FULL TRANSCRIPT
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Andy Serwer: Hello everyone and welcome to At Barron's. I'm Andy Serwer and welcome to our guest Niall Ferguson, historian, author, and sometimes prognosticator. Fair enough?
Niall Ferguson: Yeah, that's fair enough. Andy Guilty.
Andy Serwer: Good to see you. So why don't we just jump right in, Niall, and I'd like to ask you what you think the greatest risks are to Western society right now, and how have those risks changed over the past year or so?
Niall Ferguson: Great question. I think there's the risk of complacency about the economy. I don't believe in the soft landing story, because I think we've seen a tremendous hike in real interest rates and that is going to have its consequences. I would say the probability of a recession next year is much higher than market consensus. So there's that. Secondly, I think there's a major political risk coming and that is the US election. That risk is I think still being underestimated by people who haven't fully digested that the Democrats are fielding a very elderly candidate with a weak running mate against Donald Trump, a candidate who in many another country, would not be able to run for election given his conduct on January 6th of 2021. So this is an amazing potential constitutional crisis, given all the indictments that Trump currently faces. Third risk, I think there are major social problems in the United States that are kind of out of sight, out of mind. But whether it's the mental health epidemic or the opioid epidemic, the United States has a whole range of very profound social problems that I worry about a good deal. And then finally, let me give you the geopolitical problem. That the US and China are in Cold War II. I don't think everybody has fully digested what that implies, but in the early Cold War, there is a significant risk of hot war, and that's probably the biggest risk that is underpriced right now.
Andy Serwer: A lot of risks there. Want to drill down into each and every one of them. Maybe we'll start with politics. What happens if Joe Biden is reelected?
Niall Ferguson: Well, I think that's not my base case right now. My base case is that if there's a recession, which I think is more likely than the street thinks, he will lose if he is the candidate. I'm not sure he will ultimately be the candidate because I think as we get closer to the primaries, many Democrats are going to get quite seriously worried about how poorly Joe Biden is polling against the likely Republican nominee Donald Trump. So I would not rule out another candidate actually being the Democratic nominee in 2024. If there's no recession, I'm just wrong and Biden gets reelected, then he inherits all the problems that he himself or his administration created. In particular, the extraordinary fiscal crisis that this country is in. The congressional budget office just did its math and decided that actually the deficit is going to be far larger this year than it previously thought just a few months ago. So we're looking at 8% of gross domestic product. That's kind of a huge deficit for an economy that took full employment barreling along. And I don't think many people fully appreciate that this hot economy is hot because of a massive fiscal expansion that just keeps on going. And that can't be continued indefinitely, because with rates having gone up - because the Fed raised them, had to raise them because of inflation - the cost of government borrowing is far higher than it was just a couple of years ago. And so we're looking at a real fiscal problem. Whoever is president in 2025 is going to be contending with some very harsh realities. Let me give you an example. For most of its history, the United States has comfortably spent more on defense than on debt service. That is no longer true. By the end of this year, it will certainly be paying much more debt service or somewhat more debt service than defense. And that's a problem for a country that is in a major geopolitical rivalry with China.
Andy Serwer: All right, I do have some more questions on the economy, but I think we'll switch over to what happens if Donald Trump wins.
Niall Ferguson: So if Donald Trump wins, it'll be very different from 2017. A lot of people will look back and remember the somewhat chaotic quality of Trump's administration then. They hadn't really expected to win. They were not ready in fact to take over the government. It was improvisation. It was quite chaotic, if you look back. And there was also quite a lot of continuity, because he didn't really have a stable of people tap put in all the different departments and agencies, and those continuities were most obvious in the form of generals like my Hoover colleagues, Jim Mattis and HR McMaster. If Trump is reelected, the second Trump Administration will be very different. Firstly, they are planning for power. By they, I mean the Trump supporters in the America first think tank, they have a plan which I think will be very, very different from what we saw in 2017. And secondly, that plan does not include establishment people. So there won't be those restraining influences that were such a characteristic feature of Trump's first term. So if there is a second term, it won't be at all like the first term. And I would expect the personnel to be really very different. And their priorities will, I think come as a shock to many people. Number one, I think he will be back on protectionism. I think he remains a committed believer in tariffs. We kind of drifted away from those, but they haven't gone away. I recently asked Robert Lighthizer, who was his trade representative. He just published a biography. What did he think Trump would've done if he'd won in 2020? And his answer was, "Raise those tariffs." So I think there'll be a return to a protectionist strategy. And the other thing, which I think will be number one priority will be purge the Department of Justice, purge the bureaucracy, purge the swamp of all the anti-Trump elements that President Trump and his advisors feel thwarted him at every turn during his first term. So it will be a very, very different scenario, 2025 from 2017 if Trump is reelected.
