ReSolve Riffs with Viktor Shvets: The Great Rupture, Freedom vs Prosperity & the Future of Humanity

This week we had the privilege of hosting Viktor Shvets, Managing Director at Macquarie Securities and author of ‘The Great Rupture – Three Empires, Four Turning Points and the Future of Humanity – Do we need to be free?’. This deeply insightful conversation touched on topics that included:

  • Is freedom truly a prerequisite for prosperity?
  • Hong Kong’s transition from global hub to China-centric
  • US and Chinese societies face similar challenges, but have a vastly different toolkit to tackle them
  • China as the world’s locomotive for 18 of the last 20 centuries
  • The extraordinary, and largely unknown, impact Genghis Khan and the Mongols had on civilization
  • The interplay between institutions, culture and geography, and their combined role in the wealth of nations
  • Roman institutions as the great inheritance bestowed upon the West
  • Keynesian and Marxist canon – more similarities than many would believe
  • The highly disruptive labor dislocations between the first and second Industrial Revolutions
  • The likely disruption and dislocation over the next couple of decades
  • How we got here – capital abundance, declining productivity and inequality
  • Technology, financialization and the Fujiwara Effect – when hurricanes collide and compound
  • Maslowian disappointment and the dwindling faith in institutions and the system
  • Breaking the loop – finding the right set of carrots and sticks
  • Building a bridge to the future
  • Inflation volatility, continued secular deflation and a ripe moment for active management

Thank you for watching and listening. See you next week.

This is “ReSolve’s Riffs” – live on YouTube every Friday afternoon to debate the most relevant investment topics of the day, hosted by Adam Butler, Mike Philbrick and Rodrigo Gordillo of ReSolve Global* and Richard Laterman of ReSolve Asset Management.

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Viktor Shvets

Managing Director at Macquarie Securities. Author of ‘The Great Rupture – Three Empires, Four Turning Points and the Future of Humanity – Do we need to be free?’

Viktor Shvets is a global strategist at Macquarie Bank. In his almost four-decades-long investment banking career, he worked in Sydney, Melbourne, Hong Kong, London, New York and Moscow at a number of global investment banks, such as Baring Securities, Deutsche Bank, DLJ, Lehman Brothers and Credit Suisse. Over the years, he has been a highly rated analyst across various disciplines, head of research and is now recognized as one of the more innovative global market strategists, working on the intersection between finance, technology, politics, and history. He is a prolific writer on key global trends and is a frequent commentator on CNBC, Bloomberg, and other media outlets.

In June 2020, Viktor has published his first book – ‘The Great Rupture’ – distilling decades of investment and academic experience into a deep perspective of the future, and the role that people, technology and capital are likely to play, as societies continue to come under pressure from the self-reinforcing merger of the Information Age and deep Financialization. The book learns from the past and projects into the future. Will it be capitalism or communism, feudalism or despotism?

Viktor was born in Kiev, which at the time was the capital of the Soviet Ukraine. He attended Kiev University of Trade before immigrating to Australia, where he completed a Bachelor of Economics degree from the University of Sydney and a Master of Commerce degree from the University of New South Wales. He is married with two sons and currently resides in Hong Kong.

Richard:00:01:40All right.

Adam:00:01:41All right.

Rodrigo:00:01:42Welcome, Viktor.

Richard:00:01:42Welcome, Viktor.

Viktor:00:01:43Thank you for having me.

Richard:00:01:46I guess before we begin, since Mike isn’t on the call, I’ll do the honors. Nothing you guys hear on the show today should be construed as investment advice. This conversation is for entertainment, and well, hopefully entertainment, but definitely informational purposes. So, with that being said, welcome again, Viktor.

Viktor:00:02:05Thank you.

Richard:00:02:06And I guess…

Adam:00:02:09Yeah, go ahead.

Richard:00:02:11No, I was just going to say it would be helpful for the people that might not be familiar with your work to get a bit of your background before we jump in on so many of the themes that we’ve been talking about offline that we want to discuss.


Viktor:00:02:24Okay. Well, just very quickly, I’ve been a financial analyst, and strategist for about 40 years in Australia, Asia-Pacific, Japan, Europe, US, Eastern Europe, Middle East and Africa. I’ve covered a variety of sectors, I’ve covered a variety of styles. Currently, I am at Macquarie in New York doing global and Asia Pacific strategy. I’m also a writer. I published a book called Three Empires, Four Turning Points, and the Future of Humanity, very humble title. But essentially what it does, it kind of looks back at the last 500 years, and asks what actually was successful, what worked. And then look forward, what’s going to happen over the next two or three decades. Is the world changing? Is the success formula changing?

And perhaps more importantly, because I’ve been based in China, Hong Kong, on and off for 24 years, the question is whether we do need to be free. Do we need to be free at all? Or is it the linkage between freedom and independence is broken? The linkage between that and being successful and being profitable, and being innovative and being prosperous. Do we need to be free to be prosperous? And that’s essentially the essence of the book, basically saying over the last 500 years, the answer is yes, you must be free. If you’re not free, unfortunately, you’re going to fall by the wayside. But is it still true if we go over the next 20 or 30 years? So, that’s very quickly me.

The Hong Kong Diaries

Rodrigo:00:04:08That’s a great intro and that’s a great summary of what we’re going to discuss for the rest of the call today. Before we went online, it piqued my interest to get just a little bit of, like a story, a personal story about your background in Hong Kong. And you were saying you got there early, you saw the changeover in ‘94 and then back again recently. I’d be curious just to hear some of that before we get into the nitty gritty of the book.

Viktor:00:04:35No, absolutely. I moved from Australia to Hong Kong in 1994. So, for about three years, I saw the British Hong Kong, the colonial Hong Kong. I still remember first of July 1987 was very rainy day when the British flag came down and the Chinese flag came up. I was there all the way to 2000-2001, and then I came back again in 2010, and I was there for the last 11 years. So, I saw how Hong Kong changed over time, particularly in the last two or three years. And when a lot of people say, Hong Kong has finished, Hong Kong is gone. Look, Viktor, you left, many other people are leaving, I don’t think it’s fair to say Hong Kong has finished.

Hong Kong is changing and will change dramatically, and it will continue to change dramatically. It’s not going to be a window to the world. It’s going to be a much more China centric center. And it will have different people and it will have different businesses, and it will have different functions. So, Hong Kong is not finished. But Hong Kong, as we all knew, over the last 20-25 years is no longer there, and it’s changing. Some people are hoping and a lot of people are hoping for the best. And I think Hong Kong will continue to be very critical for China as you go forward, but not in the same function as it was in the past.

Adam:00:06:03Yeah, it’s almost a good metaphor for the change that you describe as almost inevitable for the rest of the world, maybe, like one path that we may follow over the next few decades. And so I’m wondering whether your time in Hong Kong and the observation and experience of this transition, was that one of the motivating factors for you to want to write this book and to write it now?

Viktor:00:06:34Yeah, it was because if you think of the new China, so to speak since 2012, when Xi Jinping came to power, it was clear that all the things we’ve seen between, call it 1995 and 2008, are likely to go into reverse. Whether it’s deregulatory drive, whether it’s liberalization drive, whether it’s a role of the state, both in allocating capital, directing capital, the role of the state-owned enterprises, the sort of shrinkage of the space between the private sector and the public sector, fusion of public and private. It was clear that that trend is unstoppable. So, it’s not something, anything new, it was clear for at least 10 years.

And so the question then becomes, in a modern world, where the role of humans is different, the role of capital is different, the role of money is different, in that world, as I said, is it okay not to have as much private space as we enjoyed in the past? Is it okay, not to have the same degree of freedom? And I think what China is trying to prove, and they might be able to prove it over the next decade, that that sort of a free space doesn’t have to be as free. But the other interesting thing, the West is going through exactly the same process.

Because if you think about the problems confronting China, are not dissimilar from what Joe Biden is looking at. Common prosperity is a pretty similar theme in the United States as well, which is essentially, is affordable housing a human right? Is access to broadband a human right, is affordable healthcare or education a human right, not a business. And so China is trying to tackle it. But in many ways Joe Biden, without the same tools or the same ability to bend society and economy to his will, also is trying to address.

Pretty much the same applies to digital platforms. What is the role of digital platforms in our society? Should you be allowing digital platforms to control real economy? Or should real economy be more important than a digital economy? Again, China is approaching it in a very direct fashion, because most of the decisions are abrupt, they are unappealable, in any form or shape, and they can be implemented incredibly fast. In the West, you can’t do that. But we’re still debating what is the role of digital platforms. The same applies to surveillance and surveillance systems. The same applies to what is considered to be a right or not right, whether you’re writing it, whether you’re discussing it. So, to me, it’s interesting that the West clearly is also moving. It is becoming less free.

If you think of the role of the government, now in China, People’s Bank of China has never been independent. Commercial banks have never been commercial, and private sector was never really truly private. Now, if you think of the West, we’re now debating what is the role of Federal Reserve? What is the role of ECB, extent to which they need to coordinate with the Treasury Department, the Finance Department. We’re debating what to do with banks, should we reinvent then? Should we do something else with the banking sector? And now we’re also debating what to do with the private sector, extent to which other policies should be impinging or directing private sector to do things. So, again, very similar issues, it’s just the approach is different.

How the West Won, for 200 Years

Adam:00:10:15Yeah. One dynamic that I — and I studied this quite a bit in the ‘00’s, and it’s since sort of been sidelined a little bit. But this idea that for 18 of the past 20 centuries, China was the dominant global economy. And then there was a time at which the West overtook them, and you spent quite a long, sort of the first section of your book is entirely devoted to the qualities of sort of a Western orientation that allowed for the West to come to dominate over the other major global communities or societies that existed through history, mainly the Russians, the Chinese, the Ottomans.

And so I’d love for, maybe just to set the table, I actually want to spend most of the conversation, looking at the contemporary situation and looking forward. But I think it’s important to set the table first with what happened over that sort of five centuries from, say, the 15th century to the 20th century, that allowed the West to come to so completely dominate the other potential global superpowers.

Viktor:00:11:38Well, there are a lot of books on that subject, of course. But one of the things that is important to understand, that the West was in many ways a lucky beneficiary of the collapse of the Roman Empire. It bequested the West with certain tools, whether it’s a canon law, whether it’s, which in turn transferred into civil law, into contractual law. Whether it was division into small dioceses, which used to be provinces of Roman Empire, which in turn evolved into various states that could never quite dominate each other. It never really got to the stage that one of those little pieces managed to dominate. And so there was a great deal of competition, for ideas, for wealth, for money, for technology. And all of that competition led to gradual opening up.

And what the book is discussing, there were certain turning points. One of the turning points clearly were the Mongols. Mongols unquestionably in the 13th century reshaped completely China, Middle East, what is effectively Turkey now. Russia essentially is the successor state of the Mongol Empire. They’d never really gone beyond Poland and Hungary. They did defeat Polish and Hungarian kings but they’d never really gone beyond that. And so you can argue that the West was spared, not just destructions that Mongols have brought about, but also types of institutions and habits that Mongols brought with them. And so that was the first major turning point. It would be interesting to see what Europe would have looked like if Mongols did go beyond Poland and Hungary.

