The Fed's Unwritten Mandate: Liquidity at all Costs (w/ Mark Blyth & Adam Tooze)
MARK BLYTH: We meet in unusual times. ADAM TOOZE: We do. MARK BLYTH: All right, so I've been very impressed, as usual, by your writing on this. And as you know, I've been tweeting out and giving it a big thumbs up. I want to start off with the piece you wrote on foreign policy, which was one of those pieces which really made me sit up and pay attention because in a sense, you pointed out something bloody obvious-- that if you thought about it for five minutes was bloody obvious and no one was really picking it up. And that is essentially that we really are in unprecedented territory. There is no mean reversion to a sense of normality that we really understand coming down the road from this. What brought you to that conclusion and walk us through why you got to that conclusion? ADAM TOOZE: It was the unemployment numbers. There's no doubt. I mean, that string, and we're still in the middle of it presumably, of numbers that just-- well, they just bust the charts. You map them logarithmically, it's still a right angle. We've never, never even seen anything remotely like it. It's order of magnitude worse than anything in the previous economic record. And as a historian, I'm really impatient with folks in my discipline who are continuously trying to insist that, you know, hold the horses, calm down, whatever is happening in the present has got some deep historical antecedent, we've seen it all before. And there are moments when that's just clearly not true. I guess I was primed anyway because I'm increasingly a climate change guy. And in the climate change discussion, the hockey stick-- the dramatic acceleration of growth and change since 1945 is, you know, what that starts from that debate really, I think the serious debate. And what I was looking for was that kind of discontinuity in that moment. It was the unemployment numbers that did it. I mean, you know now that this week, we've had negative oil, but that's a little bit more of a freakish technical result, but the unemployment numbers are bona fide. We're just seeing a collective shutdown. And then the ILO put this figure out recently 2.7 billion people worldwide, 81% of the global workforce under one or other type of restriction. We have just never ever seen anything quite like that before. And you know, sometimes, it's the job of the historian, I think, to say that according to our understanding of previous history, there's nothing been quite like that. So then, of course, the question is, well, first, how does one navigate in terrain like that? In a sense then, you do end up recurring to more standard of thinking about modernity because after all, you know, a [INAUDIBLE] way of looking at modern history is it's an endless series of breaks like this, just some are more radical than others and the ones we're living through right now are particularly so. And so then you end up with this trope of radical uncertainty as one of the kind of historical conditions that we live in in modernity. And that poses fundamental problems for rational decision-making, whether you think of that in terms of narrow calculus of cost benefits rational choice or just more generally how do we orientate ourselves to reality. That becomes absolutely fundamental concern. And in a quaint seeming kind of way, we were posing that question last year, you know, because of the geopolitical complex with China. But all of a sudden, it's taken on dimensions that we haven't-- like you were saying, at the beginning of this year, no one would have imagined that we would be in this moment. MARK BLYTH: So maybe one way of thinking about it is we need to change the way that we think about institutions. So let's think about an economy as a series of particular institutions constructed at a particular historical moment. And what is it that all these institutions do, whether they are even beyond economic institutions? Let's think social institutions-- everything from bar mitzvahs to bond markets, right? What they do is set down rules and basically help us to reduce the uncertainty, which is there all the time. In a sense, what we do as humans is construct social institutions that allow us to some way control the uncertainty that is the essential part of our lives. And what this shock seems to have done-- I'm not even sure if we should call it a shock-- is to basically demand that we think about if it's possible to tame that uncertainty with the institutions we have. Now, I've just got one very simple example of this. In the United States, as you know, there's the figure that gets quoted all the time in the media because it's true that 40% of Americans would have trouble getting $400 together for an emergency. Well, the emergency started a month ago, so they've blown through those $400 and a lot of the anti-lockdown protests is absolutely legitimately anger over the fact of this sort of economic chasm that we call an economy. But the paradox, of course, is even if you open it all up tomorrow, are you going to go back to a restaurant? Is that the first thing on your mind? Are you going to go to a shopping mall where you can literally shop till you drop? Our behavioral response has got to be changed coming out of this, right? ADAM TOOZE: Absolutely. I mean, I think that's one of the real puzzles for thinking about the whole process because if you look back, I've been looking back, scanning back recently over the auto industry shutdown, I mean, organized labor was a key driver of the shutdown in the auto sector globally, in Europe and in the United States. And you know, we think of it now as a difficult decision made by politicians. And ultimately, they have to make decisions, but I think we really have to think of that as ratifying decisions that were being made by very powerful collective actors on the one hand and also by individuals, and in a sense, what politics comes along afterwards. And so you see it in the school strike in New York as well. Effectively, teachers were calling in sick, and parents weren't sending their kids to school, and the schools were becoming increasingly dysfunctional. And so the question is when does politics sign off on the fact that, yes, this is in fact a national shutdown. And to that extent likewise, the exit from this period of uncertainty can't simply be a matter of government fiat either. It needs to be a series of procedures, a series of practices, and