Andy Serwer: And if Niall Ferguson was a betting man, what would he bet?
Niall Ferguson: Well, I think the key question is, is there a recession or not? I think if there's a recession, whoever is the Republican nominee will have a good chance of winning, because nobody has got reelected after a recession in a hundred years. Calvin Coolidge was the last person who did it back in 1924. Everybody else who tried to get reelected with a recession just behind them failed. And if you look at where Joe Biden's polling right now, it's about where Gerald Ford was at the stage in his presidency. It's about where George HW Bush was at this stage in his presidency. So if there's a recession, which I do think is more likely than the consensus, then I think it'd be really hard for Joe Biden to get reelected. I'd actually put the Republican nominee and it seems likely to be Donald Trump, but maybe close to 60% probability of winning. I don't think many people have processed those odds yet.
Andy Serwer: You talked about some of the economic problems stemming from policies of the Biden Administration, but weren't they mostly because of Federal Reserve policies in terms of flooding the markets, or quantitative easing, I should say, A and B, cutting rates, number one. And number two, you're saying that the high budget deficits are a problem. Aren't people always saying that, Niall?
Niall Ferguson: Well, I think if you go back to early 2021, a small number of people, notably Larry Summers, argued that an inflationary accident was happening. That was also my view at the time. I wrote that for Bloomberg. And if you read Larry Summers's original piece, which came out in the Washington Post, it's all about fiscal policy. He barely mentions monetary policy. And I think a correct analysis would be that there was a huge fiscal overshoot, because they kept doing stimulus. Even after the economy was going to heal. We had vaccines. The pandemic was not over, but it was clear that the end was in sight once you had highly efficacious vaccines. And the Fed accommodated this. It in fact accommodated a very large proportion of the new debt issued by the treasury in '21, '22. And it kept going. Remember, there wasn't really a change of monetary stance until into 2022, despite the fact that there were flashing red lights signaling an inflation shock. So I think it was a combination of fiscal and monetary policy error that got us to 9% inflation in the middle of last year. Of course, inflation has come down since then, but only because of a really significant tightening of monetary policy. And if you just look at the way rates have gone up and adjust for inflation, this is the biggest increase in real borrowing costs since the time of Paul Volcker. So you have to go back 40 years to see - in fact, slightly more than 40 years - to see a monetary tightening like this. The idea that this would just have no effect at all on what is a pretty leveraged economy, much more leveraged than it was in Paul Volker's day. I just can't believe. So I think there's a certain illusory quality to the current atmosphere of economic strength in the United States.
Andy Serwer: It is the case, though, that people have been calling for this recession for quarter after quarter after quarter, and they keep pushing and pushing. I don't know if that's been the case with you, but why hasn't it occurred yet?
Niall Ferguson: Well, the old phrase that I'm sure we were all taught at some point in economics classes is that monetary policy acts with long and variable lags. That variation is the key here. If the average is sort of nine months from tightening to the slowdown, that's the average. The question is, could it in fact be quite a bit longer than that? And the answer is yeah, it could actually under the circumstances. So I think it is way too early for the transitory team to declare victory and say that inflation was just this temporary aberration that had to do with coming out of the pandemic. I think it's plausible that as corporations and households have to refinance, they're going to get a terrible shock. And you can see how that sequence of events plays out if you look at when refinancing is going to happen in, let's say the coming 12 months. So that's one important point. The other important point I want to make in response to something you said a moment ago is, just as people have been warning about recession for many months, they have of course been warning about deficits for many years, if not decades. But the thing here is that the orders of magnitude matter. It's incredible, astonishing that the deficit at full employment should be as large as 8% of GDP. Jason Furman, who's a Democrat, who was an economist in the Obama Administration, noted that these CBO numbers are deeply shocking. And they really are, and they tell us that something is going quite badly wrong. And part of that something is the increased borrow costs affect the government, too. So the debt stock is already pretty high. If you look at the CBO forecasts out decades, not just years, it could get really very high, very fast, unless there's some kind of productivity miracle or unless Congress does what it hasn't done for a long time, and that is actually to reform the tax system and bring entitlements under control, which I think is highly unlikely.
