Helen Thompson - Global Macro Series - September 27th, 2023

[00:00:07] Helen

It’s been made easier for central banks in the last six months than it was because the more direct inflationary pressures from energy were falling away. Now, that I think is not to say that they might not come back again, and where China is going on gas, and in general, parts the state of the Chinese economy is going to be like an important part of that. So a weaker China will probably keep that source of inflation at bay and then that means that we go a little bit longer, some time longer perhaps, before we run into like, okay, what’s the point where central banks want to be raising rates and they really run into a serious risk of financial market instability.

[00:00:56] Intro

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Here’s your host, veteran hedge fund manager, Niels Kaastrup-Larsen.

[00:01:52] Niels

Welcome and welcome back to another conversation in our series of episodes that focuses on markets and investing from a global macro perspective. This is the series that I not only find incredibly interesting, as well as intellectually challenging, but also very important given where we are in the global economy and the geopolitical cycle.

We want to dig deep into the minds of some of the most prominent experts to help us better understand what this new global macro-driven world may look like. We want to explore their perspectives on a host of game-changing issues and hopefully dig out nuances in their work through meaningful conversations. Please enjoy today’s episode hosted by Alan Dunne.

[00:02:37] Alan

Thanks very much for that introduction, Niels. Today, I’m delighted to be joined by Helen Thompson. Helen is a Professor of Political Economy at Cambridge University. She has been at Cambridge since 1994. Her current research focuses on the political economy of energy and the long history of the democratic, economic, and geopolitical disruptions of the 21st century. She is also the author of the book Disorder: Hard Times in the 21st Century, which was published last year. Helen, great to have you. How are you doing?

[00:03:06] Helen

Good. It’s a pleasure to be with you, Alan.

[00:03:08] Alan

Good stuff. Well, we always start off by just getting a sense of our guest’s background. So maybe if you could just tell us how you got into analyzing macroeconomics and political economy and why you’ve chosen to focus on political economy, I guess.

[00:03:23] Helen

I think that when I realized that I might be interested in pursuing an academic career, I was thinking about various possible PhD dissertation topics. I came to the view that I wanted to do something about the United Kingdom’s relationship with the European Union. This was 1990 and it was just after, or in the time I was thinking about it, when the UK joined the European Exchange Rate Mechanism.

I knew that there’d been a very considerable political debate over pretty much a decade within the conservative government, Margaret Thatcher’s government, about that and that it had been very divisive. After summing it orally, I decided that that’s what I would focus my attention on, trying to explain why the Conservative government had, in some ways, come apart over the Exchange Rate Mechanism issue.

Obviously, the monetary union issue that went with it, or came to or went with it precipitated the end of Margaret Thatcher’s premiership. And then as I was writing the PhD two years in, the UK left the Exchange Rate Mechanism on Black Wednesday. So I kind of got into it all I think that way by understanding just how deeply significant this, on the surface, technical question about monetary policy was, not just for Britain’s relationship with the European Union, but for understanding British politics itself. So that was really my way in.

I largely, I think, concentrated on a set of issues about monetary policy, international financial openness and how that historically had changed through the 20th century for the first more than a decade, perhaps a decade and a half, I’m going on for two decades really in my academic career, probably two decades. And then around 2013, I got interested in energy. Notably, the way into that for me actually was again on the monetary financial side because I became increasingly aware about that time just how much the American shale oil boom jungle gas boom was upon the post-2008 monetary and financial environment.

Then I suppose I had a set of awakenings and realized just how much energy-central it was to everything in terms of the way we live our lives and to political economy and that it was quite notable that a lot of political economists paid that much attention to energy. Obviously, I think that’s changed because energy has come back to the surface, particularly since Russia’s invasion of Ukraine, but also in a way because of net zero. But I realized that you did need to think about energy macroeconomically, but just as importantly, you needed to think about it geopolitically. So I started trying to teach myself around 2013, ’14 to try to think geopolitically as well.

[00:06:31] Alan

Very good. Obviously, as you mentioned, you published book, Disorder: Hard Times in the 21st Century last year, and energy is a big focus of that book. The book sets out to try and explain some of the key economic and political developments in 2010s using the lens of history. Maybe your point is that the conventional explanation doesn’t go far enough so you map out these alternative histories, one focused on energy, one focused on the international monetary order, and the other focused on the development of democracies. Why did you write the book? What was the message that you were trying to deliver with that book?

[00:07:15] Helen

Yeah, well, you’re right, Alan. I started off, really, with the desire to write a long history of the 2010s, particularly pivoted around 2016 as a series of shocks. I thought about that as the Brexit shock, the Trump shock, and perhaps as importantly, the failed coup in Turkey in 2016. At the time, that was quite an important part in my thinking in pushing me to think about the book Disorder in the way in which I did. I had an idea, initially, that I was going to have a fourth component to it which was going to be about essentially the relationship between long cultural history and the territorial politics not just in Europe, but to some extent, in the United States, as that was, I think, historic in the 2010s. But I decided that that was way too ambitious, and that actually, I was going to keep the book largely and not exclusively in materialist focus.

