The Price of Prosperity


EVENT TRANSCRIPT: The Price of Prosperity

DATE: 12th February 2019

TIME: 13:00 – 14:00

VENUE: Millbank Tower, 21-24 Millbank, Westminster, SW1P4RS United Kingdom

SPEAKER: Todd Buchholz

EVENT CHAIR: Sophia Gaston


Sophia Gaston: Alright, these are on. I have been told to speak rather forcefully towards this. Okay, that’s on. Well it’s a great pleasure to welcome Todd Buchholz here today to the Henry Jackson Society. He is of course the author of “The Price of Prosperity” which some of many of you may have already read, if not we have some copies here today. He is a former White House Director of Economic Policy, he is managing director of the legendary Tiger-hedge fund, he is also an award winning teacher at Howard and has also been a fellow here at St. Johnsons College at Cambridge. Or is that the Cambridge in…

Todd Buchholz: Just at the right.

Sophia Gaston: Alright, wonderful. We are all clear on the geography. He is also the (interruption) author of “New ideas from dead CEO’s” which is an incredible popular book and also “New ideas from dead economists” which is also a real bestseller so he’s definitely been enough in the Amazon-charts. I think this book, what is so astonishing about it is how pursuing it was and how timely it was. It seems to me that we are really living in a time of a great democratic experiment in many ways. We never had such diverse and empowered politicians and I think this book and Todd’s research in general really gets the heart of these questions and many of the paradoxes that underline them. So I think as we say, this book remains timely, it’s incredibly provocative and Todd is a wonderful storyteller so I’ll hand it over to him, he’s going to present a few slides and then we will have a little bit of a discussion and then we can open up to the floor afterwards. So, over to you Todd.

Todd Buchholz: Thank you, thank you. Thank you for the kind introduction. You are nice enough to read everything my mother has written down. I have to tell, for all the nice things you said, when I graduated from university I couldn’t get a job in economics or finance. I remember I had this interview with this one brokerage house. I got past the first couple of rounds then I had to meet some regional manager in the corner office who happened to be from the UK. And I thought “I am pretty good with people, well I have a nice report, a nice conversation” and then I was told he is a crusty guy, he doesn’t like young kids out of school. It could be tough to build a relationship with him. So then I started worrying, how will I create a report with this fellow who might not like me very much.

I walk into his office and the first thing I see is a photo of himself and Nigel Lawson and I thought “Wow, this could be really interesting, I could talk about Margret Thatcher and Monetary Union and Big Bang and so on” so the first thing I blurred out in my young twenty something voice was “Mr. (inaudible) where did you get the great photo of yourself and Nigel Lawson?” The guy looks at me and he says: “That’s not Nigel Lawson, that’s my mother.” So I was in graduate school and now my job is to figure out what in the world is going on politically and economically. I have to show you, I was fortunate enough to be here about a year and a half or two years ago to discuss the price of prosperity which I am going to discuss again in some part but I also want to talk about what’s going on with Donald Trump and the US-economy and world markets and finance and so on. So I am going ambitiously trying to integrate a lot of material and safe some time for questions and answers. So this mouse overdance us. Victorija if I press the right button…

Viktorija: Yes, just press once again please.

Todd Buchholz: This is a demonstration

Viktorija: Right here.

Todd Buchholz: Oh so I am going to have carefully keep that in that corner there. Yeah, hold on, wait a minute I’m going to need your help.

Viktorija: Yes it’s just press that button.

Todd Buchholz: Yeah I know but if I… but I’ve got to get it down there.

Viktorija: I can simply sit somewhere there

Todd Buchholz: That’s a good idea, Viktorija take a seat!

Viktorija: Of course!

Todd Buchholz: Ok we live in this world where anything can happen, right? You know, Brexit, the pollsters, different things, it wasn’t going to pass and yet it did. Donald Trump, now this fellow thought he would be First Lady by now. You recognize Bill Clinton. People in this country lied about the pollsters, lied about whether they are going to vote for Brexit or vote for remain. Sane thing happened in my country. People did not want to admit that they would vote for Donald Trump and they did vote for Donald Trump. (inaudible). This live reminds me how our expectations in economics and finance can be overturned so quickly. I live in California and this is my former governor Arnold Schwarzenegger. Now because Arnie married a Kennedy, Arnie is filling up his Hummer, but it is a hybrid Hummer. So Arnie get’s like five, six miles a gallon on that Hummer there. On the otherside there are Hot Wheels-cars. I went to Target that day and I bought myself anew Hot Wheels-car a red (inaudible) GTO Hot Wheel-car. Now what is this. Now what is the scale compared to a real vehicle. Everyone, take a guess.

Audience man: I would say.

Todd Buchholz: Two-digit number.

Audience man: Fifty.

Todd Buchholz: Fifty? That’s pretty close. 1 to 64, alright, is the scale to a real vehicle. Do you realize in a symbol how the world economy turned upside down during the great recession. Suddenly the market capitalisation the value of all the shares of General Motors shrunk to less than the value of the Hot Wheels-cars. Hot Wheels could have bought GM, they didn’t want to, but they could have. We could never imagine we would live in world where that could happen. Next line Viktorija.

It’s not so easy, is it? Okay.

We live in this era where… We have an era of nationalism, we have an era of disattachment as well. Some of you may remember the famous scene in Casablanca where Major Strausser asks Humpfrey Bogart, Rick Blane: “What is your nationality?” And Humpfrey Bogart says: “I’m a drunkert” And then the French captain says: “Well that makes Rick a citizen of the world”.

You know, we live in an era now where people in certain industries, software for instance, feel themselves that they are citizens of the world and the American in the Silicon Valley will feel as if he has much more in common with the colleague in Mumbai than if he goes shopping at the Cosco or Wallmart just down the street in (inaudible) park. So what does nationalism mean at this point?

In “The Price of Prosperity” I point out that nations are just as likely to unravel after periods of prosperity as after periods of recession. An economic downturn is no more predictable of a nation being ripped apart than a period of prosperity.

