Philip Coggan – Paper Promises: Debt, Money, and the New World Order

what is my book about what am I talking about and today is actually a very good day to show you why this subject is so important you can look at what the Dow was doing when I was came out of my hotel room i think it was down 120 points and it was down because a greek deal is still not being put together so while these countries may seem a long way away from dallas the inability of countries to sort their debts out is a very very significant fact and if you look back over history the very idea that sovereign debt is risk-free is very strange if you go back all the way the first example i have a notebook is a guy called dionysis of syracuse and his he had a lot of debts and his bright idea was to get all the coins in the area to be surrendered to him on pain of death there’s a there’s a something the IRS a try he had all the one drachma coins we stamped as two drachma coins use the half of the coins to pay off his debts returned everything else to people and that that was the problem sorted so monarchs traditionally were the biggest debtors and they of course could change the laws and indeed they could imprison and in the French case they could often execute their creditors which is what quite a lot of French politicians would like to do to hedge funds right now so it is a long tradition that governments are indeed not risk-free but quite risky to lend to and the Greek example is a very good one as well you have a deal being hammered out in which the EU is trying to get the three leading parties in Greece to commit to various spending cuts and things like minimum wage and in pensions and naturally this is not popular with the voters and they’re trying to pre-commit the politicians to carry on with such a policy after an election so you have here the difficulty with lending to a democracy when the voters can vote out the politicians and if you look at the opinion polls in Greece pesach which is the party that was ruling up until just a few months ago is that eight percent in the appeal pause you think Congress is unpopular at eight percent rating for the opinion poll and three quite left-wing parties are combined totals of forty two and a half percent in the poll so you can make the regular politicians you know put no nose to the grindstone but the voters will rebel if you ask them to take too much pain and that’s really the theme of the book that you can see history as a battle between creditors and debtors with the nature of money really as the battleground so let me try and illustrate the theme again being toured around by Jim I went to get a coffee today and I paid whether this which is a five dollar note now back in Britain and I don’t know why I can’t get away with this in dallas i would pay with this now not only does this is is actually worth more than five dollars but it’s got a queen’s head on it when you won that rather i know it says i promise to pay the bearer on demand the sum of ten pounds as they promised on here listen picture Abraham Lincoln but that’s it because he’s not promising anything so why can’t I use this why can’t I go to my kids monopoly set and take some of that out because some of my monopoly notes have 500 written on them I should be able to get 100 starbucks out of that what what’s the answer the answer is of course this over here is legal tender so it depends on the fact that we think the government can stand behind the money supply and give it value and you only have to go to a country like Zimbabwe where the government created so much money it didn’t stand behind the money supply to see what happens when that breaks down secondly what’s the other sort of money you can use you can use your debit card or credit card and they will accept that now why will they accept that when they don’t know who the finances of the bank again because they believe that the government will stand behind the banking system as it did in 2007-2008 so this bit of money is essentially a statement of faith in our economy and our government that the cut column will keep on going so the government will be able to meet their bills and I mentioned that is involved we had sort of failed test by protecting the value failing to protect the value of its money and Greece has failed the test in that it cannot pay its bills it cannot raise money in the markets on its own it needs subsidies from Germany and the rest of Europe to do so indeed that somebody sent me a joke the other day it’s an Irishman a Spaniard and Italian go into a bar who pays for the drinks the German

