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Transcript
Rob Johnson:
Welcome to Economics & Beyond. I’m Rob Johnson, President of the Institute for New Economic Thinking. I’m here today with Rodney Jones, who’s a long time colleague of mine. We worked together at Bankers Trust Company after meeting in Malaysia, we worked together at Soros Fund Management and we’ve maintained a connection ever since the mid 1990s after I left Soros Fund Management. Rodney is the person who I think helped me in all of my professional endeavors to put together a systematic and structural analysis of what was taking place in Asia. At a time when you could get data off of Reuters about everything happening in Europe, Rodney was getting on planes and going to 12 countries each month to get budget and central banking data. And we put together a systematic framework where I wasn’t afraid that the world somehow would get ahead of us because we were assembling things and patterns and structures that the world didn’t see.
Rob Johnson:
And there were a few people, like the gentlemen in Hong Kong who created the peg to the Hong Kong dollar and others who could see these pictures as well. But Rodney was a real pioneer at that time and continues to be, having after our time in the hedge fund together, lived in Beijing and worked on the really, really deep dive into the emergence of Asia. He’s been a consultant and advisor, a macro advisor. Through his company, Wigram, that is, how would I say? From all the hedge fund managers, I’m an alumni of that sector, but from all the people I’ve talked to, he’s the go-to guy. And even some of the people, the leaders in government who study Asian policy, are very attuned to his thinking. So Rodney, thanks for joining me tonight. This is an extraordinary chance and a reunion for us. And I’m very excited for what my listeners can learn in our conversation.
Rodney Jones:
Oh, good evening, Robin. Fantastic to be with you this evening.
Rob Johnson:
So you have gone through the pandemic, you have numbers, I think five children, some of whom are in Sydney, some of whom are in New Zealand. You and your wife have gone back to New Zealand, which is, I think you told me you hadn’t been really settled there since 1989, but is your country of origin. And you’ve had a, which you might call a wonderful window into the comparative performance of economies, Eastern West, all over the world. What is it that you see, Rodney? What are the kind of insights and the lessons that you’ve garnered from this experience? What do you see now that gives you haunted feelings? And what do you point to, to give people guidance on how to evolve from the place where we are?
Rodney Jones:
I think this crisis has affirmed the importance of following Asia and following China, that we tend to drift to focusing on the countries that we culturally associate with. So, for outside the U.S., the global population obsesses on U.S. politics a lot. People don’t really obsess on what’s happening in China or Chinese politics and what it means for them. And I think what happened over the last 12 months, I mean, there’s a lot to go forward, but looking forward, go over, both looking backwards and looking forward, but if we can look back for a moment, because today it’s almost 12 months since this whole pandemic began. It was really the 20th of January when this began. The 20th of January, where this began, where Wuhan went into lockdown.
Rodney Jones:
And that was the moment, we’d had SARS1, and what Asians took out of, Asian governments and people in Asia took out of SARS1 is we got lucky. I was living in Hong Kong at the time. And I heard from a friend who was a doctor on the front line in Hong Kong hospitals, that SARS1 may have been airborne. And at that point I left with my family. It happened that my grandfather had been a medic in World War I, in the Spanish flu and he lived to just save 100. And I’d heard from him in his later life, the stories about the Spanish flu.
Rodney Jones:
And always understood the pandemic could come again. With SARS we got lucky. But different countries took different conclusions from that. In the West, people thought, “Well, this just shows coronaviruses are not that bad. We don’t need to worry. They come and they go.” The response in Asia was we got lucky. And this can happen again, and when it happens again, it could be worse. And then that’s what panned out. And I think that started the difference in response, right from day one, between Asia and the West. And that’s why we’ve seen a much better performance either in terms of containing the virus or elimination in the Asia Pacific.
Rob Johnson:
So you’re since there, and I remember making an early podcast with Danny Quah from Singapore, is that perhaps in part, because of your own family history, but also from the lessons of SARS in Asia, that that region of the world was more prepared to proactively address the challenge?
Rodney Jones:
Yeah. And I think … Well, there’s two things that happened. And I was fortunate in that the New Zealand government and key ministers and prime minister herself was very responsive to this message. One was the generation time with a SARS type virus is longer. You have a week where you can intervene between. So when someone is infectious and affects somebody, and then they show symptoms and affect someone else. That gives you a lot of time to intervene. And the other thing we saw watching the Chinese data, and my team was monitoring data from, I think, 250 cities across China, from about the 20th of January. And we were watching the cases build in these cities and the speed with which, and we were able to use some models to estimate the R-value and realize what we were dealing with was much worse than we’d seen with SARS.
