Audio Length: 00:50:25

Transcript:

S1: Hello. Welcome to the Shutdown episode of Slate Money. Your guide to the business and finance news of the week. I’m Felix Salmon of Axios. I’m here with Emily Peck of fundraise.

S2: Hello.

S1: We are incredibly blessed and happy this week because we have the one and only Adam Tooze on the show. Adam Welcome.

S3: Hi.

S1: Good to be here. I should say welcome back. We had you on our Germany episode, which was kind of my favorite episode in ages. I love that so much and we have invited you back and you were like, Well, can I come back when I have a book to plug? And we’re like, Of course you can come back when you have a book to plug. So what is your book?

S3: It is called Shutdown. How Covid Shook the World’s Economy and it’s out now.

S1: We are going to talk a lot about this book because it’s a great book. It’s a pretty definitive book when it comes to talking about exactly what happened in 2020. We’re going to talk about the Fed. We’re going to talk about China. We’re also going to have a segment on Afghanistan because you didn’t just stop after writing this book, you have kept on with all manner of projects and balls in the air. I am a proud subscriber to your Substack, which I hope everyone checks out, but you also have a podcast you’re launching what’s there.

S3: It’s called Ones and Twos, and it’s going to be backed by foreign policy. And we’re going to be every week discussing two numbers that help us map the world. I gather that’s a segment that you guys love too.

S2: Oh, I love that.

S1: we know nothing about numbers, and I’m so glad that the numbers rounds have spread to the ivory towers of foreign policy. So, yeah, ones in Tooze coming out and Adam Tooze. Yeah, I guess we should drop your affiliation then if I may have Columbia a Columbia historian. Coming up on Slate Money. So, Adam, you have published the definitive pandemic book before the pandemic is even over, I’m not quite sure how that’s even possible. What would you say is the main message of this book? What’s the big takeaway that people should live with after having read it?

S3: I do think it is this point that the Keynesian riff this idea that what we discovered was not that we could fix the pandemic because we’re not done with the pandemic as a type of publication by any means, or that it leaves you with any very optimistic assessment of the state of American society or indeed European collective, you know, the capacity for collective action in Europe. But what we have learned is that whatever we could actually do, we can afford to pay for. And that, I think, is the central message. This is obviously a direct follow on from conversations that many people have been having since 2008. It’s a kind of conversation with the MMT crowd, with conversations which are fed into the discussions of the early economic policy of the Biden administration. That’s I think that the particular claim I want to demonstrate. And furthermore, this isn’t true just for the rich world. So we mustn’t think of this just country by country. But if you’ve got the right settings on the Federal Reserve policy, we can in fact loosen the monetary framework for the entire world and out there in the emerging market economies, there are lots of highly sophisticated actors now that can take advantage of that. So there’s a sort of balance.

S1: So in terms of, you know, the Committee to save the world and talking of which I note that Bob Rubin reviewed your book in The New York Times, which while you know he was the early committee to save the world within the framework of like constraints of how much money he had to save the world with need that he had to rummage around in Boston drawers to find whatever money he needed to save the world in the current committee to save the world, which is, you know, Jay Powell and the central bankers, they just print up whatever they need. And not only does it save America, but you’re saying that it saves sub-Saharan Africa or South America like other places, too.

S3: Well, what it saves is that banks, what it saves is their financial system. What it means is that we don’t suffer a heart attack on top of the cancer and the steady degenerative disease we’re also suffering from. So that’s what it does. What we’ve learned is how to prevent, to be specific here, the extraordinary turmoil that we saw in global financial markets in March 2020, adding to our troubles and what we were able to do is to neutralize that as a problem. In fact, to an extraordinary extent. So, you know, Peru, by the end of 2020, was able to issue a century, really very modest interest rates. Now that doesn’t mean that they don’t have a constitutional crisis going on. And it doesn’t mean that they’ve been able to contain the pandemic in Lima, where there’s 10 million people, of whom 70 percent are in informal employment. It hasn’t solve those problems. This is the sting in the tail of the Keynes quote we can afford, and I think we could actually do. So it’s the actually doing that, as it were, has been revealed to us as the central, as the central issue. But as far as money and finance is concerned, we do indeed have an incredible capacity to just neutralize the problem.

S2: Reading your book and going back to March 2020 and you really sort of lay out the crisis, the financial crisis we were facing at that time, it was kind of a shock to reread it and realized just how close we had come to, just like you said, a total heart attack. I wonder if you could lay that out a little bit for listeners because I think at this stage in 2021 with, you know, everyone talking about inflation, people might have forgotten how close we came to collapse. I mean, it was really striking that the bond market went bonkers.