so and generally not very happy about that I can carry so when you think about money what’s what are its key functions well there are two things first of all I when I go into Starbucks I can use this it’s a means of exchange so I could go into Starbucks and say okay I’d like a starbucks coffee please can I give you a little speech about the history of euro if I want an extra shot I can throw in the british pound and the australian dollar as well you know what do you say and this would be a very difficult you and your businesses you know if you’re a builder you could hand over some bricks or something it would be a cumbersome way of conducting economic activity so we need money as a means of exchange but it’s also a store of value so we need to be sure that our money will still be worth something next year so I can still buy a starbucks with this note and of course in 4050 years time so the money I put aside for a pension will still pay out so if you think about that the two functions are really in conflict and I have been conflict in over the history people who believe in the means of exchange function want more money to be created that’s what quantitive easing that’s what fiscal stimulus is all about creating more money people will have more money to spend there’ll be more jobs the economy will grow its way out of the crisis people who don’t believe in that who believe money is a store of value think that will just lead to inflation you will not solve the problem and the economy will get into even worse trouble than before over history time after time we’ve seen these two arguments cohen’s class and you can also say that basically those two arguments represent the interest of the debtors on one side and the creditors on another so what key character in the book is William Jennings Bryan who you may recall ran for president three times 1896 1904 1900 and he made this huge speech that you shall not crucify mankind upon a cross of gold and he represented essentially the farming interest the Heartland interest you might say today the people who were struggling with low food prices struggling to meet their debts and he wanted silver to be added to the money supply to create a bit of inflation to help the farmers deal with their debts and he was opposed by East Coasters this is a long battle in American political history there the Heartland verse these coasts the Andrew Jackson abolished an early version of the central bank because there were very suspicious of the moneyed interests on the coast now the fascinating thing is if you flip forward 116 years there’s still that battle going on but the two sides have switched over so the Tea Party is a populist movement for austerity these people would like to see an end quantitive easing they would like to see a balanced budget that is the complete reverse of the position of the Brian I party in the 1890s meanwhile wall street which back in 1996 was in favor of sound money in a balanced budget they’re very happy about quantitive easing because quantative easing means that asset prices are kept up and wall street profits depend on higher surprises so that strange over history now doesn’t hasn’t really happened in every in any other country you go over to greece and you see the people protesting they are not calling for a balanced budget they are calling for the government to keep spending money so they still have their benefits and they still have their job so it’s very interesting America’s unique in so many ways and it’s unique in this one too so over history what I’ve tried to explain in the book is that those two functions as they came into conflict there we have set up various systems to try to manage them so the gold standard and the use of metallic money was essentially one of those systems if you go back to the Middle Ages and you had this issue that i have here of not being able to use my ten-pound note but being able to use dollars that wouldn’t have been a problem i would have had gold and silver coins and they could have had anybody’s head on and I could have gone into a shop and used the coins of whether her from Holland or I mean to how the the u.s ended up with the dollar is from a Yoakam Starla it was a German coin de thalla that eventually became a doctor there’s the doll you could use point him all over the world what mattered was how much gold and silver you had him so for many centuries that’s essentially how money worked you could use coins didn’t matter where from but monarchs were always trying to cheat so the Roman emperors for example when they were running short of money to pay their troops and if you ran short of money to pay your troops in your Roman Empire you were pretty sure shortly be an ex Roman Emperor they would melt down their silver coins add copper to them and then hand out the new coins to the Troops that was a way of making their money go further now back then there was no sort of Paulus Krugman asst saying this is an

ideal economic policy this will stimulate the economy they’re just doing it to make do though it is interesting we’ve flipped forward two thousand years and once again the government is a trouble having trouble meeting its bills and once again we are creating more money to help she’s been just a sore thumb vote now we moved on from that later on to have the the gold standard was actually came about by almost by accident with Sir Isaac Newton who undervalued silver and meant all the gold queens were circulating not the silver ones we moved up to have the amount of money tied to go because eventually you can’t go around very easily handing out gold coins if you had if I was paying for my starbucks with gold gold is what seventeen hundred and fifty dollars an ounce I would have to have some some electron microscope shave off the edge of gold and and hand it over to to the counterman and they would have to examine it regularly it just wouldn’t work so we develop pieces of paper and this is why I my temple note says I promise to pay the bearer on demand the Sun off a piece of paper to show that you own some gold and once you started to use those pieces of paper then it was easier to use those