I’m going to show you a picture of my wife’s grandmother. My wife’s grandmother is a hundred and three years old and she is in wonderful shape, we take her out on pancakes every weekend. When grandma was born there was a Habsburg empire. When grandma was born there was an Ottoman empire. And they are gone, they’re gone, never met an Ottoman, I’ve never met an Habsburger. I’ve met my feet on the Ottoman in the hotel this morning but I never met an Ottoman. So now why did they die? It wasn’t that there was an asteroid that came and struck the earth and wiped out the dinosaurs and all the Habsburgs. They died, they were rich empires that died and the price of prosperity points out, that the Ottoman empire, that was called the sick man of Europe. In fact gross domestic product was rising up through the second half of the 19th century, maybe not as fast as the UK and other parts of Europe but it was not as if the standard of living was falling (percipatisantly). It fell apart as the Habsburg empire fell apart even though there was actually economic growth and economic strength. But by the way da you remember this great scene in the movie Amadeus where Amadeus Mozart is playing for Nan and the king says “I like your music, but there were just too many notes, too many notes” and Mozart responds and says “if you can tell me which note you didn’t like then I can try to take them out”. And next line here.

Okay why do rich nations fail? It’s a combination of force. Throughout history globalisation ends up creating figures. Rich nations rack up lots of debt. We often think that it’s poor countries become bankrupt because they take on too much debt. It turns out rich countries also historically take on great deals of debt. The work ethic begins to decline, the population changes and its’ demography and it is very difficult to maintain patriotism in a multicultural, multilateral world. Now here’s a paradox we are dealing with. In this country, in this state standard of living has been going up. For a long time life expectancy in 1900 was about 48 years of age.48 years of age, today it’s roughly 80 years of age. It’s a miraculous change. The standards of living in 1959 in the states it took an average labour about 80 hours, two weeks of labour to buy a refrigerator. In 1959. Now it takes about 20 hours of labour for a medium income earner. One could buy one chicken per hour of work, now it’s over two chickens per hour of work. Technology obviously delivers extraordinary goods. This, (inaudible) Mohammed Ali reminded me of another story about technology. So Mohammed Ali was on an airplane about to take of, the flight attendant comes through the aisle, she notices he is not wearing his seatbelt. She looks down at him and she says “Champ, buckle up”. He looks up at her and says “Superman don’t need no seatbelt”. She wasn’t going to have none of that, she looks down on him and she says “Superman don’t need no plane and now put on the seatbelt.”

Okay, we live in the age of anxiety, despite the prosperity, despite the live expectancy nearly doubling, despite the economic buying power doubling roughly in my lifetime. We live in an age of anxiety. Some of you may remember this from the movie “Network”, which was a play here in the West End and it’s now a play on Broadway. How many of you have seen this movie. You must see this, this is one of the best, most (inaudible) movies ever made. If you haven’t seen it since it came out in 1976, well you are old if you haven’t seen it since 76 you need to watch it. I watched it with my children a couple of years ago. Let me briefly tell you what it is about.

This guy is a newsreader. It’s the nineteen-seventies. It’s so present, he becomes an alcoholic, he’s hooked on opioids, the corporate suits have taken over the newsroom, the integrity of the newsroom is under siege, he decries fake news. The Arab oil-embargo has taken hold there is inflation, there is unemployment. He goes on the air one night after the end of his broadcast he says “tune in next week, cause I’m going to blow my brain out on the air.” Well in the movie they show you the characters backstage, the guy playing the director, the guy playing the producer and so on and they are all saying “Turn off the microphone, turn off the camera.” One assistant producer who foresaw reality television, this is a character in the movie, steps forward and says “No no no, let him go on, let him go on. Think about the ratings, we are going to get next Tuesday.” So he goes on the air next Tuesday and now he is just as messy, (inaudible), alcoholic maniac who is coming from a storm and he goes right up to the camera and he tells the American people “I want you to open up you window and shout to your neighbour”, one of those famous lines in Hollywood history “I’m mad as hell and I’m not gonna take it anymore”. And in the movie they paned out on a 3rd Avenue in New York and you see some white guy open up his window and screams out “I’m mad as hell and I’m not gonna take it anymore”, right across the street some black guy opens up his window “I’m mad as hell”, some Chinese guy opens up ”I’m mad as hell”. I watched this movie with my kids two years ago and I thought, there goes Donald Trump and Bernie Sanders. Imagine a Billionaire and a Socialist. And they were saying the same thing. The system is corrupt. It’s no longer serving you and I’m going to make it better. How did we get in to this period of anxiety, of social figures, of division, despite the prosperity. Well there is a paradox here because in many cases it was good stuff that has led to the undermining of social cohesion. Good stuff, what do I mean about this?

Upper right used the Berlin Wall 1989, the Berlin Wall comes crashing down the march of freedom. President Reagan had the admission “Gorbatschow teared down this wall.” The wall came down. I was a young man, serving in the White House in 89 when the wall came down. I could talk to you about the politics of Poland and Berlin, but Sophia didn’t ask me to talk about the politics of Poland. I’m supposed to talk about the economy and finance and the American flag on the cover of my book. What in the world has the Berlin Wall to do with the American Flag I showed on the cover of that book? Well for every square foot of Berlin Wall cement that crumbled to the ground as dust hundreds and hundreds of workers have been trapped behind that wall, have been trapped under Communism where suddenly free. Free to what? Free to vote, free to travel, free to start a newspaper but also free to compete. Well but who would they compete against? Against my friends against my neighbours, against somebody assembling tax dials in North Carolina, someone writing software code in Rochester New York. One reason why the economic models of the Federal Reserve-board in Harvard, in Yale, in Cambridge, in Oxford. It have done no good in the last 25 years, when introduced hundreds of millions of workers into the worldwide workforce and then you open that door for India and China and a billion stream in. What does it do? It slams down labour rates. Creates a new kind of competition, puts the middle classes into a in a (inaudible) movement.

Meanwhile it raises the overall standard of living in the world, raises hundreds of millions of people out of poverty across Asia. Lindon Johnson had talked about the war upon poverty which has been going on in the US for fifty, sixty years. The war that has been won was the war on poverty in Asia, the number of people living on one dollar a day has (plomited) it’s a miraculous achievement, but it leads many of my friends and neighbours stay up late at night at the kitchen table wondering “How am I going to pay my bills?”

