How the Fed Is ‘Shaking the Entire System’

“There are moments when history making creeps up on you,” writes the economic historian Adam Tooze. “This is one of those moments.” Countries across the world are raising interest rates at unprecedented speeds. That global monetary tightening is colliding with spiking food and energy prices, financial market instability, high levels of emerging market debt and economies still struggling to recover from the Covid pandemic. Alone, each of these factors would warrant concern; combined, they could be catastrophic. We’re already beginning to see what happens as these dynamics intersect: Britain just experienced a bond market meltdown that threatened one of the most advanced financial systems in the world. Developing countries like Sri Lanka, Argentina and Pakistan are experiencing political and economic crises. The World Bank believes we could be headed for a severe global recession. Tooze is the director of the European Institute at Columbia University and the author of multiple histories of financial crises and near crises and of the excellent Chartbook newsletter. He believes this particular confluence of high inflation, rising interest rates and high levels of debt points to an economic “polycrisis” unlike any the world has seen. And he and others have argued that the U. S. Fed’s decision to raise interest rates is a core driver of that crisis. So this is a conversation about the fragile, uncertain future of the global economy at this history-making moment and the Fed’s role in it. We discuss what the British financial market meltdown means for the rest of the world, how the interest rate hikes in rich countries export inflation to other countries, the looming possibility of a global recession, why Tooze believes something could break in the global financial system, why countries in South Asia are experiencing a particularly severe form of “polycrisis,” how the Fed should weigh its mandate to bring down inflation against the global consequences of its actions, why he believes analogies to the American inflationary period of the 1970s are misguided and more. Mentioned: “Slouching Towards Utopia by J Bradford DeLong — fuelling America’s global dream” by Adam Tooze Book recommendations: The Neapolitan Novels by Elena Ferrante Youthquake by Edward Paice Slouching Towards Utopia by J. Bradford DeLong Thoughts? Guest suggestions? Email us at [email protected]. You can find transcripts (posted midday) and more episodes of “The Ezra Klein Show” at nytimes.com/ezra-klein-podcast, and you can find Ezra on Twitter @ezraklein. Book recommendations from all our guests are listed at https://www.nytimes.com/article/ezra-klein-show-book-recs. “The Ezra Klein Show” is produced by Annie Galvin, Jeff Geld and Rogé Karma. Fact-checking by Michelle Harris, Rollin Hu, Mary Marge Locker and Kate Sinclair. Original music by Isaac Jones. Mixing by Jeff Geld. Audience strategy by Shannon Busta. Special thanks to Kristin Lin, Kristina Samulewski, Jason Furman, Mike Konczal and Maurice Obstfeld.

Speaker names marked ? are inferred from speaking time and the show’s known hosts — they are not voice-verified.

• 0:06Ezra Klein?

  I'm Ezra Klein. This is the Ezra Klein Show.

• 0:23Ezra Klein?

  How do you describe Adam Tooze? Adam Tooze is an economic historian at Columbia University. He's the author of the excellent must-read newsletter Chartbook, and he's become, I think, a key interpreter and describer of the way the international finance system works. He's become a historian of our financial present. Also, I should note, a repeat guest on the show. But for the past few months, Tooze has been taking the global view of this economic moment, rather than the US-centric one that a lot of us are used to. Right now, we are seeing around the world a convergence of forces. We have high inflation. We have central banks hiking interest rates. We have governments cutting spending and raising taxes.

• 1:04Ezra Klein?

  We have very high levels of dollar-denominated debt. And we have droughts and floods that have been quite a bit worsened by climate change. Some countries amidst all this have already tipped into ecological, or political, or economic crisis. Many more are fragile. It's easy to imagine them tipping there. And what's happening now is that richer countries, most importantly, the US, are tightening the economic screws. We're doing it, we think, we intend, on ourselves in order to curb inflation. But the way we're doing it is putting tremendous stress on the global financial system and on these other countries that are highly exposed to us. We are, in a sense, exporting our own economic pain and

• 1:48Ezra Klein?

  our own economic policy elsewhere. And we're doing so with very little discussion, very little awareness of the consequences. I will say, listening to Tu's spin out the way the financial system works and the way everything feeds back into itself and connects to each other, and how a problem here that nobody noticed can flap its butterfly wings and create a crisis over there, it is dizzying. And that, to me, is very much the point. The complexity and connectedness of the global economic system is dizzying, and no one, no one truly understands or holds the information to understand all of it. We sometimes act as if our economic policy is a purely domestic matter, but if that was ever true, it's not now. As always, my

• 2:31Ezra Klein?

  email, [email protected].

• 2:38Ezra Klein?

  Adam Tu's, welcome back to the show.

• 2:40Adam Tooze?

  Great to be here.

• 2:41Ezra Klein?

  For people who haven't been following this all that closely, tell me about, just to start here, what's been happening in the UK financial markets in the last few weeks?

• 2:51Adam Tooze?

  Well, we saw this spasm, basically. I mean, the UK's been a little bit on the suicide watch, you might say, for a while. You know, the fundamentals don't look too healthy. The economy has a huge trade deficit. There's Brexit in the background. The Tory party is a little bit AWOL, we would say, and has been for a while. The Boris Johnson prime ministership collapsed. But then, in a kind of spasm of what appears to be really just downright, but rather naive ideological commitment, the Newt dual government, with Liz Truss and Kwasi Kwarteng as Chancellor of the Exchequer, so Treasury Secretary, announced that they were doing a mini-budget. Now, in the UK, because it's parliamentary system,

• 3:33Adam Tooze?

  they've got the majority built in. So when they decide to do this, it actually happens. It isn't like they have to negotiate with anyone. And this mini, what they called a fiscal event, they didn't want to call it a budget, so they didn't have to go through the rigmarole of a proper budget, also evaded any kind of assessment by the Office of Budget Responsibility, which does the kind of assessment of British fiscal policy. This decision to do a tax cut for principally better off people to the tune of about £45 billion, which In modern money, given the exchange rate of the pound is about forty five billion dollars, on top of a decision before to do a hundred and fifty billion pounds in energy price stabilisation subsidy to deal with the energy crisis, which is rocking all of Europe.

• 4:15Adam Tooze?

  The combination of the two things together unleashed an almighty panic, kind of temper tantrum type thing in the British, well, currency markets first, the pound sold off very hard, but then much more importantly, in the bond market. The British government bond market is the kind of granddaddy of government bond markets. It originates in the late sixteen hundreds, so at the time of the so-called Glorious Revolution, the parliamentary constitutional settlement that set Britain on its trajectory to being the preeminent parliamentary power. And so when the gilt market tremors, it's really quite big news, even though it's modest in size by global standards now. And it went into full-on spasm. We didn't quite understand why, but Treasury bonds, especially the long-dated ones, thirty

• 4:58Adam Tooze?

  year gilts, sold off spectacularly. And that seems to have then unleashed some nasty derivative action, a little bit too familiar from two thousand and eight. This involved pension funds who'd hedged against interest rate movements. They were then stuck, they then had to offload more portfolios of debt, which threatened to generate a fire sale kind of run dynamic. And before you know it, the Bank of England, which had previously was in the process of tightening, so selling debt it had on its portfolio, all of a sudden ended up having to buy a bunch. Where we are now is the storm has stabilised, the pound is back to where it was before the crisis began, and the Treasury yield as well, which is the inverse of the price for a bond. So people don't want bonds, they sell them, the price goes down, the yield goes up.

• 5:42Adam Tooze?

  So the yield is now back to where it was before the crisis as well, which means the Bank of England's buying has stabilised the gilt market as well. But that we could have gotten as close as we did to a full-on financial heart attack, and this did have the feel of two thousand and eight about it, shows you how fragile these systems are, and in particular, how precarious the situation in the UK is. And the future really of the Tory government from here on in is very uncertain. In the opinion polls, they now lag Labour by twenty to thirty points. So I think they're really, they're a flailing government at this point.

• 6:12Ezra Klein?

  So there are two ways of reading this. One is that you had some dumb policy mistakes, some weird economic idiosyncrasies, the way the pension funds were hedged, and that wasn't very well understood. But it all worked out, as you say, the pound is back to where it was. Everything is totally fine, no big deal here. And then there's this other argument, which is more the argument you've been making, which is what we saw there is a signal of where we are, but more to the point, what's coming globally. You write, quote, "that we are reaching the point in the monetary tightening cycle in which things begin to break," end quote. And so the idea is that we are now in this context of fragility and we are changing

• 6:55Ezra Klein?

  things and the changes are having knock-on effects we don't anticipate. Can you tell me more about that view that this is an example of something that is now becoming our reality?

• 7:05Adam Tooze?

  Yeah, so there are two different risks in the current moment, I mean, which is worth distinguishing. One is a recession risk, which you might think of as the kind of more familiar, serious, almost tragic trade-off, but nevertheless, as it were, one that you can contemplate with a degree of calm in dealing with inflation. So you raise interest rates, you take the pressure out of the labor market, you induce some, quote, "labor market slack," which is really a euphemism for unemployment.

• 7:31Ezra Klein?

  I really hate the term "labor market slack" for the exact reason you put it. It's very like Orwell politics in the English language kind of thing.

• 7:39Adam Tooze?

