Niall Ferguson, MA, D.Phil., is the Milbank Family Senior Fellow at the Hoover Institution, Stanford University, and a senior faculty fellow of the Belfer Center for Science and International Affairs at Harvard. He’s also author of 15 books, including The Ascent of Money. Niall and I chat: 

• Bitcoin as a store of value
• The pandemic and impacts on how we use money
• Debt around the world and in history
• What’s in our financial future

Niall Ferguson links:

• Twitter: @nfergus
• Website: niallferguson.com 
• Article: Bitcoin Is Winning the Covid-19 Monetary Revolution

Sponsors:

• Swan Bitcoin
• Knox Custody
• Unchained Capital (code LIVERA)
• CypherSafe (code LIVERA)
• Hodl Hodl

Stephan Livera links:

• Show notes and website
• Follow me on twitter @stephanlivera
• Subscribe to the podcast
• Patreon @stephanlivera

Podcast Transcript:

Stephan Livera:

Niall welcome to the show,

Niall Ferguson:

My pleasure to be with you.

Stephan Livera:

So Niall I say you have recently been commenting about Bitcoin and you wrote an excellent opinion piece as well. I’d love to start with a little bit of your background on, what was your first impression of Bitcoin and then how did that shift over time?

Niall Ferguson:

Well, Stephan, I published a book entitled The Ascent of Money in 2008, almost simultaneously with the publication of the original Bitcoin paper by Satoshi. And of course that meant that there was no discussion of Bitcoin in the first edition of the Ascent of Money a few years later. It must’ve been, let’s see now in the early two thousands, my then 15 year old son said to me, Hey dad there’s this amazing thing called Bitcoin that you really need to get into and we should buy some thinking back this must’ve been 2004. No, that can’t be right. It must’ve been later than that. It was maybe 2014,

Stephan Livera:

14. Yeah.

Niall Ferguson:

And I said, Oh, come on Lacky this this isn’t gonna work. I did a little bit of background reading. And I said in a very kind of patronizing professor dad way, there’s never going to be a viable future for something like this, because if it were to be successful it pose too big a threat to the state’s monopoly on money, which has been maintained for most of the, four millennia we’ve had money. So this is this is not something that, that I want to pay much attention to. Well, you can imagine the conversation that we were having three years later four years later in the big 2017 run-up in Bitcoin prices. And he was reminding me on a regular basis of the big bills we’d left on the sidewalk or the Bitcoins we’d left on the sidewalk.

Niall Ferguson:

And at this point I was beginning to learn some humility as all middle-aged men should. I mean, if you’re in your mid fifties, as I am, you better be listening to your teenage children and your 20 something children on a whole range of issues. I mean, almost every issue. In fact, you need to take their view seriously. So, I turned off over a new leaf at that point and embarked on a really quite serious attempt to understand Bitcoin and crypto more generally, I had just moved from the East coast at Harvard to the West coast at Stanford, at the Hoover institution. So I was kind of well-placed to educate myself better and spent a lot of the last three years with people much better versed in crypto than I was, just learning really. Everybody should keep on learning. And and so when I came to revise the Ascent of Money to produce a 10th anniversary edition in 2018, I had realized how wrong I had been.

Niall Ferguson:

And in that updated edition there were two new chapters which dealt with the post financial crisis world and with the rise of crypto and the transformation of money generally. And the conclusion that I came to, and this is now more than two years ago, was that Bitcoin was going to have a successful future. I disbelieved the negative view many people took in the aftermath of the 2017 bubble. If that’s the right term, when people like Nouriel Roubini were predicting that Bitcoin and everything else would go to zero, I realized that was wrong and argued in the ascent of money second edition that actually Bitcoin would likely appreciate because it had significant upside as a store of value. A new kind of digital asset, which in some ways resembled the appeal of gold to an investor. So my basic thought experiments in 2018 was if every millionaire in the world puts 0.2% of his or her net worth into Bitcoins, then you’re really talking $15,000 as a price. And if it’s 1%, well, it’s a lot more. So I was kind of from that point on a Bitcoin bull and still am. And indeedwhat’s happened this year has very much bought out that view, but credit where it’s due, it was my son, Lachlan who is now 21 who who put me right. And continues to be a source of insights on a whole range of investment issues.

Stephan Livera:

That’s a really, really cool story. And I think it mirrors the story that many people have that when first they hear about Bitcoin, they think, Oh, it’s a scam. It’ll never work. I don’t trust this thing. And yet over time it has grown and it’s gone from zero to call it a $350 billion market. And so I think this narrative as well has shifted now, more people are willing to call it a nascent store of value, as opposed to let’s call it gold, which might be the blue chip store of value for some people. So do you, have you seen that narrative shift as well, even in the last year or two?