Rodney Jones:
And then from that, when they went into lockdown, while there’s issues around the data in China, in the lockdown and how cities stopped reporting data, we could tell, still tell by miles that lockdowns were effective. And having been a critic of lockdowns, I became a convert, as a point of a lockdown, stop mobility, stop moving. Mobility is a vector. And you contain the virus, but with the intention of eliminating it. And across Asia, we’ve seen countries eliminate it, you then have another outbreak, you chase it down, you contain it, you eliminate it.
Rodney Jones:
And China’s been, China, for all their faults, and their faults were in January not and coming clean and recognizing the severity of the risk. And then in February, manipulating the data and again, not conveying the full risk. If you’ve watched carefully what China did, you’ve seen that their approach has been successful. And the argument is in free societies, you can’t do that. But if you have political leaders who communicate, you tell the story, countries in the Asia Pacific, and it’s just not New Zealand, it’s Australia, it’s Vietnam, it’s Singapore, Korea, has contained it. So it’s across the Asia Pacific, we’ve seen relative success in containing, and that takes political leadership, communication and creating the conditions for buy-in.
Rob Johnson:
In the process, you ended up in New Zealand yourself, how is it, which you might call an Anglo-Saxon or a Western bias that New Zealand and Australia were able to respond in a way that’s somewhat different than the Western, what we might call neoliberal approach, which focuses on individual rights? How could they see more clearly that collective pattern that was necessitated the lockdowns in order to extinguish the virus?
Rodney Jones:
Well, I think there’s two big differences. The first is we’re closer to Asia. We made many trade with Asia. There’s a lot of back and forth with connections and travel and government to government relations, and people at the individual level. So we’re engaged with the Asian region. And so the starting point is there’s more interest and you respect the information coming out of Asia. So you say during New Zealand or Australian politician, “This is what Singapore is doing, this is what Korea is doing, Taiwan.” They will listen intently. And so there’s not a, if you like, a looking down. There is a respectful dynamic where we can learn a lot from Asia and we have learnt a lot. And we’ve benefited enormously from our economic and relationships with China, but also with the region as a whole.
Rodney Jones:
So that’s an important aspect, but I do think, as you say, New Zealand and Australia both have more of a collective history starting from the 1930s. More of an egalitarian culture. And while inequality has emerged as an issue, you haven’t seen inequality break institutions or break the social contract. Now in Australia was more difficult. And I think where the Murdoch media, New Zealand was very lucky not to have the Murdoch media. I mean, that’s an important thing. The Murdoch media has been an enormous disruptor of democracies. And New Zealand was fortunate not to have that. In Australia, they had that, that’s been more disruptive, but you still build that social cohesion. So I think it comes back to those egalitarian roots and the ethos, if you like, of the country. And also an ethos where you have an obligation to protect the most vulnerable. And there was a lot of, in New Zealand, that’s the indigenous Maori and Pacifica, and a lot of concern and public policy orientated to ensuring that it did not get into those communities.
Rob Johnson:
I find it fascinating to listen to you because I remember around the time we first met, people like Richard Davies at Bankers Trust and other would bring us to New Zealand. And at the time, I can’t remember the name of the lady who was the finance minister, but New Zealand was almost like the poster boy for marketization that new liberal deregulation rather than a social market economy. And, how would I say? But each time that I’ve been there, and as you know, I’ve done a lot of sailing and toured around North and South islands and everything in great detail and several times in my life.
Rob Johnson:
I’ve found that, to use Muhammad Ali’s poem, which is the Guinness book of world records, it’s called the shortest poem ever written. The name of the poem and the entire text of the poem goes like this, Me, We. And on the pendulum between me and we, there are parts in the United States, particularly in the New York area, that are very me. New Zealand was very we. And even with those, how would I say? Market discipline oriented policies that have been associated more with the Britain in the United States, I found, I call it empathetic strand existed in New Zealand and was very, very nourishing, very comforting at the times that I’ve visited there.
Rodney Jones:
Yeah. And even relative to that times, you have … So New Zealand went very hard in the economic reforms. New Zealand was close to an East European model in some ways. How do you regulate a restricted economy then had that big opening up in the 1980s? And reform was been refer reaching and went too far. And you had the pendulum swung back and you had a repudiation of that, and you had a swing against neoliberal. And so the government, since then, to move to an MMP system, the governments since then have been very centralist. And so you didn’t carry on down that neoliberal track, if you like. There was an equilibration, which you, looking on from the outside, you haven’t had in the UK or the U.S., positions that got harder rather than being drawn together. But, of course, it’s easier in a small country. You can’t build a national consensus in a large diverse country like the United States. It’s not really comparable, but it’s still interesting to observe.
