Adam Tooze
History Professor, Columbia University

Shades of Green

April 26, 2021 | 42:44

Green can be a moral color, a political color, or an economic color. Join William Blair’s Hugo Scott-Gall for a conversation with Adam Tooze, history professor at Columbia University and author of Crashed: How a Decade of Financial Crises Changed the World, for a multidisciplinary discussion of how the decade is shaping up from an economic historian’s perspective—including climate change, inequality, geopolitics, and fragile financial markets.

Meet Our Moderator

Hugo Scott-Gall, Partner


00:30 Host Hugo Scott-Gall introduces today’s guest, Adam Tooze.
01:25 Hugo asks Adam for his predictions in politics for the current decade.
05:00 Are issues such as inequality and wealth distribution on their way to being solved?
08:35 When has the world come together to collectively address an issue in the past?
10:50 Can democracy be redeemed by the rally around climate change?
11:48 The impending second Cold War.
18:32 Does the current dynamic of China and the USA mirror another time in history?
21:50 Are we on the cusp of some grand innovation?
28:00 The current state of the financial market.
33:30 Is the financial system becoming increasingly fragile?
35:12 Is inflation always a bad thing?
40:00 Adam’s upcoming book release.

Hugo Scott-Gall: On today’s episode…

Adam Tooze: And what I think is totally doable is that the rich and affluent societies of the world could simply decide to have less misery in their midst, right? They could simply decide to tackle the problem of child poverty, for instance, in a sustained way, not simply in the form that we’re doing it in the U.S. right now which is hurling a few thousand dollars in checks at people for a couple of months. But there are policies that could be adopted in a quite reasonable way that would in no way challenge the fundamental status quo.

Hugo Scott-Gall: Welcome to the Active Share Podcast that explores less obvious investing insights in a world that’s always changing. I’m your host Hugo Scott-Gall. Today I am thrilled to have with me Adam Tooze. Adam holds the Shelby Cullom Davis Chair of History at Columbia University and serves as Director of the European Institute.

Previously, he was the Director of International Security Studies at Yale University and taught at the University of Cambridge. Adam is a leading economic historian and an expert on the contemporary global economy. He is the author of numerous prize-winning books including Crashed: How a Decade of Financial Crises Changed the World.

In 2019, Foreign Policy magazine named Adam one of the top global thinkers of the decade. Adam, thank you so much for being here.

Adam Tooze: It’s a pleasure.

Hugo Scott-Gall: So, I think about you as being very good at patterns, multi-disciplinary thinking. And so, I want to ask you just some simple questions which are really, how do you think the decade we are in is shaping up through the lens of politics, geopolitics, economics, and the financial system? So just sort of simple questions but obviously there is a lot to talk about. And they’re all related.

So, as we’re in the 2020s, let’s start with politics and think about your kind of prediction for the decade, how politics evolves, and maybe through the frame of the big political problems to be solved, which ones can be and which ones can’t be.

Adam Tooze: Well, I think it’s a challenging question, actually, because I think the agenda is stacked. And if we’re talking for instance about the big democratic blocks on either side of the Atlantic—after all, there is reason in the last couple of years, in the last decade of experience, to be skeptical about their crisis managing capacities. There are entrenched problems of inequality, which harm all societies founded on capitalist economies, which I think we have reached a crisis point on in the United States, which is forcing the agenda a little bit of the Biden administration. And broadly speaking, I think that’s very much to be welcomed whatever side of the political spectrum you come from.

There’s that extraordinary speech that Biden gave to some donors in 2019 where he says, “Look, we’re all highly affluent people in the room here. We know what’s up. We’ve got to renegotiate this bargain. And this need not affect anyone’s lifestyle. But we need to make concessions so as to stabilize the foundations of American society.” That I think is the wise policy. It looks like it’s the policy that the Biden Administration has chosen.

And I would expect woke Republicans to get in line with that. And one can see elements of that in the so-called populace wing of the Republican Party right now. That’s an intractable problem, however, as old as American capitalism sort of brought back to the beginning.

But at least one, I think, sees there an awareness of the need to act. And I think we’ve seen something similar in Europe as well on the immediate social impact of the corona crisis. There was a recognition that people couldn’t be left out hanging. There was a giant fiscal policy mobilization. So those are quite striking instances of action from democratic politicians.

You can say the same, I think, now about the climate problem. The giant human—the problem for humanity as a whole, where I think increasingly we’re seeing credible commitments being made notably in Europe, and those are cascading, say, to the highly sophisticated democracies of East Asia, South Korea, Japan as well, I think, and now making credible commitments on that front.