than coins themselves and they became the standard unit of currency and similarly we’ve moved on from there now most currency isn’t paper money at all all coins it’s just entries on a computer when the central bank does quantitive easing what it does is is buys bonds from the banks or the private sector and then it enters some new money on their computer you know those emails you got you get from like Nigerian dictators which say send me your bank account you know will credit you with 40 million dollars this is one of those emails come true I am Ben Bernanke chairman of the Federal Reserve please send me your bank details and i will credit your account with 10 million dollars and then he does it fantastic so money again is this very very notional a concept these days and and the gold standard lasted in it’s sort of pure form for only really about 40 years once you got to the first world war the idea of us England shipping money to because shipping gold to Germany while we’re at conflict with them to deal with the debt was obviously out of the question all all those gold transactions East and they try to reconstruct it after the first world war Britain went back on the gold standard in 1925 Churchill regarded that as the biggest mistake of his career and he made a few and the problem was that when you got to the 1930s and the economy got in trouble the amount of money was fixed there was a shock to the economy if you couldn’t do anything with the amount of money you basically had to cut wages and prices and people do not like cutting wages and prices it’s exactly the same problem in Greece today in Greece in 10 years ago they would have devalued of the drachma now they cannot do that because they’ve got the euro they can’t devalue so you have to cut wages and prices and people don’t like it and even if you do cut wages and prices the debt is still denominated at the same level so your income might fall thirty percent but your debt is still as high as it was before so it’s even harder to deal with it so economies all just buckled they all left the gold standard within five years from 1931 to 1936 after the Second World War we had a new system so that system failed on the part of the creditors we had bretton woods and Bretton Woods was which tied the amount all currencies in the world to the dollar and the dollar to the value of gold and that was that work pretty well for 27 years it didn’t it was a different system from the one we had today when I was a kid you could not leave Britain with more than 50 pounds worth of foreign foreign currency so if you’re going on holiday it was a very short foreign holiday most people didn’t go on foreign holidays we didn’t have cheap flights back then and capital movements just did not go around the world in this in the way they do today that system lasted pretty well but it imposed essentially a constraint on America America’s of one country which had to exchange dollars for gold and the French you never liked American domination of the global economy the French kept pushing and pushing in the late 1960s first under shelter goal and Pompidou they said okay give us some it was in gold and the requirement under the system was for the u.s. to adjust its economic policy to make sure other countries in the world could get their gold now I don’t want to insult anybody here but its experience of everybody in the rest of the world that if American politicians have to choose between satisfying their domestic voters and satisfying international comrades then domestic voters tend to win and that was exactly the case in 1971 Richard Nixon facing an election the next year he have his own plans how to win it but he was not going to lose it by imposing

austerity on the voters and he went off the link to gold and exchange rates have floated ever since so from 1971 we have been in this world a kind of world that we haven’t ever seen before in history there was nothing standing behind this but our faith in each other in our faith in governments to keep the whole system going so what’s happened since 1971 what’s happened in nineteen seventy one is that we have had a huge explosion of debt so consumers we were cautious about debt my father grew up in the 1930s he would not have a credit card he would not conde we move from that will to where people will be having credit cards mailed to them where they were being offered over the phone on TV when I again was where left college and you wanted a housing loan you had to go cap in hand I don’t the same here but in Britain you had to go cap in hand to the lender and say I’m a very responsible person you know I’ve got a job getting married all that kind of thing after about nineteen eighty there was none of that you you just they were handing out loans like competi and of course companies they change their attitude towards debt to you used to have lots of triple-a rated companies now if your company you’re told you’re your balance sheet isn’t efficient unless you have more debt you’re encouraged to borrow money and buy back shares so we changed the attitude to debt in the consumer sector and then the corporate sector and of course in the financial sector go back to the 19th century and banks had capital ratios of 25% they really were solid to make sure that people believe in them but then by 2006-2007 banks had capital ratios of three or four percent