BRENT JOHNSON: Well, hello, everyone. This is Brent Johnson from Santiago Capital,
and I'm back here on Real Vision. And I just have a real privilege today. I have the opportunity to speak with somebody
who I've followed for a very long time, and I've communicated with him a few times over
the years over email, but I've never actually spoken to him before. And I just can't tell you how excited I am
and how much I've been looking forward to it. And so with that, I'd like to welcome Russell
Napier to Real Vision. Welcome, Russell. RUSSELL NAPIER: Thanks, Brent. BRENT JOHNSON: One of the reasons this is
such a treat for me is, I have to say, I read a lot of, research I follow a lot of different
people, listen to their interviews. But out of everybody that I follow on a consistent
basis, you're probably my favorite. So I'm a fan. I've just got to tell you that right up front
so that there's no hiding it. And I think one of the reasons that I find
you interesting and like your stuff is I'm not really sure what to call you. You're a strategist, you're an analyst, you're
a portfolio manager, you're an author, you're an entrepreneur, and you're a Scotsman. So what's the right thing? What's the right way to refer to you? RUSSELL NAPIER: Well, that's good. So the first thing you mustn't do is call
me a Scotsman, because you'll get all the Scotsmen really upset. So I come from near Belfast in Northern Ireland. BRENT JOHNSON: Ah! Okay. RUSSELL NAPIER: But I have lived in Scotland
for nearly 30 years. So it may be wearing off. But I've got friends who are Scottish we get
really upset when people call me a Scotsman. I don't find it offensive, but they do, so
anything anything except a Scotsman is really what you should call me, but it's up to you. BRENT JOHNSON: Got it, got it. Well, one of the other reasons that I like
reading your stuff is, it's not just that you're smart, and intelligent, and all that
stuff, but in my opinion, you're a very, very good storyteller. And someone who's a very good storyteller
in finance I particularly like, because to me, when you just read a bunch of data or
a bunch of numbers, sometimes it's hard to internalize it. But the way you write your stuff, it helps
me remember it better. So maybe that's one of the reasons I like
it. But in all of your stuff, you throw in a little
historical anecdote, a little humor, but then you always have the data to back it up. So I think it's fantastic. Did you study history at some point? Is that how you came to that style of writing? RUSSELL NAPIER: Well, my friends might say,
of course, I'm from Northern Ireland, I've lived history. So that's one way of getting to a bit of history. But I just want to pause on that word "storytelling,"
because I think it's a great phrase, and it's a phrase that, in our business, people look
down on-- when you say you're a storyteller-- because it's a marketing thing. But stories are really, really important because
they are so much more than the data. And I think it's a skill that is really underrepresented
in our business and looked down on. But the problem for everybody in our business,
particularly in the modern era, is yes, it's finance, yes, it's accountancy, yes, it's
economics, but it's also sociology. I mean, you've just lived through a remarkable
election in America, which is as much about sociology as anything. It's about politics. And if you want to put all that stuff together,
you can't do it in an equation. And a story may be the better way to do it. Now, the stories can be wrong. The stories can be inaccurate. But to pretend that isn't a story, to prevent
the future, which is-- I can't say it's unknowable, or I'd be doing myself out of a job. But we'd better tell the future in stories,
because the more we tell it in equations, the more dangerous it is definitely going
to be. So I think stories are very, very important,
and that it's important for all of us, when we try to work out investment, that we are
cognizant of very many forces beyond, if you like, just economics that drive and determine
prices. So I am flattered and delighted that you think
I'm a good storyteller, and I don't see it as an insult. I see it as a great compliment, that we need--
more like this. BRENT JOHNSON: Well, I meant it as a compliment,
and I've tried to follow your lead in that a little bit. And I don't think I'm in the same league as
you, but I've definitely used your writing as a model for my own. So because I've read your stuff for a long
time, I'm fairly familiar with your views. I'm still going to ask you a number of questions
that I already the answers to, because I want-- RAOUL PAL: Hi, I’m Raoul Pal. Sorry to interrupt your video - I know it’s
a pain in the ass, but look, I want to tell you something important because I can tell
that you really want to learn about what’s going in financial markets and understand
the global economy in these complicated times. That’s what we do at Real Vision. So this YouTube channel is a small fraction
of what we actually do. You should really come over to realvision.com
and see the 20 or so videos a week that we produce of this kind of quality of content,
the deep analysis and understanding of the world around us. So, if you click on the link below or go to
realvision.com, it costs you $1. I don’t think you can afford to be without
it. BRENT JOHNSON: So because I've read your stuff
for a long time, I'm fairly familiar with your views. I'm still going to ask you a number of questions
that I already the answers to, because I want the audience here to get to hear it straight
from the horse's mouth. And I agree with some of the stuff that you're
talking about, and then, I also know that I currently disagree with some of the stuff
I've read recently, but it may just be because I don't fully understand your position. So I'm looking forward to digging into that
in a little bit more detail. I hope we have time to get through it all. I know you're a busy man and don't have tons
of time, but I hope that we get to talk about this stuff, and I hope the listeners get some
value out of it. Because I think what you're talking about
right now is really of the Zeitgeist of the moment, and that's the whole inflation versus
deflation debate. And I think one of the important things--
I think one of the important things of you starting to talk about an inflation is that
you were so much of a deflation asset for a long time. And so before we get into the current topic,
I'd actually-- if you don't mind, I'd like to rewind five or 10 years and just talk about
the deflationary environment that you correctly called for the last 10 years, when everybody
else was saying green shoots, inflation, get ready for hyperinflation, failures of currencies,
and you really stuck to your guns. And so I guess what was it that five, 10 years
ago that kept you as a deflationist? Why didn't QE work? Why didn't negative rates work? Why didn't the five arrows from Japan work? RUSSELL NAPIER: Yeah, so I remember the day
I changed my mind on this. And I was attending a conference in New York,
actually, in the Plaza, where I'd tried to interview Paul Volcker. He's very good at not answering questions. But we were surrounded by commercial bankers,
and I began to realize just the challenge that commercial bankers were going to have
in growing their balance sheets, regardless of the policy of the Federal Reserve. The most important thing for anybody watching
this to know is that it's commercial banks who create money and not the central bank. The central bank-- and I think this is a really
helpful analysis-- it's like a coachman or a coach woman driving a team of horses. But the six horses in front are commercial
banks. And the reins they have that run from the
coachman to the horses are the reins of interest rate, the reins of central bank balance sheet
size, and sometimes, they also control capital adequacy rules. And those are the reins. And by steering, they use those to steer the
horses to create money. And what I thought was right is that it wasn't
going to work, that they simply weren't going to work. There were all sorts of reasons why commercial
bank balance sheets weren't going to expand. And ultimately, if they didn't expand, no
matter what the central bank did with its own balance sheet-- which we all know has
been going like this-- in terms of broad money-- which is the money that we have in our pockets
that we spend every day-- it really wasn't going to go up. And that was one reason for being on the side
of deflation. Well, there was another reason, and that is
that the interest rate policy that they pursued in full in quantitative easing was creating
a huge boom in non-bank debt, and the debt-to-GDP ratio was going up. Now, that varies from country to country,
but basically, it was going up. So they'd actually devised a policy that was
guaranteed to do the reverse of what they wanted it to do. It was not creating any growth in broad money,
but it was creating growth in debt. And, I think as everybody watching this would
probably know, if your debt keeps going up, and your nominal GDP doesn't go up, you're
weakening your balance sheet. You're not strengthening a balance sheet,
preparing it for when the next recession comes, to be more robust. You're preparing it to be less robust. So those were the crucial reasons for saying
that this isn't going to work. It's because the commercial banks weren't
doing. Now, things have changed, which is, I think,
what we're going to come onto. But America was more successful in this than
elsewhere, but was largely unsuccessful. Some places, such as the European Union, were
completely unsuccessful in this, and that's why they've got themselves into an even bigger
mess than the United States of America. BRENT JOHNSON: So along those lines, the goal
of QE is to pull interest rates lower. And we have had low or very low, and then,
in Europe and Japan, negative rates for many years. In your opinion, are low rates inflationary,
or are they deflationary? Because I think in my opinion, that's something
people get wrong sometimes. RUSSELL NAPIER: Yeah, so I've explained the
situation in which they can actually be deflationary. And then, the way we could have low interest
rates being deflationary is they don't create any more money, but they create a lot more
debt. BRENT JOHNSON: Yeah. RUSSELL NAPIER: So monetary policy is about
the quantity of money, full stop, not the price of money. The price of money is a technique to adjust
the quantity of money. And what they manage to pull off was a price
of money which adjusted the quantity of debt without adjusting the quantity of money. And that's deflationary; it's not inflationary. You might say, well, why did they not change
that policy? And I guess that's folklore, isn't it? To a man with a hammer, every problem is a
