The 4 Biggest Threats to the West, According to Historian Ferguson | At Barron's

[Music] hello everyone and welcome to at Barons I'm Andy serwer and Welcome to our guest Neil Ferguson historian author and sometimes prognosticator fair enough yeah it's fair enough Andy guilty good to see you so why don't we just jump right in Neil and I'd like to ask you what you think the greatest risks are to Western Society right now and how have those risks changed over the past year or so great question uh I think there's the risk of complacency about the economy I don't believe in the soft Landing uh story because I think we've seen a tremendous hike in real interest rates and that is going to have its consequences uh I I would say the probability of a recession next year is much higher than Market consensus so Do's that secondly I think there's a major political risk coming and that is the US election uh that that risk is I think still being underestimated by people who haven't fully digested that the Democrats are Fielding a very elderly candidate with a weak running mate against Donald Trump uh a candidate who uh in many another country would not be uh able to run for election given his conduct on January the 6th of 2021 so this is an amazing potential constitutional crisis given all the indictments that Trump currently faces third risk I think there are major social problems in the United States that are kind of out of sight out of mind but whether it's the mental health uh epidemic or the opioid uh epidemic the United States has a whole range of very profound social problems that I worry about a good deal and then finally let me give you the geopolitical problem that the US and China are in Cold War II I don't think everybody has fully digested what that implies uh but in the early Cold War there is a significant risk of hot war and that's probably the biggest risk that is underpriced right now a lot of risk there um want to drill down into each and every one of them maybe we'll start with politics what happens if Joe Biden is reelected well I think that's uh not my base case right now U my my base case is that if there's a recession uh which I think is more likely than the street thinks uh he will lose if he is the candidate I'm not sure he will ultimately be the candidate because I think as we get closer to the primaries uh many Democrats are going to get quite seriously worried about how poorly Joe Biden is polling against the likely Republican nominee Donald Trump uh so I would not rule out another candidate actually being uh the Democratic nominee in 2024 uh if there's no recession I'm just wrong uh and Biden gets reelected then he inherits all the problems that he himself or his administration created uh in particular the extraordinary fiscal crisis that this country is in the Congressional budget office just uh did its math and decided that actually the deficit is going to be far larger this year than it previously thought just a few months ago so we're looking at 8% of gross domestic product that's kind of a huge deficit for an economy that's at full employment barreling a wrong and I don't think many people fully appreciate that this hot economy uh is hot because of a massive fiscal expansion that just keeps on going uh and that can't be continued indefinitely because with rates having gone up because the FED raised them had to raise them because of inflation the cost of government borrowing is far higher than it was just a couple of years ago uh and so we're looking at a real fiscal problem whoever is uh president in 2025 is going to be contending with some very harsh realities let me give you an example uh for most of its history the United States has comfortably spent more on defense than on debt service that is no longer true uh by the end of this year it will certainly be paying much more Debt Service or somewhat more Debt Service than uh defense uh and that's a problem for a country that is in a major geopolitical rivalry with China all right I do have some more questions on the economy but I think we will switch over to what happens if Donald Trump wins so if Donald Trump wins it will be very different from 2017 a lot of people will look back and remember the somewhat chaotic quality of Trump's Administration then uh they hadn't really expected to win they were not ready in fact to take over the government it was improvisation uh it was quite chaotic if if you look back uh and there was also quite a lot of continuity because he didn't really have a stable of people to put in all the different uh departments and agencies and those continuities were most obvious in the form of generals uh like my Hoover colleagues Jim Mattis an natur McMaster if Trump is reelected the second Trump Administration will be very different firstly they are planning for power by they I mean the Trump supporters in the America First Think Tank uh they have a plan uh which I think will be very very different from what we saw in 2017 uh and secondly that plan does not include establishment people so there won't be those restraining influences that were such a characteristic feature of Trump's first term so if there is a second term it won't be at all like the first term and I would I would expect the personel to be really very different