S3: Absolutely. And it’s the Treasury market, right? So in a sense, this is the key thing for people interested in finance. I think always to juggle in their heads, right? There’s the headline grabbing equity story, the big name tech, FAANG and so on. Everyone gets excited about. It’s like rooting for your team or something in a sports competition. And then there’s the boring, really boring bond equivalent of that, which is, you know, fixed income debt issued by those same companies, which no one ever talks about. It’s a big market, but it’s just unfathomably tedious. And then there’s the fixed income thing where all the politics is concentrated, which is the macro economic bit of the financial markets where you’re not betting on a team you’re betting on. Is it worth the viability of the entire franchise? And that’s government debt. And the biggest market of all in that is the US Treasury market. That is the gigantic whopper, the 20 trillion dollar market to end all markets. That’s where, as it were, the benchmark interest rates globally are set. And it’s this very complex picture of the Federal Reserve Central Bank’s massive demographic forces all of that. But the fundamental assumption in that market is you can always transact. And furthermore, you can transact in huge volume without it affecting the price. So this is pretty close to a perfect market when very big actors can make very big moves without it affecting the price that tells you the market. Is so gigantic, the individual rationality can be separated from the aggregate, it’s a very basic axiom of a certain sort of thinking about economics, and the terrifying thing that happened in the second and third week of March is that broke down the prices for US treasuries were moving in the wrong way. I mean, the right way in inverted commas. The one we’ve gotten used to is that when equities go down, people panic and run into bonds so their prices go up. And if their prices go up, then the yields, the effect of interest rate you’re getting goes down. And so that’s the kind of self stabilizing thing juices the economy to have lower interest rates. So the first weird thing we had was that in fact, the price of bonds was falling to the price of Treasuries was falling to. So that’s telling you everyone selling everything. They’re selling equities and treasuries. The only thing they want almost by a process of deduction is cash. And then the other thing that happened is that because so many people were trying to sell at once in this market, which is normally just assumed to be just this giant machine, it’s not working. You couldn’t transact. I was speaking to a bunch of investors in Hong Kong and giving them flashbacks, and one of them was telling me about just the he can remember the day, you know, it was the 18th of March, and he tried to sell $2 billion worth of treasuries and couldn’t sell them. There was no bid. And that is utterly terrifying because this is the piggy bank, right? When you allocate a portfolio, most the big portfolio allocations don’t hold much cash. What they hold is things they can sell instantly or very quickly at a price they can. No.

S1: Let me ask you about the causality here, because I mean, there was this big Treasury crisis and you can kind of see like, right now we’re coming up to another, you know, one of those periodic times when we hit the debt ceiling debate and everyone worries about the Treasury market and government defaults and all of that, none of which ever seems to have any effect on the Treasury market or Treasury yields or anything like that. And yet a pandemic. Had this, you know, almost existential effect on the Treasury market and almost broke into and it was only absolutely extraordinary action from the federal was pulling out all of the stops that had been invented for the global financial crisis and then some that prevented this. What is it about a pandemic or this pandemic that had such an outsized effect on U.S. government bonds?

S3: Yeah, so I mean, the action of the Fed, as you said, it’s just it’s worth just saying some of the numbers. I mean, they were buying a million dollars a second in the last week of March. They were by over 70 billion dollars of Treasuries a day. Those are the sort of numbers we saw per month in the area of good king Bernanke. They bought five percent the US Treasury market in a matter of weeks, 14 20. This is, this is, you know, the supposed solid foundation of the global financial system, and they had to buy five percent of it in a matter of weeks and put it on. And they’re still buying so. So it was absolutely gigantic. That tells you how terrifying this was because they wouldn’t be doing that kind of thing unless they were really, really worried. But I think we have to distinguish here between two types of logic. They’re not radically separate, but it’s crucial to kind of keep them, I think, slightly distinct. One is the new flow of debt into the market. So the Treasury issuance and part of which is the new deficits every year and part of which is rolling over existing outstanding treasuries because it’s a whole ecosystem of three years, five years, 10 years, 30 years and all of those need to be shuffled and rolled all the time. That’s one element, and that’s as it were an incremental addition to this market subtraction from it, in addition to it back and forth. And then there’s the churn inside the market itself, the metabolism of that market on any given day. And it wasn’t as it were a sudden shock announcement that, oh hell, we’re going to have huge deficits. But the American government is going to load this market up with huge amounts of debt. But it was a bout of indigestion, kind of. People call it a plumbing problem within the market itself, produced by selling by hedge funds, which had various types of very complicated leveraged trades on and by mutual funds that were holding treasuries for as a liquidity reserve and by foreign exchange managers. So this was to a considerable extent a sell off by emerging market exchange fund holders. They were running out of dollars. They were reshuffling their dollar portfolio out of treasuries into just cash. And and it’s that churn, and it’s in the order of 600 700 billion dollars that produce this attack of indigestion and malfunctioning in the market.

S1: So. And if I can just try and go down one more, one more level of causality here. You know, if I’m a I know a Middle Eastern sovereign wealth fund or a South African in Sheeran’s company or something like I see this wave of Covid, you know, spreading across the planet with terrifying exponential growth. What is what is going through my mind that I see that and I say to myself, Well, what I want to do is turn my five year Treasury bond into like overnight cash, especially when, like cash itself is ultimately still a claim on the US government. Like what caused that selling?

S3: So the other thing to figure in from the point of view of the emerging markets and those foreign reserve holders is that the dollar is rising in this period. So again, this isn’t the nightmare scenario of the early 2000s where people sell treasuries, sell all those, the dollar falls, interest rate rises. That isn’t the logic here. There was a global liquidity crunch as investors pulled back from emerging market investing. The dollar is rising, so those reserve managers in the emerging markets can see a funding squeeze coming down the pike. Quite fast, quite hard. And what they know they’re going to need to do is provide cash dollars to a dollar per dollar, short balance sheets in those emerging market economies. And that’s that’s what they’re doing.

