Live from Kilkenomics: financial mistakes
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The dollar demand, however, has really been quite strong, and I don't see actually the dollar weakening in the future, mainly because the dollar really reflects very resilient ent U S. Economy, a much deeper and healthy financial, the implications of the Y.

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push in Hello, and welcome to the first ever live recording of the unheard podcast with a live audience. Live audience, please cheer. I am kate Martin, a markets colum at the financial times in london.

And I have ventured out of my cozy but slightly grey studio in the basement of F. T. Hours into a pub. Well, a room round the back of a pub and kill Kenny. Part of the economics festival is, is really great to be here.

And in the run up to the economics festival, we thought to ourselves would IT be a good idea to record the podcast of the live audience. And the answer is, we don't know. We're going to try IT.

It's a big experiment and experiments of the theme of this recording that we've got going on now. So please welcome my special guest, russ ll. Nappa, who is a former analyst and from the library of mistakes, which is fittingly about economics, and mario, who's an a former economy minister from argentina, are now a senator for Venus series.

i'm going to sit down now so we're going to do a bit of a kind of global tour of economic experiments and train rex and stuff that's gone right stuff that's got wrong and whether we ever learn anything from the stuff that does go wrong hello let comes So my team, you are living through your very own live radical economic experiment in argentina right now. You have a president who tell me, if I get this wrong, he takes, he's like a radical liberata, runs around with lots of chain stores, takes his policy advice from his dogs, some of which are not alive. Is that all I got this right?

Yeah, partly. So yeah, he he speaks to his dead dog. Yeah, he is an austrian school economist and he's quite sandwich ah he's pretty savvich.

So so when he speaks to to journalists, and when he kind of gives his big pronouncements, he talks about how he is leading a regime of freedom and he's going to put the country on the right track.

What is he actually doing OK first, the good thing is that he's not doing what he told us he was gna do during the campaign. So he said he was gonna close down the central bank and deli ze argentine economy. So he didn't do that.

He said that he was gonna find tune or slash expenditure in a sensitive way. And he didn't do that. He just used inflation to slash expenditure. He's trying to recover argentina's reputation.

The issue of argentinean is not that has a hundred percent inflation a year or high dead to GDP and high and pace, high interest rate, is that our reputation is zero. So whatever you want to do with any tools, we all investing that, that's going to end up in disaster. So we anticipate things, but it's not so easy to rebuild reputation.

So it's what he's been doing at the moment. First, he had a huge evaluation in one hundred eighteen percent devaluation on that step up. Inflation from around ten percent per months to twenty five percent in december .

has ten percent a month. Like this is quite hard for people outside of argentine to get their head around.

yes. So it's like twenty five percent of month is like slashing your one hundred dollar bill in fifth and take one fifth out of your purchasing power in month. So he did that.

We had twenty five percent inflation in december, twenty percent in january, thirteen percent in in february. So he used inflation in order to a slash expenditure, pensions, public salaries and IT also happen with your own salary in the private sector. At the same time, he fixed exchange rate.

So we have what it's called rollin t, which is an experiment that argentina did in the eighties and ended up very badly. And he also managed the interest rate. So even your savings went down in real purchasing power. So either whether you have dollars before or if savings account that went down in terms of purchase in power, so what that deeds IT put the fiscal economy or the fiscal figures in the right truck, but the real economy in a real heart recession, and that's what we're experienced in at the moment. So melt inflation rate came down to around three percent per months, but the economy sank almost four percent year against the year.

so that the I M. F. Is praising his resolute action.

right? Do and markets do as well.

And so that's what I want to about russels. Like what is an economic mistake and is IT a mistake on our part to measure these things through market reactions? Maybe we should just say screw markets. This stuff doesn't matter you that policy and markets are GTA be separate beast.

what do you think? Have you told quayle? Markets discipline governments until governments abolish markets. So I think IT is a reasonable point. I think across the world, not just in argentina, governments can't live with the consequences of markets. And the crucial one is their yelling government bonds.

