hi everyone I'm Nicola tangin the CEO of the Norwegian Sovereign wealth fund and today I'm here with Rich shama one of the most respected voices in global economics and also the chair of Rockefeller International now earlier this year he published his book really really good what went wrong with capitalism and that's what we're going to talk about today so rich warm welcome

thank you thank you for having me so

let's kick off with budget deficits why are budget deficits a problem

well firstly that budget deficits have apparently not been a problem for the last uh 50 years or so because if you look at the pattern Let's Take America as an example uh it's uh in it's 300 years or so of existence in the first 250 years America did not run a budget deficit except when there was an outright recession or there was like a war going on the norm was to balance the books or to run even surpluses

then from the 197s that began to change why uh and I think that like in terms of that the Habit then some people B it to the fact that you had the end of the gold standards so the discipline went away and then this culture sort of crept in which is that you can run budget deficits and there are no consequences to it uh and for the last 50 years I think that America has run a budget surplus for only five of the last 50 years otherwise it's been a deficit practically every year

so when will it become a problem I think that we are now getting to that point and our a couple of reasons for that one that historically America's budget deficits were still I'd say within the realm of other nations you know so like in the uh for the last uh 20 years or so the budget deficit averaged around 2 3% of GDP and most other developed countries were running similar budget deficits

now in the last 3 to four years the average budget deficit that America is running has gone up to 6% of GDP and uh if uh the uh projections are right next year that let's say the tax cuts are extended uh and so the budget deficit in America will get to 7% of GDP

why is it a problem

yeah it's a problem just because of the fact that now we're getting to levels where we are borrowing so much that the auction sizes are also going to become much larger now and the Market's ability to absorb all this I think at some point is going to come into question and the issue you know there's no science behind this and especially because America has got the world's Reserve currency so it has an ability to run budget deficits that are far greater than other countries would you mind just

explaining what a reserve currency is

yeah so the reserve currency is a currency which most uh like everybody uses as the main currency of reference the main currency of transaction the world in the last uh 6 700 years has always had one predominant currency that is used in transactions around the world last 100 years it's been the dollar before that it used to be the pound sterling before that the French Frank and then before that the Spanish and the Portuguese and the Dutch currencies and

if you are the reserve currency can you have as much budget deficit as you want

uh for a while yes but eventually remember that the reserve currency is not a permanent status it's a long-term status but not a permanent status the average time that a country has been able to have the world's Reserve currency has been about 100 years or so every 100 years the world's Reserve currency tends to change

what will make it change when that firey becomes too indebted it becomes too extended and the world's trust in using that currency as a reference declines and I think that with America we are now getting to that point where this has become a bit ridiculous where America thinks that they can run whatever budget deficit they want and the rest of the world will keep funding it and financing it and and

what what causes these tipping points what is it that can make it a Tipping Point

well often it's not a Tipping Point it is the fact that it gradually happens over time but it generally is the you know when the investors the bond market they begin to say enough is enough we saw that with UK and Sterling uh in the 1950s 60s and finally they had a big crisis in the 1970s and before that we saw that with the French currency so so

we're not seeing it in the States now

yeah there is no sign of it now at least explicitly uh there other issues I address in the book as to what are the consequences of the government action which are leading to lower productivity growth and which are undermining economic growth

well one of the things that that could cause a moment where investors just decide listen we want to have a much higher price to lend money to a country right so I think that generally when the interest expenses become very high that a lot of the budget now goes to just paying off your interest expenses and the price of money is also changed

remember that for the last 20 years or so when you had virtually zero interest rates it was much easier to fund these budget deficits now we have moved to an Era where interest rates are far higher and the bond markets in other parts of the world with other countries are beginning to express their concern

we saw that in UK if you remember in 2022 what was referred to back then famously as the Liz trust moment when she tried to expand the budget deficit by cutting taxes and the market revolted

we seeing that this year as well in countries such as France where the budget deficit is now at 6% of GDP and the French government is now being forced to uh address it in some way and and this is a Playbook we've seen in so many Emerging Markets you know from Brazil to Turkey to so many other Emerging Markets Frontier markets where the bond market has said listen this is far gone far too much uh we can't do this

if if I told you that uh without naming America that there's a country in the world today running a budget deficit which is 6 to 7% of GDP its debt to GDP government debt to GDP is now over 100% and is going to be the second highest in the developed World After Japan by the end of of this decade you would say that hey this is really problematic

but in America's case because this entire deficit today is uh leading to higher economic growth uh and you have this incredible Rush of capital Coming to America because of the boom that you're seeing in technology and like AI these uh problems are being glossed over

what is a trust moment the list trust moment

is when the market basically says okay we cannot fund this we want hire and higher interest rates to do this unless you start cutting spending

