SIMON BROWN: I’m chatting now with David Buckham, CEO of Monocle Solutions. The reason I’ve got David on the line today is he sent me a book towards the end of last year. I read it over my holidays. It’s The End of Money – The Great Erosion of Trust in Banking, China’s Minsky Moment and the Fallacy of Cryptocurrency.
David, I appreciate your time today and I appreciate the copy of the book that you sent me – a good old-fashioned dead-tree version. My sense from reading it is that the world is an unhappy and tricky place, and that’s not a new or outrageous statement to make. The theme running through the book is that there’s an erosion of trust in our financial system and you very much link that to an erosion of trust in our sort of global liberal-democracy system at the same time.
DAVID BUCKHAM: Yes, Simon. First of all, thank you very much for taking the time to read the book and I really appreciate being on your show. In the last 30 years we’ve noticed a simultaneous decline in democracy, which kind of apexed in 1989 with the fall of the Berlin wall. And then at the same time, an enormous erosion of trust in banking, which is very obvious when you look at the joy with which people have sanctified the idea of decentralised finance – the ‘let’s get rid of banking’.
The question that we ask in the book is: Is this simply a correlated trend – these two trends – or is there causality in it? Our view is that the one causes the other. This is kind of an extreme version of capitalism that’s propagated from the Harvard School of Business all the way through the American system. You’ve got the Wall Street movie. Oliver Stone almost celebrates [that] greed is good. The consequence is that you have bad actors within the financial system that repeatedly and without sanction destroy trust; you’ve got tax evasion, rising inequality, and then people don’t trust the banks and therefore they don’t trust the financial system. But at the same time they lose faith in democracy.
So Hong Kong goes relatively unnoticed [and] South Sudan. I think, Simon, you might be aware that 17 missionaries were abducted in Haiti, and nothing’s happened yet. They want a million dollars per person. In times of past, Reagan sent troops into Panama to get Manuel Noriega.
So we live in a very different time where people couldn’t care less about democracy, and that’s very worrying to me.
SIMON BROWN: In the book in some senses it goes all the way. Nixon was perhaps a key start point – Bretton Wood and the exiting of the gold standard. You mentioned the Berlin wall. I remember I was a teen when that happened; for me this was the beginning of the glory days – and it wasn’t. You absolutely agree on that. And then of course, just over a decade ago, 14 years ago, the financial [woes] of ’08/09. The phrase often [used is] ‘no bankers went to jail’. The flip side of that of course was the start of quantitative easing, and here we sit 14 years later, and there’s still quantitative easing. Jerome Powell’s talking around tapering, but there is money just being pumped into a system almost in a sense to prop it up.
DAVID BUCKHAM: To me it’s completely unbelievable. In 2004, the size of the Fed’s balance sheet was $800 billion and the size of the Fed’s balance sheet today is $8.8 trillion, $9 trillion. So tapering is just a reduction in the number of bond purchases that take place, but you’re still expanding the balance sheet while last night we had inflation at 7%, the highest in 40 years. So Jerome Powell is doing pretty much exactly the wrong thing – too slow – but he’s working in a system that has 10 times more money than we had less than 20 years ago.
So people ask – or I wonder – if Bitcoin is taking away from the gold market. No, not at all. Bitcoin is a new asset that’s just added on top of a very overheated equity market. The fact that commodities aren’t also up is a blessing in disguise. All the markets are very up. I think that the really bad thing about this is it’s the lazy way out. Instead of building bridges, doing new deals type of stuff, building dams, creating real economic benefit for 50 to 100 years, they just printed money and, and bought bonds and never stopped.
SIMON BROWN: As … yesterday, when inflation was lost at these levels, in 1982 interest rates in America were over 15%, which drives your point.
I want to come to crypto in a moment. The other key point was China as a massive risk sitting on the global horizon, in a sense. I suppose part of this is how does it play? A lot of the crypto fans will tell you this is all going to collapse. It’s going to crash sometimes before Easter, maybe before Christmas. My sense from the book is this is going to be a slow unravelling, and it truthfully is happening.