The second one, clearly, was the Black Death. If you think of different places around the world, Europe just had a little bit more of urbanization in the 14th century. As I said, the princes, the royalties were somewhat less powerful. The guilds were developing, so you find some of the artisans were a little bit more powerful. And so when the population was decimated across the entire Eurasia, in Russia, it created serfdom. In Russia, you need to pin down people, because land was a lot less valuable than few individuals that were actually residing on the land. But in the West, it actually created an open labor market, whereby where your guilds or where your town people or your landowners, you were competing for labor. So, that was your second major point.

And the third one leading into is Renaissance, and basically rediscovery of the ancients. And to me, those three things created much more flexible economies, much more flexible societies. And whenever you have more flexible societies that means that periods of contraction tend to be shallower, and the period of growth tends to be faster. Now, to begin with it doesn’t make much difference. But when you go century after century, it all accumulates. And as most visitors back even in the 18th century, already saw that both Ottomans as well as the Chinese were falling further and further behind. So, it wasn’t just it happened right now, it was happening over centuries. But by early 19th century really the gap was completely unbridgeable.

So, the secret sauce or the secret formula of the West was really that degree of freedom. Freedom to explore, freedom to ask questions, freedom to build on the shoulders of previous generations, rather than having to reinvent stuff all over again, every time. That sort of freedom did not exist in China, Russia, or the Ottomans. And what it enabled it to do is in the West, the law predated creation of states. In China and Russia, states predated law. So, law never had the primacy in either China and even today it doesn’t, in either China or Russia or Turkey, the way it had been in the West. So, it’s really the benefits of collapse of Roman Empire, the splintering of dioceses and states, the canon law and the primacy of civil law and other contractual laws that really created and sort of a petri dish from which the West arose. And then you need to just have a couple of turning points, a couple of critical junctions, which just accelerated the whole process a lot.

The Role of Geography

Richard:00:16:17So, apart from the legacy of the Roman Empire, and this institutional backdrop that was built, and that was compounded over time; what role do you think geography played? Because there’s been a lot of work by Jared Diamond and … and other works that talk about how this geographical benefit for arable land and temperate climate and all these variables that allowed sedentary work to be created after the phase of hunter, gathering and subsistence. So, I wonder if you might speak a little bit about that.

Viktor:00:16:55Yeah. I think Jared Diamond’s sort of long term view is absolutely correct, that Eurasia, and if you decide more like a Fertile Crescent, which is mostly Turkey, Iran, Middle East, had advantages that other areas didn’t have. Whether it was grass, whether it was four key species of animals, like goats, and cows and horses, whatever it was, other regions didn’t have that. And at the same time, Eurasia is very sort of east to west. So, it’s easier to propagate it compared to very narrow channels like North America to South America or Africa. So, you could see how it could propagate both the species, the agriculture, how it was easy to propagate literature, word of mouth, or anything else across Eurasia. And so longer term, he’s absolutely right.

The problem is if you start splitting it up a little bit and say, okay, I understand that. But why is north of west Europe, which was not part of any of that today is much wealthier than Turkey, or Egypt or Iran. You can also debate the extent to which geography played a role in other places. So, for example, you could argue, maybe landlocked countries can’t really develop very well, because there are huge transportation costs. They don’t interact as well. But you know, what about Switzerland? What about Botswana? What about Chile? Not landlocked, but the terrible geography. What about those countries?

The same applies to sort of cocktail of diseases as well, that people will say, well, it’s much harder to do it around tropical climate or equatorial climate. Well, look at Singapore, look at Malaysia, look at Dubai. So, to me, I think geography does play a part. I think climatic conditions and the cocktail of diseases also plays a part. But to me, they’re not the primary drivers. I do think that the primary drivers are institutional, they’re cultural. One could debate the extent to which it becomes eventually genetic. And that’s a completely total set of discussions. But to me, that seems to be much more powerful than blaming geography or climate or something else.

Adam:00:19:18Well, I think you would have to agree that there’s interplay, right? I mean, certainly the fact that Northern Europeans extended their occupation into North America, and therefore, had access to a massive land and resource surplus in the presence of relatively scarce labor to develop that capital base, was a pretty substantial advantage. And then, of course, having North America isolated on both sides and therefore not nearly as susceptible to incursion. But you could say the same thing I think also about Russia and China in terms of land and resource surplus, so it wasn’t exclusively land and resource surplus. You needed to combine land and resource surplus with labor scarcity and sort of a Western-oriented value system, and dynamism and institutions in order to facilitate that, make the most of that excess capital base.

Rodrigo:00:20:24And also, you’re looking at Mexico and South America, like Mexico and the United States, incredibly close. You saw lots of land, lots of opportunities. But I remember reading a history book back in the day that showed that the way that they lured Europeans to North America was one of, this is a beautiful place artists come, Jesuits come, we’ll bring you in with open arms, you can create your own future, blah, blah, blah. The Spaniards, my people, the Peruvians, and a little bit of the Portuguese, for Richard who’s Brazilian, were lured by gold. And the type of people that came is like I will back you up, you will be part of the military, you can rape and pillage, take the gold, bring it back. And if you decide to stay, you will be given a plot of land that you will rule over. So, a very, very different cultural and backing as to what type of people we attracted. And a lot of that I think, the caudillo culture in South America is what continues to plague us today in contrast to the United States and Canada.

Viktor:00:21:27Correct. I mean, you can compare Hong Kong and Macau, for example. One was a British settlement, the other one was a Portuguese settlement. And so you’re absolutely right. It’s a culture, it’s institutional settings. Just promulgating or declaring the constitution and saying our constitution is the same as the United States, means absolutely nothing. Because at the end of the day, societal norms are very, very different. And if they are different, you can proclaim whatever constitution you want. But at the end of the day, it’s not going to function. I mean, the interesting thing, United States is one of the very few democracies that managed to maintain a presidential system. Usually presidential systems are susceptible to coups. They are susceptible to sort of garnering all of the power in the hands of one person. That’s why almost all democracies have more Westminster parliamentary system, rather than presidential system.

So, the interesting thing, US actually somehow, over the last couple of 100 years, managed to keep a presidential system and at the same time, keep democracy. But what you’re discussing is absolutely right. Yes, climate has some impact. Yes, the climate, geography, ability to communicate across mountains, all of that has some impact. But at the end of the day, what those things do is accelerate or de-accelerate pre-existing conditions, pre-existing structures. I mean, one of the things my book is highlighting, China clearly was ahead of anybody back in the 1300s. China was at the doorstep of industrial revolution. They have everything from moving print back way before Gutenberg, they had everything. They had paper. They could have gone into pretty much any area. And they didn’t.

And so the question is, why didn’t they do it? Their coal mines had almost modern equipment. I mean, something that Europeans didn’t get until the 19th century. And that was 12 and 1300s. But it didn’t happen. The same applies with Russia. Russia had tremendous iron ore resources in Ural Mountains. There was no coal but there was plenty of charcoal you could have used. And then of course, they had coal and iron ore in Ukraine. And somehow, either they’re always too late, or were too late, or alternative, they never quite got there. And so, to me, the institutional sort of reasons, sort of cultural reasons, are really so dominant, that everything else can be overcome, I think.

Richard:00:24:13Yeah, I think it makes sense that the driving force would be the cultural and institutional backdrop, but the geographical advantages would allow those to compound. And so it’s what Adam was saying that interplay is what allow that symbiosis between nature and then nurture to then create these societies. And to your point about the US, I think it has to do with the checks and balances that the Founding Fathers created, and the power of the Congress is second to none in presidential systems. I think the US Congress has a lot more teeth than other countries with presidential systems.

Viktor:00:24:49But you have to remember that if you think of Latin America in the 19th century, they pretty much adopted US Constitution. So, what we see today in Latin America, is just changes that occurred because societal norms were not in tune with the way constitution was supposed to function. But to begin with the differences actually were not that significant. Constitutions were almost the same.

Rodrigo:00:25:14Yeah, we just have 120,000 amendments versus whatever, the 40 that exists in the US in two years, before we create a new constitution.

Viktor:00:25:24That’s right.

The Rough Ride to Industrialization

Adam:00:25:25So, the dominant driver of prosperity over the last couple of 100 years under a paradigm of freedom, liberalization, rule of law, property rights, etc., the institutional framework that allowed the West to rise to dominance, predominantly that rose, or that occurred over a period of industrialization. Industrialization was the primary wealth driver and was what allowed the West to come to dominance. But it wasn’t a smooth ride. This was an interesting part of what I really liked about the intro, or the first part of your book, right? It’s highlighting the dislocations and disequilibria that occurred, as we were industrializing, and as there were these lost decades for several generations that just never benefited from these new technologies, right? And I think that this sets the table for how we might think about the information age and how it’s different than the industrial age. But maybe talk a little bit about the early industrial age, Marx and what was happening when he was doing his best thinking and his best writing. And then what came later, and then when the movement of industrialization sort of crested. And then we’ll sort of get into what happened after.

Viktor:00:27:09Yeah. You’re absolutely right. It’s not a straight line. And there were many hiccups and many problems along the way. And it’s not surprising that Karl Marx penned his Communist Manifesto in 1848, which was really the peak of disruption of the first industrial revolution. And as you were going into the second industrial revolution. Essentially, everything around you was changing.

Suddenly, peasants didn’t know who the lord of the manor was any more. Suddenly, craftsmen who are very proud of the job they were doing, saw factories growing all around them, and they had a choice of either you’re unemployed or you joined the factory or somehow find a niche that you can be useful at. And the same applies to aristocracy. Suddenly, they found that they no longer have the same social position as they used to enjoy in the past, and that social position always came with responsibilities. It’s not just you were the lord of the manor, there were certain responsibilities that you were obliged to have. And so all of that become incredibly disruptive.

And so when Luddites were smashing looms, they were smashing looms not because they thought, oh, my goodness, they’re going to take our jobs, they were smashing looms, because they understood that that will denigrate their pride, their job, ultimately, their freedom, ultimately, their compensation, and everything else. And they were totally and completely correct. Now, a lot of people say, hey, it’s all ended up okay. And one of the things I described in the book, if you just gone into time machine and you’ve gone into early 1800, London, and you were to tell Luddites, please don’t smash anything, believe me in 30 or 40 years, it’s all going to be okay, they will smash your head because 30-40 years was basically their entire life. And it is true, productivity started to improve. As you go into the 1840s, 1850s, 1860s, our productivity started to improve, real wages started to rise. And Marx was right at the back end of the first industrial revolution. He didn’t live long enough to see disruption of the second industrial revolution.

But then that came along and the second industrial revolution had a much bigger waterfall, because the first industrial revolution is basically cotton, steam, railways. You can think of the second industrial revolution, chemical, pharmaceutical industry, combustion engine, electricity, refrigeration, much wider waterfall. And again, you had dislocations. Remember, what we discussed as terrorists, that’s back in 1870s, 1880s, they were bombing coffee shops, they were killing the Tsar of Russia. They were killing later on the President of the United States. And so again, it was another set of dislocations that occurred. And you could argue that the long war, which is the First and a Second World War was a back end of that dislocation of the second industrial age. But …

Adam:00:30:17And Keynes had a lot to say about what was going on during that period as the first industrial age had sort of passed, we were now in the beginning of the second industrial age. That’s when Keynes was penning his missives about what to expect.