Then I think there are problems, which are really tricky, futuristic. And I don’t know that we really have good answers to them at all or, indeed, are capable really of addressing them. The most obvious one is the migration issue, which affects both the United States and Europe and in the European case has truly awesome dimensions in the form of sub-Saharan Africa on Europe’s boundary, indeed Africa on Europe’s boundaries, with no proven development model for large parts of sub-Saharan Africa and gigantic demographic scale and ever more so in Nigeria as one of the huge—it’s is going to be one of the huge chores in the 21st Century.

And then a fourth framing point on the geopolitical tip would be the question of how democracies even think about the reality of being increasingly overshadowed in terms of the scale of their economies and, indeed, their relevance to global problems like climate change by China and the geo-authoritarian regime there, the direct descendent of the triumphant communist party of Mao’s era.

And that is a problem I think we thought we’d passed. We’d won the Cold War; we could move on. And that is not where we’re at at all, and we are collectively struggling, I think, to come to terms with that.

Hugo Scott-Gall: I definitely want to touch on the new cold war, but before we get there, if it’s 2030 and you and I are doing this and we think about the first two problems you mentioned— one is climate, and the other is inequality, wealth or income inequality. Will those feel on the way to being solved and therefore become less hot political issues? And if that is the case, will the solution already have evolved some quite dramatic reset within democratic politics? And the reset would inevitably, I assume, have to involve redistribution, and that will go smoothly?

Adam Tooze: Well, you’re asking a historian to read the crystal ball. And I’d be incredibly surprised if there was any fundamental shift in the underlying distribution of wealth. That’s basically very rarely happened. What has happened in the successful welfare states of the world as a result of deliberate policy, as opposed to say a catastrophe like a world war and hyperinflation—but as a result of deliberate policy, we have seen shifts in income distribution.

And what I think is totally doable is that the rich and affluent societies of the world could simply decide to have less misery in their midst, right? They could simply decide to tackle the problem of child poverty for instance in a sustained way, not simply in the form that we’re doing it in the U.S. right now, which is hurling a few thousand dollars in checks at people for a couple of months.

But there are policies that could be adopted in a quite reasonable way that would in no way challenge the fundamental status quo that would lift tens of millions of totally innocent young people out of a childhood of deprivation. That I think is entirely conceivable to envision. It depends very much on the nature of the political parties in charge. But I think that’s something that’s quite possible. And it would of course be a much better world.

I don’t think there’s much chance of really large-scale redistribution. The wealth taxes that have been talked about so far would be innovative, and they would be dramatic. But as all the calculations show, they’re nowhere near large enough to actually offset the gigantic disparities in wealth between the fraction of 1% that really owned the very large collections of assets than the rest of the population.

On the climate issue, it’s make or break. And we’re going to see where we’re going to be at in 2030. We’ve created this somewhat artificial deadline for 2030 and then beyond that 2050. And to achieve the kind of reductions the Europeans, Japanese, South Koreans have been talking about by 2030, we’ve just got to remind ourselves it’s 2021. We’ve got nine years to make an impact on this. And some, they’re talking about 50% cuts. That’s not like anything we’ve ever seen before. And really, we need to see change by the end of this year.

If we start losing years then we’re not going to hit those deadlines. And on that basis, I don’t expect us to hit those deadlines. But I do expect the pressure of urgent action to continue because I think we are going to be confronted more and more with the scale of the crisis that we’re already in to be clear. Right, this isn’t something that’s going to come. We’re already in it. And it’s going to affect more and more people in more and more unpredictable ways.

And so, if we delay, then we’re on a steeper path from there on in. So, then in a sense, the pressure will be for further radical action. Exactly whether we have a constructive blueprint for that right now, I think, is very unclear. And even the Biden administration, which is clearly very willing to push, is still weeks now into Biden’s term trying to figure out what its key strategies will be.

Hugo Scott-Gall: As a historian, obviously, thinking about the past, when have you ever seen the world come together to fix something like this? My guess is there’s not a lot from history to really make one optimistic here.

Adam Tooze: No, there isn’t. We haven’t seen a challenge like this before. We’ve been working at it for a while though now. And I think the thing that makes one optimistic is that the global climate politics process is a bandwagon that’s continued. It has gathered momentum. I think we are at a critical turning point. For me, the double commitment by the EU on the one hand and then China, even more dramatically in September, is a marker.

And in a sense, we are not looking after all within the Paris framework for intimately coordinated strategies. And this is the genius such as it is of that framework. It’s basically a competitive framework in which people make national bids, and we don’t even try to reconcile them. Instead, what we do is periodically sit down and make ourselves aware of the fact that they do not deliver the intended outcome, and then everyone goes away separately and comes up with their own national program.

So, by means of doing that, we have minimized, if you like, the need for coordination and made it into a sort of test of national sovereignty, which is probably the best we can manage right now. And on that basis, you’d have to say that the momentum is gathering.