And then there are other forces at work, you know you got murders and acquisitions that make companies more efficient, but if you company has just been taken over what is your job security like?  I memorise I was watching TV I think it was 1998 and I was shocked to hear that Daimler-Benz and Crysler, two companies that have made tanks that have fought each other in World War II where merging. Now, I grew up with the idea of the big three in Detroit. I don’t know what that phrase means anymore. And I talked to my grandmother about Suderbaker, you know Packard another old name destroyed by the Daimler executive in Stuttgart when the merge was announced. And he calls his staff in a conference room like this and he has got flipcharts and handouts, finally a guy in the back raises his and says “Ok I understand who I do report to, what my division does, what I don’t understand is in German how do I pronounce ‘Daimler-Benz-Crysler Plymouth’” He stumbled over the word “Plymouth”. With the Daimler executive at the (inaudible) he couldn’t say Plymouth either. Finally he throws up his hands and he says “It’s pronounced ‘Daimler-Benz’ the ‘Crysler’ is silent”. Pretty much well how that one worked out. Okay next line here.

So as a result of these age of anxiety we backlash against free trade. It used to be on these stage, the Republican Party was in favour of free trade. Gorge Herbert Walker Bush negotiated NAFTA, he left it, he lost his election and so was left to Bill Clinton a Democratic president to pass NAFTA, which he did almost entirely with Republican votes. All he had to do was pick of a couple of members of his own party to get NAFTA through. Now there is no consentes in either party, in fact the Democratic Party is moving further to the left and Donald Trump is taking the Republican Party away from an awoved free trade position. And this result we got all sorts of (inaudible) here and there against Canada. Who knew when Donald Trump became president that our biggest enemy, when I say our, the US’s biggest trade enemy was actually going to be Canada? He first struck at Canada, not China and not Mexico with (inaudible) on lumber and (inaudible) at milk, no. In certain cases the Canadians where violating free trade rules and deserved either slap or be dragged to the negotiating table. But the implications, repucations, renifications of these are very hard to trace. President Obama for instance has slapped 35% tax on Chinese tires. I could argue was that a good idea or a bad idea Chinese dumping taxes. What I couldn’t predict, nor could he was that the Chinese would retaliate with fifty to one hundred percent (inaudible) on American chickens. So you had chicken farmers in Delaware and Marilyn making less money because of a dispute about low end rubber tires with China. Next line here.

Some structural issues that President Trump and the Congress are going to have face up to that relate to this paradox of prosperity. This slide here, it’s a little though for you to see and it’s a little old, basically what you got here is on the x-axis, the horizontal line debt as a percentage of GDP. The vertical line is the deficit. All you need to know is, that it’s dangerous to be in the south-east quadrant, cause that tells you that you country has racket up a lot of debt, is near broke and the deficit is high so dignity per whole. Now this chart (inaudible) crack at the moment, now who is there? Greece, Japan Ireland, UK, US, the Euro Zone. Now this is political implication, cause who is in the end in the north-west quadrant of low debt and low deficit? Mexico! Mexico! You might have heard that Sahra Palins said when she ran for Vice-President “I know a lot about foreign policy, because I live in Alaska and I can see Russia from my house.” I now live in San Diego, I can see Mexico from my house. I have to wait for Shanlu the whale from Sea World to get out of the way. Mexico. Who else is up there? Russia! Why do you think Vladimir Putin could rip of his shirt and strep bear chested through Crimea? Cause he wasn’t worried about borrowing on the international fond market. Because Russia did not have get at that. Now, since then the Russian economy commolidies fell apart, the national economy fell apart and now if you would see Putin without a shirt that is because he would have to sell it on a flea market. And the (inaudible) is an implication of this. And my point is wealthy countries rack up lots of debt and that’s historically if not inevitable you know, a force that seems reliable. By the way we can update this, the US-deficit improves since this chart was made, when this chart was made it was roughly ten percent of GDP, it’s gone. It went down to about 2.9 percent of GDP, the deficit. But it’s going back up, despite a very strong economy our deficit-situation is getting worse our debt-situation is getting worse and that’s typical of wealthy countries. Next line here.

By the way, how did we get into that mess? This was, before the great recession, before Barack Obama, before Donald Trump, about a third of the US-population has no federal income taxes to pay. How did we get in to that? Well there is Snoopy from our Thanksgiving-holiday. When I talk to American audiences I ask this question. First of all I would ask: Can any of you trace your ancestors to the Mayflower, a Thanksgiving-story. And if I get a hundred Americans in a room especially from the East Coast, I’ll get two or three hands up from people who can trace their families to the Mayflower. Then I say: “Okay let’s do a little thought experiment” and we can do that now. We are all coming on the Mayflower in 1620. It’s rocky, it’s stormy and we are going below deck. By the way, this gentlemen with the camera I really feel bad for you, what is your name?

Vugar: Vugar

Todd Buchholz: Yeah you going to have sore hands, you are not used to (inaudible) around so much. Kind of hopeless isn’t it?

Alright we are all coming on that Mayflower, it’s rocky, it’s stormy, we’re going below deck, cause we going to have a meeting. Cause we have to come up with some principles how we are going to run this new country, this new community. Would any of us had that moment than step forward, well, principle number: One third of one half of us shouldn’t pay any taxes. Wouldn’t that immediately undermine that community? Any of you belong to a book-club? Oh, come on, there are books out to sell here! (inaudible) what’s your name?

Audience man: Graham.

Todd Buchholz: Graham. Imagine you are at a book-club meeting and half the people say “I’m not gonna read the book, especially when it’s Todd. I’m not gonna buy the book, but I’m coming over to your house next week and I want lobster-tails” and you couldn’t have a book-club survived could you have a country? I don’t know. I don’t know. But I think we are going to be testing, we, the UK and the US are going to be testing that proposition over the next twenty years.