Rob Johnson:
I look at, there’s a lot of tension now as we look at the world. A gentleman who I think you’re familiar with, Orville Schell, who runs the U.S.-China program for the Asia society, is a good friend of mine, has emphasized in his book with John Delury, called Wealth and Power, how there was a China which has a belief about how things should go and should be structured, which was quite different than we might call the American model. And the China is recovering from the woundedness of the opium wars and British control and the innovation of the Japanese, and which might say, regaining their national dignity, restoring the middle kingdom is on one side. The Americans, since World War II, have led the world system and they would like everybody to become part of a multilateral system, which you might call a, where the social model is chosen based on the experience and an affirmation of the United States. And these tensions in reconciling those two desires are very difficult.
Rob Johnson:
And I remember even when Chairman Mao was involved, when I first started to, as a youngster look at China, the way in which he would reach to the developing countries as though both the Soviet Union and the United States were there for exploitation, not for, which you might call, the win-win game of development. I’ve seen recent movies in China in recent years, very famous movie, Wolf Warrior 2, which plays off of these themes of China as a international savior. And so I guess what I’m getting at, Rodney, is that I can see this arc of comparative systems, tensions, ambitions reaching out for strategic reasons like the procurement of natural resources in the case of China, the military footprint of the United States. And what I see is that the pandemic has introduced, which you might call a new dimension of comparative analysis that, what I’ll say scribbles the deck a little bit. It sees things … And there’s a new book in the United States that’s been banned by amazon.com, but it’s written by a number of people from China in the United States. It’s called Capitalism on a Ventilator.
Rob Johnson:
And I guess I would say the insinuation is there are things to learn from a government that can protect people through something like a lockdown and then there are things to dread by too much centralized control. And without myself taking sides, I’m kind of in the, which you might call the yin and yang of this process. It does feel like, as I say, it’s scrambled the deck and how do we see what people aspire to be like, or alternatively, in a more constructive way, particularly with capital, with climate change on the horizon, what is it that America can learn from China and what is it that China can learn from the American system at this juncture?
Rodney Jones:
Yeah. We’ll always question historians who spend decades, did the pandemic speed up change or did it change the direction itself? And I think there’s a reasonable argument to be made that it did both, of course, it sped up and it changed the direction. And so one has to take a deep breath and we have a need a bit of a reset. And this is where I struggle a bit, is I think the pandemic has changed the direction. And if you’ve been doing this two years ago, you would’ve heard a different story from me, because I think the Chinese Communist Party at home today is in a stronger position that people see that they have, after that faltering start as we talked about in January and February, that they have come through this and they have protected life. And life and health is a human right as well.
Rodney Jones:
And against that, though, you get the fortification of the party state coming with that, which means individual rights and people who see a different path for China, a different vision, are still repressed in some cases, brutally. And then you look at what’s happening in Xinjiang, that’s playing out what the Western colonial did in terms of suppressing identity and brutalizing a minority. So we’re left with how do we reconcile things that are not reconcilable? And then given those contradictions that we can’t resolve, how do we identify a path forward? And so 10, 15 years ago, we talked about the fragility of the Chinese regime and that the brittleness and that at some point would see dynamic political change, but they also have an inbuilt internal error correction process and tremendous internal debate. And the things we identify, they also have identified.
Rodney Jones:
Five, six years ago, four or five years ago, we were very focused on the excess buildup and leverage. What we’ve seen is a technocratic group emerged very focused on containing that leverage and ensuring that China doesn’t have a financial crisis. Part of the move we’ve seen recently this year, that has got a lot of global attention with Alibaba and the time down on anti-group is, to concern with financial stability, is there is a great consciousness. They have to go to any length to avoid a financial crisis, even if that means having a controlled financial system. And so, as we look at that path ahead, particularly with the Western crisis, and I do think if the West had not been in crisis for so long, and we had normal interest rates, five or 6% interest rates, fed funds rate at that, that I think China would be more difficult. There’s soft budget constraints in China, where they need very low rates to manage.
Rodney Jones:
Well, they’ve got that through the Western failure. And so, how do we reconcile this and how do we create and understand what the future may look like? China runs a very effective wartime economy. COVID is like a warming. At the start of the year, I had got Keynes’s papers out on how to pay for the war, thinking about what are the dynamics of a pandemic is the need for a wartime economy and for the state to allocate resources. Well, that’s what China has done effectively. And it’s propelled them forward. They will go very rapidly this year. Some people express concern like Michael Paris expressed his concern about the lack of consumption. And you look at the household sector though, and household sector deposit and financial wealth growth is strong, that we keep waiting for the property market to crash, but the property market is strong. And so you’re left with quite this complex picture that’s more nuanced than we expected, and isn’t where black and white views just don’t work very well.