nail. And they had a hammer, so they saw this problem
as being a nail. And they come up, and they hit it with a hammer. BRENT JOHNSON: Well, is that also a function
of the design of the monetary system and, then, the laws that the central banks have
to operate under? Because for the system to work, money has
to grow there. Has to be ever extension of credit. If credit is not extended, by design, the
system will fall. But central banks are only allowed to lend,
right? They're not allowed to print-- at least not
yet. And so the fact that you've got these low
rates that are caused by too much debt, and the only way that they can fix it is adding
to the debt, it's this deflationary spiral. And I think you are one of the people that
helped me understand that. So again, I'll say thank you. But the interesting thing now-- and, I guess,
so it's probably time to shift gears here a little bit-- is two or three months ago
now-- well, actually, you started hinting at it in the spring. And then, two or three months ago, you actually
said, inflation, get ready for it. And I wasn't totally surprised, because you
had started hinting about it. But I was a little surprised at the speed
with which you said it. Were you surprised by the speed with which
you said it? RUSSELL NAPIER: So the first thing I'd say
is I think there was a better solution than quantitative easing. And this will sound very technical, but it
was the re-intermediation of credit assets. And what could be more boring than the re-intermediation
of credit assets? BRENT JOHNSON: [LAUGHS] RUSSELL NAPIER: But
if we'd done something that persuaded the banks to buy back in existing credit, then
their balance sheets would have expanded, and they would have created money. And by "existing credit," that's, obviously,
government debt. But there's a hell of a lot of private sector
debt out there, whether it's MBS or corporate bonds. So that's the policy I would have pursued,
rather than quantitative easing. And I think if you buy existing credit assets,
at least directly, you do not increase the level of debt, but you do increase the level
of money. So that's rather technical, but I think there
were tools in the toolbox of the central bank other than quantitative easing. They didn't use them. They got it wrong. We are where we are. Am I surprised how quickly I changed my mind? That's the thing about what I do, is that
I don't change my mind very often, but where you're going to change it, you'd better do
it quickly. And I remember very well back to that particular
bank conference, because I'd been there the week before saying one thing, and I was back
the next week saying exactly the reverse. And people think, oh, you're very inconsistent. This is a terrible way to do something. But if you only do it every 10 years, it's
not quite so bad. BRENT JOHNSON: Yeah, right. RUSSELL NAPIER: So the reason that I changed
my mind-- and, I would say, two months too late-- is that I finally began to grasp the
scale and magnitude of the government guarantee programs for commercial bank debt. And I wish I'd done it two months earlier,
and I wish I'd seen it two months earlier. But also, you have to make that call, not
just that it is happening-- and nobody can refute that it's happening. You have to foresee that it will continue
to happen. And I think as time has gone on, I just get
more and more convinced that this particular manipulation of the commercial banking system
by government-- which means they now control monetary policy-- is permanent and not temporary. So I wasn't really that surprised how quickly
I changed my mind. I just wish I'd been smart enough to change
it too much earlier and really see the significance of those first-- that first step across the
Rubicon. Well, you can always jump back again, but
it took a while to realize that this was the new-- this was a revolution. This wasn't just a step, this was a revolution. So I could still be wrong on that, but I think
what we're going to discuss is, really, why this is a monetary revolution. BRENT JOHNSON: Sure, sure. And just for the listeners at home who are
new to finance, and they're still learning, the point we're trying to make here is that
QE for the last 10 years, it expanded central bank balance sheets, and it gave a lot of
reserves to the banks themselves, but the banks did not use those reserves as collateral
to then loan into the market. So lending, broad lending, didn't take place,
and typically, that's where most of the money supply comes from, is from money being lent
by commercial banks. That didn't happen, so we had this deflationary
environment where debt was growing, but money was not. RUSSELL NAPIER: You've just [INAUDIBLE], Brent,
because I think it's very easy for anybody watching to confuse the two things. There are two different types of debt, and
it's really important to divide them into two. There's commercial bank debt, and there's
everything else. So we know that as bond debt, commercial paper,
corporate bonds, et cetera. BRENT JOHNSON: Yes. RUSSELL NAPIER: So what happened is the banks
didn't lend, so they didn't create money, because that's what banks do. But meanwhile, this other great big pile of
debt grew, and grew, and grew. So that's the kind of Catch-22 we're discussing
here. You can't create more money unless you create
more debt, but specifically bank debt. The problem is they created the wrong sort
of debt. They didn't create the sort of debt that also
creates money So to solve the problem, maybe what you do in a society that, let's say,
was 50% bank debt and 50% non-bank debt, but if you've got the bank debt growing at 10%,
then the money supply might grow at 10% And if you stop the non-bank debt growing at all,
then you would have growth in money of 10%, but growth in debt of total debt 5%. So it's a bizarre-- and it's really difficult
to wrap-- it's a bizarre combination of high more debt can reduce your debt-to-GDP level. It doesn't reduce your debt level, but it
reduces your debt-to-GDP level. But the crucial bit is which bit is growing
and which bit isn't growing. BRENT JOHNSON: Exactly. And so as I mentioned earlier, you're one
of the ones that helped me understand that years ago. And so I have been in the overall deflationary
case, and I still am, on a global basis. I think we're going to talk about which comes
first, or where inflation comes first here in a minute. But I remained in the deflationary camp, but
I will say that what we're going to start talking about here is you've made the case
to me, better than anybody else, of why I should start thinking the other way. So that's why I think what we're going to
talk about next is so important, because what you're saying now-- and I'm going to let you
explain it-- is that there has been a change. There is actually going to be bank lending. And that is going to push the GDP higher,
or potentially push GDP higher. More money will be available. And so the crushing of the debt isn't there. So again, I don't want to put words in your
mouth, but why don't you explain for the listeners this Rubicon that has been crossed and why
the banks are going to start lending? RUSSELL NAPIER: OK, so let's say nothing I'm
about to say now is a forecast. This is all in the past. Everything I'm about to talk about has already
been done. It's not a forecast. So what they're going to happen in the spring
of this year is that governments, really, across the world, and almost without exception--
likely, they were acting in unison-- suddenly decided that the best thing to do to keep
the people and businesses alive during COVID-19 was to get credit flowing through the banking
system to people who needed it. Which, if you think about, is really pretty
smart, because everybody's got a bank account. So if you needed to get money down into the
very corners, to the guy who runs a taco stand, for instance, that's how you would do if. And you did it through the existing financial
system. And in America, you did it through your Small
Business Administration, but also through the banking system. So what we have to grasp is how that changed
everything. Now, the reason-- so let's talk about the
United Kingdom, because I know the numbers better. We have made GBP 30 billion Sterling-- sorry,
GBP 40 billion Sterling-- in a thing called a coronavirus bounce-back loan. Now, our banking system has been one of those
banking systems that really was unable to lend. It couldn't find anybody to lend to. So how did they suddenly find 40 billion good
commercial credits to lend to? Well, they're not commercial credits. The government has guaranteed the principal
on those loans. So suddenly, banks whose balance sheets had
been going like this for years suddenly went like this. But the only reason they could do that is
because the government guaranteed the credit risk. So when they've done that, they've created
money. So I think the stunning statistic for anybody
who's thinking about inflation is the end result of all of this on a global basis. And the end result is this. We have a figure that's called the OECD total
money supply growth number. And it begins in first quarter of 1981. It is currently at 17.4%. Since 1981, there has only been four readings
above 17.4%. So we talked about the inability of banks
to lend, the inability to create money. And suddenly, in the deepest recession since
World War II, we've got basically almost the fastest growth in money since 1981. Now, I think what we need to discuss in terms
of inflation, which we'll come on to, there doesn't necessarily have to be a link between
that scale of growth and money and inflation, but the transformational thing that is already
behind us is we've gone from broad money growth, I think, from memory, of about 6% or 7% to
17.5% globally in six months. Does it matter? Does it not matter? And then, I guess, the following thing is,
do they keep it up? Do they keep up these-- the banking system,
or do they stop and retreat? BRENT JOHNSON: This is one of the first real
questions I have for you, where I'm just going to push back a little bit on the-- I think
you've said, if they continue doing this, it will be inflationary. If they do it once just because of the pandemic
and don't follow through, then maybe it doesn't happen yet. You've talked about bank credit is up over
from last year, and it's expanding. It is true, and it's expanded, what is it,
$400 or $500 billion. But if you look at the report, a lot of it,
it happened in May and June. And then, in July up to August and September,
it started to contract because those loans have started, those programs have started
to wind down. And then, the other part of the bank credit
is all the bonds and securities that the banks have bought. So they're filling that gap. So I guess the question I have to you is,
