Taps Coogan – September 5th, 2022

Niall Ferguson, Scottish-American historian and Senior Fellow at the Hoover Institution and Harvard, recently spoke with CNBC about his outlook for markets, the global economy, China, and more. His overarching point is that people are dramatically underestimating the severity of the problems facing the global economy and should be much more cautious in their outlook.

 

Niall Ferguson on inflation and the outlook:

“This time last year we were sitting here and I said, having listened to Professor Stiglitz say that there was no inflation problem, that we should actually be worried and that there was a risk of a 1970s scenario. And remember that I said, if there’s a war… that’s when you get inflation expectations really taking off. Well, we got the war in Ukraine…”

“The ingredients of the 1970s are already in place. The monetary and fiscal policy mistakes of last year, which set this inflation off, are very much like the mistakes of the 1950s and very much like in 1973, you get a war. Except, this war is lasting much longer than 1973 (Yum Kippur) war. So, the energy shock that it is causing is actually going to be much more sustained…”

“It looks a little bit like the 1970s but are we sure it’s not going to be worse than that? …Why shouldn’t it actually be worse? Let’s look at productivity growth on the supply side. That’s actually worse than in the 1970s. Let’s look at the level of debt. It’s actually higher than in the 1970s. What about the demographics? They’re clearly worse than in the 1970s. At least in the 1970s you had détente between the super powers. I don’t see much détente between Washington and Beijing right now… So, I am going to go out on a limb and say let’s consider that the 2020s could actually be worse than the 1970s..” 

On the probability of problems:

“First of all it’s not a bell curve. The distributions in history are not normal… particularly when it comes to things like wars or…, financial crises or…, pandemics. These events are distributed in a completely non-normal way with very fat tails… That’s why people find it hard to think about it, because in their heads the world is kind of a bunch of averages and there aren’t likely to be really bad outcomes… We did some survey’s early today of Italian business sentiment. Low single digit percentages were expecting declines in investments, declines in turnover… This is in a country that’s heading towards recession with very high probability…”

On central banks and interest rates:

“Inflation is the place to start here. Central banks, I think, became rather full of themselves in the period after the financial crisis. They’d been a little over confident when they’d talked about the ‘Great Moderation.’ Then they decided that they’d save the world after 2008 and were the only game in town, but I think they made a fatal mistake early last year when… Jay Powell said ‘Look we don’t really worry about inflation. Inflation is not going to be a problem like it was back in the 1970s, in fact we wouldn’t mind somewhat higher inflation, in fact we are going to change our targeting regime….'”

“(Central Banks) aren’t anywhere close to positive real rates… It’s impossible to find an example where you bring inflation under control without positive real rates anytime in the recent past. It’s also very hard to imagine a scenario where you bring inflation down in the US or Europe without a recession in the process.”

“It’s expected inflation that you’ve got to keep an eye out for and that’s not as high as our current headline rates…”

On a soft landing:

“The dream, the hope which is sort of evaporating right now, is the idea that there could be some sort of soft landing where you wouldn’t actually have to have positive real rates… One has to assume that there will be a global slowdown that will be a recession in Europe for sure. In the US, that’s less clear…”

On China:

“China’s economic performance is so much worse than the CCP hoped that they had to scrap their growth target and in practice the Chinese economy is not growing at all… because of a combination of zero-Covid (policy), a collapse in consumer confidence, and a general sense that the party now prioritizes political power over economic growth…”

“You have far worse demographic trends than people admitted until very recently. China’s population could collapse… in the extreme case by two-thirds (and) in the base case by the United Nations, it will halve between now and the end of the century.”

“The legitimacy that the party has enjoyed on the basis of growth for decades could very well fade away… If you are an authoritarian regime and you are no longer able to deliver sustained growth, what do you have left? …I know, let’s go with nationalism… It’s not difficult to see, not this year, but in the relatively near future, a confrontation (with Taiwan) that would be far dangerous than the one we just had (in Ukraine)… I think the US has moved away from strategic ambiguity (on Taiwan) and is unambiguously saying that it will uphold Taiwan’s de facto independence… If there is going to be a hot war in ‘Cold War 2.0,’ I am very much afraid that it will be a hot war over Taiwan, and by the way, that will be far more economically disruptive than the Cuban Missile Crisis…”

There is much more to the interview so enjoy it above.