NIALL FERGUSON: I'm unusual amongst historians, because I'm interested in history mainly for what it teaches us about the present and future. The ECB is going to find a way to ease in so far as is necessary to avoid an Italian crisis. What happens in a complex system is that you are on the edge of chaos for really quite a long time. And then a phase transition happens. And quite suddenly what has appeared stable falls apart.
LARRY MCDONALD: My name's Larry McDonald, creator of The Bear Traps Report. Historians and philosophers have often said those who don't learn from history are doomed to repeat it. We're thrilled today to bring the Real Vision audience Niall Ferguson, Hall of Fame historian, someone that has looked at markets in history like no other person that we've really ever seen. And his view from looking at history and it markets going forward is, I think, fascinating. We're going to bring it to you today. We're really excited to have you with us, Niall Ferguson. Pleasure to have you here with Real Vision.
NIALL FERGUSON: Great to be here, Larry.
LARRY MCDONALD: I've been so inspired with your life. As a young boy on Cape Cod, I remember reading about you and through my life reading some of the fantastic books that you've written and inspired so many young people, and even though we're the same age.
NIALL FERGUSON: Well, I read you admiringly--
LARRY MCDONALD: Thank you.
NIALL FERGUSON: --and the feeling is mutual.
LARRY MCDONALD: And then I got my big break I did was doing a speech in Abu Dhabi six years ago this week. And I met you, and developed a good friendship. And we're was so honored to have you on. I'm personally grateful that you took the time to be with us. This platform is very exciting. And I think it reaches an amazing audience around the world. The Real Vision platform is the much higher intellect of financial acumen, which I like to say.
But yeah, take us back to your younger days. And, you know, what were your top inspirations and motivations as you were coming through school? Because you excelled at such a high level for such a long period of time. And what was that main driver?
NIALL FERGUSON: Well, Larry, I grew up in Glasgow. I guess we have Scottish roots--
LARRY MCDONALD: Yes, we do.
NIALL FERGUSON: --in common. And as a boy, I was an avid reader, and I suppose was inclining towards literature until I read Tolstoy's War and Peace. I think I was about 15, and there was really much less to do for young people in those days, especially in Scotland where it rains all the time.
LARRY MCDONALD: Yes.
NIALL FERGUSON: So you're either playing soccer or reading War and Peace. That was the choice. And on a rainy day I was reading War and Peace. And at the end of War and Peace, Tolstoy reflects on the lessons of this extraordinary novel, and indeed the lessons of history. He ends the book with a kind of philosophical essay on the nature of historical determinism. And this really grabbed my attention.
And it made me think more seriously about history as an option. I came from a rather scientific family. My mother was a physicist, and my father a doctor, my sister is a physicist. I'm the black sheep of the family. But history appealed to me from then on, because I found the study of human particles-- human particles with consciousness-- somehow more appealing than the study of, well, particles, the kind of things that physicists do.
And so I was lucky to have a very inspiring history teacher who encouraged me to pursue my interest, which at that time was in the 20 Years War, deep into the inner recesses of the Mitchell Library in Glasgow. And I set my heart and studying history at Oxford. I'm unusual amongst historians, because I'm interested in history mainly for what it teaches us about the present and future. The historian I most admired as a boy was AJP Taylor, a wonderful writer who not only produced extraordinary history books, but was also happy to be on television, and write for the newspapers, and opine about the events of the day.
So I suppose at some point I took it into my full head to be an AJP Taylor, to be a historian who used history to think about contemporary problems. And I kind of have chased that-- I've chased that vision, or that dog perhaps, ever since my late teens.
LARRY MCDONALD: That's the key to relating to the masses. And that's the key to the bestsellers. Out of all your amazing pieces of work, from Civilization to Ascent, what do you think is really the most compelling book moving forward that readers should look at for the next say, three to five to 10 years?
NIALL FERGUSON: Well, you mentioned financial acumen. I mean, if your viewers are mainly interested in finance, they should probably read The Ascent of Money. Because of all the books I've written, that's the one that aspires to tell the history of the world in financial terms. And as so happens, I've just produced a new edition of the Ascent of Money--
LARRY MCDONALD: Beautiful.
NIALL FERGUSON: --with two new chapters that take the story up to date. The book was published in 2008, just a matter of a few weeks before the bankruptcy of Lehman Brothers. But it was written with the expectation of a financial crisis in mind. So it seemed appropriate after 10 years to update it. And I think that's the right starting point for understanding my approach to the past, which has always given finance a relatively high priority.
My feeling as I was going through university at Oxford was that but most historians underestimated the importance of financial markets. Maybe as a Scotsman who was relatively numerate, quite good at math, I was sort of shocked by my English contemporaries at Oxford. Because they thought history was about kings and queens, and yeah, maybe the odd general. But it seems to me that bankers were just as interesting, actually, as those people, especially in the modern era. But even in the Renaissance, the Medici weren't originally interested in politics. They were originally forex traders, as it happens.
LARRY MCDONALD: Yes.