expectations that we all feel comfortable with. And that has to start in the hospital sector. I mean, the most fundamental one of these, I think, to take up your analogy is basically the mechanisms, and institutions, and expectations we have about dying. And in a sense, the thing that drove this entire crisis after all was not the deaths per se or even horrendously high probability of dying because neither of those two things are all that remarkable about this disease. It's the sense that it completely overwhelmed the mechanisms that we have for dealing with that ultimate existential uncertainty. You know, how do I pop off? How does this end? And it's supposed to end in an orderly fashion with known diseases in settings that we're, broadly speaking, familiar with, which don't look like some sort of hellish charnel house, that look like a conventional hospital ward. And each one of those moments is going to be terrible for those involved, but it isn't going to be a collective nightmare. And what COVID-19 did was to disrupt that. So I think from my point of view as it were, an orderly restoration of the mechanism of our regular dying is where it all has to-- that's where it has to start from. Once that's in place, you know, once I know that my chances of getting seriously sick are X, but then I've got a very good chance of getting intensive care bed, and then if I really needed a ventilator, ultimately I'll feel better about going back to or going to a restaurant. MARK BLYTH: You go to the restaurant, that's it exactly. ADAM TOOZE: It's hilarious, but I never previously thought about it, but it was, of course, literally true. And then a European traveling to the US-- this is true-- you're very ill advised to visit the United States unless you can get bombproof, gold-plated travelers health insurance because if you were en route to a restaurant from your hotel to absentmindedly step into the street and get run over, you could be bankrupt the next second. And so that existential risk and its financial implications are there, but as you're saying, we have all of these conventional mechanisms for managing that and this virus is disrupted those. And until we've got those back and eat, like the government, the politicians can wave their hands as much as they like and the economy won't restart or bits of it won't. I mean, certain bits of it will, but you know, the touchy-feely, the soft tissue of the service sector, that will all remain dead, I think. MARK BLYTH: So in light of those comments, I'm reminded once again of how Nassim Taleb is actually a lot more correct about stuff than most of us like to admit in the following sense. One of the things that he wrote about antifragility was nature always has redundancies. Nature never optimizes. And what we've been doing, whether it's through globalization, whether it's through measuring health care efficiency by the lack of ICU beds in use, we've optimized everything. And we see this all over the economy. There was a thing that I tweeted out, which was the cash flow dependence of businesses. So basically, the median sort of cash store is 15 days because we are used to having just-in-time access to liquidity. We basically make a bet on infinite liquidity. It's like 2008 all over again. Do you think that we're going to start thinking about redundancies when we retweak these institutions or are we going to go for building the same type of vulnerabilities again? ADAM TOOZE: Well, I think that seems spot on and we've seen it all the way through the system, right? I mean, the freak out in the oil market this week was to do with the fact that there isn't that much redundant oil storage capacity. And those trades which generated the crash in oil prices are basically based on non-oil-interested investors who buy oil proxies on the confident expectation that at the end of every month, they can roll them over on the assumption that there's always a buyer on the assumption that there's storage there if you need it. And all of that turned out not to be true because as you're saying, it would be inefficient to maintain that degree of redundancy, that degree of backstop. I mean, one area where, so far at least, you could say we have learned that lesson already is in a sense in bank regulation. I mean, they do not seem this time around to be the problem. That's at least an optimistic mainstream view. And we may see trouble coming down the pipe, but so far so good anyway. And that does have to do with the fact that to their immense frustration, they are being forced not to do things that they would far rather do. MARK BLYTH: Like have big capital buffers, exactly. ADAM TOOZE: Exactly. And there, the liquidity requirements we put in place really do drive them out of all sorts of market-making. And [INAUDIBLE] then, of course, in a microsense will say, well, if only we'd been there, if only JPMorgan had been able to make markets for treasuries in those crucial second and third week of March, you would not have had the trouble, but would any of us really want to take the risk on that? MARK BLYTH: Yeah, exactly. ADAM TOOZE: Well, maybe not on JPMorgan, but on some JPMorgan knockoff that's worse at the job than they are, and then ends up as a Lehman. So in a sense, we did derisk that element by following precisely the logic that you've suggested, which is yes, let's have some buffers. Let's have some short run inefficiency here to be able to deal with the unpredictable. I mean, in this case, I think whether or not the epidemic really is a black swan in the classic sense, I think it's more to my mind the sort of mental disconnect. There were plenty of people saying that this was actually a very substantial risk. Anyone you talk to in the British Civil Service will tell you it was like, you know, top three nightmarish risks for as long as they've been making the famous lists of their ultimate nightmares, but no one ever connected it up, unlike with terrorism, which from the point of view of the British Civil Service is bread and butter nowadays. Pandemics were like, well, obviously a bit like science fiction. And that'll change clearly in the wake of this. MARK BLYTH: So let's talk about the Fed because if I grab your book off the shelf from last year, the Fed is the dominant actor. The Fed seems to be the dominant actor again. The Fed is basically the global central bank. And when all of this was kicking off, I was reminded of a discussion, I think, that we had