how often do you think they need to do these programs, or these loans, in order for it
to have a lasting effect. So for years, we've had these green shoots. These programs get rolled out. We get the green shoots, inflation expectations
jump, and then we roll over. And I guess I would say over the last four
months, that's what I'm seeing again. We had these green shoots and credit impulse;
it's starting to roll over. I think what you're saying-- and again, I
don't want to speak for you-- but I think what you're saying is, these are going to
happen more and more often. Do I have that right? RUSSELL NAPIER: Yeah, so I mean, we can spend
a long time dividing up US buying credit, because it's been absolutely fascinating this
year. And nobody-- BRENT JOHNSON: Looks not good,
looks not good, looks not good-- RUSSELL NAPIER: Nobody would be interested in it. But total buying credit as of last Friday
was at a new all-time high. But if I draw in the air, it kind of goes
up, and it kind of plateaus. So that's the point. BRENT JOHNSON: Right. RUSSELL NAPIER: It's not as if, in aggregate,
it's coming down. Some bits are coming down, and some bits are
going up. BRENT JOHNSON: Right. RUSSELL NAPIER: There is something, of course,
already on the launchpad that both Republicans and Democrats have passed, which is called
the Main Street Lending Program, which is a $600 billion lending program which is stillborn. It really isn't doing anything. So I think the first thing I'd point out is
that I'll keep tweaking that until it does something. And $600 billion, well, even in America is
still quite a lot of money. So I think there's another $600 billion to
come from that program. So the programs so far have been, effectively,
life support. That's what they've been. It's to try to keep businesses alive. Now, the next programs will be recovery programs,
and then I think after that, we'll get to green lending programs and, perhaps, social
justice programs. Rather than me just throw those out there,
let me give you an example of one that's already been launched. So the prime minister of the United Kingdom
has announced, with very few details, that we will have a 25-year mortgage available. It will be on a fixed interest rate. It will be on 95% loan-to-value. Americans are very used to long-term fixed
mortgage rates. We are not. Our commercial market does not provide such
a product, because it's not commercial. But the prime minister has done this. Now, this is not the government lending money. It's exactly the same as the programs we've
been discussing. This is forcing the banks to lend the money. The government backs it. This has nothing to do with keeping businesses
alive during coronavirus. It's nothing to do with an economic recovery,
really, either. It's nothing to do with green lending. But if you listen to the phraseology of the
British prime minister, it's to do with social justice. It's to do with getting young people onto
this property ladder for the first time. And you now see how the initial move-in, which
was life support, morphs into something else. So there's a practical example of how it's
morphing into something else. And I think we'll see a lot more of that morphing
as time goes on. So absolutely, it will be recovery loans after
the survival loans. And expect to see, particularly, green investment
loans going out. So I think we already see some early indications
of how this changes into a very different thing. And if the government controls a commercial
bank, then it controls the commercial banking system, then it controls the supply of money. So you're absolutely right. I mean, a lot of this depends on more of it
coming. But I would point out that there is 17 and
1/2% more money in the world than last year. It's not particularly being spent, but just
wait until there's no lockdown! I mean, the money's not going to go away. You've got the first big pulse of money. We're going to see the effect of that. But the core call is, this is the beginning
of a new program and all the end. BRENT JOHNSON: OK, so you just touched on
something else that I think is pretty important, and I want to make sure that I understand
what you're saying here. Because when I read it, I think I understood,
but again, I want some clarity. I think-- how much of your inflation-- again,
and I know it's already happening. I know you're saying this is not a forecast;
this has happened in the last six months. How much of your belief that it continues
to happen hinges on a vaccine happening and the economy opening back up? Because I think what you just said is the
money that went out so far, it's just filling the holes of the money that's collapsing,
right? So it's steadying the boat, so to speak. And so it's stopping the disinflation. But I think to get to inflation, we need to
have more of it without any more water leaking out of the bucket, so to speak. And so I guess it's your belief that this--
that the economy will start to open up in the next six to 12 months, and then expand
from there? Is that right? RUSSELL NAPIER: The first thing I'd say is
that whenever it happens, you and I will go back to acting normally again. It's just a matter of time as to when it happens,
but we don't know what's going to happen. But it is going to happen. And the money that we've added doesn't get
destroyed between now and then. In fact, it gets added to. Now, it may not get added to at 17% per annum,
but it gets added to. BRENT JOHNSON: Yeah. RUSSELL NAPIER: I actually think we're going
to have an explosive year for GDP next year. And that's not just about a vaccine. It's about a vaccine. It's about instantaneous testing, which actually
brings a lot of the economy back into play. It's the fact that the mortality rates associated
with this disease will go down. That's what happens-- human ingenuity finds
ways to deal with that. And it's about the really, really sad fact
that these diseases tend to hit really hard on the vulnerable part of our society, and
then the society moves on, and the one thing about human beings is they have an ability
to do that. So I'm really, really confident that we'll
come back at some stage, but actually that it will be early next year. But Brent, there's something much more important
happening than my forecast. It's already happening. The problem is, it's happening in places that
we don't usually look. So I'm sure most of your viewers will know
that if you're trying to buy a boat or a yacht in the United States at the minute, you've
run out of inventory, right? The classic car market is doing very well. The art market is doing well. The antiques market is doing very well. And if I ask anybody in those businesses,
why do they suddenly think there's been a lease of life for those businesses, they really
attribute it to council holidays, that the average consumer has in the budget a portion--
let's say $2,000-- for their annual holiday. Suddenly, the holiday is canceled. They've got $2,000. Now, what's desperately bad for the economy
is if they don't spend the $2,000. The savings rate is up, for sure. It's gone from 7 and 1/2% to 14%. That's still a big number. But you go back to May, it was 33%. So I think the very encouraging thing for
me is money is finding a way to flow. The problem for Wall Street economists is
that they all live in midtown Manhattan. So when they walk down the street in midtown
Manhattan, they see very clearly that there isn't a lot going on. But human beings are very, very inventive,
and this money is already flowing somewhere. And that gives me great courage, enthusiasm,
that when we lift some of the barriers to normal behavior, it is going to explode into
the real economy. And I mean "explode," because one of the other
things statistically is that inventories are very low- - very low. And if you've got low inventory in the system,
and you suddenly get a surge in demand, then you expect prices to go up particularly quickly. And a longer-term trend which you might come
back to is a lot of this relates to China and whether we are going to have the relationship
with China for the next 30 years that we had for the last 30 years. And if that in any way constrains supply,
it feeds into this longer-term inflation debate. But being no doubt, I think it's inflation
next year I've said, and we see the inflation will be at 4% or above by next year. It's currently at 1.2%. So that's a very aggressive forecast. I don't usually make forecasts like that. But this money is there, and it's finding
a way to circulate. BRENT JOHNSON: I wanted to ask you about that
4% number, because I read that, and you attributed it to the growth of the money supply and then
velocity just normalizing. Is there some formula? I couldn't figure out the formula that took
the growth of the money supply and the normalization of velocity that got you to 4%. Is it just an estimate that you had, or is
there some kind of formula of the way you did it? RUSSELL NAPIER: It's an estimate. If I was sticking strictly to the formula,
I'd be going for much higher levels of inflation than 4%. BRENT JOHNSON: OK. RUSSELL NAPIER: Because if you increase the
supply of money from 17% from the end of last year and velocity normalizes, then you're
absolutely expecting much, much higher levels of inflation than 4%. BRENT JOHNSON: Right. RUSSELL NAPIER: So even now, I would say to
you, I think I'm right at the low end of the range. And let's be clear what the current level
of inflation in America is. The PCE, the personal consumption expenditure
deflator for September, is 1.6%. It's already gone from 0.9% at its low this
year to 1.6%. It isn't a huge leap from 1.6% to 4%. But in the markets, it's a massive leap. There's basically nobody who will believe
that inflation is going to hit 4% next year. But we're already going from 0.9% to 1.6%,
with a savings rate that's still at 14%. And I think that savings rate will be, this
time next year, maybe as early as next summer, it'll be back to about 8%. And that excess money will be circulating. BRENT JOHNSON: Well, you just had found something
else that we should probably define, because whenever I mention inflation, people will
come back and say, of course we have inflation. My cost of living is higher. These asset prices are higher. So when you're talking about inflation, are
you talking about CPI? Or is there some other number that you're
talking about? RUSSELL NAPIER: No, I'm happy in the context,
this context, to talk purely about CPI. BRENT JOHNSON: Yeah, OK. RUSSELL NAPIER: And-- say to people all the
time is-- we're getting near Christmas, so if a genie appears with a lamp and offers
you your one wish, ask for a chart of the future progression of inflation. Because if we knew that one statistic, we
could at least know where we should be on the bonds, right? Which is a significant portion of someone's