and their priorities will I think come as a shock to many people uh number one I think he will be back on protectionism I think he remains a committed believer in tariffs we kind of drifted away from those but they haven't gone away uh I recently asked uh Robert lighthiser who was his uh trade representative who just published a biography uh what did he think Trump would have done if he'd won in 2020 and his answer was raise those tariffs so I think there'll be a return to a protectionist strategy and the other thing which I think will be number one priority will be Purge the Department of Justice Purge the bureaucracy Purge the the swamp of all the anti-trump elements that President Trump and his advisers Fe thwarted him at every turn during his his first term so it will be a very very different scenario uh 2025 from 2017 if Trump is reelected and if Neil Ferguson was a betting man what would he bet uh well I think the key question is is there a recession or not I think if there's a recession uh whoever is the Republican nominee will have a good chance of winning because nobody has got reelected after a recession in 100 years kulich was the last person who did it back in 1924 everybody else who tried to get reelected with a recession just behind them failed uh and if you look at where Joe Biden's polling right now it's about where Gerald Ford uh was at the stage in his presidency it's about where George HW Bush was uh at this stage in his presidency so if there's a recession which I do think is more likely than the consensus then I think it'd be really hard for Joe Biden to get reelected I'd actually put the Republican a nominee and it seems likely to be Donald Trump but maybe close to 60% probability of winning I don't think many people have have processed those odds yet you talked about um some of the economic problems uh stemming from policies of the bid Administration but weren't they mostly because of Federal Reserve policies in terms of flooding uh the markets or quantitative easing I should say A and B cutting rates number one and number two you're saying that um High the high budget deficits are a problem aren't people always saying that Neil well I think if you go back to early 2021 uh a small number of people uh notably Larry Summers argued that an inflationary accident was happening that was also my view at the time uh I wrote that for for Bloomberg and uh if you read Larry summers's original piece which came out in the Washington Post it's all about fiscal policy he barely mentions monetary policy and I I think a correct analysis would be that there was a huge fiscal uh overshoot because they they kept doing stimulus even after the economy was going to heal we had vaccines the pandemic was not over but it was it was clear that the end was in sight once you had highly efficacious vaccines and and the FED accommodated this uh it it in fact accommodated a very large proportion of the new debt issued by the treasury uh in 21 22 and it kept going remember there wasn't really a change of monetary stance until into 2022 despite the fact that there were flashing red light signaling an inflation uh shock so I think it was a combination of fiscal and monetary policy error that got us to 9% inflation uh in the middle uh of last year of course inflation has come down since then but only because of a really significant tightening of monetary policy and if you just look at the way rates have gone up and and adjust for inflation this is the biggest increase in real borrowing costs since the time of Paul vuler so you have to go back 40 years to see in fact slightly more than 40 years to see a monetary tightening like this the idea that this would just have no effect at all on what is a pretty leveraged economy much more leveraged than it was in Paul VR day I just can't believe so I think there's a certain illusory quality to the current atmosphere of uh of economic strength in the United States it is the case though that people have been calling for this re session for quarter after quarter after quarter and they keep pushing and pushing and I don't know if that's been the case with you but why hasn't it occurred yet well the old phrase that I'm sure we were all taught at some point in economics classes is that monetary policy acts with long and variable lags uh that that variation is the key here I mean if the average is sort of nine months from tightening to to the Slowdown uh that's the average question is uh could it in fact be quite a bit longer than that and the answer is yeah it could actually under the circumstances so I think it's it's way too early for the uh transitory team to to cleare Victory and say that inflation was just this temporary aberration that had to do with coming out of of the pandemic I think it's plausible that as uh corporations and households have to refinance they're going to get a terrible shock uh and you can see how that sequence of events plays out if you look at when refinancing is going to happen in the coming let's say the coming 12 months so um so that's one important point the other important point I want to make and in in in response to something you said a moment ago is just as people have been warning about recession for many months they have of course been warning about deficits