you've given me to I owe you because you've given me money

00:13:47.680 that I then have to repay you at a higher level.

00:13:51.040 That is an extraordinary cultural adaptation that I imagine.

00:13:56.720 First of all, it'd be interesting to know when that happens and how that happens,

00:13:59.240 but also I imagine that is transformative for human society because it, among other things,

00:14:04.040 allows you to effectively do things now that otherwise you'd have to wait 20 years to do.

00:14:10.060 That's right. In the end, the most important development is to have institutions

00:14:17.560 that can smooth all the different transactions that people want to make.

00:14:23.900 And these come to be called banks.

00:14:27.740 And we can see the first modern banks emerging in Renaissance Italy.

00:14:32.440 In Florence, the Medici start out as essentially foreign exchange dealers

00:14:37.240 where you can bring in your coins that you picked up trading in Germany

00:14:42.500 and exchange them for coins that are more likely to be acceptable in Rome.

00:14:47.280 And they sat on benches, banky, and that's where the word bank comes from.

00:14:51.480 So what do banks do? Well, banks create a kind of centralised exchange

00:14:57.040 where people with money can deposit it and people who need money can borrow it,

00:15:04.020 again, to put it really simply.

00:15:06.040 And this clearly greases the wheels of commerce.

00:15:10.220 It's part of the reason why you see a significant uptick in economic development

00:15:15.420 in northern Italy. At the time of the Renaissance,

00:15:18.600 there is a more advanced financial system there.

00:15:22.160 At the same time, you can see in London,

00:15:24.960 the merchants of London start to move beyond there being goldsmiths

00:15:30.220 to there being banks.

00:15:32.680 Bankers who can lend money to kings

00:15:35.260 are really the progenitors of the modern city of London.

00:15:39.940 Kings matter because, and also republics, but kings mostly matter

00:15:43.420 because they always have greater financial needs

00:15:46.320 than they can satisfy with taxes on their subjects.

00:15:52.480 And so one of the early sources of debt finance

00:15:55.700 is just the need that monarchs have.

00:15:58.260 King of Spain needs money because he's fighting wars against the Dutch

00:16:01.660 who decide to revolt against Spanish rule.

00:16:04.080 That's part of the attraction of having silver and gold mines in the New World.

00:16:08.040 You can finance the wars that way.

00:16:11.240 So what we see happening in early modern Europe

00:16:13.580 is the emergence of the modern financial institutions we know today.

00:16:20.000 Banks and systems of public debt

00:16:23.260 where governments can borrow from their subjects,

00:16:26.720 or in the case of the Medellin Republic, from citizens

00:16:29.220 in order to finance those big expenditures like wars

00:16:33.640 that you can't really finance out of current tax revenues

00:16:36.940 because they're way more expensive

00:16:38.560 than the annual tax revenues can afford.

00:16:41.660 Those are two big leaps forward in the financial system.

00:16:46.360 And so by the time you get to, let's say, 1700,

00:16:51.240 you've already got certain key components of modern finance.

00:16:55.080 You've got the concept of money as being coinage,

00:16:58.680 but also potentially notes.

00:17:00.700 You've got banks which allow borrowers and lenders

00:17:05.760 to transact through some kind of central institution.

00:17:10.200 And you've got the beginnings of a bond market.

00:17:13.160 I'll pause to explain bonds.

00:17:15.780 Quite important thing to understand.

00:17:19.760 So in a bond, the government will say,

00:17:23.340 you're going to lend me, the government,

00:17:26.920 100, fill in the currency blank.

00:17:29.360 And each year, I'll pay you 5% of that currency,

00:17:37.600 so 5%.

00:17:38.860 And I'll keep doing that for a fixed amount of time.

00:17:42.020 It might be 10 years, it might be 100 years,

00:17:44.960 it might be in perpetuity.

00:17:47.240 And these bonds are the basis of government debt management.

00:17:52.120 So they originate in Italy, in Venice,

00:17:55.900 and then all the different Italian city-states develop that system of public finance.

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00:20:00.960 And Neil, what is it about Renaissance era, Northern Europe, Italy in particular?

00:20:06.800 There was no such thing as Italy, but, you know, the Italian states that existed at the time,

00:20:12.320 that allows them to do this?

00:20:13.680 Because moneylenders, I mean, moneylenders are mentioned in the Bible.

00:20:16.980 So the idea of borrowing money has, I imagine, existed for thousands of years by the point this happens.

00:20:22.460 What is it that happens that that adaptation into banks actually takes place?

00:20:28.340 Well, it complicates matters that Christianity and, indeed, Islam both take a rather dim view of lending money at interest.

00:20:39.440 There are even laws against it, and the crime is defined as usury.

00:20:46.800 And so this makes the business of being a Medici somewhat more complicated than it would otherwise have been.

00:20:54.700 The way around it is that you don't explicitly charge interest,

00:20:59.080 but you have commissions or payment arrangements that, in effect, charge interest.

00:21:06.080 So there are ways around, there are workarounds.

00:21:08.100 Sorry to interrupt.

00:21:09.760 I think it's worth asking, where do the restrictions, I mean, for two major religions to take a dim view of this,

00:21:18.580 and you put it very diplomatically there, to have that attitude to lending,

00:21:23.240 there's got to be some pretty serious motivation for that view.

00:21:26.920 Where does that resistance to the idea of lending come from?

00:21:31.180 Well, the love of money is the root of all evil.

00:21:33.980 Those are doubtless lines that you know.

00:21:36.640 There is a recurrent theme in Christianity that casts a shadow over the love of money.

00:21:47.360 Not money itself, it's the love of money that's the root of all evil,

00:21:51.020 and views with some skepticism the activity of money changing.

00:21:56.760 I think this has quite deep roots that are probably pre-Christian.

00:22:01.940 Somehow it's all right if you own a bunch of sheep and the flock naturally increases because the sheep have lambs,

00:22:10.420 but it's not okay if that process happens to your flock of money.

00:22:15.740 So there's an aversion to the notion of the natural increase of money through interest,

00:22:21.480 or the interest that you might get from lending it out.

00:22:24.580 So there's this moral distinction that gets drawn early on between it being okay for you to increase your agricultural capital

00:22:34.100 through the natural increase of the sheep, but it's not okay for you to increase your finance capital.

00:22:40.200 That moral opprobrium that's cast over money lending has an important feature

00:22:47.420 because there is a group, a religious minority, that isn't constrained when it comes to lending money at interest,

00:22:55.860 and that is the Jews.

00:22:57.460 And so part of the issue, if you don't know what I'm talking about, try Shakespeare's Merchant to Venice,

00:23:04.060 is that there is a group lending money at interest in Italy, indeed in much of Europe,

00:23:11.440 that is neither Christian nor, for that matter, Muslim.

00:23:13.860 It's a religious minority, it comes to be seen as a racial minority,

00:23:19.200 and that's part of the reason that there is a kind of suspicion, antagonism towards the lending of money.

00:23:26.020 But is there not also another thing, we have this great saying in Russian about borrowing money,

00:23:30.460 which is when you borrow money, you take someone else's money,

00:23:36.120 you get someone else's money for a short period of time,

00:23:38.500 and when you pay it back, you give away your own money forever.

00:23:40.960 There is a disconnect in terms of how you feel about the process.

00:23:47.500 And I mean, I don't know what the etymology of the term usury means,

00:23:51.020 but there's a sort of, I think, instinctive feeling that people have,

00:23:54.900 which is that someone who gives you money and charges you for that,

00:23:59.300 it's almost like if you borrow, I don't know, a rake from your neighbor to rake your garden,

00:24:03.640 they wouldn't charge you for it.

00:24:05.100 So why would you charge me for borrowing 100 quid?

00:24:07.280 So that kind of argument is quite common, not only in Eastern Europe, but in Western Europe too.

00:24:15.820 And I think one explanation for this is that if you go back to the medieval and early modern period,

00:24:20.600 interest rates are quite high.

00:24:22.660 Why is that?

00:24:23.600 Well, it's risky to lend money.

00:24:26.100 People who lend money to British kings, or indeed any European kings,

00:24:31.820 would frequently be disappointed because the kings would say,

00:24:34.060 you know what, you remember that money?

00:24:35.660 I decided not to pay you.

00:24:38.140 And what's your recourse?

00:24:39.560 You don't have any.

00:24:40.460 And if you put up too much trouble, off with your head.

00:24:43.240 So part of the problem is that interest rates in the medieval and early modern period are pretty high.

00:24:48.820 I mean, double digits.

00:24:50.720 And that makes it feel like it's really expensive, you know, credit card rate expensive to borrow money.

00:24:59.640 I think that's part of the story.

00:25:01.460 Interest rates trend down historically as markets become more liquid, become more efficient,

00:25:06.580 and risk is reduced because the rule of law starts to protect creditors.

00:25:14.080 But in the early modern period, it's an expensive thing to take out a loan,

00:25:17.940 and it's expensive because so many people default on their loans.

00:25:20.720 I think that's the best explanation I can really give you.

00:25:24.320 Sorry, Francis, I just want to come back because I've interrupted Neil twice at this point.

00:25:27.860 Obviously, if I borrowed your rake for a year and used it aggressively to rake my garden and the leaves and earthen my garden,

00:25:39.780 and I give it back to you, it would have worn down somewhat.

00:25:43.000 So the rake would, in practice, be worth less if I borrow your car for a year and give it back to you.

00:25:50.340 And I say, well, thanks, thanks very much, and you don't charge me your mug because the car's worth a lot less than it was

00:25:58.320 after I've spent a year driving it around, not worrying too much about it because it's not my car.

00:26:02.500 So, I mean, practice...

00:26:03.440 And you have no use for... I have no use for it for a year, which I have to find some way of compensating for.

00:26:08.680 So I'm not suggesting it's logical.

00:26:10.240 It isn't logical.

00:26:11.080 No, it's not.

00:26:11.580 And so the key thing to get across here, because let's be clear,

00:26:14.520 the constant drumbeat of hostility to moneylenders, to bankers, to Jewish bankers, to non-Jewish bankers, is kind of absurd.

00:26:24.720 It's based on the kind of stupid notion that money doesn't have a price.

00:26:31.120 But of course it has a price, just as the use of a car for a year or a rake for a year has a price.

00:26:37.400 That's right.

00:26:38.220 And so I derailed you only because I think this is an important distinction.

00:26:43.160 But you were talking about the way that Renaissance Europe made adaptations that created modern finance,

00:26:52.160 or the beginnings of modern finance, and you were talking about why they were able to do that.

00:26:56.740 I think it's a very striking feature of world history that these things happen in Europe.