  It is. I mean, it creates this sort of image of a mechanism, right? That is somehow we're going to add a little bit more play there. Anyway, so, yes, so that's one vision. What's implied by that is a sort of managerial sense, though, that we've got a clear choice to make, a trade-off that, you know, on the famous Phillips curve, we can pick our point and then we steer towards it. However you imagine the Phillips curve, whatever shape you think, you at least are positing there that you have a degree of freedom. That's one way of looking at our current situation, and that's serious enough, right? Because if you think globally, the destinies of tens, if not hundreds of millions of people are at stake, and the generation that was hit by COVID now has to face the prospect of labor markets closing on them as well, that, I mean, the young people whose education was so severely disrupted. So that's one side of this story.

• 8:22Adam Tooze?

  Then there's another side, which is, in a sense, even more alarming, but a little more obscure, which is that as we raise interest rates, what we're doing is putting pressure on every single joint in the financial System because all of the contracts which were negotiated over debt and credit over the last decade or more were done on the basis of assumptions about inflation, namely that inflation was low and that interest rates would be low as well. But no longer obtain, right? We're now in a world in which inflation across the developed economy world, with the exception of Japan, is around 10%. And central banks are responding by hiking interest rates. And so what we're doing is shaking this entire system, a system which also extends to the poorer countries of the world, the emerging markets, low income countries, which have also borrowed in dollars.

• 9:05Adam Tooze?

  And so what we're doing is pressuring this entire system by raising interest rates. And we honestly don't know, we've never done as comprehensive an interest rate increase as this before. We've never done this with this level of dollar debt out there. We hear creaking already in this system, right? With people who are already under strain. What we saw in the UK gilt market last week in time warp, because the pace of the increase in interest rates driven by the sell-off of bonds was savage. But we saw there in time warp, what is happening across the entire global economy slightly more slowly. And if there are other mechanisms like that, one of the eerie things about this pension fund derivative hedging strategy

• 9:48Adam Tooze?

  is that it just wasn't top of stack for anyone in the financial stability community, apparently in Britain. It's really striking. You would have given the scale relative to the size of the UK bond market. This was a big event, 1.5 trillion pounds worth of debt were hanging on these derivatives contracts. We have to worry at this point also about, as it were, the adequacy of the regulators, the central bankers to the task of shepherding the system through this historic tightening that we're going through. And when it breaks, then we're in a different world. Then all of a sudden, the pace of events speeds up. We're in a situation of, you know, it's a little bit more like the pandemic all of a sudden, right?

• 10:27Adam Tooze?

  The chronology is not that of a rolling program of tightening over months, but all of a sudden, hours and days begin to really count.

• 10:36Ezra Klein?

  There's a lot here. So I want to put a pin because we're going to come right back to this question of the adequacy of our knowledge of how the financial systems work, of what's happening in other countries. But I want to hold for a minute on something you said that we've never raised interest rates this comprehensively before. We raised them, at least domestically, higher in the 70s. So tell me what you mean by that. And I'd also like to throw in this question that you've been attentive to of there also being not just coordinated interest rate rises, but across the world coordinated tightening of government budgets, where you're seeing spending cuts, tax increases. So can you talk a bit about how that plays into it as well?

• 11:16Adam Tooze?

  Yeah, so the epic historical benchmark of monetary policy tightening is Paul Volcker's tightening after 1979, when interest rates went above 15%. And we're not in that zone, but the change is considerable. So the change that's been initiated since the beginning of the year. And what's even more impressive is that it's so comprehensive. So the World Bank, the IMF have been collecting data on this. And really, at no point in the history of the modern international financial system, which we could say dates to the early 1970s, and we use that marker because that's the moment at which the dollar was unhitched from gold in 71 by Nixon. And so we enter our modern regime of money, which is a fiat

• 11:59Adam Tooze?

  money regime. So money anchored only really by the authority of the state and the monetary actors associated with the state. So in that modern period, which is half a century old, we have never seen as comprehensive a tightening as this. This process did not start, remember, with the US. The Fed was relatively late to the party. The ECB is even later to the party. The Bank of Japan still isn't tightening. The tightening this time around actually began in the emerging markets. I mean, it will be, I think, misleading to call them the periphery, but I mean, it began with Brazil, which began tightening quite hard last summer, the summer of 2021, and has swept from there across many of the emerging markets and eventually enrolled the Fed from the beginning of this year. And

• 12:41Adam Tooze?

  when the Fed moves, because the dollar is so much the dominant currency, everyone else has to follow. So we're really talking about a global bandwagon, which at this point leaves only the Bank of Japan and the People's Bank of China. As central banks which are loosening policy, if you exempt the British emergency action, which really had nothing to do with macroeconomic policy, it was about keeping the financial markets afloat. And the effect of this tightening, which is unprecedented in its breadth, is compounded by the fact that, yes, at the same time, fiscal policy is tightening. Now, it's important not to misread this, there is some which is deliberate, like the Inflation Reduction Act negotiated over this summer, right, between Congress and the Biden administration, that actually sets out to tighten the deficit by raising taxes more than it spends.

• 13:25Adam Tooze?

  But from a macroeconomic point of view, you don't need to have deliberate policy decisions to produce a tightening of fiscal policy, you just run off the stimulus programmes of 2020 and 2021. And unless you replace them with new stimulus, which is an implausible idea at this point, you end up with a negative net effect, a so-called fiscal shock. And that's very large in the US. So in the second quarter of this year, it was as large as 4.5% of GDP, in the third quarter, it's down to about 3.5% of GDP. This isn't a deliberate policy decision, or rather, it's a decision not to pile in on the stimulus of 2021. Another way of thinking about it is this is, you know, what happens when your Build Back Better $3 trillion programme stalls and you end up with the Inflation Reduction

• 14:09Adam Tooze?

  Act instead. Under the circumstances, you know, massive fiscal stimulus is no longer called for in America, investment perhaps, but not fiscal stimulus. But overall, this produces a very negative drag. And this fiscal effect is not confined to the United States. So again, we're seeing a de facto tightening across the world at this moment. So when you add monetary and fiscal policy together, this produces an enhanced effect, right? The sum is greater than the parts when you do this combined pressure. A further effect, which is rather important, is the adjustment in exchange rates. So as the Fed tightens monetary policy in the United States, what we've seen is that the dollar has surged. And the effect of that is to produce a contractionary effect on everyone who's

• 14:53Adam Tooze?

  borrowed in dollars was effectively their debts are increased in value in local currency terms. And that effect then ripples throughout the world economy because it's about 22 trillion dollars plus in dollar-denominated credit to non-Americans outstanding. So these three different mechanisms, the contraction of monetary policy, the hit to fiscal policy and the exchange rate adjustment are very negative, you might say euphemistically, for the economic outlook.

• 15:20Ezra Klein?

  Let's get to that third one because I think the first two are more familiar to people. When the central banks tighten, they're making it harder to borrow money, so economies slow down. When the fiscal authorities, the governments cut back, they are, you know, they were taking the amount of support or stimulus they're putting into the economy and turning it negative instead of putting as many dollars in, they're taking dollars out from wherever they were or pounds or whatever it might be. But this idea that interest rates have this other international effect, that they create currency dynamics and they create races to, you know, for other countries to tighten. You've been focusing a lot on this and I don't think this is very well understood, honestly, from talking to people.

• 16:05Ezra Klein?

  I don't even think it's that well understood by policymakers, not to mention by me. So can you talk more about that intersection between interest rate increases and their international spillovers?

• 16:17Adam Tooze?

  Yeah, I mean, I think it's fair to say that this is something of a puzzle, right? Because we're supposed to live in a world that's emerged bit by bit since the 1970s in which exchange rates are flexible. And one of the effects of that is it's supposed to render the economic development of the individual countries relatively autonomous of each other in the sense that the exchange rate adjusts in between them. What we see is that, in fact, the dollar functions as something like a currency for the entire world, to the extent that if the US tightens monetary policy, it's as though everyone else did tighten too. And it slows the global economy down. Now, in practice, because if you do not tighten along with the Fed, your domestic monetary

• 17:01Adam Tooze?

  policy, your exchange rate depreciates very dramatically. Everyone does tend to track the Fed. So essentially, what these statistical correlations are capturing is the reality of a world which is not just interdependent, but more hierarchically dependent on the United States than the cover of, you know, the magazine would suggest. The cover of the magazine says, you know, new global monetary system since the 1970, independent exchange rates, degrees of national autonomy they didn't have before. De facto, what we see is a system which tracks the dollar very, very closely. One mechanism for this is that central banks actually track the Fed's policy because otherwise you tend to get depreciation.

• 17:45Adam Tooze?

  If your currency devalues against the dollar, then you tend to get import inflation because the goods that you buy from abroad, many of which are denominated in dollars, become more expensive. And the other reason you'd be leery about doing this, especially if you're an emerging market or low-income country, is that many of your businesses, big businesses, will have borrowed in dollars. Why? Because your local capital markets aren't big, deep, or sophisticated enough. And the US market is there, and hitherto, borrowing on US markets has been cheap, relatively speaking. And so what big corporates in the emerging market will do is issue debt, you know, with the help of investment banks in New York and in Europe, onto global dollar markets and borrow there.

• 18:25Adam Tooze?