S1: They also so, so, so Emily is shaking her head. Basically, the idea is that this crisis is going to be really damn expensive and it’s going to be really damn expensive in places like South Africa and the South Africans are going to need to borrow money. And so I’m going to want to give myself a bunch of dry powder in terms of cash that I can then lend to South Africa because they’re going to need it. And so I’m selling my treasuries in order to give myself the liquidity that these other countries are going to wind up needing. And the dollar is nice and strong, so now is the time to load up on.

S3: And furthermore, the hedge

S2: funds and mutual funds in the U.S. are thinking that they’re thinking, we’re going to need a lot of cash to loan

S3: to hedging market in the mutual funds in the US. It’s simply, OK, we’ve got a balance of different assets here. Shares are just tanking like crazy. This is not a moment to try and liquidate those. Let’s go to our piggy bank. Let’s try and liquidate all treasuries instead. So that’s why they were selling those trying to sell shares in the second week of March 2020. This is not the moment to try to do that. You’ve got to realize

S1: losses if you’re if your mutual fund holders are like panicking and selling their fund holdings, you don’t want to be like selling the stocks you’re holding on their behalf. You. Going to be selling the Treasury because they’ve retained their value.

S3: And then there are a bunch of hedge funds that were gambling basically on on futures secured on these treasuries, which were conditioned on particular types of price movement between them. Those became fundamentally destabilized by this unexpected shift in the correlation between shares and and bonds. They then had what it merged. They had strongly leveraged positions. So they really needed to fund what were now loss making positions. They face margin calls. They needed to unwind those very quickly. And we think it’s that kind of order. It’s hundreds of millions from the foreign exchange reserves managers. It’s a couple of hundred million from the mutual funds and about 100 billion or so from the hedge funds in that kind of stack the pile into the Treasury market at the same time. And the big banks in the U.S., which normally would have been in the business of warehousing this right because if there’s a bunch of people tried to sell treasuries desperately since these are US treasuries, you know, in due course, the price will come back. So if there’s a fire sale of them and you’ve got the balance sheet capacity Peck, the Treasury is up now. It’s a guaranteed profit. But that depends on the big banks being having the balance sheet capacity, and this is where we do come back to the as it were a longer term story because the entire U.S. ecosystem for Treasuries had basically since the Republicans turned the fiscal taps on in 2017 become stuffed with treasuries. There’s a huge volume of Treasury issuance going on from 2017. The balance sheets and the holdings of Treasuries up on the part of the big market makers. The people like JP Morgan, have all risen over this period that already warehousing a lot. There was the repo tremor you may remember in September 2019, when this market already showed signs of instability. And then we added 500 to $700 billion of sales in a matter of weeks between the end of February and early March. And that’s where you get the story. And of course, everyone could do the math on this. Everyone’s watching this in panic. And so the real risk is this is just the beginning. And by the time we get to April, people are trying to offload a trillion and then we’re in real trouble. No one can contain that. So the first thing the Fed does. And this is very characteristic is to just offer repo finance. So the significance of that is we don’t the Fed doesn’t have to buy the treasuries itself. It just makes it really cheap for private balance sheets to hold the treasuries for the banks so the banks will

S1: lend money to the banks. They can buy up the treasuries. But like, I feel like we’re kind of disappearing down the rabbit hole here, and I don’t want to spend too much time on fed liquidity provision in March 2020.

S2: I don’t think I as a regular person, I really don’t think people realize how close to disaster we were in March. If the Fed hadn’t stepped in, could you just Adam give me like the very short? What happens then kind of scenario?

S3: Yeah. I mean, if you can’t stabilize this market, then the entire portfolio allocation of everyone is destabilized, right? Because you hold your riskier illiquid assets on the assumption that you can backstop them with a piggybank of liquid assets, the liquid assets that you use as your piggy bank, all the treasuries. If the Treasury market is malfunctioning and is no longer liquid, your entire portfolio is illiquid. And that’s not a sustainable position. So then you need to shrink the entire portfolio really dramatically. In other words, we would have seen spiraling fire sales of all other assets. Those bonds issued by by companies would have become fragile. They would have needed to have been sold off. It would have spiraled into the equity market. And this is going back and forth because remember, the mutual funds are selling the treasuries because their suffering runs from their investors and they don’t want to sell their equities because the equity prices falling. So the faster the equity price falls, the more the pressure there is to sell into the Treasury market’s malfunctioning. So this was the sort of nightmare spiral death spiral. And ultimately, this does come back to the fiscal policy point. This is a moment when governments around the world really want to issue debt. And in Britain, in the third week of March, the Bank of England has been sort of in in cautious moments. That said this out loud is we were worried about the ability of the UK government to fund itself. And you can see how worried they were because they basically reopened this historic this weird thing in the U.K. Treasury Bank of England relationship where the Treasury has an overdraft facility with the Bank of England, so they don’t even need to issue any gilts to get their hands on cash. They can just simply book it to an account in the Bank of England. Now, no one really wants to use that on a huge scale. They did it briefly off to 2008 and then round it down again. They didn’t actually need to use it in 2020 because the interventions in the gilt market, the U.K. Treasury market was strong enough and worked. But that shows you where this goes next. In other words, if you have this total meltdown, how does the government finance itself? Of course, it can ultimately do it just simply off the balance sheet of the central bank. But that means that this conventional funding mechanism has stopped.