00:27:03.900 They do not happen, say, in China, which has a much simpler monetary system, which has a system of coinage,

00:27:16.540 no real system of public debt, fairly basic and rather low-yield system of taxation.

00:27:23.840 China's empire runs on different rails.

00:27:26.300 Why is that?

00:27:26.960 And the, I think, most plausible answer, which I also try to explore in a book called Civilization,

00:27:32.620 is that Europe is divided into a lot of relatively same-sized polities.

00:27:40.240 And these polities are in aggressive competition with one another.

00:27:44.920 They regularly make war on one another.

00:27:48.100 Periodically, one of them will try to create a European-wide empire,

00:27:51.960 and the others then band together to stop that.

00:27:55.540 And war is, in many ways, the driver of financial innovation in Europe.

00:28:02.960 And it just takes a very different form from the geopolitics of East Asia,

00:28:07.960 which is characterized by one fairly large and more or less homogenous empire

00:28:13.220 with a relatively low-level financial system with taxes as a share of GDP much smaller.

00:28:21.380 So one of the lessons of financial history is that you need to have the kind of stress of regular warfare

00:28:28.900 to propel financial innovation forward, as well as to propel scientific innovation, exploration.

00:28:35.140 People are motivated by a sense that there isn't enough money for the needs of the state.

00:28:40.920 And that's why you set sail for the Americas, thinking you're going to the Indies,

00:28:46.000 you're looking for precious metal.

00:28:47.660 That's why you sit down, come up with the idea of public debt.

00:28:50.700 Hey, wouldn't it be a good idea if the rich people lent the government money to fight the war?

00:28:54.540 These innovations, I think, are propelled by the imperatives of geopolitical conflict in Europe.

00:29:00.420 But in a way that we talk about the borrowing and the attitudes to people who lent us money,

00:29:06.600 is that why Shakespeare talked about a pound of flesh when it came to Shylock?

00:29:15.580 Well, if you think about the merchant of Venice, Shylock is trying to collect on a debt,

00:29:24.500 but decides when it's clear that he can't be paid,

00:29:28.580 that he will take full advantage of what he thinks is his power as a creditor

00:29:34.180 and demand the death of the debtor.

00:29:37.220 And that leads, of course, to his coming a cropper,

00:29:41.840 because as Shakespeare makes clear, that's actually a wicked thing to do.

00:29:47.580 Absolutely.

00:29:48.320 But it's also, there's a hypocrisy there,

00:29:50.180 because as we've alluded to, without borrowing,

00:29:54.960 without taking essentially financial risk,

00:29:58.520 innovation can't happen.

00:30:00.400 And that's innovation whether it comes to exploration,

00:30:04.080 whether it comes to setting up a business,

00:30:06.380 whether it comes to, you know, a government, for instance,

00:30:10.200 building infrastructure.

00:30:11.800 We need to borrow.

00:30:13.840 This is essential, isn't it?

00:30:15.500 Well, it's very risky.

00:30:16.320 I mean, Shylock's being asked to finance oceanic trade,

00:30:20.560 and ships sink quite regularly in those days.

00:30:24.280 So there's quite a substantial risk in financing any maritime trade.

00:30:29.820 That's, of course, the side of things which would make you sympathetic to Shylock

00:30:34.520 before he decides to go for the pound of flesh.

00:30:38.540 But, I mean, I think the point you make is a really critical one.

00:30:41.600 Just as there's a cost to my borrowing a car for a year,

00:30:46.640 or for that matter, a tractor,

00:30:49.020 so there's a cost to my borrowing £100,000 to start a business.

00:30:58.000 And anybody who's going to bet on my business being successful

00:31:01.160 will need to be compensated for the risk.

00:31:04.300 And that's at the heart of almost all financial transactions.

00:31:08.460 What's the appropriate compensation?

00:31:09.980 Because there are risks.

00:31:11.480 One risk is the default risk, which Shylock encounters.

00:31:14.240 Ah, sorry, I can't pay.

00:31:15.340 The ship's all sank.

00:31:16.440 What can I do?

00:31:16.960 It was the weather.

00:31:18.140 But there's other risk, too.

00:31:20.040 Suppose that we contract this debt in pounds,

00:31:25.000 but we do it in the 1970s,

00:31:27.520 and in the period of the loan,

00:31:30.880 the inflation rate rockets up,

00:31:33.600 as it did when I was a kid,

00:31:35.120 into above 20%.

00:31:35.980 And so the debtor gets to pay back in these depreciated patents,

00:31:40.400 the purchasing power of which has been reduced in the year by 20%.

00:31:43.760 There's also a risk there.

00:31:45.480 So if you're lending, you ask yourself,

00:31:47.260 what's the default risk,

00:31:48.640 and what's the depreciation or inflation risk that I am running?

00:31:52.920 And efficient financial markets,

00:31:56.120 to use a term that's been much abused over the years,

00:31:59.880 deliver, if there's sufficient information and sufficient liquidity,

00:32:05.480 they deliver a reasonable price for those risks.

00:32:09.660 And we're talking about risks.

00:32:12.400 And one of the stories that you tell in the book,

00:32:15.440 which was fascinating,

00:32:16.940 which is all about risk,

00:32:18.160 is the story of Nathan Rothschild,

00:32:21.000 which every,

00:32:22.460 look, people will know it's a famous name,

00:32:24.380 but particularly the anti-Semites,

00:32:26.620 who will be, you know,

00:32:27.280 the moment they hear the word Rothschild,

00:32:29.520 immediately they're kind of,

00:32:31.200 the light bulbs start pinging.

00:32:32.440 So let's talk about the story of Nathan Rothschild,

00:32:34.660 because that's a story about financial risk,

00:32:37.500 lending,

00:32:38.300 but also vast amounts of wealth

00:32:40.460 that come as a result of that.

00:32:41.880 Yes, the story of how the Rothschilds made their first million

00:32:47.220 is a famous one.

00:32:49.420 It's even been made in two movies a couple of times,

00:32:53.600 once by the Nazis.

00:32:55.280 And that gets to your point,

00:32:58.960 that this story has often been used by anti-Semitic writers.

00:33:03.600 I wrote a history of the Rothschilds back in the 1990s,

00:33:07.840 based on the archives of the bank here in London,

00:33:12.380 and tried to tease out what had really happened.

00:33:15.580 And it's important to tell these stories

00:33:17.940 with historical documentation

00:33:20.120 and as much accuracy as you can muster,

00:33:23.240 because it's really the only possible antidote

00:33:25.940 to the anti-Semitic myths.

00:33:28.740 The myth says that,

00:33:30.420 in a somewhat illicit way,

00:33:32.480 the Rothschilds make money

00:33:35.140 from the outcome of the Battle of Waterloo,

00:33:38.920 while heroic Frenchmen and Britons,

00:33:42.280 not to mention Germans,

00:33:43.420 are perishing in the battle.

00:33:46.440 They're profiting.

00:33:48.560 So what really was going on?

00:33:50.980 What was going on was that Britain,

00:33:53.400 other European countries,

00:33:55.460 fought recurrent wars with France

00:33:57.600 from the 1790s,

00:33:59.620 from the period after the French Revolution,

00:34:01.520 right up until the Battle of Waterloo in 1815.

00:34:05.760 And a variety of different instruments

00:34:08.900 were used to finance these wars,

00:34:12.040 including bonds,

00:34:13.040 which the British government was able to issue

00:34:14.900 in substantial quantities,

00:34:16.560 and bankers.

00:34:18.180 And the Rothschilds were one of a very significant number

00:34:21.500 of bankers

00:34:22.320 who contributed to financing the war effort

00:34:25.280 against revolutionary and then Napoleonic France.

00:34:28.600 One of the most important things

00:34:30.100 that the Rothschild brothers did,

00:34:31.500 there were five,

00:34:32.720 in the course of the period prior to 1815,

00:34:36.580 they left Frankfurt and established themselves

00:34:39.200 in five different financial locations.

00:34:43.020 There was the original base in Frankfurt,

00:34:45.980 there was a house in Vienna,

00:34:48.160 a house in Naples,

00:34:49.440 a house in Paris,

00:34:50.300 and a house in London.

00:34:51.120 These five houses of Rothschild

00:34:53.400 contributed primarily by advancing gold

00:34:57.220 to the armies in the field.

00:35:00.040 If you're an armed force

00:35:02.840 marching your way,

00:35:04.960 say, up from Spain towards France,

00:35:07.740 you really can't pay with paper.

00:35:11.180 The locals want to have hard currency.

00:35:13.320 And so part of the challenge was

00:35:14.320 getting the gold

00:35:15.920 to where it was needed,

00:35:18.060 ultimately,

00:35:18.680 by the Duke of Wellington's army.

00:35:19.940 And the Rothschilds had been involved

00:35:21.720 in those transactions,

00:35:23.200 as well as other transactions,

00:35:24.880 occasioned by the Napoleonic Wars.

00:35:27.200 OK, this is where it gets exciting.

00:35:29.840 So the Napoleonic Wars

00:35:30.800 appeared to be over before 1815.

00:35:34.040 It appeared that Napoleon

00:35:35.160 had been defeated

00:35:36.640 and he had been sent into exile

00:35:39.740 and on the Isle of Elba

00:35:41.900 and peace had arrived.

00:35:44.380 And when peace arrived,

00:35:46.160 there was significantly less need

00:35:49.160 for the gold that had been used

00:35:51.120 to finance his ultimate defeat.

00:35:54.800 When Napoleon makes a comeback

00:35:56.760 for 100 days in 1815,

00:35:59.040 culminate at the Battle of Waterloo,

00:36:01.340 the Rothschilds, of course,

00:36:02.420 are scrambled into action again

00:36:03.960 to help finance

00:36:04.920 another campaign against Napoleon.

00:36:07.640 But nobody knows

00:36:08.840 how long it's going to last.

00:36:10.840 And indeed, it's reasonable

00:36:11.980 to expect a long time

00:36:13.080 because Napoleon has

00:36:13.860 an incredible record

00:36:15.020 of military success

00:36:16.320 and he's back.

00:36:17.680 The emperor is back.

00:36:18.760 He appears to be back

00:36:19.600 in control of France.

00:36:21.580 When the news breaks

00:36:23.220 that he's been defeated

00:36:24.700 in the Battle of Waterloo,

00:36:26.240 it takes a while

00:36:27.340 for that news to spread.

00:36:29.780 No internet, no telegraphs.

00:36:31.900 The only way you can actually get news

00:36:33.580 around Europe in 1815

00:36:35.600 is to have guys on horseback

00:36:38.740 riding to the Channel Coast,

00:36:41.100 handing the message

00:36:41.960 to somebody in a boat

00:36:43.060 who gets across the Channel,

00:36:44.400 hands the message

00:36:45.360 to another guy

00:36:46.260 on a horse,

00:36:46.800 horse gallops to London,

00:36:48.080 news is delivered.