When that came into focus in my mind, then I thought, well, actually, I’m going to double down on what I’ve got to say about energy and I’m not going to use energy to try to explain everything. I think that’s wrong. There’s a lot that happened in the 2010s that you wouldn’t be able to explain, particularly I think the relationship between democracy and nation. But I thought that it wasn’t possible in a geopolitical sense to understand the 2010s at all without coming to terms with the fact that the United States had become a major energy producer. I didn’t think it was possible to think about that.

This goes back to my initial how I got into the subject without seeing the relationship between the possibility of American shale oil gas boom and the post-2008 financial environment. So I will find a way of both making energy quite central to what I wanted to do, but also (and this was pretty important to me), find ways of explaining how the interactions between seemingly different events and different structural forces were playing out. So, that it didn’t make sense to try to understand the middle of the 2010s without understanding the big picture economic environment, and obviously, that brought in questions about China as well.

But then as soon as you get into China, you go back to energy because if the big turn in 2010s was the United States returning to be such a large-scale oil and gas producer, the big turn of the 2000s was the big increase in China’s foreign energy demand.

[00:10:15] Alan

Obviously, and I think I heard you speak about this elsewhere as well, what you’re alluding to I think there as well is the very low rate environment and the cheap cost of capital was I guess a key contributor to the US shale boom. Obviously, that had ramifications elsewhere from a geopolitical perspective. But one of the interesting features of the book I thought was how you map out how the US initially sought to push the EU away from consumption of Russian energy towards the Middle East, but how that ultimately broke down around the time of the Suez Crisis. This I guess has highlighted this European dependence on Russian energy which is obviously very timely. I think the book came out just around the time of…

[00:11:03] Helen

It came out on the day of the invasion.

[00:11:05] Alan

Yeah, exactly. So it was very timely in that respect. Europe then appeared to dodge a bullet, I guess. There was a lot of pessimism around this time last year about the outlook for Europe going into the winter, and they managed to get sufficient LNG to bring us through the winter. Where do you see Europe’s oil dependence now or situation? Is that as difficult as it was last year or do you think we’ve seen genuine improvements on that score?

[00:11:33] Helen

Well, I think that if we go back to what happened last year, we need I think to recognize several things and they’re different in regard I think both to oil and to gas. If we say oil first, I think it’s important to see that there were several things that helped Europe considerably, in fact, helped the world economy in some ways very considerably. The first of them was the fact that China continued with zero COVID policies through most of 2022.

So, China’s demand for oil was relatively weak certainly compared to what it had been in 2021 where it looked like China was making a more rapid recovery from the pandemic in economic terms, I mean by that, than other countries, and the fact that the Biden administration took the decision to release quite a considerable volume of oil from the Strategic Petroleum Reserve. So in that sense, the United States was acting as an emergency supplier or emergency provider of last resort, if you like, to the oil markets through last year.

That is not something that Europe contributed to solving its own problems. That’s something for which it was benefiting from what Biden decided to do. Even allowing for that, we can still see that actually, quite a considerable amount of Russian oil made its way into Europe not because European countries didn’t reduce their imports of Russian crude. They did. Not all of them, particularly the ones coming from pipeline-landlocked countries like Hungary.

But what we can see is that European companies were buying refined oil as petroleum products, particularly actually from Indian companies, and then it was coming back into- which was refined from Russian crude. India went from a country that was scarcely buying any Russian crude prior to Russia’s invasion of Ukraine to a country that’s a significant part of Russia’s crude oil market now. So in Europe, we’re still using rather more Russian oil than seemed on the surface.

I think the question about gas was more dramatic for obvious reasons because so much came in. Russian gas came into Europe via the pipelines, and ironically, by some point in the latter part of 2022, practically the only gas that was going through pipelines was coming to Ukraine, which were the very pipelines that Putin had spent the best part of two decades trying to basically get out of the picture.

What we can see here I think is that first of all, there is still Russian gas coming to European countries, particularly in the form of liquid natural gas and that actually probably Russian liquid natural gas sales to European countries increased during the course of 2022 . It looks like particularly they went to Spain, Portugal perhaps as well, and certainly France. So again, what looks like on the surface is straightforward, oh, we’re turning our back on Russian energy, it turns out not quite to be the case.