so this is what happened in the UK right

yes

and remind us what happened with interest rates in the UK yeah trust announces

yeah so interest rates sort of you know spiked up the currency uh declines because generally like in America and all we used to that when interest rates go up you expect the currency to strengthen so a tell sign that something is going wrong is when interest rates go up but the currency declines doesn't go up that is always a Telltale sign that the market is now saying enough is enough and foreign investors are uh retreating

so the country you uh talked about without talking about uh they are seeing interest rates going up but also the currency going up in the US today interest rates have gone up even after the Trump uh election interest rates have gone up but but the currency is also gone up so that shows that there is no sign as yet of any big concern but my fear is that these things can turn very quickly next year the you know when the budget deficit in America begins to hit 7% imagine what happens in America if there's an economic slowdown then the budget deficit gets to 8 to 9% of GDP because if you have a Slowdown then the revenue slow down spending automatically goes up

so we're getting to levels which are uh completely egregious and I think that investors are being misled because a lot of this deficit today is artificially funding the growth so the economic growth in America looks pretty good and you think that what's the problem but I think that because it's being funded by the deficit because usually in the past when America has been at this stage of the economic cycle where the unemployment rate has been this low the budget deficit has historically been only 1 or 2% of GDP today you have full employment virtually in America and a deficit of 6 to 7% of GDP so this is I think uh an unsustainable situation

Ria what's the score in Europe

Europe is in much worse shape you know than America so as I argue in the book that capitalism is in worse shape in is bad well no um not

everywhere else but

core Europe at least because if you look at France Germany productivity growth is much lower than than even America in America too productivity growth has been declining for the last 30 to 40 years but in Europe it's a lot more

why is this the case because as somebody said that Europe is really the Silicon value of Regulation uh like in America as we know that they're trying to now uh go after too much regulation we know that regulation has been a big burden on small to midsize businesses in Europe the regulatory burden is far higher

similarly like in Europe government spending as a share of GDP is far higher the deficits may not be but government spending is so you're forced to tax much more and in countries like France government spending as a share of GDP is nearly 60% how do you call that a capitalist Society When government spending as a share of GDP is 60% of the economy second possibly highest in the world after North Korea that is not a capitalist Society anymore

now IMF the international monetary F uh have added together all the the debt in the world they get to roughly $100 trillion is that a problem

well I think that just looking at the total debt levels is not uh like the issue for me because in fact I've done a lot of work on this that what when is debt a problem and here's you know what I I found and something I've written about in my previous books that typically it's not the level of debt which matters but it's the pace of acceleration because if you uh extend too much debt over a short uh span of time uh often end up making bad loans and so

the typical sequence which happens is that the private sector makes uh those mistakes which is that you see a big lending boom which takes place which is what we saw in America and in Europe in the 2000s uh it was mainly into the housing markets and then be if the pace of growth is very sharp over a 5-year time Horizon you end up making lots of bad loans and then you end up having a problem and the government debt typically increases after the country has hit a crisis point or the problem then the government increases its debt to bail out the private sector that's been the usual sequence of events

this time what's happening currently is that the private sector has not increased debt that much in places like America if you look at the households even the corporate sector the increase in debt has not been that much but this time the unusual thing has been that the government which is supposed to be the lender of Last Resort that is where the debt has gone up exponentially and so now the problem is that if you get in trouble where the government uh debt becomes an issue you have no lender of Last Resort left because the government was supposed to be the lender of of Last Resort and that's where the debt has gone up

now you have some bold perspectives on capitalism in your book is that something that's been kind of brewing in your mind for a long time or was it a particular moment there we triggered it

well I think that um you know like I've been a writer for a long period of time I've been a I've been writing since the age of 17 so these are thoughts which keep building over time and the book is a accumulation of that thought process but I would say that for me the moment was during the pandemic that during the pandemic when I saw what governments did which is that to shut everything down and then to say that we will just give massive amounts of stimulus and you can sit home and and in terms of it it does not matter

and then that stimulus is what led to this huge amount of asset price inflation where in 2020 the number of new billionaires which were minted by people sitting at at home was incredible because because stock markets went up asset prices went up that's when the real thought came up what's gone wrong with capitalism that this is not how it's supposed to function where you give people free money and especially the rich and the privilege sitting home uh earning more than $100,000 a day are getting checks or tax credits uh that's not how capitalism is supposed to function

what's the biggest difference between how it's supposed to function and how you believe is functioning now right so

one thing I believe is the fact that uh you know as someone put it very suly which is that capitalism without bankruptcy is like Christianity without hell which is the fact that if you have capitalism then you have to accept risk as well you cannot have a system like you have today where risk has been socialized where the you know where the governments are telling you on the upside you can make as much money as you want fine we will tax it you know when we have to but you can make all the money on the downside we are here to protect you