So what we see, and I think what we will continue to see is the government's picking up your point exactly in single with meant we have a perfect answer to this because we have all these savings in the economy. And if we are paying too much for government debt event of the market discipline us, we can easily discipline in this market because we can force the people of our country to buy government bonds at a yellow that we want tomorrow. Now that's called financial representation.

But IT goes to the crux of the question, if society concludes that IT doesn't want to be disciplined by markets, that we want to ignore markets and effectively abolished them through compulsion. And i'm sure you're the world. The word in the U.

K, O is mounted ation. We're going to hear lot more about that, a dimension of her speech. So yeah, I think we've got to that turning point in society where the politicians on the people pop potentially can cope with the consequences of the market Prices.

So we effect of the above lish them. This is a long, long cyclical structural swing. And I think the rest of us, I can't speak for genta, but the rest may be going in different argentina. But in the developed world, that's the world we're going to move into.

Yeah so you mention the Manda ation. This is a kind of debate in the U. K.

Around the idea that U. K. Stock markets are kind of pretty rubbish, have been for a really long time.

And what we should do is in some way force the U. K. Pension system to buy U. K. equities. Now this will be a kind of carrot sticks, right? You think you you can't like, put a gunn's people's heads and say, you must go by the stand.

You can put a gun to people's ads .

if you have the government.

The question, I mean, we could just simply pass a lot tomorrow morning. I think argentina done this at the past.

Control that .

receive tax break for the pension, fifty percent has to be in U K. assets. And if IT isn't, use your tax break. That's not quite a gun to head. You could actually just what we did after during word war to usually it's during warfare that you put a going to people's head and you say you are buying government bombs. So yeah, you can put a going to .

people's ad. You do you like to find a treasury. So for example, if you buy certain type of bonds that counts is got a special accounting for a minimum cup that requirement and banks so you provide an incentive for capital to go to financial treasury. yes.

So this brings me on to kind of probably the biggest experiment of all, which is you know around government borrowing like rit large, right? There's a lowest stuff that governments need to spend money on like defense, particularly in the U. K.

And europe. Ticula after the election of of donal trump, the Green transition, because the climate is not going to fix itself. Where at what point does the market say okay, enough, russ, because this is one of these debates that every time bond deals are picking up, for whatever reason, right? So Prices are thinking the yields are picking up, bond markets are very happy and people say are, well, now is the time. This is the markets way of saying that, you know, so so far and no further.

how close are we start? Well, related for forty years that the GDP has been going up, and for forty years, yields and government, government has been coming die. So everybody, anybody who ever stood up and said enough is enough is being completely, totally another really wrong.

So i'm here to tell you that enough is enough. So what we are witnessing, I really across the developed word, there's no growth in in broad money. And this is an argument for a certain type of economists.

I suppose i'm are watching bonist going up. And of course, the market narrative is those bonuses are going up to reflect they're ing inflation. But IT is highly unlikely that we ve got a coming inflation when there is virtually no growth in the money supply across the entire develop world.

So IT may be that we've already lived through the first four months of that's where we are getting to realize that the market is beginning to Price in a little thing for the on sustainability of this. Not to be clear, the unsustainably is not the government to folding an interest in principle. The unsustainably is generating a level of inflation that gives you a very poor real return, al, fixed interest securities. So i'm going to say to that the Marks already begin to Price IT in. And then I means I can be .

wrong by Christmas because these things have a habit of going wrong, you slowly and then quickly, right? So it's argentina, little down spin with global markets in terms of keeping the money coming in. First.

argentina has something has called the original scene, so it's not the same of developed countries. So it's very hard for you to get a loan in your own currency. So then that means that in order to repay the loan, you need to have a proper exchange rate in order to build research, build up research h or attract capital otherways.

You are not able to find us yourself whenever you need to replay the loans. And that's been happy quite some time. So when you were asking whether markets would say enough is enough for argentina, they said many times, enough is enough.

So we we end up having no crit at all. So for example, now country risk for a and dinner around nine hundred basis points. So we paid nine percent of up. What treasure bill? Spi, can I ask you what the .

people of argentina hold a large percentage of their savings and somebody else is currency. Have you any idea what presentation of this at me? This is a double problem, even your own people.

yes. So how much of the savings argentina do you think rest in effect of the us. dollars?