  Now, if your currency severely depreciates against the dollar, and this is a big company which is earning revenue locally, its problem all of a sudden is that it has liabilities in dollars which are worth more and assets or a stream of income which is in a depreciated local currency. And that's a recipe for financial crisis in big corporations. So those effects between them, there's also an effect by way of major commodities. So oil, for instance, is denominated in dollars. The price of oil tends, however, to vary inversely with the value of the dollars. The dollar goes strong, oil tends to sell off. That helps to a degree, but overall, a strengthening of the dollar will often put pretty severe

• 19:06Adam Tooze?

  pressure on commodity importers in the short run because they then, say Pakistan this year, or Bangladesh, or India, the entire South Asian continent, which is Heavily dependent on imported energy has been facing a double whammy or even a triple whammy where interest rates have gone up. The price of commodities has gone up and they're paying for those commodities in an American currency, which also has gone up. And so that triple effect exerts a very painful squeeze on the bits of the world economy which are integrated enough to actually be entangled with the dollar system, but not sufficiently strong and resilient to be able to ride this out. And so this trash test that we're applying here, this this very severe shaking of the system

• 19:50Adam Tooze?

  is in a sense going to reveal who is on what side of that crucial divide, who can handle the stress and who can't.

• 19:57Ezra Klein?

  So I want to slow down on one part of this, which is sort of implicit here. Why, when the US raises interest rates, does it cause the currencies of countries that have not raised interest rates to depreciate? Why should making it more expensive to borrow in America create a problem in the currencies of Brazil or Bangladesh or Chile?

• 20:21Adam Tooze?

  Yeah, so this is a crucial point and it axes on the difference between the trade element of the balance of payments and the capital account element. Because as America increases interest rates, it becomes more expensive to borrow, as you say, in the United States, but it becomes extremely interesting to lend in the United States because when you lend, you're going to get a better interest rate for lending. And the way you lend in big markets is not with a bank loan, but by buying or selling bonds, right? So when you sell a bond as a business, you're borrowing and the person buying the bond is lending you the money, the face value of the bond or you know, whatever you actually buy and sell it for. And so as interest rates go up

• 20:59Adam Tooze?

  in the United States, it becomes more attractive for foreign investors to own American assets because they attract this higher interest rate. And so as people buy those assets, essentially, America is exporting assets, if you like, foreigners buy them and that produces an appreciation of the dollar. The flip side of that is a depreciation of everyone else's currencies because if you're a global investor and you've got a portfolio, you've got a giant trillion dollar portfolio and you've got to put that money somewhere, you spread it across the entire world and as interest rates adjust, you reallocate your portfolio away from the now relatively low interest countries and towards the relatively high interest countries. And that in this

• 21:40Adam Tooze?

  case would now suddenly be the United States. So you see these big reallocations in portfolios which drive extreme rate movements.

• 22:11Ezra Klein?

  So now I want to go back to something you had said a few minutes ago, which is that there were these dynamics in UK financial markets that were just not the top of anybody's mind, not something that a lot of people understood very well. And to connect that to something more broadly, certainly my read from covering 2008 and the financial crisis then and doing more research into past financial crises, is that the really dangerous thing in financial markets is when one of two things happens. One is that information everybody took as settled and known and made decisions about, like housing prices are going up and these bonds are safe. If that information changes all at once, and as such, everybody

• 22:54Ezra Klein?

  now has to live in a new informational world where their old assumptions don't hold, that often can create a financial crisis. But the other piece of it is that when something like that happens, when there is a rapid effort to respond to new information or changes, it turns out there's a lot of parts of the financial markets that we don't understand. Dependencies, vulnerabilities, exposures, counterparty risk.

• 23:19Ezra Klein?

  And so you were saying a few minutes ago that you wonder if our central banks and our regulators have what they need to track all this. And it seems to me the answer is of course, no. This really comes through in your work oftentimes to me, that the complexity of international, even domestic markets is now so far beyond the capacity of any individual or even any agency or any kind of informational structure, that any kind of rapid change is going to expose things nobody was prepared for. And so that creates just like an underlying vulnerability to big explosions. Is that a kind of fair way of talking through the risk now?

• 23:54Adam Tooze?

  Certainly, I would wholeheartedly agree on the first point, which is that indeed, we know, we build institutions to deal with and we make strategic choices of a large size to deal with scenarios and futures as we, within reasonable boundaries, think are reasonable and are likely to emerge. And the scenario which British pensions were hedging against is a scenario in which interest rates went down. And that was a historically warranted assumption to make. And so the irony of the current situation is that the strategies that blew up were strategies that were needed in a world which we no longer currently inhabit, where we're suddenly seeing huge interest rate increases. And that is what they were

• 24:38Adam Tooze?

  not prepared for. I don't think you can really blame them for having adopted these strategies in the first place, because they were highly exposed, largely private pension funds with open, you know, with large commitments in the future. I think the question has got to be in the UK case, why the bank, the treasury, the financial regulators, knowing that we were heading into an interest rate increase cycle, were not more attentive to this risk. And it's a reasonable question to ask, because we know how anguished the communication between the financial sector and the bank was on Monday and Tuesday before they had to make the decision on Wednesday. And by all accounts, The bank took a long time to really get it for the penny to drop. And that's not what you would really want in this situation.

• 25:23Adam Tooze?

  You would have wanted the central bankers to be on this risk from the very beginning, carefully monitoring it before things got as toxic as they were by the end of Tuesday and as dangerous as they were at that point. To your point about whether or not this stuff can be foreseen, I think I'm less, I mean, I would characterize your description there as sort of conservative liberal. There's a kind of, almost a shade of Hayek about it, right? The world is too complex for us fundamentally to grasp. We have therefore to face in a kind of rather resigned way, the prospect that we are going to be overwhelmed by things that we can't see coming. And so then presumably we either adopt a very conservative stance, which says that we should prudentially avoid certain risks as far as possible. Or I don't know, I think we sort of have to shrug and say, well, you know,

• 26:08Adam Tooze?

  bad things are going to happen and we, you know, we just have to roll with that. I'm not sure I'm willing to settle for that. I think especially with regard to the global financial system, there is, you know, persistent evidence, recurring examples of cases where the bank and the British regulators were in fact warned year in, year out for several years by people who were knowledgeable about the pension system of how dangerous this strategy was. It's not rocket science to look at the major holders of UK treasuries of gilt and figure out where the risks are to work your way down the tree. My take would be more kind of left progressive radical take, which is to say there were systematic reasons as to why we're blindsided by these kind of events.

• 26:50Adam Tooze?

  People are actually not trying hard enough or the folks that are in these positions are not competent and for good reason not competent. In other words, folks who are making money don't want competent, aggressive regulators in those jobs and make damn well sure that they're not in those jobs. Information is deliberately not shared and that would be my approach. And until we saw somewhere that had made a very concerted effort. To crack down on this kind of behaviour, you know, I wouldn't be willing to concede that modernity is just too complex for us. I think, you know, on balance, right now, my guess is simply that, you know, this is exactly the kind of crisis you'd expect in the system shot through with conflicts of interest as it is, and it's the conflicts of interest which are the driver here. I mean, you know, in part of the contrast here,

• 27:33Adam Tooze?

  and it's a disconcerting comparison, but it's one we've talked about before, but so it's on the table already, the contrast is a place like China, which this year and last year is going through what is unprecedented in global financial history, the deliberate effort to deflate the bubble to end all bubbles, which is the Chinese real estate bubble. Now, that is being deflated with complete deliberateness. They don't know exactly how all of the thing, you know, how the Jenga tower is going to fall, that they're having a hard time containing Evergrande, they've got problems at the local level, but they brought that thing down deliberately because they thought there was too much risk in that system. And until we see a determined effort by a Western regulator to do something like that, I wouldn't be, I think, willing to concede that this is a problem which surpasses

• 28:17Adam Tooze?

  us on grounds of complexity per se. I think it's more likely to be that there just isn't the will out there, and there aren't the interests, in other words, that would drive us towards really firm-handed, intelligent, aggressive regulation of these sectors.

• 28:34Ezra Klein?

  Well, I'm going to cop to half of that. I think I do have some of the view that these systems are now more complicated than than human minds can fully grasp, although I don't think I'm as fatalistic as where you you would take that. But I want to be clear here that I'm talking not so much about the specific thing we just saw in the UK, but of what we saw in the UK is more of a metaphor for the other side of what we're talking about, which is this now global system of pressure coming from global inflation, coming from US interest rate increases, and now spreading out into a lot of economies that we don't understand that well, that we don't watch that closely, that have uncertain relationships to their own political systems or the political systems of their neighbours.

• 29:18Ezra Klein?

  And as such, that to me is where this gets a little bit frightening, that we are playing with systems I don't even think that we truly pretend to understand, which is maybe a good bridge into what you've been calling the South Asian polycrisis. Do you want to talk a bit about what you've been tracking there?

• 29:36Adam Tooze?