Andy Serwer: Niall, you're back in the UK these days. What does the rest of the world think about America at this point and how has that changed?
Niall Ferguson: That's a great question. I'm on leave from Hoover back in the UK for a year, and it's fascinating because people there are more worried about American politics than people here as far, as I can see. And that is true in Europe, generally. I was just in Kyiv last weekend and there's great concern there that if Donald Trump gets reelected, he'll pull the plug on Ukraine. This worries all the Europeans. The Europeans have really increased their commitment to Ukraine's war effort against Russia, but they know that without the United States, it would be extremely hard for Europe alone to sustain that war effort. So there's a good deal of disquiet about what is going to happen next year in the US election. On the other hand, there's a kind of envy, and the envy is directed at US economic growth, the dynamism of the US economy. They all have AI envy because there basically is no AI in Europe and scarcely any in the UK. So it's a strange bifurcation. People are really worried about American politics and kind of envious of the American economy.
Andy Serwer: Is globalism and liberal democracy in permanent decline or is this just a hiccup, an aberration that we're experiencing?
Niall Ferguson: Well, globalization has been pronounced dead rather often recently. It's not that dead, actually, when you look at the resilience of international trade and capital flows. It's dialed back a bit since the high point, which was 2007 before the global financial crisis. But we're not looking at a huge retreat from globalization of the sort that we saw after 1929. When people talk about decoupling between the United States and China, I say, does that mean Apple produces 80% of its hardware in China rather than just a hundred percent? Because 80% is still a rather large number. The US trade deficit with China is still huge. US trade with China is still huge. So what's really going on is that globalization's shape is shifting and it's shifting in response to a variety of things, some of which are conscious. Like the US government is consciously trying to reduce its exposure to China, supply chains are consciously be moved away from China. But there are other things that would be happening anyway. The fact that Chinese labor costs are no longer particularly attractive, Mexico's now overtaken China and its trade with the US; there's a reason for that. It's close and it's actually pretty competitive. So it's a combination of policy and structural shifts that would've happened anyway, but I think one shouldn't exaggerate the extent of the shift. It's still globalization if American companies are manufacturing in Vietnam or in Mexico as opposed to in China. The idea that we can somehow bring it all back home, we can somehow bring all manufacturing back to the United States isn't very plausible, because it's just much more expensive to make microchips in the US.
Andy Serwer: It's a good segue to China. How bad is our relationship with China and how bad a leader or good a leader is Xi Jinping?
Niall Ferguson: Well, let me take those one by one. The relationship is not in a good state. Despite President Biden's talk of a full Hiroshima not so long ago. The visits that have been made by members of his administration to China have really not gone terribly well, haven't really achieved terribly much, haven't changed the sentiment in Beijing, which is that the US is pursuing a conscious policy of technological and economic containment that is designed to keep China firmly in second place in the Indo-Pacific. So I think relations are not good, and I don't think that they've been improved by these various visits that we've seen, to judge by what we hear from Xi Jinping and senior figures in the CCP. Xi himself, I think has not been good for China for two reasons. One, explicitly aiming at strategic... Well, equality or parity with the United States, which I think was a silly thing to explicitly say you're going to do. That was like sending a warning. Something that previous Chinese leaders had avoided doing since Deng Xiaoping. They had sort of kept their light under a bushel. The second thing, which has been more damaging, I think, has been what he's done to the Chinese economy. Xi is in many ways a Marxist-Leninist believer who has reasserted the power of the Chinese Communist Party, the CCP, over the economy, over society, even over academia. It's a very different China from the China I used to visit 12 years ago, regularly. Much, much less free in expression and less dynamic economically, because the big tech companies had been reigned in. Jack Ma was essentially brought low by Xi Jinping. And that huge real estate sector, which was really about 29% or 30% of the Chinese economy is in a state of crisis. So I think both as a political leader and as an economic leader, Xi has steered China into very treacherous waters.