S1: And that, in turn, gave a big boost, as you say to people, you know, in the movie world modern monetary theory world who are going around saying governments don’t need to borrow money at all, they can just spend money, they

S3: can short circuit this market. Jessamine, it’s a very roundabout way of talking this up, but it is the mechanism we use, and so to suddenly shift out of it at a moment of shaken confidence would just add to the sense that this is the end of the world. But it’s technically true we could do without it. But to step from one set of conventions, a particular dance that you play and it is a dance which has a particular group of actors that dance a certain way to saying, No, we’re not doing that anymore. It’s all pogo now. Whatever it is, we’re just, you know, we just have to the sense that literally the world as we knew it had ceased to exist and no one wanted to take that risk at that moment.

S2: Not a good time to do that. With the pandemic bearing

S3: down really no mosh pit is not what we needed at that moment.

S1: I wanted to also talk because one of the other things you have a really well in the book is like placing everything in its proper sort of international context. And if we zoom out from like the complete chaos of March 2020 to the chaos that we’re still in right now with supply chains and with the Delta variant and all of this kind of thing. One of the big, probably in many ways, the sort of long term biggest story that people haven’t been paying nearly enough attention to is China and its central role, not only in terms of global supply chains, but in terms of really doing its own sort of revolutionary change like we’ve had. You know, she basically installed himself as president for life. He took over Hong Kong, he dismantled all of the, you know, freedoms there. And it seems like reading your book that because of the incredible power that the Chinese Communist Party has over every aspect of daily life in China, that the pandemic was really kind of consolidated, the huge amounts of power in this like incredible bipolar world that we seem to have found ourselves in.

S2: I just want to say, just reading your book before you answer, it really clarified to me, Oh, China, one the pandemic, and this is huge, and I don’t hear anyone talking about it except in your book.

S3: And it needn’t have been that way. I think, you know, finishing the book in the midst of soccer season in the summer, you know, it’s as though in the first half of the game, like China shipped two goals and then in the second half of the game, the opposing team came out, ran down to its own goal and spend it the next half of the game, just firing the ball into its own net. And then at some point, at the 90 minute mark, we said, You know what? I think the other side lost. I mean, because if you’d stop the clock at the end of February, that would not have been your conclusion. Your conclusion would have been this is the worst crisis to have hit the Chinese regime since the beginning of the reform period. That disease reporting system, which they were very proud of and which they put in place after 2003 to prevent precisely this kind of incident from happening. You know, in this giant country, which is like South American, North American, Europe bolted together and you’re trying to run it from London. And so they put a reporting system in place that was supposed to mean that if something happened in Amazonia, they heard about it and it didn’t work right because there were all these layers in between and the Wuhan and Hubei party, people wanted to stay on track for the big season in January and February. And that was a disaster, a complete disaster. Then they had to do something which country to sort of liberal prejudices about authoritarian regimes they’ve never done before. No one had ever attempted to lock down a city of 10 million people and that in a huge province, the size, you know, bigger than California in terms of population, they wanted to have attempted to do that before. And then they suffered by far and away the worst economic shock that China has suffered since, well since the Cultural Revolution. In fact, since the great leap forward. I mean, it was a sudden and abrupt collapse in GDP. And, you know, in the well-protected, modern bits of the Chinese economy, this is OK as it’s proved to be in the West as well. But in the huge semi informal giant small scale private sector of the Chinese economy, which is largely service sector based face to face. It was an absolute catastrophe. You can see the regime tried to process that fact in the spring, where they have these hidden arguments, with Li Keqiang kicking it and saying, You know, we need to talk about the 600 million poor Chinese and that was instantly repressed. So they know how wobbly they were, but they just, you know, no one sees coming the complete disaster of Western crisis management. But I agree. By the summer, it’s evident in their own light, to their own mind and terms, just that the ordinary continuation of life. I’m sure you’ve got friends and acquaintances who are in China, but anyone you were talking to in that period was saying it’s, you know, it’s just normal life here. By the summer of 2020, they were turning to something very much like normal. The difference, of course, is true. They won, but the game has changed. And this is the what’s the other part of this story is like we were once upon a time in a world of the Olympics of governance of, you know, comparative growth rates. When will China overtake? We’re in a much darker world now, and that shift also happens in the course of 2020. So the Chinese may have won that old game, but they now find themselves playing in a much tougher, much more aggressive winner takes all kind of a strategic competition

S1: because, like hawkishness towards China, they’re basically anti-China. A sentiment not only in the United States, but also in Europe has been on the rise has coincided with the rise of authoritarianism in China and the realization that just because China is this very capitalist country doesn’t mean that it’s in any way sort of free or on our side.