at one point whether if there was another big crisis, would the Fed be able to do what it did last time because the politics have changed. And the politics have changed, but they've done even more, so how do you think about that? ADAM TOOZE: I think that's one of the real puzzles. And it wasn't just us having that conversation. I can tell you that like some, and I'm sure you've had the same experience, of extremely highly-placed people in institutions like the IMF were having that conversation and would ask me in a kind of open-eyed way, well, does this imply that? Could you imagine getting this done with the GOP? I think the short answer-- and this may be, like, the simplistic answer, but nevertheless it may be the most correct answer-- is it really depends who's president is in the White House. Like if you have a Republican president in the White House, the GOP is a very different beast. And I would expect all sorts of trouble to kick off if and when Joe Biden is elected. I think the whole thing may tip. Whilst there's a Republican-- I mean, I know this is a crude explanation, but I think it may explain most of what's going on-- is that the GOP is a ruthlessly cynical political actor. And in a year like this, where they think they've got a president who has a fighting chance of getting reelected, unlike Bush in 2008, when the parties actually sort of battered itself into compliance with the Trump team, when you've got somebody like Mnuchin who appears to be doing a reasonable job of squaring the circles on Congress and pulling in Pelosi and co from the Democrats, in fact, they're not going to kick up a fuss. And the internationalism is kind of is internationalism lite. It's technocratic. It doesn't appear to be an issue. I mean, I had a bit of a wobble, I must admit, when I heard that Erdogan of Turkey had explicitly raised the issue of swap lines, which would be the backdoor mechanisms through which the Fed is doing this lender of last resort to the central banks. And he probably raised it in a phone call with Trump. And you know, there were two things that they're worrying about that A, Erdogan knows-- well, three-- Erdogan knows about swaps, Trump knows about swaps, and Trump knows Erdogan wants a swap. And if there's a configuration more likely to produce a blow up than that, it's pretty hard to imagine. I mean, I have another theory, which is that the folks around Trump just didn't know. And that's not true. MARK BLYTH: But let me throw this one at you. Let me through this one at you though because here's the puzzle I have thinking about this. When I think about the Trump administration in terms of trade, I think about basically arguing over bilateral trade deficits. And you and I both fall into the camp that it's really about global patterns of saving and investment, and it doesn't actually mean that much, and in fact, it's a show of strength rather than a weaknesses, et cetera, et cetera. Nonetheless, they seem to sincerely hold this point of view. And if you do hold that point of view, then doing swaps should annoy you. But they're kind of letting it go. Now, is it because in a sense- - let's flip that around. Are they really just cynical on the whole trade thing? Do they really actually understand the picture a lot more than we think, and that this is just a way of pissing off China, and doing various, like, foreign policy goals, but they actually do get the plumbing? They do get the architecture. They do understand not just the exorbitant privilege, but the fact that the Fed is the global central bank. And if you do get that, you're kind of the top dog, right? It's good to be the king. Why would you screw with that? ADAM TOOZE: Well, I mean, another way of sort of squaring the circles-- I mean, I agree it's a fundamental puzzle. I mean, Gillian Tett wrote a great essay about this-- like this question of the compatibility of a populist nationalism with an international global hegemonic role is a fundamental one, and it's a fundamental one all the way back to the beginning of the 20th century in the aftermath of World War I. The same problem arises. And part of the answer may simply be that one of the way that power operates is it's incoherent. All the dots don't need to join up. One of the ways in which to do this is that you disaggregate the different functions of the state and politics, and they operate in different spheres. And so then the coherence is, as it were, the matter A, in the intellectuals head of like how these things fit together and B, whether or not certain political actors decide through political entrepreneurship to basket things together and say, look, this means that, and so. But if you were looking for strands of coherence, I mean, couldn't you broadly say that Trump's been pretty consistent in not wanting a strong dollar? And one of the ways in which you avoid the dollar strengthening is to pump dollar liquidity out into the global system to prevent what appeared to be going on, especially around the 18th of March, which I think is going to go down in history as, like, the absolute high point of financial tension in March this year. The big foreign exchange market in London was all one way, and it can't work like that. Everyone just wanted to sell everything and buy dollars. And in a sense, what the Fed's policy is designed to do is to find every conceivable way possible of gently easing that pressure off and avoiding a spike in the dollar. And there's nothing that would be from the point of view of that kind of mercantilist trade view that kind of fits, right? You want a weaker dollar. You don't want a strong dollar. So that might be part of the way in which this works. How it fits with the geopolitical dimension, the way in which last year, we were so worried about trade issues shading into something much nastier, and that, I think, we still haven't worked out. And you know, this repo facility that the Fed has set up where they allow foreign central banks to borrow against treasuries they hold as collateral, the advantage of that is the foreign central bank doesn't have to sell the treasury, which is what the Fed really wanted to prevent from happening because in March, several of those weeks were really dodgy even in the treasury market. But on the other hand, that implies a degree of cooperation between the central banks in partnership, if you like, which really doesn't fit all that well from the point of view of an antagonistic