Niall Ferguson:

I think there’s been a remarkable shift this year in particular, a succession of eminent investors, Stan Druckenmiller, for example, have said, Oh, I get it now. Others, Ray Dalio have said, I don’t get it, but I get that I don’t get it. And I think there’s been in that sense quite a shift in sentiment. There’s also the institutional adoption that you’re seeing, which I mentioned in my recent Bloomberg opinion piece, PayPal and Stripe and others. So I think that the process of individual high net worth adoption and institutional adoption is really gathering speed. I think the pandemic as in so much else has accelerated this process. It’s now commonplace to say that what typically would have taken 10 years has taken 10 months in 2020. I think it’s true of Bitcoin, just as it’s true of a whole range of different tech phenomena.

Niall Ferguson:

People had to think a lot more seriously about a world in which old school modes of payments and indeed old school asset classes were taking a hammering. Would you rather have had value stocks in 2020 or Bitcoins? It’s a no brainer. So I think this, this has really been a noticeable feature of the year. And I think as a historian that this shouldn’t surprise us because the most disastrous pandemic in all history, the black death in 1340s had a similar impact on the monetisation of the English and other West European economies, which in the period between the fall of the Roman empire and the advent of a recognizably modern Europe had really become, not quite cashless, but close to cashless with feudal relationships based on barter and the payment in labor as the dominant form, that was the essence really of feudalism and the black death changed that to a remarkable extent. It wasn’t something I could go into in detail in the article there wasn’t space, but it’s really a very important point about Western Europe in the mid 14th century, that monetization is one of the real consequences of the black death.

Niall Ferguson:

So I think if a pandemic or any really big historical disruption, as potentially an accelerant of, of, of monetary change. And we had these innovations already not only Bitcoin, but a whole range of other forms of cryptocurrency Ethereum. And we have the phenomenon of decentralist finance. All of this, I think, has been accelerated by the events of this year. And that’s a good thing because from my vantage point, there are a number of plausible monetary futures for the world. One of them is a world in which fiat currencies, the post Bretton Woods currencies produced by central banks and banking systems are debased. And we’ve seen a remarkable expansion in the supply of dollars this year, as a result of the policies that have been pursued in response to the pandemic. That’s not a particularly appealing future. If we imagine higher inflation in a bunch of countries potentially a weaker dollar. The second and even more worrying, future is one in which a Chinese central bank digital currency starts to become widely adopted, not only in the second largest economy in the world, but in many of its trading partners.

Niall Ferguson:

And that’s a system for monetary surveillance, the fundamental points of the way the PBOC is designing central bank digital currency is that all transactions will be on a centralized database, immediately accessible to the communist party. That is definitely not a monetary future that I like the look of. The third monetary future is one in which there are multiple, multiple forms of money coexisting, and Bitcoin is one of these and perhaps a potentially a very important one. I’m going to say something that not everybody listening will agree with. I don’t think that Bitcoin is going to be, as it presently exists, a means of payment that we use directly. You’re not going to be, unless you really are very different from me buying Starbucks espressos or lattes with Bitcoin, but Bitcoin is unquestionably working as a store of value and a digital asset.

Niall Ferguson:

I called it an option on digital gold in the Ascent of money. I quite like that phrase. I got it from my friend, Matt McLennan, who runs First Eagle. And I think as such, it has the potential and here I’m going to be a little speculative to be a reserve asset, to be the basis of a system the idea of a Bitcoin standards, not original one it’s been discussed before, but that’s where this parallel with gold makes the most sense because Bitcoin is something with finite supply in a world of technological abundance, cause everything else online is just infinitely replicable. I mean, Bitcoin is this potentially unique scarce asset in the world of digital abundance. And you could imagine a situation in which we would want to have a significant portion, not only of wealth, but of reserves in this form.

Niall Ferguson:

And that would then be the like gold in, the late 19th century, the way in which large scale transactions were cleared between nations or between large-scale entities. But you and I would be buying our lattes with some other currency, but that currency might actually be connected to Bitcoin. So that’s a much more appealing monetary future than the other two in my mind, not least because we get back to one of the characteristic features of previous monetary eras. An era in which transactions were not all under the direct supervision of the state. I mean, it’s true that the state had for most of history, some kind of monopoly over money, but a monopoly over coins doesn’t allow you to trace every transaction, because cash transactions are by their nature anonymous. I think for people who are law abiding, there should be some in a free society, some right to privacy in our payments w we shouldn’t really be subject to a completely arbitrary surveillance of every transaction we carry out. So I’m increasingly attracted to the idea of a Western financial future, because I think that should be distinguished from the Chinese financial future in which there is not a completely libertarian paradise when we can do what we like but a world in which as in previous eras, we have some monetary autonomy, some financial privacy provided we remain within the law.

