Niall showed me around his geopolitical landscape and I emerged nervous, better educated, and unable to stop thinking of his quip that ‘there’s no hedge for Armageddon.’ Full transcript below.
Niall Ferguson, MA, D.Phil., is the Milbank Family Senior Fellow at the Hoover Institution, Stanford University, and a senior faculty fellow of the Belfer Center for Science and International Affairs at Harvard, where he served for twelve years as the Laurence A. Tisch Professor of History.
Some key moments:
The world entered Cold War 2 about four or five years ago. Most people have not realised this fact.
The decline or death of the dollar are exaggerated because there isn't an obvious or superior substitute.
On the other hand, an important difference between Cold War 1 and Cold War 2 is that China is a much more formidable opponent than the Soviet Union. If war happens it would likely be lost by the United States. A loss would be calamitous for international financial order, with serious implications for the 10-year bond as the benchmark global asset.
Cold Wars have an inner logic. Events tend to undermine efforts at detente and impel both sides towards confrontation. Especially worrying as in Ukraine the two superpowers have a dog each in the fight.
Deterrence is the key concept and the US has a limited time to get sufficiently ready to deter China. The Chinese know the US isn't ready, so right now is a good window of opportunity for them. Moreover, that window may already be closing, with population, debt and declining growth rates weighing increasingly heavily on China.
The Inflation Reduction Act, is a an Industrial Policy Act. It is the progressives way of saying “we can give you protectionism, but we'll make you feel good about it” it's still Make America Great Again, under a different guise.
And Brexit - a terrible idea at a dangerous time.
Transcript of the chat
Meyrick Chapman
I'm delighted to welcome Niall Ferguson to Exorbitant Chat today. Niall, will be well known to most listeners as the consummate commentator of global economic history with numerous essential contributions to a wide range of economic history. He's the Milbank family's senior fellow at the Hoover Institution, Stanford University, a Senior Faculty Fellow at the Belfer Center for Science and International Affairs at Harvard, where he also served for 12 years as the Lawrence A. Tisch Professor of History. Thank you for joining me, Niall. This is a real treat.
Niall Ferguson
Pleasure Meyrick. Looking forward to our conversation.
Meyrick Chapman
Let me start, I suppose at the pivotal part of reason for talking to you, which is by asking you about how the world and finance in particular may be changing the invasion by Russia of Ukraine has prompted widespread sanctions against the Putin regime and an unprecedented freezing of foreign exchange reserves. On one level that demonstrates the current force of dollar dominance yet, it also reminds us of the perils that Russia felt by holding dollar reserves. And it's in the aftermath of that there's been a huge discussion as well as of of whether the dollar system itself may be coming to an end and what alternatives we might be facing. You as a historian have studied a wide range of what might be termed Imperial economic systems or monetary systems. Is there an inevitability of overreach by the imperial hegemon or is there a precedent for this? I'm thinking in particular, I suppose the one that springs to mind is Roman debasement of their coinage, for instance, which is not quite the same thing. Although we've got, you know, rampant inflation at the moment.