The national, I can say that we hold around two hundred and eighty billion dollars. So it's roughly half of what we are or a little bit of of what we do. And it's the country in the world after russia.

I think that has the largest amount of dollar bills per person. It's amazing because whenever you whenever have a country for exam in my lifetime, I started standing economics in one thousand and one thousand and eighty nine. I live through two hyperinflation, one big depression, devaluations and recessions almost out of my life, the ticula effect, thea ticula effect, yeah, the great financial crisis.

So every four or five years we live for the crisis. And the only way to get something, an instrument to avoid losing purchasing power is to hold someone else is currency. That's one of the reasons why, even in the nineties, argenton adopted a currency board to stabilize and to say, okay, lets go directly for a different currency in that moment, backing our currency with dollars, with hard dollars. And in IT, IT ended up very badly.

Can I suggest that this is the man who should be looking after your money? I mean, he's seen everything there is to see we, we, the people of see more than most people, but we haven't seen this. We think we'll never see IT.

We'll see some of IT. But the professional people who manage our money, who our business school educated, been in the business for twenty years, have no comprehension. Of what a structural changes where the government has to get more involved in the marketplace. So we go all the wrong people running all your money at exactly the wrong time. So you should turn up a few management.

It's impossible to survive in our origin unless you understand something over the economics. A taxi driver and I said, yeah, so when we have inflation, nobody is leaving their their money, their chicken account. We know that for sure. We know that we're losing time every single day that passes by.

Argenton is an extreme case, right? But again, on on top of the kind of extra kind of government borrowing that we're likely to demand, like around the world, we do have a more inflationary world. We have supply change that got horrible disrupted during koba and made everyone think, okay, let's be less reliant on china.

Let's bring manufacturing back home IT on the margins. That just means that, you know, that big disinflationary impulse that we had from china joining the W. T.

O. In two thousand and five has gone away. So this sort of the low level kind of simmering inflation is there in the global economy all the time.

As russel, as you was suggesting, policymakers just haven't grasp back yet because they just think, okay, we need some money. Let's either print IT or borrow IT. IT will be fine. It's been fine for at the past three minute, twenty years or something. So IT will continue to be fine.

But what if it's not what what foundation is? This is really a different approach because as you say, either you borrow more at the government level or you print more. But there is a third way, a mountain ation is the third way you take people savings and use them for what you want to do.

Your government that the GDP doesn't go up. This is a contingent liability. Um you're forcing people into this government bonds are forcing them into what you want funded.

And you know the reason that argentina does unfortunately slip into hybrid inflation is because people keep their savings outside of the country. You can't mobilize the savings of the people of virgin is difficult to get confidence to do that. But all our savings rest really in our kind of domestic currency.

And if you want to utilize that through mediation, then you don't need to borrow any more money at the government level. You don't need unnecessarily print lots of money. So in the way you deal with excessive debt, long before you get to hyper inflation, there are stealing people savings.

So theft comes in all sheep and forms. But I don't hesitant theat to call IT stealing people's VS, but it's giving them a positive nominal return and a negative real return. We did IT afterward war two and the lots of U.

K. policymakers. We think this is a brilliant template for what we should do know. If you held british government bonds from one thousand and forty five to eighty two, I think you lot eighty percent of your purchase in part and yet by many people that seen as a tremendous triumph. And so that's what we're back in again, and that's the way we're going to do that. And the government that tgd p comes down IT doesn't go up over for a long term.

You seem to get the counter or right, which is like the U K. In particular was massively underinvestment in domestic equities relative to its peers. We've got to do something to turn this around. Buying begets buying. You know this is just a kind of turning at all.

right? Mean, first of all, it's turning wrong because you're md getting people to buy the edge. So you're turning IT quite bluntly, but you've point out out we are having this association from china, so you don't get this massive investment, but funded by the Mandarin as you have new security from india.

So you ve got a really elevated growth rate for the united kingdom, just the united kingdom, for kind of everybody as we read toll x china. So know i'm you tell them really quite optimistic about all of but but not for people who see if this is the problem. So when we did that afterward, war to the prime ministers could say, in fifty seven, you've never had IT so good.