and the reason was that it was very much in their incentive to do it they were incentivized because they were quoted on the stock market to maximize short-term profits and maximizing short-term profits meant borrowing more money and often borrowing more money to invest in assets or lend against assets so you have for this long period it’s great economic boom this sort of virtuous circle where banks lent money to people to buy assets the assets rose in price that felt that made banks feel more confident so they lend more money which meant prices go up went up further and so on and so on and every time the markets wobbled as they did in 1987 and the reason was that it was very much in their incentive to do it they were incentivized because they were quoted on a stock market to maximize shorts and short term profits meant borrowing more money often borrowing more money to invest in assets or lend against assets so you have to this long period is great economic where banks lent money to people to buy assets the assets rose in price that felt that made banks feel more confident so they lend more money which meant prices go up went up further and so on and so on and every time the markets wobbled as they did in 1987 in the early 90s in 1998 when long-term capital management suffered in 2001 all of those occasions central banks tended to cut interest rates to rescue markets from their problems and the economy from their problems and if you think about it over time there was nothing more likely to give speculators kind of one way bet what we used to call the Greenspan put you knew that if the markets wobbled the Fed would come to the rescue and here we are again today the markets have this huge wobble in 2008 and interest rates were at zero so the culmination of this long process then was this huge level of debt relative to GDP and a whole series of asset bubbles from in emerging markets Comstock’s and then in housing so where do we go from here now we’ve got to this point suffering unique point in economic history well there’s good news in this bad knees so they let’s start with the bad news because I’m often accused of being depressing enough Avila absolutely the bad news is that debt is all about confidence if you lend money then they both the lender in the borrower needs to be confident that the borrower can pay the money back and can pay interest on top so there has to be an element of confidence that things are going to grow the income of the borrower is going to grow asset price at which you leant against is going to grow you know Joe seems like confident guy he’s a shrewd guy confident guy but he serviced esas the risks and make sure he’s not going to be lending money to people who look like deadbeats or investing kind of swampland so it’s all a matter of confidence and that confidence was suborn at the last 25 years up to two thousand seven house prices were always going up we only have very short recessions in the economy population was growing economic growth was was very steady confidence was born out that now if you were a look in Europe what have you got

now you’ve got this a recession we’re going back into a recession in Europe just two or three years after the last recession got huge bills for the taxpayer and country is imposing austerity and a key factor you’ve got demography right against you work forces in Europe are going to fall over the next 30 to 40 years in many countries and economic growth is about two things the number of workers that you have and how productive you can make them if the number of workers you have is falling it’s very difficult to get economic grip you can boost productivity and they’re trying but it’s a kind of slow process one to two percent a year and it’s very hard to grow so look at Japan which has gone through 20 years with very little economic growth in nominal terms and still has all the debt and more that it started the process with and still has asset prices to well below the levels of 1989 don’t believe when people say stocks for the long run they will always go up that’s not an ironclad rule because you only have to look at Japan to see that’s very much not the case the surest way to make prices fall rapidly to have everybody believe they can only go up that’s what happened in with us houses people thought they could never go down at the national level but they can you just have to make them at a stupid price and then they’ve got only one direction to go so that’s the depressing news for Europe it’s going to be very difficult for them to get out of the debt crisis so I’m going to be positive about America and say that it’s as one country that can get out of the debt crisis it is America you have much better demography you have a younger population we’ve had more immigrants population has grown steadily you also have a more dynamic economy and then you have to look round Dallas but then you can go to California and see the Silicon Valley you can think about biotech companies you can look at the companies which you are creating new wealth and new products just look at Apple which was once down and out nothing to do with we had a piece on state capitalism a couple of weeks ago but you could not imagine China producing an apple this is a classic example of American innovation one company being able to produce a product that nobody thought they would want in advance