Niall Ferguson
Well, I as an historian, not an economist, I've approached this subject with rather I suppose, unorthodox mixture of politics, and economics and geopolitics, I don't think Rome's the right analogy, maybe maybe the British Empire is is a better analogy because in many ways, the United States today is in a position rather like the British empire between the wars. That is to say, it's still very clearly the dominant global power in terms of the range of its military power projection, but it has a pretty large stock of debt. And it also has a waning domestic commitment to the the imperial project, which was one of the characteristic features of Britain in the 20s and 30s. And I did a piece for The Economist about this back in 2021, saying (and this was even before the abandonment of Afghanistan) that the dangers for a great power or an empire at this, this juncture are initially fiscal because there's a comes a point when the costs of debt service start to exceed your defense budget, your national security budget, and that's usually a bad sign for any great power. This was something that that pointed to Ottoman decline in the 19 century, for example. The monetary problem, I think, tends to manifest itself with a lag. The thing that I've learned from reading scholars, such as Barry Eichengreen is that there's enormous path dependency and inertia in international monetary regimes. And therefore, rumors of the decline or death of the dollar are almost always exaggerated because there isn't an obvious and superior substitute. The problem for Britain in the mid 20th century was that there was and that was the US dollar. But the but the US economy did so badly in the 1930s, so much worse than the British economy which had a pretty good Depression, that the issue of being as it were replaced as a reserve currency by the US dollar didn't really arise until after World War Two. So I think the way to think about this, at the risk of giving an excessively long answer is that the US is approaching a major test of its geopolitical strength and its fiscal capacity. And that test will probably take the form of simultaneous conflicts in Eastern Europe, the Middle East and the Far East. This was the problem Britain had. We call it now World War Two. But at the time, it was really a succession of different regional conflicts that just came together in roughly the same timeframe. And when that happened to Britain, in 1939- 1940, it was too much. It was too much Britain could not actually simultaneously conduct wars against Germany, Italy, the Soviet Union and Japan. I mean, that was way too much. And I think the United States is going to face a similar geopolitical challenge. And if it fails, which isn't inconceivable, I don't know how the United States succeeds in a war over Taiwan for example, the points of failure will be the point at which it will be meaningful to question dollar dominance. But we're not there yet. And even if we do get there, it's not as if there's a preferable alternative, waiting in the wings in the way that the dollar was waiting in the wings when Sterling was clearly going to have to depreciate in 1945 and the subsequent years. So the analogy is not ideal. It's not perfect, but I think it's the best one we've got. And what's fun about it is that Americans are very resistant to it because they hate being compared with any thing other than the United States. So when you say well, actually, your your, your the history you really need to learn from that is actually British history, there's great resistance. People, people are very reluctant to do that. They actually prefer Rome because it just sounds more glamorous.
Meyrick Chapman
That's that's an amazing amazing that they skip over Britain when you're well, I suppose it's kind of little brother Big Brother or older brother, younger brother, rivalry perhaps. Actually, I was going to have a follow on question which you've actually circumvented to some extent or to a very large extent, because my following question was going to be about economic ascendancy as as the as the the force which drives the change in monetary arrangements of the world. But what you're highlighting is is not really economic ascendancy but military, ascendancy or military overreach. And I think one of the things that's really changed in the last year, in particular, has been this very dramatic shift. From economics as the dominant discussion point to military might. And against that, or simultaneous with that, that that change of focus towards the military is also almost the shelving of economic factors in policymaking and yet do we still think that China's actually going to have a lesser impact in the global economy, it looks actually as if the opposite of and is still towards a growing weight? Of China within the world economy so that the the focus may have changed radically away from economics, and yet the economics is still really pointing in one direction.
Niall Ferguson
I think it's important to recognize that an economic war is already underway between the United States and China. And it dates back to the tariffs of 2017. The tech war of 2018. One of the remarkable things about the Biden administration is that it's more hawkish on China than the Trump administration was, and the recent US Commerce Department restrictions on Chinese access to high end semiconductors and the tools to make them and the people to make them were really sanctions in all but name. So economics really matters in a cold war, because a Cold War is not a hot war in which you are competing to see who can produce the most destructive machinery and ammunition. That's the situation in Ukraine right now. In a cold war, there's a broader economic and technological competition going on. Most people haven't fully processed that we're in Cold War Two and have been for about four or five years. I'm still amazed how few people get this. The real way to think about our predicament is that we had an interwar period from 1991 until about 2016-17, or maybe even earlier because I think Xi Jinping basically declared Cold War on America, but nobody noticed. And that interwar period was characterized by extraordinary integration of global markets for capital for commodities, for manufacturers, and for people. And in that period of interwar globalization, there were powerful disinflationary forces at work, that some people mistook for secular stagnation, not realizing that it was just a classic interwar moment when the inflationary pressures that you associate with great power conflict and especially with war really dissipated. That the levels of conflict was so much lower in the 1990s and 2000s than they had been in most of the 20th century that it was really remarkable interlude of, of, of low conflict and therefore low inflationary pressure because wars the great driver of inflation historically. Now, now Cold War Two, like Cold War One took a while for people to notice. And I think if I look back to my writings around 2018, when I first started seeing this, I got huge pushback. And I would say, Look, why are you so worried about a Cold War? It was really good for the United States the first Cold War and it's certainly better than world war three which is actually the alternative. Now, if Cold War Two persists, then it will be characterized by an economic competition, particularly over things like artificial intelligence and quantum computing. But not only those things it'll be as in Cold War One a pretty broad technological contest with a number a really important difference, which is that the China's a more formidable opponent, bigger economy, technologically, much better than the Soviet Union, which, you know, the Soviet Union couldn't do semiconductors, basically. And that meant that it was bound to lose the Cold War, as soon as computers started to matter. It's not obvious in which domain the US currently can defeat China when it comes to technological competition. So I think this is the way to think about our situation.
