Why nation states fail?

[00:00:00] This huge note is only a copy, but Venezuela's President Nicolas Maduro used it to present the country's most valuable new bank note, the 100,000 Bolivar note, with the present hyperinflation worth about two euros. A year ago, the 100 Bolivar note was the biggest denomination, but is now worth practically nothing. This is the Debunking Economics podcast with Steve Keen and Phil Dobbie.

[00:00:26] Well, that was Venezuela in 2017, often given as the latest example of a failed state, and that is often blamed on printing too much money, and a reason why government should keep their spending in check. But is it really as simple as that? Well, you could argue that Britain was on the brink of a disaster when the Bank of England had to step in to bail out pension funds when there's a flight from UK government debt when Liz Truss announced her high spending budget.

[00:00:51] But is that really what creates failed states? Is it all down to socialism, big spending governments printing too much money? Or could a hopeless president bent on self-harm have a good go at it as well? That's this week. So this week we're going to look at why nation states fail. We're doing that not because we think Donald Trump is necessarily going to make the United States fail.

[00:01:19] I think that's a nation state that's perhaps too big to fail. But have a look at reasons why other states have failed in the past. And obviously there's ones they're given, like the Weimar Republic, which is used as the whole reason why people shouldn't embrace modern monetary theory, because printing even just a little bit of extra money causes the whole state to fail. It's trivial. The tiniest dose of extra money and you have infinite inflation. Exactly. You can learn that from Twitter.

[00:01:45] So is it always inflation? We'll look at the role of the money supplier, but also bonds. You know, is that actually sort of like a safety check mechanism, particularly for larger states, but also small states. Why do they fail? Is it because very often they are indebted to America or other countries in outside their own currency? And what do they do to protect themselves from that? And, yeah, and large states, can they fail?

[00:02:10] Now, look, Steve, very often the reason that countries fail is actually nothing to do with economics, is it? If you look at Afghanistan, Somalia, Yemen, Syria. Let's go back. Let's do Samaria, Egypt and Rome. I mean, you get this line from all the, you know, Bonvinch-Lanti types and the, you know, Weimar Republic types that 100% of fiat currencies have failed. What they're really saying is 100% of empires have failed. Okay.

[00:02:40] And so, like, the main reason that some countries fail is they lose a war. Okay. And then when you lose a war, your money is worthless because it's got the dead king's coin on it. So you melt those down and remake them with the new king's coin on it and on you go with a, you know, so it's the whole, you know, 100% of fiat money has failed. It means 100% of empires have failed. And that's an interesting prediction for the American empire. Yeah. Yeah. Yeah. Okay. Well, we'll come back to that. I mean, just you're talking about losing wars. So interesting.

[00:03:10] I mean, there we are. There's a case for starting wars, isn't there? And winning. Yeah. So there's, you know, well done, Russia. You'll get tired of winning. You'll get really tired of winning. Yeah. Because look at Ukraine. It's got a GDP. Well, in 2021, just before the war started, it had a GDP of about 200 billion. Now it's 175 billion. So it's, you know, it's not destitute, but it's fallen a great deal because of the war. But more to the point, they reckon that the cost of rebuilding after the war is 524 billion.

[00:03:39] So there's a many times multiple of what the country's GDP is. So they are bankrupt. Seriously bankrupt as a result of the war. And unless other people chip in to help, they are a failed state. No fault of their own. They just got invaded by a bigger power. Yeah. I mean, and that's, you know, if we go back to World War II and the end of World War II versus World War I and its end, the difference in why Germany was rebuilt from the ashes.

[00:04:05] Until so, some as they decided to invent the euro as a functional state, the difference was that after World War I, the intention of the Treaty of Versailles was to cripple Germany. And that led to the rise of Hitler, which Keynes didn't predict the individual, but he predicted the event in his book, The Economic Consequences of the Peace, which is a book. I think you can find it on the web for free. And it's highly recommended read because it's basically his recollections of being present at the Treaty of Versailles

[00:04:35] and seeing the actual politics and being horrified of the intention versus the Marshall Plan after World War II, where America helped rebuild Germany. And so they got the assistance to make up for the damages for Germany at the time, which would certainly have been larger, I think, than what applied for Ukraine. And, you know, out of the ashes, you had the successful German economy until they decided to shoot themselves in the foot with the euro.