My personal hope is at some point technology takes over because then it becomes very unpolitical and becomes driven by forces, which are not, say, subject to the electorate of the United States and the vagaries of the American Constitution.

And I think we’re also seeing—and about this, one can have more mixed feelings, I think—a huge shift in capital, right? So, I think there is now a growing awareness on the part of very large capital allocators that this is a strategic issue for them for a variety of different reasons, partly political. I think we’ve gone beyond the cosmetic. We’re now squarely in the realm of the political. They want basically to insure their license to operate intact, and one way you do that is to look like proactive actors in this domain.

And many of them are actually trying to figure out what the genuine ramifications for their portfolios will be. And then the key thing is, all of a sudden, it looks like you can actually make some serious money in this sector. And then we start moving the trillions of dollars fast, and that’s, I think, the best hope at this point.

Hugo Scott-Gall: Yeah, green can be a moral color or a political color or it can be an economic color. So, do you think that democracies, which as you said, face some pressure from the success of some nondemocratic regimes, certainly their success in raising GDP per capita, that democracies can find some inner strength from rallying around the cause of investing heavily as societies to solve the climate change. Is there sort of redemption in some ways for democracies via this common purpose?

Adam Tooze: If you talk to senior EU figures, they’ll say that expletively. Remember back in 2017 when Europe was haunted by the populism crisis, which was really by that point a nationalist right-wing populism crisis. The days of Syriza were long behind us and Podemos at that point.

And if you speak to them about it—I did so on camera a couple of months ago—they’ll say exactly, “Climate is the salvation of European politics” in that way. I’m not sure that works quite yet in the United States, unfortunately, because of the polarization of the culture wars. But in Europe, I think that’s absolutely the story. And even in the U.K., the Brexit U.K. is going to not only host COP26 but the Tories are making a fist of a rather energetic, rather dramatic green energy policy. It helps in a sense, historically, that they were the party that dealt the deathblow to the most entrenched mine union in Europe. They were the people who essentially set the destruction of a national energy system in motion.

So, Britain has not for nothing become the playground of the innovators in off-shore wind who are multinational, many of them former oil companies, who’ve got great off-shore technology and expertise. And it suits Britain down to the ground as a technology. So, Britain has emerged as a forerunner of that type of—it’s not the old green vision of decentralized small-scale energy, but, damn, it decarbonizes your electricity system quick.

Hugo Scott-Gall: I want to go from politics to geopolitics. We touched on—there is already is a cold war. Well, maybe you disagree. Say if you do. But China/U.S., it’s a cold something. And it’s probably going to increase, and that has implications for kind of all of geopolitics. Is that how you see the world? And do you think the extent of that is underestimated, as in how far in we are already?

Adam Tooze: As a historian, I’m tempted to say that we were always kidding ourselves, really. We chose to ignore what happened in ’89. And because we built collaborative relationships with Beijing, which were undeniable, we overlooked the fact that we’re doing it with a regime that in ’89 sent a very clear signal that what was happening in Eastern Europe and the Soviet Union was not going to happen in China, even if that meant the violent repression of a large part of their population.

And that was an uncomfortable reality that we chose to ignore. So, there’s a bit of me that simply wants to say we had a cold war. Then we had a cold peace. And now in a sense, we’re heading back in the cold war direction. It’s the same struggle.

And if you listen to the hawkish people around the Trump administration, they were sort of discovering the fact that Xi Jinping takes a very hard line on the narrative of the collapse of the Soviet Union when he gave the secret speech where he said that, fundamentally, the failing of the Soviet Union was that it lost its ideological mojo. It’s lost its commitment to the legacy of the revolution. It disowned Stalinism, and this is a mistake we shouldn’t make. So, they discovered this. And this has clearly always been true, really, about CCP ideology that they’ve never really stepped away.

So, I think we’re back in the space of reality. But to my mind as it were, do we choose détente—warts and all? Because détente was always a warts and all policy. In other words, you have to reckon with the fact that your counterpart has a very different conception of human rights, a different system of law, of politics. And, nevertheless, you say we’re going to collaborate on key issues of mutual interest and particularly with regard to issues that concern the survival of humanity on the planet, which was the logic of the Cold War détente. In other words, the nuclear threat is so real we have to look past other things.

Or you head down the route, which the Trump administration was taking us on for better or worse, aggressively, and really with dramatic speed last summer. And what struck me so far is I don’t see the haste on the part of the Biden administration I would’ve expected to reevaluate some of the choices that were made at that moment because I don’t see how the Chinese regime can interpret the decisions that were made, particularly on vital technologies—microchips is really the most visceral—how they can interpret that as anything other than a kinda declaration of economic warfare or at the very least an open statement by the U.S. that Chinese industrial and technological development will go this far and no further.

