Hidden Forces
The New Political-Economy | Russell Napier, Edward Chancellor, & Helen Thompson
Mon Jul 03 2023Description
The episode discusses the changing nature of the international economic and political order, driven by demographic shifts, globalization, and energy transition. It explores the impact of China's integration into the global economy, including interest rates, debt levels, and wealth inequality. The role of low interest rates in asset price bubbles and financial system risks is examined. The episode also delves into the impact of China's rise on energy markets and the transition to low carbon energy. Geopolitical competition and Europe's energy challenges are discussed, along with Europe's future uncertainties and the potential role of government.
Insights
China's Integration into the Global Economy
China's integration into the global economy has had far-reaching effects on interest rates, debt levels, wealth inequality, and jobs. Its influence on the world has changed many things.
Low Interest Rates and Financial System Risks
Globalization and central bankers' actions have led to low interest rates, which have fueled asset price bubbles and increased risk in the financial system. These ultra-low interest rates have also had social consequences such as rising inequality and discontent with the market-based system.
The Impact of China's Rise on Energy Markets
China's increasing demand for oil has caused an ongoing oil situation, while the shale oil boom in the US has helped prevent an energy crisis. However, investment in fracking driven by low interest rates proved unviable.
Transition to Low Carbon Energy and Future Energy Crises
The transition to low carbon energy is happening slowly, and the replacement of oil with electricity in transportation is not as significant as hoped. Investment in renewable energy requires government intervention and a shift to lower energy efficiency may result in technological limitations.
Geopolitical Competition and Europe's Energy Challenges
Geopolitical competition between China and the US is driven by their pursuit of dominance in low carbon energy. Europe faces challenges in catching up with China and the US in low carbon energy, and there is disagreement within Europe about its direction.
Europe's Future Uncertainties and Role of Government
Europe's political disunity and ongoing sovereign debt problems contribute to future uncertainties. There may be a bigger role for government in Western political economies, and investors need to consider industries incentivized by governments.
Chapters
- The Changing Nature of the International Economic and Political Order
- China's Impact on the Global Economy
- Globalization, Low Interest Rates, and Financial System Risks
- The Impact of China's Rise on Energy Markets
- Transition to Low Carbon Energy and Future Energy Crises
- Geopolitical Competition and Europe's Energy Challenges
- Europe's Future Uncertainties and Role of Government
The Changing Nature of the International Economic and Political Order
00:00 - 07:16
- Podcast episode featuring Edward Chancellor, Russell Napier, and Helen Thompson discussing the changing nature of the international economic and political order
- Material changes driven by reversal of multi-decade trends in demographics, globalization, and low-cost carbon-based energy sources
- Ripple effects on inflation, risk rates, wealth and income distribution, national security, and ruling legitimacy of national governments
- Discussion on energy transition and its geostrategic consequences for resource-rich countries like US and Russia, energy import-dependent countries like EU, and China's investments in renewables
- Possibility of rapprochement between US, Europe, and Russia
- Industries/sectors positioned to benefit or avoid in new economic/political paradigm
China's Impact on the Global Economy
06:51 - 13:20
- China's integration into the global economy has had a massive impact on various aspects, including interest rates, debt levels, wealth inequality, and jobs.
- The emergence of China led to a massive investment in tangible productive facilities, affecting prices and causing distortions globally.
- China's currency manipulation has pressed down the rate of inflation and interest.
- Geopolitical conflicts with China have been ongoing since around 2012, leading to a different world order.
- China's influence on the world is significant and has changed many things.
- Chinese savings and the rise of China have influenced interest rates in the United States over the last several decades.
Globalization, Low Interest Rates, and Financial System Risks
12:56 - 21:04
- Globalization has dampened inflationary pressures by bringing down interest rates.
- Central bankers have played a significant role in lowering interest rates through zero and negative rates, as well as quantitative easing.
- Low interest rates have led to asset price bubbles, including housing, cryptocurrency, SPACs, and contemporary art.