Then there was a fact that, second (and this was quite a significant contingency), was the fact that the winter in Europe was, as we know, really quite mild. It was one of the mildest winters in decades. Then I think the China question is again really crucial here because what we see in 2022 is that China’s actual overall consumption of gas fell and its demand for liquid natural gas fell quite considerably. So I think it fell pretty consistently every month from February 2022 through to a year later.

It escalated again quite considerably in March of this year. But if we then go back to what was causing the gas problems for Asian countries, I should say, in the second half of 2021, it was China’s sharp increase in liquid natural gas imports, about 15% year-on-year at that point. So what we see in 2023 is that as European (I call it) Eurasian structural competition for liquid natural gas supply intensified after the 24th of February 2022, European countries essentially won it. Either they did it because China got cautious also effective of zero COVID.

But it also came at the price of shutting out some Asian countries, notably, I would say Pakistan, after all, the fifth largest country in terms of population in the world; a country that at the beginning of 2022 had an energy mix of which gas was more than 40% was effectively shut out of markets. Essentially, it was more profitable for companies, liquid natural gas companies, to break their long-term contracts with Pakistan, and just to put the point schematically, sell it on the spot market to German companies.

So whilst Europe got through in this respect, it did it on the back of really quite significant pain being inflicted on poor countries, and I don’t think that that should be forgotten when we want to tell ourselves a somewhat congratulatory, self-congratulatory, story of what we in Europe got through and it wasn’t as bad as everybody said.

[00:17:22] Alan

Yeah. From an economic perspective, I think I was reading recently, there seemed to have been some economic adjustment as well, particularly in Europe, in terms of some energy-intensive industries scaling back output or maybe be no longer viable. I guess that raises the overall question. There was quite a lot of pessimism over the last number of months about the German economic model in simple terms using Russian energy sources to produce industrial goods for China, so feeling strains on both sides of that.

Is that a valid perspective or overly simplistic, or do you think there is a longer-term structural challenge here for Germany, and more broadly, Europe, given that Germany is at the core of Europe, given those two tensions?

[00:18:11] Helen

Yeah, I do. I’m not sure I can go as far as thinking that Germany is deindustrializing, which is sometimes language that is put on that. But yeah, if you look at, say, the chemical company BASF, it’s pretty clear that the end of pipeline Russian gas for them was a major business shock and that it came at a time when they were already believing that they were (not unreasonably I would say) disadvantaged in industrial competition with the United States because the effect of domestically produced shale gas, for the US, has been that gas costs in the industry a lot lower in the United States than they are in either Europe or in Asia. It’s quite simply a lot better, from that point of view, to have a domestic shale supply than it is to have to import a lot, particularly by liquid maritime gas.

Obviously, some of those pipelines came from Russia. They quite literally went to BASF plants. It was very well set up for a company like BASF to function in gas terms. So I think that it’s not at all surprising that the brunt of the reduction in consumption, in Europe gas consumption I mean by that, was borne by the industrial companies and companies like BASF.

I think that also had some knock-on consequences for the rest of the world, poor countries in particular, because if you have European chemical companies who aren’t producing fertilizers any longer because it’s too expensive in energy terms and then they’re buying fertilizers on the world market, that has an effect for countries who again get priced out of those markets. So I do think the effects were quite systemic. They weren’t necessarily hitting Europe as directly as they were actually hitting others.

But I think that if we then think about the future and we look at the gas position of Europe compared to the United States, we would have to say that Europe is at a disadvantage and that disadvantage has been compounded by the events of the last year or so. It was already there because of the fact that the United States is where gas is concerned, pretty much self-sufficient and it’s relatively cheap.

Europe’s need collectively to import gas has been going up for some time and its major supply in the cheapest way possible from pipelines from Russia has now, for most European countries (not all obviously) been taken out of the picture.

[00:21:22] Alan

We’re talking about the impact on the industrial sector. I guess one of the interesting themes that we’ve seen in the last couple of years, partially in response to COVID but maybe it has longer origins, is the rebirth of industrial policy and bidenomics. We’ve got the Sullivan doctrine in the US, kind of a focus now on cultivating production in certain sectors and obviously the US offering subsidies, etc., for certain types of production of EVs, etc. We’re starting to see a response to that in Europe as well.

If you look at the factors that drove your analysis in the book, how do you relate those factors? Where does this come from do you think, this shift to industrial policy that we haven’t seen for a number of decades?

[00:22:23] Helen

I think if we look at this in terms of the United States, we can see that it’s being directed at multiple problems, and I’m thinking particularly here obviously the inflation reduction. You say what its purpose is, it’s obviously primarily in that sense to address the climate crisis but also serving some shorter-term political purposes than that. The first of them I would say is that it’s a geopolitical move against China.