[00:05:00] So it's the currency fails because the country fails, not the country fails because the currency fails. And then that's, you know, so if you get down to the currencies which have failed, then you're down to a handful of currencies. And you look at the political and economic circumstances of those collapses. And, you know, one of them was the Weimar Republic. Well, that was a direct consequence of the Treaty of Versailles with what I'm now seeing literature saying.

[00:05:29] It was actually a deliberate decision to do that level of hyperinflation to effectively eliminate their debts. Right. OK. So they were given this massive amount of war reparations they had to pay. And they were – I mean, if they hadn't made it as a deliberate decision, what choice did they have anyway? Because they had to pay those back. The country was struggling to recover. They didn't have the money to make those reparations. So all they could do was create that money in effect.

[00:05:58] And I've still got to – I've got to research this one. I've only seen a paper on it. I haven't had a chance to read it and work through the argument. But the proposition that they made in this paper about the Weimar inflation was that there were bonds that had been issued as part of it and bought by American – largely bought by Americans. And the hyperinflation wiped out those bonds. So the numbers are crazy.

[00:06:26] I mean, if you ever take – there is actually the Bank of International Settlements CPI data includes a consumer price index for Germany from before World War I forward. And the rate of inflation is in the millions of percent. Okay? But then it suddenly ends. And at that point, Germany no longer has debts to Americans.

[00:06:46] So this paper is arguing that, in fact, even though it was horrific for the people of Germany who went through the experience of the hyperinflation, it is a political tactic. It actually meant that Germany, after that period – it lasted about two years. It was extremely fast. It was – up and over type of thing. And then stable prices after then. And what people have done – and this is what pisses me off with the amateur knowledge of history that most people have.

[00:07:15] They say, the Weimar Republic led to Hitler. Well, no. In fact, there's about 10 years between the Weimar inflation and when Hitler became chancellor. And Hitler became chancellor not during a period of inflation but during a period of deflation. Prices are falling by over the order of 10 percent per annum. Unemployment was 25 percent. Pretty much the same situation as America. And that's when Hitler came to power, not because of inflation or hyperinflation but because of deflation. Well, yeah.

[00:07:41] I mean, both are not good, inflation or deflation. I mean, deflation, you make something and it's worth less straight away. That's not good. Inflation, hyperinflation is obviously a bad thing. I mean, I think – I mean, this seems very basic but it's lost on a lot of people, isn't it? Inflation is actually quite good. If you've got debt, inflation is great. I mean, you don't want hyperinflation. You don't want to get out of control. But your debt is basically devalued by inflation. And this is what happened in the 70s.

[00:08:09] So if you – like the inflation in America. Let's talk a country which hasn't been invaded since – was it 1496? I tend to lose my history when the Americans – when the Puritans turned up on the Mayflower. So that was the last time America was invaded by Americans.

[00:08:33] And that country, if you look at its capitalist period starting from about the 1800s, you know, sort of – 1790 is the earliest study you can find for America in terms of inflation rates. And guess when the highest rate of inflation was? I'll give you a little – this is one. Just tell me. Just tell me. Let's save time. About the 1870s. Right. And you had 30% inflation for one – and it then fell to minus 20 a couple of years later.

[00:09:02] So what you had was ridiculous volatility in prices. And that corresponded to equal volatility in economic activity. Booms and busts. Really big booms. Really big busts. And since the Federal Reserve and since the – particularly since the end of the Second World War, the highest rate of inflation was 17%. That was roughly 17% at the time of the VOCLA increases in interest rates. So that's the biggest rate of inflation America's had.

[00:09:28] Now, what that meant was – and you're quite right – the high inflation at the time meant that the high levels of private debt, which had been accumulated at the time, reduced even though debt continued to rise because the GDP, which includes inflation nominal GDP, rose, whereas the debts, which were also denominated in nominal dollars, were still rising but not rising as fast as nominal GDP was.