Niall Ferguson
Everything changes though if it becomes a hot war. As we've seen, in Ukraine, as soon as you start actual war, what matters is is the technology of destruction and you have to be able to supply your frontline troops with artillery, tanks, drones, destructive hardware, and lots of it. And the big shocker has been how quickly the war in Ukraine has depleted our stocks of certain key weapons and munitions. Imagine scale that up by what two orders of magnitude to get a war between the United States and China. For me, the shocking realization of the last few weeks was that if that war happened, the US would be out of precision missiles within a week, a week, and that war would therefore quite likely be lost by the United States. Unless the Chinese were foolish enough to stage a 20th century style amphibious landing which would quite probably go wrong. But if they blockade Taiwan, if they tried to rerun the Cuban Missile Crisis, with the United States as the Soviet Union having to send the long distance naval expedition to run that blockade, that will be a fantastically risky moment for the world because we'll have got to the most dangerous moment of Cold War Two even faster than in Cold War One. Again, this is where I think your world of finance can learn from the past. The thing about Armageddon is it's hard to hedge against. And so markets when you look back at 62 were quite sanguine, really considering how incredibly dangerous the situation was. Because people didn't fully know how dangerous it was. We found that out later. But I think rerunning the Cuban missile crisis over Taiwan, which could happen next year, it could happen it's certainly likely to happen this decade, but it could be as soon as next year will be very, very perilous, because a/ a hot war would be far more disastrous economically than the war in Ukraine, a hot war between the US and China and b/, the US could lose and then you are at a real paradigm shift for the international financial order. All bets would be off because the US 10 year would no longer be the the ultimate safe asset and the dollar would no longer be the ultimate reserve currency because the US would suddenly have reached a moment of Imperial crisis, comparable to the crises that Britain suffered in the 40s and 50s between Dunkirk and Suez.
Meyrick Chapman
Yeah, yeah, that's a very scary prospect that you've just outlined. And it's it's hard to argue that we're moving away from that. I mean, it's looks as if that situation you've just described as kind of becoming the, the expected future of, of the administration itself
Niall Ferguson
Cold Wars have an inner logic. Even if you say to yourself, gee, this is kind of risky. We should do detente, which is what the Biden administration was saying earlier this year. It takes one spy balloon over Montana, to scupper your detente initiative, forcing the Blinken visit to Beijing to be canceled and creating another round of hawkish posturing in in Congress where there is bipartisan consensus on on Cold War, as of course, there was the beginning of Cold War One. So I think it's very hard to get out of this dynamic. I'll give you another example. At the Munich Security Conference, what was the most important moment, when Secretary of State Blinken said we think the Chinese are considering supplying lethal aid to the Russians? They really shouldn't do that. Well, of course, that implies that the United States is allowed to supply lethal aid to its proxy, but China is not allowed to do it to its. I think the Chinese inevitably will increase the economic support for the Russian war effort because it can't be achieved and things interest for Putin to lose. And so we have the classic cold war scenario where the war keeps going and escalates because the two superpowers have a dog, a dog each in the fight. That's why I think it's really hard to do detente. It's like, imagine trying to do detente in the early 50s or the early 60s. Every time they tried, something would happen like the U2 spy plane in 1960. So I think the direction of travel is clearly towards Cold War escalation, the temperature goes down, if that's the right way of of using the analogy and attempts to improve things get scuppered because there's so much of a structural logic to the arms race. Remember the Chinese are frantically building their defense capability. They're frantically building nuclear missiles. This is this is a really extraordinary arms race, and it's happening in other domains too, like AI, like