CREW: Can you say your name, your title, and the company?
JIM GRANT: Yes. Oh, I should do it? Yeah. I'm Jim Grant. I'm the editor of Grant's Interest Rate Observer. And what I do for a living is write. I want to interview famous people, but who are famous, perhaps, for reasons that the public is not fully aware of. I hope to elicit from them new thoughts, frank admissions of things that they had not previously admitted to, and I want to get them to laugh once or twice.
Hello, viewers of "Real Vision." This is Jim Grant, and it is a great privilege to be in the company today of William R. White, economist extraordinaire, international financial-- what might be the noun here-- certainly authority. I daresay in the minds of some of the central bankers of the world, you're not only an authority, but also rather a troublesome one. I'm thinking back to the year 2003 and 2004 when you said things that were not exactly welcomed.
But Bill White has made his reputation as one of the seemingly impossible combinations of establishmentarian and original thinker. Who was it, Bill, who said that when brands impinge on experience, you get an idea. And sometimes, that idea is not the one that is authorized from on high. Bill White has made his career by thinking things not always authorized. He began as a young alumnus-- you had a University of Manchester PhD by the time you started with the Bank of England, did you not-- that was 1969.
WILLIAM R. WHITE: Yes. Yes.
JIM GRANT: You returned to your Canadian roots and served with the Bank of Canada, finally rising to Deputy Governor over the course of 22 years. It was on to the Bank for International Settlements, the central bankers-owned Swiss Bank. And there, Bill headed the monetary economics department for upwards of 12 or 13 years. We know him principally by his work in the early aughts when it appeared that everything was moderate and swimming and financially invulnerable. And, Bill, I'm thinking to the famous Jackson Hole conference in the year 2003.
WILLIAM R. WHITE: Oh yes.
JIM GRANT: And you and Claudio Barrow gave yourselves some notoriety by presenting a paper that had to do with the imperfection of the state of affairs then ruling in international finance. And that seems to me, if I recall correctly, had something to do with leverage with interest rates and with unintended consequences. And it was that paper that not necessarily distinguished, but really it was characteristic of the approach you have taken for well-nigh five decades.
I speak five decades, respectfully, as a fellow who is actually slightly older than that. And then after this career-- a storied career in the BIS, it was on to the OECD and now the CD Howe Institute in Toronto. But Bill is currently speaking to us from quarantine in London. And after that somewhat windy introduction, Bill, welcome to "Real Vision."
WILLIAM R. WHITE: It's a pleasure to be here. And it's a great pleasure to be interviewed by in particular.
JIM GRANT: Oh, thank you, Bill.
WILLIAM R. WHITE: I'm more than pleased to be here.
JIM GRANT: I want to divide this into two or three parts, one of which is to do with the monetary arc preceding the truly Big Bang of 2007, 2008, and 2009. But that is somewhat historic. And not all of our viewers share our interest in that long ago episode. I daresay they should. But before we get into the backstory, I want to begin with a question or two about the moment. And I want to ask you-- you're an authority on bubbles, having first of all asserted that they could exist in a world of conscientious central bank administrations. In the light of your work and the area of excesses, unintended consequences, and bubbles, tell us, is there a bubble today? And if so, where might it be?
WILLIAM R. WHITE: Well, Jim, that story that I was telling well before the pandemic arrived was that, in fact, we were in another unsustainable bubble-- an accident that was waiting to happen. All that was required was the trigger. And as it turned out, the trigger came from a totally unexpected place, which was the pandemic-- at least unexpected by the economists. It was a pandemic.
But the conditions beforehand struck me as being classic sort of pre-crisis conditions, which was leverage, a huge expansion in debt. I mean, if you take a look, for example, at the IIF numbers on global debt as a proportion of global GDP, they were actually up 50 percentage points from 2008 through to the last quarter prior to the pandemic. So if one thought about the great financial contraction as being a period of deleveraging in which we went back to normal, it was the very opposite.