Viktor:00:30:37Yes. And Keynes, one of the things he was describing, and what will happen if this continues, and if this continues, his view was in four generations, we will have nothing to do. In a sense, productivity eventually is going to be so high, and then basically we’ll be liberated from the slavery of labor. And so the way I look at it, whether it was 1850s, when Karl Marx was debating something very similar, because to Karl Marx, the idea of communism was not a totalitarian system, but rather a system of such a high productivity that basically, you’re liberated. You can do whatever you think is appropriate, from everyone according to his ability to everyone according to his needs.

And if you think of Keynes in 1930, it’s pretty much exactly the same idea. If you think of 1980s, 90s, a lot of people including people like Peter Drucker, were debating very similar issues. What will happen if technology continues to move forward? As it continues to move forward, yes, there are disruptions. Yes, there are 40-50, maybe 100 years of volatility. But at the end of that process, productivity which used to be 10 bips for a thousand years, which then rose to 100 bips after the first industrial revolution, then rose to 200 bips after the second, now we’re back down to below 100 bips in most places. That could mushroom to 500 bips, 600 bips or maybe more. And if it does, at that point in time, there is a sort of liberation, of labor, that is going to occur. And so that’s what we are facing.

But the thing is, so there is a glorious outcome at the end of it. There is a glorious good thing at the end of that. But between here and now and that final destination, lies pretty treacherous times, just like it was in the Karl Marx days. The way I look at it when he was describing Lumpenproletariat, which is a proletariat that lost his or her consciousness. They don’t know what they are anymore. When he was describing bourgeoisie and aristocracy that was completely disoriented. You can step back and say, well, it’s exactly the same thing. They have factories, we have artificial intelligence and robotics. They used to have their aristocracy, we have our own aristocracy. And so it’s exactly the same disintermediation, the same discontinuities. And the thing is that — the interesting thing to me was that the next 20 or 30 years, in my view, will be the peak of that disruption.

The Peak of Disruption

Rodrigo:00:33:23Isn’t it amazing how all of these thoughts and philosophies and books have completely been given one camp of, you’re a bad book, you’re bad philosophy and you’re good philosophy? You know, Karl Marx, Communist Manifesto, then you have Keynes and others talking about similar things, but from a different context. And yet, it’s all leading — it was just a mismatch of timing, right? It was about if there’s going to be a few organizations that are going to make all the wealth, we have to help the proletariat gain some of that wealth, get redistribution, have a social safety net; all of these things that today, are the real things that we have for a capitalist economy, are actually Marx’s ideas, in many respects.

Viktor:00:34:10Yes. Well, you can trace it even before Marx. But yes, you’re absolutely right. It’s a similar issue. Whenever you go through those periods of dislocation, you find — let’s say you have a first industrial revolution. The billionaires of the first industrial revolution, were cotton manufacturers, were textile manufacturers. If you think of the second industrial revolution, that was your Henry Ford. If you think of today, this is your IT, biotech. And so whenever you go through those junctions, a small number of people become incredibly productive. And a small part of the economy becomes incredibly productive.

And so compensation levels, whether it’s in capital or wages, goes up massively. But the rest of the economy is sort of killed, one cut at a time. And that’s why aggregate productivity cannot really increase until such time as everybody, more or less, is on the same page. But that takes decades, on average. For the first and second industrial revolution, looking 50-70 years that takes at least two generations, sometimes longer, for everybody to get on the same page. And then what you have, you have a lift. But as I said, in between, you have sort of a problem of churning waters, you have a problem of wealth inequalities. You have to remember that British was inequality, which was extreme in 1830s-40s, did not correct itself until 1910s.

Now, sometimes you can argue that those sorts of corrections require a war. In other words, this physical destruction of capital and labor, and that is true. But there are other ways of doing it. I mean, Iron Chancellor Bismarck, who was not a communist by any stretch, he was the first one to introduce social welfare system and unemployment benefits. And in 1880s, the argument was that will undermine the capitalism. That will undermine the development of Germany. It didn’t. He just took the sting out of what otherwise would have been a much more volatile period for Germany.

Adam:00:36:29So, let’s sort of move forward in time a little bit. So, we’ve crossed over the point of maximum acceleration of the second industrial revolution. Productivity has begun to attenuate again. Does that set us up for a discussion of what happened when Nixon closed the gold window, they abandoned Bretton Woods, and then that sort of, we had put a pin in that date and those events as setting the stage for what you sort of call the evolution of the Fujiwhara effect, or Fujiwhara effect, that we’re now sort of starting to see culminate. So, maybe what led to the abandonment of Bretton Woods, and then what happened once we left the gold standard, and we entered a fiat currency domain?

Viktor:00:37:35Yeah, absolutely. I describe it as Fujiwhara effect, as you correctly said, which is two hurricanes merging and reinforcing each other. And one hurricane is clearly technology and information age. That’s a human spirit. And human spirit is always invented, whether we’re in the caves or first industrial revolution or today. But the speed with which technology propagates very much depends on the cost of capital. The lower the cost of capital, the faster it propagates. It’s a bit like pouring kerosene on a bonfire. It just goes very, very quickly. And so we’re living in a world where those two hurricanes, which is technology and financialization have merged, and they reinforce each other.

Now, if you think of the key dates, 1971-73, which is getting off the gold standard, then you look at Paul Volker coming in at the Federal Reserve, which is late 70s, early 80s. And then you have Alan Greenspan in 1987, basically inaugurating what has become as a put option, that asset prices have become so critical to economic outcomes that you could no longer tolerate volatility of asset prices. So, what led us into that world? The answer, as Adam said, is declining productivity, in my view. So, in other words, productivity started to taper off.

As a productivity tapers off, we have a choice: do we accept a lower standard of living and low wealth corresponding to the productivity that we generate? Or do we somehow disregard it and insist on the continued growth irrespective of the consequences and on a continuing wealth creation irrespective of the consequences? And in late 70s, through 80s, decision was made that we need to grow, no matter what. And so the only way we can do it is by basically bringing future consumption to the present by leveraging asset prices as an additional sort of value creation beyond the productivity that you generate.

Now initially, that’s actually quite good, because what you actually get is extra fill up, extra gross. Initially, the relationship between asset prices and underlying economies are not clear cut. But then the longer you go, the more you need to generate capital and liquidity that underlying economies require. Because essentially, you need to not just underwrite this year’s GDP, but next year’s GDP as well. And the only way you can do it is by levitating asset prices higher and higher. And the further down the road you go, the more money you’re praying to generate, that money doesn’t go into real economy, it goes into assets. That’s why it doesn’t generate inflation.

And so the more you do this, the more you’re reliant on assets for pretty much all decisions. So, if a household wants to decide whether to spend or to save, corporates want to decide on CEO compensation, or share buybacks or investment, you just become committed to asset prices. And the further down the line you go, the less volatility you can tolerate. Eventually, if you don’t change economic policies, the only appropriate level of volatility is zero. There is no volatility that you can accept at all. And so part of the process is declining velocity of money, that velocity of money just keeps falling. So, marginal incremental impact of everything you do get smaller and smaller. And so the result is technology, information age is being accelerated because of cost of capital and neutral rates have to continue to fall. And the reason they continue to fall, because marginal impact of every dollar getting less and less and less as you progress.

And the lower your cost of capital, the faster you disrupt the economy. Not only are you keeping zombie alive, it’s debatable and there are various numbers you can compute whether it’s 12, or 15, or 20%, of corporates, even at a low level of interest rates, cannot pay interest costs for at least three years. And I said in most countries, 10 to 20% today. If you go back 20 years ago, those numbers would have been somewhere closer to 5%. Whether you’re creating excess capacity, whether you’re keeping zombies alive, whether you’re disrupting existing business models, all of that just becomes so much more accelerated. And the question is really, how can you break that loop as you go forward? Sorry.

Rodrigo:00:42:20I want to clear up one point. Are you saying that the low cost of capital leads to a higher level of creative destruction and therefore innovation and vice versa?

Viktor:00:42:31Correct. Because there are two types of innovation. There is inventiveness and innovation. Inventiveness, generally created by public sector. Private sector doesn’t do inventiveness because inventiveness is just too uncertain. You don’t know what’s going to happen, you can’t just commit resources to that. And so there was a pool of inventiveness that was created through 1940s, 50s, 60s, 70s, even into 80s. That pool actually is getting depleted. That’s part of the reason everybody’s discussing now that we need to invest more in a basic R&D and fundamental R&D than what we’ve been doing for the last three decades.

But innovation is what the corporate sector does what the private sector does, they’re basically taking whatever was proven to be right in size, and then when they doing the developing products out of it. And so the lower your cost of capital, the more any idea will be tried. And so 20 years ago, company A might have had three or four competitors. Today, they might wake up every day, there will be some other new competitor coming in, and trying to pinch part of the business. And so to me, the magic formula is really cost of capital. The lower the  cost of capital, the more it propagates, the faster it disrupts.

Richard:00:43:51And not to mention …

Rodrigo:00:43:53Sorry, Richard, is that a bad thing? This is where…

Viktor:00:43:56No, it’s not necessarily a bad thing. All I’m saying is that if you think from a societal perspective, people only move at a certain speed. After all, we only have maybe 70-80 years of our life after the age of 40, arguably, we can’t change anymore. Whatever the answer is, societies only move at a certain speed. The social norms only move at a certain speed. That’s why we have such an explosion of population in Africa, that you can save babies very quickly by giving them drugs, stop malaria deaths. But societal norms as to how many children a woman should have changes over decades. You can’t just change it overnight.

And so the problem is really, that societies are moving at a different speed compared to technology, and because it’s moving at different speeds, you have a difference between a higher in New York or Silicon Valley, between London and Birmingham, between Sydney and Brisbane or Queensland or whatever. You have those people within the country move at different speeds. And then the countries move at a different speed as well. Think of the First World War. Up until 1870s, France was really ahead of Germany. But then by 1910s, they realized, oh, my God, Germany has a chemical industry, pharmaceutical industry, they’ve got a car industry. We don’t have anything like that. And so countries move at a different speed.

And so what it does is it generates tensions within the country, and between the countries. And that is a problem. And that’s how one, I think, should think of it, how do you resolve it? How do you slow down the pace of change? And if you don’t want to slow down the pace of change, how do you create systems that actually reduces the societal and geopolitical pressures?

Adam:00:45:55Yeah, I think that’s a key point. It’s not that the acceleration of innovation and invention should be curtailed. It’s more that the institutions and values and political objectives in societies are unable to move at the same pace. And so there’s a disconnection, right? I really like this passage that I took out of the book. “Financialization will aggregate technology induced inequalities until either there is coordinated global action to redirect excess capital to uses that people prioritize, or societies will be at risk of total disintegration.”