S3: Well, there’s that. So there’s the economic component, there’s the human rights component. And then there’s the third element, which has come ever more to the fore, which is the geopolitical dimension. And sometime, you know, around about 10 years ago or so, an important, increasingly important group in the American national security establishment decided that Afghanistan and counterinsurgency really wasn’t the big game and that peer to peer competition with China was. And they have been pushing very conservatively over that period, and it started on the Secretary of State Clinton towards a reorientation towards the end that what they now call the Indo-Pacific, that’s a category that didn’t even exist three or four years ago. It’s part of this grand strategic realignment. And in the summer of 2020, this culminated not so much in military measures directly, but in us. I mean, I use this language, I stick to it declaring economic war on China. And it wasn’t about soybeans and steel or aluminium. It was about very targeted attacks on the leading edge of the Chinese tech industrial complex and its warlike in the sense that it’s tactical. It’s not just warlike in the sense that we say here and no further, and we will combat you if you go beyond this point. But we’re also going to move tactically. So if while Wei attempts to source chips from some other source, we’ll go after that supplier. We will apply leverage to companies in the Netherlands to prevent them from accessing the technology indirectly. It’s a very fast moving campaign to block the development of the leading edge of the Chinese industrial economy.

S2: It’s interesting, too, because the U.S. is waging that kind of war against China, but it lost the war against China. If you look at it in the way that China figured out how to battle a deadly pandemic really quickly locked down and people got to live as normal so their economy could bounce back quicker, and that was like a key battle in the war and the U.S. Maybe it’s doing all these maneuvers against China when it comes to trade or business, but like the U.S., hasn’t been able to take care of this disease and is going to suffer and has suffered economically as a result, like it’s not fighting the war. Totally.

S1: I want to take the other side of that Emily. Like, I think there’s two things going on here. One is where we are now. In September 2021, the US economy is looking pretty healthy. We’ve managed to bounce back, you know, surprisingly well and have exceeded all expectations. In contrast, I should say to somewhere like Australia, which followed that idea of let’s lock down and really concentrate on controlling the pandemic, which is still in lockdown and is having a very hard job of that. And I think the what China managed to do just really isn’t possible in a free country like Australia is about as close as you can get and no one’s happy with, you know, no one in Australia is happy with the way that the Australians have approached it.

S3: In fairness, I mean, the Australians just have a higher standard than the US. I mean, if the Australians were having the kind of epidemic that Kentucky is currently suffering from, they would be under a lockdown regime, the likes of which we’ve never seen before. I mean, they basically are aiming for a much higher level of containment the America has given up in large parts of the country. I mean, you’ve got to compare like with metric is absolutely huge. It’s not as big as China. It’s 330 million people. And in parts of this country, we have quite effectively fought the disease in due course. There are large parts of the country which are now living the nightmares of the spring of last year. You know, the National Guard is being mobilized in Kentucky right now. It was a, you know, headline of the Financial Times this morning to to help stabilize the hospital system there. So I think that, to me is also the overall lesson, and it goes back to Emily sort of hang on. So on the one hand, on the other night vision of America, to me, 2020 poses the question if the coherence of America at this moment. And that’s a way also of reconciling Felix this point, right? So it is true that those Americans who have a large stake in this thing we call GDP and have large portfolios of assets invested in the S&P 500. They do brilliantly made out gangbusters. But if you’re in the bottom 50 to 100 million of the American population, then it may be true that you are now getting back into your low pay, precarious job that you went through a huge shock last year, which you do not have the balance sheet to really survive. Your children are probably one year behind in that bad public education. You do not really have the means to offset that, and the long run consequences of that going forward are quite unpredictable at this point and depend to a considerable extent on what welfare benefits Congress is willing to grant. And I think around about 10 million people lost benefit on Labor Day earlier this week. So, you know? And that’s just that two realities, and they coexist within this country, and I think the same is true with regard to economic policy and military policy and social policy and pandemic policy. It’s, you know, we used to say things about post-Soviet Russia that, you know, it was a gas station with nukes. Well, the United States is like a Federal Reserve with nukes and it’s frankly nonexistent national welfare system. We don’t, it turns out, have a national unemployment system in the United States. That’s kind of a problem for a national economy. And then this is before we even get to the, you know, the drama. I mean, we shouldn’t use. I’m not. What of those people who goes to the Weimar Republic? But nevertheless, we saw in the United States last year a full on constitutional crisis, which required all questions to be answered by the leading American soldiers about where they stood on the constitutional issue. I mean, in the middle of everything else going on exactly the oh you say, the social crisis, the failure to contain the pandemic, the mobilization of the military and quite successful monetary and fiscal policy are all happening at the same time. And I think that’s kind of what we’ve got to encompass about that.