[00:09:56] Therefore, you had a falling private debt ratio. And that got us out of the crisis of the 1980s without a serious downturn, like a depression-type downturn. But when we had the 2007, you had inflation at 5%. People don't actually remember this. Inflation was 5% at the start of the global financial crisis. It fell to minus 2%. So you had a short period of deflation, then you got through it.

[00:10:23] But, yeah, the periods of real hyperinflation haven't occurred in an advanced economy that hasn't been invaded and had its productive resources destroyed. Right. And is that because there's checks and balances in those large economies? So we just saw it, didn't we, with the United States where there was a concern about the way that the U.S. economy was being managed.

[00:10:45] There was concerns about the tariffs and also the fact that Donald Trump was trying to push through with his tax cuts and that was going to increase government debt, which was seen as being a concern. There's a worry about the value of American bonds. And so we saw this massive sell-off of American bonds, just as we saw with Liz Truss, with her unfunded budget, this massive sell-off in bonds. So are bonds actually the check and balance in large economies?

[00:11:08] Not really, because what's probably going on with the bonds, I'm not following the bond market closely, but what's probably happening is that there's so much leverage in the share market. And the level of margin debt in America at the moment is about 3% of GDP. And that's the highest it's ever been since, I don't know, October 1929. Right. So margin debt being just to get us all on the same page? Yeah.

[00:11:36] Margin debt is you buy shares with a loan from your broker. And the margin debt is that sort of loan. So if you have like half a million to invest or speculate, then you go to the broker and the broker says, I'll tell you what, let's borrow it. Just take a margin loan from me and make it a million dollars worth of shares. And then if the shares increase by 50%, you double your money. That's the margin. Well, back in the 1920s, it was put down $100,000 and buy a million dollars worth of shares.

[00:12:05] The leverage was 10 to 1. And margin debt went from 1% of GDP in 1920 to 9% in 1929 and then collapsed to half a percent during the crisis. And that's a real problem. When people are borrowing to invest because the interest on their borrowing is so low and they're perceiving that the gains that they're making on the share market in particular are so huge, they're thinking, why wouldn't they? But you're gambling on money that you don't have. I mean, it's a real problem.

[00:12:34] What happens with the margin loan is you think what's called a margin call. I know this is – I'm seeing literature about this at the moment. This is happening – has been happening in the last few weeks. Firms which have borrowed money to lever up their gains and they're seeing the market rise and great results. And then, bang, this Trump shock comes through as well as the impact of higher interest rates. And suddenly they're losing money on the stock market. They get a margin call. How are they going to cover the margin call? They sell their bonds.

[00:13:02] When you sell the bonds, the price goes down. The yield goes up. So what you have is both the stock market – the share market's falling and the price of bonds are falling at the same time. Normally they're seen as going in opposite directions. So this is – this particular bond crisis is driven, I expect, by margin calls. Because shares were going down. Although shares then went out. I'm not quite sure of the sequence of timing of it.

[00:13:27] But I think that the bond crisis hit when the shares were back on the bounce. I think they were going down. They were going down. They were going down. And then at that point – At the point when Donald Trump tweeted or put on some truth social – Great time to buy shares. That's a good time to buy. Great time to buy shares. So there we are.

[00:13:46] First of all, the issue that he has a president who's using a platform that he owns, that he's financially benefiting from for passing out messages, his form of communication with the American people is something that – he has actually learned how to monetize presidential speeches. I think that's true. That's a good person to use. But then he's also using it to give stock tips to people as well based on what he's about to do. That's all a bit of a worry, isn't it, on so many levels? But I mean – so we're talking – so actually, you know, states that fail, it's very often not the economy.