relationship. And when we're in the Huawei worlds, then that seems to me almost more at odds with the Fed's role. MARK BLYTH: Well, just to build on that then, I mean, if we think about it in let's be gross and aggregate again, so the United States' growth model, if you will, even though it's large and disaggregated, is basically consumption driven. And we do deficits. And the German, Northern European, Eastern European, and Chinese growth model-- even though China's export platform has much declined in the 10 years-- is still quite export heavy. They rely on accumulating dollar claims, and they're not intermediate in the domestic banking system, and essentially giving them back to us. That kind of circular floor of dollars is what the entire system depends upon. So you don't even have to invoke enlightened self-interest in this one because ultimately, Chinese and German firms earning dollars, and then dumping them in their local banks, forcing their banks to find a corresponding asset keeps the whole thing going. The Treasury just needs to sit and play the regulator on this whole thing. And that kind of implies that the politics, in a sense, is not that it doesn't matter, but it matters less than perhaps we think. ADAM TOOZE: Absolutely, I think that's a great view. And I mean, the other element they need to then do is hedge a little bit currency risk because that strategy involves you basically in accepting foreign exchange loss if you expect the dollar basically to dribble down. And that then can produce eddying effects, where people have got big dollar hedges. And if the dollar then suddenly reverses, which is what we've seen periodically-- like if you've got a bunch of people who are basically heavily hedged against the dollar depreciation, and then suddenly a panic builds up and the dollar surges, that can cause real ructions. But otherwise, I agree. There's a sort of hydraulic quality to this, which should not be underestimated. And we shouldn't just take the news conferences at face value. Those news conferences have a functional significance. They matter very, very crucially for the reproduction of Trump's politics, but that doesn't necessarily connected in a direct way to these sorts of issues of macroeconomic governance that you're talking about. MARK BLYTH: Exactly. So let's stay with the Fed just for a minute. They are doing much more than we thought possible. Even the Republicans have discovered direct monetary financing on the treasury side, but let's leave that to one thing. Is there anything that the Fed has done or is doing which has genuinely surprised you and made you go, hang on a minute, what's that? ADAM TOOZE: Well, it depends. I mean, I guess it's expanded our envelope. After 2008, we thought of the Fed, as you were saying, as a very activist actor. I mean, what we've seen now is just the disinhibited kind of willingness to take pretty much anything. I mean, so they've bought corporate debt. MARK BLYTH: Right, and then they're buying junk bonds. ADAM TOOZE: Exactly. And then they had to sort of draw a line around that and say, well, it was going to be only investment grade. And then, of course, you create trouble on the line, so then it was grandfathered in stuff, which isn't investment grade anymore, but was investment grade, I think, on the 22nd of March or something. And then it turns out they will buy high yield, but by way of the ETFs rather than the underlying assets. And I don't expect that to stop. And I think that's the thing that's been really surprising is just the utterly pragmatic nature of the Powell Fed. You know, is it ultimately surprising if you take the view that the Fed is in the end, this comprehensive lender of last resort? You know, then it shouldn't be surprising, but you kind of think there were kind of shame boundaries-- you know, there were the kind of taboos that the Fed would not want to violate. And yeah, it doesn't look like that right now. MARK BLYTH: Yeah. Isn't there a danger in this though? I mean, let's do one version of the story, which you've heard before. So the Fed has basically since the Greenspan era, engaged in asset protection through a series of puts. And this is just the latest example of the biggest put of all time. And the Fed finds itself in a position that it is guaranteeing or putting a floor, if you will, under asset prices. And that's not the job of the Fed. And when you basically have negative real longs, and that's gone on for as far as you can see, and there seems to be no sign of inflation, and if it's not in this coronavirus moment, growth seems to be ticking along reasonably well-- I'm thinking of the Blanchard piece at the end of 2019, right-- you're incentivizing a lot of bad corporate behavior, like the issuing of debt, and buybacks, and all this sort of stuff, right? No, I know. ADAM TOOZE: You're sounding like a neoliberal. MARK BLYTH: I know, I know, but just follow me on this one. ADAM TOOZE: Like a proper neoliberal. MARK BLYTH: A proper-- a real one, exactly. A real one, right? So you incentivize all this bad behavior, right? And then what you do is you buy it. I mean, you know, there is a kind of moral hazard problem here, which we do have to face up to at some point surely, right? ADAM TOOZE: Yeah, I mean, the stories that have blown my mind have been that one where the mortgage lenders knew they were going to face risk, so what they did was they shorted mortgage-backed securities because those would collapse. And then it turned out the Fed intervened so quickly that they never collapsed, so their shorts all went bad. So they needed bailing out to protect them from-- MARK BLYTH: From their own shorts. ADAM TOOZE: Yeah. MARK BLYTH: Oh, brilliant. ADAM TOOZE: Yeah, you've got these distressed debt merchants who are all over Bloomberg complaining about the fact there isn't enough distressed debt for them to buy because the Fed is doing too good a job. MARK BLYTH: Right, exactly. ADAM TOOZE: I mean, yes. Are these the morbid symptoms of a system in some sort of transition to invoke the over-invoked [INAUDIBLE] phase? You could claim that. I'm really much more of the sort of build your boat at sea, ramshackle, whatever it is Mad Max, build your crazy highly mobile dangerous contraction of capitalism both at the national, global level as you go along. In the sense, what else do we expect? MARK BLYTH: If you were to rewrite the econ textbooks for this period, I imagine you just wrote the first