S2: Yeah, yeah, it’s really striking how the Fed was able to save the markets from disaster again. But we don’t have the same kind of smooth running save us from disaster mechanism on the social side. It’s more of like a fight tooth and nail to rescue people who really need help to get those social policies out there. Like you just seeing what’s going on now with the reconciliation bill and the fight over that, it’s if the markets are in trouble and there’s chance of a meltdown there. That’s a well-oiled machine of rescue at this point. People have figured a lot out and it helps everyone at the top. Yeah. Maybe you didn’t get a stimulus check. But Adam says in his book, Like your stock, your 401K has exploded in value. It’s insane. But then for everyone else, it’s like a battle to get anything that they need. And most of the fiscal policies that passed quickly in the pandemic were temporary,

S3: absolutely and temporary in a sense of light. And it is that the stimulus moment just after Christmas, where you know, Trump’s busy playing golf and just doesn’t feel like citing the latest stimulus bill. And so this basic set of protections for American citizens expire, you know, and so it’s kind of a knife edge, a knife edge situation there. I mean, I mean, they’re they were everyone’s heroes, but there is a sort of genius logic to the folks who figured this out and said, Right, so what I do is I take my stimulus, puts it in equities, right? You know, that’s actually the way to bridge this gap. The maybe very smart people in the MMT crowd say, I should have a Fed bank account. I’d like to have a Fed bank account. Then they could issue me money through the Fed bank account. But since they’re not doing that, what I can do is take my stimulus check, put it in equities and then, Hey, presto, it turns out the Fed acts on those. So what’s not to like

S1: better yet, just put it in GameStop?

S3: Well, but I mean, let’s take that as an instance right off the gate and you suddenly realize, given the really big profits, it’s been made that doing that. And then of course, it becomes a whole thing.

S1: Before we finish, I do want to spend a segment of this here podcast on a completely different subject, which is, I don’t know, I guess everything is interrelated. Any reader of Adam Tooze knows that everything is interrelated, but you have recently been writing a lot about Afghanistan, and I felt that your Substack piece, especially even more than your foreign policy piece on this, was incredibly clear eyed about this very huge dilemma that is facing Treasury. And we have seen like the technocrats, as you say, they came to the rescue in March 2020. They knew what to do and they, you know, they save the planet. We now have a humanitarian crisis of absolutely astonishing proportions in Afghanistan. We have literally millions of people at risk of dying of starvation. It is a terrible place. And the money that was coming into the country month in and month out while it was effectively a US client state has just come to a sudden halt. And most importantly, the $9 billion of reserves that the Afghan central bank has have been frozen. The Afghan central bank cannot access any of that money at the Federal Reserve or the IMF because the Afghan government is a terrorist organization and according to the, you know, the rules of Treasury, we, you know, we don’t allow terrorist organizations access to dollars. So this risks causing many more deaths than happened in the war in Afghanistan. This risks causing, as you say, millions of people dying. How do you analyze this and what is your advice to Treasury?

S3: There are two overlying problems in Afghanistan. I like to make these comparisons. It’s kind of helpful. Afghanistan is almost exactly the same population as California. Thirty nine million people, half of those are desperately poor humanitarian relief cases, the millions of children suffering from acute malnutrition or risk of acute malnutrition. That was that’s a new jarring problem. It it’s a. Important to say this, because whenever you campaign on the Afghanistan issue, people come and say, Oh, well, but it’s always like this, it’s a failed state. It’s never going to be anything other than poor. So let’s acknowledge that reality to start with. So you have 20 million people who are on the edge in any given year, especially with the impact of drought, climate change, civil disturbance are just not being able to survive. And then on top of that, the injection of money that we’ve provided over time has created an urban society of about 10 million people. That metabolism, that ecosystem is sustained by modern electricity, by modern forms of consumption, and it is dependent heavily on imports and the deficit. The trade deficit Afghanistan is a quarter of Afghanistan’s GDP. And even if you allow for opium, this is the other thing that made you people throw into this huge dark money. The farm gate price for opium revenue in Afghanistan, we estimated about $2 billion. So it would cover maybe a quarter to a third of the trade deficit and the money’s all spoken for already. Like the money’s already spent, the money doesn’t sit around in some warlords coffer. It already flows into the Afghan economy. So you can’t suddenly say, right, well, we use the opium money to pay the import bill. It’s already being used. So this is the situation and the risk is that on top of the humanitarian crisis, which is terrible right now because of the drought and the disorder, we will basically inflict a financial heart attack what economists call a sudden stop on that population of 10 million people in the cities who have over the last 20 years grown up as clients of the United States. And the truly terrifying thing that happens then is that those 10 million people who almost by definition are relatively speaking, slightly better off start competing for the available resources with the bottom 20 million. And what this unleashes is a spiral upward in food prices and the depreciation of the Afghani as everyone bids their local currency for whatever dollars they can get, so as to be able to buy the crucial imports. The crucial imports are electricity, which is 75 percent of Afghanistan’s electricity is imported. Petrol The entire country runs on imported fuel, mainly from Iran and flour. Why do they import flour? Because they don’t have any mills the mill grain with. That’s how underdeveloped this economy is, so the key elements of logistics in the continuation of modern life depend on imports. Those are highly sensitive to the exchange rate. So the real nightmare is that as it were, you end up with a kind of Darwinian struggle for survival. And that is, you know, you also saying that all the smart analysts of famine tell us this. That’s what actually creates the famine conditions because the people who it’s it’s an income distribution thing. It’s an either quality thing. So it is imperative that we as it were, ease that problem, that funding problems some way. Now, I don’t think anyone seriously suggests that the Biden administration is now going to allow the Afghans uninhibited access to the $9 billion. The $9 billion would cover Afghanistan’s imports for a year and a half. So it’s a really substantial amount of money, but we clearly do need to find some mechanism for slicing foreign exchange into the country, and we need to find some mechanism to prevent the macroeconomic crisis, the sudden stock crisis. And we need to find some way of continuing large-scale humanitarian relief to address the problems of the 20 million or so Afghans who even in a good year, can’t really make out effectively. And those are the two interconnected problems that we have to address.