Rob Johnson:
So, let me ask you. I look at the situation when my tendency is to see the magnetic attraction of emotion, wanting people to have what you might call discreet right and wrong, black and white. But my intuition is everything is about shades of gray. To use analogy, in the United States, I’m always haunted now by thinking about the absence of gun control, because the freedom to carry arms brings with it the lack of freedom from being the victim of somebody else’s shooting. And when I think about the COVID crisis, the desire of the willful individual not to wear a mask, to go hang out in the bar, to not have their kids stay home from school, whatever you want to call it, puts you in a place where in order to honor, which might call, very independence or their individual desires, you’re putting all kinds of other people at risk.
Rob Johnson:
And so, one can be in a very suspicious environment where too much centralized authoritarian control can be the source of oppression, but we’ve just seen an episode where in some contexts, suppressing the individual takes us out of, in that world at the game theorist called the prisoner’s dilemma, out of the lose, lose category or the big winner and the other loser of bull shapes and into a win-win place. In other words, the role of the government in protecting people can sometimes be very, very harmful, but at other times it can be just what the doctor ordered. And so I think this, which I might call dogmatism, the black and white of this system versus that system is very, very muddied by this experience. And I don’t see how, which you might call, I don’t see how one can draw the conclusion now that the pure de-centralized system focused entirely on the ethic of individual freedom makes sense.
Rodney Jones:
No. Yeah, I see it very much in similar terms. I mean, telling you about this book, I forget the author, but the title, when Ireland saved Christianity. About Europe in the dark ages and the Rhode Island played. And small liberal democracies, like New Zealand, play an important role, like Taiwan, like Singapore that it’s been seen as authoritarian in the past, but places a heavy weight on governance and on creating a national consensus and protecting the vulnerable. And somehow in the West, as a function of neoliberal or the economic reforms of the 1980s, that loss of obligation is it because the church and the synagogue is no longer the central place of people’s life and that sense of community. Why has it happened? Is it larger countries are harder to manage? But that loss of a national consensus, the loss of community, that means when you get a hit by a shock like this, you struggle to execute the sorts of public health interventions you need. Public health interventions require individual rights been given up to the state. That’s the definition of it.
Rodney Jones:
Immune immunization involves the majority in being immunized and going through that discomfort to protect disease spreading. And so it’s a crisis of governance. And I was quoted as I did an interview in New Zealand, start of the year, and I said that COVID in February was a crisis of governance. It was a governance failure in China. And it was at that moment, we had the same governance failure in the West, and yet the boat wasn’t able to write itself. And we’ve watched these cases and the relentlessness, and it’s just not the United States. It’s also Europe, Europe succeed lockdown, more success in the United States and contained the virus. So then June, July, they didn’t have a lot of cases. They had to give up this summer.
Rodney Jones:
There had to be a national consensus or European consensus, “This year we’re not going to have a summer, we’ll stay at home, in our locality to ensure we don’t create another wave.” They refused to. This summer was put ahead of public good to have a summer holiday. And mobility sword and the virus came back. And so, the West is actually left with a lot of soul searching after this. Particularly, going all the way back to the 1980s, what does good governance mean? How do you get good governance? What sort of social contract do we have? What’s the way forward? And I think, yeah, China presents itself as a competitor. And we have to ask in the West, is are we fit for competition right now? And then the answer is not really. And so while there’s a lashing out in China, we do have a problem in the broader West, and it comes down to governance and community and these sorts of fundamentals.
Rob Johnson:
So, I think the, how would I say? The question that I guess I’m really asking you, when I look at the development of Africa, when I look at China’s moving from the middle income trap to a more advanced economy and becoming perhaps which you might call the aggregate demand engine of growth in the world, and when I look at the dissatisfaction in the United States, of very large segments of the population, and then I look at the ominous challenge of climate change, where it is essential that are trying to in the United States cooperate, how are we going to, which you might call, put all these ingredients in the drink and quench our thirst?
Rodney Jones:
Yeah. And particularly with climate change when you look forward. So I’ll tell you what worries me. I mean, what worries us with the West is clear, but what’s the concern with China? And my question with China, has Xi Jinping, by doing away with term limits, may create a more effective governance right now, but as we go into third term and the fourth term, has he undermined something vital? I mean, what we’ve seen with the President Suharto in Indonesia, to use the Asian example, when he was with his contemporaries, he made good decisions. He had people around him who could give him that feedback. Even someone like Lee Kuan Yew in Singapore, was that his most vibrant when he was with his contemporaries. People like [inaudible 00:32:01] could go into him and tell him he was being stupid and he was making a mistake. They could speak freely to him.