ever econ textbook right now-- would you say that the part of the role of the state is to produce a floor for aggregate demand? You might want to just say, we don't really do that anymore. What we care about is asset prices. And basically, central banks pop up asset prices. Would that actually be a fair characterization? [INTERPOSING VOICES] MARK BLYTH: Switch it to Europe in particular, right? The whole debate over Corona bonds, and basically off balance sheet spending to allow greater macroeconomic impact, it seems to be-- now the ECB is kind of a shit version of the Fed. They'll do some guaranteeing of a floor for prices, and then you're on your own. That's pretty much it. ADAM TOOZE: The consequences of that are in a union, which in some senses, if you take the whole eurozone comparable to the United States, pretty lamentable from a political point of view. It doesn't work that well, right? If your choice is between that version of capitalist governance and the American version, I think odds of which one you pick is pretty evident, right? The sustaining aggregate demand is an important function. And divvying it up across the complex, highly divided zone of the eurozone is something that eurozone economic governance fails at. And the symbol of that is the stagnation of the Italian economy. MARK BLYTH: So let's focus it on Europe. You just mentioned the Italian economy of being deeply problematic, and in a sense, impacted by bad eurozone governments for the past 20 years, by some readings. Are the Italians off? Is this the breaking point, or is it just going to continue as it did through the crisis as it did last time? ADAM TOOZE: My sense is this is the very unhappy version of the Mad Max improvised capitalist governments. It's a very unhappy marriage. It's a very unhappy, dysfunctional machine. I'm not sure that it breaks off. Because even with Greece, I was pretty persuaded that the costs of a Grexit were exorbitant for a country the size of Greece. For an economy with sophistication of Italy with the balance sheets of the Italian financial system denominated in euros, it would need some wizardry of financial engineering to get them out of there without a complete meltdown, which given the weaknesses of the Italian economy right now is the absolutely last thing they need. So I don't think in Italian exit from the euro is even remotely plausible politics. And certainly in the previous situation, the last time that the euro skeptic drowned ultimately, when it actually came to it, they backed away from that, all the powers there be in Italy into being quite heavily to ensure that as it were, whatever government arrived was one that they thought they could work with. I think it's very unlikely that Italy will crash out. But I think what it means is that we continue on in an increasingly unhappy way. MARK BLYTH: But does that mean the politics get worse? So if we're currently looking at 30% unemployment, in all economies, generally, you can imagine the Italians being in even worse shape. This is a catastrophe. If the demands for this [INAUDIBLE] for the block zero come back at that point, and demands for a new round of austerity, which seems likely to actually happen-- and that will be catastrophic, politically, for these are most affected economies, surely. ADAM TOOZE: Yeah. I think [INAUDIBLE] may win the prize, if not the prize, at least the runner up prize for the first announcement of that politics. So the head of the German Bundesbank has already said, OK, fine. Spend now, but you know we're going to have to do consolidation later. And that is a catastrophe, because Italy's debt to GDP ratio will be up in 150s by that point. So really, there isn't any realistic alternative but to part that on the ECBs balance sheet and leave it there, short of some imaginative European federal fiscal fix, which no one seems to have any appetite for. There is a catastrophic politics of austerity that could look down the road. And that would-- I agree. The political fallout from that could be ruinous. MARK BLYTH: Let's turn to Britain for a moment. Boris becomes the spendthrift, even though he went in and out of a current ward. He fires his chancellor because he's basically an austerian, and puts on someone that gets bullied around by Dominic Cummings. They've discovered helicopter money. They're doing an 80% replacement on wages. They even got programs to help the selfemployed. Are you as utterly freaked out by this as I am? ADAM TOOZE: It's very difficult to locate politically. I agree. That's the thing, because as a leftish observer from the outside, you keep thinking, well, I should be making constructive suggestions. And then you realize who you're making them to. And this is a conservative government. And the question, I think, for me, is going to be where are the constraints. So is being an advanced economy, and as it were, the mind map of global investors a permanent thing? That is, we're attached to the brand of UK, or to the undoubted technical competence of the people who run that machine-- mean the people in the treasury in the Bank of England-- they know their business, or is it actually attached to the macroeconomic fundamentals in the way that we used to think it was. And I mean the whole lesson, really, for the advanced economy group. And that, in a sense, is a circular self-definition for a group of countries since the late 1990s, is that many of the constraints that we thought existed, and that history told us did exist, even for them, no longer really applied in quite the way that we thought they did, unless you constructed fiendish, devilish machines of discipline, like the eurozone, which somehow managed to reimpose on an actor like Italy. The constraints, which are acting like the UK doesn't seem to operate under. MARK BLYTH: Exactly. ADAM TOOZE: Because you would expect-- history would tell you that sterling should plunge in some uncontrollable kind of way. And the treasury, the UK gilt market, the treasury market should sell off. And whether the government liked it or not, interest rates would surge. And this would be the story of the 1950s, the '60s, and the '70s, right? MARK BLYTH: Absolutely. ADAM TOOZE: And that constraint just doesn't seem to be there. There was one moment, I think. There was this great Chris Giles report in The Financial Times, the day after, so March 19th. And through that darkly-- I'm not a market participant. I'm not in the inside of the Bank