satellites. So I don't think this is going to change anytime soon. And from the vantage point of an investor, what does that imply? Well, it implies, for example, that if you're China, you don't want to be on the wrong end of a US sanctions move that freezes your your reserves, which is what happened to the Russians. I still don't know what the Chinese do about that. But they are very well aware that that's a problem. This kind of Mutually Assured financial destruction, don't you think Meyrick? I mean, my sense is that when we talk about these issues, about particularly Taiwan, implicitly, what constrains both the United States and China is the financial calamity that would ensue, even before a shot had been fired. So I've been playing around with the idea of Mutually Assured financial destruction to capture why that might not produce a shooting war, because before you know, before the aircraft carrier as it got to the Taiwan Strait, markets would be down 20 plus percent.
Meyrick Chapman
Yeah. Well, I, you may have reminded me that it was British and German businessman ahead of World War One who said there can't possibly be a conflict between our two nations because our trade links are so important to both sides that it makes no sense which, and then there was the financial crisis on the outbreak of war, which nobody really remembers because it was overtaken by the cataclysm of World War One. But certainly, it seemed like a very major financial crisis.
Niall Ferguson
It was it's not it's people don't remember the crisis 1914 Because the markets entirely closed, therefore, there are no price data, or very, very sparse price data. That, the point you make is highly relevant here to thinking about World War Three. Because if Cold War fails, if you actually don't sustain the Cold War and you end up in the hot war, you're in World War 3. 1914 happened against all economic logic. Norman Angell had published The Great Illusion. He wasn't the only person to point out that the UK and Germany had become extraordinarily economically intertwined with very high levels of trade and indeed foreign direct investment, all the rest of it. And that that turned out not to matter when the logic of of war plans and mobilization kicked in. And if you go back to the critical days of late July, early August 1914, which I spent an early a large part of my early career thinking about, markets begin to crater before a shot has been fired unless you count the shot at Sarajevo. They don't really reopen until the end of of the year because in London in New York, in all the major stock exchanges trading had to be suspended because there was such a massive sell off brewing, and that that's led to a certain amnesia. People think 1929 was the biggest financial crisis because the market stayed open and therefore the prices are there, but they closed completely. There wasn't a major stock market opened by from memory August the third 1914 And they all stayed closed for the rest of the year, pretty much. If they'd stayed open. It's hard to know where prices would have landed but it would have been an absolutely gut-wrenching sell off. And that would be I think, the case in the US China conflict. I mean, it would be carnage to use an overused word and the sell offs would be would really be on a on a par with 2008-9 maybe maybe worse.
Meyrick Chapman
Yeah, yeah, I could I, I think what you're describing is very plausible. Unfortunately, well, unfortunately on both the the cause and the effect, but mostly cause I wonder whether the logic of the narrative that the West is receiving on China and the move into Cold War Two is quite correct. I you know, I I have no way of knowing exactly what the CCP and Xi Jinping actually are thinking and what they want and what they regard as an appropriate accommodation of their ambitions. Do they want war? I do not think so. But so what what, what would be an appropriate accommodation from the Chinese perspective? That's very hard to decipher, particularly when you have US military and US administration officials who are telling us that China must be stopped. Well, if it's going to be stopped, it's going to be thwarted, and thwarting is exactly what the Chinese are going to feel particularly upset about. So, in the in the same way, I'm not sure that it was possible for us to accommodate Germany, us being Britain, I suppose. But us currently is the West. Is it possible for us to accommodate China? Is there is there a route by which accommodation can be made?