It’s driven by the knowledge that China is dominating the low-carbon energy supply chains, not least in relation to metal extraction, and in particular, actually metal processing, and that the United States’ present ability to move to low carbon energy, and I mean by that both actually wind and solar generated electricity, and electrifying what’s previously been done by fossil fuels is dependent upon importing various goods and materials, these rare earth minerals from China, and that’s a completely unsatisfactory state of affairs in Washington. They’re not willing to let China win the geopolitical game around low carbon energy.

Second, I would say is that it has been directed at the political problem in the United States of trying to avoid a repetition of 2016 and Trump’s successful insurgent candidacy then. This isn’t just about Trump, it’s about anybody, I think, coming along as a candidate from outside the existing party structure and mobilizing the grievances of those who lost out in terms of let’s call it globalization for shorthand, particularly the loss of manufacturing jobs in that period from about 2000 to 2003 where there really was a pretty sharp reduction in manufacturing jobs in the United States that Trump was still a decade or so later able to exploit and to win first a republican nomination and then the presidency.

So there’s an attempt I think to put a bulwark against that, and in doing so, in the United States’ case as well, I think trying to kind of like resurrect an idea of economic nationhood, the kind of project that Franklin Roosevelt had of saying you use the power of the state to try to create some sense that there’s a political community that shares economic interest, but this time doing so in a much more racially inclusive way than was the case with Franklin Roosevelt’s New Deal. So it’s got that sort of climate justice element to it. So in reshoring manufacturing to the United States or hoping to reshore manufacturing to the United States is trying to, in some sense, stabilize the American republic, as well as deal with China as a competitor, as well as deal with the climate crisis.

[00:25:41] Alan

It sounds like it’s obviously partially a political project as you’re saying, but then obviously as well, it partially reflects deglobalization and the nearshoring, etc. Deglobalization has been the buzzword in the last year, but it is disputed. There is a debate about how real it is. What’s your sense on that? Some people might suggest it’s more de-sinofication as opposed to deglobalization. Do you think it is? Is the world fragmenting into separate economic components or blocs or is it just kind of more changes at the margin?

[00:26:26] Helen

I think this is quite a complicated question. I think if you look to say energy itself, you’d say that the patterns of trade are being reconfigured, particularly that’s where both oil and gas are concerned, but they’re not necessarily becoming less global. So for instance, if you look at where China has signed or Chinese companies have signed long-term gas contracts in the last couple of years, more than 40% of them have been with American companies. That’s a risk from China’s point of view but that doesn’t really suggest decoupling.

I think more broadly, I think that there’s a basic tussle conflict being played out between states, if you like, politicians leading states, particularly in obviously in the United States, the Biden administration and the companies. It’s not so clear to me who’s in the end going to win this. So I think you can see obviously lots of pressure being put on companies to decouple and derisk at the very least, but are they really doing that? Is Apple really moving out away from China, something that’s fundamental to its business model?

You go back to BASF, it’s in the process of building a Chinese plant that’s about the size of its biggest one in Germany. I understand that has caused quite a lot of division within the company, but at the moment, it’s not the ones who are nervous about that who are winning out. I think if look historically, you can see that this kind of might be expected. If you go back and look at American companies in the 1930s, the companies after the Nazis came to power, whatever the foreign policy of the Roosevelt administration, it wasn’t like we’re jumping out of Germany as quickly as possible. Because obviously, these are big changes that corporations have to make even more so now I would say than was the case in the 1930s.

So I think that we’re going to see a struggle. Maybe they can win. I’m not saying that they can’t win, if you see what I mean. I think it’s a bit unclear. But I certainly don’t think just because the politicians in various capitals are starting to say we want you to be less dependent upon China, that means that we’re going to get all companies saying yes, yes, yes, that’s what we’re going to do.

We’re going to jump into line with your geopolitical priorities, particularly because in some cases, if you start to try and replicate, even if it’s not in relation to China, say Taiwan, if you try to replicate high-end semiconductor chips, the kind of things that Taiwan manufacturing companies make, you can do that with any reliability, if you can do that at all.

[00:29:33] Alan

Yeah. Certainly, there does seem to be a recognition of the limits of globalization in the sense that you go back 15, 20 years or whatever it was, the world was flat and we were going to have this seamless global trade. Obviously, what we’ve seen with COVID and now, obviously, with the invasion are the risks of global integration. Was the West naive in the first place? I guess what was underpinning all of this was the assumption that Chinese economic development would probably lead to greater freedom in China and maybe some form of democracy.

Obviously, as Xi Jinping has come into power, that has never really moved in that direction. Was there naivety in the first place there? Why have we seen that kind of belief in globalization being rolled back?