of England, or the treasury, or the Canary Warf. But through that, it seems to me, you could glimpse something pretty terrifying was going on March 18 in the London market, so something that scared the bejesus out of the people in the Bank of England. They saw-- the pound fell by 5% against the dollar. And they saw very weird behavior in the gilts markets. They saw prices going up and down, and they saw gaping between different remnants of gilts, which ought to trade on a smooth curve, and they weren't anymore. And I think that for them was a sort of prodigious moment where they realized, oh, shit. This really could go south, and it could go south fast. But the response was the response, essentially, huge QE. And then the following week, something they're now vigorously denying its direct monetary finance, but it's basically a huge overdraft on the British government's [INAUDIBLE] account at the behest of the treasury. It clearly wasn't the bank of England that took the initiative. MARK BLYTH: So I got a lot of-- you probably know this-- but I got a bit of insider gossip on this, because I was talking to someone who has bank connections asking about this overdraft. Apparently, it's been around since the '40s. And apparently, it has been operative for the whole time. And at some point, at some point during the 1980s, the overdraft was equivalent, according to my source, of 60% of the money supply. It's bloody huge. And it goes up and down, right? But at some points-- so effectively, they've always been doing this. It's just very sort of odd. No one's saying anything about it. ADAM TOOZE: Yeah, there's something wrong with our standard accounts of the way in which the balance between direct financing, and the bond market, and then the indirect mechanisms in which you nevertheless provide money to the government by way of buying bonds out of the bond market. There's something wrong with our account, and our basic, stylized facts are not quite right. Until the '90s, I think almost all central banks essentially took direct monetary financing for granted. And then, as it were, the doctrine of central bank independence, and a kind of stylized version of the Bundesbank model imposed themselves as the thing that everyone did. And that includes in the case of the ECB an explicit prohibition of direct monetary financing. But as you are saying, almost all the actual genuine national central banks have as their sort of appendix this emergency button that you can press, if you have to. And they did it in 2008. They ran up a couple of 10 billion pounds worth of financing that way. And after all, you don't have to be an MMT person to just understand that this is just the hydraulics, essentially, of the national balance sheet being worked a slightly different way. And, all right, really doing-- and I believe them. Is basically saying, look, we don't want to stress the gilt market right now. It just doesn't seem like a good idea. So we'll run up this ways of means account. We think there's zero risk of inflation. So there's really no problem in doing this. And what we'll do later on is run an oversized bond campaign, raise the money that we need, suck it back out-- MARK BLYTH: Suck it back. Right. ADAM TOOZE: --pay down, and pay down this. So that's all it is, folks-- MARK BLYTH: Yeah. That's it. Yeah. ADAM TOOZE: --which is the one side of the coin. And the other one is yes. And it's a complete violation of the taboos of the 1990s, isn't it, to which the answer is yes. It is also that. MARK BLYTH: It is also that. So are we in a-- ADAM TOOZE: [INAUDIBLE] MARK BLYTH: No, and exactly. It never was. So let's push it even further then. Does it make sense anymore to talk about fiscal policy and monetary policy as two separate spheres, as the classic central bank model also demands, or is that just completely gone as well? ADAM TOOZE: That's clearly up for grabs in the same way. To a historian, this is delicious, because all that's telling you is that all of these institutions clearly have genealogies that are constructed in the course of the 20th century. At the end of the 19th century, there wasn't anything that we would really currently understand as economic policy at all. There was need of fiscal more monetary policy in the modern sense because there was no conception of the macro economy to attach those too. There was fiscal prudence, and debt management, and management of the central bank balance sheet, but not monetary and fiscal policy as we understand it now. So what we are learning in real time is that those are products of the emergence of the macroeconomic mode of governance, which putting through, and was not fundamentally shaken by what we think of as the supply side revolution, or rational expectations. All of that happened, but it really happened within the envelope of macro policy. And what we're seeing now is a dissolution of the frame of that. The one, the bit that always has fascinated me is macroprudential regulation. Because again, in the '50s, the Bank of England didn't have any inhibitions about telling Barclays what it thought how much it thought it should be lending, and under what terms. And it would directly condition its ability to do so by requiring it to whole different types of reserves. In exactly the same way as the People's Bank of China does right now, and an activist form of macrocredentialism would argue that we should be doing as well, right, across the Western world. So these, what we're learning is that those boundaries are different types of economic policy intervention are highly institutionally specific. They've got histories. They've got ideas. As someone like you would argue, they're very powerfully structured by the kind of ideas people have about economic policy. And they are up for grabs in the moment of crisis like this. MARK BLYTH: Yeah, certainly seems to me. We've mentioned China, but we haven't really gone there. So let's go to China. How do you read China coming out of this? Because in a sense, they're advertising to the world that they are coming out of this. But they're coming out into a very different world. And that's got to matter for China. How do you read the whole China growth project and governance project post Corona? ADAM TOOZE: It's a pretty stunning moment, again, because I was looking at the auto industry through this, because they seem like a good bellwether. They're a little old-fashioned, but nevertheless, big employer in a