  Yeah, so this polycrisis is this notion which I picked up when I wrote this book, Shut Down, about the 2020 crisis. And it's a term originally used, well, coined and put into somewhat wider circulation by Jean-Claude Juncker, the president of the European Commission at the time of Europe's troubles between 2014 and 2016. And the term, it turns out, has an interesting genealogy which goes back to 1970s complexity theory. Basically, it's the idea that you can have a crisis and then you can have a polycrisis. And a polycrisis is when you have a whole series of interconnected fires which then turn into a general, a firestorm, a conflagration, which is larger than the sum of its parts. So the situation is worse even than the diagnosis of each individual one of its components would suggest, because those components are powerfully interacting with

• 30:21Adam Tooze?

  each other, moving fast as well, which makes it difficult to track. And so at that level, yes, complexity theory, you know, you're right, Ezra, would point towards the kind of idea which says there are constraints to what we're able to do and understand, more importantly, about the world. I guess my invocation of the term is trying to at least point to the fog we need to be navigating through, even if we can't necessarily clear all the fog away. So, and I find this a useful way of thinking about interactions of crises. So deciphering the polycrisis a little bit. One way is to understand the regional connections between crises. Maybe this comes out of my background, thinking about the EU and the

• 31:02Adam Tooze?

  eurozone, which you could describe as sort of, you know, a classic regional polycrisis. So you can see interactions like that between Turkey, Syria, Lebanon, that entire complex of regional issues. You know, you could refer to that as the West Asian polycrisis. But there was, and it is ongoing, I think, a question about the stability of several of the states within what you might broadly think of as the Shatter Zone of the British Indian Empire, which took in at its height Burma, Bangladesh.

• 31:35Adam Tooze?

  India, Pakistan, Sri Lanka and much of the border region to Afghanistan, which in modern parlance is South Asia. And out of that emerged a series of more or less successful post-colonial states, of course, building on long, long historical lineages. And as of this summer, we had a manifest total crisis in Sri Lanka, an ongoing disaster now compounded by this gigantic climate shock in Pakistan. And very severe pressure on Bangladesh, and that's strategic because Bangladesh, you know, in the global development narrative, Bangladesh is one of the truly bright spots, right? So this is a model student, if I may use that language, in the development game, coming under very severe pressure.

• 32:16Adam Tooze?

  And what connected all of those, they all have very distinct political histories, interacting, of course, through a geopolitical force field that connects Pakistan, India and Bangladesh, for instance, or, you know, India and China around Sri Lanka. But all of them were under the pressure of this triple whammy of rising interest rates, accelerating commodity prices, which early in the year were very dramatic and in energy persist, and also the strong dollar. And those three forces were acting on this cluster of states, and we're talking about a huge slice of humanity in a rather concerted way. Just to say about a quarter of humanity. Yeah, this South Asia, I mean, South Asia and East Asia between them, you know, if you monitor those two regions, you're covering close to half of humanity's experience at any given moment.

• 33:01Adam Tooze?

  Of course, it's hugely asymmetric because India entirely dominates this, but Pakistan and Bangladesh are very, very big countries by any standards. Pakistan, I think, is number five in terms of population, Bangladesh number eight. So these are hugely significant pieces of the global jigsaw puzzle, and they were all simultaneously being rocked, even India, by this triple shock. And the energy component is particularly dramatic because Bangladesh and Pakistan had been tempted in the glut days of global energy when, you know, LNG in particular was dirt cheap because there was an

• 33:34Ezra Klein?

  Liquid natural gas.

• 33:35Adam Tooze?

  Yeah, liquid natural gas. In global parlance right now, that's a key variable. No, it doesn't figure very much in American politics right now because America has an abundance of gas, but LNG is crucial because it's shippable, right? You don't have to have a pipeline. You can put it in a very, very sophisticated tanker. And Bangladesh and Pakistan, as in Bangladesh's case at least, rapidly developing low income countries had fixed onto LNG as a cheap source of relatively clean energy as well because the alternative is either burning diesel or burning coal. And they were therefore blindsided, I mean, hit really hard by this spasm that we've seen in the global LNG market, shippable, transportable gas, as East Asia, the giants

• 34:17Adam Tooze?

  to the east, and Europe to the west, compete for these cargoes, which literally will just turn course in the middle of the Indian Ocean if the Europeans outbid Bangladesh. And that's not hard for the Europeans to do. The tanker just turns around and it goes to Spain rather than going to Bangladesh. So Bangladesh, this, I mean, extraordinary example of rapid economic development under the sign of globalization in the last 20 years because they had this incredible boom in their garment sector. This state, which was for the first time really also offering its citizens regular electricity supply, you know, keeping the lights on all the time. So there was an emerging IT sector as well, suddenly faced rolling blackouts and, you know, all the symptoms of dysfunctional emerging market in low income countries.

• 34:59Adam Tooze?

  And then looking out, you know, down the Indian Ocean to Sri Lanka, there is this terrifying prospect of complete state failure, which would be obviously a great disaster. Anyway, so this is one way of trying to think of this, this region as being shaken by this global tension.

• 35:15Ezra Klein?

  How do you think about the strength or vulnerability of the Indian economy right now?

• 35:19Adam Tooze?

  One of the things that India has going for it is that it's a relatively closed economy. So it is not as exposed to global dynamics as Thailand, for instance, or Malaysia, which are true workshop economies in the current global economy. India is huge, poor, and relatively less exposed. It doesn't borrow very much, it doesn't have a bond market to speak of. So there isn't much international involvement in Indian debt. It's now rich enough to be able to afford what is its crucial import, which is energy. It's heavily dependent on imported oil, increasingly also on coal. But it also has a currency reserve, much of it borrowed, but nevertheless on stable terms of over $500 billion. So India can ride out any of the shocks.

• 36:02Adam Tooze?

  The last time that India was in really manifest crisis, financial crisis, was in the early 1990s. So India has moved itself well out of what you might think of as the danger zone for low-income countries. But it is nevertheless subject to buffeting from the outside. And what I think is more important is the question of how dynamic its growth engine really is, because India is sustained right now by a dramatic story of rapid economic growth that came out of the 1990s and really hit its stride in the early 2000s. Growth was up 7%, 8%, 9% at various points recently as well. India has outpaced China. But I think there are deep concerns at the structural level about the adequacy of India's

• 36:44Adam Tooze?

  infrastructure, the adequacy of its education system to providing the skills that hundreds and billions of young India needs. India has a huge youth bulge coming in its way. And increasing signs of what you might call a kind of crony capitalism, where Prime Minister Modi and the BJP's collect around them pivotal players in the Indian oligarchy, in a sense almost as a substitute for the absent state. So those oligarchs and their giant business empires will do the job of building the infrastructure that India needs, rather than working away over the long run at building the state capacity, this is the term you hear again and again in India, that would allow it to emulate the sort of things that China has done. The big questions are all about the longer run in India and whether or not there is

• 37:27Adam Tooze?

  a growth model that can be sustained over the next two generations, which is what India would need, you know, to rise comfortably into the zone of higher-middle-income countries.

• 37:38Ezra Klein?

  We've talked about the role that interest rate increases and economic policy in the US might be playing in adding tension here. You've touched on the weather events, to use a very bloodless term, in South Asia recently. Obviously, we are a main driver of climate change in over the century. These weather events are related. Can you talk a bit more about the role the floods and the rains have been playing in the problems in South Asia, and also what that perhaps implies for US or Western responsibility?

• 38:14Adam Tooze?

  Yeah, I mean, we're seeing it around the world, but South Asia is perhaps the most vulnerable. Certainly, when you put it in proportion to population that's exposed, South Asia really is the absolute crosshairs of climate change. And it works in a double way there. So on the one hand, you have terrible heat waves and drought, which have been affecting crops in northern India. And then, on the other hand, you have the appalling epic flooding in Pakistan, which is an undated a third of the country. And this isn't the first time this kind of mega flood has happened in Pakistan. And for the entire northern region of India that's in the Ganges and the runoff from the Himalayas, one really

• 38:55Adam Tooze?

  has to fear for the possibility of this kind of mega flooding. So those are, as it were, the two types of exposure, extreme heat on the one hand, drought, and the prospect of inundation through the monsoon. If the monsoon is even more extreme than normal, the immediate effect on Pakistan is devastating. And I don't think there's any real doubt that Pakistan is going to have to fundamentally renegotiate its international debt. There's no way, I think, that it can continue in what was already a very fragile IMF program. And so there is there an immediate linkage to financial crisis. I think more broadly, what this does is to put India in particular in a really severe dilemma with regards to its climate policy in the upcoming COP in Egypt.

• 39:39Adam Tooze?