Oh, my wife’s grandparents! So here is Hellen 103 years old, her husband (inaudible) just passed away a 103, they were honoured. Exactly two years ago, Valentines Day two years ago my wife’s grandparents the longest married couple in America. My wife’s grandparents in this photo were honoured, they were, married 81 years. I mean they weren’t happy about it, you know. 81 years, it’s fabulous! The life expectancy how active people are. If you go to New York in a couple of weeks you’ll be able to see a revival of the show “Fill around the roof” directed by Joel Gray. And some of you may remember, Joel Gray was the original MC in Caberay back in what, the 1960 and he is 89 years old. He’s directing the show and he’s not in a wheelchair and feeble and honorary directing, no he is spry and telling the actors what to do. Our presidential candidates Donald Trump roughly 70, Hillary Clinton roughly 70, Bernie Sanders above 70, Joe Biden is likely to run again above 70. The activity of senior citizens is remarkable, something very different from any other time in history and it’s a fabulous sort of thing, but if you are trying to run pension programmes what we call social security and Medicare and grandma and grandpa retire at 60 and now they still going bowling at a 100 it’s tough to manage those programmes. Something else happens when countries move from poor to middleclass status people live longer but also, next line, they choose to have fewer children. We used to size a man counting his children, now we count Rolex-watches, six-pack-abs and Twitter-followers. Traditional societies were about man demonstrating their virility. I mentioned cabaret. How many have ever seen “The king and I”? One of the first scenes you see the king and all of his (inaudible) and all of his children coming out as if it’s a big Western production, it might have 50 little children coming out, because he’s a manly man, he’s a king. That’s not the way we think about prestige anymore now. Children are more likely to carry Chanel handbags and you know accessories. Again you got grandma and grandpa living up to a 100 and more and having fewer children, how do you balance budgets? And so we see, next side, by the way in the US today, oh this is a map of McDonalds we have a lot of McDonalds. You got a lot of McDonalds, but you realize the mistakes and this is not my forecast, this is now. We have more golf-courses than McDonalds in America today. That’s a sign of the change of aging population. Next side.

So it becomes a burden on debt and on our future liability. Franklin Roosevelt was honest and smart. He said on our security retirement programme in 1930. He sets the retirement age at 65, why? Because in the 1930 the average 65 year old was… dead! Dead! Franklin Roosevelt himself did not live to see age 65. In the 1950 we had about 15 to 20 workers, 15 to 20 fulltime workers for one retiree. That whole half of this room would work fulltime, pay a little bit from your pay check, give it to the next person who walks in the door. There is he! Let me help you catch up. We were all saying something embarrassing about our lives and now it’s your turn.

Alright so now we are getting to the part where we only need about two workers for one retiree, the numbers just don’t add up. Now next line! Our president in the 1960 Lyndon Johnson, look at that photo. He sets up our Medicare-retirement programme. A medical care for older people we call it Medicare. He sets it at age of 65. Now look at that photo. Do you realize Lyndon Johnson did not live to see age 65? That’s a senior prom who 21 years old in that picture, that’s what people looked like in that era. The numbers just don’t add up anymore and in the US certainly not. There is no discussion whatsoever, 2016 election so far no discussion, looking in to the 2020 election of these sorts of relations. I had an idea the other day, I had lunch at the White House last month to talk about a different issue, but I said you know maybe what we need, if we are going to stop this problem, how about this: A nationwide campaign to drive down live expectancy. Right? Like no more guard rails on (inaudible), no more bicycle helmets, you know guard rails on grandma’s bathtub. Maybe we should stop the sense of suspection of meat, you know. You let me know if you hear anything more serious from our politicians that try to deal with these issues. Now (inaudible) sounds pretty glum. We are talking about the debt, the deficit, the social figures and yet economically the US is doing well, our stock market up until a month ago has been on a tear. How do you explain this? Every president has an enemies list. President Nixon has names, right? Journalists and others. In fact now the grandchildren and children of those on Nixon’s enemies-list take great pride and framing and showing up: “My dad or grandpa was on the enemies-list.” President Obama came into office and he had his enemies-list. He was on a tank with a turd that spend 360. And he looked around to different industries and he said. Insurance is here to cheat people, oil, gas, coal. They are here to pollute the atmosphere. Agricultural chemicals you are polluting the soil! Finance! Where are the customers yachts? Hotels, restaurants you exploit minimum wage labour. Before you knew it, outside green energy, there were no sectors at the stock market that didn’t feel as if they re-subject for new taxes and regulations. Now Donald Trump comes into office and god know this man has enemies. And he has trouble distinguishing among them. You know. It’s like if you woke up Donald Trump in the middle of the night and you say “Who is you biggest enemy?”, he might say “Well, that would be Mr. Kim or North Korea” or he might say “Well, Barbara Streisand I never could get along with that woman.” He just doesn’t distinguish these things, his enemies. Taxes, regulations has been an enemy, Mexico is an enemy, Canada was an enemy on trade, the mainstream media is an enemy. The difference is those are not sectors of the SNP500, sectors of the stock market. In the economic recovery from the great recession that began in 2009 the weakest link was business capital investment. Basically businesses just sat there, you know, “we don’t trust it”. Now in the last two years business capital investment has come back strongly. Next line here.