so this is what you call the bailout culture that's right

okay

tell us about it what when did they start uh

this is relatively new Nikolai because if you look at even America right up until the 1970s America believed that private sector companies are not meant to be bailed out and then when the first attempts at bailout happened in the 1970s there was a lot of resistance uh uh in in uh Washington uh in Congress at the city state levels any talk of bailing out private sector companies was met with Fierce amount of resistance

but isn't it quite perfect I get the upside and if it goes wrong somebody bails me out

yeah but that's what leads to problems also because that's where you end up having so many inefficient companies that stay alive because of that asymmetry and then it prevents new companies from entering prevents new entrance uh from um entering the system

and I think that that's what really happened that in 1984 was a landmark moment because that was the first major bailout of a financial institution in America that was the the Continental Illinois Bank and once that happened then every time there's been any problem in the financial system the government's been there to bail out and the most ridiculous situation was last year where you had the Silicon Valley Bank bailout which is that it was a midsize Bank of relatively ra uh rich depositors and uh the depositors were all bailed out and so now you have the implicit assumption that at any Bank if you put money uh the government's there to protect your deposit

so originally this was called the green span put right cuz he was a central Banker when it happens at the first time but what are the implications of this happening again

yes the green span put's a bit different so we spoke about the bailout culture of Continental like Illinois the greenpan put was also very significant and this is the irony of it we associate the 1980s with this Golden Era of free markets and capitalism being Unleashed by Reagan and Thatcher and stuff that's the popular image and yet a couple of landmark moments which totally distorted capitalism happened in the 1980s

we spoke spoke about the bailout of Continental Illinois in 1984 which was a landmark as the first major bailout of a financial institution in post World War II history and then in 1987 for the first time when the stock market crashed the Central Bank explicitly cut interest rates and intervened to prop up the stock market and that created this feeling of a green span put which is that once again on like on the upside the policy makers say we don't know how to predict bubbles or when markets become too expensive so we'll do nothing about it on the downside if something happens we are here to clean up the mess

so um you say that we become addictive to these type of help support bailouts right

yeah

now how do you win markets off it

well it's very difficult but I'd say that in terms of that's what I said you know that that for any incoming president or something it's to make it very clear that we do not believe in a bailout culture uh in terms and how do you show that by letting something go bus no by by s it uh preventively before in good times because once you have a crisis it becomes very difficult because once you have a crisis then everyone scrambling to find a solution but if you make it clear to the outset that this is not the culture we believe in and

remember you know this is what I find like the great irony of it that usually we say populism and an economic populism is bad economics that you know populism is supposed to be spending giveaways and stuff like that but here is one populist measure which I think is good economic ICS if you say no bailouts because bailouts remember are very unpopular with the average person

the 2008 bailouts you can argue that they were required of the banking system they were very unpopular with the average American they were because they saw their small Community Banks fail and yet they saw these large Banks getting bailouts and that I think SED the seeds for so much of the anti-establishment feeling the anger that we have today so I think that that's one of the solutions out here but there are a whole bunch of solutions that I offer in the book as to what can be done to try and correct this system where the average American or the average person in Western societies feels that the economic system is not working for them

first step is to recognize this what I find shocking even in America is that you know like in terms of the number of people who are in denial to say the oh the economy is doing fine we're growing at 2 and a half% what's the problem in terms of that no no we're growing at 2 and a half% but that's at the headline level look beneath the hood the number of people who are dissatisfied with the economic system is staggering there are 70% of Americans say they want the economic system to be torn down and the country is moving in the wrong economic Direction

I think that was a very important factor even in this election and a very important reason why in the last uh uh three elections for example here in the US the incumbent party in the white house has lost the election that's never happened before uh or at least not happened before in the last you know 150 years that I know

you say that capitalism in Europe is dysfunctional what do you mean by that

that I mean like in Europe as I said that if we talk about problems in America of overregulation over uh spending and too much of a uh welfarist Society then in Europe those problems are even greater

and you think America is going in the same direction

exactly so that's what's happening which is if you look at welfare spending as a share of GDP America is very quickly catching up with Europe now and I'm talking about core Europe as I say like in Europe also we have to make distinctions that there is core Europe uh which is the France Germany of the world but then there are some good examples in Europe too one of the countries I speak about are countries like Switzerland where I say that here you know like it's the richest country in the world it is among the 20 largest economies and they seem to get the balance much correct in terms of their spending as a share of GDP there is no utopian Nation but uh they get the balance correct

on the other hand and you know this even in places like Scandinavia and staff that that places like Sweden and all that that when they became very overextended in the 1990s and they faced a crisis even they were forced to pull back their government spending as a share of GDP had reached 70% and stuff in the early 1990s and they reached a crisis and then the good thing is that these countries uh are much more fiscally disciplined today compared to let's say America

so do you think the countries in Europe will start to pull back on government spending