00:36:49.380 The Rothschilds clearly

00:36:50.440 got the news

00:36:51.620 before the British government

00:36:53.500 that Napoleon

00:36:54.460 had been defeated.

00:36:55.660 So their couriers

00:36:56.560 were faster

00:36:57.280 and this certainly

00:36:58.840 was part of the reason

00:37:00.160 that they were able

00:37:01.140 to make a significant

00:37:02.080 amount of money.

00:37:03.680 But as I showed

00:37:04.720 in the book,

00:37:05.260 the House of Rothschild,

00:37:06.200 also known as

00:37:06.760 the world's banker

00:37:07.480 in all good bookshops,

00:37:09.180 there was a terrible moment

00:37:11.160 when they thought

00:37:12.220 they had actually blown up

00:37:13.860 because they didn't expect

00:37:15.680 Napoleon to lose.

00:37:16.820 They'd expected

00:37:17.440 a protracted campaign

00:37:18.720 and they'd accumulated

00:37:21.080 a lot of gold

00:37:22.440 in the expectation

00:37:23.480 of that continued campaign.

00:37:25.560 When they heard the news

00:37:27.140 that it was all over

00:37:28.280 and he'd lost again,

00:37:30.160 there's a moment of panic

00:37:31.960 within the brotherhood.

00:37:34.280 They're writing to one another,

00:37:35.260 who has the money?

00:37:36.100 I thought you had the money.

00:37:37.240 Wait, where's the money?

00:37:39.020 They really thought

00:37:39.700 they'd overextended themselves

00:37:41.060 and were about

00:37:41.760 to come a cropper.

00:37:43.520 Now, Nathan Rothschild

00:37:44.540 was not the eldest brother,

00:37:46.300 but he was the smartest brother.

00:37:47.800 He was the one in London.

00:37:50.380 And Nathan was one

00:37:51.580 of these people

00:37:52.080 who can, as they say in New York,

00:37:53.600 turn on a dime.

00:37:55.000 As soon as he realises

00:37:56.120 what's happened,

00:37:57.500 Nathan radically shifts

00:37:58.860 the position

00:37:59.440 and goes long

00:38:01.300 British government bonds,

00:38:03.220 known to this day

00:38:04.100 as gilts.

00:38:05.480 He goes long

00:38:06.360 British bonds

00:38:07.140 because he thinks

00:38:08.340 peace is now here,

00:38:09.520 it's all over,

00:38:10.580 these bonds are going to rally,

00:38:12.320 in other words,

00:38:12.800 interest rates are going to come down,

00:38:14.000 we're going to peacetime economy,

00:38:15.620 and it's that trade,

00:38:17.700 buying bonds

00:38:18.900 before the rest of the market

00:38:20.460 knew that Napoleon

00:38:21.540 had been defeated

00:38:22.260 that made them

00:38:23.140 a million pounds,

00:38:24.080 which at that time

00:38:25.120 was a lot of money.

00:38:26.580 That's what really happened

00:38:27.980 and it then becomes

00:38:30.160 part of the mythology

00:38:31.360 of the Rothschilds

00:38:33.420 right down to the present day.

00:38:35.220 Where is the,

00:38:36.380 the allegation

00:38:38.360 of cynicism

00:38:39.380 or sinister behaviour

00:38:40.520 within that?

00:38:42.000 Where is the divergence

00:38:43.360 between what you're telling,

00:38:44.780 which is what happened,

00:38:45.540 and the myths?

00:38:47.280 Beginning,

00:38:48.400 really not long afterwards,

00:38:49.640 in the 1820s,

00:38:51.440 particularly in France,

00:38:54.480 critics of the Rothschilds,

00:38:56.740 who certainly included

00:38:57.760 people sympathetic to Bonaparte,

00:38:59.940 who were hostile

00:39:00.560 to the restored royal regime,

00:39:03.100 began to portray all of this

00:39:05.100 in a somewhat scurrilous light.

00:39:08.420 And there are two kind of pieces

00:39:09.640 to this.

00:39:10.140 One is,

00:39:11.180 well, you know,

00:39:11.840 heroic people

00:39:12.500 are laying down their lives

00:39:13.720 and they're sitting in London

00:39:15.420 making money.

00:39:17.340 And the second one is,

00:39:19.160 well,

00:39:19.560 there's some kind of

00:39:20.180 insider knowledge.

00:39:21.240 There's something

00:39:21.760 disreputable about the fact

00:39:23.740 that they front-run the market

00:39:25.240 before even the British government

00:39:27.260 knows the story.

00:39:29.500 But that's sort of not enough

00:39:31.940 for a conspiracy theory

00:39:33.880 to have legs.

00:39:34.820 Right.

00:39:35.560 And so quite quickly,

00:39:36.460 what you get is this element

00:39:38.180 of the supernatural,

00:39:39.860 that there's something

00:39:40.400 really not quite right

00:39:42.940 about the fact

00:39:43.600 that they can know this

00:39:45.240 so early.

00:39:46.880 And so you get the legend

00:39:48.720 of a kind of talisman

00:39:50.840 that protects the family

00:39:52.280 and makes the success

00:39:54.680 of the business.

00:39:56.020 And this idea

00:39:56.620 that there's a secret power

00:39:58.020 at work is interesting

00:39:59.600 because it exists

00:40:00.400 in the anti-Semitic literature

00:40:01.680 or the anti-Rothschild literature

00:40:02.980 and it exists

00:40:04.000 in Jewish literature,

00:40:06.880 including in Russia,

00:40:08.160 with the notion

00:40:08.680 that there's something magical

00:40:09.800 about this family.

00:40:11.040 They're kind of the super Jews

00:40:12.340 and that Rothschild

00:40:13.400 refer to themselves

00:40:14.340 as, you know,

00:40:14.820 the royal family of Judaism.

00:40:16.420 And so this idea

00:40:17.100 that there's something

00:40:17.660 kind of more to it

00:40:18.580 than just business acumen,

00:40:20.460 I think,

00:40:20.800 is part of what fuels

00:40:22.080 this really powerful

00:40:23.740 conspiracy theory.

00:40:25.480 I mean,

00:40:25.640 I think what's interesting

00:40:26.700 is it morphs

00:40:28.880 into a series

00:40:29.980 of apocryphal sayings

00:40:31.760 along the lines of,

00:40:32.980 you know,

00:40:33.100 the time to invest

00:40:34.180 is when there's blood

00:40:35.100 in the streets

00:40:35.920 or, you know,

00:40:37.620 the sound of guns

00:40:39.480 or of cannon fire

00:40:40.620 is a chance

00:40:42.340 to make money.

00:40:43.160 Those apocryphal sayings

00:40:45.160 arise in the course

00:40:46.760 of this story

00:40:49.560 morphing into a myth.

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00:42:33.160 I wonder how much of it

00:42:36.440 is the end of the reign of kings

00:42:39.080 as well

00:42:40.620 because the way you described it

00:42:43.000 when it came to kings

00:42:43.800 in medieval Europe

00:42:44.580 made so much sense to me.

00:42:45.740 Of course, if I'm the king

00:42:46.840 and I want to fight

00:42:47.620 a war against France,

00:42:49.100 I'm going to borrow money

00:42:50.380 from whoever's going to lend it to me.

00:42:52.360 It would be very, very strange

00:42:54.380 in that situation

00:42:55.340 to blame the lender for the war.

00:42:58.200 That doesn't make any sense.

00:42:59.620 But as you inch towards

00:43:01.460 slightly less obviously visible

00:43:04.980 people borrowing money,

00:43:06.240 the government,

00:43:07.020 whatever that is,

00:43:07.800 you know,

00:43:08.220 not saying that necessarily

00:43:09.100 happened with the Napoleonic Wars,

00:43:10.340 but just as you start

00:43:11.260 to head towards democracy,

00:43:12.420 you can see why

00:43:14.120 it's almost like,

00:43:15.280 well, who is responsible for this?

00:43:17.060 And of course,

00:43:17.800 this modern narrative

00:43:18.780 exists all the way through

00:43:20.100 to, you know,

00:43:20.860 the military-industrial complex

00:43:22.580 and so on.

00:43:23.340 There's always this narrative

00:43:24.460 that wars aren't being fought

00:43:26.760 by people in charge

00:43:28.100 of governments

00:43:28.660 who either have real

00:43:30.380 geopolitical,

00:43:31.300 geostrategic concerns

00:43:32.460 or they want to show

00:43:33.560 that they've got a bigger penis

00:43:35.140 than the other guy

00:43:36.000 or whatever it might be.

00:43:37.980 It really is,

00:43:38.980 you know,

00:43:39.300 the shadowy figures

00:43:40.880 in the background

00:43:41.680 who just want to make money from it.

00:43:44.140 I think that's right.

00:43:46.240 In the course of the 19th century,

00:43:48.900 which is over time

00:43:50.340 an increasingly democratic age

00:43:52.500 where more or less everywhere

00:43:54.240 there are widening of the franchise,

00:43:56.840 politics changes

00:43:58.200 and one of the targets

00:44:00.760 of the more democratic politics

00:44:02.560 is the relationships

00:44:05.280 between bankers and politicians.

00:44:10.320 And you get this in most countries.

00:44:13.040 In the United States,

00:44:14.360 there was always a skepticism

00:44:15.860 about financial power.

00:44:17.540 It was right at the earliest

00:44:19.920 stages of the republic

00:44:21.480 that you had the debate

00:44:23.220 over whether there should

00:44:23.960 even be a central bank.

00:44:25.540 The decision not to allow New York

00:44:27.340 to have too much political power

00:44:28.560 to create Washington, D.C.

00:44:30.060 is part of resistance,

00:44:32.640 particularly by the Southern founders,

00:44:34.500 to Alexander Hamilton's vision

00:44:36.180 of a quite British form

00:44:38.220 of United States

00:44:39.060 in which all power,

00:44:40.180 financial and political,

00:44:41.180 would be concentrated

00:44:41.980 in New York.

00:44:44.100 So the 19th century debate

00:44:45.740 evolves in interesting ways

00:44:48.080 to offer a critique

00:44:50.580 of those who run

00:44:52.300 the financial markets

00:44:53.460 and the Rothschilds

00:44:54.280 were the dominant financial family

00:44:56.520 for most of the 19th century,

00:44:57.920 far bigger than, say,

00:44:59.000 J.P. Morgan,

00:44:59.820 who was a newcomer,

00:45:01.520 new on the block

00:45:02.300 in the late 19th century.