The leverage continued to go way, way up, and all around the world-- not just in a few countries, but basically globally. And then you looked at the spreads which were coming down, you looked at the level of equity prices, particularly in the United States, PE ratios-- all of those things seemed to me to indicate that we were in troublesome territory. And as I say, it was, in a sense, an accident waiting to happen.
And the pandemic now, of course, has only made it significantly worse, not just because of the supply side implications of the pandemic, but because the reaction of the governments-- in a sense, rightly-- but nonetheless the reaction that has made the underlying debt problems significantly worse than they were before. So yes, we have some issues out there as we speak.
JIM GRANT: Bill, to me, the most extraordinary single fact about our finance's decay is the level of securities, debt securities, priced to yield less than nothing on a nominal basis. And a while ago, not so long ago, the figure was $17 trillion-- with a T-- plus. And on the authority of Dick Sylla's and Sidney Homer's History of Interest Rates, these are the lowest rates in, let's see--
WILLIAM R. WHITE: Ever.
JIM GRANT: 4,000 years. And certainly the level of bonds and notes perhaps yield less than nothing. It's a new thing under the sun. Would you venture the hypothesis that there is a bubble in debt?
WILLIAM R. WHITE: Absolutely. Absolutely.
JIM GRANT: Is there a bubble in bonds, as an investment? I know you're not a professional speculator, but does this strike you as a characteristic investment excess? There are very successful people who've made a whole career by being long bonds from the peak in yields on September 30 of 1981 to the present. And there is a body of theory, almost an ideology, almost a kind of a belief that has grown up around the invincibility of the asset class of bonds. And we see this hypothesis regarding perpetual deflation-- or what's the term from the '30s-- secular stagnation.
WILLIAM R. WHITE: Secular stagnation. Yeah, it sort of came out a bit later, but the same kind of thing. Larry Summers has been pushing this for quite some period of time.
JIM GRANT: So are you a buyer or seller of bonds? We got to know, Bill.
WILLIAM R. WHITE: The truth is that the bond rates are low because the central banks have been caught in a kind of debt trap. And what I mean by that is that every time there's been a slowdown-- and this really goes down sort of 30 years or more, it goes back to 1987 at least with the Greenspan put, and maybe even before then. But in any event, let's start off with 1987, which is long enough ago. So we had the kind of Greenspan put.
But the basic message was when the economy's in trouble, looks as if it's going to turn down, or the financial markets look as if they're in trouble, the answer is, lower the interest rates and print the money. The problem is that when you do that, you simply encourage an accumulation of more private sector debt, and potentially even more public sector debt, because the public sector knows that they can finance its increased expenditures at a reasonable rate of interest.
So you get this expansion of debt that over a period of time, Chairman Greenspan rightly characterized as generating headwinds so that you get an immediate positive effect through this monetary easing. But the medium to longer term effect is an increase in debt, which actually works in the very opposite direction. And this continues. And it has continued since the late 1980s. But the accumulation of debt has now got to such a point, and the interest rates have been lowered to such a point, repeatedly cycle after cycle, that we now have a situation where the central banks know, I think increasingly, that the path on which they have embarked is unsustainable.
But they're so far down the path that they can't get off it by raising rates. Because in raising rates, they create the very problem that they're trying to avoid. So we've gotten ourselves to a place that's been a very long path, but we've gotten ourselves to a place where we don't want to be. So your question, really, is what takes us off that path? I would contend that debt of any sort-- if it's unproductive debt, which much of the debt we have is now unproductive debt-- essentially narrows the path. And you can fall off that narrow path in one of two directions. And one of them is the debt deflation direction, which is what I think we're probably heading for short term.
The other one you could fall off in the inflationary direction. And which side basically determines how you feel about bonds? Now, I guess my sense of it is that over the course, and I could well be wrong here-- it's tipping points all the way, and who knows where they emerge. I think we're going to fall off from the debt deflation side, in which case monetary easing will continue. The bond rates will continue to stay very low. Whether they will go any further, I guess I have more doubts about that.