[00:30:30] Helen

I think it was a mixture of naivety and interest in the sense that there were, let’s just say, a class of people who benefited from the arrangements that were made with China. Apple is a good example of that. It’s been a really different company than what it was when essentially it was a Made in America kind of company. I think that partly, what happened in this respect is that the naivety came not so much in the sense of say someone like Bill Clinton being naive about the geopolitics of US-China, but being a bit on the naive side, about the domestic politics of the United States and whether it could accommodate actually generating as much class grievance in a sense as it did by the incorporation of China into the World Trade Organization and the world economy more generally. There was a kind of sense, I think.

In a way, I suppose that that goes back to the kind of comforting assumptions that third-way politicians, as they call themselves, like Tony Blair and Bill Clinton had that there was no alternative on the left and they didn’t then think that actually those grievances might get expressed in ways perhaps from the right, particularly (and this is with no disrespect) in the United States. I suspect that there was some naivety in the geopolitical sphere itself in the sense that they thought that actually that the global economy would actually act as a constraining force on what China could do.

If you go back say to the middle of the 2000s, you had someone like Larry Summers saying that what existed between the US and China was a balance of financial terror. So they might be at odds with each other, but because China was basically acting as a United States creditor and because the United States was acting as China’s big export market and currencies were bound together through this set of dynamics that all that generated that neither of them could inflict real harm on each other.

That isn’t a particularly cozy way of thinking about what the first part of the 2000s was like, but it does start from the premise I think that the economic interdependencies actually mean that there’s a limit to how much geopolitical belligerence there can be. I think that assumption turned out not to be correct for various reasons. I think you could say that even in 2008, that it wasn’t correct in terms of the damage that China could do by withdrawing credit to Fannie Mae and Freddie Mac, the two big American mortgage corporations that were in good part financed by the Japanese and Chinese central banks.

It’s also the case that in the age of QE, that China’s influence as a creditor to the United States was obviously much, much less than it was before QE came about where it really mattered like essentially at the interest at which China was willing to lend to the United States, that mattered a lot less once you’re into quantitative easing.

[00:34:15] Alan

Maybe just coming back on the point you made about the industrial policy and it being part of the focus is on addressing that, there was some of the fallout of globalization in terms of manufacturing jobs, etc. I guess one of the things we’ve also seen in the last few years is, if you go back to the early 2010s, the focus was all around austerity and the need for fiscal discipline. You had the Rogoff and Reinhart paper about debt to GDP ratios, etc. That’s not something you hear about these days at all.

Late 2010s, we had modern monetary theory and during COVID, governments wrote a lot of checks and it feels like we got used to more expansionary and unencumbered with fiscal policy. Again, is that a natural reaction to what we’ve seen over the last number of years, these structural trends you’re highlighting? Do you expect that to continue, or at some point, will we see a shift back to more disciplined fiscal policies?

[00:35:17] Helen

I think that this is a really interesting question. If we go back to about this time last year, so September into October of 2022, and you think about Liz Truss’ premiership, and even in a way I think in the run-up to, I don’t think it really just started actually when she became prime minister, you could see a certain nervousness taking hold in financial markets because once the Fed had pivoted to interest rate rises and other central banks were following suit, there was that sense (and I remember writing about it myself) that we were going to find out where the limit of interest rate rises lay without causing very considerable financial market instability to the point of systemic crisis.

Lizz Truss and Kwasi Kwarteng tried their fiscal experimental, let’s just call it, and it went wrong very, very quickly. The whole issue of interest rates in relation to pension funds was obviously part of that story. I think you can see something in the regional banks. There was earlier in the year in the United States where it kind of flickered again. Now, one way of looking at where we are now would be, well, this is something that looked like it got the potential for considerable trouble and it turned out not really to be the case, and that actually, there’s still pretty big fiscal space. I’ve got an open mind about that.

It’s been made easier for central banks in the last six months than it was because there were more direct inflationary pressures from energy have fallen away. Now, that I think is not to say that they might not come back again, and where China is going on gas, and in general, parts of the state of the Chinese economy is going to be like an important part of that. So a weaker China will probably keep that source of inflation at bay and then that means that we go a little bit longer, some time longer perhaps before we run into like, okay, what’s the point where central banks want to be raising rates and they really run into serious risk of financial market instability?

[00:37:51] Alan

Obviously, as you say, we haven’t had that pressure in terms of debt markets. Obviously, we had it briefly in terms of the UK case, but not more broadly. This kind of brings it into this whole area of the longer-term outlook for bond yields, etc. We had secular stagnation in the last decade and now we’re moving into this period. I’ve seen this question, and a little bit that’s come out of Jackson Hole as well as it’s this question around r-star, the neutral rate of interest, and will bond yields be higher over time now, which is an important question for financial markets.

I guess a lot of that does depend on will we see stronger investment demand over time, which I guess links to those industrial policies and whether we’re seeing more active fiscal policy more generally. Do you have a perspective on that question of is the secular stagnation era behind us and will this decade look fundamentally different? I guess a key part of this as well possibly will be will the greening of the global economy be for real or not?