  Then it's caught in something of a cleft stick because on the one hand with its developmental ambitions, India could try and do a China and run up a huge fossil fuel intensive industrialisation programme. I mean, if it could get the infrastructure sorted, that would be an option for India. The problem is that by doing so, it would exacerbate a problem to which it is more vulnerable than practically other, any other really large state in the world. And on the other hand, it also alienates the most vulnerable small island nations, which could be India's allies. And so add that to the list of challenges which India has facing it in this current moment. I mean, not just as it were the issues of political economy and the huge backlog of infrastructure investment and human capital, education, in other words, that needs to be delivered, but also the fact that going forward,

• 40:22Adam Tooze?

  its 20 to 30 year time horizon is shaped by this climate crisis. And stand back far enough from this and you really begin to get a sense of the tragic dilemmas facing the large emerging and low income countries in the world. And India is perhaps the most dramatic in the sense that much of Africa, particularly sub Saharan Africa, has not really embarked on rapid economic growth at all, in patches in individual countries, but not for the continent as a whole. India really has, and it sees the door to the classic development path slamming in its face. It's like one of those action movies where the bad guy is hurtling towards some sort of door which the heroes are

• 41:03Adam Tooze?

  trying to shut before the villain can get their fingernails around the edge of the door. And they're desperately trying to keep this door closed. And India finds itself a little bit in that position, but the reverse, right, where the the door to the development future is swinging closed in front of it. And it now has to conceive of an entirely different strategy to go forward because the path to fossil development, even if it embarked on it, you know, A, it would be disastrous for the planet, and B, it would find itself most likely outflanked by the supercharged green development that China's now embarked on. So it comes into its own, and the Indians speak a lot about, you know, this is being India's moment. It comes into its own at a moment where We're at some sort of a fork in the road or in this polycrisis in which the way forward

• 41:48Adam Tooze?

  is completely opaque and you and I can argue back and forth about whether complexity is the issue, but what is certainly clear is that the path forward from here in most respects, political, scientific, economic, is unclear. That's precisely the moment, you know, in which Delhi feels that history has arrived. So it's really a tragic, I don't think is too strong a word for this situation and it demands huge creativity and that is another question that certainly liberals that you meet in Delhi put to you is that can you really imagine Modi and the BJP rising to this challenge because it's as big as if you like the non-aligned movement in the 50s and 60s that was trying to shape an alternative for humanity beyond the Cold War. In terms of climate, nothing less than that is what's on India's plate.

• 42:33Ezra Klein?

  Then let me add another dimension of vulnerability here, which has been, I think, something we're talking about less here in the West, which is the amount of indebtedness, particularly in emerging markets.

• 42:46Adam Tooze?

  Yes, I mean, the amount of indebtedness is in and of itself not that huge because, you know, almost the definition of being poor is that you can't borrow as much as you would like. So the total quantities are not that impressive in many cases. And I think the worry is that the debt levels were, this goes back to your diagnosis of the parameters changing, the debt levels were contracted in a world for low interest rates. And the question is whether any of them are sustainable as interest rates become significantly positive and, you know, maybe we're talking about long run interest rate in the United States of three to 4%, which means that an emerging market low income borrower is paying eight, nine, 10% generally, you know, whereas right now those are the kind of rates paid by true frontier market borrowers.

• 43:31Adam Tooze?

  So in that kind of world, what kind of debt is sustainable? And this is indeed a huge question for a whole list of countries. The question is whether any of them are big enough to cause a systemic crisis. You know, if you think of the Indias, the Brazils, the Indonesias of this world, all of them are robust enough at this point to handle the shock that's coming their way. Right? So they have done an enormous amount of work in terms of building institutions, accumulating foreign exchange reserves, have just been developmental success stories over the last generation such that They're robust to this kind of shock. The real question is about the Angolas, the Sri Lankas, the Pakistanis, which are in a much, much more fragile position.

• 44:13Adam Tooze?

  The question, however, from their point of view is also, are they too big to fail? And in the case of Sri Lanka or Angola, they're almost certainly not too big to fail, right? These are states which, you know, would be regional crises perhaps, certainly local disasters. But it's very unclear whether the, you know, this thing we euphemistically call the global community or the international financial institutions would really muster the wherewithal to mount major support actions in their favour. I mean, one of the things that complicates the current debt situation is not just the level and the poverty of some of the borrowers, but the structure of the debt as well, which has undergone a really dramatic shift in the last fifteen years. So the early two thousands began with a debt jubilee, which meant that the lowest income

• 44:57Adam Tooze?

  countries had their debts cut. And that debt was largely owed to a group of governments known as the Paris Club, which is basically Europe, the United States and Japan, who used to do government-to-government development lending. Almost all of that debt was written off. So what the developing and emerging market countries now do to access funds is they borrow from things like the World Bank, which is a major source of development funding. They borrow from bilateral lending by new lenders, notably the Chinese, who emerged in the one-belt-one-road period in the last ten years as a lender on a scale of the World Bank. And then they borrow from private markets. And so part of the problem in dealing with the current debt overhang will be that if

• 45:40Adam Tooze?

  things do break, in other words, if a state becomes unable to continue of paying its debts. The question of renegotiating those debts is complicated in a way it's not been before because there's more private debt and because the Chinese have a much bigger stake and because the classic Paris Club lenders, the Europeans, the Americans, the Japanese, have precious little influence over the situation. And this complicates the situation because the Chinese have a bunch of public-private policy banks, which they insist are simply banks, and everyone else insists are extended arms of the Chinese government, which the Chinese will or will not, depending on the circumstances, allow to be incorporated into government-to-government negotiations. In any case. This is a situation of complexity. It's not inherent.

• 46:24Adam Tooze?

  You know, this is like a four body problem. This is not immensely overwhelmingly complex. But it's just that interests on the part of the private lenders and the Chinese and everyone else mean that it's very difficult to assemble a clear cut structure for restructuring all of this debt. So this gives us further reason to be anxious about a world in which interest rates are going up.

• 47:08Ezra Klein?

  One of the things I think about sometimes when I read descriptions of polycrisis or I look at some of these numbers is that there's this interesting shadow side to it or light side to it. And I'm almost nervous making this argument because it can sound like you're downplaying what could become what will become a lot of human suffering. But I want to at least open up this question of poly bulwarks. Because by the same token, that we have a lot of financial and governmental and economic interconnection that creates a lot of vulnerability and climate interconnection and communication interconnection and political interconnection. Some of that ends up being a force in the other direction.

• 47:52Ezra Klein?

  I mean, you've talked a bunch of different times here for a bunch of these big countries about the support they might be able to get from the international community, which might buffer shocks that at another time would have overwhelmed the country. We've talked a lot about how much richer India and China, and for that matter Bangladesh, have gotten. And that, among other things, has also helped them a lot when dealing with things like very rough weather. We're seeing unbelievably bad. Disasters now, but the death tolls of them, thankfully, for now, from what we can tell compared to what we've seen from not even quite as bad weather shocks in the past, it's better than it once was. I mean, it's a really big deal that Bangladesh has something

• 48:32Ezra Klein?

  near, or it says actually 100% electricity. And so one of the things I sometimes read, when I read your descriptions of polycrisis, is a sort of narrative of vulnerability. There is so much more now that every country in the world, including us for that matter, feels vulnerable to. But there's also more support, more technology, more money, more kind of possible multilateral coalitions. You can get help from China now, which really wasn't on the table 20 years ago. Is there something to be said, not just for a rise in vulnerability and exposure, but particularly when you're speaking outside of the climate context, to a rise in reinforcement that comes from some of these same dynamics having a positive side?

• 49:18Adam Tooze?

  I wouldn't, I wouldn't disagree with you at all. I mean, I think that was very visible in 2020. I mean, in two different dimensions. One is that we, in early 2020, many of us were on the warpath, you know, warning in a sense, already then, of the sort of crisis that we're warning again about now. In other words, interest rates were going up. Many, many low-income countries were shut out of global financial markets. There was, it seems, the prospect of a kind of rolling disaster, and it didn't happen, nor did debt restructuring, however. But the mega crisis that we anticipated did not arise, and many of the emerging market countries actually showed considerable resilience in coping with the crisis. And if you go from the 30,000-feet, you know, discussion

• 50:00Adam Tooze?

  of government debt to situation on the ground in India, I mean, many people will remember the extraordinary images of the tens of millions of Indian migrant workers driven out of the cities, you know, where they live in informal housing, desperately seeking refuge in their home villages as the lockdown was put in. You know, it was a movement of people that India and the subcontinent hasn't seen since the partition after independence, when Pakistan and India violently separated. But the astonishing thing, and talking to experts in India recently, the astonishing thing that even critics of the Modi regime admit, even critics of his lockdown policy admit, is that very few people starved, if any. There was malnutrition, there was misery.

• 50:42Adam Tooze?

  But in the end, the government and the local authorities and the villages along the way were sufficiently competent, sufficiently capable, and in the case of the villages, sufficiently rich to be able to feed people. So there was not a humanitarian catastrophe. And this has to do with overall higher levels of income, and it also has to do with technologies which a state like India in a pioneering way has put in place for personal identification, electronic identification, direct delivery of benefits. And the Indian state has a higher degree of capacity by way of electronic accounts to deliver income, of course, small amounts, to its citizens than the United States does or most European states do.

• 51:24Adam Tooze?

  And this was the deliberate effort through a leapfrogging, if you like, of the development of various administrative stages of the state to enable Delhi and provincial government in India, the state at the state level, because India is a federation, to target benefits at very low income people by means of electronic tagging and biometric identification. Now, this is problematic in all sorts of ways, data protection and so on, but it does provide a resilient capacity for the delivery of support that hasn't been there before. And Bangladesh does far better in typhoons now because it has, you know, world-class typhoon forecasting. So yes, there is that resilience there. The question that smart folks in India ask themselves is, is this the platform for a

• 52:05Adam Tooze?

  progressive narrative of development from here on in, you know, which of course is the side the boosters take, that once you equip people with these kind of means of identification and means of payment and so on, you enable a programme of, you know, bottom-up-led development. And we've seen some elements of that in East Africa as well, in Tanzania and Kenya, where cellphone-based payment systems are much more common than they are in the West. The question is whether that's the future, which would be a full-blown progressivist kind of reading of the situation, or whether it could be something rather grimmer, which would be the avoidance of existential disaster. It would be a kind of adaptation, if you like, to a world of greater danger, a successful adaptation up to a certain point.