but as soon as they got it out everybody wants one I remember going we were choosing between computers with my wife and you and just went and look to the mac and it’s just beautiful relative to all the all the others have kind of clunky and just look at that and it’s beautiful and everybody wants it when they see it and that’s a that’s a huge advantage so America has a chance of growing its way out of the crisis in a way that Europe does not the bad news however from that point of view so I shouldn’t really be finishing with bad news but i just have to mention it is that it’s america will not have the same freedom of action that it has in the past it has been able there was that much talk of under the first George Bush of the unipolar moment in the world history where America was the dominant economic power and I could do what it liked but that is shifted with over the last 20 years the systems that I was talking about the gold standard Bretton Woods they were set by the creditor nations to Britain set the terms of the gold standard Bretton Woods was set by America so when this whole debt crisis emerges and we get some sort of new monetary order which I think we will I can talk about that later if you like China is going to be the key factor in determining what though what the system is like and you cannot ignore the wishes of your creditor once you start getting getting into trouble my sister’s not very good with money and she’s always threatening to write her a bank manager and take her overdraft elsewhere well you can’t do that very easily there was very good example whether Britain we’re used to kind of like a century of economic decline in 1956 Britain and France decided after NASA nationalized Suez Canal though that would send in this mission to occupy the canal and keep it open for international shipping President Eisenhower rang and leading the British prime minister and said no you don’t because we’re going to organize a run on the pound if you withdraw and we would drew very very quickly indeed national humiliation a French learn from that that they should always oppose American education and the British learn from that that we should always stick as close to America’s everything and never do anything that America didn’t like so you can draw it you drew different lessons from there but the idea then going forward that America will be able to act as it likes without Chinese say so particularly over an issue like Taiwan i think is as fundamentally foolish the two economies are bound together and let’s hope it’s all organized peacefully but it’s not just possible for America to organize to overlook Chinese wishes and just to go

back to that grease issue Germany views Greece as this kind of Spencer if nation which hasn’t met its bills and retires too early and spends too much money on fancy goods that’s how the Chinese view America you should look if you can’t even find on the internet it’s called the Xinhua news agency that’s xin hua they put out a statement after america was downgraded by Standard & Poor’s and it basically said you can’t go on like this America is spending too much you need to sort yourself out it was like a letter from a bank manager or from you know a father to a kid as over spend his allowance at university it was just like that that’s their attitude to America now and so that needs to be sorted out a deal needs to be reached between the US and China where China agrees that its exchange rate rise steadily over time in a mirror agrees to organize its debts and keep it steps down and to finish on that positive note I think that deal can be possible and that’s what the New World Order will look like and thank you very much for coming yes that’s a good question well a demand-side approach would require Greece to be able to borrow the money from somewhere to run a huge fiscal stimulus because they they are as you know running a large deficit already but they cannot finance that deficit on the market so they are therefore dependent on foreign countries Germany in particular to lend them money just to meet their day-to-day bills would Germany agree to increase that overdraft if you liked at twelve thirteen percent of GDP a year in the hope of stimulating the Greek economy not the chance a lot of people in europe i did a column at this some in last week’s issue about the war and finance people who want to declare war on their creditors you know the europeans are very keen on saying they should people should you know not complain not speculate in the markets what they’re essentially saying is we hate you all and we’d like to lend you to lend us money at two or three percent well you can’t go on like that you cannot do that you have to listen to what the creditors want so unfortunately for Greece there’s no chance of them pursuing a Keynesian style solution so on the higher key in one of letting the sort of whole crisis flood itself out so the Capitals destroyed and at new businesses created me now is happening almost by rather than by design but there is plenty of reform to be done from going to Greece in Greece I was there the beginning of last year and the taxi drivers are on strike because they were being asked to reply supply receipts this is a very strange economy there are lots of people up there who the number of people who declare a tax income of over a hundred thousand euros a