Rodney Jones:
What happens when Xi Jinping, by the time he goes into the next term, he leaves his contemporaries behind. Someone like [inaudible 00:32:15], who’s been an incredibly effective economic technocrat this term, is probably going to retire. We’ll have a new central bank governor, [inaudible 00:32:22], at some point. And then Xi Jinping goes into his third and fourth term. What does that look like? We know from history that that creates issues. And so China right now is riding high, but we can’t take that for granted either. And the balance can shift.
Rodney Jones:
Right now the U.S. is on the low and China is ascended, but this is a bit of a seesaw and that balance will change. And then with that shifting balance, how do we ensure progress towards climate? China’s economic model relies very much on this heavy industrial infrastructure investment property, high carbon emissions. They’ve got one of the most carbon intensive economy in human history right now, forgetting the historical legacy of the contributions to carbon, the balance, if you like, historically, from the West right now, China is the major contributor and their economic system is a carbon intensive economic system. How do they transition away from that?
Rodney Jones:
And at the same time, and they have a lot of debt and demographics. And so we’ve got really quite big challenges in the longer-term, looking out in both the U.S. and China, and then the rest of the world. The sorts of governance issues we’re seeing in Europe over vaccines, is that a warning sign as well? So it’s a little bit hard to be optimistic. And then we haven’t even talked about the financial imbalances, the trade imbalances, the role of U.S. monetary policy. We haven’t gotten to that yet. And that leaves you with concerns for the future. So, again, we talked about the lack of black and white and the shades of gray. It’s very much that when we look out that China has come through the pandemic, there’s this permanent change associated with that, that wouldn’t have happened otherwise. And there’s a stepping forward of having speeded up some of the transition, but then there’s the risks of where that leaves us. Can China make the change it needs to be under a single leader, under Xi Jinping? Will they make the change? Will they start to struggle at some point?
Rob Johnson:
What I think, Rodney, at this juncture, is that there is a concern that, which you might call the incompatibility of where the U.S. and China were. Let’s go back to say, 2014, 2015, the China 2025 program. The concern about knowledge intensive industries being able to open in China and not be just forced into a technology transfer agreement, and then watching a clone beforehand and sees all the market share with the government’s help. Wall Street not being allowed to exercise what you might call the development deepening and maturing of the Chinese financial market in what America thought was a profound comparative advantage. Entertainment industry and intellectual property rights, and perhaps the pharmaceutical industry, which is obviously under a lot of pressure now because those property rights don’t seem so important in the context of a collective crisis that requires everyone to be vaccinated for everyone’s benefit.
Rob Johnson:
But I look at this tension and I look at the turn inward by China, and I’m trying to understand essentially how these two different models, and I don’t see the Chinese giving up that state supported state enterprise model for a pure private sector. I see many in the West terrified of companies like Huawei, who they think will get large economies of scale at home from having a protected market and cross subsidized gaining market share around the rest of the world. And you can see, which you might call, just in a pure commercial sense, this deterioration of compatibility, the concern of Silicon Valley, which you might call commercial platforms and cybersecurity our intention. And nobody quite knows how to put, how I say, those things into a place where trust and collaboration can be fostered and maintained.
Rob Johnson:
Hackers can say they’re from Saskatchewan, say, let’s say that’s where they are. They can say they’re from New York and attacking Shanghai. Hackers in Armenia can say they’re from Beijing and attacking Washington, D.C. And nobody on either side, even with good intent, knows how to put this, which you might call common platform, into place without all the big data side-effects that the Japanese rightly pointed out when they prohibited American, which you might call, freewheeling penetration of their market, but you have all of these tensions. And I don’t know how to see. Rodney, let’s just say I flew you into the country tonight and you had to advise Joe Biden on what to do in U.S.-China relations. What’s your playbook look like?
Rodney Jones:
Well, I think the most important thing is we have to strengthen our own systems, so you can focus on China or you can focus on yourself. You have to take steps to strengthen one’s democracy, but that’s ultimately our weapon. If we say China is building a competitive and good looking system that reform and opening up is over, that age is ended, that in some ways if you were to divide China’s history, you would say you had 1949 to 1979 as one period, which was the age of Mao and after, you then had reform and opening up in 1978, 1980, that’s probably ended in 2020 with this pandemic. And you now have this inward-looking China. It’s more East Asian in a way.