Niall Ferguson
Well, I think we know pretty much what Xi Jinping and the CCP leadership aspire to because they're actually quite explicit about it in their internal communications. Rush Doshi's book on this subject is good. It's not the only thing one can read. But broadly speaking, the goal has been to achieve at least parity with the United States, at least in the Asia Pacific or Indo Pacific region. And if you read some of the more hawkish international relations, writers in Beijing it's more than that they want to be the successor empire. I quote some of those people in in my most recent book Doom because most people in the West don't realize how radical the Chinese ambition is, how nationalistic the Chinese population is. The recent blockbuster movie about the Korean War is really worth watching because it depicts heroic Chinese soldiers taking on the Americans in Korea and I have no doubt based on years of being, I was a visiting professor at Tsinghua for five years, I've no doubt that the ambition of the leadership are to challenge American primacy includes the option of war I know that because it's it's been part of Xi Jinping most recent statements, including something that he said just this week at the Yang Huei that China is ready to fight. He's been putting China on a war footing for some time. And I think this is not fully recognized in the West because we are quite complacent about where we're going. Can you deter China is the right question because I think you know, accommodation would imply accepting Chinese primacy. And that's not that's not something that almost anyone is contemplating, apart from maybe the far left of the Democratic Party in Washington today. So the issue is not accommodation. The issue is can you deter China? Now, Britain failed to deter Germany not once but twice in the 20th century? And it failed to do so because it didn't create sufficient defense capability to deter the German military planners and the United States, I think can avoid that mistake, but it it's got to get on with it. Right now. I don't think the defenses of Taiwan are sufficient to deter China. By right now, I think in fact, the US commitment Taiwan, which is less and less ambiguous, lacks credibility, because it would be so difficult for the US to wage a war over Taiwan. Especially as I said earlier, if if China simply blockaded the island, I think the invasion scenario, which is what everybody talks about here is not the high probability scenario. Because it's so obviously risky for China. So I think deterrence is the key concept here. The US is really bad at deterrence now. It totally failed to deter Putin from invading Ukraine, and not enough as made of this. We know what the policy was in 2021. It was to say that if Russia took more of Ukraine, there would be sanctions, such sanctions, as you'd never seen really big sanctions, but that's it. And the whole effort of the administration to deter Putin with sanctions was an utter strategic failure and to me, it was very infuriating to be in Kyiv in September 2021, hearing American spokesman saying things that were so obviously not going to deter Putin, who'd already published his article on the historical unity of the Russian-Ukrainian peoples in July of that year. So we already know that the Biden administration sucks at deterrence. It sucks at it doubly, because when Putin started to talk about his nuclear option, the US and its NATO allies just retreated pulled back from supplying jets in the early phase of the war to the Ukrainian so we're really not good at deterrence. Could we get good at it in time to stop China? Well, that would be nice. People aren't Elbridge Colby, (who would be in any future Republican administration, state or defense) are arguing very convincingly, that the US has a limited time to get ready, sufficiently ready to deter China and he would say if he were here now, we're a long way from being ready. And that means that there's a very dangerous moment, and we're in it. And it's the moment when the US is starting to realize that it has to make Taiwan a porcupine, that's really hard for China to invade. But the Chinese know that this is a good opportunity because the US isn't in fact ready and nor is Taiwan the US is preoccupied with Ukraine. It could become preoccupied with Iran very soon.
Niall Ferguson
And here's the last point I'll make Meyrick. The most dangerous time to deal with an authoritarian or totalitarian regime is not when it feels confident. But when it feels that that actually history is not on its side and time is running out. And if the CCP leadership doesn't feel that way, I'd be amazed. I can remember having a very surreal conversation with members of the Chinese elite more than five years ago on the subject to Toqueville's 'Old Regime and the Revolution', which Wang Qishan made every member of the standing committee of the Politburo read. And I said that's kind of unusual. Why Why were you guys reading that? And the chap next to me pulled his copy out. He literally had it in his jacket pocket and said I have it here and we have a lot to learn from the situation of France in the 18th century. So if they were worried about being France in the 18th century, then they have 5 or 10 more reasons to be worried about it now. The demographics are much worse than anybody thought. The debt dynamics you know, and I know they're pretty bad. The growth rate has to be heading down to low single digits over the next 10 years. And that's the worrying moment because if they start to think we can no longer deliver high growth to the population. We possibly face, the middle income trap. Time is not on our side. That's when strategic risk gets taken by an authoritarian regime, not when it feels that it's on the winning side of economic history.