Well, if you're a bond hold last thirty percent of your purchasing part, but if you're the average guy in the street, he was getting involved in all these new businesses and industrial production. So there there's a kind of industrial renison coming for the developed world that could be hard and could be the U. K. Could be anywhere else except france, i'm .

possibly.

So let's not be the reason to be personism about this, you know, stealing money from silvers. But there's another side to IT. More investment, more economic growth, more blue collar jobs and markets.

at least temporarily, would like IT. So IT won't look like a mistake early on.

Yes, I call IT stealing money from old people slowly. And that if you do IT slowly enough, they don't really notice it's already happened if you have held the british government bonds in in twenty twenty one, yeah, you've lost a fortune and no one terms on real terms. So we already staying money .

for people is this is really cheerful as let's talk about something else really cheerful. Don't trump huge experiment coming down the tracks here economically from him. What on earth like Martina up with you? What earth you make of the kind of tariff policies that he says he's going to bring in, whether he does or not, we don't know.

Okay, when I was in baster, when of origination is when trump on the first time, and you never know whether he has intuitions or a team behind him, that is a freedom came stuff.

He's not talking to dead dogs.

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Yeah, right.

He likes me. But at the beginning in the first term, he he was saying of his people was saying, okay, we cannot rely on europe anymore because we cannot rely on american companies anymore because they are not american anymore, and we cannot rely on the WTO and multiple theism.

And I think that part of those intuitions were okay for what he wanted to do so and now he's facing a world in which there are certain threats and certain trends and the sharing and sharing and and I think that he's building on what he did before, give IT IT more even more fuel. So this is the the tarriff thing, reassuring and bring in some production back to the us. But as I was saying, that would only add to inflation. And if you also are gonna send workers abroad, because that will add to inflation as well. And so if we are seeing a world in which inflation is starting to be the tool to solve the issue of over index, then that would only add to the tall kit.

Yeah, this is one thing he loves. It's when stocks go up under his watch, right? And and stocks like us, stocks have had a really good run after he after he got elected.

So he will see this as an immediate kind of, we know, welcoming from from global investors. But at the same time, the bomb market depute quite a bit. And that's the markets way of saying, i'm not sure about this fiscal policy. I'm not sure about this deportation policy. So you know, again, how seriously do you think we should take that warning sign?

I think we should take that very seriously. What you have described in what is national capitalism is using the savings of amErica for jobs for america, that the capital is not free to go wherever IT once its national capitalist not just got a problem with that foreigner's own fifty seven trillion dollars worth of his own assets. That's the growth number.

If you take them that that all over amErica owns overseas, it's still twenty two trillion on a negative basis. If let's take the U. K, the U.

K begins with Mandatory. What are people onna sell to buy all this stuff that the british government wants him to sell? What if C S M P, five hundred, president, mr.

Ones very keen on the same thing, is tremendous ech at borne, he said european and put three hundred in a year into america. This is absurd. Know if if the if europe begins to repot real capital, he's actually short.

I mean, he thinks he's got ten. The strongest economy in the world he is. But he is ably reliant upon sourcing forex service into the S M P five hundred, the treasury market. So what may may be beginning to see he thinks he wins that particular where he's a few, he's a flow guy is not really looking at stocks. He doesn't win that work because if japan in particular, if japan was to begin to repeat the capital to fund the zone government, they're be selling hundreds of billions of us securities every year. So that's what I think that's the floor that's beginning to be Priced into his borne market in particular.

That's been the kind of dog that hasn't book for so long as in this you know, any day now, china is gna say, and often start selling down its treasuries.

And so and so as japan, we've talked about whether that point is getting there are but how does that relate to the economic situation, particularly in china, where the potted history of of the past couple of years is that the property sector went down the tubes and the idea among investors was, well, as soon as they pump in enough money back into property, this is all going to sort itself out. We're going to be able to invest in chinese stocks again. It's been horrible. There have been some big pick ups along the way, but it's been pretty good .

about fading away debt. So we just give you the debt number. So america's death, the GDP asia, which is public, and privates, two fifty five percent of GDP grossly over in there.