S1: Humanitarian flows are still allowed. There was a brief period where you like remittances were not allowed, but those have now been turned back on again. But I wonder whether a humanitarian flow remotely adequate to the scale of the problem is even possible, you know, under a Taliban regime, given that any kind of financial flows to the Taliban expressly forbidden because their activist organization is, do you think humanitarian aid is even possible?

S3: Well, I think it probably has to sidestep the United States, right? The less the United States is involved in this, the better for everyone concerned. So the United States needs to step away from the problem. The money needs to be channeled by way of multilateral agencies if it needs to come, not from the Americans who are necessarily even the largest donors. In any case, it would need to come from Europe. It would need to come from Asia and China. Of course, everyone turns that glance towards China as a potential support here. The $9 billion in the Federal Reserve in New York, if one needed to, one could, if you like, use them as some kind of collateral. But frankly, this money needs to come in the form of grants, not loans, because this country is too poor any time soon to pay this money back. But it has to sidestep the US. I think the less America is involved in some sense, the better.

S2: What is the point of the sanctions at this point? Like America left Afghanistan? Unfreeze the money and just wash your hands of it. America, like isn’t sanctions to like, make a country do a thing. But like, we tried that for 20 years.

S1: This is the point the Adam made so incredibly well in. And his email was basically the point of the sanctions seems to be to push Afghanistan in the direction of what he calls the modernization, which is exactly the same direction that the Taliban is trying to push Afghanistan.

S3: Yeah, this is very different. So normally when we apply sanctions, we are applying it to a highly sophisticated society like Iran or Syria, and you squeeze an autonomous, highly sophisticated society strategically from the outside. In this case, Afghanistan in its modern bits. The bits we profess to support, though we’ve just abandoned them, is entirely dependent on us. So this is more like, you know, this isn’t like a boot camp for, you know, an overgrown adult. This is more like cutting off the oxygen to a kid in intensive care. We’ve just had the baby. We’ve given birth to this baby, and we’re basically saying in its incubator, we’re turning off its food and it’s and. And this is a patronizing image to use because obviously Afghanistan has its own dynamic. But the point I’m trying to make is that society is utterly dependent and that 25 percent, you know, a trade deficit of 25 percent of GDP. Obviously, you’re not used to thinking in macroeconomic terms that may not make a big impression, but if you are, that’s a shocking number. I mean, that’s, you know, very few societies are that dependent on imported goods. And Afghanistan, it’s not as though this is a big difference on big volumes like Afghanistan’s imports are six or $7 billion a year. Afghanistan’s exports are $1 billion. It doesn’t export anything. Its main export crops are things like gold, opium if it was legal and then dried fruit and nuts. It’s not an economic engine that can sustain this modern society that we help to foster.

S2: What a failure of twenty years. I mean, how many that the United States spent trillions of dollars in Afghanistan and they weren’t able to stand up an economy at all?

S3: We didn’t spend it on Afghanistan, on a Afghanistan, on us. I mean, the trillions of dollars are flowing through the American military machine. So in terms of aid actually delivered to the civilian side of the Afghan society, you’re talking single digit billions for Adam over a 20 year period in the society of 40 million people, which is one of the poorest in the world. So it actually was more like drop in a barrel, just not that much. Military aid security aid was equal, at least equal throughout the entire period, but those huge numbers that get bandied around that’s all internal to the United States military machine. And a large component of it is health care and welfare for veterans when they return to the United States.

S1: Which actually brings me to my number for this week’s numbers round. I’m going to use this as a segue way to kick off another round because I just calculated this for Axios the total amount of money spent on private sector defense contractors over the past 20 years since nine eleven. I guess I should have said the number first. I’m doing it backwards. There is seven point three trillion dollars overwhelmingly that comes from the Pentagon. It comes a little bit, obviously from, you know, other countries that fought alongside the United States. But seven point three trillion dollars going into companies like Lockheed Martin and Raytheon and Boeing. And when we talk about $2.2 billion being spent in Afghanistan or something, yeah, it’s kind of in Afghanistan. But a lot of that wound up, you know, contributing to Lockheed Martin. The share price, which went up from $35 on like the 10th of September 2001 to $350 now it’s actually gone up 10 times.

S3: We didn’t spend it on Afghanistan, on a Afghanistan, on us. I mean, the trillions of dollars are flowing through the American military machine. So in terms of aid actually delivered to the civilian side of the Afghan society, you’re talking single digit billions for Adam over a 20 year period in the society of 40 million people, which is one of the poorest in the world. So it actually was more like drop in a barrel, just not that much. Military aid security aid was equal, at least equal throughout the entire period, but those huge numbers that get bandied around that’s all internal to the United States military machine. And a large component of it is health care and welfare for veterans when they return to the United States.