00:45:03.700 The Rothschilds and finance

00:45:05.340 become almost synonymous

00:45:06.980 with one another.

00:45:08.380 The relationship between

00:45:09.440 that financial world

00:45:10.660 and the political world

00:45:12.440 of kings and of ministers,

00:45:15.160 prime ministers

00:45:15.760 and finance ministers.

00:45:17.440 Now, those relationships existed.

00:45:19.120 Of course they existed

00:45:19.980 because the governments

00:45:21.260 are consistently

00:45:22.440 encountering the problem.

00:45:24.240 You seem to have a deficit,

00:45:25.940 Your Majesty,

00:45:27.280 and here's the choice.

00:45:28.960 Raise taxes

00:45:29.760 or cull the Rothschilds

00:45:31.420 are obviously politically

00:45:33.420 more convenient

00:45:34.160 to go down the borrowing route.

00:45:36.280 These relationships exist.

00:45:37.460 They're documented.

00:45:38.360 There's correspondence.

00:45:39.780 I spent a great deal

00:45:40.600 of my time in the 90s

00:45:42.160 piecing all that together.

00:45:43.260 The critique that comes

00:45:45.400 from democratic political figures

00:45:47.840 is, well, there's something

00:45:49.240 not quite right about this.

00:45:51.320 I mean, A, aren't they making

00:45:52.820 a crazy amount of money?

00:45:54.800 And surely that's ultimately

00:45:56.100 taxpayers' money.

00:45:57.620 And B, isn't it a little bit cosy

00:45:59.360 that the prime minister

00:46:00.320 is so close to the Rothschilds

00:46:02.140 that, oh, his daughter's

00:46:04.000 just married a member

00:46:04.760 of the family.

00:46:05.980 Those are the critiques,

00:46:07.920 but they come from both

00:46:08.860 the left and the right.

00:46:10.380 And this is a really

00:46:11.220 important thing.

00:46:12.120 The critique of finance

00:46:14.380 or finance capitalism

00:46:16.360 is a socialist critique.

00:46:19.800 It's there in Marx.

00:46:21.140 But it also becomes

00:46:22.440 a critique on the far right.

00:46:24.300 And in the 1820s,

00:46:25.320 those distinctions

00:46:26.380 aren't yet clear.

00:46:27.500 They're just radicals

00:46:28.520 and radicals don't like this.

00:46:30.320 They don't like the Rothschilds.

00:46:31.540 They don't like the restored monarchy.

00:46:33.680 By the time you get

00:46:34.540 to the 1840s, 1850s,

00:46:36.740 there are two flavours.

00:46:38.360 You can be a Marxist,

00:46:39.640 a social democrat,

00:46:40.420 how you can be for the workers

00:46:42.580 and against the capitalists.

00:46:45.620 But if that's not quite

00:46:47.120 strong enough drink for you,

00:46:48.820 then you can join

00:46:49.800 the nascent radical right,

00:46:52.020 which ultimately evolves

00:46:53.380 through populism

00:46:54.640 into fascism.

00:46:55.480 And you say,

00:46:55.900 you know what?

00:46:56.760 The real story here

00:46:57.680 is the Jews

00:46:58.420 are taking the money

00:46:59.960 of the Christians.

00:47:01.040 And that's, I think,

00:47:03.040 the kind of bifurcation

00:47:04.280 that you see

00:47:04.900 in the democratic politics

00:47:06.340 of the 19th century.

00:47:07.900 Isn't, doesn't a lot of this

00:47:11.240 anger, resentment, frustration

00:47:13.760 come from people

00:47:15.440 who don't really

00:47:17.020 understand money?

00:47:18.260 They don't understand finance.

00:47:19.640 They don't understand

00:47:20.580 the bond market.

00:47:21.680 So where you have

00:47:22.620 this absence of knowledge,

00:47:25.000 what then gets fed into it

00:47:26.680 is conspiracy theories,

00:47:28.540 anger, resentment,

00:47:29.900 which then leads

00:47:30.720 to anti-Semitism,

00:47:33.020 resentment,

00:47:34.100 which then leads

00:47:34.820 to movements

00:47:35.620 like communism,

00:47:36.740 socialism, etc.,

00:47:38.060 fascism.

00:47:39.200 I think one of the odd things

00:47:40.860 about the way education

00:47:42.220 evolves in the course

00:47:43.480 of the 19th century

00:47:44.440 is that while we

00:47:46.200 generally agree

00:47:47.340 that it's a good idea

00:47:48.220 to teach people

00:47:49.760 literacy and numeracy,

00:47:52.380 not to mention

00:47:53.080 some history

00:47:53.780 and maybe a foreign language,

00:47:55.800 we never really sit down

00:47:57.300 and teach them

00:47:57.920 about finance.

00:47:59.140 And indeed,

00:47:59.620 financial illiteracy

00:48:01.200 is a very striking feature

00:48:03.040 of our world today.

00:48:04.820 It's a very complex

00:48:06.040 financial world.

00:48:07.360 Everybody is expected

00:48:08.460 soon after they leave education

00:48:12.440 and perhaps even before then

00:48:15.120 to understand how a loan works,

00:48:17.580 even if it's just a student loan.

00:48:19.900 We expect people intuitively

00:48:22.520 to know how interest rates work

00:48:24.520 when they've probably

00:48:26.100 only encountered the concept

00:48:27.740 in a mathematics class.

00:48:30.900 So we have that problem

00:48:32.200 that nobody really quite understands

00:48:33.640 what a bond yield is.

00:48:34.400 That is still true.

00:48:35.300 I read just the other day

00:48:36.220 in the newspaper

00:48:36.680 that some British political figure

00:48:41.220 didn't actually understand

00:48:42.460 what a bond yield was.

00:48:44.060 I remember noticing at Harvard

00:48:46.020 when I was teaching

00:48:46.920 a financial history course,

00:48:48.520 which was a popular course,

00:48:50.360 that quite a few

00:48:50.920 of the teaching fellows,

00:48:51.880 the graduate students,

00:48:52.780 couldn't in fact explain

00:48:53.880 very well to the undergraduates

00:48:56.340 what bond yields were.

00:48:58.060 So I think it's true

00:48:59.620 that ignorance is one

00:49:01.220 of the precursors

00:49:02.220 to conspiracy theories.

00:49:04.380 When you actually explain

00:49:06.200 what an interest rate is

00:49:07.640 and what risk is,

00:49:09.660 the kind of risk that you run

00:49:11.060 if you're a lender,

00:49:12.940 why being a banker

00:49:14.000 can give you sleepless nights,

00:49:15.580 I think it becomes

00:49:16.660 a little less mysterious

00:49:17.780 why the Rothschilds became wealthy.

00:49:20.640 From the very outset,

00:49:22.660 they ran colossal risk,

00:49:24.600 not only in 1814-15,

00:49:27.580 but recurrently

00:49:28.460 through the 19th century.

00:49:29.720 They take on the risk,

00:49:30.520 for example,

00:49:30.900 of financing railways.

00:49:32.260 They're very early

00:49:32.840 to see the potential.

00:49:34.540 And railways are the big

00:49:35.620 capital expenditure.

00:49:36.920 They're the data centres

00:49:38.000 of the 19th century.

00:49:40.100 But to a large extent,

00:49:41.520 these railroads

00:49:42.520 in Britain and Western Europe

00:49:44.720 are built by private finance.

00:49:46.600 Further east,

00:49:47.340 it's the government

00:49:47.900 that does it.

00:49:48.800 There's enormous risk involved

00:49:50.260 in building a railroad.

00:49:51.440 It's an extremely

00:49:52.040 expensive undertaking.

00:49:53.740 It's a pretty unregulated market.

00:49:56.440 And a lot of companies

00:49:57.380 that built railroads

00:49:58.180 did not make money

00:49:59.180 and indeed went bust.

00:50:00.680 So I think people

00:50:01.500 don't have a good understanding

00:50:02.800 of risk,

00:50:04.320 nor do they have

00:50:05.180 a good understanding

00:50:05.800 of the difference

00:50:06.500 between risk and uncertainty.

00:50:08.660 Something I try to explain

00:50:10.020 in The Ascent of Money

00:50:10.900 goes back to a distinction

00:50:12.060 the Chicago economist

00:50:13.640 Frank Knight drew

00:50:15.240 about 100 years ago.

00:50:17.020 Risk is calculus.

00:50:18.120 I mean,

00:50:18.300 I roughly know

00:50:19.060 the probability

00:50:19.760 that each one of us

00:50:21.400 will experience

00:50:22.440 a car accident

00:50:23.500 in the next year.

00:50:25.000 We can kind of

00:50:26.000 put a number on that

00:50:26.900 because it's fairly

00:50:27.740 normally distributed.

00:50:29.160 We all can figure out

00:50:30.660 what our risk of

00:50:31.620 being diagnosed

00:50:32.500 with cancer is.

00:50:34.160 Mine's higher than yours

00:50:34.960 because I'm older than you.

00:50:35.880 All that's calculable.

00:50:37.540 And so when we're calculating

00:50:38.660 how much we should pay

00:50:40.100 in health insurance,

00:50:41.440 that isn't actually

00:50:42.300 tremendously difficult

00:50:43.500 to figure out.

00:50:44.900 But what is the probability

00:50:46.040 of war breaking out

00:50:48.040 that involves Britain?

00:50:49.980 Actually, that's impossible

00:50:51.060 to say.

00:50:51.840 What's the probability

00:50:52.660 there'll be another pandemic?

00:50:54.160 Nobody knows.

00:50:55.420 When will there be

00:50:56.100 a huge earthquake

00:50:56.940 in San Francisco

00:50:58.420 that completely

00:50:59.140 ends Silicon Valley?

00:51:02.040 Nobody knows.

00:51:02.980 So that's the domain

00:51:03.820 of uncertainty.

00:51:05.340 So anybody who's

00:51:06.300 embarking on

00:51:07.220 a large-scale investment,

00:51:10.080 whether they're lending

00:51:10.920 the money

00:51:11.380 or buying the equity,

00:51:12.760 we'll come to that

00:51:13.500 in a minute,

00:51:14.700 is taking on risk.

00:51:16.380 Some of it's calculable

00:51:17.460 and some of it's not.

00:51:19.600 And that is ultimately

00:51:20.860 at the heart of capitalism,

00:51:23.000 the cost of risk

00:51:24.220 and uncertainty.

00:51:25.900 And one of the things

00:51:26.460 to pick up on there

00:51:27.180 is you corrected me

00:51:28.280 and I'm grateful

00:51:28.760 for your correction

00:51:29.320 in that you wrote your book

00:51:30.380 before the financial crisis.