Rodney Jones:
The focus on jewel circulation, on building domestic champions, on not being so open, as you say, that loss of compatibility in the system, well, if we’re going to compete with, and that’s a competitive system, how does one compete? Well, one compete at home first. If you’re a smaller economy like New Zealand, small liberal democracy, it means making sure that your democracy is strong and you’re not subject to foreign influence and that people are free at home. For the United States, it would be the same advice. The way to compete with China is to strengthen at home and do the reforms and changes that are required, because this is now going to be a marathon, that there’s been risks along the way.
Rodney Jones:
China could have had a debt crisis. They could have had a financial crisis. They could have been a different leader or Xi Jinping. That hasn’t happened. We are where we are. And China is a capable competitor. I think there’s an inconsistency in the U.S. attitude. And this is maybe a good segue into that, is the co-dependence of this relationship. The role that the federal reserve has, in my view, U.S. monetary policy has been a tremendous enabler, part of the rise of China and provide tremendous sustenance to the Chinese Communist Party. The idea we had in the ’80s is that with economic liberalization, we’d have a more volatile business cycle.
Rodney Jones:
And that’s the way the resources would move and you’d maintain productivity growth and maintain efficiency. You had to protect the most vulnerable through unemployment benefits and fiscal policy, but a volatile business that’s in financial cycle was part of the life of a more dynamic economy. What we’ve had it started with Greenspan in ‘87 and then saving LTCM in ‘98, and then the bursting of the dotcom bubble. That monetary policy always been used to four to five financial markets. That’s had it been … And a counterpoint to that is East Asia started running these persistent surpluses. And you basically have U.S. financial policy meets Asian and largely now, Chinese export policy.
Rodney Jones:
And so we have these financial imbalances and real imbalances in terms of goods in the current account deficit. How are we going to do this? What sort of system is this? How can you have a compass system you’re competitive with, and then a system that you’re codependent on? And then every time there’s a shock, the federal reserve steps in [inaudible 00:42:15] optimistic actors, but also in doing so enables the Chinese system. I mean, the Chinese economic system is built on a web of soft budget constraints. It’s a socialist market economy. The socialist part relies on low interest rates to carry those non-performing assets life, if you like. Forward, it’s both a dynamic economy as you’ve talked about the tech sector and the household sector, the use of IT, the payment system. And it’s also, we got these ossified state-owned enterprises that are sustained by very low rates and lots of credit.
Rodney Jones:
So, again, that’s what troubles me. In some ways, I look at the current system, the large current account deficits, the enormous financial flows, through all the federal reserve in enabling the system. Whenever there’s a point to stress in the Chinese system, because that makes us stress in global financial markets, the federal reserve then steps into support financial markets, like we saw in 2015. And so that emphasis on always saving financial markets is also an enabler of the Chinese system. But the self-interest in the U.S. to preserve this, it’s not clear to me how you resolve it. It’s a lot of, if you like, the criticism we’ve had of China, the shift in thinking about China has happened in a geopolitical mindset or geopolitical framework. The economics is not tied in, and that the co-dependence and the financial and real economies. And can you achieve that separation?
Rodney Jones:
So if we just do a thought experiment to think about, well, how could it happen? To me, the only way it could happen would be if we do get inflation the cycle and we get a change of mindset in the U.S., and the recognition that maybe this dollar system doesn’t work olderly to U.S. advantages, given the role that the federal reserve has to always play in sustaining the global system. So, that’s my question and that’s what I’d say to President Biden. It’s like, you’re really talking about all the system issues. It’s just not some tweaking on foreign policy or some tweaking on geopolitical strategy. It’s much more complex and deep seated than that.
Rob Johnson:
How do you see this game playing out in the eyes of places like India and Australia and New Zealand, other parts of Asia, or for that matter, the European community, do you see them playing a supportive role on either side?
Rodney Jones:
Well, for countries like Australia, you have your economic relationships with China and you have your security relation with the United States. How do you reconcile that? That’s a journey that is starting on. New Zealand sits in the middle, has an independent foreign policy, as does Singapore. So lot of the region is more independent and you end up, you get into a balancing. New Zealand’s accused of being soft on China, but then in the past, it’s ahead of tense relationship with the United States. When I was at SARS in the ’90s, I had a meeting at the state department that was canceled when they discovered that I was a New Zealander, because of the prohibition meeting, New Zealand is above a certain, meeting U.S. officials above a certain level. Speakers of the U.S., New Zealand, U.S. tensions over nuclear ships and answers.