portfolio. But I think it's the one economic indicator
that can give you some idea of where you should be and what you should be-- at the end. Ask for that one. So this is the important one to focus on. There are thousands of things you should be
looking at. This is going to be so important. And the market, after 40 years of disinflation,
the market is prone not to believe it. BRENT JOHNSON: OK, so now we've explained
why we had a deflationary environment. We've explained why you believe we're moving
into an inflationary environment. And we started to talk about when you expected
it show up-- whether it's six months, or 12 months, or-- you think it's coming sooner
than most. So I guess my next question is, where? And what I mean by that is, do you mean this
on a global basis? Do you mean it in the United States? Do you mean it in the emerging markets? And then, as a kind of a corollary to that,
in which currency? RUSSELL NAPIER: OK, so I see it in every developed
world economy. Because every developed world economy has
already seen this step change in the growth in the supply of money. So there are really no exceptions in the developed
world. Does it get to emerging markets? Well, it kind of has to. If it's the entire developed world doing it,
it's very hard to see how they avoid it. They, I think, have been more disciplined
than emerging markets. China has been particularly disciplined, and
that's for a unique reason we can, perhaps, come back to. But if the developed world is going to produce
inflation like this, it is clearly going to spread to the emerging markets as well. In terms of which developed world markets
are likely to get to the inflation first, it probably is the United States of America,
because you have produced up-- if I give you those broad money growth numbers again, we're
looking at Europe and Japan being up close to 10%, but we're looking at America 24%. So it's just been significantly more aggressive
in America. Canada is not far behind at 16%. I think Australia is 12%, and UK is 14%. So perhaps America gets there first, but be
no doubt that it's coming absolutely everywhere, because those numbers-- even in Europe, those
numbers have doubled in six months. It's just an America, they're tripled. So that's the difference. But this is across the developed world. And it's part-- I mean, I should have made
this clear. We haven't already talked about this yet,
is it is part of policy to have higher inflation. It's not as if it's going to be a separate--
It's not as if nobody wants it. Arguably, quantitative easing has been trying
to achieve it for a long time. And the rationale behind higher inflation
is to bring down debt-to-GDP ratio. And the final point in inflation. It has to get the wages. If it doesn't get to wages, it doesn't work. Certainly in the household, debt-to-GDP does
not come down in the household sector. Or debt sustainability doesn't come down in
the household sector unless this gets to wages. And I think that is where your election is
so important. And the massive turnout in the US election,
I think, tells us something about wage growth, and that wage growth-- this election tells
me wage growth is going up. BRENT JOHNSON: Yeah. Yeah, I think the topic of wage growth, I
think, is important because, again, when we talk about inflation, people always say, well,
my cost of living has gone up. Of course there's inflation. I think sometimes, they get confused with
prices going up with their wages being deflating, right? So whereas, especially blue collar workers
like you've talked about, they've seen no wage growth in 20 or 30 years or whatever
it is relative to prices. And so for inflation to show up, I agree that
somehow, this has to translate into wage growth. So here's a question. If we see this inflation showing up in, call
it, "the developed world"-- Europe, the United States, Canada the G8 countries, for lack
of a better word-- what does that mean for the euro, and what does that mean for the
dollar and some of the other currencies? If we look at the dollar index, it's made
up of the yen, and the euro, and some of the Nordic countries, and, I think, the Swiss
franc. And so do we get inflation in the US with
the US dollar falling, or do we get inflation in the US with the US dollar rising? Because fiat currencies trade relative to
each other, right? So they can't all go down. One of them has to rise. And so what do you see? How do you see this playing out in different
currencies? RUSSELL NAPIER: OK, so just before I do that,
I just want to talk about the election. Because you and I know what I've written about
the election, but I don't think anybody else does. So to me, the fundamental thing is that blue-collar
workers have re-engaged with both parties. Not just with one party, but with both parties. Trump began that process. He's taken it much further. And now, the Democrats have, obviously, jumped
ahead in turn. So for a generation, I think, the blue collar
workers said, of these guys are working for me. There's no point in me turning up; they're
not working for me. What Trump showed, whether you like it or
not-- is that the Republican Party can do something for the blue-collar worker. And many blue-collar workers believe that,
or they wouldn't have turned out in so many numbers. So now, the battlefield is the blue-collar
worker for the first time, I would say, in a generation. So you've got to expect policies from Republicans
and from Democrats to help the blue-collar worker. And what is the bottom line on that? It's wage growth. That's what the bottom line is. And there are all sorts of things that can
be done to get wage growth going up. So that is the future. And it's a global thing, as well, that this
is happening. So that's why I think it's very, very important
for not just the US, but for the world. In terms of currencies, I have a real problem
with the euro, because I don't think it is a currency. It's an experiment. BRENT JOHNSON: Yeah. RUSSELL NAPIER: And it's an attempt to create
a currency. And, of course, it's been going for 20 years,
so most people would say, well, it's a currency, because it's been going for 20 years. Well, that's not the way currencies work. The way you get a currency to work is you
jam all these countries together, and then, basically, there's internal economic adjustment
and price adjustment until everything levels out, the United States being a good example. It takes a long time. And then you get there. And, of course, American currency went to
zero twice. Once, it was a Continental that went to zero. Second time, it was a Confederate note that
went to zero. So even your own attempt to build a currency
had a few failures in it. The real problem right at the middle of Europe
is the debt-to-GDP difference between France and Germany. So the numbers are going up very, very quickly
now in this pandemic, but by Christmas, we should be in a world where Germany's total
debt-to-GDP ratio is 200% of GDP and France is 400%. Now, what we have discussed so far is how
you inflate away debts. And if you and I were running a country where
half of it had that debt-to-GDP ratio and half of it the other, you could not create
a monetary policy that would work for both. So the currency, for me, remains flawed, so
I'm really pretty optimistic on the dollar, despite the conversation that we've had earlier. Because the real flaws in the euro are being
postponed. They haven't been solved, they've simply been
boned. And this crisis shows up-- so you should expect,
I think, capital flight from Europe. And arguably, we've seen quite a bit of that. I mean, this is a zone with a very large current
account surplus. America is a zone with a very large current
account deficit. And yet, it's the dollar that's been going
up for years relative to the euro. And that must be because people getting capital
out of Europe. So I think that exacerbate it. It's very bullish for the dollar. And I've been doing this a long time, and
doing it 25 years writing, and I've never heard more bearishness on the dollar from
Americans. Usually, if you've got an accident-- BRENT
JOHNSON: Tell me about it. RUSSELL NAPIER: If you've got an accident
like mine and you're bearish on the dollar, that's acceptable. But to hear so many Americans talking about
the demise of the dollar and the end of the dollar-- I can see why it is. You're desperately focused on the politics. You desperately focused on the division. But things aren't that bad. Other countries have got-- as you've said,
it's a relative call. And other problems have much bigger problems,
I think, than the United States of America. BRENT JOHNSON: OK, so you just touched on
something that's very important, and it's something that I've talked about a lot, and
I've gotten a lot of pushback on it. And I want to hear your thoughts on this. And I think you just it a little bit, was
that in my opinion, it's possible to have inflation, along with rising rates and a strengthening
dollar. And I think a lot of people intuitively think,
if you have inflation, it means your currency is going down. But I think people forget that in a relative
world, where currencies, fiat currencies, do not trade on intrinsic value but rather
relative value, that's not necessarily the case. Do you know of a good way to just exploit
that simply? RUSSELL NAPIER: We could go back to the early
1980s. And you could see that inflation is coming
down as the dollar is going up. This is one of the great bull runs in the
dollar under the Reagan presidency. But inflation was coming down. I mean, it wasn't zero, and it wasn't below
zero, and it was a hell of a lot higher than it is today. And from memory, it was certainly above 4%. So there was a sign, when the dollar was going
up, and the inflation rate was already above 4%. So the rate of inflation may have been coming
down, but actually, we still had inflation. So there's a reasonable historical precedent
for a period of a strong dollar and you had inflation at a high level, it was nowhere
near as low as it is today. The other way I'd put it is this. We are living through a structural change. And hopefully, some of the discussion we've
had is pointing to that massive structural change, which is more inflation, but also
more government-- more involvement of government. And that comes in the entire developed world,
but I think it comes, in America, just a bit slower-- maybe because of the Constitution,
maybe just because of the nature of what America is. And that's an issue for capital flight. In discussing Europe, I've already mentioned
capital flight. So if the reason your currency is going up
is because people want to put more money into your assets because they believe they're safer,
or higher return, or whatever, yes, the dollar goes up. Yes, you dump in import price inflation potentially,