Stephan Livera:

I think you make some really interesting points, and certainly your point about scarcity in this world was very Julian, Simon inspired, right? It’s very it’s this idea that anything that we really want, we can go and make more of it. So now we actually need to think of ways to forcefully or programmatically make our money scarce and have that as our actual reserve asset. And we can build layers up on top of that, that are used in a more transactional, you know, day-to-day commerce way. An example of that might be the lightning network. But certainly I think most Bitcoiners would probably agree with your assessment there, that most of the, you know, longer term day-to-day commerce will not be done on the Bitcoin blockchain. It will be on higher layers. And some of that may be, you know, lightning network, if some of that may be through our bank.

Stephan Livera:

So our retail bank may help manage kind of those connections. But I think part of the revolution of Bitcoin is that now if you want to, you can be your own bank and you can spin up your own little node and run your own lightning channels and do your own kind of aspects of this. And I think to bring it back to what’s really important, I think a really interesting concept, and I’d love to hear your thoughts on this is it’s by Nick Szabo. He’s one of the pioneers in this space, and he’s spoken about this idea called deep safety, as opposed to shallow safety. And so what he’s trying to get at there is he saying, if you’re just thinking shallow, or I want one asset that zigs while the other zags, and I just want kind of a diversification and it’s just numbers on the screen. And, you know, that’s one thing, but he’s saying here deep safety is more like a fundamental analysis of the underlying political and legal environment. And so the point that someone like Nick Szabo would make is that real estate and gold have some level of safety based on local kind of security, but using Bitcoin in the trust minimized way gives you another whole level of safety. And that potentially is why it makes sense to be the base of a new monetary system. I’m curious what your thoughts are on that idea.

Niall Ferguson:

I have a lot of respect for Nick but full disclosure I haven’t read the relevant essay on that point but I’ll take your summary of it and try and work with it. I think the notion that you can get safety from diversification is quite central to most modern ideas, theories about finance, but when the correlations go to one diversification, can’t save you. And there have been a number of periods in the recent past when we’ve seen that. And diversification strategies have been remarkably poor. If you think back to what happened in March when the world had a really acute financial spasm that was a moment when you actually didn’t get a whole lot of protection from a standard diversified portfolio especially when there were wobbles around the treasury market. So I think there’s an important point to be made here.

Niall Ferguson:

That diversification is not really it’s not really safety in in a meaningful sense, at least it, it can be much of the time. It’s one of the arguments I’ve made for holding Bitcoin. My basic view is that if Bitcoin behaves, eccentrically relative to other assets, that is a good and desirable feature, but it’s right to draw a distinction between that benefit of diversification and some deeper notion of financial security, of course, in a world of States capable of confiscation. There’s really no such thing as a truly secure asset. Remember that the Roosevelt administration was able to make it illegal for Americans to hold gold in 1933. And I know it’s hard to imagine, but there were literally FBI agents tracking down people with holdings of gold above the legal minimum and prosecuting people who did that, land is of course a wonderful thing to own.

Niall Ferguson:

I am a big believer in the fact that they’re not making any more of it. And indeed that there is a certain erosion of the available land, not least because of climate change, but you can have that confiscated too. I mean, think of all the regimes in the last hundred years that have expropriated landowners, most of the revolutions, most obviously the revolution’s led by Lenin and Mao were associated with wholescale expropriation of landowners. If you want to be given a sense of what that’s like read Frank Dikötter has amazing books, including his book on the 1949 revolution when landowners were just shot for the crime of owning land. So Marxism remember it’s an amazingly potent ideology that refuses to die and and its basic objective is to expropriate your land. So I’m not sure there’s a state of the world in which we can say we are unassailably and impregnably own wealth because in every form it is capable of being confiscated in a revolutionary situation.

Niall Ferguson:

And I think that’s an important lesson of history. Part of what intrigues me is that we as human beings struggle a bit to foresee disasters. And it’s partly because disasters don’t happen that frequently. To the say the average developed country, they happen pretty frequently in some less developed countries, but it’s also because the incidence of disaster can be quite random or disasters can be governed by power laws, not normally distributed. So psychologically we struggle a little bit to envisage them. This is where Nassim Taleb’s idea of a black Swan is helpful. We just kind of are evolved and educated to expect normal distributions, and we struggle with power laws, but in fact, the big disasters in history, and this is a theme of my forthcoming book, do the politics of catastrophe is that most history is just disaster punctuated equilibria, and disasters.