NIALL FERGUSON: So I suppose I started off thinking, hmm, I could maybe have an edge in this history game if I emphasize financial history. So I did a lot of my early work on kind of obscure stuff like the 19th century bond market, and how World War I functioned in financial terms. I wrote a history of the Rothschild family and banks, a massive, two volume history. By the time I wrote The Ascent of Money, my goal was to try to give financial history a large audience. It was also a six part PBS series.
And the goal I had was very simple. To explain the financial system to people and the financial crisis by showing them where it all came from. Because I think if you try and explain the financial system with some kind of flow chart or even worse, a mathematical model, most people are just baffled. But if you tell them the story of why we have banks, why money is mostly bank money, why there is a bond market, what the stock market is and where it came from, then it all starts becoming more intelligible.
So I greatly believe in financial education. I think a chronic problem we have in the United States, and indeed in most countries, is financial illiteracy. The Ascent of Money was designed to make the whole financial system seem more intelligible by just telling its story.
LARRY MCDONALD: So let's look at the next say, 2, 3 years. Italy has-- in terms of near-term debt maturities in Italy, you're talking about $820 billion of next three to four years of near-term debt maturities. You have, in Italy, for example, a movement with Mr. Salvini, an incredible populist who has gone from single digits in the polls to, I think, upwards of the 30s. On one side, this is a Reagan-esque tax cutter. And on the other side of his marriage party, you have Five Star, which is really like, a Bernie Sanders populist, which is fascinating. Because Europe is a little bit further than the US in terms of populism.
Whereas we've had Mr. Trump in more of a right wing populism, the left wing populism so far has risen but failed in 2016. If we look at the near term debt maturities-- if you're a bondholder right now in Europe or own the part at some of the banks and you have these near-term debt maturities, and you have Italy going up against France, and you see France with their budget starting to blow through because the yellow vests and what Mr. Salvini might say to the European Union and the EU in the next say, six months-- how do you see that whole debt profile playing out over the next year and a half, 2, 3 years?
NIALL FERGUSON: Well, I've spent a lot of my career thinking about public finance. In fact, I think the very earliest article I ever had published in the scholarly journal was, in fact, about public that in Europe, admittedly before World War I rather than more recently. But I spent a lot of time writing about this kind of issue. Back in the late 1990s as the European Monetary Union was taking shape, Larry Kotlikoff and I-- professor at Boston University and I, got together and wrote a piece for Foreign Affairs, predicting the ultimate degeneration of Europe's monetary union.
And the argument we made in this-- I think it was published back in 2000-- was that the monetary union would ultimately be unsustainable because of the fact that it wasn't in any way a fiscal union, and that there was bound to be substantial fiscal divergence between the member states. That was baked into the cake because of demographics and differentials in growth. So I was a skeptic about monetary union, mainly because of fiscal imbalances.
And back then when we were discussing where would things most likely go wrong, it was Italy that we always tended to come back to. Greece, of course, had even worse public finances, and probably should never have been allowed to join the monetary union. But Greece is relatively small, whereas Italy is not only a founding member of the EU, it's also really quite big economy. So I guess the big question for any investor is what's the end game for Italy.
It has zero to negative growth. It is a huge stock of debt, as you rightly mentioned, a quite large proportion that falls due in the relatively near future. In history, stories like that tend not to have happy endings. And they can end in a bunch of ways. They can end in default, or they can end in some monetary inflation if the country is in a position to do its own monetary policy, which of course, Italy isn't. Or it can end in agonizing austerity as the government runs primary budget surpluses to try and get out of the hole.
And when you look at the Italian case, you find yourself wondering, well, how can any of this happen? How can any of these classical historical scenarios play out? Because it would be so disruptive to the rest of the European Union if Italy defaulted. It would have terrible consequences for the Italian banks. It's impossible for Italy to inflate its way out of the situation, because it doesn't have an independent monetary policy. And it's very hard to imagine a populist government, especially a coalition of the populists of the right and the populists of the left, which was never supposed to happen, doing austerity.
From an investor's point of view, this is lots of flashing red lights on the dashboard. Go nowhere near this. My hunch is that when push comes to shove two things are going to happen. One, the ECB is going to find a way to ease in so far as is necessary to avoid an Italian crisis. Because it's just too big a risk for the system. The reality is that the ECB can't really stop quantitative easing. It can't normalize monetary policy, so long as Italy is in this situation.
But the other thing that has to happen is a political change in Italy. And the question really is at what point does Matteo Salvini, the leader of the League, press the button and take advantage of the fact that his party's far ahead of the populists of the left, of the Five Star Movement? And he could do that this year, but I don't think he's going to.
What Italy needs is actually the Brazilian formula. If you look at Brazil, you've got a populist leader, Jair Bolsonaro. But they're doing free market economics. They're doing structural reform. And that's what Italy needs. And as long as they're held back by the populists of the left, the Italian economy is not going to grow.
LARRY MCDONALD: So you've got the right wing populists, or the Reagan-esque populists in Salvini still rising in the polls, whereas the Five Star or left wing is kind of receding a touch. So there's a little bit of a spread developing, which you're saying over the next year could have actually Salvini and the League actually leading the whole show.