Viktor:00:46:44That’s right.

The Need for Speed

Richard:00:46:45Is that where we are now?

Viktor:00:46:47We are. We are. And so the next sort of 10 to 20 years, it’s going to get even worse, because if you think of technological waves, technology comes in waves, they don’t just go on the straight lines. If you think of the first wave, it was mostly directed at corporates, PCs, enterprise software. It’s kind of the world of IBM, Sun Microsystems, those sorts of companies. Now, degree of disruption was actually relatively limited. But then after 2000, we actually got broadband network, we’ve got smartphones, we’ve got better software. And so that was the beginning of the age of Google and Facebook, and Amazon and the rest of it.

So, suddenly, it starts spreading much wider. So, editors and the journalists today are not editors and journalists of 1990s. Fund managers or analysts today are not fund managers or analysts of 1990s. Entertainers today are not the same as entertainers in 1990s. But going forward, the next stage, the third stage, it’s all about disintermediation of atoms, not just digits. It’s about replacement of factories, atrophy of supply and value chains, robotics, automation, alternative energy and transportation platforms. It’s all about physical matter, which means that the next 10 to 20 years, which you’re going to see, plumbers will find that there are self-healing pipes, so you don’t need a plumber. You will find you will be able to print a house for a fraction of the price. We don’t need the builders.

Now a lot of people say hey, you know what? It’s okay. It’s like a buggy driver become a bus driver. But the problem is with that is twofold. Number one, the speed as we just discussed. I agree with McKinsey that it’s about 3,000 times the impact of the industrial revolution. In other words, the waterfront is wider, and the speed is faster than it used to be. That’s the first problem. The second problem, we don’t feel the pain of people who have to go through it. To us technology is all good, but you were not there when it happened before. You don’t know how much people actually suffer through this process. And the third problem is that as you expand it wider and wider, it’s not just low skill and middle skills get affected, eventually cognitive skills as well, whether you agree or disagree with the timing. But I think the chances are by 2040s, maybe ‘45, even the PhDs in physics will feel it. Certainly computer programmers will feel it, they already do. I say it’s good to get even stronger. So, to me, you’ve got all of that accumulating at a faster and faster pace. And the next 10 to 20 years will be worse than the previous 20 years.

So, what policies should we have in order to keep societies intact? And a lot of people say UBI, which is Universal Basic Income Guarantee, that it’s making people lazy. No, no, it isn’t. It just compensating people for their lower degree of utility or marginal utility or marginal value. Sounds funny to say when we’re running out of people right now, because we have all sorts of disruptions. But the reality is, marginal utility of everybody is declining. So, what it does, it compensates you for it, while still keeping economists intact. It also enables over time for people to find what they want to do. Maybe you shouldn’t be a fund manager. And maybe the only reason you’re a fund manager because there is no way you can think of making money. But maybe you should be a poet, maybe you should be doing something else.

And so the concept of UBI has to be an integral part of that. But there are many other ideas, as I said, from common prosperity, if you want to use Chinese term for it, which is anything from affordable housing, education, health care, broadband, etc., to basic R&D, to regulatory changes that would need to occur. And the important thing to me is also Marshall Plan for least developed countries. We tend to assume that private sector will invest. In a lot of those places it’s not about investment, it’s about enlighten the nation that you’re doing. Because if you don’t do it, you will find there will be a billion people on the move. It will be bigger than Genghis Khan back in the 13th century. If you don’t do it, you will find that’s going to be a place for another pandemic that potentially could arise.

Richard:00:51:31Belt and Road, right? You’re talking about Belt and Road. I guess what you’re describing are some building blocks that will create the bridge to get us to where you see 20 years from now. The issue is the disruption has begun, it’s been going on for some time. The blue collar worker feels it before the white collar worker, but it’s happening to all of us as you’re describing it. And so I’ve heard you talk about in the past, how these disruptions create the fertile ground for autocracy. And this ties back to what you were talking about in the beginning of the conversation about do we need freedom for prosperity? So, I wonder if you might talk a little bit about these dislocations we’re seeing obviously, the rise of strong men across the globe. And some of the geopolitical dislocations that are coming from this. We might touch upon the Russian in Ukraine skirmish that it may or may not be about to happen. So, maybe talk a little bit about how you see the difficulties that might arise as we create this bridge forward.

Viktor:00:52:35Yeah, what we’re basically describing now is the Maslowian Disappointment, that people are disappointed. Not necessarily they’re worse off, they’re just disappointed. They’re disappointed that their children are not going to have the same future as they had in the past. Or they might be disappointed that they’re not adding as much value as they were hoping to add when they were younger. Or they’re disappointed that their career path doesn’t look anything like what they expected their career paths to be. And so whenever you have Maslowian Disappointment, people reach out to extremes.

The same happened before whether it was Stalin, well, Stalin was a bit different, whether it was Hitler or Mussolini. One has to remember that the US came very, very close to that in 1930s, as well. And so they always reach out to those extreme answers, because people generally speaking, don’t really care as much about democracy or non-democracy. I mean, some people do, but most people don’t. But what they do care about is that they want to feel good, they want to feel that somebody is actually acting on their behalf.

And populists are very good at convincing people that I have identified the enemy, and I understand your pain and what you go through, and I will be working for you. And it’s amazing through the ages, how many times people are actually convinced that that is the right answer. And so extreme left and extreme right are actually not that much different. They both amplify the state. I think … was quite correctly highlighting that there is no difference that much between fascism and communism. Both of them are magnifying state, both are big for the bigness sake. They both do the same thing.

Richard:00:54:26Totalitarian at the extreme. It’s the Horseshoe Theory, right? They’re both totalitarian extremes and heavy government.

Viktor:00:54:32Correct. There are some differences. For example, the extreme right tends to be xenophobic. They tend to be exclusive, they tend to be us or them, they tend to be localized. They also tend to have sort of moral preconditions whether it’s religious preconditions or abortion, procreation rights. Extreme left, on the other hand, tends to be more international, they tend to be less xenophobic. They tend to be more inclusive. They want to reshape a human being, rather than determining what your private matters really ought to be. And so that there are differences. But the key that links them together is that the answer is the state. The state has got the solutions for you. And that’s why a lot of policies that Elizabeth Warren or Bernie Sanders were propagating are rather similar to what Donald Trump actually wanted to do as well.

And so the question becomes, is it the right answer that the state is the answer, because China genuinely believes that to be the case? As we said, in the last 500 years, that was the wrong answer. But one of the things I described in my book is that Nikolai Bukhari started …, which become a planning agency of Russia. He also started our New Economic Policy in Russia in 1920s, which basically tried to combine elements of private sector and public sector, but with a public sector dominance and direction. Now, it did not work. And he got shot, of course. But the thing is, the same sort of thing was tried by Allende in Chile, the same sort of thing was tried by many others, … all of them failed.

So, one of the things the book asks is a socialist calculation debate that was raging in 1930s, 40s and 50s, which basically argued that central allocation of capital could be more efficient than Adam Smith’s invisible hand? Is this debate over because it has been over since 50s? But is it over? Or are people like Bukhari and Allende, for example, were just ahead of their time, they did not have the computational means in order to allocate the capital, something that Xi Jinping has today in a much better stance than Bukhari who used to have those little files, he was counting nails and galoshes and stuff like that, trying to determine what are the right prices and the right supply. So, that could be one area that you could argue that maybe, maybe we are now in a position, that central allocation of capital could be better. And after all, private sector can stuff up things very badly, and can misallocate capital incredibly badly as well.

The other area is inventiveness. And if you think of inventiveness, in the past, the answer is that if you don’t exchange views, if you don’t exchange opinions, if you don’t build on the shoulders of others, you’re finished. But now, increasingly, artificial intelligence picks up a lot of this. It doesn’t have or require the same degree of freedom. Neither does it require the same degree of information interchange, what the previous generations required. So, can you actually have inventiveness, because think of China, the greatest innovator of the last 50 or 60 years, but very poor inventor, invented almost nothing. Literally, almost nothing. And that is why Donald Trump was so successful in his campaign against Huawei. Because China, it still draws on intellectual capital of the West. Without it, nothing functions.

So, can China become inventive in a society of unappealable authority, in a society that doesn’t have the same degree of freedom that normally you would associate? The answer, maybe they can. Because as I said, as human input becomes less, maybe you can do it. And so that becomes the essence to say if we can actually allocate capital differently, if we can invent differently, maybe the degree of freedom that we require, might be less. And — Yeah, go ahead.

Inventiveness and Freedom

Rodrigo:00:58:58Can I just clear up, one thing that I’m missing here is you mentioned how there’s a difference between innovation and inventiveness, right. Innovation is the iterative process where you grab and idea that’s brand new, and you iterate and make money on it. You’re talking about the state in the United States, or that the construct of United States allowing for inventiveness and the construct of China not allowing for inventiveness. But you also mentioned that the state is inventive and the private world, the private companies are more iterating with that inventiveness. So, is it that the freedom allotted in the United States within the government allows for inventiveness and there is no freedom in the political system in China, and that stymies inventiveness? Is that what you’re saying, that the inventiveness comes from the central government, but just the capitalist central government of the United States is more inventive?

Viktor:00:59:55No. Well, essentially, inventiveness again is ability to explore something without necessarily having a financial objective at the end of it. There might be nothing at the end of it at all. You’re just asking a question. And maybe there is no answer to the question you’re actually asking. Private sector is not very good at that because it doesn’t really conform with the way private sector works with objective, with its quarterly reporting or otherwise. I usually say, if a  pharmaceutical company found a substance that will help humanity but will really help their competitor, not themselves, would they actually develop it? And the answer largely will be no, they won’t.

And so it’s not necessarily that it’s capitalist and not capitalist government. It’s the fact that in the West, you have a recognized institution of knowledge, institution of research. They are by and large, independent, they have their own charters. And there is a history of allowing scientists just to explore. That’s pretty much what was happening in the US in 50s, and 60s, 70s, even into 80s. Now today, applied science called innovation applied science, applied science dominate not only in China, but also dominates in the US.

Because what started to happen, the same idea of return on capital, efficiency, the likes of McKinsey have … to pay for, for this. There’s this idea that the government should be functioning as an efficient enterprise, reviews, constant publish or perish. And those sorts of ideas have swung everyone to what’s applied research rather than the basic or fundamental research. That’s why US used to spend two or 3% of the GDP on applied research. Now it’s more like 50 bips. And even that is doubtful how much it’s actually is fundamental.

So, it’s not just China’s not doing a lot of inventiveness, the West is also not doing a lot. And so what we need to do is basically resuscitate it. You know, Bell Labs was funded by the government, NASA was sponsored by the government. And a lot of the things were funded by the government.


Rodrigo:01:02:17DARPA, yeah.

Viktor:01:02:18DARPA is funded by the government. And so it’s a can you switch it back to replenish the pool of inventiveness, the pool new ideas? And the answer is that’s what we are debating in the West now, how much fundamental research should be going forward.

Rodrigo:01:02:36Isn’t it that failure costs too much in today’s political landscape?