Niall Ferguson:

Whether you’re talking about an earthquake or volcanic eruption, a wildfire, a pandemic, a war of financial crisis disasters are just very, very difficult to foresee because none of them none of the things I’ve just listed is normally distributed. So I think in thinking about Bitcoin, you have to consider the world a state of the world in which there is actually a significant level of political dislocation in which a one party totalitarian state is significantly expanding its power. And that is what is happening right now under Xi Jinping. And that therefore what Bitcoin offers is not perfect security, but a form of security. I mean, as long as the Internet’s working and that’s a pretty important precondition and you have mobility and have your key, then there is some form of wealth, which is quite tricky to confiscate compared with the money in your bank.

Niall Ferguson:

So that’s, I think an important reason why Bitcoin has attracted adherence among some of my South American friends. I’ve learnt a lot in recent years from Wences Casares an Argentinian. I have a good friend also from Argentina Pierpaolo Barbieri who’s taught me a lot about FinTech. If you grew up in a country where overnight the currency could just be changed, or the bank accounts could simply be seized or devalued naturally, you find attractive the idea of money that is not dependent on banks, and let’s face it most money in the world today is bank money, not central bank money, bank money. And it exists because of a strange evolution that began with fractional reserve banking and gave us the world today in which most countries have a relatively small number of very large banks that extract rents from people because we all need to have bank accounts to get paid, to pay our bills, all the rest of it.

Niall Ferguson:

And the essence of banks is that they kind of charge they charged their fees. They extract their rents because they can exploit informational asymmetries. And actually that doesn’t need to be that doesn’t really need to be the basis for financial life in the 21st century. So that’s, what’s exciting a bit about Bitcoin above all. To me, it’s exciting that you can have peer to peer transactions with that third party verification because you no longer have that third party extracting rents from the informational asymmetries. That is a very exciting phenomenon and it doesn’t really have any obvious precedent in history.

Stephan Livera:

Yeah, that’s really fascinating. And I’m also reminded from your book, the Ascent of Money you mentioned as well, I think some of the work of Peruvian economist, Hernando de Soto, and you were talking about how bureaucracy and the difficulty of establishing property title in places like South America that can actually be why some of the poorer countries are poor because they just don’t have that same infrastructure. And so perhaps it’s like in a similar line of thinking it’s that Bitcoin is providing a new line of infrastructure that people can sort of store their value and in doing so they can start to accumulate capital. And that helps stop that process of society or at least speed that process of a society advancing and becoming more prosperous.

Niall Ferguson:

Hernando de Soto is a remarkable man. Who’s inspired me for many years. His mystery of capital made the point, which I guess I’d seen with my own eyes that a significant proportion of the world’s wealth is outside the financial system. And therefore can’t be used as collateral. And he wrote that before. We had even heard of Bitcoin more recently, Hernando’s been exploring ways in which blockchain can be the basis for easily titling the property of the poor. Something that he’s been working on in his native Peru, but has also looked at in North Africa, everybody listening to this should make a point of reading Hernando’s work. He’s a tremendously creative and unorthodox economic thinker. He’s one of the few people who came up with a really good explanation for the Arab revolutions, the so-called Arab spring, again, looking at ways in which insecurity of property rights rendered the small business class of countries like Tunisia and Egypt revolutionary.

Niall Ferguson:

So I do think Hernando’s really one of the most interesting thinkers in this whole area and that ultimately what we’re seeing in the 21st century is a revolution in financial inclusion, which is taking all kinds of different forms, the key point in a place like Peru. And it’s also true in Argentina. It’s true actually in much of South America, is that really large proportions of the population are outside the financial system altogether. They don’t have bank accounts, similar things are true in Africa and even even more so the combination of the advent of smartphones and the technology that you can you can put on a smartphone is really changing that. And I think Bitcoin’s part of that wider story where financial innovation happens online lowers the barriers to entry makes it possible for a working class, a kid in Buenos Aires slum to have an account with an online payment site.

Niall Ferguson:

And he can therefore enter the financial system, which his mum and dad really couldn’t do. So I do think that that’s part of that’s what Bitcoin is part of, now to get to the point where you’re actually able to own a Bitcoin is a stretch for most people in the slums of Buenos Aires is but I think what’s happening in those countries. And especially in the most screwed up of countries like Venezuela, is that people who do have some wealth see Bitcoin as a really invaluable store of value that’s it’s very hard for a renegade state to get its hands on. And that’s why I think that’s why Latin America is an important part of this story because there have been so many bad monetary experiments and so many arbitrary acts of confiscation that people instinctively know, Oh, this is a solution to a problem that we’ve had repeatedly. To say nothing of all the inflations that there have been.

Niall Ferguson:

I mean, part of the interesting thing about the world today to take a step back is that it’s not a very inflationary world. And I remember when I first moved to California, I was struck by how many people pitching me, crypto ideas, or talking about Bitcoin would say, Oh, well, this is going to be a terrific protection against inflation. And I would say to them, why are you worried about inflation? Everybody in the Fed is worried about deflation. And we haven’t really had an inflation problem in the developed world since the 1970s. And so you’re kind of solving a problem that seems kind of like last generations. And I think that’s, that’s been one of the little headwinds that that Bitcoin has encountered in the Northern hemisphere, that the argument you need to protect yourself from inflation, doesn’t actually resonate certainly with anybody much younger than me.