Meyrick Chapman
Yeah, very concerning. I was thinking when was your expounding that of the role of finance in war, actually, and recently, I've got the impression that the generals and some in the administration are looking at the great power rivalry with China and with Ukraine and saying, Well, we're here is a perfect excuse for us not to draw in the fiscal stimulus that we can redirect it perhaps but we are we are not going to pull back the deficits. The deficits are, are needed to re energize our military to prepare for the future conflict, if it if it emerges, and also to to supply Ukraine on a continuing basis. So this is a completely different discussion that as far as I'm aware, all my time in finance from the early 80s on, we have the argument has been about the deployment of fiscal deficits for the benefit of that it's a welfare it's largely a welfare payment. This is this is quite a new read. It's quite a new deployment of fiscal resources, and it's very common in war to have this effectively financial repression and also call on central banks. For instance, the Bank of England's original function was to to help the government finance war. And this is I just wonder whether we're baking in the cake, a, a consolidation of state power and state direction of the economy that are on both sides, really on both both of China which is already there, but the more that the conflict gets elevated, the more the US itself, moving to a war footing becomes a statist economy.
Niall Ferguson
The deficit according to the latest CBO numbers will rise from 5.3% of GDP to 6.9% over the next 10 years. I wish I could tell you that's been driven by a rearmament program that will suffice to deter China but the truth is, it's not. The defense budget will get squeezed because it's entitlements that are the major driver of US deficits and nobody dares politically to touch those. And indeed, the Republican Party abandoned the idea of fiscal reform following Mitt Romney's defeat. So I think the US is on an unsustainable fiscal path that is only sustainable so long as some combination of foreign investors and the Federal Reserve could absorb new issuance. The way I think we are heading is towards an ever larger stock of debt with a very large percentage of it held by government agencies principally the Fed. The the tendency will be depending on the trajectory of rates for the defense budget, in fact to be squeezed. The defense budgets already very bloated. The problem is that the US has got very good at spending a lot of money on really bad outcomes. That's true of its health care policy, most expensive in the world, delivering falling life expectancy right now. Defense budget is similar. There, they're going to have the most expensive fighter jet in the world, but they will run out of ammunition. In a matter of weeks, in the case of a shooting war. This is really not good. And Americans should be much more worried than they are about it. But what's happened I think in Washington has been a kind of suspension of disbelief about nasty fiscal arithmetic, that's bipartisan. That goes back really to the debates about the financial crisis, when economists like Krugman argued that the deficit wasn't nearly big enough, should have been much bigger if only it had been bigger. If only the stimulus had been larger. The Biden administration took all that to heart and decided to do stimulus, on top of what already was a large pandemic stimulus by Trump and got into an inflationary mess, just as Larry Summers said it would. The Fed accommodated it because Jay Powell wanted another term as as Fed chair and here we are in a big the biggest inflation breakout since the late 60s, early 70s. So I think that's the story on the fiscal side. But what's going on, which I think is true, is that at the same time, a National Industrial Policy with a strategic rationale has become a big part of what Washington does. The Inflation Reduction Act, most misnamed recent piece of legislation is a an Industrial Policy Act, which in many ways is more protectionist than anything Trump did. And it does, I think, illustrate the progressive tradition going all the way back to Roosevelt, which is or even to Woodrow Wilson, which is expand the role of the federal government What could possibly go wrong? And so, yeah, even as this fiscal crisis plays out, and erodes the ability of the United States to be an effective superpower, so the administration in Washington imagines that it's somehow going to become possible to replace Taiwan's semiconductor fabs with substitutes in Arizona and elsewhere, which it's not. I mean, I don't think anyone at TSMC thinks that you can rebuild TSMC in the United States. It doesn't make any sense from the point of view of cost. But that's kind of what they're doing. And it's kind of good politics. You can see how this approach could get the Democrats another term, if Biden can be kept alive, because it's so much more politically pleasing than populism, which has this nasty edge. It's like, oh, let's put tariffs on them. Let's reduce immigration. What the progressives say is, we can give you protectionism, but we'll make you feel good about it by saying it's a national industrial policy. I mean, it's still make America great again, it's still America first, but it's sort of touchy feely the democratic edition. And that works politically, which is why Biden won and Trump lost and it's probably why they will rerun that election in 2024 and Biden will win and Trump will lose again.