but actually, that money is coming in because you're in a great economic boom, and that
money that's coming in is not necessarily coming in because inflation is going down. It's coming in to participate in the economic
recovery. And I guess the final part of this-- because
when we talk about big currencies, we have to talk about the renminbi as well. And it's-- BRENT JOHNSON: That's-- I definitely
want to talk about that. I definitely want to talk about China. Sorry to interrupt. RUSSELL NAPIER: That's OK. If we're ostracizing China from the global
trading regime-- so I'm not talking about America, I'm talking about a global ostracization--
you're going to get inflation, and you're going to get a strong dollar. That's the nature of the beast. So you've got all these structural forces,
and I think people who are calling a weak dollar are looking at the cyclical forces. America may grow faster, its current account
may get worse, but they're not looking at this great structural schism that's coming
in the world for the euro, for the renminbi, and why that is positive for the dollar, and
you can have growth on dollar and inflation all at the same time. But why has inflation been low for many, many
years and falling? Definitely lack of money supply growth, but
also China. And China is a busted flush. It's a busted flush because it's had massive
wage growth, so it's not as deflationary. But it's potentially an even bigger busted
flush, because we in a cold war with China, and you don't trade with people in a cold
war. BRENT JOHNSON: OK, so you've just touched
on two issues that I definitely want to talk about, and they kind of relate to each other. You have said that cap day is coming. And cap day-- again, I'm not going to speak
for you, but cap day refers to capping rates. But why don't you explain what cap rates are--
well, what cap day is, and then we'll go into how that's going to affect different countries
and different currencies. RUSSELL NAPIER: Yeah. So as inflation picks up, interest rates pick
up. We all know that. There is a problem, however-- we've got record
high debt-to-GDP ratios. I mean record-- they're above World War II
levels for most countries if you add the private sector and the public sector together. So if interest rates start to go up when you've
got record high debt-to-GDP ratios, everybody might go bankrupt. The answer to that is not to let them go up. We have lived in a system for three decades
or more where the market determines long-term interest rates. We've gradually come out of that during quantitative
easing, but ultimately, the rate stayed down for the best possible reason-- there was no
inflation. I'm arguing that if inflation is coming back,
rates are going up. But at some stage, that will be a disaster. And this is right across the developed world. There are really no exceptions to this. It's not an American phenomenon. So how do you cap rates? And I don't mean policy rates, I mean long-term
rates. You have to find someone to buy all the government
debt at a preset, predetermined interest rate. And to me, that is clearly going to mean forcing
savings institutions to do that, not the central bank. Imagine, let's skip forward just six months
where inflation is higher, but more importantly, you and I actually believe inflation is going
even higher. We are ditching our government debt, but the
government declares that banks are going to price their loans off the five-year bond. The five-year bond is now yielding 2 and 1/2. These guys are pricing at 3 and 1/2. Corporates are really struggling to pay that. The guy in the street is struggling to pay
it. We've got to cap it. The last thing that you could do, then, is
use the central bank's balance sheet to cap rates. Because you and I as investors will be saying,
there's too much money in the system. There's too much inflation in the system. Interest rates should [INAUDIBLE]. And the central bank would respond by printing
more money and pushing interest rates even lower. So the cap rate-- to me, cap day is when we
go to the big savings institutions of America and we force them to buy government debt at
bad prices. And people will say, that's constitutionally,
legally impossible. But of course, we've done it before-- and
more aggressively in Europe after World War II than America. But that is what cap days is. And just finally on that, the reason that
cap day is so interesting is that to buy these bonds, they have to sell something. And it's what they sell that I'm most interested
in, because it primarily would be equities. And also, cap day lasts for at least a decade. It doesn't last for six months, or nine months,
or 12 months; it lasts for a decade. So that's why cap day, I think, is so important--
because once again, it changes the very nature of what our economy is. The government is now determining the interest
rates right along the curve. The government is determining where your savings
go, if they're in a regulated institution. The government is determining the supply of
money throughout the banking system. And this is capitalism with Chinese characteristics. BRENT JOHNSON: As I think about this, and
I look around the world, I'm curious how you see the progression. Because I would think that cap day would first
come to China, and then it would go to the countries who primarily export to China. So let's say, if I had to guess, I'd say it
starts in China, and then it goes to Australia and Canada, Chile, places like that who have
to export to China. And as that happens, the renminbi starts to
lose value. It starts to push the dollar higher. And now we get back into this situation where
all this US dollar debt out there, and as the dollar is rising, putting pressure on
these countries who have borrowed in dollars at the same time that they're trying to do
cap day on their local currencies. Am I thinking about this incorrectly? RUSSELL NAPIER: So I've tried to estimate
who goes first. And what I've looked is debt service ratios
for the private sector, which are all-- if there's anybody is watching this, you can
get them in the Bank of International Settlements's website-- and looked at who is most strained
currently in servicing debt. Because they're the people least likely to
be able to allow interest rates to go up, all private sector. But you're absolutely right to focus on China,
because the two big economies in the world that are top of those big economies-- I'll
come back to the smaller ones-- are China and France-- France as well. BRENT JOHNSON: Yeah, you're right. RUSSELL NAPIER: --the core of our currency. So in a single currency zone, you're supposed
to have one cap. You can't say we're capping French rates at
3 and we're capping German rates at 4, because in a free movement of capital, it's a euro. We'd all move and get the 4 and not the 3. So you've got two huge economies. America can live with materially higher interest
rates. And I don't want to go into the numbers, but
I have tried to calculate some numbers for this. But ultimately, it has to cap as well. And at least in America, rates can rise significantly
higher, because your debt service ratio is a bit lower-- not massively law. And if you look around the world to find the
countries with really, really low debt service ratios that probably don't have to get into
this, huge structural shift. They are in the emerging markets. And particularly, in terms of big, big economies,
I would single out India as an economy where the debt service ratio is very low, debt-to-GDP
is very low. Maybe they don't have to do any of this. You'll be interested in the small economies
that are really high up on that list as well, because they are the ones you've mentioned--
Canada and Australia, actually Sweden and Norway. But Canada, there are lots of different ways
you can try to use the debt metrics to give you some objectivity on what that means for
cap day and inflation, and Canada's got some of the worst metrics in the world. BRENT JOHNSON: They're awful. They're horrible. [LAUGHS] Sorry to laugh, but yeah, they're
not good. They're not good. Let's talk about-- we touched on China. Why don't we just focus there a little bit
more, just because I want people to understand, again, because it has so much impact on the
rest of the world, right? And you've said that they're in a debt trap
and that the recent strength in the renminbi or the yuan-- whatever you want to call it--
is actually a misnomer, because it's actually reflecting potential weakness rather than
actual strength. Could you explain that in your own words,
and why that is, and why you think that the renminbi will actually fall in value? RUSSELL NAPIER: Yeah, so first of all, it's
not a floating exchange rate; it's a managed exchange rate. And therefore, where it goes and where it
doesn't really tell you very much at all. The Hong Kong dollar hasn't gone anywhere
since the 15th of October, 1983. What does that tell you about Hong Kong? It tells you absolutely nothing. BRENT JOHNSON: Nothing. RUSSELL NAPIER: What you need to do is you
need to look behind that to see how they keep it there. So now, it's not a peg; it's a link. It's a managed exchange rate. But let's look behind the way the exchange
rate moves. Now, when you look behind it in Hong Kong,
what would you look at? You'd look at foreign exchange reserves to
see if they're going up, and then you would look at the total quantity of Hong Kong dollars. And around the managed exchange rate, those
are the two things that would tell you whether there's upward pressure on the currency or
downward pressure on the currency. But the currency itself would tell you absolutely
nothing. So when we look behind these numbers for China. What you see in the foreign exchange reserves
is they're really not being very much. They had a big fall from 2014, they had a
bottom, they went up a little bit, and they kind of trickle sideways to slightly up. But more importantly, when you look behind
that to the total supply of renminbi, which is related to this, these are the assets of
the central bank, its foreign exchange reserves. So the liabilities of that, just like qualitative
easing of the size of the central bank balance sheet. The size of the balance sheet has contracted
over four years. I mean, show me an economy anywhere in the
world with a central bank balance sheet-- so to get the exchange rate to do what it's
doing, we are changing liquidity and monetary policy in China. And we're not loosening monetary policy; we're
tightening monetary policy. So I think it's a fallacy to look at a managed
exchange rate and say it tells you anything. Look at what that's forcing them to do. And it's actually forcing them to run, by
their own standards, a relatively tight monetary policy. So we're actually getting to a world where,
maybe by year-end, the growth in the total amount of yen in the world could exceed the