00:51:31.700 I didn't know about that

00:51:32.620 because I became aware

00:51:33.460 of it shortly after.

00:51:36.580 What did you see

00:51:38.640 that other people

00:51:39.200 didn't see?

00:51:39.780 So in 2006,

00:51:43.520 there were a couple

00:51:44.940 of red lights

00:51:47.040 that were flashing

00:51:48.240 on the dashboard

00:51:48.840 and I wrote about it

00:51:49.680 at the time.

00:51:51.400 There was a lot of debt

00:51:53.100 accumulating

00:51:54.100 the financial system.

00:51:56.140 Household debt,

00:51:57.300 particularly the famous

00:51:59.200 subprime mortgages,

00:52:01.380 loans that were taken out

00:52:02.500 by relatively low-income families

00:52:04.540 to buy homes,

00:52:06.840 but there was also

00:52:07.440 a lot of debt

00:52:07.980 on bank balance sheets

00:52:09.280 and then there was debt

00:52:10.600 that was not

00:52:11.060 on their balance sheets

00:52:11.900 in various off-balance

00:52:13.440 sheet vehicles,

00:52:14.320 part one.

00:52:14.860 Part two,

00:52:15.840 the cost of debt,

00:52:16.980 interest rates,

00:52:18.900 were rising.

00:52:20.200 And therefore,

00:52:20.720 there was going to be

00:52:21.620 a steady and sustained

00:52:23.160 squeeze

00:52:23.700 on any vulnerable borrowers,

00:52:26.580 anybody who had

00:52:27.220 overextended

00:52:28.120 or any institution

00:52:29.160 that was undercapitalized.

00:52:30.480 You could see that,

00:52:31.880 I could see that

00:52:32.620 from late 2006.

00:52:34.760 And I think

00:52:35.420 the moment of truth

00:52:36.280 for me was when

00:52:37.320 one of my friends,

00:52:39.380 Jim Tisch of Lowe's Corporation,

00:52:41.140 sat me down

00:52:42.120 with his mortgage specialist

00:52:43.700 and she showed me a chart

00:52:45.420 of when the subprime mortgages

00:52:47.360 would reset.

00:52:48.720 Because the way

00:52:49.240 the subprime mortgages worked

00:52:50.620 was that you had

00:52:51.300 a sweetener period

00:52:52.340 when the payments

00:52:53.300 that you had to make

00:52:54.680 per month

00:52:55.900 were relatively low,

00:52:57.580 artificially low.

00:52:59.100 But they reset

00:52:59.980 after a certain period

00:53:01.100 of time

00:53:01.620 to a much higher

00:53:03.300 market rate.

00:53:04.320 And those resets

00:53:05.860 were all pretty much

00:53:06.960 pre-programmed

00:53:07.880 to happen

00:53:08.540 in the course of 07.

00:53:10.680 And so you could see

00:53:11.500 that the trouble

00:53:12.100 would start to build

00:53:13.320 in the course of 2007.

00:53:16.840 And then finally

00:53:17.780 would spill over

00:53:18.680 in the full-blown crisis

00:53:20.580 that we saw in 2008.

00:53:23.360 First Bear Stearns,

00:53:24.500 then Lehman Brothers,

00:53:25.260 because the overextended

00:53:26.580 investment banks

00:53:27.420 were really the weak link.

00:53:29.660 The interesting thing

00:53:30.760 looking back on it

00:53:31.560 is how few people

00:53:32.480 saw that.

00:53:34.620 That was partly

00:53:35.560 because if you were

00:53:36.340 making money

00:53:37.160 in the market,

00:53:38.460 you were incentivized

00:53:39.440 not to see it.

00:53:40.280 If the music

00:53:41.240 is still playing,

00:53:42.340 we'll keep dancing.

00:53:43.180 That was what

00:53:43.680 Chuck Prince,

00:53:44.240 one of the bank's CEOs,

00:53:45.460 famously said.

00:53:47.140 But I think

00:53:47.800 there was also

00:53:48.360 a kind of failure

00:53:49.360 on the part

00:53:50.040 of some economists

00:53:51.440 fully to understand

00:53:52.780 the precariousness

00:53:54.680 of the debt dynamics.

00:53:57.180 And in some ways

00:53:58.520 it's an advantage

00:53:59.520 to be an economic historian

00:54:01.100 because you don't have

00:54:01.940 some fancy mathematical model

00:54:03.500 that you have to focus on.

00:54:05.740 You're really just looking

00:54:06.480 to spot pattern recognition,

00:54:08.920 do pattern recognition

00:54:10.100 to see,

00:54:10.940 well, we've seen

00:54:11.680 this kind of debt dynamic before.

00:54:14.800 I think it's important

00:54:15.880 to bring into the conversation

00:54:17.180 something we haven't

00:54:18.120 talked about yet,

00:54:19.060 which is the equity market.

00:54:20.760 Because we've talked

00:54:21.360 about banks,

00:54:21.940 we've talked about bonds,

00:54:23.320 but we haven't talked

00:54:24.120 about the stock market.

00:54:25.520 And that's funny

00:54:26.420 because actually

00:54:27.380 people typically focus

00:54:29.180 a lot more

00:54:29.860 on the stock market

00:54:30.740 than they do

00:54:31.440 on the bond market.

00:54:32.920 And certainly

00:54:33.280 in the United States,

00:54:34.540 most conversations

00:54:35.320 about Wall Street

00:54:37.080 are really conversations

00:54:38.000 about the stock market.

00:54:40.260 And it's worth

00:54:40.840 just understanding that

00:54:42.280 because it was collateral damage

00:54:44.580 in the financial crisis.

00:54:46.560 I mean,

00:54:47.140 equity markets

00:54:47.900 tanked

00:54:48.820 in the wake

00:54:50.100 of the Lehman Brothers

00:54:51.360 bankruptcy.

00:54:52.340 But it wasn't really

00:54:53.320 at the heart

00:54:54.220 of the crisis.

00:54:54.820 So let's just quickly

00:54:56.680 do a refresher on that

00:54:57.880 because stocks

00:54:59.380 or equities

00:55:00.980 are just a way

00:55:02.240 in which

00:55:02.820 we can own

00:55:03.840 a piece

00:55:04.560 of a business,

00:55:06.140 a piece of a company,

00:55:07.360 whether it's Apple

00:55:08.580 or Alphabet

00:55:09.540 or a much smaller company.

00:55:12.500 If it's a publicly

00:55:13.700 traded company,

00:55:14.880 you can go and buy

00:55:15.940 a little piece

00:55:17.560 of its equity,

00:55:19.660 of its capital.

00:55:20.980 There's more risk involved

00:55:22.760 because the company

00:55:23.860 can go bust

00:55:24.500 and you get nothing

00:55:25.640 if that happens.

00:55:27.060 But there's more upside

00:55:28.080 because if the company

00:55:28.980 is NVIDIA

00:55:29.800 and you were smart enough

00:55:31.280 to buy NVIDIA stock

00:55:33.200 on the eve

00:55:34.160 of the launch

00:55:34.960 of ChatGPT,

00:55:36.100 then your upside

00:55:36.740 is massively bigger

00:55:37.900 than in any other

00:55:39.480 asset class.

00:55:40.300 I wanted to throw that in

00:55:41.480 because if you want

00:55:42.880 to understand

00:55:43.400 how the financial system works,

00:55:45.620 you've got it populated

00:55:46.720 with all the different

00:55:47.780 components.

00:55:48.580 Of course.

00:55:49.120 And they kind of,

00:55:50.180 they accumulate over time.

00:55:51.700 There's no equity market

00:55:52.860 prior to the 18th century.

00:55:54.140 That's essentially

00:55:54.920 when you start to see

00:55:56.700 something like

00:55:57.620 a modern stock market

00:55:58.720 emerge.

00:55:59.700 Similarly,

00:56:00.060 there isn't really much

00:56:00.900 of an insurance market

00:56:02.000 in the modern sense

00:56:02.980 until the 18th century

00:56:04.980 and the 19th century.

00:56:06.900 And that brings us

00:56:08.500 perfectly to where

00:56:09.980 we are today

00:56:10.780 because one of the ingredients,

00:56:12.560 France has mentioned,

00:56:13.340 ignorance,

00:56:14.080 but another ingredient,

00:56:15.280 I think,

00:56:15.520 is pain.

00:56:17.480 Another ingredient

00:56:18.340 is terrible economic times.

00:56:21.360 Another ingredient

00:56:22.080 is war.

00:56:24.020 Another ingredient,

00:56:25.020 basically times

00:56:26.060 when people feel

00:56:27.600 that something

00:56:28.640 has gone wrong.

00:56:30.900 And the rise

00:56:31.820 of the radical left

00:56:32.800 and the radical right

00:56:34.060 is something that I think

00:56:35.060 is happening

00:56:35.560 in our society today.

00:56:36.680 I think it's undeniable.

00:56:38.540 You know,

00:56:39.220 here in the UK,

00:56:40.160 the Zach Polanski's

00:56:41.080 of the world.

00:56:41.900 In the US,

00:56:42.680 you have both

00:56:43.240 the radical left

00:56:44.020 and the radical right.

00:56:45.140 And, you know,

00:56:45.540 we've spoken to people

00:56:46.400 on both sides of that.

00:56:47.800 It's happening.

00:56:49.180 I don't know

00:56:50.500 how you feel about it.

00:56:51.780 I mean,

00:56:51.980 you've talked a lot

00:56:52.660 about the indebtedness levels

00:56:53.960 and it's obvious

00:56:54.500 that's a huge problem.

00:56:57.020 Are we headed

00:56:58.480 in a sort of

00:56:59.560 1920s direction,

00:57:01.680 1930s direction?

00:57:03.880 Well,

00:57:04.340 it's a good question

00:57:05.700 because the ideologies

00:57:07.340 are the same old,

00:57:08.280 same old.

00:57:08.800 Yeah.

00:57:09.300 I mean,

00:57:09.660 it's sort of depressing

00:57:10.660 that we can't come up

00:57:11.880 with new material,

00:57:12.820 but...

00:57:13.420 It's like the writers

00:57:15.480 have just gone home

00:57:16.500 and we're stuck with,

00:57:17.720 oh,

00:57:17.940 I'm really disillusioned.

00:57:19.360 What can I have

00:57:20.900 for my disillusionment?

00:57:21.940 It's like,

00:57:22.240 well,

00:57:22.520 sir,

00:57:22.760 we can offer you

00:57:23.400 Marxism

00:57:24.900 if you'd like that.

00:57:26.560 Or if you'd rather

00:57:27.740 something stronger,

00:57:29.200 we've got some anti-Semitism.