NIALL FERGUSON: Yeah. I think that's going to happen. The only question is when. And it's really the only way out for Italy. Italy needs structural reform. And it needs something like Reaganomics. And I think what's interesting about the Brazilian example is we're beginning to see, for the first time, that you can be a populist on issues such as law and order in the case of Bolsonaro, or immigration if you're Salvini. But you could also do free market reforms.
Now most people assume that even the populists of the right are going to do non-free market economics. I think that's an incorrect assumption. I think populists of the right are capable of doing good economic reforms that actually generate growth. And let's face it, say what you like about President Trump, the economy in the United States grew 3% in 2018, which is not something that the economists of the Democratic Party expected to happen. So I think that's the kind of winning formula. There's no other way out for Italy. It can't escape what was once called nasty fiscal arithmetic if it continues with zero growth and an ever rising stock of debt.
LARRY MCDONALD: When I was younger, my dad constantly referenced to Alexander Fraser Tytler, a Scotsman. And through my life reading some of your works, I always made that-- maybe I was wrong or right, but I always made that connection with the two of you. And I remember as being a young boy, my dad reading this phrase to me. A democracy can only last until the voters realize that they can expunge the public treasury with their votes.
And the cycle that he talks about, Tytler, where he talks about a classic democracy-- if you think of Venezuela, if we just think of any democracy of the last 400 years, you have this period of original bondage like the United States in 1750, 1775. And then you break out and you're into patriotism, entrepreneurship, abundance, and then a dependence phase, an apathy phase, and then a back to bondage. It looks like, to the untrained eye, that Tytler was onto something here. I always wanted to ask, what's your personal view on that cycle in terms of do all democracies end up in that same place historically.
NIALL FERGUSON: I'm not one of those historians who thinks that history is cyclical. If it were, it would be so easy to predict, wouldn't it? But in fact, what's interesting about the historical process is that much as we would like states or empires or democracies to behave like individual human beings, to have vigorous youth, and then to reach their prime, and then to kind of get a little bit old, and then to collapse and die, that is not in fact how they behave.
And indeed, the key to thinking about history is to recognize you're not studying a bunch of living organisms with a natural life cycle. You're studying complex systems. And complex systems behave differently from individual organisms. They can last an extraordinarily long time, and then very suddenly fall apart. It's only with hindsight that we say, oh, there was some kind of life cycle to the Soviet Union. And it went through that kind of trajectory.
It didn't. The Soviet Union seemed to be fine until it wasn't, and it fell apart in the space of two years, really from 1989 to 1991.
LARRY MCDONALD: Thanks to old Boris.
NIALL FERGUSON: Hardly anybody predicted that. And when I wrote--
LARRY MCDONALD: A lot of vodka.
NIALL FERGUSON: Even in the summer of 1989 when I wrote a piece predicting some kind of collapse, the British newspaper I was working for refused to run it, as it seemed as if I'd, to quote the editor--
LARRY MCDONALD: Is that right? Wow.
NIALL FERGUSON: --been listening to too many Ronald Reagan speeches. So rule number one of history is that if things were cyclical in that way, then history would be much more predictable than it is. The other thing you have to think about is that the United States has gone through some very bad patches economically, and fiscally, and in terms of inflation. Many more recent writers on political economy in the United States worried in the 1970s that some terrible downward spiral was beginning because of the processes that you describe.
And indeed, it became almost a school of thought and political economy that the inherent tendency of governments to borrow to excess, to inflate away debt, would lead the United States into a terrible period of decline and fall. The 1970s were a terrible time in the United States, not only because of economic malaise, but also because it all seemed to be going wrong in foreign policy. And yet what happened? The United States bounced back after Vietnam. In the 1980s, it was by far and away the dominant superpower. It won the Cold War.
And we spent the 1990s and right into the early 2000s thinking that the end of history had arrived. We'd solved all our problems. So I wish history were cyclical. It would my job much easier as a pundit, because I'd just say, oh, well. I know where we are in the cycle. The US has done for now. It's about time for decline. Here it goes. But it's not the way it works. Complex systems don't behave that way.
What happens in a complex system is that you are on the edge of chaos for really, quite a long time. And then a phase transition happens. And quite suddenly, what has appeared stable falls apart. That's what you have to worry about. That's what you have to worry about if you're Xi Jinping.
LARRY MCDONALD: Perfect transition to China. So in our Bear Traps Report, which is kind of a macro report that I'm pleased to have you as a reader.
NIALL FERGUSON: I'm an avid reader of Bear Traps.
LARRY MCDONALD: Thank you.
NIALL FERGUSON: And all of your viewers should read Bear Traps.
LARRY MCDONALD: Thank you so much.
NIALL FERGUSON: It's a must read. Because Larry, you have great insight into how financial markets work, better insight than I, as an academic, can never have. Because you've kind of been there, been in markets. And you bring to Bear Traps a tremendous insight into the way the world works. But I think you understand how it works better than the people who are actually