Niall Ferguson:

I remember double digit inflation in the UK in the 1970s, but I’m quite old. And the first, my first ever contribution to literature was a letter to the Glasgow Herald complaining about the price of school shoes, because I couldn’t believe how much more they cost each year. And my mother had to go buy them cause my feet kept growing. It was actually my introduction to the problem of inflation at the age of 10. But for most people your age, there just hasn’t been an encounter with double-digit inflation unless they have lived somewhere like Argentina or Brazil or in an African country. The most, the few hyperinflation episodes we’ve seen in Zimbabwe and in Venezuela are really conspicuous by their low number. So I think part of what we’ve forgotten about is what real monetary instability looks like because in the developed world, it’s, it’s largely faded from memory. And the problem of the last 20 years has actually been avoiding deflation rather than worrying about inflation.

Stephan Livera:

I see. So it may be, it may well be that certain nations, as you mentioned, certain South American nations, they see the anti-inflation case much more clearly than we do in the Western world, right? Me here in Australia, people in the US or the UK, they may not feel it as often, unless they’re more acutely aware of these kinds of things. And I think this is another point that I’ve seen, you mention as well, which is that just the general level of financial literacy is not that great. And so I think it’s just that most people wouldn’t, like if you talk to the random guy on the street lady on the street, they may not really understand you know, the concept of they might not be thinking deeply about, Oh, what’s my real rate of return. What’s my return after inflation?

Stephan Livera:

And if you were to ask sort of basic financial questions, they might not necessarily get those right. And perhaps that’s just part of the journey. I’m also interested to get your thoughts around just in a broader macro sense where a lot of governments around the world are going into more debt and what does that mean from, are there historical insights there around the typical things that happen when governments reach a certain level of debt? And what does that mean for the currencies? An example might be that people are less inclined to borrow from, or rather to lend to that currency because they have less confidence that they won’t inflate their way out of it.

Niall Ferguson:

Well, this is a very live question because we’ve seen an enormous increase in public debt this year even larger actually than the increase that followed the financial crisis of 2008, 2009, the trajectory of the US federal debt is looking more and more like that of world war two. And it’s breaking through the 100% of GDP ceiling and going rapidly upwards towards 150% now, most economists, certainly the mainstream economists at the Harvard, MIT kind of institution would say to you, it’s not a problem. So Larry Summers and Jason Furman just published a paper this week saying there’s a new paradigm and tone because of secular stagnation, interest rates are going to be very low for a long time. And therefore the government has considerable latitude to run up a large stock of debt. No downside risk here. And Olivier Blanchard has essentially said the same.

Niall Ferguson:

This is the new consensus amongst the mainstream Keynesian influenced economists. And I think it will influence the Biden administration, as it thinks about its options starting next year. Now you’ve got to be a little careful taking on Larry Summers. It would be significantly easier to take on a charging rhinoceros because there is no more combative and powerful intellect in economics than Larry. And I think one of the lessons of the post financial crisis period was it’s a smart move to be on Larry’s side because Larry’s argument from 2014 was we’re in secular stagnation. You do not need to be worried about inflation. Interest rates are not about to normalize. And it was a mistake to dial back the fiscal stimulus in the Obama administration. And it’s a mistake for the Fed to try to normalize rates.

Niall Ferguson:

And Larry won those arguments. And those who took the other side and I occasionally did and said, Oh, dear quantitative easing is going to generate some inflationary pressure. We were wrong. So that makes me very cautious because I think I don’t want to get back into those bits of battles over austerity which I think ultimately we’re one by the secular stagnation school. However and this is a big, however, yeah, the aftermath of a pandemic is quite different from the aftermath of the financial crisis. The reason that the financial crisis had this long hangover was that it was about from some very fundamental things like bank capitalization, the inadequate capitalization of American banks was a major reason why it was a slow process to get the economy back to full employment. And it turned out that just as the Keynesians had argued, you needed to do additional fiscal stimulus.

Niall Ferguson:

Of course, when Trump did it, or when Mitch McConnell did it, when the Republicans did it with the tax cuts, the Keynesians didn’t cheer because it was the wrong kind of stimulus politically. But oddly enough, Trump was the Keynesian candidate in 2016 and the Republicans did fiscal stimulus. It was just that they did it through tax cuts rather than increased expenditure on a whole range of public works. So here we are in 2020, and we’ve just been through this high-speed depression where the events of 10 years were compressed into 10 months the economy recovered. But as I remember predicting earlier in the year, back in April, it was like a giant tortoise or a reverse square root where it kind of went down very steeply. And then it came back up the tortoise’s neck, but then it got to the tortoise his head, which was some way below where the tortoise is, his shell was.