DAVID BUCKHAM: Yeah. I think it’s been unravelling – we just haven’t noticed – since 2018. The start of it was the Hong Kong intervention. The Chinese banks’ balance sheet last week, I think, is $49 trillion. To put in perspective, the US balance sheet is $22/21 trillion, US GDP’s $20 trillion, and Chinese GDP is $15 trillion. So, no matter which way you look at it, Chinese banking assets to GDP, which is a very good metric to look at holistically, are way, way bigger than any large economy should ever be.
We know, for example, that China has made loans into Africa, like the recent Entebbe Airport story, where the loan is at a 2% rate, completely non-economical, and it hasn’t priced … and it hasn’t priced credit risk. These loans aren’t being paid back. That’s about $6 trillion of the $49 trillion that goes to the Belt and Road Initiative.
So, as China’s debt bubble bursts, because China is not a democratic country which therefore doesn’t have free press, I don’t think we are going to see a big kind of public explosion like we had with Lehman, and I think Evergrande’s just the tip of the iceberg. I think it’s going to be more like a long, slow burn and you’re going to see increasingly autocratic behaviour, because the person on the ground in China is going to suffering economically. They’ve worked very hard, they’ve worked very long hours and their children are not going to work those same hours. You’ve got a declining working population because of the one-child policy.
So in order to pay off their debt, just the interest-bearing part, they’re going to have to grow at more than 6%. We worked out that that means per person over the next 15 years they’d have to grow at 10%, which is 10% increased productivity – which is impossible.
So I do think that China is not a failed state, it’s not a failing state, it’s a slow burn with unfortunately a characteristic of autocracy.
SIMON BROWN: Yeah. It’s a ‘slow puncture’, to use an analogy. One of the subtitles is ‘The fallacy of cryptocurrency’. You’ve mentioned crypto. A lot of my listeners out there are [thinking] ‘this is all perfect; crypto steps into that space and solved this problem’. I’ve never been convinced, certainly not convinced by that.
DAVID BUCKHAM: No. Cryptocurrency is one of the silliest ideas in the issue of human endeavour. [Simon chuckles] I studied mathematics at university, so the actual cryptographic function, which is the kind of underlying technology that underlies it, is a particularly stupid idea, which is that you get computers to crunch through the prime factors to find the prime factor of hundred-digit numbers. So you’re just burning energy. That’s called ‘proof of work’. The collaborative way is basically a completely trusted system in which you have thousands of people doing the same thing to authenticate each transaction.
So, if Bitcoin were to become a real currency which you use to purchase goods on a daily basis, they would have to move away from proof of work. Aside from anything it’s philosophically bad because we are celebrating not having a central financial system. So it’s the equivalent of not having a central medical system. A lot of people with Covid haven’t trusted the medical fraternity, and you’ve got the non-vaxxers. So you are always going to have tensions in a centralised system.
Think of the police, for example, think of the emergency services, think of aircraft rules and regulations. If we don’t trust the banking system and we replace it with a completely trustless inefficient system – by the way, Simon, as you know, most people don’t even care about the decentralised finance part of it – [we’re] just trading an asset that keeps going up.
SIMON BROWN: It’s Speculative, yes.
DAVID BUCKHAM: For me, it’s a silly idea. At best it will become a regulated currency, at best it will become fully regulated, like any other part of this central system. At worst it will crash.
SIMON BROWN: The whole idea of not having any oversight. I always say, well, that’s fine, then we are living in Mad Max, and that’s not a world we want to be living in.
We’ll leave it there. That’s David Buckham, CEO of Monocle Solutions. The book is ‘The End of Money – The Great Erosion of Trust in Banking, China’s Minsky Moment and the Fallacy of Cryptocurrency’. Get yourself a copy and read it. It makes for some fascinating reading.
David, I really appreciate the time.
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