year is tiny when clearly there are millions of people who could do it so there are plenty of reforms that will go in Greece the problem is that with a deal that Germans are insisting on is we will lend you money if you pursue this reform policy including cutting all your benefits and the population just does not like it as a general strike today there are protest today and it’s a fundamental issue with democracy can you impose this kind of stuff on on democracies Greece already has an unelected Prime Minister and so does Italy and is that where we’re going that the only people who can push this through a central bankers and technocrats yes well I mean it’s a great strength of countries like America and D Britain which issued getting their own currency to be able to inflate away their debts and it’s what is often happened in the past I mean what’s happened what’s happened so far however is that the money that the Fed has created as 10 is just sit in the banking system it has not gone out there and being used to stimulate the economy significantly in America is doing better than Britain but a lot of the money it’s same in Europe for the European Central Bank just expanded its balance sheet the money that slender banks has ended up back with it so it’s a prot as a problem the column is called pushing on a string the

other issue is that there is a lot of unemployment in most countries in the developed world wages are not rising so we have to add a little bit of inflation as you know with food and energy prices but that’s the kind of wrong kind of inflation if you want to get rid of a debt crisis you want wages to go up so it’s easier for people to pay back their debts what you don’t want is for wages to be flat and energy and food prices to be up because that means that people have even less disposable income to deal with the debts and that’s what we’ve had so far so I don’t think inflation is going to happen in the next two or three years but yes down down the line and the example the analogy I tend to use is the ketchup bottle where you shake and Shake and Shake and it nothing comes out and then suddenly and it all goes all over the plate and that and that’s the risk that we face well they’re going to default on their debts leaving the actual euro is a real problem for them because their debts will still be in euros and their income will be in drachma escudos which will be thirty forty percent lower so that’s the issue if you default on your debts when you’re in dollars and you’re still earning dollars or you write it down it’s not a problem leaving the euro would mean that they would have to balance their budgets overnight because they could still not borrow money from anybody so that would mean even more austerity than they got at the moment it would mean that the banks and companies in Greece and Portugal would probably go bust because they have their debts in Euros too so it’s a very difficult thing to get out of once you’ve got into it might it happen in the long run yes I think you’re right I think they’re going to do everything possible and the second reason is that it’s in the rest of Europe’s interest for them to stay in because let’s suppose Greece leaves tomorrow if you’re a Portuguese bank depositor you will see that Greek bank depositors have just had their all their money switched from euros to drachma and lost thirty or forty percent of their savings over night it happened in Argentina ten years ago so you would think to yourself as a Portuguese bank deposit up I’m not going to let that happen to me I’m going to drive over the border into Spain or even further into France or Germany and put my euros in somebody else’s bank and then they can’t do that to my savings so you would have an immediate run all the banks in the country that’s feared would be threatened which would just make the crisis even worse so that’s why the Germans are desperate keep the Greeks in and why they’re in the end the gems will have to pay I’m afraid euro working to dissolve how it affected American car okay well I think you can see as I tried to illustrate at the start that you know with a dial down that this is a very significant risk it’s very significant risk on two levels the first is that banks have lent money to Europe and banks will have bad debts if you’re certain goes down and second is that Europe is a huge market for American exports and that if Europe goes into recession that affects American businesses I know there’s also an issue i suppose that of a contagion worldwide once you start to worry about countries not paying debts eventually attention may turn to America I think America is probably the last country in the line to the last Domino to fall but you just have to look at the projections for federal expenditure in the projections of federal revenues and see the gap getting ever wider and at some point that will cause an enormous crisis not not this year or next year but at some point unless it’s sorted out it will so you should have to be careful that a crisis in Europe doesn’t eventually provoke the crisis unity well they have a very successful economy which has been growing eight nine ten percent a year I mean not everybody believes the data that anybody who’s been there will see you know the huge cities that built cities you’ve never heard of that have seven million eight million people they’re fantastic you know producer in many areas they are moving up the value chain so they are you know shifting towards higher-margin products they are the big creditors of the world they own three point two trillion of foreign exchange reserves of which least half is in dollars and the sixty percent million dollars so they know they do hold the purse strings they are enormously influential in the emerging world if you’re a merging nation and you think of which model shall I choose should I choose what we’re the Conant’s creatures call the anglo-saxon model of sort of free markets and liberalisation which has just produced the biggest crisis for 70 years or do I choose the Chinese model which doesn’t seem to reduce much of a crisis in which keeps growing forever