Niall Ferguson:

And that’s because as long as we got COVID-19, there is about 5%, or maybe more of GDP that we just can’t bring back online because there’s a whole bunch of service sectors that can’t function. And whether it’s adaptation by people or rules issued by state governments, the economy is, is down there on the torso of his head. It can’t get back up to where it was on the back of the shell at the beginning of this year, but vaccines are coming with high efficacy and they’re going to be distributed pretty rapidly. And I think many economists underestimate how rapidly we will therefore bounce back more rapidly than we did after 2008, 2009. American households have probably about a trillion dollars of forced saving ready to spend. And they’re itching to spend it. The Idea that the savings rate is going to remain very elevated through next year after we’ve got vaccinated.

Niall Ferguson:

And we can get back to restaurants and bars and cruise liners and crowded planes and parties, all those things that people are missing, I think is wrong. So imagine the following scenario, we bounce back faster than expected. Next year by the summer, things are really frothy because everybody’s enjoying the return to normality. There are some supply constraints leftover from the disruptions of the lockdowns. I wouldn’t be wholly surprised if inflation surprised the fed a little bit to the upside above the 2% target. Now, the fed has said, it’s relaxed about overshooting. It wants to overshoot. Sure. And I can get the rationale for that. But remember there are these spectators called the bond market looking on and asking themselves, are they really sure they know what they’re doing? There are people like me who read Allan Meltzer’s history of the federal reserve many years ago, the late lamented Allan Meltzer.

Niall Ferguson:

And we remember what the mistakes of the late sixties and seventies were, where essentially the central bank, the fed and other central banks around the world were too passive in the face of changing inflation expectations and fiscal imbalances. So I put it to you that there is a non-trivial probability that things do surprise in terms of inflation expectations, and that the bond market reacts to that you do not need a significant move in rates to make the debt burdens of the developed and developing world suddenly quite scary. It’s all about the debt service. I pointed this out 20 years ago in a book called the cash nexus. The debt GDP ratio is not really a meaningful number. I mean, essentially you’re looking at a stock relative to a flow. What really matters is this are your debt service payments, are they actually sustainable relative to your growth rate?

Niall Ferguson:

And if not, then you’re in, what’s known as nasty fiscal arithmetic very quickly. So that I think is the key issue. What if secular stagnation turns out to have been true after the financial crisis, but not after the pandemic? Then I think the central banks of the world are going to be in a very nerve wracking game of chicken with bond investors. And although the Fed has been buying every new bond that the treasury has issued this year, pretty much, if you imagine the situation a year from now, I think the credibility of the Fed could be on the line. If there is a significant exit by foreign investors from dollar denominated bonds, because people look at the numbers and they look at inflation and they think, Oh dear it’s the 1970s and Joe Biden is Jimmy Carter. I mean, that’s again, not a kind of high probability scenario, but it’s not a 0% probability scenario.

Stephan Livera:

That’s a big, however, but a big one I wanted to get into with you were mentioning around bonds and interest rates. So I think it’d be interesting to get your views on where we are in terms of interest rates, you know, today in 2020, they’re obviously very low. How does that compare historically? And what other times in history have interest rates have gone this low? Does it not seem like a bit of an aberration that we’ve got almost 0% rates. And if you consider from a real perspective, people are earning negative because of inflation?

Niall Ferguson:

Right? So the nominal rates are very unusual. The real rates, not so much. Let me take a step back. My student Paul Schmelzing did an amazing doctoral dissertation at Harvard. It’s been partly published by the Bank of England in a couple of working papers. There’ll be a book soon. Now, what he shows is by going all the way back to the 1200’s and looking at at interest rates from a whole variety of different debt instruments, there has been super secular stagnation and the nominal rates have trended down century after century since even before the black death and therefore our present nominal rates are very remarkable in history. It’s hard to find periods when nominal rates were this low. In fact, it’s pretty much impossible. And so that is one of those rare occasions when the economic historian can say unprecedented, but the real rate story is not so straightforward because in fact, there have been lots of periods in history when real rates were negative.

Niall Ferguson:

That for example, happened in the 1970s. And it was one of the reasons investors in bonds had a torrid time in that decade. So I think the normal rate story is remarkable, the real rates story, not so much. So in other words, a relatively small amount of inflation at the moment can get you negative rates because the nominal rates are so so low. And it’s the real rates that matter in the end to an investor who’s thinking rationally about returns. And that I, I guess, is another reason to think that there’ll be some pretty nervous trigger happy bond vigilantes if inflation does start to surge at any point. And that I think is the great unknown. We’ve seen a little bit of life in inflation expectations ever since the vaccine breakthrough news came.