And I just think that’s incompatible with the most fundamental aspiration of China’s regime, which is the commitment to sovereignty and the restoration of Chinese sovereignty and the assertion of China as one of the great powers of the world. This is what those centuries of humiliation kinda rhetoric is about, and microchips are a red line that they simply can’t accept.

I’ve been impressed to answer your question about whether we realize how far we’ve gone by the relative inaction of the Biden administration on this issue. They don’t seem to be making a concerted move one way or the other, which from Beijing’s point of view presumably means the status quo, which is a condition of a kind of economic warfare.

Hugo Scott-Gall: Your answer, I would argue, is very much around resources versus ideology. So, if you wind this forward—you brought up semiconductors, chips. Once China is able to be self-sufficient in the things it wants to be self-sufficient in, can that lead to a happier coexistence? Once China has access to the resources it feels it needs to continue its economic growth and once the U.S. feels that its resources that it needs externally are available to it, does it kind of cool—well, not cool off because it’s a cold war. But does it not escalate?

Adam Tooze: I would be pessimistic on that score because I don’t think from the United States point of view—it’s not like they’re arguing over microchips. And the question is do American producers get the microchips they need, or do they go to China? It’s not the like the vaccine kind of zero-sum competition.

I think America finds it, given that it is, as it were, the incumbent superpower and as recently as the 1990s was the height of powers, the only game in town globally. And because it has, as a result of World War II and the Cold War, in placements throughout East Asia, unlike the Europeans, for instance, it faces a historic decision as to when and how and on what terms it cedes space to China in its own backyard. And that is not something that is squarely addressed by this issue of resource access.

And I think that is going to be incredibly difficult for the American political system to process. One might hope that they would simply depoliticize it and let it happen. But that is itself a decision, and you have to bury certain issues of interest to certain lobbies in the United States. And I think that is the real issue. So, no, I don’t think you can get to diffusing this by way simply of resolving resource allocation questions.

Hugo Scott-Gall: And, again, with your long historian’s telescope as you survey history, what does this period feel like with ones superpower and another rising power—Thucydides, Germany, turn of the 20th century? Or is it something else?

Adam Tooze: As a historian that’s a question that you see coming a couple of thousand years away. It’s the inevitable question that you get asked. One response I have is—let’s get this into proportion. Sparta, Athens, Imperial Germany, the British Empire—I think China’s in a different league. I really do. There’s a bit of me that just resists that analogy because it’s not the same.

China is whatever it is 1.4 billion people. It is a huge slice of humanity, which finally, as it were, has achieved middle-income status. And this implies fundamental shifts in the balance of power. Now the questions are all for the incumbents. And they are also, of course, for Beijing because they’ve got to decide how they play this. But I think the difficult questions are for the incumbents really.

One thing you can say is that we’re all conscious of this story, and everyone you talk to about this issue knows the Thucydides trap. In other words, the risk that an incumbent power will strike at a rising power before it becomes too powerful. And as it were, we are making a wager on our collective intelligence, in our ability to steer away from the inevitability of that clash.

And we know that Xi Jinping is actually on the record as saying—this Thucydides trap thing, thinking in those terms. It’s pretty damn dangerous, isn’t it? We shouldn’t do that. So, he’s even willing to just say this out loud.

If you did want, as it were, historical examples that would make you feel more optimistic, there is at least one highly significant one, which is the early 20th century, which I spent a lot of time thinking about at one point. I wrote this book, Deluge, about the transition of power, which went hand-in-hand with the rise of the United States in the early 20th century.

And there is a moment after winning the war against Imperial Germany, which in some sense was the minor challenger, the British, and, crucially, the Japanese sit down with the Americans in Washington and say “okay, how are we going to divvy up”—what at the time was considered to be the great vehicle of strategic power globally, which were battleship fleets. How many are we going to have? And they fixed ratios. And they say said, “Look. So, the United States and Britain will have…” And the ratios were five for them, three for the Japanese, 1.67 for France and Italy, and no one else was going to have a battle fleet.

So, it was a determined effort by the incumbent powers to manage this. It was all prospective. The Americans hadn’t even built the battle fleet yet. But the idea was that you couldn’t outrace them. So, intelligent leadership in both Britain and Japan decided to concede. Now that didn’t turn out, obviously, to be a lasting bargain as far as the Japanese or the Germans were concerned or for that matter the Soviet Union or for that matter Mussolini.

But that then gets us into a much wider terrain of how you make a deal like that robust. And I would argue it needs to be massively multiple-stranded. It needs to involve a variety of different commitments but at least suggests that it’s conceivable when faced with this sort of world historic transition, which the rise of the United States was. There are alternatives in modern politics to inevitable clashes.