Meyrick Chapman
Yeah, I mean, what I am reminded there is that not only the inflation Reduction Act, but also as you pointed out, I think what's known as the digital Trusted Digital Ecosystems, rather ugly description, but actually could be applied in all sorts of different manners, Trusted Monetary Ecosystems, perhaps Trusted Banking Ecosystems. I don't know when you apply it, whatever epithet you want to sit in there that is becomes part of the Balkanization of the global trading arrangements. And I'm just thinking as a sort of, perhaps a last last question is, I'm sitting in global Britain, and the mantra to the extent that there is a mantra anymore, but the mantra still is, Britain is global and open, which was never quite true and is probably not true and never will be true. But nevertheless, that's the only thing we've got, having left the European Union. And it seems like it may have been a good good idea at the time, but it looks as if the Balkanization of alliances and economic bloc's which has begun is going to expose that British policy to the extent that it's a policy that there is no global anymore, well, significantly less. And there certainly is much less openness. So where does that leave Britain? Now I know Britain isn't your isn't your focus, but it does appear like we're falling between quite a number of stools here.
Niall Ferguson
Yeah. Well, I was opposed to Brexit not because I have any affection for the European Union or the European Commission, but because I thought the timing was terrible. And to embark on a strategy of of of, quote unquote, global Britain, when it was clear that the backlash against globalization was in full spate and was indeed supplying votes for the Brexit project seemed mad to me. I couldn't understand any of Daniel Hannan's arguments in favor of Brexit they all seem to me completely fantastical. And sure enough, the cost of leaving the EU has been pretty high, about as high actually, as I think the more substantive Treasury report of 2016 projected. Britons therefore picked the wrong moment to, to, to take back control. And that's going to be expensive. The most obvious way in which it's expensive is that nobody wants to invest in Britain at this point. And that decline in investment has already had a pretty deleterious effect on British productivity. And British economic health more generally. I would say that if we're reenacting the 1970s, which to some degree, we are certainly in inflation terms, then Britain will be the country that reenacts the 70s with the greatest attention to period detail, it'll be like a BBC costume drama reenactment with BAFTA Awards all round. It's going to be so familiar to us, Meyrick, because the strikes have already begun. You can see you know Sunak and his opponent Kier Starmer as, as versions of of Heath and Wilson. Weak governments will make matters worse, the Labour government that will doubtless be formed in the next couple of years will will make things worse, because that's what they do. So it's hard to be too bullish about Britain, although you could say that the equities are a bit under-priced at the moment. I'm not sure I'm not sure I'm a buyer even at these prices with this outlook. and Britain keeps kind of over committing. If the Germans are ambivalent about Cold War Two, we're all in. We're all in in Ukraine. We're all in AUKUS. We're all in to take on the Chinese with with a defense capability that makes Ruritania look like a superpower. And that's the thing that's really off about this that we haven't in Britain come to terms with the extent of our decline in military terms. There's still a quality officer corps no question, but when you actually look at the the the armaments, the cupboard is bare, the arsenal is empty, supplying tanks and aircraft carriers or nuclear submarines all of this is at odds with Britain's capability. We're Switzerland. The logic of Brexit was just to be Switzerland. Switzerland is not in the EU. And it's engaged in an endless negotiation with the EU about what that means in practice. The mistake was to think that Brexit was a stock, it's a flow. It's a permanent state of negotiation with a more powerful economic neighbor. So we decided to be Switzerland, but have you been to Switzerland lately? It is a much wealthier country than most of Britain. Most of Britain is basically Poland. If you step if you drive far from London, and I mean, by far, I mean 60 miles, you're in one of Europe's least impressive