then you might well choose that one and so they are gaining influence all the time they’re buying up natural resources around the world they are aiding nations that we don’t like to aid you know their their voice is growing and they are 1.3 billion people which is one in six of the world’s population so I think it was Napoleon’s who said China is asleep but when China wakes it will shake the world and here we are we’re in the shaking period ah now that’s very good very good Christian well it is defaulting it is in the process of just deciding mother defaulting by 65 or 70 percent on their debt which is quite significant but they’re defaulting only to the private sector creditors and this is something i think is fundamentally wrong headed they are trying to instill is perceived as voluntary and they want the deal to be voluntary so the credit default swap insurance is not triggered now the way it works there’s a committee called is the International Swaps and Derivatives Association I think don’t hold me to that acronym but it’s like that swap dealers association that’s what is international swap dealers association they decide whether a default is triggers the CD s or not if it’s there all is if it’s voluntary it doesn’t and if it’s compulsory it does and they are honest of honor bound the Europeans are determined not to make it compulsory so what what does that mean it means that they are trying to make sure that CD s are worthless why do they want that because they hate speculators and they think it would all reward hedge funds and stuff what is the consequence of that the consequence of that I think is counterproductive because if you are an investor you will think you might think of trying to bargain hunting say Spanish or Italian debt but you might want to insure yourself against the risk of default when you do that but you won’t be able to insure yourself against the risk of default because the seed you know that the CD s won’t help you so I think it’s wrongheaded and I wish they change their mind but that’s the way they seem determined to go I think it already has been effective hasn’t it I mean if you look at the number of Republicans which are committed not to raise taxes if you look at the great struggle that you had to pass an increase in the debt ceiling last August and that was very much down to the implement to the Tea Party I mean I’m not sure it is one of those old sayings about being careful what you wish for i’m not i’m not sure if they really had their policies come into effect they would be quite as happy as you think about it the problem is is immediately having a balanced budget amendment for example so the US is running an annual deficit of about a trillion dollars and you couldn’t raise taxes okay so suddenly a trillion dollars would have to be cut from spending that would be no benefits to people who spend money or goods that the government orders the whole problem with the column is it so circular my income is your expenditure if you buy the book for example if i buy a starbucks my income is by expenditure as the starbucks income so if you suddenly yank out whole amount of expenditure from the economy then everybody lots of people’s incomes will suffer and their demand will suffer i knew you would get a quite steep recession immediately now you might say in the long run it would be better if government was a smaller proportion of the economy and the economy was more in the hands of the private sector and i wouldn’t disagree with you the trouble is how quickly do you get from the long run to the short run and i think the answer is to go there at one step at a time rather than all in one great rush and if you really want them charles schwab wrote a piece in The Wall Street Journal saying the Fed should get out of managing interest rates and let interest rate to rise their natural level just tuesday i think it was if you really had interest rates of three percent so that mortgage rates were I don’t know what Joe’s gone whatever the mortgage rate would be six seven percent instead of four or five now you’d have a lot more people in trouble defaulting on their loans you’d have businesses make it finding more difficult to make ends meet so again you would have a quite a negative impact on the economy so there is a huge difference between bring scaling back government in the long run and doing it all at once it’s very good question I have to give a very dull answer which is that I have a very very diversified portfolio so I have in Britain we have the equivalent of tips which are index-linked gilts which our guilts linked to inflation so