Hugo Scott-Gall: Good, good, good, good. So, when you have something like a cold war, innovation, historically, has been a healthy byproduct. You get innovation when you have a motive, and a cold war is often a motive. So, are we on the cusp of something really quite innovative for the global economy overall? Is there a benefit from COVID? Is there a nice sort of dividend from a cold war where you’ve got the motivation, and you’ve got the means?

I’m not going to get into sort of the roaring 1920s analog, but are we actually on the cusp of really quite an innovative age in terms of the motives and the means and some very real problems to solve—climate, COVID. So, the world is not short of capital—it is swilling around looking for a return. We’ve got some more powerful tools, whether that’s communication technology, whether that’s processing power, whatever you call it, we’ve got tools, means, motivation. And the motivations are many. That should equal, actually, quite an inventive age.

Adam Tooze: I think there are reasons for optimism on that score. The Cold War has two histories of technology. The early Cold War and the Sputnik moment in the United States did indeed generate a huge surge in government-sponsored research in the United States, and that fed out of the system that had come from World War II.

But in the latter stages, the Reagan era is, after all, the phase in which government sponsorship of basic research in the United States was systematically run down. So, you can have a kind of cross-cutting ideological formation. And, also, there was plenty of, as it were, momentum to ride with. So, the microchip revolution had been set in motion. So, they were off to the races. The biotech revolution had been set in motion. So, they were off to the races.

I do think you could imagine and envision—and after all the vaccine race last race year, it was an extraordinary demonstration of precisely the potency that kind of research set up, the pace with which the virus was sequenced, and then we moved rapidly to vaccine design. And I would emphasize not just through super high-tech mRNA side, but the traditional vaccine development routes, they were only about a month behind. And, frankly, if we had cut corners on safety testing, the Chinese were vaccinating people already in the late spring of last year.

So, there is huge potential there. And exactly as you say, there is enormous capacity for innovation now within the science system. Researchers can parse information around with unparalleled speed. There is huge number-crunching capacity; 4%, I think, of total science output in 2020 was devoted towards COVID-related questions. That’s just a staggering amount of brainpower and scientific equipment that was pivoted to a single question.

To me, I think the challenge of a promising politics, which is promising in the sense of, as it were, enabling us to live free and meaningful lives on the increasingly serious natural constraints. And also, I think, an avenue for very profitable development is just to double down on that. What we learned is Operation Warp Speed was world transforming. And how much did it cost—$10 billion dollars? This is peanuts on the scale of modern economic policy right now. So, just think of the potential to harness the scale of the modern research establishment.

One shouldn’t take this too seriously, but I checked the comparative numbers of hairdressers and molecular biologists in the United States right now. I’m not saying I don’t like hairdressers. And god only knows I need one at this point in the epidemic, but I can’t go until the molecular biologists have done their work. I want more molecular biologists being funded through the education system. I want more med techs. I want more nurses. We want more testing capacity. These are great jobs. These are meaningful lives.

This is great human capital we should be developing. We should be just lavishing money on it. It goes around anyway, and we know that we can waste it on the administration of health insurance systems. Let’s shift it out of there, and let’s shift it into something that unleashes this incredible capacity that there is out there. So, no, I’m down with that kind of tech optimism. And I think we’ve seen elements of that in the green energy story as well.

We know that there can be historic dead-ends. Huge amounts of money were spent in the 70s and 80s, for instance, on nuclear power. And I’m not saying that nuclear is necessarily a technological dead-end, but given the safety environment, it’s economically not viable. But that shows as it were the seriousness of the strategic choices you have to make.

If you’re going to spend very large wodges of money, I think the idea would be a portfolio. It would be redundancy. It would be trying not, as it were, to pick one winner. It would be trying to pick multiple routes. We’d have to get smart about how we did it.

But, no, I don’t find that an implausible vision. It’s our best hope, clearly. And what else we learned last year is that if the solution to any of these risks and challenges comes down to our ability to discipline ourselves collectively as societies at least as far as that in America and North America and Europe are a concern, we’re done for. That isn’t going to work per se.

We can maybe do that with a time horizon where the Hail Mary pass or the technology’s going to come in and rescue us, but we kinda need that sense of imminent salvation in the form of a scientific or technological silver bullet. And there’s no reason to think that that isn’t possible. We haven’t tried that really.

Again, one of these silly comparisons. We spend in the United States right now less on energy research than we do on pet food faced with a climate crisis. We’re not even trying in other words. We literally have not begun to seriously struggle with these problems.