00:57:30.460 So it's essentially

00:57:31.160 Zoran Mamdani

00:57:32.060 or Nick Fuentes.

00:57:33.420 And that's like,

00:57:34.440 really?

00:57:35.100 We've got 100 years

00:57:36.360 on the clock

00:57:36.840 and it's those guys again?

00:57:39.320 That's somewhat disappointing.

00:57:40.940 I feel we could be

00:57:41.620 more creative.

00:57:42.320 Maybe we're not

00:57:43.420 reading enough manga.

00:57:45.700 You know,

00:57:46.040 we're short of new ideas.

00:57:48.460 So the question is,

00:57:49.360 do we get

00:57:49.980 the macroeconomic context

00:57:52.140 in which those ideas

00:57:53.780 come in from the margins

00:57:55.280 and become very popular?

00:57:57.060 Because right now,

00:57:57.960 the people attracted

00:57:58.660 to the extreme ideas

00:57:59.940 are still clearly

00:58:00.660 a minority.

00:58:02.580 I think it's just...

00:58:03.480 Sorry to interrupt,

00:58:04.300 Neil,

00:58:04.440 but Mamdani's

00:58:05.240 mayor of New York.

00:58:06.440 Yeah,

00:58:06.820 but he's not going

00:58:07.780 to be president

00:58:08.160 of the United States.

00:58:08.880 I mean,

00:58:09.220 remember,

00:58:09.580 New York politics

00:58:10.180 is not at all

00:58:11.220 representative of US politics.

00:58:13.200 I'm just making the point.

00:58:14.760 They are making Inbroke.

00:58:15.760 Oh,

00:58:16.140 unquestionably.

00:58:16.960 But the key question is,

00:58:19.040 you know,

00:58:19.280 do we have enough

00:58:20.420 economic volatility

00:58:21.440 of the kind they had

00:58:23.000 in the 20s and 30s

00:58:24.260 to propel

00:58:25.580 today's

00:58:26.680 wannabe Hitler

00:58:27.680 into a position

00:58:29.440 of political power?

00:58:30.940 And lots of

00:58:31.860 so-called far-right populists

00:58:33.660 aspiring to power,

00:58:34.940 and the question is

00:58:35.860 how many get there,

00:58:36.820 and obviously,

00:58:37.360 how radical are they

00:58:38.240 when they get there?

00:58:39.840 Same question

00:58:40.560 for the left.

00:58:41.560 New York can take

00:58:42.820 a kind of punt

00:58:44.240 on socialism.

00:58:45.540 Maybe Minneapolis

00:58:47.020 might do it too,

00:58:48.180 but I'm not sure

00:58:48.720 that many other cities

00:58:49.560 are going to do it.

00:58:51.200 But remember,

00:58:51.980 all this is happening

00:58:53.120 after a period

00:58:54.800 of sustained economic

00:58:56.100 expansion,

00:58:57.680 where economists

00:58:58.580 have predicted

00:58:59.280 several of the last

00:59:00.700 zero recessions,

00:59:02.420 apart from the shock

00:59:03.800 of the March 2020

00:59:05.460 onset of COVID,

00:59:06.880 the economy

00:59:07.440 has essentially been

00:59:08.960 on expansion mode,

00:59:10.900 certainly in the US,

00:59:12.660 since the financial crisis.

00:59:14.640 There hasn't been

00:59:15.160 that much

00:59:15.940 in the way

00:59:17.500 of volatility

00:59:19.080 by the standards

00:59:20.520 of the 20th century.

00:59:22.840 So when

00:59:23.540 Andrew Ross Sorkin

00:59:24.840 publishes

00:59:25.740 his new book,

00:59:26.520 1929,

00:59:27.680 we're all

00:59:28.540 supposed to read it

00:59:29.800 looking for

00:59:30.980 traces of the

00:59:32.280 1920s

00:59:33.680 in the 2020s.

00:59:35.740 And, of course,

00:59:36.500 there are some

00:59:37.140 because there are

00:59:38.540 1920s people

00:59:40.380 offering

00:59:41.180 projects

00:59:43.060 of implausible

00:59:44.440 economic

00:59:45.640 viability.

00:59:47.120 Step Forward,

00:59:47.920 Sam Altman

00:59:48.440 of OpenAI.

00:59:50.340 There's margin credit.

00:59:51.960 There are traders

00:59:52.600 who buy stocks

00:59:55.260 on the YOLO

00:59:56.240 principle,

00:59:56.900 you only live

00:59:58.040 once,

00:59:58.900 or on the

01:00:00.380 FOMO principle

01:00:01.080 because they have

01:00:01.600 fear of missing out.

01:00:02.620 That's all quite

01:00:03.420 1920s.

01:00:05.020 So what's the

01:00:05.580 probability that we

01:00:06.500 get the great

01:00:07.660 shock of 29

01:00:08.700 followed by

01:00:09.700 a decade of

01:00:10.700 depression as we

01:00:11.720 did in the 1930s?

01:00:12.560 That is very low

01:00:13.680 probability

01:00:14.300 because we're

01:00:16.020 unlikely to make

01:00:16.820 the policy mistakes

01:00:17.720 that were made

01:00:18.600 back then.

01:00:20.600 Which are what?

01:00:21.280 Well, the key

01:00:21.880 lesson of the

01:00:22.920 Great Depression

01:00:23.460 is that the

01:00:24.620 Federal Reserve

01:00:25.180 did almost

01:00:25.760 everything wrong,

01:00:27.260 everything to

01:00:28.140 make matters

01:00:28.680 worse.

01:00:30.100 And when I was

01:00:30.860 trying to navigate

01:00:31.860 through the

01:00:33.460 financial crisis,

01:00:34.460 after I published

01:00:35.140 the book,

01:00:35.600 I did a lot of

01:00:36.360 talks in a lot

01:00:37.200 of institutions,

01:00:38.060 the question was

01:00:38.620 always,

01:00:39.300 is it the

01:00:39.780 Great Depression?

01:00:40.520 And I would say,

01:00:41.100 well, no,

01:00:41.540 because Ben Bernanke,

01:00:43.160 who was then the

01:00:43.740 Fed chair,

01:00:44.620 knows the

01:00:45.500 financial history

01:00:46.380 of the Great Depression

01:00:47.060 and he's not going

01:00:48.120 to do what the

01:00:48.700 Fed did then

01:00:49.740 which was actually

01:00:50.620 to tighten

01:00:51.100 monetary policy

01:00:52.040 and that had the

01:00:53.640 effect of causing

01:00:54.540 multiple bank

01:00:55.320 failures persistently

01:00:56.680 right the way

01:00:57.240 through from late

01:00:58.380 29 all the way

01:01:00.160 until Franklin

01:01:00.980 Roosevelt is sworn

01:01:02.060 in and finally

01:01:03.080 shuts down all

01:01:03.820 the banks in

01:01:05.040 the famous

01:01:05.460 Roosevelt bank

01:01:06.160 holiday.

01:01:06.600 We're not going

01:01:06.980 to do that

01:01:07.380 again.

01:01:08.280 No central banker

01:01:09.160 would make those

01:01:10.160 mistakes again

01:01:10.980 and in a sense

01:01:13.160 we've run the

01:01:13.640 experiment because

01:01:14.400 when the financial

01:01:15.360 crisis happened,

01:01:16.960 the Fed and

01:01:17.780 other central banks

01:01:18.820 did what came

01:01:19.840 to be euphemistically

01:01:20.880 called quantitative

01:01:21.780 easing,

01:01:22.800 i.e.

01:01:23.120 they expanded

01:01:23.640 the balance sheet,

01:01:24.480 they bought lots

01:01:25.100 of stuff that was

01:01:26.300 otherwise going to

01:01:26.960 tank in price,

01:01:28.240 they bailed out

01:01:29.020 key financial players

01:01:30.080 and we didn't have

01:01:30.980 a Great Depression.

01:01:32.260 I think therefore

01:01:33.960 it's reasonable to

01:01:34.740 assume that we're not

01:01:35.700 going to have a

01:01:36.160 Great Depression

01:01:36.700 when the next

01:01:37.640 recession hits,

01:01:39.020 which eventually

01:01:39.740 it will.

01:01:41.860 My student Tyler

01:01:42.900 Goodspeed has a

01:01:43.700 brilliant book

01:01:44.400 coming out early

01:01:45.260 next year called

01:01:45.940 Recession,

01:01:46.660 which everyone

01:01:47.140 will have to

01:01:47.560 read,

01:01:48.420 showing what it

01:01:49.820 takes to cause a

01:01:50.740 recession and it's

01:01:52.420 usually more than

01:01:53.240 one thing that goes

01:01:54.360 wrong.

01:01:55.300 I think we will get

01:01:56.280 at some point

01:01:57.480 enough bad news

01:01:58.900 to check the

01:01:59.900 CapEx boom

01:02:00.740 in AI,

01:02:02.380 we'll get enough

01:02:02.960 bad news,

01:02:04.300 maybe geopolitical

01:02:05.200 bad news,

01:02:06.180 to make investors

01:02:07.200 much more worried

01:02:08.020 than they currently

01:02:08.880 are about Taiwan.

01:02:11.400 At some point

01:02:12.520 I'll be sitting here

01:02:13.600 with you guys

01:02:14.220 talking about

01:02:15.040 how we got into

01:02:16.100 the latest financial

01:02:17.160 mess,

01:02:18.180 but I doubt very

01:02:19.240 much that that

01:02:20.220 financial mess

01:02:21.300 will lead to the

01:02:22.620 kind of

01:02:23.800 economic pain

01:02:25.400 that we saw

01:02:26.480 in the 1930s,

01:02:27.540 without which

01:02:28.440 it's hard to believe

01:02:29.480 so many authoritarian

01:02:30.860 leaders would have

01:02:31.800 come to power.

01:02:33.020 It's very hard to

01:02:33.920 imagine the

01:02:34.460 collapse of

01:02:35.540 German democracy

01:02:36.420 and the

01:02:37.480 advent of

01:02:38.200 Hitler

01:02:38.600 without the

01:02:39.880 huge shocks

01:02:41.000 of hyperinflation

01:02:41.960 in 1923

01:02:43.300 and then

01:02:43.720 a crash

01:02:44.580 where

01:02:46.100 unemployment

01:02:47.160 is like

01:02:48.100 north of 25%

01:02:49.600 in Germany

01:02:50.560 by 1932.

01:02:51.780 I can't see us

01:02:52.880 going there again.

01:02:54.460 So the bad

01:02:54.960 ideologies,

01:02:55.720 they're back.