[00:39:07] Helen

If we’re going to use a shorthand as secular stagnation, I’m not really convinced that secular stagnation is behind us. I think that the energy system in all its aspects, so the existing fossil fuel-centered energy regime plus the energy transition or the aspiring energy revolution really have got dynamics within them that make it really quite difficult for, certainly, advanced economies to grow very rapidly. I think that China has obviously got a set of issues on top of that as well.

So when I was writing Disorder, my general sense was that the fundamental problem around oil prices if you just reduce it to that was either that they were too high for consumers and that those periods will basically tip the world or the economy in the recessionary direction, if not over into recession like in 2008. Although they were too low for producers in 2014, 2015, that tended to cause absolute havoc in various oil-producing countries, not just a country like Iraq or Venezuela in 2014, but all that turmoil in Saudi Arabia. Remember when there were members of the royal family being tortured in a hotel in Riyadh, that that was bound up with that problem.

It still seems to me, and we saw that I think in the second half of 2021 before the Omicron variant hit and really stole economic recovery, again, that every time you get some bit of pace in economic growth, you run into rising energy prices of the kind that then depress economic activity again, and I don’t think that we’re really out of that. I think if we then tie that to the attempted energy revolution, because that requires huge amounts of present-tense energy to be used to achieve it, then it can’t escape from that problem.

Even somewhere down the road, it can be a driver of growth in its own right without running into the fossil fuel energy constraint issue. We’re not there yet. There’s some trap, I think, that’s going on that means that it’s quite hard to get beyond sluggish growth. I know that’s not the way, and I mean that being the energy-centric explanation, it’s not the way that secular stagnation is usually explained. But that’s what I think gets added to the analysis of the problem that secular stagnation is describing by bringing energy into it.

[00:42:08] Alan

So it sounds like the global economy has caught up a little bit in the sense that we’re not seeing the oil prices maybe aren’t high enough or the concerns around the transition aren’t enough to motivate more investment in the space. At the same time, whenever you do see a surge in growth, oil prices will pop, but then that will circumvent the economic expansion. So from that perspective, it sounds like you see these periodic spikes in oil prices as something that we should expect on an ongoing basis. Would that be fair to say?

[00:42:47] Helen

Yes. I think some caveat has got to be put into that. I think a lot here does obviously depend upon China. Because if you look really since about the turn of the century, say about somewhere between 40% and 50%, probably 40%, 40% perhaps, of the growth in oil demand has come from China. So what happens in China, in this respect, is crucial. Now, the thing we’ve got to bear in mind though is that China’s growth, deterioration in China’s growth prospects impacts the rest of the world economy too.

If we go back to a couple of years before the pandemic, I think it was the phrase synchronized global growth or something like that was being used by the IMF I think in 2017, which was basically coming off China recovering from the financial crisis that it had in 2016. We get to 2019, we’re in a global synchronized slowdown, I think, something like that was the expression. Again, that was like the slowing down of the Chinese economy. So there’s again a kind of trap there because on the one hand, China’s weak growth helps on the energy side of things, but China’s weak growth doesn’t help more generally in macroeconomic terms.

That sense that there are quite a number of traps where something, if you like, that’s beneficial happens but then has a consequence, the systemic consequence is negative, and that is quite common in the set of problems that we face at the moment.

[00:42:47] Alan

Yeah. You touched on obviously on China, you mentioned Saudi as well. Obviously, we’ve had this kind of shift maybe in the relations between the US and Saudi over the last while, and at the same time, China appearing to be getting warmer towards Saudi, and obviously, we had the BRICS meeting recently and the expansion of the BRICS as well. Obviously, from the US perspective, is that a risk that we’re seeing this realignment in those relations and is that again part of a potential risk factor for oil markets and energy markets looking ahead?

[00:45:08] Helen

Yeah. I think this is quite complicated, but I think you can certainly see that China has made a series of moves over the last few years, probably say five years, but intensified in the last few, really to try to strengthen its position in the Middle East. In a way, it’s followed, albeit for a somewhat different purpose, the playbook that Russia used around the middle years, let’s just call it, of the 2010s, which is to try to get closer to everybody regardless of what their bilateral relations are with a state that you’re trying to get closer to. So i.e., you can get closer both to Saudi Arabia and to Iran and to Israel. I think you can certainly see that at work with China on the Saudi-Iran question.

Obviously, they played some part, at least, in brokering the restoration of diplomatic relations between Iran and Saudi Arabia. If you look at the Huawei question, it would look like not just Saudi Arabia, but the United Arab Emirates have really gone China’s way on that rather than the American way on that. So there is a way of reading, I think that what’s going on is that Saudi Arabia has become less close to the United States and closer to China. I don’t think that’s all there is to be said about it. I don’t really see much evidence say of Saudi Arabia buying Chinese financial assets.