[00:14:14] It is the ruling government. Yeah. Like in Zimbabwe, it's the same sort of thing. I've forgotten who the leader was. Was it Mugabe? Yes, it was Mugabe. Yeah. Okay. Who basically – I mean, a big chunk of that was getting white farmers off the land and the productivity that failed because they were given to the farm workers who actually didn't know how to run a farm. They just knew how to work the land and it all failed. Yeah. Yeah. Far too fast to transition. Yeah, exactly.

[00:14:44] And so then the response was to continue printing the money and then bang, you have the, you know, billion dollar note impact. 7.6 billion percent in November 2008. So that would be a bit like, you know, how much is the iPhone? $500? Really? Is it that much? No, it's $900. Really? $900? No, it's $1,400. Quickly buy it because it keeps on going up, you know. Yeah. Would you like to pay – would you like to, you know, pre-order and pick it up in a month? Yeah, sure. It'll be – well, then it'll be $389 billion.

[00:15:13] You better take it now. I mean, that's where the breakdown, you know, hyperinflation causes without a doubt. But every time it's happened, it's been a consequence of a political decision beforehand which backfires and destroys physical capability of the economy. And then bang, you – and then you have the hyperinflation occurring. The only difference – there's no way that you can say Mugabe's was at all tactical.

[00:15:38] But it appears the Weimar inflation may have been tactical and successful for Germany. But, I mean, America's a long way off this even if there's competing competence. Yeah, yeah. You know, it may well destroy its productive capability the way that it's going. But it has to be policy decisions that lead to that on a grand scale.

[00:15:59] And then the government responding by – you know, it's one of the two main – the two domestic sources of money creation, deciding to pump out money, the paper over it. And then you get the hyperinflation effect occurring. Everybody's putting up markups, putting up wages. You know, it'd be – and what it really – and this is the point which is, you know, the learnable point here. Inflation is not a monetary phenomenon. It's a conflict over income distribution phenomenon.

[00:16:27] Workers want wage rises because they've got wages that can't pay enough food for the family. Firms find their profits being eliminated by wage rises. They respond by putting up markups. And you get this contest over the distribution of income that leads to rising prices. But it has – in the case of hyperinflation, it starts from something which means if you don't do something like that, you face starvation. Yeah. Just quickly finishing – we'll take a break in a second. Let's just finish on this whole bond issue then. Yeah.

[00:16:56] Because I'm wondering whether it is a check and a balance for, you know, for a government that's losing a bit of control, which we saw with Liz Trust. So if you remember, at that point, the Bank of England had to step in because there's so little confidence in buying – No, the because is wrong. The because is wrong. The because was – and I had to look this up to find out. Again, I'm not following the market closely.

[00:17:20] There's a particular levered form of bond product called LDC or LDI, which was being marketed by the finance sector to pension funds and so on. How to increase your bond gains using? I think it's called leverage. Now, what happened in that case was that that caused a collapse in the value of those assets. And so pension funds were facing bankruptcy. So pension funds were buying bonds that they really couldn't have afforded without –

[00:17:46] They'd buy the bonds and then onsell them through this damn mechanism, LDC, LDI. I've got to look it up again. But it was a mechanism that enabled you to have a levered gain on the returns they're getting from the bonds. But they'd actually sold the bonds on to get that gain. And so when the margin calls came in, they didn't have the bonds. They had to go buy them. And then you get – or sell them. Or God knows the actual mechanism.

[00:18:13] But it was – that's what caused the rapid collapse in the bond market. So the Bank of England – But what triggered it off in the first place was a mistrust in the government and people wanting to get out of UK bonds in the same way that I think – Well, you're saying that in the States they didn't want to get out of – necessarily get out of US Treasuries. They just needed that money. They had to sell them to get the money to cover the margin calls. On the shares that were going down.

[00:18:43] So in both cases it appears – I know the actual mechanism for LUS Trust is somewhat more complicated by the looks of it. But it involved this particular financial product marketed by those wonderful engineers in the finance sector, which looks great when things are going up. And when there's a change of direction crash and then the pension funds face bankruptcy. So bang, that incredible –

[00:19:06] You're trying to give the finance sector, banks and non-financial institutions in particular actually – you've got to give them top marks for finding new and inventive ways of trying to squeeze money out of thin air. The old expression is to give – they make money by grabbing pennies in front of an advancing roller coaster. Yeah. Yeah. Well, I mean, yes, so it's the same deal, isn't it really?