S1: Which actually brings me to my number for this week’s numbers round. I’m going to use this as a segue way to kick off another round because I just calculated this for Axios the total amount of money spent on private sector defense contractors over the past 20 years since nine eleven. I guess I should have said the number first. I’m doing it backwards. There is seven point three trillion dollars overwhelmingly that comes from the Pentagon. It comes a little bit, obviously from, you know, other countries that fought alongside the United States. But seven point three trillion dollars going into companies like Lockheed Martin and Raytheon and Boeing. And when we talk about $2.2 billion being spent in Afghanistan or something, yeah, it’s kind of in Afghanistan. But a lot of that wound up, you know, contributing to Lockheed Martin. The share price, which went up from $35 on like the 10th of September 2001 to $350 now it’s actually gone up 10 times.

S1: Or listen to John Kerry’s podcast because

S2: John Kerry Ruse podcast or this is the

S1: 2020s, everybody has to focus even Adam Tooze as a podcast. Adam What is your number?

S3: This week it is minus zero point zero zero eight, and that is the yield that you could gain on a five year bond issued by the government of Greece on the way to September 2021. And it is a wow no.

S1: Greece is now issuing bonds that negative yields five years.

S3: It’s a total stunner. I mean, if there was anything that demonstrated that we could afford that, I think we could actually do this would be the one. And as my friends were saying, if you want to hear much more about this number, check out Ones and Twos, the new podcast that we’re launching with foreign policy in the not too distant future.

S1: That’s exciting. That is exciting. I’m definitely going to be tuning into that one. Adam Thank you very much for coming on the show. We’re going to have a Slate Plus segment on Emily gets to choose the Slate segment this week because there’s so much we wanted to ask you about. Oh, we did want

S2: to ask Adam lessons learned from this current crisis. I think we know some of the lessons learned from 08 at this point, but what are the lessons we’re going to take away from the Covid meltdown?

S1: Let’s talk a little bit about that on Slate Plus many thanks to all of you guys for listening. Many thanks to Jessamine Molli and Seaplane Amada for producing. And many thanks to everyone for emailing us sleep money. Asleep they’ll come. We love the emails. We will be back next week with more sleep and money. Lessons from the crisis, we have a sleepless segment. Let’s stick to one Adam. One of the things I think about this crisis a lot is that it was a kind of epistemic crisis that everyone sort of, you know, intellectually honest, wound up changing their minds on a regular basis about many things were changing so fast. What is the main lesson that you learned in the court over the course of this crisis that you didn’t know before?

S3: If I may, it will be two. The first was simply that climate change isn’t our only problem, or that climate change is sort of nested with a bunch of other things that are coming at us even faster and harder. And if we think of this as a kind of sequence of challenges, we’re getting it all wrong. All of this stuff is going to happen at once. And the second lesson that immediately follows from that is our ability to cope is truly limited. And so given our limited ability to cope, particularly in the West, science really is a silver bullet here. So it’s made me not more of a techno optimist, but a sort of desperate last resort. I’m kind of techno committed in the sense that I think is where we have to go. It’s banal, but basically Operation Warp Speed and the other vaccine development programs are what gives us some kind of hope of getting on top of this, and we need to start thinking extremely seriously about that kind of big bucks, high intensity, high speed industrial policy science policy

S1: and do that not only for public health, but do it for climate change, do it for cyber security, do it for all of the other existential risks coming at us simultaneously.

S3: Carbon capture absolutely green steel.

S2: So you’re saying the scientists will save us from climate change because no one else is coming to the rescue?

S3: They are essential allies and we need to overcome any sort of inhibitions we’ve had about industrial policy and big box R&D insights policy. Because not because I am a sort of techno optimist who believes necessarily that this will say this. I just think it’s probably our best bet.

S1: Basically, it’s not the science will save us. It’s more that if we do manage to get saved, it will be by science

S3: and certainly coming out of this crisis. We should surely be discounting the idea that comprehensive social collective self-discipline type strategies now are very promising. So then you just start looking by a process of deduction. What are we left with? And then you realize just sobering how little we currently actually do spend. I mean, for me, I always play this dog food test. You know, what does America spend on dog and cat treats and pet food? And it’s $35 billion dollars a year that is considerably larger than what the federal government spends on basic energy research. And that just seems wrong. I mean, I love my dog, but I want to love my son so much on cats, you know, on an even larger scale like we need that we really need to get serious about this and that the pet food test bites.

S2: The scientists could save us, maybe. But people we’re seeing now, I mean, a lot of people got the vaccine. Seventy percent of Americans, I think. But there are a lot of people who don’t trust the scientists to save us.

S3: We do not need a complete solution. I mean, for the pandemic control, we just need a substantial majority.

S1: And then we away and to be and to be clear about this, like there’s a lot of Americans who don’t trust the Federal Reserve either, but that didn’t stop the Federal Reserve from saving us.

S2: That’s true. They don’t even know. They don’t even know the Federal Reserve saved us.

S3: I bet there’s a considerable overlap with this.

S2: They think the same people.

S1: Yeah, bitcoin will save us. Adam Thank you. This is this is useful framing.