Okay, let’s talk about the economy again. Move along. There we are. Three critical levels, rates, oil and trade. And I may skip some slides so we save enough time for questions. Federal Reserve-board rewrote economic policy with zero per cent interest rates. Sophie was kind enough to mention a book I wrote, as a graduate student at Cambridge of “New Ideas from Dead Economists” and I got an endorsement from Milton Freedman and others for this book. There is a chapter on monetary policy and it’s been rewritten and has revised in many languages there is no one sentence about negative interest-rates. In this magisterial masterpiece of mine, not one sentence, because I was not smart enough to imagine this morning, the one year bun, the German one year note, the interest-rate is 0.13% and may go negative in the next couple of minutes. So the Federal Reserve-board followed by most central banks in the world cut interest rates nearly to zero. Most of my Republican economist friends thought was a disaster. They told me it was going to lead to hyperinflation. I haven’t seen that. They told me the US Dollar was going to fritter away in nothing. Ha! Was there a downside to below interest rates? Yeah it probably sparked the (inaudible) for Bitcoin and Crypto-currencies and there is a downside for these sort of things but by the Federal Reserve-board-policy this actually can be defended. Price of oil and trade there are two other critical ladders we can talk about. As I said (inaudible) every central bank, Bank of England here. Oh! The rates went up! 0.75 is the base rate right now. Bank of Australia. (inaudible) every central bank in the world. My friends thought it’s going to be a disaster. (inaudible) is going to bring us back to the 1970. You remind the 1970? Jimmy Carter, the singing group “The Village People”? YMCA. The term we had then was stagflation, a recession that would not end combined with raging inflation. I’m not seeing the raging inflation there is an inflation rate. This man helps explain that. This is Jeff Bezos, from Amazon. That’s a photo I can show you. There are certain ones that I can’t show you yet. He looked like a 98 pound weakling. Percentage of consumers willing to pay extra for delivery in a defined timeframe. No one will pay extra to get a delivery within one week or three to five business days or two days. Next day 23 per cent. But almost half the number of the people will pay more to get something the same day. Next one.

He moves from that to now, he looks like that. And that’s the slide I can show you. One of the big puzzles in the world is, why is inflation stage so low? Well, this can explain it, this slide here. We still have the price wars going on. Amazon actually bought whole food, do you have a whole foods here?

Audience woman: Yes.

Todd Buchholz: Yes, some say no. Okay. Whole foods kind of upscale grocery markets and the joke was, instead of whole foods people call it “whole paycheck”, because it’s so expensive to shop there. Amazon took them over and has driven down the prices so they are more compatible. Next slide here.

The gig economy, the gig economy is a surprise side shock. It takes access resources and puts them on the market. How many of you have taken an uber? I just took one once again. How many of you stayed in an Airbnb? If you are owning a car company or a hotel, don’t you think it’s hard to raise interest rates? Sorry, prices when you are competing against Airbnb and competing against uber and the whole gig economy. Another thing that has held down the US inflation is being the strong dollar. I don’t really have time to get into this except why is the Abercrombie-dude lonely.

Across the street from Trump Tower is the Abercrombie and Fitch store. For years there have been a half-naked dude standing in front of that store and it’s not a vagrant, he actually works there. And there have been mostly foreign tourists lining up around the block to take photos with the guy from Abercrombie and Fitch. He’s a lonely boy today. And not just because it’s cold in Manhattan. He’s a lonely boy because the foreign tourists can’t afford to stay in New York because the Dollar has been so strong. I got a story here. I ended up staying at the Waldorf Astonia Hotel about a year and a half ago. That’s where the presidents, well Trump doesn’t stay there, he’s got his own Hotel. Presidents stay there! Prime Ministers stay,the Waldorf Astonia hotel in New York City on parker. I stayed there because there are 229 Dollars a night, because they are competing against Airbnb and the foreign tourists regards. So I’m at Waldorf knocking at my door. Minibar check. I said “No no no, nothing from the minibar. Because I won’t pay 12 Dollars for a bottle of Evian.” And the guy says “Oh can I sawp something out of the minibar?” I said “Sure come on in”. He gets down on his knees and I said “What are you doing?” He said “I’m taking out the Vodka”. I said “What are you putting in? Bourbon?” He said “I’m putting in Pringles potato chips.” The Russian tourists weren’t coming to New York anymore because of the Dollar. The strong Dollar helps contain inflation, helps keep interest rates down. Let’s move ahead here. Oh what’s going on…I said ROT rates. Rates I think are staying low, because inflation is going to be staying low. Because Jeff Bezos is keeping inflation low, bacuase the strong Dollar is keeping inflation low, because the gig economy is a surprise side shock. What’s going on with the oil prices? I told my wife I can’t use this or you will hate me, because it looks like I’m bragging. I was on TV when oil was a hundred Dollars a barrel on FOX. And then the newsreader (inaudible) known as the money holly in New York said: “Todd, what’s going to happen with the price of oil?” I said “Maria, from a hundred it’s going to collapse to 50 or below.” That was 2014. And they put that on the headline. I told my wife if I use this my friends at the Henry Jackson Society will hate me, they will think I am the biggest bragger. And she said “no, read this”, so she wrote for me a note to read: I, Todd Buchholz, did graply forecast the collapse of the price of energy, but around our house I get everything wrong, which is pretty much the case. This is a story about technology. When oil was way up here the people from Goldman Sachs and all who say “Oh it’s gonna go, it’s gonna keep going” No!  The technology revolution in fracking means that there is a surplus of energy around the world. I am flying to Kuwait this evening from Heathrow. The US has now become the Saudi Arabia in terms of oil production, which means this occasional moves up and ends up being corrected, because there is more energy offline than there have been brought online. Next line here.