Hugo Scott-Gall: I hear you. I hear you. And I do think those kinds of reallocation resources, particularly motivations—where motivations are sufficiently high, then you do get reallocation of resources, and you can get good solutions. And it feels like those three things I mentioned—post-COVID the acceleration in medical research, climate, and then also cold war, which between U.S. and China—that at its heart is kinda resources. So, that does feel like it could be a first R period for spillover for concomitant innovation.

This is all connected. But the final area I want to talk about with you is just, I guess, financial markets. You wrote a masterly weighty book called Crashed, which is really a very forensic analysis of the pipes of the financial system and the importance of the dollar. Now you wrote that after we had a pretty enormous crash in 2008. With that lens, with that expertise that you have, how do you look at the financial system today?

It’s difficult to find an asset price that isn’t close to an all-time high in the world, which is unusual. And when that happens, there’s usually an increase in leverage. And, somewhere, that increase in borrowing leads to something bad happening. How do you think about the efficiency of the financial system today? You wrote a lot about the role of the dollar. So, in that is a question—I’ve got a lot going on in that question. But how are you thinking about it today?

Adam Tooze: Well, I agree with that diagnosis. And the one thing that 2020 revealed had changed is the banks were not the epicenter of the concern that they were in ‘08 or ‘09. The problem in ‘08-‘09 was that the securitized mortgage risk, which was market financed by way of repo, therefore, in other words subject to runs. And they were uninsured like standard deposits.

And the run in the case of a big investment bank could easily be $100 billion dollars in a day because they would repo these portfolios on a rolling schedule. And if the market just didn’t like them anymore, then they would lose access to the repurchased facilities. So, they would not any longer be able to fund their assets, which is tantamount to a run risk.

But that in that form is not something that we found ourselves dealing with in 2020. On the other hand, what we did see was something truly alarming, which is quite profound market failure in the most important market of all, which is at the time a $20 trillion-odd U.S. Treasury market. And the key actors there were a variety of non-bank actors—so, mutual funds, hedge funds, emerging market fund managers of various types that dumped for a variety of different reasons because, in fact, they needed dollar liquidity treasuries into the U.S. Treasury market, the market where you’re always supposed to be able to find a price pretty close to what you paid when you bought the stuff.

So, hugely liquid markets suddenly turned illiquid. And that was a really massively alarming symptom of instability. In some ways, I think worse. And people who went through both crises, I think, will confirm it was worse than what we saw in 2008. Because when the panic was on in the banking sector, people were running into treasuries. And this time around, it wasn’t even obvious that treasuries were acting as a safe last resort for liquidity. And that suggests that there are still some pretty serious plumbing issues in the system.

It was not a run out of the dollar because the dollar was strengthening at the time. It was a shortage of dollar liquidity, which caused a massive reallocation within dollar portfolios. And once again, the Fed ended up carrying the can.

Other central banks had to step in because like in the U.K. the gilt market was also massively troubled in March. But all of this is indicative of the fact that in the end we live no longer really, I think, in a bank-centric financial system but one that is based essentially in markets fundamentally. Liquidity is being provided by various types of short-term credit on the basis of secured borrowing. Really, the model or the epitome of this is the repo market.

So, having said that, I think everyone is watching current developments in the treasury market extremely anxiously. It’s a potentially worrying situation with regard to the huge volume of debt that’s being pumped into the system. That debt is not just, as it were, a draw on savings in the classic lump of saving’s sense. It’s also rocket fuel for various types of non-bank financial activity. We are spinning the roulette wheel. We are continuing as it were to escalate. And I don’t see an exit strategy from that.

There were people on the left notably who were demanding really radical reform in ’08, ‘09, and ‘10. They didn’t really get a hearing. We decided that we were going to try and run this system hotter and hotter and hotter fundamentally. We took the banks out of the equation, and that’s a step in the right direction.

But what I see and sense is the central banks moving more and more to the center of really very hands-on risk management. They may try and make the treasury market more transparent. But they’re also going to do things like create standing repo facilities to put themselves in a permanent backstop position in a market, which they previously were not a permanent actor in. So, I think that’s the trend.

And it continues to be dollar-centered, this bit at least of the global financial system. And part of what keeps it so is how quickly the financial authorities in the U.S. respond to crisis. Those folks have their act together. They put the emergency facilities in quick. They flood the world with dollars so everyone goes back. You don’t in the end end up fundamentally regretting your decision, though there may be, of course, longer-term forces that take us out towards a more pluralistic world.

And I think that is also clearly happening. But large amounts of very hot money distributed across the entire system continue, essentially, to be the U.S currency. And, ultimately, the source of liquidity remains the U.S. Central Bank.