Rodney Jones:
So, it’s just not a case of sailing back into the Pacific and saying, “We’re back now.” It’s been a progression and the Trump administration will have a long tail on what’s happened to U.S. credibility. So, the U.S. is not part of TPP. They walked away from TPP or CPPTP, as it became. You have the asset agreement, the regional trade apart in the economic partnership. Although it’s outward looking, it’s still a big deal from a trade perspective. So China is tied into the region. The region has to live with China. We may wish it was different, but the region has to live with China and has to work with China on a range of issues, as uncomfortable as that can can be.
Rodney Jones:
And so, the U.S. just can’t demand loyalty and the withdrawal that happened under Trump and then the trade deal that was done with China that was damaging to country’s interests in the Asia Pacific, Canada, Australia, New Zealand, were all hurt by the trade deal that Trump did. I mean, at the end of the day, Trump was still President in the United States. It was the United States government, and you just can’t wish that away. And so I think it’s not only the pandemic, it’s the impact of Trump and it’s the impact of she has left the region more fraud, more vulnerable to sharks, but leaving smaller country having to navigate between the two giants and having to do that filly or jointly. It’s a more complex region than it was five years ago.
Rob Johnson:
Yeah. Yeah. So, at this juncture, let’s narrow it down. Let’s go to the place where you and I worked together. What do you think the possibilities are for Chinese stocks bonds, the RMB vis-a-vis the dollar, what portfolio strategy would you overlay into all these cross-currency intentions that we’ve been exploring?
Rodney Jones:
Well, I would say that China has made that transition as a large economy. It’s like Germany or Japan and the ’60s or ’70s, has made that transition. It’s running a structural surplus, its current account surplus was 2% of GDP. The IMF is assuming that it narrows. I think it will stay fairly wide over time as investment. If you think about, and climate comes into this, that you get a reduction in this heavy industrial investment in this infrastructure over time. One day, the housing market will be satiated and housing investment falls, that tends to be associated with larger surpluses. I mean, yes, the savings rate is generated domestically, but they also have a trade surplus. Their goods and services balance is running at $50 billion a month, significant surplus that’s growing as the U.S. deficit grows.
Rodney Jones:
And so, to me, there’s echoes of Japan in the 1980s. Large surplus, they started accumulating reserves. Again, the RMB is a store of value right now. The currency gives you, government bond yields of 3%. They’ve come through the pandemic. The rest of the world will still be hamstrung in 21. China will grow eight to 9% this year. And then there’s a certain amount of momentum. When I look at the Chinese economic data, there’s a sense where, that in a way the pandemic broke China was in this deflationary funk, it was growing more slowly. Somehow the pandemic has put it on a different growth path. We’ll see how long that lasts. But for now, there seems to be considerable momentum. And so there’s a sweet spot here, but where the currency is under significant pressure to appreciate, the central bank is now intervening to stop that. But as they do that, they create liquidity.
Rodney Jones:
And domestic assets are very attractive both in terms of yield and then the stock market, having been a lag ad for most of the decade. And so again, it’s international funds are going to be under pressure to invest in China and for their to reduce your obligation, there’s no reason they shouldn’t. And so this is where we’ve ended up. You just can’t reconcile or the consolable pieces that the other for China, it actually looks very positive. The corporate earnings is strong that the Asian cycle has been lifted. The one risk is what happens with technology and does that impose a drag? If that cut off from U.S., take 10 large in the medium term, what does that imply? So you can see risks further out, but the near term for 21, 22, 23, looks very positive. And again, that China’s had the advantage, they’ve eliminated the virus, they’ve got the low rates and stimulus of elsewhere in the world that hasn’t, and they’re taking full advantage of that.
Rob Johnson:
Well, I guess I’ll bring it a little piece of interesting evidence here. I received from our mutual friend, Andrew Shin, the document last night, called the global happiness report of 2020. And when I looked at it, they talk about taking all things together. This is the question. Would you say you’re very happy, rather happy or not very happy, or not happy at all? And I looked at the societies and how they did on that ranking of the combination of very happy plus rather happy. In other words, the plus side of the column. And what was quite powerful was that China finished number one of all the countries in that survey, with 93% of the people, 80% saying they were quite happy and 13% say they were very happy.
Rob Johnson:
And in the United States, it was 70%. Not surprisingly, some of the Scandinavian countries, Netherlands finished very high and the Canada, Australia, your neighbor finished right in the top, but it was quite a, how would I say? Quite a noteworthy thing at this time of acute distress in the UK and the United States to see data indicating that the Chinese people, how would I say? Whatever the ominous contingent threats of their centralized government and its traditions at this juncture appear to be a lot happier than most of the people in the West.