Alright, has the stock market been in a bubble? What does the stock market need to grow in this environment? We need some signs that the rest of the world is not into recession. So far we are not getting those signs obviously you saw the data coming out of the UK yesterday. Economic growth 0.2 percent. We are going to be (inaudible) by North Korea. American investors and financials they want to be bored of foreign policy. They don’t want to have to worry about North Korea or worry about Syria. Most critically though we need inflation to stay low. If I am wrong about inflation god help the world economy, I mean it is weak enough as it is. If I am wrong about inflation and it begins taking off our Federal Reserve board is going to slam on the breaks, interest rates around the world will jump, equity markets will tumble, will lose 30 to 40 percent of their value and I know that the entire world economy will be back in another great recession. What are the chances of that happening? Let’s say about 30.2 percent. By the way I heard somewhere that 85 percent of all statistics said by a speaker are made up on the spot. So 30.2 percent, I don’t think it is going to happen, but this is really… let’s keep it on… it doesn’t matter really… don’t care about the states, don’t care about the US economy. For the world economy I say, keep an eye on the US inflation. If it takes off there is a huge risk to the world’s economy. Let’s move ahead here. And part of it is explained by my mother. This is not literally my mom but it reminds me of a story. When I was a kid if you put money in the bank, you got a return. You got an interest rate. That was more than zero. And not only that. You would get glass-wear, a toaster, right some people are nuts in their heads. I remember when I was a little kid and I am on the backseat of the car and my mom had a 10.000$ CD-bank certificate of deposit in the first national bank of so and so and she was withdrawing the money. And by the way she got a toaster for the deposit of the money. So she withdrew the money cause the six month certificate of deposit had matured. She is racing across town to the second state bank. So I am in the backseat and I said “Mom I don’t understand, why are we taking our money from there to the other bank?” She said, ”Well, we need a blender.” Because interest rates have been zero they had more money invested in stocks than they otherwise would. So the question is, if interest rates ever normalize will people like my mother and all of her friends and my friends and neighbours take their money out of the stock market instead return it to banks. And if inflation takes off that’s one of the first thing that is going to happen. Next slide here. Okay let’s move ahead, let’s talk about Donald Trump for a couple of moments and having time for questions. Is he some narcistic, factless maniac? Well the narcissism, there are some signs there but is he factless? I look at this photo here. He’s posing. Obviously he knows that there are photographers there, we all do that. Now we pretend that we don’t know that we do. But look at his desk. This is not a guy knowing that a photographer is there who took his forearm, whipped everything of the desk so it’s prestige, so he looks like he knows everything in his head. This is a working man’s desk. Secondly he’s got a view of central park. There are fewer more difficult business propositions than to build a skyscraper an the corner of 55th street and 5th avenue in Manhattan. How do you get that done? You have got to negotiate with a landmarks commission the majors commission. Sachs Fifth Avenue the anchor (inaudible) of the retail stores on the first level. You need to deal with the plumbers union, with the electritians union, you need cement. Where do you get cement in the New York metropolitan area? You have got to go across the tunnel to Jersey up to Tony Soprano to negotiate them up. This is a guy who likes getting things done. When he first come into office the tax cut took forever to get down and a lot of people said “He’s too much a loner, he’s to bombastic, to megalomaniacal”. And the tax cut came through and now we got the trade war negotiations going on. Let’s move ahead here.

I’m gonna skip this Freudian, move ahead again and again. The winners and losers of what hehas done to the economy, now coming back to politics for a moment. The tax cut he cut (inaudible) taxes from 35 to 21 percent that helped the stock market, he allows companies to write of equipment they are investing in, that has helped transportation  and telecom companies and so on. Canaries in the coalmine. What he hasn’t done is helped California and New York. Or New Jersey. The tax cut was (inaudible) payed for by reducing the ability for people in high tax states to deduct their state and local taxes. I’ll just say that again. We used to be able to fully deduct from our federal taxes, the taxes we payed to our state and local governments. Now if you live in a state like Texas or Florida that have no income tax that doesn’t matter, but if you live in a state like California and New York the income tax might be 10 or 11 or 12 percent, That’s important. Secondly the tax cut removed the ability to full deduct interest on home mortgage. That doesn’t matter if you live in a state like Louisiana where the average house costs 120.000 Dollars. But if you live where I live, California where just getting a mailbox is costing 300.000 Dollars, much less the land it’s punishing. The Canaries in the coalmine, California, Connetticet, New Jersey and New York, they have a real problem, a real estate recession, before the next election. Now, does it matter to Trump, it always matters but I might point out, these are so called blue states, these are democratic states. So arguably the Trump tax cut, was payed for by punishing his political opponents and their residents. And remember in the US we don’t vote for a president by popular vote, it’s this whole complicated electorial system. In which case if you lose California anyway it doesn’t matter if you lose all of it and every single voter. Okay let’s move on ahead here. Important players. Oh well, we don’t have time. By the way you might know Peter Nevaral, I actually talked to Peter at Harvard years ago, Peter Nevaral is the president trade council leader in the White House. Peter here was plugging his book, this was before he joined the White House, called “Death by China, one lost job at a time”. This is the guy, the guy who wrote Death by China is one of the guys who is closely advising Donald Trump at the Oval Office. Now you got other people, like Larry (inaudible) their free traders, but it’s not (inaudible). So well for Larry. Next slide here.

Who is in the (inaudible) for trade deficit? It’s all China, I don’t know why we talk about Canada when it comes to trade (inaudible). So here comes the problem Trump has politically. Trump says “I’m gonna solve the Chinese trade deficit.” And the overall US trade deficit, but the main deficit is getting worse and worse. Why is it getting worse and worse? Because we are the only healthy country in the world. I’m exaggerating, but when your country is growing and other countries are just stagnant your people can afford to buy more stuff. So it is actually a paradox of prosperity that the US prosperity is leading to the trade deficit getting bigger. So Donald Trump somehow has to explain why the trade deficit is getting worse during his watch. Ok, next line.

Here by the way, gain theory. Trade negotiations, if you study gain theory and if you have ever seen “A beautiful mind” which is about John Nash the Prinston genius gain theorist. Three principles of gain theory. Either you get a PhD in gain theory or you listen to me for the next ten seconds for the three things you need to know. Number one: Ask for the world when you are negotiating. Ask for too much. Number two: Go crazy, let the other side thing you might do really something nuts and scary. Number three: Roundup allies. What Donald Trump really did well with the first two, ask for the world in negotiation and acting crazy. He hasn’t been too good in rounding up allies, maybe it’s getting a little bit better with his new NAFTA-deal. We don’t know whether Trumps trade negotiation, style or strategy will be a disaster. A year from now we may say “oh my god this idiot set the entire world economy into not just a great recession but into depression by tire of scolling up everywhere.” Or we might look back and say “Wow he was a pretty clever guy, he knew he would get the Chinese then if he but the screws to them and showed that he was a little crazy and willing to endure pain. It’s to early to say. Next slide here. Move on.