Viktor:01:02:41There are many things baby boomers like myself have to pay for. Because there is no question that generation of baby boomers brought in an incredible degree of freedom that was not there before. Whether it’s the freedom to divorce, the freedom to marry anybody I like, the freedom to change job, the freedom to move countries. I moved many countries in my life. So, that brought a lot of freedom. But the consequence of that, it was a freedom of opportunity, not a freedom of outcomes. And so the result was a desire for success, desire for growth irrespective of consequences, desire for wealth irrespective of consequences. That had many consequences, many implications, whether it’s environmental degradation, whether it’s financialization, whether it’s low neutral rates today, all of that is negative.

And the new generation coming up, anybody born after, call it 1980-85 onwards, the new generation have different views. So, one of the interesting things is to look at Freshman Surveys in the US. A lot of the good thing about it was exactly the same questions asked all the way to 1965. Exactly. And they asked it from the same people who’re just entering college. So, the same age, you can’t say if they would have aged they would have changed their view, it was exactly the same people.

And the interesting thing to see how in 1960s, and even into 1970s desire to help society, desire to join Peace Corps, 20% of graduates wanted to join Peace Corps like that, rather than making money was a primary motivating force. If you’re saying from 80s onwards, one of the things started to happen, enrollment in the business schools and finance schools has gone through the roof. Enrollments in arts or anything to do with art went down. The primary motivation became money and being successful, rather than anything else.

The interesting thing, since millennials started to go into college, call it early 2000s, it’s interesting to see how that survey started to shift, and that the younger people still want money, don’t get me wrong, they understand that money is important. But it’s money to achieve certain things. And what they want to achieve is greater society good or environmental — or tackling environmental degradation or something else. If the Peace Corps really of any substance, they probably would have joined Peace Corps as well. And so you can see how they’re returning back to what people felt back in the 50s and 60s.

And so the result is that they will turbocharge political change, which in turn will enable a lot of economic changes to occur from UBI to everything else that comes through. You can even calculate for most countries when this sort of rollover is going to happen. Because it’s when are they going to become plurality? In the US, it’s a bit hard because unlike Australia, for example, US does not have compulsory voting. So, there is a discrepancy quite often between demographics and voting public. But even they you would argue that to do they’re 20-25% of votes, but they already around 40% or so of the demographics. Give it another 10 years, they are bound to be in a majority. And when they are in the majority, as I said, politics will change.

So, if you’re think of this transition, do you have disruption coming up? Yes. Is that disruption going to get stronger? Absolutely. Can we unhook ourselves from financialization? No way. Do we need to change policies? Yes, we do. How quickly can we change policies? Only as quickly as society is willing to tolerate. Because if you think about it, center is still holding. So, you have extreme right and left, but center is still holding, and center doesn’t agree with all the things or most of the things we’ve just discussed. So, what you need to do is to see the center weakening, and extreme getting stronger. Now, that’s a recipe for more dislocation, for more volatility. But at the same time, what it will do, it will usher different policies. So, this 10-year period, I guess, will be the period of the greatest volatility.

The other thing I just very quickly will highlight, normally, the structure of labor market is changing, the role of capital is changing, too. And that’s why I basically argued in the book, if role of capital and function of capital and the function of labor is changing, it is no longer capitalism, at least not as capitalism as we traditionally think of capitalism. So, it’s not just labor, our capital itself is changing too.

Millennial Confidence in Government

Adam:01:07:52I think one thing too, that just to sort of tie a bow around Rodrigo’s question about the role of the private sector versus the public sector in invention versus innovation. And then bring that forward to the present. And contrast it to the sort of 50s, 60s, 70s and like you say, even into sort of the early 80s, coming into the 50s, 60s, 70s and early 80s, there was still a very high trust in institutions, right. And certainly in the earlier decades of that period, there was a very high trust and belief in the government’s ability to effectively allocate resources. And then I think the boomers sort of came along with Reagan and Thatcher and supply side economics and Friedman, and we sort of abandoned this belief that the government could effectively allocate capital on behalf of the citizens.

And with that lack of faith, then there was just a consistent decline in the amount of funding that government was granted in their ability to like fund stuff, like DARPA, or fund primary research. You saw NASA sort of fade into the background and all of those major scientific institutions, right. And I think what’s interesting, I hear you say that surveys in the 50s, 60s, 70s, observed that people going into college were public service oriented. But I think that they were also they had a high conviction and confidence in the state and the states institutions and government.

I wonder, I think I agree today the surveys are saying that the millennials have much more of a public service orientation. So, there’s an overlap there with where people were thinking in the 40s, 50s, and 60s. Would you say though, that they have the same impression and confidence in public institutions in government? Because I think that that’s a necessary condition for them to want to use the government institutions to effect the change that they declare that they want.

Viktor:01:10:17Totally, totally. If you ever think about it from, call it, mid-40s until late 60s, there was a great deal of trust in what the government will do. Then there was a period of turbulence from late 60s to, call it, early 80s, where people didn’t really know what to do and how to move, how much trust. What is the right societal consensus? What should be the role of individual freedom versus societal freedom? People tend to forget that 1950s and bulk of 60s were not liberal era at all. Most people accepted a great deal of restrictions on what they can or they cannot do, as a trade off against the government acting on their behalf against the gross rates, middle class creation, creation of suburbs, interstate highways, GI Bill, educational services, and the rest of it. Now all of that broken apart, are in late 60s. And from late 60s to early 80s, there was a chaos. Now, people still wanted to believe the government but there was a chaos. There was no societal consensus. Now that societal ..

Adam:01:11:26Yeah, Nixon, Vietnam, the initial hippies, Woodstock. Yeah.

Viktor:01:11:30That’s right. Those societal consensus emerged in early 80s. And you’re absolutely right, baby boomers brought on their shoulders Ronald Reagan, Ronald …, Margaret Thatcher, Milton Friedman, and the rest of them. And that consensus, which private sector knows the best, our public sector is inefficient and should be constrained on what public sector does. Private sector solutions are always superior to anything that public sector does. That consensus was pretty strong all the way through 80s, 90s. And one could argue pretty much almost the GFC, which is call it, 2007-2008. Now, then that consensus disappeared, and so we now have maybe a decade, maybe 12 years of chaos, that society does not agree what consensus should be.

Adam:01:12:25Did it disappear, though? I want to push back on that, because my observation of what happened in ‘07, ‘08 was that the — it’s not that there was a shift in a political consensus away from the private sector and towards the public sector, but rather, almost there was an acceleration of the view that the private sector is the only path to take us out of the turbulence that we observed in 2008. The role of government to subsidize the private sector’s ability to increase productivity. So, I think it’s an important distinction.

Viktor:01:13:12Absolutely, absolutely. And that’s why it takes years. Remember that in 1968, Richard Nixon used to talk about the silent majority, right? Now, clearly in 1968, there was a lot of anxiety in the society. There were very large sections of society that did not agree with what US, or for that matter, in other countries, 1968-69 was a fire all over the place from Paris, to London, to Germany, to Brazil to everywhere. So, a very large sections of society, which was the young baby boomers, did not agree with society as a whole. But Richard Nixon was right that there was still a solid majority that actually agreed that we must continue. And so a lot of Richard Nixon policies continued what LBJ was doing. He hasn’t actually changed those policies at all. So, think of Richard Nixon and Gerald Ford presidency as a bridge from one world to another.

And what happened in ‘07-‘08 is that it was such a shock to the system, that increasingly millennials were convinced that look, something needs to change. But the middle ground held. The middle ground was still dominant. And so you already have seen displeasure in the marketplace. You already seen disappointment starting to spread, but it’s not dominant yet. And that’s what I’m saying, I see in the US 2028-2032 or something like that, probably will be the right time, when the new consensus finally will emerge. But right now you have very large sections of the population who do not agree with what you’ve just described, and they don’t agree with that consensus, which was with us since the early 1980s. So, in that respect, you’re totally right. We are now on the bridge between A and B. And right now …

Adam:01:15:08It’s a fork in the road.

Viktor:01:015:09Yeah, well it is. But if you assume that younger people will get a larger cohort, which they must? If you also assume that baby boomers will never change their view, which they arguably will not, but they will become less relevant, then you have to say that there will be a shift occurring, and there is nothing to stop that shift. In a sense, the technological disruption will get more robust, financialization is unstoppable. Income and wealth inequalities will continue to rise. There is no answer right now to any of that.

Rodrigo:01:15:51Right. So, just — I want to clear something up. So, what you’re saying, Adam is, what has happened is that we have used the government through the Federal Reserve, for example, to continue to facilitate private entities like banks, to financialize further the economy, right? That’s the government’s role has been, listen, let’s prop up private companies, and give them everything that they need because they are the solution. And what’s happening now is you have a millennial group of individuals that have a conscience and want to do better, financialization is not going to fix their problems, but rather may be fiscal policies, UBI. And that is the bridge that we want to get to, that has yet to occur.

Viktor:01:16:39Correct. So, what we’re doing is trickle-down economics. We’re basically saying what we will do is to create an environment that will be conducive for private sector to lead forward and make decisions that we think private sector should be making. Now, the problem with that is that in a country like China, you can do that, because there is no independent central bank, there is no commercial banks, there is really no private sector in a conventional sense. So, there is a direct line of sight. This is what I want to do, this is how it’s going to happen.

Now, even in China, it’s not easy. But in the West, we don’t have that line of sight. And so all the money that’s been created over the last 30 or 40, decades, basically stayed in the cloud of finance. That’s why cloud of finance, so capital is now 5-10 times larger than underlying economies. And that’s why they are the tail that wagging the dog, or should say, cloud or finance is a dog and the real economy, just a tail. And so the result is, that money never goes to where people want to see it. Instead, it’s gone to Picasso paintings, Ferrari cars, Hampton mansions, Miami, whatever. It’s gone to all sorts of places. And so the debt generated high inequalities, they generated disinflation rather than inflation, because that money never reached the ground to begin with.

And so the next step is to say, one way of doing it is for the government to commandeer the capital. Basically, we have excess capital, we have more capital than we know what to do with. Instead of letting private sector make those decisions, or lack of decisions, because they didn’t decide, they say, do you really want me to put money into building roads? I think I’m okay with finance. I’ll just keep it in finance. And so what the government can do is to commandeer that capital through a variety of carrots and sticks. And that’s your fusion of fiscal and monetary policy. The problem with the fusion of fiscal and monetary policy, as soon as money reaches the ground, it becomes inflationary and reflationary at the same time.

And so the question is, how do you balance a system, which is based on rolling bubbles, which is essentially what we have? The only way we can keep neutral rates from falling through the floor, and the only way you can generate growth is by rolling one bubble into another bubble. So, how can we reconcile the system based on rolling bubbles that requires ever-declining cost of capital and disinflation, essentially, into a system, which by nature is more reflationary and inflationary? How can we move from here to there without causing massive dislocation? And the answer, it’s hard. But that’s the answer.