And that the united, there is two thirty four percent, there are two hundred and ninety percent. And it's going straight up china, china. So they have to inflate away that that if we go back fifteen years ago, they we're about one thirty.

They gone from one thirty. There's been nothing like a in human history. So now either, as you ve very alured to what is the consequence for the word of china, hustle to west.

Well, IT can't be a stable currency. And the reason theyve been buying so many treasures that exchange your intervention to secure the level of the currency, so the whole global monetary system blows apart. Because at the corner stones of that was that link between the N.

B. And the and the dollar. And I can continue as they have to inslee away there that so we have a huge structural change. And I none of time to go into all the all of the distortions that the old system cost.

But if you think, why do we have so much gearing in the world? Why are asset Prices so high? It's with the chinese length of currency to the dollar a of sort of nineteen election.

So I but that every thirty or forty years monetary systems collapse. This one is collapsing in front of our various. On the front page of the F, T will still be talking about next orders, GDP growth.

Yeah, it's shocking. I mean, that's not a reflectional ft. Is that's what everyone do and seen in the industry as well. We're not talking about the thing that staring is in the face. There's a new global monetary system coming and it's because the old one didn't have in the end, it's almost like I didn't exist, right? But of course.

that exists. What is anyone?

So the new one i'll call national capitalism. Okay, it's not a good thing, but if you're safe, it's not it's not a good thing. But as a said, if you color worker or maybe it's not a bad thing, yes, having your debt and fluted away with new opportunities in the manufacturing sector, it's mister piglet. I might call that a .

redistribution of wealth. But so the latest cell a from china was to, uh announce gna pump on another one point four trillion dollars of stimulus since the market. Is this just kind of passing in the wind? No.

this not play art because he does not have an independent dent. But countries for the independence or bank that began the road to reflation always succeed, always nice. They may stumble.

Maybe i'll take a second theory of force. I can't think when you have an independent and rebuying on an independent fiscal policy, can think of anybody who's ever failed. So it's of course it's gna succeed may mean another one two and a rine three. But yeah course.

Well, this has been much more .

miserable .

than I is a bad, a bad way to to start the day. But what we're going to do now is, is move on to like a little kind of feature that we have on the podcast, which is called long short.

Bones are back, and so is all the credit P G, M. Fixing comes monthly podcast series. From the latest trends to long term perspectives, you'll get timely fixed income insights from leading economists, research annalists and investment professionals, whether your meta bones or a season investor tune into all the credit, whether you get your pocket, this podcast is intended solely for professior investor use.

Past performance is not a guarantee of future results. What we're gonna now is, is move until like a little kind of feature that we have on the podcast, which is called long, short, that part of the show where you go, long a thing you love or short a thing you hate, IT can be anything I told you to prepare something, and I don't think you've done IT. No, you're gona have to come up, up. I shot anger .

in politics because IT prevents us from thinking.

just politics generally. Anger, anger in politics, politics. Yeah, yeah. I think you're right on that one.

Rosell, france.

I don't know why.

Why is everybody laugh? And if I said argentina, nobody would laugh. No, seriously.

I just feel like we should have carved out ten minutes to talk about that.

But so funny by france. So I think not just french speak, all french assets that go out and take a bet that will be a sixth republic within five years. I think they're the fifth republic only, yes. So yeah, I think you'd get pretty good old. So not so bad on a french six republic .

within the next five books.

That books is out the front door .

to the right yeah, just on the right.

Whether call Kenny lab Brooks is ever such a bad .

yeah I don't know if they're taking goals on that sort of thing. I am gonna a belong you guys in the audience. I had no idea if anyone was going to turn up to this, and you did. And you've really good father. So thank you so much.

Unhatched is produced by jake harper and edited by brian earth. At our executive producer is jake of gold. We had additional help from top a forehead shaw bromly as the fs global head of audio special banks to Laura ark, alaa mai, Greta hon.

And naki cycle F T premium subscribers can get the unheard newsletter for free. A thirty day free trial is available to everyone else. Just go to F T dot com slash unhedged offer. I'm kt. Martin. Thanks for listening.