Andy Serwer: How concerned should we be over Vladimir Putin? Some people say it's just not that big a deal for the United States. Other people say it's a mortal enemy.
Niall Ferguson: Well, from the points of view of Ukrainians, he is a mortal enemy who is killing significant numbers of Ukrainian soldiers and civilians every month. I just came back from Kyiv. There were air raids before and after my time there, and the reports that one received from the front line by soldiers who had been serving there, pretty grim. This is a very bloody war, and anybody who was hoping that the Russian army would fall apart at the time of the Prigozhin mutiny, I think, has been disappointed. They are dug in, they have managed to lay minefields. They have made an almost impregnable defense of the territory that they hold in southern Ukraine. And the truth is that the Ukrainian offensive of this summer has not achieved anything like what President Zelensky hoped for. Does that matter to the United States? Well, on one level, no. It's a long way away and it's not American soldiers who are doing the fighting. The problem is that we've backed Ukraine. Not only financially, not only in terms of weaponry, but we've publicly, morally backed Ukraine. And we say, as Secretary of State Blinken said in Kyiv just about a week ago, that we'll be there for as long as it takes, but that could be a long time. A German general who was in Kyiv at the weekend said that the German planning horizon was out until 2032. That is a much longer war than anybody in the United States thinks they've got involved in. So I think the problem in the short run is that we are stuck in a war that doesn't have an obvious end in sight, and that means that resources are going to be absorbed, financial resources, hardware from military stocks buy this war for I think longer than Joe Biden expected. But there's a broader problem, and that is that Putin is closely allied with Xi Jinping. This is a partnership of extreme importance to the Chinese leader. China isn't about to let Russia lose this war. So we can't just see the war in Ukraine in isolation. It is part of a broader geopolitical struggle in which the US and the Europeans and other allies support Ukraine, and China and Iran support Russia. That is actually quite an alarming state of affairs. You can think of it, not so much as a European or an East European war, but as the first hot war of Cold War II. And in that sense, I think Putin is part of a broader threat, a threat of a kind of axis of China, Russia, and Iran, that will pose challenges to the United States, not only in Eastern Europe, but in the Middle East and potentially in the Far East, in the case of Taiwan.
Andy Serwer: Final question, Niall, and I hope you've got something to say on this topic, given some of the conversation we've been having. What could go right in the world?
Niall Ferguson: Well, it would be great if the Russian army suddenly unraveled, lay down and died, and Ukraine won the war. That would be terrific, but it feels less likely than a year ago when the Russians were in flight from Kharkiv and then from Kherson. That would be great, but I'm not holding my breath. It'd be great if China's economic troubles translated into some kind of political crisis there. Because I think Xi Jinping's attempt to reassert one party rule, the dictatorship of the party is dangerous not only for China, but for the world. So you could hope for change. And I'm an optimist about Cold Wars. I haven't had a lot of them, but if the last ones anything to go by, the society that believes in freedom and democracy tends to be more dynamic than the society that believes in the opposite. So I think what ultimately will happen is that the problems and pathologies of one party government will manifest themselves and China's growth rate will slow and its threat will diminish and perhaps its leadership will change. And what else could go right? Well, all the things that are currently going on in the realm of technology, particularly the breakthroughs in artificial intelligence, might turn out to be really good for the US economy. Maybe there's a huge productivity shock coming as we all start using ChatGPT to prepare our interviews or whatever it is. And the next thing you know, the US economy achieves higher growth than anybody expected, and all those things that I was worrying about earlier turn out to have been mere phantoms. So there is an optimistic bullish case. There always is, in this town of New York, there'll always be somebody who's bullish. But that would be my bullish scenario.
Andy Serwer: All right. On those notes, Niall Ferguson, thank you so much for your time.
Niall Ferguson: Thanks Andy.
Andy Serwer: This is At Barron's. I'm Andy Serwer. We'll catch you next time. The production team for At Barron's is Elia Malidu, Rebecca Bisdale, Kinga Royjack, Joe Lusby, and Laura Salibury. The executive producers are Kristen Belstrom and Melissa Haggerty. We'll be back with a new episode next week.