The answer is, and that’s where millennials are coming from. That’s why if you think of Kelton’s book, Stephanie Kelton, a lot of people propagating MMT, nobody really listened to them for a very, very long time. Now it’s a bestseller. So, what it tells you is that academia is ready or getting ready. Policymakers are getting ready. Society is gradually absorbing some of those ideas, but it takes time. Remember, science progresses one funeral at a time. So, you need to have a time before curricular changes, you need to have a time before new PhDs are going to come through. Federal Reserve cannot throw away the system they have without putting something in its place. So, to answer your question, yeah, it’s a fusion of fiscal and monetary policies.

Displeasure, the Catalyst for Disruption

Richard:01:20:38The problem I think that we need to address, you were talking about the displeasure in society has not yet peaked. So, it’s still segregated to minorities. But I would argue that the lack of trust is, if not at peak, I would say, it permeates now a majority of the population. And obviously, this has to do with the information and our information bubbles, and all these things. So, I wonder, I think the mistrust in institutions, tying this back to the great financial crisis, I would argue that our trust in institutions is probably close to a low point because we don’t trust the government to do the right thing.

But we also don’t trust capitalism or private enterprise, because in a lot of ways they’re perceived to be crony capitalism, and to have this regulatory capture and special interest groups sort of controlling the game and rigging the game, keeping social mobility from happening, all these things. So, I wonder, is this the catalyst for this potential disruption that you fear might happen, but you’re hoping there are solutions to keep us from that brink?

Viktor:01:21:51Yeah. Don’t get me wrong, I think dissatisfaction is very high. Cohesion of policy is not high. So, in other words, everybody is dissatisfied. Whether you’re in Ohio, whether you’re in Chicago, whether you’re in Miami, whether you’re in New York or LA, everybody’s dissatisfied. So, don’t get me wrong, dissatisfaction is very high. Lack of trust is very high. Where we don’t have cohesion is what is the answer. So, very large portions of society basically says we need different policies. But then there is a middle, which basically says no, the problem we have, is it because we tried to change what can be regarded as a pure liberal capitalism. We actually reneged on the basic ideas that would have delivered us a much better future if we just stuck with them, rather than changing the policies. So, dissatisfaction is at the peak. I don’t think it’ll come off, I think dissatisfaction will continue to grow.

Trust in institutions of state in most countries is low. Again, it varies country by country, admittedly. Countries with a relatively low income and wealth inequalities tend to have a high level of trust. Anglo-Saxons, particularly US, which has higher inequalities tend to have a much higher level of distrust of the system. So, it varies. But all countries are reporting pretty much the same trend. The level of distrust is high. Where we are not yet at the point is to say, this is the answer. Now, one could debate whether FDR’s new deal would have come across or would have succeeded if there was no crash of 1930s. And one can debate whether it would have survived if there was no World War Two. But the combination of a crash and World War Two basically created necessary and sufficient conditions for change. And then society coalesced and that coalescence lasted more than two decades, all the way from 1945 until late 1960s.

Now, if you think of today, we have financialization, technology, disruption, we have a global financial crisis, we have COVID. All of that creates necessary but not yet sufficient condition for societies to coalesce. The way I compare it because I was born in Russia, Ukraine, is I compared it to 1905 revolution. Conditions for revolution with inequalities, starvation, terrible kleptocratic systems, they were there, but they were not sufficient. It took World War One, to create a real revolution in 1917. And so that’s the way I look at us today. We have a lot of necessary conditions, but they’re not yet sufficient.

And so what will be sufficient? Well, COVID-24, COVID-26 might do it. I don’t know. What else? Geopolitical dislocation might do it. You could accelerate the process. Alternatively, you just wait. And as you wait, gradually electoral changes, as… changes, politics will change by definition. Today’s Democratic and Republican Party will be looking very different in the US 10 years from now. If in Australia today’s sort of Labor Party or Liberal Party would look very different in 10 or 12 years’ time. So, to me, that’s what it is. The unhappiness is there, distrust is there. I think it will continue to grow as we progress forward. But we’re not ready yet to agree what are the answers.

Getting From Here to There

Adam:01:25:42Well, even if we did, were ready to form consensus, I mean, I read through your prescriptions, I found them compelling. The hiccup, I guess, is it’s critical to move capital out of the cloud of finance, down to the ground at the real economy level. But we can’t do that, because we don’t have sufficient productivity for the real economy to absorb the excess demand that would occur. How do we solve that problem? Right? Because it’s important for industry to invest. I mean, what we’ve seen over the last, especially the last decade, is the private sector is not investing in new capacity. Instead, they’re recycling capital back into the cloud of finance, through buybacks, etc., …

So, we haven’t any sort of incentive for the private sector to invest in the excess production required to absorb the excess demand, as we move. So we go to a UBI, which I endorse, that moves money from the cloud of finance into the real economy. You’re creating excess demand, and you’re creating excess demand with the people with the highest marginal propensity to spend. So, that’s an amplification mechanism on the propensity for inflation. Even if we had consensus, how do we get from here to there?

Richard:01:27:25Viktor, just before you answer, I just wanted to add a point. The issue with financialization is the second order effect that is leverage. And so once you start to unwind the system, what it does to collateral, and so it’s that it’s that idea of Minsky Moment. Viktor mentioned this maybe an hour ago that you can only have low or zero volatility. But once you start to unwind collateral, and you’re bringing down the leverage, you’re going to accelerate, and you’re going to have this phase shift into high volatility, and the amount of money that is in the cloud is going to be reduced to a large extent. And it’s not going to be nearly enough what you thought you were bringing down to the real economy.

Viktor:01:28:07Correct. And in fact, it will crash, it will absolutely crash realistically, very quickly. Because one of the charts I like is money supply gross versus nominal GDP. And the difference between those two lines is really asset prices. This is your house, this is your 401K, this is your pension. So, if you move abruptly, people will discover they have no pension. Their 401K is worth nothing. Their portfolio managers actually haven’t made any money. It was just money supply growing faster than nominal GDP. And as soon as you converge those two lines, your pension is gone. And so that’s politically and socially completely and utterly unacceptable.

Adam:01:28:50No, but Viktor, the alternative is also unacceptable, right? The alternative — Okay, go ahead. Yeah.

Viktor:01:28:57Yeah. So, the question is, how do you transit from one to the other? Well, the answer is gradually, carrots and sticks. So, for example, very soon any company doing share buybacks will be penalized. I’m confident. It’s only a matter of years before that’s going to happen. Anytime that CEO compensation reaches 300 times, 200 times whatever, average wage, they’re going to get penalized. And then there will be sticks and carrots whereby the government encourages and underwrites effectively for private sector to relocate the capital back into the project, still giving a return to private sector, don’t get me wrong. But it’s going to be carrots and sticks that gradually moves the capital into areas outside IT, software, because if you think of US gross fixed capital formation for private sector, in the last 15 years, 50 to 55% was intangible.

Now, if you go back to 1970s, that would have been around 10%. So, when people say companies don’t invest, that’s not true. They just invest to replace you. They just invest to increase efficiency or reduce your pricing power. But people want to see roads and bridges and factories, and they want to see capacity coming. They want to see something real. That’s one of the things you can argue about China, that China is trying to disconnect the digital and finance universe from real economy.

One of these things Marxists are very big on is what they call fictitious capital versus productive capital. Now, if you think of fictitious capital, that’s sort of your superstructure. It’s your culture, political institutions, finance. Real capital is real stuff, is what you do on the ground, its products, its goods, it’s whatever. And so one of the things communists believe is that fictitious capital multiplication have to be kept under control. Because capital basically has a tendency of multiplying for its own sake. It doesn’t actually do anything other than just multiplies for its own sake.

And so one of the things China is trying to do is instead of digital economy and finance economy, controlling real economy, tried to flip it the other way. Now, that’s not an easy task to do. But at least that’s one of the reasons why Alibaba and … that occurred in China. That was, in my view, one of the reasons they’re trying to do that. In the West, we can’t flip it like that. That’s, we don’t have the tools or society or political system to be able to do it. We have to work with private sector. And so it’s a mix of carrots and sticks to underwrite it.

People tend to forget that Fred Trump, Donald Trump’s father, or Bill Levitt, when they were building suburbs all around US in 1950s and 1960s, remember, they were bulldozing the size of Rhode Island every year. When they were doing it, government underwrote all of this. Yes, it was done by private sector, but the government underwrote all of it, just like they did underwrite the Interstate Highway System. The same applies to education through the GI Bill. And so it’s not that you completely get rid of private sector. I think in the West, that’s not a feasible answer, and probably not a good one either. But through carrots and sticks, you can actually encourage it. But to do that, you have to have societal cohesion, because we still argue that debt is real. Money is real. None of it is real. It’s digits. None of it is real. But we still feel it’s a debt that needs to be repaid. That we’re saddling our children and grandchildren with trillions of dollars of debt that needs to be financed. But that’s an absolute nonsense. But most people actually believe it.

Richard:01:33:04Now you sound like Stephanie Kelton.

Viktor:01:33:07Yeah. And I think it’s true. And I think it’s true. Now, I wouldn’t be the first one to say, look, if we can go back to 1980s pre-technology, pre-financialization, I will do this. But the problem is we can’t travel back in time. So, the only thing we can do is to go forward. And if we go forward, if we continue with the current policies, as Adam correctly said, it’s going to get worse. Interest rates everywhere will be negative, neutral rates will be deeply negative, inequalities will continue to rise, the … will continue to fall, eventually societies are going to blow up.

So, you say okay, how do we shift? Well, people say just stop doing it. As soon as you stop doing it, the vigor of private sector will just emerge like a Superman, and everything is going to be fine. Total nonsense. Private sector will collapse on the spot, if you actually tried to do this. And so the next step becomes, okay, if it has to be public sector, which clearly has to be in my view, how do you structure it in a way that keeps as much freedom as possible, and as much free space as possible, recognizing that we’re all going to be less free as we go forward, recognizing it’s not going to be returned to the glory days of baby boomers. And the freedom we enjoy, either traveling between countries or migrating or marrying or changing jobs or whatever, recognizing all of that. How can we keep enough of that freedom?

And the answer is slowly and gradually, the public sector needs to change. But for them to change we need to stop being preoccupied with debt, stop being preoccupied with the idea that public sector investment is automatically inefficient. Get rid of all of that. But even if we do get rid of all of that, it’s a very hazardous task, as you correctly highlighted. Because you are inviting volatility, basically. And if you’re inviting volatility, god help you, because the impact it will have both on the financial economy and real economy will be unimaginable. And so that makes it very, very hard. And therefore, from an investment perspective, instead of trying to play value versus growth, or thematic, or quality or whatever, I just basically look at it and say, okay, which areas have very strong circular drivers going forward.

And to me, those areas are everything that we need to change. So, that’s your common prosperity, to use Chinese name, or maybe we can invent a better name for it. It’s things like replacement, and automation and replacement of humans, mechanization of humans. New universe, including entertainment of humans, social geopolitical disruption, new transport platforms, new energy platforms. And then you say, but it’s not all the same. It isn’t. Because clearly second generation digital consumer platforms are sunsetting. That’s your Facebook’s, that’s your Google’s, that’s all of them. Clearly, they’re sunsetting.