growth in the total amount of renminbi. Which, if I told you that a year ago, we would
have laughed hysterically that such a thing was possible. So China knows how to play this game, and
what they're desperately trying to do to keep the game going is to suck in as much capital
as possible. And that is what the whole drive has been
for several years. And the great excitement for people who are
much more optimistic on China than I am is that everybody in the world is going to buy
Chinese RMB-denominated government debt. And that capital inflow into that country
will hold the currency steady, get the foreign exchange reserves going up, and crucially,
on the other side of that, get their central bank balance sheet expanding. And that is the Hail Mary for China. And without it, they're in deep trouble. And there are some people who think the Hail
Mary will work. There are some people who think it won't work. And there's some people who think-- Mr. Rubio
being a very good example-- who think America should be trying to stop that Hail Mary from
working. BRENT JOHNSON: Well, so along those lines,
do you think that the recent strength in the renminbi-- again, it's a set rate, it's a
managed level-- do you think they managed it to the high end because of the election,
moving towards the election? Or do you think it's just random? RUSSELL NAPIER: I think you have-- BRENT JOHNSON:
--the US election. RUSSELL NAPIER: If you think of the US Secretary
of Treasury for year, after year, after year, until this administration, where things are
slightly more random, the Secretary of the Treasury of the United States always has to
say that America is in favor of a strong dollar. Now, why would he have to say that? Because there's a very obvious reason why
you have to say that. If the dollar's weak, if you talk the dollar
down, there's nothing you can do to reverse it. You might as well tell everybody it's going
to be a strong currency, because if it starts falling, the only way you could turn that
around would be to put interest rates up. And you wouldn't want to do that. So it's really important if you're managing
an exchange rate, even a floating rate like America, to always talk your currency up,
to always talk. Because if you want to bring it down, you
can do that. But you've got to talk it up. So I think they have to do everything they
possibly can to convince people that this is a strong currency. If you want to suck money into the RMB government
bond market, OK, so it's got a higher yield, but if the currency devalues by 30%, who cares? So you've got to always create the illusion
of strength. The illusion of strength is really important
in sucking in all this capital. And based on the conversations I have with
investment managers, it's been successful, and they are convincing fund managers of this. I don't get the argument, but they're convincing
people, so it is this Hail Mary. The ball is in the air, it's heading into
the end zone, and maybe they'll pull it off. But I'd say it's the biggest bank in finance
that they are playing here. And then there's something-- they've got a
couple of guys under the ball. So who knows? Maybe they'll pick it up. BRENT JOHNSON: OK, so let's rewind a little
bit, because what we talked about earlier is we were in deflation because the central
bank policies, just for 10 years, didn't work. We're now moving into, by your estimation,
an inflationary environment, because the policy is now being mandated by governments rather
than set by central banks. And then, we talked about cap day, about capping
rates. Now, who caps the rates? Do the central banks cap the rates, or do
the governments cap the rates? RUSSELL NAPIER: So let me-- BRENT JOHNSON:
I guess you're saying that governments do because they mandate people buy the government
securities. Is that's right? RUSSELL NAPIER: Yeah, it's called macro prudential
regulation. And "macro prudential regulation" are perhaps
the three most dangerous words in the English language if you happen to be a saver. And it's not coincidental that they almost
scan with motherhood and apple pie. How could you stand up in public and be against
prudential regulation? But what that tool-- it's a tool of government,
not a tool of central bankers. It's a tool of government to force you-- not
you as an individual, but you if you have money in a wrapper which is regulated-- to
own an asset that you know will provide a negative real return. So it's using that tool of regulation by government. So that's what I mean by the government now
determines long-term rates. If they say, look, we don't think the bond
yield should be above 2 and 1/2, then fine, they can do that. They can absolutely mandate that through that,
and you lose as a saver. And, of course, savers will be pretty up in
arms in that. I think one of the reasons that comes to American
later is that you have a judicial system, and this would clearly go into the judicial
system, all the way to the Supreme Court. I'll let your viewers who know the Supreme
Court better than I judge what the Supreme Court might do with it. But that is a protection, I think, a greater
protection for American savers than, perhaps-- well, I'm looking at a map of Spain behind
you there, and I'm [INAUDIBLE]. I'm not sure I would feel so comfortable going
into the legal system in Spain and France to protest that the government's use of macroprudential
regulation was a form of theft. BRENT JOHNSON: Yeah. Well, OK, so we've talked a little bit about
where cap day comes first, where it needs to come from an economic perspective. Where do you think it's easiest to come from
a legal perspective? I mean, I guess if you've got a dictatorship
or some kind of a top-down managed economy where you don't have to, necessarily, get
Parliament or Congress's approval, it's maybe a bit easier. But does the ease of which you can Institute
macroprudential policies affect where you think it comes first? Or do you think they just all have to do it,
so it doesn't really matter? RUSSELL NAPIER: So I think they all have to
do it, but it absolutely affects the sequencing. And I would put America towards the end of
that list because of the reasons we've just mentioned. China already does it to some extent. There's no way that anybody in China can stop
the government doing whatever it likes. A lot of this has to do with, can you control
the financial institutions? Well, in China, they own them. So the answer is clearly yes, of course they
can control the financial institutions. So it's not even up for doubt that China can
do it. All I'm talking to you is that it's probably
ultimately incompatible with a stable exchange rate when they begin to do it. But mainland Europe is an easy place to do
it, because there's a long history in mainland Europe of owning, sometimes owning outright
or manipulating the financial system for political ends. And I don't think there's much of a legal
challenge to that. So I would put mainland Europe second. I mean, be clear, we all get there. This isn't necessarily a high debt-to-GDP
ratio thing. No, it's global. We're all going to have to do this. But that's why I think it comes first, and
it's one of the reasons, Brent, for being a bit more enthusiastic on the dollar, because
the dollar is just behind the curve on this. And I guess the final thing we should mention
on all of this is when we look at the history of these policies, they've never been successful
without capital controls. If I say that-- BRENT JOHNSON: You have to
have that. It's a requirement, right? RUSSELL NAPIER: Yeah. Well, in some ways, this is a capital control. If I mandate to the savings institutions of
Spain that they can only buy Spanish government debt, well, that is a capital control. I'm saying to one of the biggest owners--
not owners, but custodians of savings in Spain, you can't take your money and put it into
German government debt or British government debt. That is a form of capital control. So macroprudential regulation is-- this is
why it's so interesting. It's a lovely new phrase for-- it's a new
jar. It's putting some very old medicine into some
very old jars. BRENT JOHNSON: Well, you can actually see
over the last, let's say, I don't know, four years-- maybe it started four or five years
ago-- not that they've started putting the capital controls in place, but they've started
making steps to a way that they could put them in control easier if you look at money
market funds, right? They've started forcing-- not "forcing," but
through regulation, "encouraging," for lack of a better word, government-sponsored money
market funds rather than corporate-sponsored money market funds. And I think they do the same in other parts
of the world too. But to me, that's just a way to-- it's not
necessarily a capital control, but you can see where it could become one, the way you've
defined it. RUSSELL NAPIER: I keep getting told that you
can't have capital controls in the modern world. And yet, in the developed world, we have recently
had them in Greece, in Cyprus, and Iceland. That's just the developed world. If you go across the emerging world, they're
everywhere. And let me tell you the easy way to have capital
controls. If you break the rules, you go to jail. That usually works. BRENT JOHNSON: Yeah, unless you're a bank. RUSSELL NAPIER: Unless you're a bank, in which
you pay a $1 billion fine. BRENT JOHNSON: Unless you're a banker in Iceland. They're the one place that actually did it. RUSSELL NAPIER: Yeah, and I know the man who
did it. And I'm hoping to get in-- BRENT JOHNSON:
[INAUDIBLE] RUSSELL NAPIER: Yeah, yeah, yeah. I'm sorry. Actually, I want to plug his book. I don't even think it's published yet. But please look out. There's a book coming out from the man who
did it, and this is his story. And if it's not out yet, it'll be sometime
next year. So look out for that. BRENT JOHNSON: Is that the name of it, The
Man Who Did It? RUSSELL NAPIER: No, no, I can't remember the
name of the book. Yeah, but he has written it, and I've seen
a draft of it, and he's a great guy. And so I think if you just Google Iceland,
and bankers, and Amazon next year, the name of his book will pop up. And he did it, so-- BRENT JOHNSON: Got it,
OK. So based on everything you've told me and
everything I've read, I understand where you're coming from on the why we're moving into inflation. Again, I'm not quite sure that I agree yet,
but I understand the logic, and I can see how it could happen. Here's one of the things that I have the most
trouble with, and help me understand this. And so let's go back to central banks. You've talked about the monetary policy for
years has been set, for decades has been set by central banks. Central banks have enormous power. Probably, I would argue that central bankers