Rodney Jones:
Yeah. And I think there’s two aspects. One, in a society that’s not free, you always have to be cautious interpreting the data. So you have to have that. That’s an important caveat, but I think it comes down to public health as well, that people want to be free from disease and free from risk to their life. And the importance of delivering on that is critical. And this, the pandemic has showed us that, that if we knew what we knew today, maybe there’ll be a consensus to eliminate the virus, but there was a strong argument back in March when the countries were going to lockdown, that you go into lockdown to eliminate the virus, just not to contain it. There’s no herd immunity. You can’t seek herd immunity with the coronavirus, because it will mutate too many times over and could create a monster.
Rodney Jones:
And China, despite that foldering start of January and then February, eliminated the virus. And what you see in countries that have eliminated the virus is the populace recognizes that there’s a real achievement. And so why would, with the caveat I expressed, I think that’s real in that sense. And that’s why the Chinese Communist Party now, and there’s plenty of evidence of this, people were pretty proud of what they’ve achieved in a world that’s one on apart, so to speak.
Rob Johnson:
Yeah. Well, another indicator, they took two snapshots of what I’ll call the delta between times and the change since December of 2011. The Chinese people in those two categories, very happy and rather happy are up 15%. During that same window of time, the United States is down 15%, but perhaps more acute based on our conversation tonight, more surgically zoomed in, is since June of 2019, six to nine months before the pandemic, the Chinese people are up 11% and the United States is down 9%. So I don’t know how to … I don’t want to pretend to be over the top in terms of understanding these things. And I don’t think it’s all a continental thing in the sense that the happiness in India is down 11% since 2019 and down 23% since 2011. But at any rate, how would I say? I’ll just raise those statistics because it’s food for thought.
Rodney Jones:
Yeah. I think the takeaway from that food for thought is this notion that it is a competition and we are now in a competition that’s different to the cold war, is different with the Soviet Union. And we have to rise to that challenge. And that means rethinking the way we do things now. As an outsider, looking in the U.S., it’s hard to see that happening. And so that’s where, I think we face quite a difficult path ahead, but at the same time, and this is the inconsistency, economically, once we’re through the pandemic, it’ll probably, we’ll bounce back pretty fast, but there is real scarring and there’s trauma from this experience, that China on the whole was being protected from. There are real and sustained gains from having eliminated the virus.
Rob Johnson:
Rodney, I don’t know if you have any concluding or thoughts that we haven’t explored that … but I do want you to tell our listeners where they can find your work. How can they subscribe to your-
Rodney Jones:
Yeah. So we’ve got some things on the go where really I’ve tended to work with a smaller group, but it’s important that higher quality work be shared. So we’ll be looking at things for that over the next 12 months, making some of our work more publicly available to key the key thought pieces, because we need to disseminate … I’ve spent the last 30 years really doing the same thing over and over, as you described at the start. Really trying to understand the rise of Asia, the rise of China and what it will mean. And this journey ain’t done, for the next decade, the next 20 years, enormous challenges for the West and for the world and for China. So, we will be, I can’t give you an answer to that today, but we’ll certainly be looking for ways to really disseminate our work more widely and share what we do, because these are big issues and they’re going to remain with us. And as we’ve said in this discussion, there’s no black and white. It’s shades of gray and how do we navigate this really quite complex path?
Rob Johnson:
Well, all I can say is I’ve been very fortunate going back to that day when I walked into a brokerage in Malaysia and met you. And the sensitivity and nuance and intensity and unyielding nature of your mind and your efforts is something I would welcome becoming part of what I’ll call the global public good. I’ve certainly made money from your insights. I know the people at the various hedge funds, like Soros Fund Management, Moore Capital Management and others where I’ve worked, have always benefited from your just fiercely independent and very creative style. So, if it is infused in the understanding of public policy so much the better, but you have been a tremendous beacon of insight in, and how do I say? Also inspired and nourish my curiosity about Asia. So, thank you.
Rodney Jones:
Oh, thank you.
Rob Johnson:
All that you’ve done, where you think you might be going, I’ll be standing there cheering and encouraging people to get on board with me.
Rodney Jones:
Thank you and I’ve enjoyed tonight’s discussion. Every opportunity to talk and think about the path and future with you is always a privilege.
Rob Johnson:
Well, we’ll wait a few months, we’ll watch how the Biden people come out of the blocks and then maybe we’ll do another session. Next time you flag something that seems acute or interesting, we can come back on and talk to listeners again.
Rodney Jones:
Thank you very much.
Rob Johnson:
Thank you. Have a good night. And check out more from the Institute for New Economic Thinking at ineteconomics.org.