economies. That's the reality that a lot of people who basically stay in London don't want to face. The elite supporters of Brexit. It's always a mistake to think of Brexit as a populist insurrection. It had huge support from members of the elite, where they were just fantasizing about what could be done in the context of the late 20 teens and 2020s. And it's funny I think they kind of know it now. They don't, they can't admit it. But the people who, who backed Brexit, know that it's a failure. And it's a failure. It was a predictable failure, not only because Daniel Hannan's arguments made no sense. I mean, from an economics point of view, you'd have failed it as a, you know, as a graduate essay. But it also made no sense politically. Because basically, Brexit happened in order for Boris Johnson to become prime minister. And there was no point to that except to gratify Boris Johnson's huge ego. Anybody who put their faith in in Boris Johnson didn't understand how entirely flawed he is as a leader. And so it was predictable that it would fail politically too. I mean, I get Dom Cummings his argument that you needed a revolution in government that that was the point of Brexit. But if your vehicle if your tool for achieving that was Boris Johnson, you were dreaming from the get go. As anybody who, who who knows Boris Johnson could have told them.
Meyrick Chapman
Well, that is probably why it's raining in Chiswick, at the moment,
Niall Ferguson
It's always raining in Chiswick, isn't it Meyrick, it's more surprising that it's raining in Palo Alto as I speak, but I mean, I think what's funny about this is that although Britain is is paying quite a heavy price, for the decision to undo half a century of European integration. Effectively, Britain's decided to go back to 1972, having forgotten why it joined the EEC in the first place. But the funny thing is that even as all of this plays out, and it won't be economically fun, there are things about Britain that seem very attractive internationally, despite everything. In particular the education. So Britain has probably got the best schools in the world in the private sector. They're amazing. They're much better than anything in the United States. And it still has in Oxford and Cambridge and Imperial world class universities, which are run on a shoestring by American standards. And so there's something there that I think will keep people coming, including people like me coming back, and I've come to this I've come to see that it's, it's the it's the beauty or value of inertia. The reason that crazy woke ideas haven't swept through British education is just inertia. It's really hard to turn Oxford into anything, and certainly into anything woke. And so Britain's inertia, which is the kind of thing that Tolkien celebrated as a as a virtue, may turn out to be quite valuable in a world that is not only engaged in Cold War but it's also engaged in a kind of collective mental breakdown. So I think, I think what keeps me coming back is this sense that however much, we've messed it up the core things that that have made Britain a pleasant place to live, they're still intact, just as they stayed intact through the really terrible times the 30s, the 40s, the 50s, the 60s, the period, the period of Imperial decline, somehow Britain got got through that without the kind of trauma that most countries going through Imperial decline experience. And that's, that's consoling to me. I'm not sure the United States will cope with Imperial decline half so well.
Meyrick Chapman
Well, that's a that is, I think, a double edged but I think underneath there is there's an optimism there which is refreshing. It's refreshing and I hope you'll come back and see quite how how are we making it out? Yeah. How are we making out here.
Niall Ferguson
Looking forward to it, Meyrick, and I'll shall join you for a rainy Chiswick dinner at some point, I hope later this year.
Meyrick Chapman
Well, that sounds like an excellent idea. I'll put it in the diary. And thank you so much for joining me today. It's been great. It's been great in a rather alarming sense in many in many cases, but great nonetheless. And I hope we will have a chance to do this again sometime.
Niall Ferguson
Thanks very much, Meyrick. And keep writing because your your writings on contemporary financial issues are really first class and and always original and illuminating.
Meyrick Chapman
Thank you very much Thank you.
Exorbitant Chat, Episode 5: Niall Ferguson