to cover the risk that that gentleman has it was referring to about inflation that have a significant amount of money in that area then I have a exposure to the growing economies of the world in the emerging markets which are if you look at the developing world it used to be all the crises were in the developing world but look practiced in this week’s economist which is outside I’ve written a piece about this there’s the ratio of debt to GDP in the developing world is much much lower than the ratio of debt to GDP in the developed world so the emerging markets are in a strong and getting stronger position relative to where so those are the two bets and that I’m making relative to you know how you might have your portfolio a protection against inflation and an exposure to the faster growing economies like it will but my there’s a I I write a lot about pensions my sins and my liability in retirement is based on inflation right so I need an income in retirement that goes up with inflation and that’s what index-linked gilts and tips give you you know that yes okay your your cap your price market price might fall but your debt is repaid at maturity at whatever the starting price is plus all the inflation in the interim okay so you’re not if there is inflation you’re not going to lose if you hold the bottoms to maturity and you are going to be protected against inflation it’s not an exciting investment but it is a good safe investment oh sorry so that’s those generally what were described as outside the OECD so which is the organization of Economic Cooperation development so it’s much of Asia much of Latin America few bits of Africa few bits of the Middle East China yes absolutely yes yes I mean you emerge I mean emerging markets but I’m we use development working for the Economist sorry so so the emerging markets are those countries which generally have lower GDP per head figures you know not as rich as R Us and their growth rates are faster the trouble with emerging market is they’re very volatile so the best they had a very bad year last year but that perversely makes them a better the best time to invest is when they’re out of favour and when their valuations are cheaper than those on developed markets the worst time to invest is when everybody’s talking about them and they are more expensive to their valuation than more expensive in developed markets so they have years up forty percent and then down forty percent but over the long run over the last decade it vastly outperformed developed yeah I wouldn’t you’re going yeah yeah exactly you’re you’re you’re going beyond my nikka raccoon egg equities I know I should know the biggest industry in greece’s tourism actually greases exports are up 43 percent over the last year but from very low base and tourism by an old thing counts as an export sounds strange but it is it’s sort of selling services overseas so yes they they could do I mean they got plenty of unemployment they could employ some Greeks in this business but if you’re any you you have to accept people from anywhere else in the EU there’s plenty of bits of Eastern Europe of people who have moved there they do have a slightly up-and-down relationship with the likes of Albania where people move there which isn’t in it you but you know as in Britain it’s as we’re discovering it’s actually quite difficult to control the level of immigrants you cannot do anything about people from the rest of the EU so we’ve had in the last few years for example a lot of Polish people come over almost every street corner has a Polish shop now including mine the Polish you the builders and most people are very glad to have them because they work very hard and very responsible which is not always true my fellow countrymen important right now it’s very good question if you

the last time the Treasury bond yields were about this level when was in 1949 if you bought then and held for ten years you lost money in real terms every year if you help for 30 years you lost money in real terms every year lending the government money at two percent historically has not been a very good deal so I’m not I’m not suggesting nominal bonds as a great investment however you only have to look at Japan to see that in Japan which has had similar debt problems yields then fell to one percent and have stayed there and and I know a number of hedge funds who have given up in frustration at shorting the Japanese bond market because they thought yields about to rise so timing is of the essence if you can tell me what’s going to happen in 2013 if let’s say there is another divided presidency and Congress and there is another battle to raise the debt ceiling and if Congress sort of them pulls the trigger and says no we’re not going to raise the debt ceiling and we’re gonna have a technical default in the bond market then if that’s going to happen then I would be very worried about no bonds and those circumstances but so that the biggest threat is almost home grown if you sort of shoot yourselves in their own foot then you’d have a trouble at the moment people are only too happy to lend to America two percent because they look around the world they’ve got grease legal Portugal they’ve got Italy and America looks great in those circumstances so the future is kind of in your own hands for several years provided Congress gets it back together Washington gets you