well I'm not sure that they're going to start to pull back but you know like on government spending because very few do it until they face a crisis

what do you think will cause the crisis

the bond market that you know when the bond market revolts we saw that in UK we and we're seeing some signs of that in France this year so I think that the the only way is when the market says enough is enough we cannot fund these deficits we can't fund this spending anymore and Emerging Markets have seen that all the time which is that you know that the markets say we just can't fund this it happened to Greece too

in fact the the poster child of an economic turnaround story in Europe has been Greece that Greece at this time last decade we were all what it sick about Greece and the crisis in Greece they were forced to cut back but but they faced a crisis the problem is if you don't face a crisis then you can keep on extending and pretending that's what Japan has done that's what Italy has done so it's almost sometimes better to have a crisis to force change because then the society the people understand the reason for cutting back and for change if you don't have an outright crisis even if the problem is Insidious in nature there is no incentive to cut it back and I think that that's where we stand today with many Western societies

with the increased public sector um activity in many countries what are the implications for productivity in those countries

well as I said that if you look at productivity growth and this is the great Paradox right which is that productivity growth in the last 30 to 40 years has been declining even though we've had some incredible technology booms through it uh and so I think that the only way that you can explain it is that because you've had this increased role of government in the last 30 to 40 years because productivity growth should be going up on the back of the tech boom and except for a brief period in the late 1990s and and early 2000s when you had the tech boom and you saw big increase in productivity yeah um

otherwise productivity has been declining now um after the pandemic we've seen some increase in productivity in places like the United States but that could be because you got some churn out there where where old businesses were some shut down some new ones began but the trend has been down for the last 30 to 40 years the Paradox is why do we have a decline in productivity in the midst of this incredible Tech boom and the only explanation that I can find uh over this time is the fact that the role of the government has increased a lot it has distorted capitalism that if you if risk is being socialized then then you will have a lot of Deadwood float up in the system

and one of the big themes I speak about as well in the book as well is the concept of zombie companies and I think this is fascinating which is that you know uh this term zombie companies first became popular in Japan and the 1990s uh when um and if you read the Western press then or of even the American Press and staff they would almost be scornful that you know these zombie companies which are defined as companies that don't even make enough profit to cover their interest expenses for three years in a row that these companies exist in places like Japan it's not in in in in like America they don't exist

now in the 1990s zombie companies were roughly 2% of the total amount of listed companies in places like America today by some estimates such as the bis the number of zombie companies is close to 20% of the total number of listed companies in places like America why has that happened that's because you've kept so much Deadwood alive in the system because of easy money bailouts that and if you have so many zombie companies it only stands to reason that it'll be much more inefficient now

so if you could make some changes to put capitalism on a better path what would you do

well I'd say that what's practical and what's practical right so cutting spending welfare and all is Not Practical it's not going to happen so let's not even go down that path what are the three to four practical suggestions that anyone can do uh to to try and do that so I do think that deregulation is a very big step because the people who are hurt the most by regulation tend to be the small and midsize businesses and that's where confidence today is really low the large companies they're able to uh they almost like regulation because they they're able to uh afford it and they're able to also write regulations in the way which favor them because they have all the lobbyists uh in the capital city such as Washington so deregulation is very important

the second thing I think which is very important is that if you if I were to say what's the leading symbol of what went wrong with capitalism it is housing prices that in places like America it is unaffordable to buy a new home uh the number of 20 year olds who are living in with their parents today is more than 50% the number of Americans who say today that you know that they'll not be able to realize their so-called American dream of having their own home is staggeringly high so home prices have gone up a lot and

one of the big reasons home prices have gone up a lot is because uh you have so much amount of Regulation that it's very difficult to build new homes now and so Supply is very short on the other hand if you have very easy interest rates then the demand is very high for for for home so you got this massive mismatch so I think focusing on making homes affordable again has to be a central issue for capitalism whether it's got to do with improving zoning coding laws the culture of nimbyism that's that's something else which needs to be done

and I think that the other thing also as I say is that this culture of bailouts needs to end that you know and it needs to be done preemptively you can't do it in the middle of a crisis but in the middle of an expansion for you know like you know for the leaders to say that we you the private sector companies get in trouble you guys need to sort this out on your own don't expect us to come and bail you out these are some of the basic steps which can be taken I think to try and uh right capitalism

and also I think that this whole idea of running deficits this large in the middle of an economic expansion you know like what's the justification for doing it uh I think that a lot of people are worried about you know what the debt situation is the younger people it leads to geter intergenerational tension they think that they're going to be left with all this debt uh to try and service at some point in time so I think these are some of the basic steps which need to be taken to right capitalism

rer this has been great uh just an example of why it is so incredibly interesting to live today and to read the papers every day see what's going on in the economy and W Times have just never been more interesting big thanks

thanks Nikolai enjoyed the conversation