01:02:56.560 They never really

01:02:57.100 went away,

01:02:57.660 they're just back

01:02:58.340 and somewhat

01:02:59.100 attractive.

01:03:00.100 To me the weird

01:03:00.980 thing is that

01:03:01.640 they're attractive

01:03:02.480 at a time of

01:03:03.880 relative economic

01:03:05.100 prosperity

01:03:05.880 when there really

01:03:07.060 isn't that much

01:03:07.640 pain.

01:03:08.120 You mentioned

01:03:08.640 pain.

01:03:09.600 Well,

01:03:10.000 we ain't seen

01:03:10.600 pain.

01:03:11.680 Mass immigration,

01:03:12.680 mass illegal

01:03:13.200 immigration is

01:03:13.800 probably a big

01:03:14.560 driver of it.

01:03:16.540 And I think

01:03:17.060 maybe that's

01:03:17.640 where some of

01:03:18.260 the appeals

01:03:18.660 have come.

01:03:20.260 Unquestionably.

01:03:21.000 But the

01:03:21.640 interesting thing

01:03:22.100 about that is

01:03:22.840 that if you

01:03:23.760 cut it off,

01:03:25.320 which is happening

01:03:26.000 in both the

01:03:26.560 US and the UK.

01:03:27.500 It's hard to run

01:03:34.320 the NHS

01:03:34.720 with immigrants.

01:03:36.820 I would assume

01:03:37.660 it's the US

01:03:38.580 economy without

01:03:39.640 cheap labour

01:03:40.340 from the south

01:03:41.180 runs in a very

01:03:42.260 different way.

01:03:43.320 And so all of

01:03:44.580 the changes that

01:03:45.380 are currently

01:03:45.880 being made in

01:03:46.680 response to

01:03:47.440 disillusionment

01:03:48.240 about immigration

01:03:48.840 will have some

01:03:49.480 kind of as yet

01:03:50.520 unclear economic

01:03:51.440 cost.

01:03:51.580 Yeah, it's got to

01:03:52.160 be calibrated

01:03:52.800 correctly.

01:03:53.300 I certainly feel

01:03:53.880 that in the UK,

01:03:55.300 I don't know how

01:03:56.260 reliant Britain

01:03:57.600 is on boat

01:03:58.960 crossings from

01:03:59.820 France.

01:04:00.420 No.

01:04:00.800 I don't think

01:04:01.220 we are reliant

01:04:01.700 on that at all.

01:04:02.300 In fact, I think

01:04:02.800 it's a massive

01:04:03.380 cost and drain

01:04:04.340 on the economy.

01:04:05.060 Yeah, absolutely.

01:04:06.000 But there's one

01:04:06.740 other thing on

01:04:07.480 economics and

01:04:08.480 finance that I

01:04:09.320 think is a

01:04:10.500 giant problem.

01:04:11.500 And I wonder

01:04:12.700 if you know

01:04:13.780 how it's ever

01:04:14.300 going to get

01:04:14.660 solved, which is

01:04:15.360 we don't seem

01:04:16.760 to be able to

01:04:18.080 live within our

01:04:18.900 means.

01:04:19.920 And this is

01:04:20.800 where, you know,

01:04:21.320 Francis did, I

01:04:21.940 think, as good a

01:04:22.520 job as anyone

01:04:23.020 can do of making

01:04:24.980 the case why

01:04:25.640 borrowing,

01:04:26.260 can be a

01:04:27.140 really useful

01:04:27.820 tool.

01:04:28.260 And it has

01:04:28.720 been.

01:04:29.040 It allows

01:04:29.520 civilization to

01:04:30.360 grow fast.

01:04:30.920 It allows us

01:04:31.360 to do things

01:04:31.900 before we

01:04:32.360 otherwise would

01:04:32.900 have been

01:04:33.220 take risks,

01:04:34.280 et cetera.

01:04:35.460 But when you

01:04:36.140 become addicted

01:04:36.820 to it in the

01:04:37.680 way that we

01:04:38.200 have, I mean,

01:04:39.300 we really are

01:04:39.840 in trouble in

01:04:40.420 that aspect of

01:04:41.060 things, and

01:04:41.340 we're not.

01:04:42.340 A mate of

01:04:43.100 mine tries to

01:04:43.840 quit vaping

01:04:44.500 every new year,

01:04:46.300 every time he

01:04:47.160 fails for the

01:04:47.820 same reason.

01:04:48.860 He removes the

01:04:49.580 habit but never

01:04:50.480 replaces a

01:04:51.320 ritual.

01:04:52.000 That sounds like

01:04:52.800 you.

01:04:53.340 This will help.

01:04:54.220 If you're part of

01:04:54.860 the 50% of

01:04:55.720 people who

01:04:56.140 attempt to

01:04:56.540 quit vaping

01:04:57.140 every year,

01:04:58.220 you need to

01:04:58.820 equip yourselves

01:04:59.700 with the right

01:05:00.500 tools for the

01:05:01.200 job.

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01:06:15.320 good habit today.

01:06:17.140 I mean, we really

01:06:18.140 are in trouble in

01:06:18.880 that aspect of

01:06:19.520 things, are we

01:06:19.880 not?

01:06:20.080 Yes.

01:06:20.340 Deep trouble.

01:06:21.980 If you borrow to

01:06:24.080 invest and you

01:06:26.880 acquire some

01:06:28.000 productive asset,

01:06:29.520 then what's not to

01:06:30.860 like?

01:06:31.540 It'll probably help

01:06:32.720 you repay the

01:06:33.900 debt.

01:06:34.560 But if you borrow to

01:06:35.340 consume, well, that

01:06:36.900 way lies trouble, and

01:06:38.660 that's what we've been

01:06:39.740 doing.

01:06:40.740 Let's put it really

01:06:41.680 simply.

01:06:42.560 The systems of public

01:06:43.680 debt that evolved in

01:06:44.880 the 20th century to

01:06:46.240 finance wars,

01:06:47.260 particularly the world

01:06:48.260 wars, after the

01:06:50.820 1945 Allied

01:06:52.720 victory, began to

01:06:55.000 transition to

01:06:56.380 financing welfare.

01:06:58.000 So we went from

01:06:58.720 warfare to welfare

01:06:59.700 states.

01:07:00.680 Those welfare states,

01:07:01.840 which evolved in the

01:07:02.560 40s and then got

01:07:03.540 another expansion in

01:07:05.340 the 60s, assumed

01:07:07.120 certain demographic

01:07:08.160 features about

01:07:09.560 fertility and

01:07:10.600 longevity, which have

01:07:11.700 completely changed.

01:07:12.700 So we now don't have

01:07:14.240 really any countries

01:07:15.840 outside of

01:07:16.520 sub-Saharan Africa

01:07:17.280 where fertility is

01:07:18.280 above the replacement

01:07:19.080 rate, 2.1 children on

01:07:21.700 average per woman.

01:07:23.160 And we have, in most

01:07:24.980 countries, retirement

01:07:26.680 ages that were kind of

01:07:28.160 devised in the mid-20th

01:07:29.700 century, while life

01:07:30.680 expectancy is steadily

01:07:31.860 increased and people can

01:07:33.020 expect, therefore, to

01:07:34.340 spend substantial parts of

01:07:35.580 their lives retired.

01:07:37.560 Our welfare states can

01:07:38.820 cope with that on either

01:07:40.060 side of the Atlantic.

01:07:41.360 In the U.S., the real

01:07:42.480 driver of the debt and

01:07:43.980 the deficit is Social

01:07:45.220 Security to retirement

01:07:46.600 program and Medicare,

01:07:48.400 free health care for the

01:07:49.240 elderly.

01:07:50.240 In the U.K., you have a

01:07:51.560 whole system of benefits

01:07:52.520 that can trace back to

01:07:53.860 the Attlee government

01:07:55.160 after 1945.

01:07:56.680 It's all anachronistic

01:07:58.020 and it's really hard to

01:08:00.580 reform.

01:08:01.120 Why is it hard to reform?

01:08:02.400 Because there's a very,

01:08:03.660 very powerful constituency

01:08:04.800 that likes the status quo

01:08:06.300 called the elderly and

01:08:07.980 their huge proportion of

01:08:09.260 the electorate and

01:08:10.180 dependably vote.

01:08:11.620 I think I read the other

01:08:12.760 day that 40% of the

01:08:14.940 German electorate, more

01:08:15.800 than 40%, is now above

01:08:17.000 retirement age.

01:08:17.940 So you can't get radical

01:08:19.860 reforms through with that

01:08:22.700 basic obstacle.

01:08:24.900 Nobody who tries to reform

01:08:27.260 these welfare states

01:08:28.260 survives politically.

01:08:29.500 Emmanuel Macron has been

01:08:30.440 dead in the water since

01:08:31.380 France.

01:08:31.860 Why?

01:08:32.480 Because he tried to make

01:08:33.260 a microscopic increase in

01:08:35.060 the French retirement age

01:08:36.180 and he's been twisting in

01:08:37.340 the wind ever since.

01:08:38.160 This is the problem.

01:08:39.920 What does it lead to?

01:08:41.560 It leads to there being

01:08:42.620 deficits every year and

01:08:44.440 not just in the bad years,

01:08:46.420 which is wrong.

01:08:47.460 The deficits every year.

01:08:48.520 In the US, 6 plus percent

01:08:50.940 of GDP every year as far as

01:08:52.420 the eye can see.

01:08:53.740 Gross debt, now above 120%

01:08:55.820 of GDP, higher than it was

01:08:57.280 at the end of World War II.

01:08:58.640 This is not sustainable.

01:09:02.140 Ferguson's law, which I promulgated

01:09:04.760 in January, because everybody

01:09:06.420 should have a law, and I

01:09:07.660 decided I would have.

01:09:09.680 So I said Ferguson's law states

01:09:12.060 that any great power that

01:09:13.420 spends more interest payments

01:09:14.980 on its debt than on defense

01:09:16.380 won't be great for much

01:09:17.640 longer.

01:09:18.740 Well, the UK stopped being a

01:09:20.200 great power a long time ago,

01:09:21.680 been in violation of Ferguson's

01:09:23.220 law for many years.

01:09:24.100 But the US only crossed this

01:09:26.000 threshold last year, and it's

01:09:28.000 going to stay well above it

01:09:29.680 for the foreseeable future

01:09:31.620 until by about 2040, I think

01:09:33.400 I worked it out, the US will

01:09:35.040 spend twice as much on debt

01:09:36.620 service, on debt interest, as

01:09:38.380 it spends on defense.

01:09:40.060 These are completely

01:09:40.940 unsustainable trends.

01:09:43.140 Problem is, politically,

01:09:45.460 nobody wants or dares to go

01:09:48.860 there.