Foreign policy, oh boy. I was actually at a meeting, Tony Blair was there and I don’t know Tony Blair. I met him once and we were discussing. I said “Mr. Prime Minister, I think Vladimir Putin is auditioning for a movie roll. “ And Mr. Blair said “What do you mean?” And I said “I think he want’s to be the villain in the next James Bond movie.” There he is right there. He’s watching. He’s watching Donald Trump and Afghanistan and Syria. Remember I talked about Vladimir Putin marching into Crimea? That was six months or so after Barack Obama turned to Assad in Syria and said “If you use chemical weapons I’m going to take you out.” And that happened. He used chemical weapons and Obama says “I’m going to talk to the Democrats in Congress, I’ll be right back. Oh, I should talk to the Republicans. I’m going to give a speech at the UN that will really get them.” So Putin is watching Trump and what Trump is doing on foreign policy. Watching the generals leaving the administration. And I keep my eye on Belarus and other parts of the Baltics where Putin decides to take of his shirt, put on the jack boots and start marching again. Ok I am covering too much ground here. Oh, by the way. If you think that the world is ending and there is so much going on bad what I would do is buy shares, as an economic advice, in the exchange rated fund for aerospace and defence, which have been doing great. Because there is Mister Kim there. One man, one country, one haircut. You know for the whole country. Let’s go to the end, next slide here. One more.

Look for the US it’s the best economy in ten years, but inflation is going to have to behave. Three critical levels, rates, oil, trade policy and the trade war. If it doesn’t end it’s going to risk Trumps re-election. Foreigners are losing money in the states and the overall economy has grown by three percent, now it’s about 2.8 percent. Unemployment is down to 4 percent, foreign income has almost dropped 10 percent. Nebraska, Kentucky other places that are critical to a Republican victory are beginning to get nervous because of foreign income dropping. And that’s why I actually think we will look back a year from now and say “wow he was pretty clever and pretty though he didn’t get all what the wanted and yeah he declared victory without a full victory but I think he is going to end up signing something with the Chinese before the end of 2019. Alright let me close this way. One more movie reference because I rewatched the movie “The third man” the other day. “The third man” takes place in Austria after world war II. It’s time of chaos and intrigue and assasinations. (inaudible) character says this, he says “In Italy under the (inaudible) there was warfare, murder, bloodshade, terror. But they produced Michelangelo, Leonardo Da Vinci, the Renessance. He says “Switzerland, 500 years of peace and quiet and what did they come up with? The Kuckucksclock” My point is, despite the divisions I talked about, the figures, the social disruptions, the fact that some of us can’t even have a dinner conversation without getting into an angry argument about leave or maintain, Trump or not Trump. This now is still the opportunity for progress, This now is, despite the figures and the opportunity for prosperity and this is a time where we still have a better live for ourselves, for our friends, for our neighbours. I thank the Society so much for inviting me today, Look forward to your questions, thank you very much. And also Viktorija for her fine work.

Sophia Gaston: Okay, so. We technically actually inly got five minutes, but I a stay a little longer. I’ll just ask a couple of questions and then we’ll go to the audience.

You talked a lot about debt and what’s interesting here in Brittan and of course across Europe is the long period of prosperity. Now we are sort of at the end of it and things are shifting, because there was a kind of public consenses that authority was necessary after the financial crisis and that we are all in this together. Things have changed now and here in Britain actually even though there is kind of a crosspatty demand that you can see in public opinion poling, for more spending. People want the government to spend more on public services and in fact even many conservative voters are happy to see the government huge sums of money to that renationalized industries and so on. We are in a different phase. So much of this to me speaks about the inability of governments to talk about trade offs with citizens. The aging population, we are obviously going to come in the end of the lineat some point to this we have to take decisions, either to raise taxes or whatever. How do you think governments can communicate better about the trade offs involved in public policy?

Todd Buchholz: Well that’s a great question. There is a difference between longer terms sustainability and short term. So if interest rates are zero, it is a pretty good time to invest in things, public ventures as well. If the government is going to borrow, that it’s going to borrow when interest rates are at zero percent than when interest rates are seven percent. But the question is, how much confidence do you have that those investments will either pay of or will be (inaudible) chosen. That’s a problem we have throughout the world. A bridge to nowhere. There is a famous quote “My bridge to nowhere, to Alaska”. Gerry Brown is in Tenton spending billions and billions of Dollars for a high speed rail line that will take you to where nobody lives. Somehow he is a (inaudible) of this and California voters will be in debt forever. So the question is not only whether to spend money, but how to choose what to spend money on. Now, I don’t have a specific answer but I will give an example of something that actually did work. That was attorney issue. After the Soviet Union fell and the US thought about a piece (inaudible) one thing that we had to do was to save some money on defence when Regan had a big defence build up. Soviet Union collapses and now we don’t need to spend so much on defence. We should close a military basis. The problem was any congressman with a military base in his or hers’ district would be defending it as if they would fight the Soviet Army. And so what did Congress do. It actually appointed a commission that would identify which bases were superflues and then Congress held a simple up or down vote on the entire menu. So they didn’t have the ability to negotiate base by base and trade and so on.

So I kind of wonder whether that kind of mechanism which insolates politicians from some of the decision making is what we are going to have to go to in order to make (inaudible) decisions on those sorts of questions.

Sophia Gaston: Your book is a hugely international rock, you are going between different time periods and certainly between lots of different countries and cultures. Is there any country in the world that you think particular in the West which is doing this right. Who is responding well to these challenges that you identify in the book, if anyone.

Todd Buchholz: That’s a tough one. There was a book written in the1950 by (inaudible) who is a historian economist and it’s called (inaudible) revolution and basically one chapter is on the (inaudible) revolution in Japan and every revolution that ever took place. And the book reviews that came out in general said “Fabulous book” you know brilliant but any specific expert said it was a brilliant book except he didn’t quite understand the Japanese and the Russian experts said fantastic on China and Japan and the US but he didn’t quite get the Russians. It’s a little (inaudible) to say it. Certain countries do well in certain matters. It’s remarkable tome for instance. We Americans think of Canadians as being politically a little further to the left a little bit more nurturing a little bit more caring kinder to their neighbours and partly because they have a better national healthcare system and the US does not. However on emigration policy the Canadians have a much more strict emigration policy they have a point system if you have a higher education, if you have money and so on. They discriminate. You know, the way the US does not. And so I actually think the Canadian system is a smarter way to run an emigration system. So when you talk about emigration I say I think Canada has done a good job. Canada has also done a good job in the 1990, early 90’s. Canada nearly went bankrupt with its’ debt and deficit. And there was a run in the currency and the bond sold of and there was a terrible financial crisis. The same thing in Sweden. And the Canadian government under the left wing party under Paul Marten actually ended up slashing federal pensions, taking of what we would think is historia conservative prosperity actions and that’s set Canada up for more prosperous 20 years to come. I don’t endorse everything that Canada does in certain areas partly out of crisismade decisions the US has avoided.