- Low interest rates also increase risk and leverage in the financial system.
- Recent cracks in the system include global bond and stock market sell-offs, UK pension fund collapse, regional banking crises, and highly leveraged companies facing difficulties.
- Ultra-low interest rates have social consequences such as diminishing creative destruction forces in the economy, misallocation of capital, low productivity growth, rising inequality, and discontent with the market-based system.
- China's entry into the global trading system has had a significant impact on job loss in Western countries and contributed to social discontent.
- Secularly low interest rates have facilitated expensive real estate prices in the UK, creating vulnerability to rising interest rates.
The Impact of China's Rise on Energy Markets
20:37 - 27:55
- The rise of China brings an end to the story of the 70s crisis and how Western countries got out of it.
- China's integration into the World Trade Organization in the early 2000s increased its demand for energy, particularly oil.
- China's increasing demand for oil coincided with stagnating world oil production, leading to an ongoing oil situation.
- The shale oil boom in the United States during the 2010s helped prevent an energy crisis.
- The shale boom was made possible by a low-interest rate and monetary environment.
- Investment in fracking driven by low interest rates proved unviable in terms of returns.
- The current period is characterized by structurally different energy conditions and a more difficult monetary and financial environment.
- While the shale boom is not over, it cannot grow at the same rate as before due to concentration in certain areas and stagnant conventional production elsewhere.
- Renewable sources of energy are being sought as a non-carbon-based alternative to meet future demand.
Transition to Low Carbon Energy and Future Energy Crises
27:33 - 34:58
- The demand from China caused an increase in the price of oil.
- Renewable energy could potentially supplement the world's energy needs and keep the price of oil stable.
- The transition to low carbon energy is happening slowly, especially outside of decarbonizing electricity.
- The replacement of oil with electricity in transportation is not as significant as hoped.
- Petrochemical demand is still rising.
- The shale boom has compensated for the supply problem, but it has a limited shelf life.
- To avoid future energy crises, we need to speed up the move away from oil before its constraints become more severe.
- The weakness of China's demand for oil is currently masking the oil problem.
- If China's growth rate increases or if India's demand for oil rises rapidly, it will impact global oil prices.
- Investment in renewable energy requires government intervention and a false cost of capital due to externalities and market uncertainties.
- Energy transitions have historically occurred without government direction based on increasing efficiency and productivity growth.
- A shift to lower energy efficiency may result in less surplus for mankind and technological limitations need to be considered during the transition period.
Geopolitical Competition and Europe's Energy Challenges
34:32 - 41:47
- The world sees climate change as a climate issue, not just an economic one.
- Governments are willing to intervene and increase supply if the market fails to deliver on emissions reduction.
- China's focus on low carbon energy gives them a strategic advantage in terms of supply chains and processing of metals.
- Geopolitical competition between China and the US is driven by their pursuit of dominance in low carbon energy.
- Europe faces challenges in terms of resource distribution and catching up with China and the US in low carbon energy.
- Europe has experienced an energy shock due to the breakup of its long-standing relationship with Russia and the availability of cheaper gas in the US.
- There is disagreement within Europe about its direction, leading to tensions between member states.
- Christine Lagarde and President Macron have made important speeches acknowledging these challenges.
Europe's Future Uncertainties and Role of Government
41:18 - 48:12
- Macron acknowledges disagreement on the direction of Europe and urges countries to move forward
- The head of the central bank and President Macron recognize a shift in Europe's vulnerability
- Europe's political disunity makes it difficult to solve ongoing sovereign debt problems
- Challenging demographics and energy issues add to Europe's future uncertainties
- Macron concedes that Europe is not a third force and relies on NATO for defense
- Germany's weak coalition and different economic interests in relation to China fracture European unity
- Globalization has contributed to interest rates, innovation, economies of scale, and political stability
- There may be a bigger role for government in Western political economies
- Investors need to consider industries incentivized by governments and avoid sanctioned or capital-controlled economies