01:09:49.720 And so your next question is

01:09:50.940 going to be, so how does this

01:09:52.280 end, Neil?

01:09:52.780 How does it end?

01:09:54.220 And that's the big question.

01:09:56.120 And there are a finite number

01:09:57.060 of options, very, very limited

01:09:58.600 range of options.

01:10:00.600 Happy ever after option, OK?

01:10:03.240 It has been done.

01:10:04.580 You can have a really large

01:10:05.640 debt, and you can grow your

01:10:07.460 way out of it.

01:10:08.260 That's what Britain did after

01:10:09.220 the Napoleonic Wars, going back

01:10:10.540 to the time of the Rothschilds.

01:10:12.100 Britain just ran primary budget

01:10:15.060 surplus and grew, thanks to the

01:10:16.900 Industrial Revolution.

01:10:17.840 So that's the good way out.

01:10:19.500 If that's to happen here in the

01:10:21.880 2020s, we need AI to be every

01:10:24.860 bit as good as Sam Alton says it

01:10:26.400 is, and the productivity growth

01:10:28.160 to be so great that in a couple

01:10:30.260 of years' time, this podcast will

01:10:32.380 be generated by GPT-6, and you

01:10:35.540 guys will be out of a job.

01:10:37.040 So that's the good news, that

01:10:38.960 productivity gains will get you

01:10:41.360 out of jail.

01:10:42.760 Do I think that's likely?

01:10:44.120 No.

01:10:44.500 I think it's quite unlikely.

01:10:46.260 I think it's unlikely.

01:10:47.260 There's some social consequences

01:10:48.440 to that out as well.

01:10:49.240 It would, I think, you would not

01:10:51.040 be the only aggrieved people in

01:10:52.640 this scenario.

01:10:53.340 There'd be an entire generation of

01:10:54.520 people with university degrees who

01:10:56.300 wouldn't even be Uber drivers,

01:10:57.900 because the cars would also be

01:10:59.040 driving themselves.

01:11:01.120 Plan B.

01:11:02.540 So then you kind of default.

01:11:04.600 You say, go back to the medieval

01:11:07.060 monarch approach.

01:11:08.080 Ah, you know that money that we owe

01:11:10.560 you?

01:11:10.940 I don't know, but I'm really sorry

01:11:13.040 about this.

01:11:13.600 I'm not going to pay you.

01:11:14.500 Defaulting on the bondholders is

01:11:18.360 something that used to be more or

01:11:20.120 less a recurrent every decade

01:11:22.500 experience in Latin America.

01:11:24.700 But if you default on the people

01:11:26.380 who receive benefits, particularly

01:11:28.180 old age benefits, I don't know.

01:11:30.840 I'm just thinking you better have a

01:11:32.780 plan for the private sector, because

01:11:34.380 your political career will be cut

01:11:35.980 very short.

01:11:37.460 What about Plan C?

01:11:38.900 How about we inflate it all away?

01:11:42.580 How about we do what we did,

01:11:43.760 repeatedly after World War II, and

01:11:46.380 we just reduced the real value of

01:11:47.860 all these liabilities, with a big

01:11:50.400 sudden unexpected increase in

01:11:52.940 inflation?

01:11:53.780 Yeah, that's going to be pretty

01:11:54.680 unpopular too.

01:11:56.260 The other problem is that a lot of

01:11:57.660 the liabilities these days are

01:11:59.120 index linked, because we went

01:12:02.140 through this once before, and then

01:12:04.620 the decision was, let's not do that

01:12:07.100 again.

01:12:07.600 Let's make sure that we can't

01:12:09.160 inflate away the debt.

01:12:09.980 So the number of ways out of this

01:12:12.860 problem is pretty small.

01:12:15.720 I think what ends up happening is

01:12:18.020 some combination of default, where in

01:12:20.300 practice we reduce what we said we

01:12:23.380 would pay out, and some element of

01:12:26.020 inflation.

01:12:26.600 We inflate away, or use financial

01:12:29.500 repression, some of the liabilities.

01:12:32.320 None of which is going to be fun,

01:12:34.100 particularly for the people who've

01:12:36.060 got significant amounts of money

01:12:39.700 they expect to receive from

01:12:40.940 government, or the people who've

01:12:43.460 accumulated lots of pounds, or

01:12:45.780 dollars in savings.

01:12:47.580 But I don't see any other way out.

01:12:50.040 And it's not just the Western world.

01:12:53.680 I was reading about this.

01:12:54.860 China's got a debt of 17.8 trillion.

01:12:57.940 Chinese debt's interesting because

01:12:59.200 it's mostly at the local level, and it

01:13:01.280 tends to kind of get passed over by

01:13:03.020 people who are taken in by

01:13:04.400 Xi Jinping is awesome.

01:13:06.080 But actually, Xi Jinping is not

01:13:07.360 awesome.

01:13:07.920 The public finances of China, if you

01:13:10.000 drill down, are about as bad as

01:13:12.060 those of the United States.

01:13:13.880 It's just that it's mostly local

01:13:15.480 government debt.

01:13:16.620 If you add up the liabilities of the

01:13:18.300 public sector, they're about the

01:13:19.660 same relative to GDP.

01:13:21.800 And the deficit, the Chinese

01:13:23.340 deficit might be even larger.

01:13:25.320 The IMF did a study, I think a couple

01:13:27.280 of years ago now, where they

01:13:28.980 calculated the real deficit of the

01:13:30.900 entire public sector was more like

01:13:32.320 15, 16 percent of GDP.

01:13:35.200 So China has this problem.

01:13:36.720 Of course it does, because it has a

01:13:38.320 very rapidly aging population and its

01:13:40.740 fertility rate has collapsed.

01:13:42.500 So the demographics are the real

01:13:44.540 driver here.

01:13:45.800 If you leave your system

01:13:47.280 unadjusted, it's just going to go

01:13:50.360 insolvent unless you have a miracle

01:13:53.160 rise in fertility.

01:13:54.640 That's vanishingly improbable, very,

01:13:57.260 very unlikely.

01:13:58.840 Or you might have a pandemic that

01:14:01.360 really kills the elderly, rather than

01:14:03.620 just kind of half-heartedly does, the

01:14:05.740 way COVID did.

01:14:07.040 So those seem like pretty unlikely

01:14:10.640 solutions.

01:14:12.040 You're finally going to be forced,

01:14:13.980 whether you're China, Europe, the UK,

01:14:16.840 the United States, to do something

01:14:19.060 radical.

01:14:20.500 And this is where Mr.

01:14:21.380 Millet is interesting.

01:14:23.460 The Argentine president is the only

01:14:25.040 really fiscally radical leader in the

01:14:27.580 world.

01:14:28.280 He's the only one who's serious about

01:14:29.420 this, who in his first year as

01:14:31.340 president said, I'm reducing the

01:14:32.980 deficit from 5 percent of GDP to

01:14:35.500 zero.

01:14:36.280 And he did it.

01:14:37.600 So, you know, Millet has shown that

01:14:39.480 you can be radical.

01:14:41.880 But what's really interesting is you

01:14:43.660 have to be, as the Argentines were,

01:14:46.000 staring at 200, 300 percent inflation.

01:14:49.000 You have to have your economy just

01:14:50.900 flat face down in the ground to get the

01:14:54.820 votes to do the radical stuff.

01:14:57.120 Well, look on the bright side, Neil.

01:14:58.360 That's probably going to happen.

01:15:00.200 I console myself that in the end,

01:15:02.720 everybody is Argentine.

01:15:04.340 Eventually, they all get there.

01:15:05.900 And then everybody needs Millet.

01:15:07.700 Neil, what a pleasure.

01:15:08.820 We could carry on this conversation

01:15:11.200 for many, many hours.

01:15:13.160 It's always a fascinating insight.

01:15:16.160 Final question is always the same.

01:15:18.200 What's the one thing that we're not

01:15:19.740 talking about that we really should be?

01:15:21.240 Well, maybe we have been talking about it.

01:15:26.960 I'm always struck by how much less fun

01:15:28.960 these conversations are.

01:15:31.660 Conversations about money than...

01:15:32.960 Thanks, mate.

01:15:33.540 ...conversations about sex or political

01:15:37.400 extremism.

01:15:38.580 And I actually think we've just had the

01:15:40.440 conversation that a lot of people would

01:15:42.380 rather not have.

01:15:42.980 Because culture war is more fun.

01:15:44.240 I mean, the culture war is just much more

01:15:46.780 fun.

01:15:47.120 Is it really a woman?

01:15:49.640 But my message is right.

01:15:51.880 You see, already we have laughed.

01:15:54.880 But I think we're talking right now,

01:15:57.260 what we've just done is we talked about

01:15:58.920 the difficult, nasty, gnarly stuff

01:16:02.340 that isn't going to go away.

01:16:03.780 I mean, you may not be interested

01:16:04.920 in financial history.

01:16:06.520 Financial history is interested in you.

01:16:09.320 And those who don't understand debt dynamics,

01:16:12.460 those who enter adulthood without a clue

01:16:15.360 about how interest rates work,

01:16:17.220 who don't know what a bond yield is,

01:16:18.820 who've never made an investment

01:16:20.020 in the stock market and never will,

01:16:22.600 those people will have worse lives

01:16:25.460 than the people who get informed.

01:16:27.660 So the thing about the stuff I do,

01:16:29.240 at core, it's boring but important.

01:16:33.560 And if you can't get your head around

01:16:35.340 the stuff that's boring but important,

01:16:38.040 if you can't bear to get through

01:16:39.600 the ascent of money because you'd just

01:16:41.160 rather watch Nick Fuentes on YouTube,

01:16:44.020 you will be poor and I will laugh.

01:16:49.880 There we go.

01:16:51.660 Fantastic.

01:16:52.860 Neil, fantastic.

01:16:53.800 Thank you very much.

01:16:54.380 Getting ready for a game means

01:17:08.660 being ready for anything.

01:17:10.220 Like packing a spare stick.

01:17:11.980 I like to be prepared.

01:17:13.600 That's why I remember 988,

01:17:15.540 Canada's Suicide Crisis Helpline.

01:17:17.480 It's good to know, just in case.

01:17:19.660 Anyone can call or text for free

01:17:21.500 confidential support from a trained responder

01:17:23.460 anytime.

01:17:25.100 988 Suicide Crisis Helpline

01:17:26.900 is funded by the government of Canada.

01:17:28.480 in this point.

01:17:30.220 Thank you.

01:17:34.160 Thank you.

01:17:34.220 Thank you.

TRIGGERnometry - January 04, 2026

The Debt Crisis No One’s Talking About - Sir Niall Ferguson

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