are one of the smallest groups that has more power over the greatest number of people in
the world. And you've argued that that power is now slipping
from their grasp, and it's going into the hands of elected officials who are so inclined
to give the money to their constituents so they get reelected. And I understand that, but what I have problem
with is I've never seen-- with the possible exception of George Washington and Cincinnatus--
anybody have great power and just willingly give it away. And so I have a hard time seeing the central
banks just saying, OK, it's yours. We won't fight it. Do you think that they're just out of bullets,
and so they're just giving up? Or do you think it's because they're all going
to work together, and they've just said, OK, you take the lead, and we'll play second fiddle? RUSSELL NAPIER: So I think if we go back to
where we were in March, they were out of bullets. So they were really grateful that the government
came along with new bullets. So they weren't going to argue with this. Just to refresh, the government gets in, and
the government forces that bank-- and they weren't going to argue with that, because
this was going to be their worst performance since the Great Depression, because they were
out of bullets. They could backstop credit markets, clearly,
and they did that, and they will continue to do that. And that's what they're good at, and they
can do that. But in terms of creating growth in money and
nominal GDP growth, they were out of bullets. So they're delighted to have it. So they've done absolutely nothing yet. Now, let's skip forward to, I think, even
less than a year, and the governments are still going with this, and America's money
supply growth is still growing at 24%. I don't think it'll be that high, but it will
be a lot higher. And they want to do something about it. OK, so what are we going to do about it? The government, remember what the government
has done. The government is forcing loans at an interest
rate they choose, for a duration they choose, to people they choose. So that's your Small Business Administration
loans. How does the central bank stop it? So you jack up interest rates, but the government--
so let's say interest rate spend, let's pick a high number. Interest rates went to 4%. The government tells the banks to lend at
2%. Are they going to not lend at 2%? If the government controls the banks, that
credit keeps going anyway. But of course, the 4% rate is going to very
negatively affect, let's say, you and me, because we don't get the benefit of small
business administration lending. So you're really going to screw one bit of
the economy, which is, let's call it, the more privately financed bit of the economy. But then, we, you and I, would then go instantly
try and get onto any of these government credit programs, because the price of credit isn't
going up there. So there will definitely come a bit when the
central bankers fight back. But they'll lose, because unless they get
the government structurally out of the commercial banking system, the tools they have to combat
inflation will not be sufficient. So they willingly give these tools up, because
there was no other option for them in February, March this year. But because the government has the ability
to control that, the [INAUDIBLE] they are, the ones I discussed at the beginning, interest
rates, size of balance sheet, perhaps capital adequacy rules, they're insufficient if a
government can run part of the banking system. And that's part of the history of the post-world
War II period. Also, remember, I think Arthur Burns is the
best person to discuss this in the light of Arthur Burns was the central bank governor
late '60s, early '70s. He didn't do a lot to combat inflation, and
gets a lot of criticism for it. But America was in turmoil-- I mean political
turmoil. There was a war to fight, and central bankers
compromised. And they didn't do what was right with interest
rates. I mean, and my final point on this-- which
is, maybe, slightly insulting-- is that central bankers are predominantly academics. So if you show me a brave, courageous academic
prepared to lay their pension on the line for independence of monetary policy, and maybe
I'll change my mind. BRENT JOHNSON: OK, well, so you just touched
on something else that I've always-- I've never really believed it. I've understood the concept of it, but I've
never really believed it, so I'm just curious what you think. Do you think central banks have ever really
been independent? I mean, really, behind the scenes, have they
ever been independent? RUSSELL NAPIER: So they would say they have
been independent. But you've got to think. I mean, I have rather facetiously, in the
past, described a central banker as a person who would permit inflation in anything except
wages. Once you say that, though-- and you're laughing
at it, which I think means there's at least a kernel of truth in it-- it's instantaneously
a political organization, isn't it? BRENT JOHNSON: Yeah, it is. RUSSELL NAPIER: Because most people in America,
their form of remuneration comes in the form of wages. So I'm not saying that they are politically
biased against blue-collar workers. I'm just saying that their intellectual framework,
because of what happened in the 1970s, because of this wage inflation spiral, has pushed
them to how they view the Phillips curve, a view of the world which has made them benefit
capital at the expense of labor. Now, there's a three-hour discussion on all
of this. But that is where they've come from. It's why I think this election is so important. The blue-collar worker is the important voter
in determining who holds power, and the more we are going to go after that blue-collar
worker, the more that has to be focused on wages. And that focus the central bankers have had
historically, which has actually been questioned by the Phillips curve and this relationship
between inflation and wage inflation, is gone. So I'm not saying that they were deliberately
biased one way or the other, but their ethos did benefit one section of society over another. BRENT JOHNSON: So do you think that there
will be a battle at all between the central banks and the governments? Or do you think it'll just be pretty simple,
all the battles will take place behind the scenes? Will it be open? Will there be an open battle that people can
see? Or do you think it will just be taken care
of behind the scenes, and the central banks or-- all the governments have to do is say,
we just passed a law, your charter is changed, and it's done. So do you think that will play out in the
public? Or will it just be behind the scenes? RUSSELL NAPIER: I think in public, it will
be something. Because everybody who's a central banker will
want to save face, and the way you save face is you do something in public, and then you
surrender. BRENT JOHNSON: Yeah. Yeah, yeah, yeah. Got it, got it. And what about the banks themselves? Because again, OK, so the central banks are
incredibly powerful, but the banks themselves have incredible power, right? You could argue that by not lending, the banks
have held the economy hostage, right? And so now, they've got governors, and congressmen,
and politicians telling them who and when to make a loan to. They basically just become a utility. RUSSELL NAPIER: So that is a fantastic point
and a really, really, really important one, because I think the American banking system
in particular is incredibly politically powerful. And I think any citizen of American knows
where they're politically powerful, so that means the resistance is much stronger from
the American banking system than it might be from other banking systems. They're much weaker all across the world,
and they've been regularly owned by their own governments in the past. So the American banking system stands up stronger,
but yeah, absolutely. And I think that's absolutely right-- they
become, starting, perhaps, in Europe, and they've always been in China, utilities of
the government. And that's why I don't own bank stocks, particularly
in Europe, where I think we're very close to this already. There's probably still quite a lot of upside
in the cyclical recovery in American bank stocks. But if we're sitting here five and 10 years
from now, it will become clear that that thing has become a utility of the utility of the
state, even in the United States of America, though I think the resistance will be much,
much stronger given the political power that those institutions have in play in America. BRENT JOHNSON: Makes sense, OK. So the other battle, while the battle takes
place between central bankers, bankers, and congressmen, they're basically fighting over
the blue-collar workers, right? And that means that there's also, simultaneously,
a battle going on between savers and borrowers, and the young and the old. So what does that mean for countries around
the world who now-- let's say for the last 30 or 40 years, for the most part, things
have been fairly socially stable, at least in the West. But in the last 10 years, you've started to
see-- at first, it started in Northern Africa, and then it was in the Middle East, and then
it was in Europe, and now you're starting to see it in the United States, the social
fabric is not quite as solid as it used to be. And you're seen riots, and frustrations, and
public demonstrations. Do you think that this macroprudential policies
that will come from the top-down government will lead to bottom-up social unrest? RUSSELL NAPIER: So this is called financial
repression. And when I've tried to explain it in very
simple terms, I call it stealing money from old people slowly. BRENT JOHNSON: This is why I like reading
you, because I always get great quotes. I get great one-liners. RUSSELL NAPIER: Well I want to just stress
the "slowly" bit. Because if done slowly enough, the saver won't--
I mean, of course, the saver will realize, but the saver won't scream. So let me give you my definition of "slowly,"
which is nominal rates not going above 2, inflation never going above 6, maybe never
going above 4. And very slowly, that's a transfer of wealth
from old people who live on fixed income to young people who borrow. And that, socially, gets you there over a
very long period of time without, perhaps, the saver absolutely screaming. The problem is that controlling inflation
is an incredibly difficult thing to do. And at any given point in time, it can spike
out of control. So there is a gentleman who-- you know Ray
Dalio, he refers to this as "the beautiful deleveraging." And [INAUDIBLE] at that controlled pace, it
is, indeed, beautiful. It's not beautiful if you're a saver, but
it's unbeautiful, unbeautiful in a slow fashion. So maybe that can be pulled off. But ultimately, I think at some stage, you