Niall Ferguson:

But I think what really from my money matters is where we’ll be by the summer of next year. Given that as I said, a vaccine that works is a form of stimulus, more powerful than anything in the Keynesian playbook, because it is a promise to consumers that they can go and do stuff that they’d been prohibited from doing for the better part of a year. And the analogy here that I quite like is with the aftermath of the war, you know, when peace is declared there typically is a little boom. That was certainly true after World War II in the United States when controls started to be removed, but you saw a great surgeon consumer spending because people had really been forced to save. I think this is one of the ways in which COVID-19 is a bit like a war.

Niall Ferguson:

And when you know, Moderna and BioNTech come along and say, we’ve got a vaccine, that’s not, that’s like saying peace. So it’s not so much VE-day or VJ day. It’s sort of V-COVID day, victory over COVID. And I think people will respond to that in a way, which will be exuberant to use a word that has done its has done the rounds in modern financial history. As I said, we can’t be certain, it could be after all that, there are problems with the vaccines that we haven’t foreseen and that would be enormously dispiriting and depressing to people. It could be that in the course of next year, some new form of disaster arises that we didn’t quite think about, because we’re always surprised. We’re always looking at the last disaster expecting to repeat itself.

Niall Ferguson:

And then along comes some new form of disaster, but if everything else is equal and people can spend a trillion dollars in bars and restaurants on vacations, et cetera, in a mood of it’s over, I think we could see quite a frothy middle of 2021. And that will be the moment that the fed is tested and it will most likely be tested because the dollar will slide and foreign investors will want to exit US denominated in us dollar denominated bonds in preference for say Euro denominated bonds, or for that matter, even RMB denominated bonds, because there would just be more attractive real returns in those instruments.

Stephan Livera:

Right. And also wanted to get your thoughts around the concept of financial repression, right? So if governments are in this very high debt situation and they essentially do not want to let interest rates rise, do we risk seeing that kind of Japanification in other countries around the world that simply do not want to let the rates rise? So they just keep everyone in that sort of low growth environment.

Niall Ferguson:

I certainly think that Japan is a little bit of an experimental laboratory for all that we’re discussing because in Japan, in the wake of its financial crisis, at the end of the 1980s there was a great surge in government debt, far the levels in other countries at the same time Japan had the the extreme case of the aging population and it has spent decades trying to solve the problem of very low inflation expectations, very low inflation and and very low growth. And I suppose when I look at Europe, I think to myself, that’s kind of the future for Germany because it will be very difficult with the rising debts of the Eurozone, the aging population, and what I think will be quite low growth to avoid being a version of Japan. I don’t think it’s necessarily the future of the United States because the United States has fired bazookas in a way that Japan never did.

Niall Ferguson:

I mean, the bazookas fired back in the spring in terms of the level of government debt issued in the expansion of the fed balance sheet, these are really big big, big bazookas. And the key issue here is when life returns to normal, I think that both consumers and banks will be quite eager to expand. And so I don’t think it’ll feel at all, like post-crisis Japan and the US next year if it feels like that anywhere, it’ll be actually in Germany. And in Japan itself.

Stephan Livera:

Yeah. I guess sort of coming to the end of our time, I wanted to just kind of take a step back and look a little bit further into the future. And let’s imagine this idea that, Bitcoin does become seen more like a reserve asset, right? So people aren’t necessarily doing day to day stuff with it. What kind of a financial system, what kind of you know, do you see it being like a credit system or an equity sort of style of system, if you had to kind of project out maybe 10 or 15 years, if you have to speculate we’re kind of imagining what it might look like. Do you have any ideas what that could look like?

Niall Ferguson:

I think that we’ll spend a lot less time talking about banks in the financial future, and there’ll be a kind of platform based system for buying and selling financial services. I think that seems like a plausible future. We’ll therefore see a significant compression of the fees that financial services companies can charge. And there’ll be a decentralization of the system in a whole range of different ways so that it will look, I think, radically different 10 years and 20 years from now, one of the points I made when I was updating the Ascent of Money was that not much actually changed between 2000 and 2018. We spent those 10 years putting patches on the system to make sure it didn’t fall apart. But my prediction was that the next 10 years would see a financial revolution propelled by technology and that financial revolution would do for familiar institutions, such as banks.

Niall Ferguson:

What the technological revolution in e-commerce is currently doing to department stores. It will render a whole structure of finance obsolete, or at least obsolescent. I think most of us will be able to conduct our daily financial transactions on our smartphones with a variety of apps. I think the competition to allow payments to be done at low cost will be such that I will no longer be fleeced every time I need to send remittances to my wife’s family in Kenya and Somalia. And I think the whole remittances business will cease to be the nasty racket that it is a frictionless and low-cost payments across borders will suddenly be a reality, which will be a great boon for the poorer proportion of humanity, I must say. Because if you, if you look at the fees that are charged for typically relatively small transactions across borders, they’re absolutely extortionate.