Sophia Gaston: Something that Trump and his campaign seemed to do so well in 2016 was to play to a base that was there. America as it was in that time or as the Democrats projecting forward to this demographic change that have quite been realized yet and just a little bit ambitious timing there. Do you think by 2020 particular because so much of what we have seen in politics at the moment. The reactive movement, some sort of dynamism in these two sides put as a resistance to Trump. Do you think that those issues and I think many of them are issues that you (inaudible), do you think they will be as prominent in the debate in the election in 2020 ordo you think the landscape will have shifted significantly?

Todd Buchholz: I don’t think the landscape has shifted much. You know part of what you are getting there is the demographic change and there is an attitude ”Alright, Trump won a majority of white men but also a majority of white woman”. And as the Caucasian population becomes a smaller percentage the Republican party will go out of business and especially the Trump part of the Republican Party will go out of business. But that raises the question about minorities and about which way they will vote and I think a more sophisticated view will tell view for instance many people will dumb Hispanics into one group but Cubans had tended to be much more Republican and much more conservative on social and economic policy and certainly foreign policy than Mexicans for instance. Very view people have studied the Asian population in the US. When we say Asian in the US we less talk about India and Pakistan and more likely talking about China and Japan and Vietnam. The Asian population in the US politically is up for graphs and neither the Republicans nor the Democratic Party has really made firm inwrotes into that population. So we may look back in 20 years and say “Well the Asian population is the same as the majority white population or maybe not. So I think a more sophisticated view of these things would tell you that it’s unknown that it’s too soon to say Trump and the Republican Party are just (inaudible), nativist, nostalgic party for Caucasians. In fact that might not be the case at all.

Sophia Gaston: Brilliant, I think we can probably do about five or ten minutes of questions I anyone has a burning one they like to ask.

Audience man: Yes, in your book you make it very clear destinction about personal debt and government debts and I think this is really with the man standing in the cemetery who is asked for the debt of his father and he tells the debt collector to jump into the grave. Of course government debt goes on and on. Excluding the Euro-zone, do you think it is possible for the US and the British government to go bankrupt? Because obviously there is an (inaudible) increase in bonds now (inaudible).

Todd Buchholz: It’s a great question. One thing that I have been advocating for the US and for some extend I would for the UK I have been (inaudible) I wrote about it in the book and I have argued it with the US treasure department. Interest rates are virtually zero. I am exaggerating. Ten year (inaudible) right now 2.65%. The US should be issuing one hundred year bonds and locking in these low interest rates for all of our lifetimes and than so on. The average duration of US debt is five years. In the UK it’s actually twice that. So we roll over our debt five years. If interest rates normalize. If ten year notes go from 2.5 to 5 or 6% that’s trillions of Dollars to the US debt. Why doesn’t our government do it? You might say, who would buy a hundred year debt? Mexico successfully auctioned a hundred year debt. Private companies do it. The Disney Company issued so called sleeping beauty bombs that pay back in a hundred years. Railroad companies (inaudible) railway company. You might not have railroads in a hundred years, in this country you might not have them next week. So why don’t we do that in the US? Because issuing short term debt flatters the current profile for whatever a government is in power. Because interest rates are nearly zero now short term debt interest on the debt is a tiny sliver on the US budget and so it makes the budget deficit look small to issue short term debt. So the US (inaudible) be doing, the UK (inaudible) to be doing, can the US go bankrupt? I mean probably not but we can inflate, we can just print money and everything I said about inflation goes wrong and than we don’t end up like Venezuela, but we end up certainly with a much weaker economy and a much bigger balloon payment at some point. The question I have is: Can the US tackle this without facing a dire crisis. I mentioned Canada taking firm action because they were in crisis, they had no choice. Sweden in the early 90’s had to raise short term rates to 500% because people were dumping the Swedish Crona. So can we face up to it before we get to the crisis point? I don’t know the answer to that.

Audience man: You mentioned increasing long (inaudible) in America and other countries (inaudible) white male with no other than college education (inaudible) going down. Now the medium income formed that group has been static in real terms for decades. Are there going to be benefitials (inaudible) changes that Trump (inaudible).

Todd Buchholz: That’s a good question, it’s rather startling in the last couple of years the life expectancy for many lower income white man stagnate or even gone down. And I think the opiod crisis is a big part of that. Similarly in the 1990’s the Crack-epidemic influenced the crime rate. So if the US crime rate has improved dramatically since the1980’s you know, almost without interruption except there was an interruption certainly in urban areas during the Crack-crisis. When you separate that out the crime rates improved and got better and better. And I think the opiod crisis has done the same thing to many people but in addition as I point out in the book, the number of people voluntarily not working got up, the labour participation rate in the US has gone down, despite our unemployment rate on 4%. Many cities and many states it’s well below four percent. There are jobs and plenty,but the number of people who collect government disability payments has gone up and in certain counties, in certain regions it has become a kind of lifestyle. That’s what happens around the world. There are (inaudible) epidemics in certain communities. So I think that the overall story about life expectancy is going to continue to improve but we do have these social pathologies that won’t be applying as long as these social pathologies take hold in certain regions.

Sophia Gaston: Oka, I think we will leave it with that, because we are quite overtime now and so I think Todd will be kind enough to stay for a little, while yet somebody wants a copy of the book and have it signed and so on and maybe take a few more of your questions casually. But all is left to do now is to thank Todd for his generous and really wide ranging presentation in the usual way.

Todd Buchholz: If I want to be generous, come with me to Kuwait tonight! Thank you.


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