But I think the likelihood that they will stay quite low for an extended period is reasonably great. Having said that, if the central banks finding themselves in this situation say, as indeed many people recommend, that you simply double down on monetary expansion and fiscal expansion-- and fiscal expansion-- for the first time, then this combination of a lot of fiscal stimulus supplemented by central bank financing could very easily lead you into a world of fiscal dominance, where the expectations suddenly start to shift.
And if that happens, then you're into an inflationary world where, obviously, bonds is the last place that you want to be. So I suspect it will be near term deflation and longer term inflation-- and potentially, even very high inflation. Because once these processes get out of the box, it's very hard to rein them in. We've seen this over and over in terms of historical experiments.
JIM GRANT: Bill, you have been around central bankers. Indeed, you have been one of them for most of your career. What is wrong with these people? And I'm going to illustrate with a story from the American game of baseball. All right, so you've got to imagine a journeyman second baseman named Dick Schofield. He plays for the St. Louis Cardinals. And the formidable, looming Bob Gibson, one of the great pitchers of all time, is sitting in the dugout when Schofield strikes out, as he so frequently does.
Schofield comes back to the bench, he proceeds to throw a tantrum. He slams his helmet on the floor. He breaks his bat. He swears up a blue storm. And Gibson says, come over here, please. He says, look, here is your batting average. It's .230, what did you expect? All right, what do the central bankers expect? The Fed has 700 and something PhD's-- I know you're a PhD, I don't mean to disparage the title-- these people have heard once or twice about this unintended consequences business, and yet they persist in administering the most critical, certainly consequential rate, in capitalism, which is the basic rate of interest-- we call it price control under other contexts.
So my question to you is, what do they expect when they manipulate this most consequential price and generate behavior that they deplore in their speeches but nonetheless egg on in their actions? What do they expect?
WILLIAM R. WHITE: Well, I've been around this community now for pretty close on to 50 years. And let me assure you that most of the people that you're talking about are enormously smart people and their hearts are in the right place, and they're wanting to do good. The fundamental problem is, in a sense, not with the central bankers but with the analytical framework.
These people have bought into an analytical framework, but unfortunately, from my perspective, it's wrong. And the fundamental error that I think has been made is not even an economic error. It's a philosophical here. It's an epistemological error. They have made an assumption about the character of the economic system that is wrong. They're starting off with the idea that the system is comprehensible, it's understandable, and it's controllable.
And my view, and it has been for quite some period of time, is that this is wrong-- that the starting assumption ought to be, the economy is a complex, adaptive system. And it has characteristics, including unintended consequences, that are not present in models or analytical frameworks that assume the system is comprehensible and controllable. So the fundamental mistake is an analytical mistake, which is basically coming out of the universities.
And something I know given your long history of interest in economic history, I think one of the biggest mistakes that the universities ever made was to stop giving courses in the history of economic thought, where many of the unintended consequences are, in fact, given pride of place. And also, economic history demonstrates that systems don't equilibriate, that they are not operating towards equilibrium all the time, and that really bad things can happen. So I don't think these are dumb people. I think the fundamental problem is buying into the wrong analytical framework.
JIM GRANT: Yeah, well for smart people, they certainly make the same mistake over and over again. There was a guy named William Goldman, one of the great screenwriters of Hollywood. And one day-- he wrote "Butch Cassidy and the Sundance Kid" and other such films. One day, he had finally had his fill of the studio heads predicting some outcomes and success of the movie. He said, you know what? Nobody knows anything.
WILLIAM R. WHITE: That is right. Nobody knows anything about nothing.
JIM GRANT: Right. And certainly the points you bias is exaggeration and in regard to this complex system that the conceited authorities and central banks think they have mastered, they don't know nothing actually. The dynamic, stochastic, general equilibrium model-- what is that?
WILLIAM R. WHITE: Well, it's based on the--
JIM GRANT: What is it?