But on the other hand, they will continue to be incredibly profitable. But then there are other things we need. We need a lot of materials to build new age. That’s your copper, your nickel, your cobalt, to lithium, your semiconductors. We need capital goods companies, actually to build it. We need new startups to actually operate it. And so instead of being so hanged up on the ideas of tech, or ideas of growth, or ideas or value, instead of doing that, just get rid of all of that and look at companies that you think, or themes that you think are going to drive you.

Rodrigo:01:37:12Yeah, we’re certainly are on the camp of a decade of higher inflation volatility is what Adam has nicknamed it, right, this idea of periods of massive inflation, because there’s a fiscal spend or an excess liquidity …

Viktor:01:37:27Sorry. I prefer to look at it as a pendulum rather than — Because what happens is that we would have had a period of strong consistent inflation, if we had societal consensus, but we do not. And so what we’re going to have, we’re going to have an inflation spike and boom, disinflation. And that inflation spike and then boom disinflation again.

Richard:01:37:52But does that help with the debt load, because everybody talks about too much debt in the system. You say we got to stop being so hung up on it. But in nominal terms, inflation would help alleviate part of that debt load or the burden of debt to society.

Viktor:01:38:09But we can’t generate inflation, that’s the point. The point is that disinflation is too strong. You have technology, you have financialization, you have debt, you have commitment to asset price, you have demographics, you have extreme wealth inequalities. So, the background is incredibly disinflationary. And the only thing that creates inflation is when the government puts a thumb on the scales. And when it does, it spikes. But as soon as the government takes the thumb off, disinflation takes control again, until again, they’re going to act.

And so my view was, it still is that yes, there is a period of inflationary pressures. But we are facing the biggest negative fiscal deltas since World War Two. We’re facing the biggest negative monetary delta, forever, pretty much. And without cyclical recovery, the chances are, disinflation will come back very quickly, probably into early ‘23. And that would imply the Federal Reserve instead of tightening in ‘23, or other central banks doing the same, might need to turn around, just like they did, if you remember, in August, September 2019, when we had a heart attack in the repo market.

The Federal Reserve changed their course six months before COVID even sort of arose anyway, globally. And so to me, that’s our future and that could go on for 10 years. And if that is the future, that’s a very volatile, as you correctly said environment, whereby central banks will be struggling to control and corral risk premia across debt and across equities.

Rodrigo:01:39:58… — asset management once more, right? I just think this is a decade where those that can navigate that actively will do better than the four basis points SPY allocators.

Viktor:01:40:10Theoretically the answer is yes. The other problem is when I was a young man back in Sydney in the mid-80s, we didn’t even know relative PE, right? EV/EBITDA just come up, it was just one of those hunky little things that came out of the US, and we started using that sort of stuff. There was no consultants by and large. And then money was managed by people because they managed money, and the kind of people trust them. So, you’re absolutely correct, theoretically, it is the best time for active fund managers, so long as we don’t have consultants.

Rodrigo:01:41:01That’s the bridge we need to burn.

Viktor:01:41:03And the problem is the way the industry has evolved, the ability of fund managers to do their job has declined so dramatically that even though what should be the best of times, might not necessarily be so.

Richard:01:41:24You’re talking about gatekeeping, to a large extent.

Rodrigo:01:41:28Probably, regulatory requirements and constraints, and consultant constraints on the portfolios they prefer, that’ll slowly have to change as it did. I mean, look, in the ‘00’s, it was the alt sleeve for most institutions was hedge funds. The alt sleeve today is private credit and private equity. By the tail end of the next decade, they’ll switch it back up to hedge funds at the wrong possible time. Right?

Viktor:01:41:54Well, it could happen, it could happen.

Belt and Road and Disequilibrium

Richard:01:41:56Viktor, I wanted to go back to your point about fiscal being the lever that when governments are willing or able, they’ll press their thumb down, we’re probably coming out to midterms in the US where by all accounts, the sitting president is going to be hampered and unable to push a lot of his policies forward. But then you have on the other side of the world, China and Belt and Road Initiatives and ability to spend. I wonder, how much do you think, or to what extent do you think China can pick up some of that slack? And the amount of money that they’re dispersing to Central Asia and even to parts of Eastern Europe, right, that entire Belt and Road geography to counterbalance the fiscal cliff that you’re describing to the west? And what does that do for the geopolitical equilibrium that we seem to be finding ourselves in sort of a disequilibrium more and more?

Viktor:01:42:58The interesting thing to me is that not only the West doesn’t have sort of consensus, what to do, neither does, in many way, China. Because China is treating and a lot of Chinese treat Belt and Road as kind of commercial transaction. They’re even structured as actually commercial transactions. That’s why so many countries are beholden now to China. And China actually requires repayment or they take the assets or whatever. So, China developed Belt and Road as a good idea, but they’re still approaching it through the lenses of capital asset pricing model. They’re still approaching it through the lenses of corporate finance, rather than regarding it as something that will drive productivity on a global basis, something that will occupy factories in China itself, and something that will reduce geopolitical, health care and social pressures.

And so what we have seen over the last 18 months or so, China actually has been downscaling a lot, Belt and Road, and they’re investing less and less, which to me is a mistake. I viewed Belt and Road, as a sort of thing we should be doing, provided that it’s structured properly, because a lot of the countries in the less developed world are kleptocratic. So, if you give them the money, they’ll just steal the money, and you’ll get nothing. At the very least when China comes in, at the end of the day, there will be a bridge, there will be a road, there will be a power station, there will be a water treatment plant. Quite often, Chinese will stay behind to operate it or they send the locals to China to get them trained.

So, it’s actually a much better way of doing it than just dispersing the money to those countries and accepting that maybe half of it will just disappear somewhere. And maybe the other half will be in some form deployed. So, I actually felt that that’s actually the right way forward. And my idea was that Europe, or European Union should combine with China and spend 10-15% of their GDP on those programs. Because if you think of a billion people coming up through Africa and parts of Middle East, if you don’t do it, they’re going to be on the move. America is isolated, as Adam correctly said, two oceans. Yes, you have people from Honduras coming up, but it’s nothing in the quantity that China and Europe will be seeing if you actually don’t do it.

And so to me, that would have been the most obvious answer. But China is hesitant and China is reluctant to accept that that is actually the answer. Are they doing it for geopolitical purposes? Yes, they are because they — countries like Russia or China, they don’t have friends. They either have vassals, or they have enemies, but they don’t have friends. And so they don’t try to build this area. So, there is geopolitics involved. But there is something bigger than that. And I think Belt and Road could be the type of initiative, because think of it as a Marshall Plan.

Rodrigo:01:46:13Yeah, I was going to say isn’t it the …

Viktor:01:46:17Yeah. It’s less enlightening because remember, when America created the Marshall Plan, it was designed to help Japanese or Germany to help themselves. It was not leveraging back in the US, it wasn’t doing any of that stuff.

Adam:01:46:31So, it was in the spirit of benevolence.

Richard:01:46:34Not so much benevolence. It was trying to stop communism from spreading and they were trying to keep….

Viktor:01:46:39Absolutely, absolutely. There are geopolitical agenda in both cases. But the thing is China is sort of reluctant, looks like they’re reluctant, which they shouldn’t be. Now what is happening however, that clearly, there is an Anglosphere forming, there is a Sinosphere forming, Europe will have to make a decision. I think Europe is too big to be small, too small to the big, kind of like India, in a very similar sort of position. They would need to decide how they create their own thing or do something else. But clearly, we increasingly will be residing in blocks, both for trade, for manufacturing, for critical commodities, as well as for movements of people. Increasingly, it will be easier within the sphere than outside the sphere. So, clearly, that is forming.

And I think internal cohesion, sort of the internal development of China is now very much internal. In other words, sponsoring domestic. Whether it’s domestic technology, whether it’s domestic consumption, linking up with Russia, Central Asia, Turkey, Iran, parts of South Asia, parts of Southeast Asia, parts of Africa. So, clearly we are having blocks. Those blocks does not necessarily mean war. And in fact, they will continue trading, they have to. Anybody who thinks you can decouple is just nonsense. But just like when something was coming out of Soviet Union to the France, if it was oil, okay, get through. If it was a magazine, French will look, okay, what is this?

On the other hand, if it was Life magazine of the US, they’ll just wave it through. Okay. You’re good to go. So, are we going to have more restricted information flow? Yes. Are we going to balkanize internet in some form? I think the answer is yes. Are we going to have more restricted transfer of technology and know-how? The answer is yes. Are we going to have more restricted educational opportunities or skilling opportunities? I think the answer is yes. But if you want to send us bulk chemicals, I think that’s going to be fine. I don’t think that’s going to be an issue.

Richard:01:48:57Deglobalization, wouldn’t that be inflationary to some extent, and won’t that push supply chains? Because a lot of people are talking about how the US has now realized that some critical production, including pharmaceuticals have been offshored to China, and now China is this geopolitical foe that they’re so unsure of. Now they need to bring that back, onshore those productions back. Won’t that transition, maybe for a brief period, supersede the demographic, technological and debt burden deflationary forces and continue to drive that inflation upwards for the time being?

Viktor:01:49:36It could, it could, because what you have now is, if you think of 1990s and 2000s, everything was disinflationary. We had digitalization, we had globalization, we had financialization, and the state sector played a small role. Now what do we have, we have lots of disinflationary stuff but we also have more aggressive fiscal spending. It’s intermittent, but we have more aggressive. Nobody ever is going to practice austerity ever again. Nobody’s going to do another Greece or Portugal ever again. Okay, so we have that. Then we have deglobalization, which is also on the balance more inflationary than disinflationary. And so there are aspects that will create a more inflationary climate or will offset it.

However, to dismember supply and value chains is next to impossible. The only thing that will dismember it is technology. I think within the next 10-15 years, factories will disappear or start disappearing. I think supply and value chains will start atrophying. Increasingly, production and consumption will be located pretty much in the same area. And so what’s going to happen? And that’s a challenge for a lot of emerging markets. That’s sort of a king’s road for prosperity, which was manufacturing and trade is atrophying in front of them. And so it’s all the big countries will do better, smaller countries will do worse. So, to answer your question, yes, I think it could be more inflationary. But within a period of time, it’ll go because most of those things will not be required. In the meantime, to dismember supply and value chains is just not feasible.

Richard:01:51:25So, it’s a sine curve with a downward trend is what you’re saying. Inflation continues to be in an overarching downtrend, but it’ll have the bursts that we’ve been talking about.

Viktor:01:51:34Yeah. The way I think of it is it’s like a channel down. But within this channel, we have an sine wave going up and down. Whereas previously, we were relatively flat.

Rodrigo:01:51:44So, I just want to understand one thing with regard to productivity because we talked about how productive we were in the 50s and it went down and it went up again, and we’re back at a reduction of productivity. But you mentioned that we might get to three, four, five times that productivity somehow, while we also have a declining and aging population. So, how’s that going to transition and when is that going to happen?