Hugo Scott-Gall: You look at asset prices. It all feels strong. Your argument, the way you see it, I think, is saying, actually, the fragility rises almost in tandem with asset prices. Do you see the system as becoming more and more fragile? And in a sense, when you said, “I don’t see a way out,” that does imply therefore fragility.

Adam Tooze: It does. And I think the question is where would we start tweaking? And I must admit that I’m hoping. And it’s incredibly techie and kind of nerdy that we start seeing proposals out of the Biden administration on how to fix the repo market, how to make it more stable because it shouldn’t be causing—we’ve had two really big hiccups in the fall of 2019 and then in the spring of 2020.

And that market in particular, the treasury market, ought not to experience those kinds of dysfunctions. Liquidity should not be disappearing. It’s really dangerous for that to be the case. So, we need to look at market structure. I think we need to look at the incentives of the key actors involved. There’s going to be a push from the big banks saying that their regulations should be lifted in a way, which increases their balance sheet capacity.

I’m skeptical about that kind of argument in the end, so long as we have that repo-based system in place, which is running into multiple trillions of dollars of liquidity there, then in the end, it all comes back to the central bank.

So, if we don’t want that to be the case, we need to be really thinking about much tighter regulation on that entire non-banking area of global finance. That potentially, as the Chinese have experienced, repeatedly squeezes liquidity, squeezes credit out of the system. So, you would want to pick your moment in the business cycle carefully to do that. And that’s not the space that we’re in right now. We’re in a taps full on, taps full open kind of mode.

Hugo Scott-Gall: So, where I want to go next is, right now, very current—is the threat of inflation, although it’s not even always seen as a threat. There are quite a few commentators who actually welcome inflation and say, “What we need is a nice burst of inflation.” Back to your full historian hat, do you ever get nice bursts of inflation? Inflation usually ends badly. Correct me if I’m wrong.

Adam Tooze: Well, usually. Our track record with inflation, it’s a small data set really. The big ones of the 20th century—after World War I when it was massive. I guess there’s a major inflation after World War II and then the 1970s. That’s the N equals three. Some of them are runaway. Some of them are not. What I think people mean when they say that—and I would definitely be in that camp—is if we could have inflation ticking up to three, tending towards four, and the Fed having to pull back hard on the levers, this would be a success.

And, in fact, now with the Fed’s adjusted policy, that’s broadly speaking what they’re committed to trying to bring about because they want to achieve an average inflation rate of 2% given our recent track record. That means that to hit that target they need to go towards three and even slightly more than that. And they do that confident that they have the levers to address it because we know, I think, historically, how to slow inflation, especially if the underlying dynamics are not as complex as they were in the last big bout in the advanced economy world, which is the 70s.

And Friedman is right. Inflation is always and everywhere a monetary phenomenon, but not all monetary phenomena are inflationary, as we’ve discovered. You can blow the money supply up any way you measure it. And you don’t get inflation at all, as we’ve had since 2008.

To actually turn it into inflation, what you need are real economy bottlenecks, real economy dynamics of some kind. We’re going to see some bottlenecks this year, clearly, because we’re disentangling a world economy that was just gunged up last year. It’s going to be a whole variety of different things—lumber in the United States. Oil prices are rebounding. The rates have changed. They’re going to look dramatic. All of that’s happening.

But what we don’t have are the flywheels of inflation that we had in the 70s. We do not have tight labor markets in the west yet. And in those labor markets, even when they are tight, as we saw in 2019 in the U.S., we do not have organized labor. We do not have a workforce with bargaining power that’s able to rapidly drive up the nominal wage when labor markets get tight. We do see some changes, especially at the bottom end, which is very desirable from a social justice point of view. But we do not see the snowballing dynamics of wage price spirals we saw in the 70s.

So, if that remains the case and there’s no reason, unfortunately, to doubt that it will change, the mechanics of inflation control look relatively straightforward. And there are, after all, economies like the U.K., which have bumped along at a higher end of the inflation envelope for quite some time without it every breaking out. And then there’s the cases like the eurozone, which would struggle to get much above 1.5% in terms of long-run inflation expectations, which is frankly miserable for everyone.

So, yes, a little bit of inflation would be a great thing. It would also shift the balance-on-balance sheets, which is what we’ve been saying. We’ve got a lot of leverage. We’ve got a lot of debt. And, obviously, a modest phase of inflation would be helpful.

Hugo Scott-Gall: And that almost gets us back to where we started on politics. If you get sharply rising inflation or sustained, it has political consequences, of course. And it might also maybe shake the faith in the sort of almost omnipotence of central bankers as well, which you could argue has never been stronger.

Adam Tooze: It’s a two-way argument, isn’t it? Is confidence in central bank shaken more by their inability to get to 2% or by the fact that they finally did and then had to demonstrate the efficacy of a policy of restraint. I would argue, certainly, as far as the markets are concerned, the more striking thing in recent years has been everyone’s disbelief that they can actually, as Paul Krugman said, “credibly commit to being irresponsible.” We just haven’t seen that.