WILLIAM R. WHITE: The premise that we have a relatively simple system which is invariant over time and which can be understood and controlled. And it has certain characteristics, not least of which is that inflation relatively quickly goes to the level that the central banks want it to go to. And if the real side of the economy is shocked away from full employment, it will rapidly go back to that equilibrium. And as I've suggested, these premises are wrong.
JIM GRANT: This is still an operation. This is still a basic macroeconomic forecasting model in the central banks, is it not?
WILLIAM R. WHITE: To be honest, I don't know. There's an old colleague of mine, however, Scott Roger, who wrote a piece for the IMF a number of years ago. And his contention was that in practice, the models receive less emphasis than you might think. The central bankers are always sort of thinking in terms of their own analytical framework.
The problem is that the analytical framework, whether it's one equation or 100, tends to have the same sort of underlying premise. And that's the thing that's wrong. And when you talk about humility, the thing about complex systems, adaptive systems in particular, is that they do have tipping points, they are highly nonlinear, they have unintended consequences. And the central thing that comes out of that is that if you're trying to control them or influence them, you should be humble in terms of your capacity to do so.
JIM GRANT: You read these learned analytical papers that come out in such profusion from the research department of the Federal Reserve and from other central banks as well, and you look at the citations and the attached bibliographies, and none of them-- almost none-- is dated any older than 10 years before the publication date of the paper. There is a positively myopic focus on the analytical apparatus, pretense, whatever the word might be, of the present.
Writing in the 1850s and the '60s, Walter Bagehot, the muse of modern central banking, famously said that-- apropos of the national figurehead of Britain-- John Bolton can stand anything, but he can't stand 2%. He uttered this great epigram in the wake of the nth speculative bubble that was egged on through very low interest rates. So he observed that low interest rates caused people to do strange things with money. It was if they were under the influence of some abusive substance.
But this bit of non-quantified, homely folk wisdom seems to have eluded the formidable intelligences that run our monetary institutions. And I want to know why. I got to know why, Bill.
WILLIAM R. WHITE: I mean, you know this as well as I do-- you go back to people like Thomas Kuhn and The Theory of Scientific Revolutions where he talks about paradigm shift and how difficult it is even in the realm of science to get a paradigm shift. And Darwin spent 10 years before he was prepared to publish-- Copernicus was on his deathbed. And in both instances, it was because of concern about what right thinking people would think.
Paradigms are hard to shift in whatever area. And our difficulty is we have a paradigm which needs to shift. But getting that shift is proving, well, I've been bumping my head against this now for 25 years, so I know how hard it is to change people's views.
JIM GRANT: What is a Canadian doing in the business of monetary trouble? I ask this, because Canadian banks famously do not fail. Some put this down to the phlegmatic national character of Canada, which is perhaps-- perhaps it's the conceit of the speculative mind of Americans.
But Bray Hammond, the famous to me author of one of the most marvelous books on financial history, Of Banking and Politics in America from the Revolution to the Civil War, devotes a chapter, this Canadian does, to Canadian banking. And he points out that it's tended to be oligarchic, as has been the politics of Canada over the course-- he said that sometimes the Canadians are more royal than the House of Windsor, and that there are ever so few banks in Canada and still fewer failures. So my question to you is, what are the Canadians doing that we're not doing? And why has a Canadian become one of the foremost authorities on bank failures?
WILLIAM R. WHITE: Well, I'm not sure that that's the case. I do think that there's more attention being paid, particularly in the light of the pandemic, but even before, to the question of the resilience and the sustainability of systems, that efficiency isn't everything. And this is where you get into some tricky stuff when it comes to banking. Because it may well be that a degree of consolidation that allows competition. But nevertheless, a new level of profits that can be plowed back in to sort of higher capital and greater resilience has got something to say for itself.
Whether the Canadians have got it exactly right because there always is, in a sense, a trade-off between efficiency now and resiliency going forward-- whether they've got the optimal position, that I'm not in a position to say. But certainly, there's something to be said for that range of territory.
JIM GRANT: Bill, we are looking, some of us