Niall Ferguson:

They are usury in the modern world. I think that it will be a different world in terms of the ways in which we finance new ventures. And this, I think is a thing that people struggle a bit with because they’re, so pre-programmed to think in terms of of equity finance and the IPO as the culmination of your career. When you sell securities through public markets, I’m not sure that that will necessarily be the dominant mode of financial capitalism. By the time we get to 2030, because there will actually be simpler ways of raising money for operations. And I sense that the era of private equity, the era of the the asset manager is passing because ultimately it will be possible to manage a portfolio with technology and not pay the kind of fees and rents that had been characteristic of the last 20 or 30 years Bitcoin’s future, which is really what we should focus on in our final minutes is to me the great unknown, because it’s in the hands of financial regulators, it’s ultimately up to, I think, to the US treasury and the US federal reserve, whether the United States is creative about the financial future or conservative, it’s been conservative for years.

Niall Ferguson:

Washington’s attitude has been for the last 20 years. We love Swift. We love payments between banks with this cranky, clanky, what’s the word I’m looking for? Clunky! Technology dating back to the 1970s, because it allows us to do financial sanctions and financial sanctions are the US superpower so much easier than sending the 82nd airborne. So please, can we leave things as they are? That’s not really a viable strategy. It’s an opportunity for China to build an alternative payments architecture. I don’t think it is smart to let that happen. The US if it’s smart is going to use Bitcoin, a successful proven blockchain based technology for peer to peer payments as part of its plan for an alternative financial architecture that is decentralized, that allows that kind of peer to peer payment to happen with minimal state surveillance and therefore creates an alternative to China’s centralized artificial intelligence-based one party rule panopticon. Essentially the totalitarian dream, no human action outside the surveillance of the party. We’ve really got to offer people something better than that. And I don’t think the answer is “We’ll do the surveillance through Facebook. Don’t worry Zuck is a good guy.” We need something that is more authentically American. Remember the American system of banking was designed from the outset to be decentralized and to guarantee significant privacy to the individual. The whole point of the United States is the Liberty of the individual. And what’s exciting about Bitcoin is it kind of fits into that model of American decentralized and relatively state free finance. So the argument that I would make to the incoming Biden administration is for heaven’s sake, don’t feel that you have to replicate the people’s bank of China playbook and build a digital central bank currency for the United States, that’s like turning Chinese.

Niall Ferguson:

Let’s think about what’s already working what the United States has been good at, which is building cryptocurrency as a new kind of, of money. And let’s make that part of our system. And if ultimately Bitcoin becomes a reserve asset, which will take time with its price volatility, obviously diminishing over time, then that’s actually quite an exciting prospect because it makes to my mind more sense to have at the root of the system a unit of account that can’t be debased. I mean, why not? And we used gold for the better part of a century in the United States to provide that kind of anchor. We’ve been drifting anchorless since 1970, we’ve had one bout of inflation and the near bout of deflation. I don’t think one could look back and see the Fiat currency is awesome. Let’s keep it going. I think there’s an opportunity to come up with something better and we don’t need to reinvent it because it’s been around now for 11 successful years. And that’s what for me is so exciting about Bitcoin and why my then 15 year old, now, 21 year old son Lachlan was right and I was wrong. And I’m still not so old that I can’t learn a new trick.

Stephan Livera:

That was a phenomenal Niall. Finally, just for listeners who would like to follow you online, where’s the best place for them to find you and follow you online?

Niall Ferguson:

Well, I was once upon a time bullied into using Twitter by my publisher, I kind of hate Twitter. As a friend of mine once observed, it’s like, you know, the biggest urinal wall in history but use carefully, it’s not a bad way to follow writers. So I am on Twitter @nfergus. I have a website which is just as you might predict niallferguson.com, where you can find all my journalism. I write every two weeks for Bloomberg opinion, a rather lengthy column, the most recent one was about Bitcoin. And it just came out a little less than a week ago. And I have a book, as I mentioned, doom coming out, which will be my 16th book published at the end of April next year. So there are lots of ways you can, you can follow my stuff. And if you like TV more than any of the previously mentioned media, I did a PBS series called net world back at the beginning of this year, which not not wrongly pointed out some of the dangers of a highly networked world. I think that’s still available to watch 5 PBS.

Stephan Livera:

Fantastic. So listeners, I’ll put Neil’s links in the show notes and Neil I’ve really enjoyed chatting with you. It’s been a really, truly interesting conversation. Thank you for joining me.

Niall Ferguson:

Thank you, Stephan. It’s been a pleasure.