• 52:49Adam Tooze?

  But would also leave you trapped in a kind of techno-populist equilibrium, which my friends in India describe as cheap rice and cellphones. You know, you basically have an endless stream of electronic entertainment on your cellphone. You know you're not going to starve. But beyond that, neither the national or the personal level is the much-prospect for development in a society with hundreds of millions of poorly-educated young men and women entering the labour market without really the prospect of dramatic economic growth. So we could be in a kind of warehousing, bread-and-circuses kind of model of stabilisation. I mean, I think one way of looking at India is that it is precisely the most grand, I mean, the most dramatic, spectacular, world-historic in scale, you know, project of social stabilisation,

• 53:34Adam Tooze?

  first and foremost, in the current moment, which may offer growth prospects, but that's yet to be tested as a proposition.

• 53:42Ezra Klein?

  But I want to think about this more on the side of vulnerability, because this goes to where, I was saying earlier, I cop to half of the Hayekian description, which is, I have this experience, first as somebody who's covered now, I mean, I feel like my whole life as a journalist is just one crisis after another. And now I look back and I think of the 90s as this very anomalous period, not of no crises, I mean, there are obviously debt crises in Asian markets and Latin America, but as more relative stability than I have experienced in my political adulthood. But nevertheless, I do often have this sense that I read on any given week about five things that could plausibly become a gigantic international financial, economic, or humanitarian

• 54:26Ezra Klein?

  crisis, and most of them don't. And that's not to say none of them do. I mean, we've lived through 2008, obviously the pandemic was and is like a catastrophic scenario, but that our tools for response...

• 54:40Ezra Klein?

  Do seem somewhat more effective than they have been at other times. Our ability to blunt things that could, through complexity, overwhelm the whole world, also seems somehow to be matched by an ability to form coalitions and even with the very, very weak methods of international governance we have, take on coordinated actions that keep a lot of things from rising as far as they do. And I'm asking this of you very particularly because your work very much focuses on these questions of polycrisis and the ways in which these crises could build on each other, interconnect to each other and become more than the sum of their parts. And when I read it, there's such a sense of deep vulnerability and then I sometimes

• 55:22Ezra Klein?

  step back and I wonder, well, is it actually matched? Is it potentially, at this point, more than matched, looking historically, by somehow the opposite, like the, I don't want, exactly want to call it coordination, but that I wonder if our tools have not become somewhat better than we often appreciate. I do think the system is too complex for people to understand. And yet, by the same token, it seems to mostly be working, not morally, not as well as it could be, not the utopia, but, you know, as you say, like, India's a lot better off than it used to be. China's a lot better off than it used to be. We're seeing, you know, we didn't see 2020 become the kind of crisis we worried it would become in financial markets. Is there maybe more room for optimism here than an average

• 56:07Ezra Klein?

  reader of the news would assume?

• 56:10Adam Tooze?

  I think this is a very valid point. And if you go back to the 20th century reference points, I mean, you could say, you know, we've avoided another Great Depression and we could have had one in 2008 and arguably in 2020 as well. We've avoided another World War I, World War II style total war. And we've avoided revolution in the catastrophic, overwhelming sense of, you know, the wave of revolutions after 1917, and notably the Russian Revolution, for better or worse, some people would say. We've also avoided, you know, outright, modern versions of fascism, which have an apocalyptic politics about them, a do or die, you know, genocidal violence of that type has remained rare if, you know, there hasn't really been a straightforward

• 56:55Adam Tooze?

  repetition of that kind of politics. It comes out of You know, massive economic and dislocation and the logic of total war. So at that level, yes, those nightmares, I think, we have to a degree learned to contain more or less effectively, and especially on the macroeconomic side. Yes, I think we've gotten pretty good at avoiding great depressions. That doesn't mean, however, that the risks won't repeatedly arise so that our efforts to contain them becomes larger and larger. And this is, you know, the lesson of twenty twenty as opposed to two thousand and eight. The stuff we had to do in twenty twenty to contain the fallout from the lockdown shock was not an order of magnitude, but several times larger than what we had to do in two thousand and eight. So I think the reasonable question to ask is, you know, are we at a moment at which

• 57:40Adam Tooze?

  the culmination and accumulation of a series of challenges, which are not unprecedented individually and which we have some track record of managing in the past, whether those could be accumulating in a way that becomes increasingly difficult to cope with. And I think tensions over Taiwan and Ukraine in the last six months should give us serious pause. I think people who study, you know, the logic of nuclear deterrence, which was well established, a really formalistic and expert system in the Cold War, feel that the current situation with regard to US-China-Russia relations is much, much more precarious. And also, I think, we have to reckon with the possibility that the climate crisis,

• 58:22Adam Tooze?

  let's use that as a cipher for environmental stress more generally, may be reaching a point, maybe reaching a whole series of tipping points indeed, where it poses challenges to us of a type which our societies have never faced, right? Because that relative success in managing crises, which you quite rightly allude to, the worry is surely that it took place within an environmental envelope not yet so stressed that it became impossible for us to cope. But we have never lived on a planet as stressed as the one currently and as stressed as it will become in the next decades as population, shall we say, crests and global growth continues and the accumulation of CO2 and other greenhouse gases in the atmosphere continues and the

• 59:07Adam Tooze?

  attrition of ecotopes and pollution piles up. We simply don't know how that system works. But I think, as it were, that is the question, whether or not these coping techniques of the twentieth century will continue to work. A, in a genuinely multipolar world in which we have many more empowered regional actors, of which China is just one, but there are a whole series of regional systems which are all nuclear capable, push come to shove, which could escalate into global catastrophes. Because a medium-sized exchange of nuclear weapons will have, we should be clear about this, would have devastating impacts environmentally, I mean, at least all our science tells us that. And on top of that then, as it were, this issue of the environment.

• 59:48Adam Tooze?

  But stepping even one step further back than that, let's grant that we do live in a world that's continuously excitable. You know, part of the price we pay for this higher crisis management is continuous crisis awareness. So I wouldn't, I, I take your point that the news is continuously full of crisis talk, and there's a famous historian of political thought, Istanbul Hunt, who thought that crisis was, as it were, the idiom in which modernity expresses itself, all the way back to the 18th century. But, you know, that doesn't mean that in some sense it's not necessary. You know, sometimes, sometimes the fact that I'm paranoid doesn't mean that they aren't up, out to get me. In this case, the fact that we are continuously haunted by crisis doesn't mean that some

• 1:00:30Adam Tooze?

  of those risks aren't at this point on a reasonable assessment, accumulating to the point at which we should become extremely concerned about our ability to go on winning as often as we are right now. I think that's the wager of our generations.

• 1:00:42Ezra Klein?

  I think the idea there, that there is also a dynamic relationship, that the very fact of worrying about things is sometimes what puts us in a position to do enough that the worries then later seem hyped up, i- is a very, very important one. I think sometimes that if we ultimately are relatively successful on climate change, we will learn almost exactly the wrong lesson of it, that people will look back and say, oh, the worst didn't happen, all those environmentalists were overstating things. But a lot of the reason the worst may not happen, if you look at current trends, is because enough alarm was put into the system that our technological forces change direction, our policy change direction, our cultures change direction, there is, on some level,

• 1:01:27Ezra Klein?

  like an almost all of the planet effort, it is not the only thing happening, but it is a very real thing happening, to change our climatic direction. And on some level, too, it's working. And if it works, I think people will not realize sometimes that it worked, they will instead say, oh, look, the things that people worried about at four and a half degrees didn't happen, and so, you know, we don't need to take these kinds of warnings seriously in the future. But that also brings up a place where I want to look at another historical analogy that we are using quite a lot right now and the way maybe there's another side to it. So in America, the dominant historical analogy of this economic moment is the 70s and 80s, is the stagflation period, is the Paul Volcker disinflation, where he jacks up interest rates

• 1:02:09Ezra Klein?

  incredibly high, he causes 10%, you know, even more unemployment. That does do enough to break inflation. And central bankers, including Jerome Powell, look back on Volcker as like the central banker, right? And Powell has been referencing him quite explicitly. But an overlooked dimension of that era is what Volcker's interest rate increases did to emerging economies. And I want to quote here the Harvard historian Jamie Martin, who writes, "In developing countries, the debt crisis that followed the so-called Volcker shock was profoundly traumatic. Across Latin America, it led to a collapse in GDP, rising unemployment, and skyrocketing levels of poverty, from which the region made a slow and imperfect recovery over the last decade that followed.

• 1:02:54Ezra Klein?