But China really thinks it has deep strategic interests in the Middle East and that it wants to reduce its maritime vulnerability in the Strait of Hormuz, and that an important part of being as close to Iran as it now is is to try to exercise some influence in those waters via Iran, also some extent, its relationship with Oman. So I think that we are living in a geopolitical world in this respect where the United States remains, obviously, the naval power that has primary responsibility for keeping oil moving through the Persian Gulf, but China isn’t exactly just saying we’re going to rely on that from the US permanently.

So I think that whilst I’m not really of the view that China is, or China or the BRICS are really in a position to develop an alternative to the dollar, which is obviously in another argument which is made, I don’t really see that. I think that dollar is still too fundamental to the world economy and international banking in particular for that to happen. I do think that there are moves that China in particular has made, certainly when allied with Russia, that mean that the Middle East is a lot more difficult for the US than it was even say six, seven years ago. So like at the time of the beginnings of the Syrian (that’s 10 years ago), Syrian crisis.

[00:48:38] Alan

You touched on the dollar there. That is another dimension of this presumably in terms of possible internationalization of the renminbi. If that is something China really wants or not I guess is debatable. But certainly, regardless of whether they want to internationalize the renminbi, they certainly want to de-emphasize the dollar it would seem. There’s been speculation around are they either paying for oil in renminbi or pricing it in renminbi? Do you think that is a significant trend or is it more optics and at the margin that we’re seeing that?

[00:49:12] Helen

I think it’s at the margin. Obviously, this has been a Chinese ambition for some time, but I think that the bottom line issue here is China doesn’t have an internationally convertible currency for all purposes. So long as it doesn’t, there’s a pretty limited motive for anyone, however friendly they want to be with China and how antagonistic they are to the United States, really to want as payment for handing over actual commodity, oil or gas, actually wanting renminbi for that. So there can be things that make certain elements of the transaction easier to handle maybe, but I don’t think that China can really challenge the dollar’s primacy in this respect so long as the Chinese currency isn’t fully convertible.

[00:50:11] Alan

Obviously, a big part of the book is about, I guess a third of the book is about the international monetary order and the history of that. You talk about or you write about Bretton Woods and the system since then. Through all of that period, we have had these periodic concerns about the role of the dollar and its reserve status and would it be sustained.

You mentioned obviously the 2006, 2007 period where you had this Bretton Woods 2 type arrangement of the Chinese surplus being recycled into treasuries. If anything, it seems like the crises have strengthened the dollar’s anchor position with the development of these dollar swaps. Is there anything on the horizon to unwind that or, as you say, it seems like the dollar’s structural place in the international order is as strong as ever?

[00:51:06] Helen

I’d say it’s actually stronger really for the reason that you said, the place of the dollar swaps and the fact that the Eurodollar system doesn’t look like it really functions over any period of time anyway without the credibility of the dollar swaps. If you look at American monetary power in immediate years before 2007, 2008, I think there are ways in which you could say that the United States was somewhat constrained in the ways in which it could deal with monetary policy.

I would say that in 2004, 2005, for instance, that it had to worry about what China was doing in terms of buying US Treasury bonds, Fannie Mae and Freddie Mac bonds and securities, what China’s impact on oil prices was. If you look at, say, 2015, 2016, you’ve got the Fed having the ability really to cause a first-class financial crisis for China simply by raising interest rates by 0.25. Even before actually, that rise, actually just the idea of it was enough to destabilize things. That seems to me a really rather different world.

If we go to March 2020, there was a pretty big financial crisis. It’s kind of forgotten about I think often now partly because it just happened in such a short period of time. But it was almost like every aspect of the Eurozone crisis and the financial crisis of 2008 were all compressed into a few-week period. The only player that could rescue the system, so to speak, was the Fed, and it did so including by providing a backstop for China if it was really necessary; not a dollar swap, an indirect way of dealing with the problem.

I don’t think I would quite go far as to say, if I really thought about it, to say America has never had this much financial power, but this is the one area where American power is really not in decline.

[00:53:17] Alan

Okay. Throughout the book, there’s references back to the 1970s and I suppose a lot of the structural trends maybe have their origins back then. The 1970s was a period of monetary strain. If you read Paul Volcker’s book, he was kind of permanently going around Europe trying to shore up confidence in the dollar in that period. I guess your perspective on that, what’s different about that period versus now is that does it come back to energy again, that back then, you had the energy, you didn’t have the shale boom, and you had the US as an energy consumer.

[00:53:56] Helen

I think there are a number of differences. I think there’s obviously one that’s nothing to do with energy really, which is to do with the fact that there was a much more significant trade union movement, not just actually in European countries but in the United States too. So once energy inflation kicked in, the trade unions were able to, some trade unions anyway, were able to make wage demands and get secure wage increases that then acted as a further inflationary pressure.