Viktor:01:52:12Yeah. Well, the way I, David Graeber, he died recently, he was a professor at LSE. He wrote a book, Bullshit Jobs, and it was heavily criticized and his database was criticized. But the basic essence of it is very true. He basically asked white collar workers across Europe, Netherlands, UK, France, Germany, whether the job they do, they believe is useful or worthwhile. And what he found, a very large percentage, were feeling that it’s not really useful, whatever I do. And he called the concept the Bullshit Jobs. And so when would the productivity rise is when we stop warehousing people in bullshit occupations. Because what’s happening is that technology progressed far enough to reduce marginal utility, and marginal value of human contribution, but not far enough to replace it altogether. And so we’re sitting in our chairs, and every day, our perception of self-worth, our perception of what we do, our marginal utility declines, and we feel unhappy about it, but it is declining.

And so there will be a time when finally, you’re no longer needed in that chair, you can go home. And so where do we stop warehousing people, that’s when it’s going to. Productivity will mushroom. Because the reason it’s not mushrooming, because we kind of get rid of you yet. Now in the areas where people are needed, because today, whether you’re a truck driver, whether you’re a plumber, whether you’re an electrician, none of those things are there yet. This is the third stage of information.

The way I look at it, four stages. We’ve gone through the first two, we’re going into the third, and the fourth stage is singularity. That’s when you don’t differentiate between human and non-human contributions. So, as we go into the third stage, plumbers, electricians, construction workers, all of those guys will feel what fund managers and journalists and entertainers have felt for the last 15-20 years. They’re going to feel it. And so they will embark on exactly the same curve of diminishing importance, diminishing utility. So, the jump in productivity, in my view, could be a couple of decades away, which is quite a long time.

Rodrigo:01:54:47So, it’s just a lower participation in the employment pool, right? So, we’re seeing unemployment being very tight, but there’s less and less people willing to be employed. And I wonder whether we’re already seeing that transition through COVID. I certainly know of people personally, you hear anecdotes that they’re done doing that bullshit job. And they found — my next door neighbor, he decides to start trading sports cards and makes a living out of it. And he loves it and he can’t wait to get up every day and do this non-bullshit job that is paying him, like, enough, right?

For him it isn’t. The interesting thing is that TikTok, YouTubing, all the stuff that my kids are obsessed with, it’s incredible. Think back to the tribal ages. What was our utility? We mostly slept and hung around. Then when we were hungry, we would go and hunt for a day. And then we’d have enough food for three or four days. And we just hang around and gossip, right? Like, that’s the human race. That’s how we’re supposed to be. This idea that we have to work from nine to five and be there all the time doing things to be productive, that shift, I think is an important one. I think some — in the disruption, it’s always bad, right?

Seymour Schulich is a Canadian billionaire wrote a book, I remember one of the most important things that got me because I was 20 at the time, he said nothing is worse than being in your 20s because you’re disrupted from university when you knew exactly what you needed to do to do something in your life. And those five years are horrible. Right? I think this decade may be horrible for a lot of humanity. But I think a lot of humanity is going to find themselves doing what other people perceive to be a bullshit job, but the passion of their lives, right?

Richard:01:56:33If they can subsist…

Viktor:01:56:39Yes, you might be able to. And that’s the whole idea of UBI. A lot of people say, well, it’s an extra spending, it’s incremental consumption. But you have to remember, US spending well over $3 trillion already, in various forms, it’s just inefficient how it’s done. It’s like carpet plethora of various inconsistent programs, and then there is a massive bureaucracy that actually administers it and polices the entire system. So, it’s not that you’re not spending money, you’re already spending money. It’s just you could be doing it a lot better and a lot more efficient. And that’s ultimately going to be the answer.

But in the case of, I think US is a little bit ahead of the curve. Because there are various explanations why US started to depart from other Western countries in labor participation rates. Because if you go back to 2005, 6, 7, there was really not that much difference between the US and UK and Germany and Japan and all the other countries. After that, US diverged. Now, to me that divergence of clearly, a couple of ones, number one, US has a very brutal incarceration system. But it’s not clear to me that it’s actually become more brutal than it was in the past. Number two, opiate and drug addiction, clearly much greater in the US compared to other countries. But number three, is exactly what you discussed, that it’s not captured in Bureau of Labor Statistics. It’s not captured in any of the categories. And to me, that’s probably the best explanation why labor participation rate is called 62.5% while in the UK, 77%. Because if you just return US back to labor participation rate of ‘07, ‘08, that is eight-nine million people out there that actually — …

Rodrigo:01:58:27Has no idea what that looks like.

Viktor:01:58:31— theoretically could be re– Now, the argument of retirement, I don’t buy. Because in the US, top 5% owns almost 70% of the net worth, bottom 60 own absolutely nothing, have access to less than $1,000 in cash. There is no consistent Social Security system. I just don’t buy this argument that so many people will just go to Costa Rica or whatever, Honduras, or just retire. I don’t think that’s true. But what does make sense to me is exactly Rodrigo, what you discussed. That is, we’re not capturing and the US is probably ahead of the curve. And that creates its own economies. How those economies will develop, how they function, how they’re priced, how they’re regulated eventually, in some form, I have no clue. And I don’t think anybody does. But that’s your beginning. Yeah.

Adam:01:59:25But I mean, is this — Are we arguing that the future of humanity is bread and circuses? That’s obscenely depressing, right?


Rodrigo:01:59:34It’s not depressing. Oh, hold on a second. Why is that depressing?

Richard:01:59:37Purpose, where does purpose come in?

Rodrigo:01:59:39I’m sorry. But again, going back to the tribal times, purpose was not a thing. It was living a good decent life. You did what you wanted to do and you felt like you needed to do once in a while. I see my daughter wanting to do TikTok. She’s a great dancer. She’s a great singer. And there’s a lot of joy in being creative and putting things in TikTok. The creativity that I see in my children that has been garnered from TikTok and YouTube that isn’t given in school, like, I don’t sit in my school’s parent-teacher reunions and we go through math and we go through English and then we talk about her art and how she’s fallen behind an art. Nobody’s talking about how …

Richard:02:00:19That’s an interesting anecdote. Can you generalize it?

Rodrigo:02:00:24I’m generalizing to TikTok and YouTube, dude. The people doing these things …

Richard:02:00:29What percentage of the population can do this or …

Rodrigo:02:00:32Anybody with a phone. Everybody with a phone can find 10,000 unique followers.

Adam:02:00:38Viktor, what percentage of total entertainment revenue accrues to the top 0.1% of entertainers?


Rodrigo:02:00:45That’s fine. But maybe you don’t need that. We talked about this before, they don’t need that much to live through it, right.

Viktor:02:00:51But the point is, when people say bread and circuses, it sort of has a negative connotation to it. But what it basically is, go back to Karl Marx from everyone according to his ability, to everyone according to his needs. And that basically says that we are all competitive creatures. You know, humans are competitive, where monkeys, we want to chew the best leaves, we want to sit on the high branches. We’re all competitive. But what is meant by competition is changing. So, it doesn’t necessarily mean money. It doesn’t necessarily mean power. It could be ticks. I like you, tick my box or whatever. It could be religion, it could be sports, it could be socializing, it could be a variety of things. And around those things economies will develop because increasingly humans as they become less relevant, other economic issues are going to evolve.

But the problem and I think Richard was saying it correctly, is that it’s a longer term timeframe, you’re looking really 20-25 years out. A more interesting question is what’s going to happen in the next five or 10. And in the next five or 10, we have huge numbers of people who will not be able to find those niches. And so social policies and fiscal policies have to be structured, not to stop progression, because you can’t stop that, not to even slow down in a massive way, but to accommodate it in some form.

Richard:02:02:26Safety nets. Society needs multiple and different types of safety nets to keep it from unraveling and coming undone because of this transition.

Rodrigo:02:02:36You almost need to dismantle the current education system and shift it towards a passion-based educational system. I think Andrew Yang, who’s big in UBI, and in his book, he matches that UBI dollar in your pocket with a social network program that connects you with your neighborhood and gives you social credits in order to be — because human beings need to be happy, they need to be connected, feel like they have friendships and a passion, right? So, this industrial-based educational system that was built to house people in factories now needs to be completely reinvented to this other area. And there is no infrastructure currently. That’s what I’m saying. Like, we’re in our 20s as a nation, or as a globe. A lot of people are going to be very unhappy. A lot of people have found their passion already, but it’s probably a very small percentage.

Richard:02:03:35I love the point about education, and I think we touched upon this when we had Jim O’Shaughnessy on. The fact that we have pretty much the knowledge, the accumulated knowledge of humanity in our pockets now means we have to stop teaching kids how to memorize stuff, and learning how to learn, mental models, the idea of pivoting and having mental flexibility. That’s what needs to be taught. And so the educational point, I think is very good. Yeah.

Viktor:02:03:58Yeah. One of the parts in the book, I basically say that it is quite possible that in 20 years’ time, Harvard University or Harvard College will be closed for lack of demand, and it will be overgrown with beautiful palm trees. No, in Boston, you can’t have palm trees. But anyway, overgrown by something. And yeah, because education is not that. It’s creating a human being rather than creating a narrow specialist. But you have to be very, very careful because if you have young children or teenagers, if you’re wrong by 10 years, they’re completely wiped out.

Rodrigo:02:04:39This is the discussion that Adam and I were having, This is the discussion that Adam and I have been having. Which is, I think he leans more toward, no, let’s stay the course a little bit. Let’s do a little bit of that, but I mostly don’t want to ruin their lives. And I’m like, let’s go ahead and see what happens. I think they’ll be happy. I don’t know what’s going to happen at the end.

Viktor:02:04:57I think if a child is just born or is like two or three years old, I think it’s absolutely fine. The real problem are children sort of above the age of 10-12, and all the way to young adults or all the way to, call it 25-30. One of the things I said in the book that we might need to sacrifice one or two generations. That might be the answer. And so my sons are 22 and 24. So, they say, well, my father thinks that we will be sacrificed. But it’s very difficult to see how you’re going to find sort of the right answer. You cannot depart the club before the new club is built because you’ll end up in the cold wind outside without any shelter.

Richard:02:05:50You’ll breathe resentment and you’re going to breed very bad outcomes for society.

Rodrigo:02:05:56Unless you’re being raised by Rodrigo Gordillo, in which case, you know, it’s the individual case. Yeah, very neat. A lot of these conversations we’ve had, Viktor, always end up in a very somber tone. I think there’s a lot of interesting disruption coming. I think there’s a lot of interesting things that as a society, maybe much longer time period than most of us want is going to end up in a better spot. Anyway, I like your work as it gives us a bit of both, in spite of the disruption that is ahead of us. Of course, as active asset managers, were kind of going to welcome a little bit of this, for sure.

Viktor:02:06:37Okay. Sounds good.

Rodrigo:02:06:39Thank you, Viktor.

Adam:02:06:40Thank you so much. This has been just as magical as I anticipated. And I’m very grateful for you coming on and sharing.

Richard:02:06:49And generous with your time. We’re more than two hours. So, this exceeded expectations. Thank you very much.

Viktor:02:06:56No problem. Thank you. Thank you very much for inviting, and look forward to coming back at some stage.

Adam:02:07:01Yes, us too.


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