And if you look at the track record of somebody like Janet Yellen is testimony to that. We’re trying not to say this, but Janet Yellen presided over two interest rates hikes in ’15 and ‘16, which were probably a mistake, certainly, if the name of the game was get inflation to 2%.

And there is, as it were, an anti-inflationary impulse apparently hardwired into most central bankers. You only have to look at say the inflation predictions of the ECB over the years. It’s that famous eyelash graph where they repeatedly predict it’s going to shoot up. And, in fact, it keeps on going down. So, it looks like sort of a Walt Disney eyelash. So, I don’t know really. It would be a new test of their authority for sure if they actually had to suppress some inflation.

Hugo Scott-Gall: So, I’m conscious of time. And there’s always just too much to talk about with you. There isn’t a book yet to define this age other than as I understand it you are currently working on a book, but that is strictly under wraps. So, we can’t say that it might or might not be the book to define the age in capitalism.

Adam Tooze: Oh, I wouldn’t. No, it’s out in September. It’s called Shutdown. And it has the much more modest ambition, actually of—I’m fascinated with history. The history also is—this was true of Crashed. And it wasn’t just, as it were, the economy that crashed, but it was also our preconceptions that crashed.

And what I’m fascinated with, as it were, the shock, the drama of smart people struggling to make sense of the world and finding themselves blindsided, confronted with realities they didn’t anticipate and then, as it were, scrambling to make up solutions. And that’s what Shutdown is about.

Hugo Scott-Gall: Great. I look forward to that. I’m sad that this is ending, but I look forward to that. So, Adam, I want to say thank you very much for joining us.

Adam Tooze: Thank you. It was a pleasure.

Hugo Scott-Gall: Thank you for listening to today’s episodes of The Active Share. To hear additional insights from William Blair Investment Management, visit us at blog.williamblair.com. “The Active Share” is available on iTunes, Stitcher, Google Podcasts, and TuneIn. For questions, comments, or topics you’d like to hear discussed, email us at podcastim@williamblair.com.

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The Bloomberg Barclays U.S. Aggregate Bond Index is a broad-based benchmark that measures the investment grade, U.S. dollar-denominated, fixed-rate taxable bond market, including Treasuries, government-related and corporate securities, mortgage-backed securities (agency fixed-rate and hybrid ARM pass-throughs), asset-backed securities, and commercial mortgage backed securities.

The MSCI ACWI IMI Index is a free float-adjusted, market capitalization-weighted index that captures large, mid, and small cap representation across developed and emerging markets.

The MSCI ACWI ex-US IMI Index is a free float-adjusted, market capitalization-weighted index that captures large, mid, and small cap representation across developed and emerging markets, excluding the U.S. The Value and Growth Indices are a subset of the Index that adopt a framework for style segmentation in which value and growth securities are characterized using different attributes. Multiple factors are used to identify value and growth characteristics.

The MSCI ACWI Small Cap Index is a free float-adjusted, market capitalization-weighted index that captures small cap representation across developed and emerging markets.

The MSCI Emerging Markets Index is a free float-adjusted, market capitalization-weighted index that is designed to measure the equity market performance of emerging markets.

The MSCI World Index is a free float-adjusted, market capitalization-weighted index that is designed to measure the equity market performance of developed markets.

The Russell 2000 Index is a market capitalization-weighted index designed to represent the small cap segment of the U.S. equity universe.

Index performance is for illustrative purposes only. The indices are unmanaged, do not incur fees or expenses, and cannot be invested in directly.

Alpha is a measure of an investment's return in excess of the market's return, after both have been adjusted for risk.

Beta is a measure of the volatility of an investment relative to the overall market, represented by a comparable benchmark.

Half-life is a statistical measure of the time required for the discrepancy between price and value to contract by half of its starting value. Fundamental value estimates are based on the Dynamic Allocation Strategies team's proprietary research.

P/E Ratio is a measure of valuation which compares share price to earnings per share, calculated using estimates for the next twelve months.

Standard deviation is a statistical measurement of variations from the average.

The William Blair Earnings Trend Model captures information about short- and medium-term changes in analyst estimates in an attempt to anticipate future estimate changes and stock performance. The score combines measurements of earnings revisions, momentum, and earnings surprise.

The William Blair Valuation Model combines varying metrics used to characterize the relationship between the stock’s trading price and its intrinsic value. By going beyond using only one or two measures, the model attempts to build a more holistic version of a stock’s worth vis-a-vis the market. The score combines measurements of earnings/cash flow based, asset-based, and model-based factors.