probably lose control of inflation, which is where you really do get social problems. But if they could just preset inflation for
interest rates to leave it for 20 years, we have got-- there's a massive transfer of wealth
over that period to young people away from old people. It's just happening slowly and incrementally,
and you might get away with it. It is a higher risk, or more likely, that
at some stage in the process, it's not 4 and 2; it's 2 and 10, or something like that. And that's when things start to go very awry. But be in no doubt that this is what's going
to happen. It's just, can you do it in a controlled fashion
or an uncontrolled fashion? And depending on whether you controlled or
uncontrolled, depends on much social unrest you might get. That's just not one issue. There are many other things that can cause
social unrest in a society, rather than just moving money from savers to debtors. BRENT JOHNSON: What you just described there,
to me, is the perfect way to move into the last thing I want to talk about, and that
is whether you can control it or not. I completely understand all the points you
made, and I think they're factually correct. And you've given me a lot more to think about
as a result of this conversation. My question is, do you think that, as they
roll out these macroprudential policies-- I mean, to my mind, they're also going to
be creating a lot of moral hazard. The banks will be giving loans to people,
or companies, or corporations, that should probably not be in business. So you are increasing the money supply, and
you're doing it in a way that doesn't initially increase government debt. And so now, you've got more money without
more debt-- well, without, at least, more government debt. So the debt-to-GDP becomes more favorable,
up and until those loans fail. And then the government has to come in and
back the banks, because they guaranteed them. And then the governments would have to print
money, or start or issue new bonds, in order to back the banks. And if that happens in smaller countries,
where, perhaps, there's more unfavorable businesses getting loans than in the bigger ones, I could
see a situation where those currencies start to fall precipitously compared to the major
currencies, or some of the currencies that aren't as far down that path. And so I guess my point to you-- here's the
question, is I can see this leading to hyperinflation in some places, because there's no demand
for their currencies outside of their own countries. But I have a very hard time seeing this leading
to hyperinflation in the United States because of the high demand for the dollar. Now, people always tell me, no, Brent, it
can happen in the US as well. And it can; I just think it's very unlikely
that we have these extremely high levels of inflation in the United States before we have
extremely high levels of inflation in some of these smaller countries who don't have
as much demand for their currencies. Am I thinking about this wrong? Am I missing a step in here? RUSSELL NAPIER: So I would agree with that. But maybe it's because we define hyperinflation
defined by academics as 60% a month. So let's get away from-- so America's not
going to have that, full stop. Let's just bring it back to something more
reasonable. Will inflation, in this cycle, go above its
peak of the 1970s? That's a reasonable way to look at this, which
I think was 14%. The answer is, it might in America, but there
are some places where it will go higher. The interesting thing is that emerging markets
have got really good balance sheets. So it's really about, is there structure of
constitution strong enough to stop a government pursuing this? It's really about your institutions, and your
views on property ownership, and all of that stuff. And of course, that's the problem in the history
of some of the smaller countries. Not all of them, but the history of that constitution
is that it has allowed politicians do these things and to get away with it. So we obviously think of Venezuela today. I know lots of people have questions about
President Trump's ability to override the Constitution. But ultimately, if anything, the last four
years is to show that the president is constrained in the policies. So there are constraints on the American political
class, I would say, that don't exist anywhere else. And actually, if you look at that, if you
read Carmen Reinhart and Kenneth Rogoff's, This Time it's Different they point out that,
I think, there are seven countries that will always hyperinflate because they always have. And the [INAUDIBLE] thing about that is it's
because of weak institutions. It's really nothing more than weak institutions,
that a strong man-- I think with one obvious exception in Argentina, it's usually been
a strong man-- has overridden those things. So I don't think America gets to that stage. And if it is going to get to that stage, it's
a very long way from it. All I would say is this-- the crucial magic
sauce in inflation, which nobody can control, is the velocity of money. And that is when you and I-- if you and I
ever come to the conclusion-- I'm sitting at this very nice desk. If I ever come to the conclusion that this
desk is a better store of value than money, a significantly better store of value than
money, then we have got a problem. Because suddenly, those monetary balances
which we held as savers suddenly go into what we would call a consumption and transaction. Now, to me, it's really highly likely that
at some stage in this process, velocity just spikes. And it could be many, many years away, but
it doesn't take you to hyperinflation. It maybe takes you back towards the levels
associated with the 1970s, but I don't think it takes you to hyperinflation. BRENT JOHNSON: OK, so I've got one final question
for you, and I'm really curious your thoughts on this, because when I first saw it, again,
four or five years ago, I thought it was the most ridiculous thing I'd ever seen in my
life, and I just could not figure out what in the hell they were doing. But the longer I've looked at it, the more
I've come around to, maybe they're just really smart. [LAUGHS] And that's the Swiss National Bank. So for many years now, they've been printing
the Swiss franc in order to keep it from appreciating too wildly, and then they take those Swiss
francs, they buy US dollars, and then they go out and they buy US stocks. Again, I initially thought this is the height
of the opposite of macroprudential. This is the opposite of strong monetary policy,
or smart monetary policy. But as I've seen the progression, and I see
these potential cap rates in other parts of the world, and maybe they hit the US, but
they hit the US last, and when I see that Switzerland's in a better relative shape than
all these other countries, and they've also got to keep their currency from getting too
strong, it actually might be a genius move. I haven't decided yet, but I'm just curious,
do you have any thoughts on what they're doing? RUSSELL NAPIER: Yeah, for sure. So they had to stop the currency going up,
so that's the first thing. So you might say, well, they don't have to. They could just let the economy adjust, but
they preferred not to. And the adjustment in the economy could have
been gross, given how high the exchange rate would be. So that's the first decision. And once you take that decision-- which, I
think, socially and politically they had to make, the only interesting question after
that is, what are you going to do with all the money? So that's the interesting bit. The first bit, I think, was pretty predictable,
socially and politically. To focus on stocks is not actually that different. I mean, if you think about a country like
China, for instance-- and we all focus on its great flow into US Treasuries-- well,
it also set up sovereign wealth funds. And a proportion of the money also goes into
equities and so. It's not just, even, in listed equities. It's in private equity, et cetera, et cetera. So the argument has always been, once your
private bonds, government bonds gets to this level, which is the great liquid asset that
you might need one day to defend the exchange rate, you can slough off the other bit into
less liquid assets. So I don't think they've done anything-- probably,
in terms of the proportions, it's a bit radical. But actually, in terms of reserves management,
which is really what we're talking about, it's not that radical. I mean, the level of bonds that already had
was easy enough to back up the currency, so let's put some more of it into assets. It's happened-- look at Saudi Look at Norway. These are countries with huge investments
in equities all around the planet. And I guess the difference in Switzerland
is it all happened really, really quickly, and it didn't happen because they had oil
that people wanted, and it didn't happen-- which is Norway. It didn't happen, as in China, because they
had lots of products that people wanted. Bizarrely, it happened in Switzerland because
it is a currency that everybody wanted. The long-term solution to that problem is
capital controls. But they didn't do it. And the only way they could have dealt with
that problem is to try and make it more difficult for people to put money into the Swiss Franc,
and that would have been a capital control. And arguably, that's probably what they should
have done. But they didn't put a capital control up. They accepted all that capital flowing in. They had to buy something, and if you're going
to buy something, it's not, actually, that bizarre to have a proportion of it outside
of the bond markets and in equities. But going forward, a country who faces that
problem may want to go more towards a capital control, because we will live in a more normal
world. And just finally on those capital controls,
the IMF now endorsed them anyway. So the whole intellectual framework of that
particular policy, which was absolutely anathema to everybody, certainly, 20 years ago, becoming
less so is moved on. So the next time we get a problem like that,
capital controls may be the answer. BRENT JOHNSON: Well, Russell, as I knew it
would be, this has been a fantastic conversation. I really appreciate-- I could probably talk
to you for another two or three hours, but you'd probably want to cut your throat, and
the listeners would get sick of hearing me ask questions. So I think this is probably a great place
to wrap it up. But I really want to say thank you again. I really enjoyed this. I hope the listeners enjoyed as much as I
did. And you're a gentleman and a scholar. RUSSELL NAPIER: Brent, that's the nicest thing
anyone's said to me since COVID began. So thank you very much. BRENT JOHNSON: All right, have a great day. RUSSELL NAPIER: Thanks, Brent. Cheers. NICK CORREA: I hope you enjoyed this special
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