  Even those who claim Mr. Volcker made the right decision admit that he precipitated what may have been the worst financial disaster the world had ever seen in Latin America, the consequences of which were even worse than those of the Great Depression. Elsewhere, Volcker himself later said, Africa was not even on my radar screen." I don't think the Fed right now, somewhat understandably, is thinking too much about its effect on emerging economies. It is obsessed with what its statutory mandate is, which is managing employment and inflation in the American economy. But if there is reason to fear that big interest rate increases could trigger the kinds of

• 1:03:35Ezra Klein?

  crises that the Fed triggered in the 1970s elsewhere, how do you think they should take that into account? How do they balance their responsibility to the United States and our moral responsibility not to throw the rest of the world into, or many countries elsewhere in the world, into depression-like conditions?

• 1:03:53Adam Tooze?

  I think right now, on the broader system and the broader concerns of the Fed, I mean, the Fed has a mandate for the American economy. It does not have a mandate as a global hegemon. And you can scratch a Fed person as deep as you like, and all you'll ever see is fundamentally a concern for the stability and health of the US economy. And that's their job. And I don't think that's merely a legal technicality. That's their main concern. When and where the Fed acts globally, it does so because it believes that there is a serious possibility of blowback to the US economy from global events. This goes back to the point I was making about, you know, which crises in the emerging and low-income market world will matter to the system and which not.

• 1:04:38Adam Tooze?

  And a Pakistan crisis matters to the State Department, to the NSC, to the Pentagon, right? A financial crisis in Pakistan does not matter to the Fed, does not matter to the Treasury, it does not matter to Wall Street. Even a major financial crisis in India probably doesn't. And when India's central banker Rajan, who was at the helm in India in 2013, made this case to Ben Bernanke against Ben Bernanke's proposition of tightening American interest rates at the time, which unleashed a so-called taper tantrum. Again, the American central bankers shrug, right? The countries that enter into their calculus are ones which threaten global financial stability.

• 1:05:22Adam Tooze?

  And you can tell the ones which they take seriously in this respect from the degrees of support they'll extend to them. And the critical indicator here is the so-called swap line system. And the swap line network, which extends to Singapore, South Korea, to Brazil, to Mexico, is there because those are members of the financial system about which...

• 1:05:46Adam Tooze?

  The Fed is concerned in a crisis because potentially the scale of a disaster there could have ramifications for systemic players in the American financial system. That those support actions tends to support the stability of the local banking system, notably in Europe, for instance, after 2008, is a side effect, you know, which is welcome, but it doesn't, it's not the ultimate justification for the Fed's actions. And there is here a systemic issue, there is a huge tension between the de facto role of the Fed and its constitutional, indeed, its sociology, its entire purpose, right? I mean, it, there is a tension. The overlap is created by the de facto vulnerability of the American financial system.

• 1:06:30Adam Tooze?

  So the more vulnerable the American financial system is to these kind of shocks, the more those other bits of the global system become too big to fail. And to that extent, they become extended and incorporated into the system. Again, to take your point about resilience, though, these networks are spread, right? So the Bank of Japan has a swap line network with a whole bunch of other economies in Asia, which de facto therefore indirectly become part of the US system. Though the United States was not willing to extend a swap line to Indonesia, for instance, it did create a facility, a standing repo facility, which is a facility where you can essentially trade good assets for cash to take account of China and Indonesia.

• 1:07:12Adam Tooze?

  So there is, as it were, tacitly, and in quite a, quite a deliberately, I think, low-key, below-the-radar kind of way, the construction of a series of networks which give resilience to this system, which helped to bridge the gaps somewhat, if you like, between the almost logical contradiction between a globalized economy running on the national currency of the United States.

• 1:07:34Ezra Klein?

  Let me then bring things to the Fed and what it believes it needs to do here, because we've been talking about vulnerability elsewhere, but probably if we're going to be talking about the 1970s and Volcker, the question there that seems to dominate thinking is this question of credibility. And when the Fed has credibility and people believe prices are not going to rise, they act as if prices don't rise, and so prices don't rise. And when Fed loses credibility, they need not only to change the demand curve in the economy, they need to not only slow the economy down so people aren't buying as much, but they need, or they believe they need to do it with such violence, that they also change people's beliefs about the economy. I mean, it's an act of not just economic policymaking,

• 1:08:19Ezra Klein?

  but economic psychological intimidation. They're trying to cow people into acting with different beliefs about the future.

• 1:08:28Ezra Klein?

  The view at the Fed, the view of quite a few quite loud economic observers right now, is that the really danger is saying is the Fed losing credibility, and that they need to act with a lot of force, because if they do, they're going to have to do everything even worse in the future. Say what you will about how bad it is if interest rates go up to 5%, but it'll be even worse if they go up to 10% or 15% as they did under Volcker. How do you understand the task here? How do you understand what it takes for the Fed to maintain, and not just bring inflation under control, but maintain that slightly ineffable quality that seems to be so crucial to economic action of credibility?

• 1:09:09Adam Tooze?

  Yeah, I mean, I think the idea in and of itself is fairly intuitive. Anyone who's been involved in the difficult business of parenting or received parenting will be aware of threats and sanctions regimes and the credibility of such regimes, right? There's a big difference between your parents saying, do this or else, and them saying it and doing it in a way which means you know that the punishment will be forthcoming. And once that credibility is established, then they really only have to start counting to three or something, and that by itself will already induce the adjustment in the child's behavior that the parent is looking for. That's the kind of logic that we're talking about here. And with regards to big financial markets,

• 1:09:52Adam Tooze?

  there is a way in which psychology does seem to be the most apt way of talking about it. In a sense, because you're dealing with a relatively small number of actors who are all relatively similar to each other. And so we are really talking about a sort of social psychological phenomenon where mediated by news outlets and news sources, and you can do these quantitative studies of nice sounding, optimistic sounding words and pessimistic sounding words as they ripple through the chatter of the financial markets. At that level, this sort of talk makes sense, it seems to me. And, you know, if you're dealing with bond traders, what you want to convince them of is that, you know, if you raise interest rates a little bit, you mean to move them a lot. And so then the markets will adjust in a way, which means that you don't need to move them too much.

• 1:10:34Adam Tooze?

  You can rapidly get caught up in a whole series of really opaque psychological dynamics in doing this, right? Because once you've said you're going to do it and they believe you and then they anticipate you, then you never actually have to do it. And so, you know, is it really a credible threat? And so on and so forth. When it comes to broader society, I think this entire social psychological talk about credibility and confidence and expectations and so on, actually is quite misleading. Because when we talk about the willingness and capacity of, you know, market actors, in other words, employers and, well, workers and maybe in some cases, historically, their representatives, trade unions,

• 1:11:13Adam Tooze?

  to set wages and prices, when we ask, you know, how credible is the Fed? And if the Fed is credible, then people will not rage wages and prices. The question you have to ask is who sets wages and prices? What empowers them to do so? And what are the uncircumstances under which they make those choices? And in the 1970s, you know, it wasn't so much a matter of psychology as so much bargaining power between capital on the one hand and organized labor on the other. And what you were really trying to do was adjust the behavior of distinctly identifiable groups of major trade unions and employers, both in the United States and Europe and in Japan, so as to get buy-in on an adjustment path that would lead to lower inflation.

• 1:11:55Adam Tooze?

  And originally, those conversations took place behind closed doors, or sometimes in fact in public, between the government and the key decision-makers in in the economy. And it was in a sense when that structure, what was called liberal corporatism, was abandoned in the course of the neoliberal market revolution, that we ended up in this world in which the Fed acts on some nebulous thing called Psychology and expectations to establish its credibility. Whereas previously, what it was about was, you know, Jimmy Carter trying to negotiate a deal with the AFL CIO on all the United Auto Workers on what they expected and expected as reasonable in terms of a wage adjustment in relation to price changes. And they would literally bargain over whether or not they could anchor a wage increase

• 1:12:40Adam Tooze?

  if and only if the government agreed to fix gas prices in a way which was acceptable to the members of the United Auto Workers. This was part of the negotiation over whether or not to liberalise gas prices in the United States. So it's the shredding of that world, the destruction of that world, which really pushes us into this new era of very kind of vague psychologistic talk. And that, for me, is also the fundamental element of implausibility about the extension of the 1970s analogy to the present moment, because what it ignores is the fact that not the psychological dynamics, sort of human nature, sort of eternal factors like that, but the concrete political institutions, the historically given circumstances under

• 1:13:24Adam Tooze?

  which decisions about pricing are made, have fundamentally changed. I mean, we are seeing in the United States wage adjustment in line with prices, and that's what really freaks the Fed out, because that tells you that the inflationary pressure is broadening. But that isn't because of an empowerment of the organised working class in the United States, though of course there have been these, you know, dramatic breakthroughs in terms of the organisation of high sta-, you know, high-profile employers like Starbucks or whatever, but that, that does not make a wage push. The wage push in the United States has been on an entirely atomistic individual basis, driven by the surge out of the labour market of workers during Covid and then back into the labour market. Of course, many people just lost their jobs and had to shuffle back in to new jobs, and

• 1:14:08Adam Tooze?

  that sorting process generates a tumultuous adjustment in wages in the United States ultimately. In Europe, where we've also had very high levels of inflation by, by recent standards, 10% or so, we're seeing systematic attrition. Of real wages. The same was true in the United States early on in the inflationary push. And that just shows that even in Europe where you have higher levels of unionisation, there isn't that dynamic push, that so-called wage-price spiral, which is the real nightmare that lurks behind all of this talk about expectations. You know, we are in a sense sort of shadowboxing here around the actual question of what the political economy of price and wage setting is. And until we engage with that seriously, to my mind, we're really

• 1:14:53Adam Tooze?

  not, we're not actually grasping the nature of this inflationary situation, which is quite different from that in its underlying logic from the 1970s.