global manufacturing business too easily underrated. And it's a stunning fact about the world right now that the only factories, that BW, the largest car factory in the world has open, that are making cars that are being sold to actual customers are in China. So there is a-- MARK BLYTH: There's a there there. ADAM TOOZE: There's a real reality to the fact that they are coming out. Everyone else is all shut down, right? So that's clearly the case. The other thing we've got to do when we do these comparisons is get our scales, right? Because China is the size of Europe, the United States, and everyone else put together, really, in terms of the scale of its economy, not GDP. And if you look at Hubei province, Hubei province is still wrecked. Hubei's province is GDP, which is the equivalent of looking at Italy after all, because it's about the same population. That's by no means recovering. But in the rest of the giant organism of the Chinese economy, there's real recovery. And the thing for me that's really striking, the dog that hasn't barked, is where is China's stimulus? If you get really into the weeds, if you follow whatever Western sources that a non-Chinese speaker can follow on the PBOC, you know they're tinkering. They are twiddling all the different buttons on their dashboard, and they have a lot of different buttons to manipulate the Chinese credit system. But what they're not doing is saying-- they're not issuing one of those party directives the way they did in the fall of 2008, which is comrades, the future of the nation is at stake. We expect you to find an investment project and report to party headquarters next week on what it is and what you're going to do about making sure it gets built in the next month. That is not happening. That's what they did with the virus itself. The lockdowns were implemented as a party campaign. There is no stimulus equivalent. And so what's happened from 12 years on from '08, is clearly, China is a lot richer. It matters far more to the global economy. It doesn't rely on exports anywhere near as much as it did in '08, but it is also much more constrained. This is a kind of Michael Pettis theme, that we need to look at the way in which Beijing is actually at this point hobbled by three things, basically, by the fragility in its financial system. They simply don't know how much they can trust the banks to do the job of acting as a flywheel. There's too much investment for too long, and too much of it's unproductive. So their debt-to-GDP ratio is really flat to them, and they know it. And the third thing is the worry that with memory of 2015, 2016, when China experienced $1 trillion of outflow. And they really don't want to go back there. And the last thing the emerging market world needs as well is instability in the Chinese exchange rate. So for all of those reasons, Beijing is, for me, the dog that hasn't barked they've done the public health thing. So you would expect. Now the triumphant economic policy followup Not so far. They're required to-- spring week last week, not banging the one bell, one road drum meekly it seems basically going along with the rest of the G20 and doing debt relief-- no strong signs of heavy unilateral Chinese grand strategic project at that moment. So kind of a bit of a puzzle, really. MARK BLYTH: So just focusing on one part of that-- one that's always puzzled me-- and you highlight it in the book-- is exactly this huge amount of capital flow that comes along in 2015 that scares the bejesus out of them. If you want to live up to those geopolitical ambitions, if it's about the Asian investment bank in Belton Road, et cetera, you need to internationalize your concern. But you can't do that if you have three layers of capital controls on an entire investor class clearly signals I'd rather be living somewhere else. So if they are fundamentally constrained in that way, that's got to have a kind of knock on effect for long term growth, and long term investment, and the role they can play usefully in the global economy, right? ADAM TOOZE: And on the other hand, totally granted, would we really want to see China with a fully liberalized balance payments account? Would we really like to have seen what would have happened in '15, '16, if they hadn't been able to turn the tap off? For me, the moment that really came home, it was like The Economist-- The Economist magazine does an annual roundup. And they did this account of the crisis of '15. And all of a sudden, you found yourself reading the flagship organ of global liberalism celebrating, openly celebrating Beijing's capacity by means of increased regulatory efforts to control this moment of capital flight. And at that point, you realize. Hang on. These two things do not go together. So basically, it seems that to keep China as a steady flying wheel of economic growth implies not moving forward into that world of total integration. The story of the 1990s was incoherent. The responsible stakeholder story of the 1990s, simple convergence, was incoherent, not just the political side. In other words, getting richer was not going to make the CCP more liberal. It's also potentially incoherent from the economic side-- surprise, surprise-- because after all, liberal economics is totally devoid of any incoherence. MARK BLYTH: Absolutely. ADAM TOOZE: It is incoherent because, in fact, economic growth is not a steady state machine that just-- it just doesn't keep on giving, especially in a tumultuous environment like China. 