for many years if not decades uh but the thing here is the orders of magnitude matter uh it's incredible astonishing that the deficit at at full employment should be as large as 8% of GDP Jason Ferman uh who was of course uh who's a Democrat who was a an economist in the Obama Administration noted that these CBO numbers are deeply shocking and they really are and they tell us that something is going quite badly wrong and part of that something is the increase borrowing costs affect the government too uh so the debt stock is already pretty high if you look at the CBO forecasts out decades not just years it could get really very high very fast and unless there's some kind of productivity Miracle or unless Congress does what it hasn't done for a long time and that and that is actually to reform the tax system and bring and bring entitlements under control which I think is highly unlikely Neil you're back in the UK these days what does the rest of the world think about America at this point and how has that changed that's a great question I'm I'm on leave from uh Hoover back back in the UK for a year and it's it's fascinating uh because people there are more worried about American politics than people here as far as I can see and that is true in Europe generally I was just in ke uh last weekend and there's great concern there uh that if Donald Trump gets reelected uh he'll pull the plug on Ukraine this worries all the Europeans the Europeans have really increased their commitment to Ukraine's war effort against Russia but they know that without the United States it would be extremely hard uh for Europe alone to sustain that war effort so there's a good deal of disqui about what is going to happen next year uh in the US election on the other hand there's a kind of envy and the Envy is directed at US economic growth the dynamism of the US economy they all have ai Envy because there basically is no AI uh in Europe and scarcely any uh in the UK so it's a strange bation people are really worried about American politics and kind of envious of the American economy is globalism and liberal democracy in permanent decline or is this just a hiccup an aberration that we're experiencing well globalization has been pronounced dead rather often recently it's not that dead actually when you look at the resilience of international trade and capital flows uh it's it's dialed back a bit since the high point which was 2007 before the global financial crisis but we're not looking at a huge Retreat uh from globalization of the sort that we saw after 1929 um when people talk about decoupling between the United States and China I say does that mean Apple produces 80% of its Hardware in China rather than just 100% because 80% is still a rather large number the US trade deficit with China is still huge us trade with China is still huge so what's really going on is that globalization's shape is Shifting and it's shifting in response to a variety of things some of which are conscious like the US government is consciously trying to reduce its exposure to China Supply chains are consciously be moved away from China there are other things that would be happening anyway the fact that Chinese labor costs are no longer uh particularly attractive you know Mexico's now overtaken China in its trade with the US there's a reason for that it's it's close and it's actually pretty competitive so it's a combination of policy and and structural shifts that would have happened anyway but I think one shouldn't exaggerate the extent of the shift it's still globalization if American companies or Manufacturing in Vietnam or in Mexico as opposed to in China the idea that we can somehow bring it all back home we can somehow bring all manufacturing uh back to the United States isn't very plausible because it's just much more expensive to make microchips in the US it's a good segue to China um how bad is our relationship with China and and how bad a leader or good a leader is Xi Jinping well let me take those one by one the relationship is not in a good St despite President Biden's talk of a Thor Hiroshima not so long ago the visits that have been made by members of uh his administration to China have really not gone terribly well uh haven't really achieved terribly much haven't changed the the sentiment in Beijing which is that the US is pursuing a conscious policy of technological and economic containment that is designed to keep China firmly in second place in the Indo Pacific so I think relations are not good and I don't think that they've been improved by these uh various visits that we've seen to judge by what we hear from from xiin ping and Senior figures in in the CCP shei himself I think has not been good for China uh for two reasons one explicitly aiming at strategic well equality or parity with the United States uh which I think was a silly thing to to to explicitly say you're going to do that was like sending a warning uh something that previous Chinese leaders had avoided doing since dening they sort of kept their light under a bushel but the second thing which has been more damaging I think has been what he's done to the Chinese economy she is in many ways a Marxist leninist believer who has reasserted the power of the Chinese Communist Party the CCP over the