Although we see there’s a little bit of that going on; a little bit you can see in the UK I think perhaps. Generally, I wouldn’t say that we have seen the kind of… We can’t because the trade unions were, in many ways, in Europe, politically defeated in the 1980s, so they simply don’t have the bargaining power in the face of an inflation episode that they did then.

I think there were two differences, well, three differences actually, on the energy side. The first of them is, as you said, Alan, which is the ’70s was a decade in which the United States had very, very quickly to adjust to being the world’s largest oil importer. It started off just moving to importing oil at a significant scale and before long was the world’s largest oil importer. The United States is not domestically self-sufficient in oil, but it is in gas, and the volume in which it helps to export is not what it was anywhere near the peak in pre-shale in terms of imports.

The second energy difference then is that in the ’70s, a few countries aside, capital energy consumption was a Western affair. It wasn’t Asian, and that isn’t the world in which we live. It isn’t just China, it’s India. Most of the world’s most populous countries, as we know, are in Asia. When you combine the fact that the ’70s saw the Western countries oil companies lose control of the energy resources of the middle east through resource nationalism, and that hasn’t changed since, then you add into that the fact that Asian energy consumption is what it is now and the size of the population involved, that just in itself, makes the world really different than it was in the ’70s.

And then although obviously there were moves to encourage low carbon energy in the ’70s. I think if you look at the world in data, you can see right at the end of ’70s, wind power appearing in Denmark for the first time and in energy-like mix. There wasn’t an attempt at an energy revolution in the 1970s. There were attempts at getting people to consume less energy. There were attempts at energy conservation or attempts to develop alternative forms of energy, but not essentially let’s recreate the entire energy basis of our material civilization, which is like where we are now.

Just that fact alone I think means that we’re not in the position of the ’70s. That doesn’t mean there aren’t any things, patterns, that we can see then and are still there now. But the underlying context, typically where energy is concerned, I think this is magnitudes different.

[00:57:40] Alan

Okay. Just conscious of time, there was one other topic I wanted to get your perspective on. Obviously, you wrote a book to explain a lot of the phenomena of the 2010s and obviously Trump’s win in 2016 was one of those seminal events. Obviously, as you look at the political situation in the US at the moment, it’s unprecedented, it is a word we always say. You talked about how the Biden administration is using fiscal policy to try and boost that working class vote, I guess you could say. Do you think are we headed for ongoing civil discontent in the US? What’s your perspective on where things are out there?

[00:58:21] Helen

I think that we are. It’s very difficult to see how this election in the United States next year can be anything but a pretty destabilizing experience for the Republic, American Republic I mean by that, and for its citizens in some sense in having to participate in it. I don’t mean by that that I think that Biden administration, Biden doesn’t have any chance of getting reelected or the Democrats don’t have a chance to be reelected if Biden turns out not to be the candidate.

What I mean is that when you’ve had the experience of the Trump presidency in which it ended in the way in which it did, and now he’s subject to these multiple legal prosecutions and yet he still appears to be the leading candidate for the Republican nomination, that’s a whole other territory. That isn’t like repeating 2016. That’s going somewhere darker, I would say. Trump in 2016, in some sense, he was an insurgent candidate who hijacked the Republican Party.

He was able to do that because he spelled out certain unpalatable things about the American Republic, at that time, and was able to address anger of the kind that we’ve talked about already and also make some fairly crude unpleasant appeals to nativist sentiments but in a way that that had some kind of history to it. I mean, complicated because of Trump’s personality, because Trump wasn’t or didn’t start as a politician.

But for instance, I remember a lot of time people talking about, I remember doing it myself when talking politics, say, of like the relationship between the American Populist Party and Trump; the American Populist Party at the beginning end of the 19th century. It wasn’t the same, but there were certain things you could say, look, there’s a little bit like that. I’m not sure you would really find anything now, with this Trump candidacy for 2024.

You can say, oh, it’s a little bit like that one there, we can see that playing out. This is not like that. This is something else because of what happened and what Trump did during his presidency and the fact that the Republican Party does not seem able to have recovered from that. It doesn’t seem able to recover from what happened.

[01:00:57] Alan

Interesting. Well, we could get you back again for a whole hour long special on Trump and US politics I think based on that brief response, but thanks very much for coming on today, Helen. It’s been a great conversation. I’ve really enjoyed it.

So make sure to follow Helen’s work, because as you can tell from today’s conversation, we are living in a truly interesting global macro world and more important than ever to stay informed. So from all of us here at Top Traders Unplugged, thanks for tuning in. We’ll be back soon with more content, so stay tuned.

[01:01:27] Ending

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