8% growth per annum is not just not a formula for political liberalism, it's also not a formula for financial stability. And if it's not a formula for financial stability, then you need all hands on deck. And the BIS has underwritten this. The annual report they put out last year-- the BIS Annual Report is a document, I think, will go down in history. Because it basically says to all other EMs, by all means, financially integrate. But if you do, you need reserve capacity. You need a large exchange reserve. You need to be able to do deep macroprudential regulatory interventions in the balance sheets of private actors big enough to destabilize your economy. And yes, you need to be willing to contemplate capital controls to stem massive destabilizing outflows. Otherwise, the tradeoffs are just not good enough. MARK BLYTH: You're not in Kansas. Right. We are not in Kansas anymore. Yeah, absolutely. ADAM TOOZE: And true for Thailand, Thailand is-- basically, a local problem for Thailand, if it's true for Thailand, it's clearly in aggregate true. The United States needs the PBOC to not be a mirror image of the Fed. MARK BLYTH: Yes, and all of which will relicenses that kind of dollar flow that we were highlighting earlier. Because if there is no other competitor, then you're stuck with it. And simply by being, if you will, the liquidity and the [INAUDIBLE], that gives the United States the structural power to just continue to behave as badly as it wants, and then bail everyone out. ADAM TOOZE: Exactly, because it allows other people to behave as badly as they like, which is the private actors in China, because they will gorge the immensely overleveraged Chinese real estate developers, would have caused [INAUDIBLE]. They're like everyone's, I think, disaster waiting to happen. They have over $100 billion worth of foreign currency denominated debt, that clearly means-- MARK BLYTH: They don't want that going south. ADAM TOOZE: No. That's just Jenga, basically. I mean people pull bits out, all the way out, that at some point, it's like mega Jenga. But that's also enabled by this, right? And so there is, indeed, like a weirdly mutually reinforcing-- and inequalities, Michael Pettis and Matt Klein have this book on its way out into this moment right now, which traces this all back to quest structures of inequality. it sends a classic liberalism theme. Hobson articulated this, that if you have massive inequalities of wealth and income, then you will have patterns of demand, which are not, if you like, self-satisfied. They do not stabilize in national economy. And then you end up in these networks of interdependence. MARK BLYTH: Yeah. That makes a lot of sense. Just in closing then, globalization, it was already not in retreat, but being reconfigured. We're not going to completely globalize. Reimagine of a kind of economic nationalism doesn't necessarily foretell darkly by any means. But the virus has shown us to be frighteningly interdependent. Is it a way in which the experience of the virus protects globalization, or undermines it? ADAM TOOZE: You're singing my music. That's exactly how I would have put it. Historians argue about the emergence of a global condition in the 19th century, which is the state, if you write, almost the state of mind. But it's much thicker than that. We all all-- the frontier is closed. We're on one planet. We're not actually already on a satellite watching us as a planet. But we understand ourselves in that closed way. So that means talk about globalization will be almost North Korea. Every other condition, including the Cold War, implied, of course, an acute awareness of the presence of the other, which was a form of globalization. So it's all about reconfiguration. And I agree that the virus is, in fact, very ambiguous in its effects. On the one hand, we've seen-- we've actually internalized, in a sense, because we're shut in our houses, we're not even noticing the fact that we simply can't cross international borders anymore, literally. MARK BLYTH: You can't do it. ADAM TOOZE: Italians, who don't have residences in Italy, who were visiting people in Australia, were sent back to Italy willy-nilly because that's the only place their passport will actually gain them access anymore. They literally have nowhere to live in Italy, but that's the only place they can go. So it's been spectacularly damaging at that level. But on the other hand, it is as you say-- Macron, that interview and the FDA, if you can gain access to the transcript, everyone should read it because it's so-- on the one hand, the guy's got more brain power than your average head of state. And on the other hand, it's real Stanley Kubrick style Dr. Strangelove at moments. But he does have this phrase about anthropology, that this is an anthropological experience. When ever previously in history has such a cross section of humanity, literally from you and me, two streetwalkers in Delhi, and in Lagos, and in Durban, have all essentially been shocked by the same thing at the same moment? They obviously, in radically different ways, with hugely different implications, but we share this moment. Everyone in the world will be able to say what were you doing during the corona epidemic? literally, everyone on the planet, that's unprecedented. And astonishingly, virtually every government in has reacted in some rather dramatic way. And the ones that haven't have now label themselves as kind of corona pariahs because the whole scenario and so on. And they're playing that game, which is itself-- so anyway, I agree. Just I was previously thinking about climate change. It isn't really-- this just drives home that, but it works there. In other words, whether we like it or not, whether our political systems can process it, we are massively interconnected. The thing about climate changes, as Bruno Latour made this point in an editorial, there is literally no national answer to the global threat of climate change. There's nothing you can do nationally that will make any difference. The perverse thing about COVID-19, is that there is a massive global threat, there is the sense that through local solutions we can protect ourselves, at least temporarily, not restore a viable mode of life, but protect ourselves temporarily. And that has a retrograde logic that climate change is just paradigm busting, because there is no alternative to acting collectively, and there will be no solution that isn't collective. So yeah. I think COVID, it clearly has the potential to be played. And again, we got to stress agency, and ideas, and all your kind of stuff. It has the potential to be played catastrophically in the most xenophobic nationalistic way imaginable. But that's an option rather than really a structurally determined. MARK BLYTH: Absolutely. I think I've had my chat. How about you? ADAM TOOZE: It's been great. It's really fun. MARK BLYTH: It's been great. Absolutely. I miss you. I miss talking to you. So how about this? We make a promise, that when New York finally opens up more-- we're allowed to travel-- we will pick a restaurant, and we will go to it. ADAM TOOZE: Go to it. Let's see whether we can get our risk, personal risk tolerance is aligned. MARK BLYTH: Exactly, exactly. JUSTINE: If you're ready to go beyond the interview, be sure to visit realvision.com where you can try real vision plus for 30 days for just $1. We'll see you next time right here on real vision.