economy over over Society even over Academia it's a very different China from the China I used to visit 12 uh years ago regularly much much less free in expression and less Dynamic economically because the big tech companies had been rained in Jack marah was essentially brought Low by cesan ping and that huge real estate sector which was really about 29 or 30% of the Chinese economy is in a state of Crisis so I think both as a a political leader and as an economic leader she has steered China into very treacherous Waters How concerned should we be over Vladimir Putin some people say it's just not that big a deal for the United States other people say it's a mortal enemy well from the point of view uh of ukrainians uh he is a mortal enemy who is killing uh significant numbers of Ukrainian soldiers and civilians uh every month I I just came back from keev there were Air Raids before and after my time there and the reports that one received from the front line by soldiers who had been serving there pretty Grim this is a very Bloody War uh and anybody who was hoping that the Russian army would fall apart at the time of the progan Mutiny I think has been disappointed they are dug in they have managed to uh lay minefields uh they have made almost impregnable defense of the territory that they hold in southern Ukraine and the truth is that the Ukrainian offensive uh of this summer has not achieved anything like uh what president zalinski hoped for does that matter to the United States well one level no it's a long way away and it's not American soldiers who are doing the fighting the problem is that we've backed Ukraine uh not only financially not only in terms of Weaponry but we publicly morally backed Ukraine and we say as Secretary of State blinken said in Kiev just about a week ago that you know we'll be there for as long as it takes but that could be a long time uh a German general who was in keev at the weekend said that the German planning Horizon was out until 2032 that is a much longer War than anybody in the United States thinks they've got involved in so I think the problem in the short run is that we're stuck in a war that doesn't have an OB VI end in sight and that means that resources are going to be absorbed uh Financial Resources uh Hardware from uh military Stocks by this war for I think longer than Joe Biden expected but there's a broader problem and that is that Putin is closely allied with xinping this is a partnership of extreme importance to the Chinese leader China isn't about to let Russia lose this war so we can't just see the war in ukra ukine in isolation it is part of a broader geopolitical struggle in which the US and Europeans and other allies support Ukraine and China and Iran support Russia that is actually quite an alarming State of Affairs you can think of it not so much as a a European or an East European War but as the first Hot War of Cold War II and and in that sense I think Putin is part of a broader threat a threat of a kind of axis of China Russia and Iran that will pose challenges to the United States not only in Eastern Europe but in the Middle East and potentially in the Far East in the case of Taiwan final question Neil and I hope you've got something to say on this topic given some of the conversation we've been having what could go right in the world well it would be great uh if the Russian army suddenly unraveled uh lay down and died and Ukraine won the war that would be terrific but it feels less likely than a year ago when the Russians were in flight from AR and then from Hans so that would be great but I'm not holding my breath' be great if China's economic troubles translated into some kind of political crisis there uh because I think xiin Ping's attempt to reassert one party rule the dictatorship of the party is dangerous not only for China uh but for the world so you could Hope for Change and I'm an optimist about cold Wars haven't had a lot of them but if the last one's anything to go by uh the society that believes in freedom and democracy tends to be more Dynamic than the society that believes in the opposite so I think what ultimately will happen is that the problems and pathologies of one party government will manifest themselves and China's growth rate will slow and its threat will diminish and perhaps its leadership will change uh and what else could go right well all the things that are currently going on in the realm of Technology particularly the breakthroughs in artificial intelligence might turn out to be really good for the US economy maybe there's a huge productivity shock coming as we all start using chat GPT to prepare our interviews or whatever it is um and the next thing you know the US economy achieves higher growth than anybody expected and all those things that I was worrying about earlier turn out to have been mere Phantoms so there is an optimistic uh bullish case uh there always is in this town New York there'll always be somebody who's bullish but that would be my my bullish scenario all right on those notes Neil Ferguson thank you so much for your time thanks Andy this is at Barons I'm Andy serwer we'll catch you next [Music] time

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Length: 22min 49sec (1369 seconds)

Published: Thu Oct 12 2023