• 1:15:01Ezra Klein?

  Well, let's end by trying to grapple with that seriously, but I want to do it less as a philosophical question and more as a policy one. What would you tell Jerome Powell to do differently than he is currently doing? What is your, what is your sense of how the situation has changed since the 70s imply for how he should treat the situation differently than the analogy to the 70s, which is that the interest rate pain will continue until morale declines? How would that advice change?

• 1:15:33Adam Tooze?

  I mean, I like the Powell of the beginning of 2021, who came flat out and said, you know, we don't think basically that the inflations of my youth will return. He's on record of saying we can bury the 1970s. And he's right. He was right that time round. I think he's been bullied into the sort of hawkishness that he's adopted more recently by the just relentless drumbeat of the inflation hawks, by the fact that inflation has remained relatively high, by the fact that it's spread to a wider range of sectors, that it's now quite deeply entrenched above all in the cost of housing, which is the big driver most recently. It's spread from energy and supply bottlenecks to a much wider circumference. Broadly speaking, I'm not a critic of the Fed and the way it's handled this situation. I think that the

• 1:16:18Adam Tooze?

  argument that they should have hiked sooner is misplaced. I think they erred on the right side in being slow. I don't think we should regard this inflation shock as a disaster. It's a reasonable trade-off. That isn't to say that we should downplay the distributional consequences. It's been very tough for the real living standards of certain parts of the American population. And there's a need for policy to adjust to that. Fiscal policy should be doing that work. I don't actually think that the Fed is wildly off-beam here. I think the questions are going forward. How long do they tighten for and or what are the costs? And the solution for emerging market and low income countries is not necessarily for the Fed

• 1:17:00Adam Tooze?

  to stop its movement, but for other agency, notably the international financial institutions, to step in to provide the support that they need. So the questions about the Fed are really, how long are they going to continue this tightening cycle for? They've been slow enough to get there. The interest rate increases so far have been, I mean, large in historic terms because they're doing seventy five percent, you know, seventy five basis points at a time, but nevertheless, we're still quite a long way away from having positive real interest rates. So this is not a savage tightening cycle in those terms. The question really is whether the current system with the huge levels of leverage we've got in it and the global ramifications can can manage that. And if the Fed needs to do interest rate increases, it may not

• 1:17:42Adam Tooze?

  to do need to do very more because I think the American economy, the steam is rapidly coming out of the system. And at that point, they should be flexible enough and brave enough to take their foot off the brake as soon as possible. But if there are wider problems in the global economy, you need other instruments to deal with that, right? You cannot target multiple problems with one instrument. If you do, you'll end up in horrible trade off situations. So what we need to do is multiply the means with which we fight this crisis. There could be another issuance of SDRs or there could be a more generous policy in reallocating the synthetic currency that was created within the balance sheets of the IMF. That's what SDRs are to face the crisis. We should ensure that the World Bank and the IMF can move rapidly to address country crises. The United States and other Western states

• 1:18:26Adam Tooze?

  should be proactive in pushing for debt restructuring options at this point. So that would be the the range of policies that I would advocate. They should be moving also towards cooperation with other central banks and should do so publicly. It's not that they're going to make a major adjustment to American interest rate policy, but they need to signal that the central banks of the world are cognizant of the blowback, the interaction between the policies that they're adopting on a national basis. Because otherwise, we really are going to be dealing with the first truly global inflationary shock of the new era of globalization since the nineteen nineties on a nation by nation basis. And that, I think, is behind the curve of, you know, what the current moment demands.

• 1:19:12Ezra Klein?

  What is your explanation then for why the month-on-month and now year-on-year inflation data has been so defiant to the predictions of those, including me, I should say, who felt, you know, this is different than the 70s, it's localized, the way the inflation has kept spreading, spreading out of localized sectors into a general dynamic, the way you're beginning to see wage adjustment, the way it has been persistent in the face of the stimulus running out of the economy, the way it is persistent in the face of the economy sort of coming out of the pandemic, the way it just keeps going beyond what I think people

• 1:19:54Ezra Klein?

  who are a little bit more dovish said was a cause and ending up kind of somewhere else or somewhat more broad. You know, I think there is something where Powell would say, hey, look, my rhetoric certainly has changed because the facts changed. You still seem a little bit more bullish on the view that this would ring out of the system, that we're looking at an adjustment, not a problem of expectations. But I think you also would have expected it to end earlier. So what, if anything, has the sort of ongoing persistence of the inflation done to your model of the situation?

• 1:20:28Adam Tooze?

  Well, I think the situation is more complicated and dangerous than I thought. I mean, particularly thinking about the European side, the persistence of the energy price shock, you know, linked to Putin's war is, you know, was a huge aggregation of the problem. You could say the same about global food markets, which were also shocked earlier in the year. Then I think it's very interesting to see the recovery dynamics in the US, notably the labor market recovery dynamics. So the fact that there was such a wave of unemployment that people made redundant, who lost their jobs during COVID, did shift labor market dynamics in a way which I don't think we quite anticipated. Why? Because as people got back into work individually, they had a degree of bargaining power and were more choosy about the sort of jobs that they went back into for good reason, and furthermore

• 1:21:11Adam Tooze?

  demanded adjustment in relation to prices and got it largely from employers who thought they could probably afford to pay those wages. And so that's why we've seen those adjustments. I think the element of this, which is probably most troubling, is the housing sector. And I don't think there's much reason to doubt that in quite a number of the major real estate markets of the United States, there were some pretty serious structural issues, which mean that they are sensitive to, you know, price pushes like this. I'm thinking notably of the, you know, the discrepancy between the coast and the other parts of the United States where we don't see the same level of escalation in real estate and

• 1:21:53Adam Tooze?

  rental prices, which is now one of the key elements driving this. So as that real estate boom, I think grinds to a halt and goes into reverse, I still expect the transitory hypothesis to be confirmed. Of course, at this point, you could say, well, this has been, I mean, this is a semantic argument, but in any case, I expect a downturn in the real estate market to become quite a big driver of a slowdown over, you know, the course of the rest of this year and into next year, by which point I think many people expect the US housing market to be going into a quite serious recessionary phase. I mean, it would be astonishing if that were not the case, given how rapidly mortgage rates have moved up to 6%. So this is a huge shock to the cost of buying houses. That too may be something that ripples around

• 1:22:38Adam Tooze?

  the world, so Canada, Australia, where there's very, very overheated real estate markets. So I think that's the, you know, the broad logic is there was the energy and commodity price shock, there was then a widening of that to labour and to the service sector, and now the inflation is to a considerable extent in the real estate sector, and I expect that to ebb away in the next six to 12 months. So that by next year, most forecasts still see inflation coming down very dramatically, which again is a reason why, on the whole, I don't think that we are going to see anything even remotely like Volcker-style, you know, interest rate shocks. That, you know, what Powell and his colleagues are doing aren't

• 1:23:20Adam Tooze?

  going to add up to that. But there's a way in which they need to, you know, summon the ghost, the spirit of Volcker, to refight the 1970s, apart from nothing else, to demonstrate that they're serious. I mean, amongst central bankers and in finance, finance Twitter world, invoking those kind of analogies are what you do when you want to signal purpose. I mean, in the speech that Volcker gave at Jackson Hole, the gathering of central bankers and economists this summer, the whole speech was an exercise in kind of retro chic, if you like, a kind of invocation of the stylistics of the 1970s and 80s, just to kind of reassure everyone. That they were now wide awake, had smelled the coffee and were ready to do what was necessary. In practice, I don't think they're going to have to do anything even remotely as dramatic

• 1:24:04Adam Tooze?

  as what Volcker did because the underlying dynamics are different, right? Because you do not have that sociology of distributional struggle working its way through the American system and expressing itself in prices and wages in the way that it did, you know, 40 years ago.

• 1:24:19Ezra Klein?

  I think that is a good place to end. So always our final question. What are three books that have been on your mind of late that you'd recommend to the audience?

• 1:24:26Adam Tooze?

  So I've been reading the Elena Ferrante Neapolitan Quartet series, which are stunning. Another book that I read recently that rocked my world was Edward Paces's But Youthquake: Why African Demography Should Matter to the World. And though I read it and reviewed it quite critically, I think if you want to follow the conversation right now on global economic history, you should check out Brad DeLong's Slouching Towards Utopia, which came out recently and has been very widely reviewed, and make up your own mind.

• 1:25:02Ezra Klein?

  Adam Tooze, thank you very much. Great pleasure to be here.

• 1:25:17Ezra Klein?

  The Ezra Klanshows produced by Annie Galvin, Jeff Geld and Broja Karma. Fact checking by Michelle Harris, Roland Hugh, Mary Marge Lockhart, Kate Sinclair. Original music by Isaac Jones, mixing by Jeff Geld, audience strategy by Shannon Busta. Special thanks to Kristen Lynn, Christina Samulewski, Jason Furman, Mike Konczal and Maurice Otsfeld.