[00:19:30] But I mean, however it happened, whether it is a reaction to margin calls and needing to get hold of that cash, they bought those bonds as almost like rainy day money. They needed to be called on and that it needed to be called on. So that's a check and a balance. I just wonder whether – again, the question whether the bond market, however it happens, is acting as this safety measure to stop complete collapse in large economies.

[00:19:55] It's whether actually – which would mean government debt is actually a good thing because they are issuing the bonds and therefore is it helpful in trying to keep economies balanced? After the break or – Do it quickly now. Well, the bonds – there's no check on the – of the government money creation in the primary bond market because the funds that are used to buy those bonds in the primary auctions is actually created by the deficit itself.

[00:20:24] It's a complicated mechanism that the central bank is involved in to make sure there are enough reserves available for every one of the auctions that occurs. But there will never be a failure of a primary auction so long as your bonds are denominated in your own currency, which the central bank can create sufficient reserves to buy them by buying existing bonds. And therefore, you then have the primary dealers having enough money on the table to be able to buy them. So you can't discipline the primary market.

[00:20:52] The discipline, if there's any, comes through the secondary market where the banks then on sell those bonds to non-bank financial institutions and to wealthy individuals. All right. We'll take a quick break. Back in a second. We'll look at Greece next. Not a completely failed state but, you know, an interesting story there. C-R-E-A-S-E or? W-E-C-E. Yeah. No, don't take it aside. We're not going to introduce Olivia Newton-John into this. Okay. Back in just a second.

[00:21:17] This is the Debunking Economics Podcast with Steve Keen and Phil Dobby. Okay. Well, it is the Debunking Economics Podcast. By the way, we are on YouTube as well. If you've not caught the video yet, I don't know why you'd want to do a couple of ugly middle-aged blokes. Well, and we're being kind by saying middle-aged as well, aren't we, really? It's a tickly to me. Yeah. I'm old-aged. Thank you very much. But anyway, I think we look almost the same age, actually, to be honest with you.

[00:21:45] So I'm having a tougher life. So let's look at Greece then. So there's an interesting story there because very often Greece – I mean, Greece went through a period, didn't it, of – I mean, the economy basically stumbled. People were – the living standards were falling. People were leaving the country because the whole situation had got so bad. Some of it is because they were part of the EU. But, I mean, they also had, you know, big private debt. But more importantly, there was a lot of government debt.

[00:22:14] And they were paying, you know, a lot of money into the civil service, you know, into public sector workers. That wasn't helping a great deal, was it? I mean, it's often leveled that – the issue was the EU then came along and said, well, you've got to fix this. And the speed at which they were asked to fix it I think was part of the problem, wasn't it? Well, in fact, the reason that bonds are a discipline for any country in the European Union, of course, is that they don't create their own currency. There is – the drachma is gone. They've got the euro instead.

[00:22:45] And therefore, countries in the euro function like states in America where they have to get revenue out of taxation or government service sales to cover their expenditure. Otherwise, they do have to issue bonds in the money they don't create. And then you can have a collapse. So the Greece situation was because the whole obsession with the euro is reducing government debt while they ignore private debt.

[00:23:10] And when the crisis hit in 2007, the economy is tanked because of the impact of credit collapsing. And then the euro response was, oh, you've still got to balance your books. Now, when you have a credit collapse, the immediate impact in government spending is that there is less taxation review coming in. There's more unemployment benefits going out, et cetera. And therefore, you widen the deficit. And that acts as an automatic stabiliser.

[00:23:34] The government spending, if it's national currency, then stops the depth of the decline you would have if negative credit was the only factor changing the amount of money in existence. And this is one reason why Wynne Godley and a brilliant paper called Maastricht and All That, written in the London Review of Books, I think in the early – mid-1990s. It's a great, great paper.

[00:23:56] And he said that when a crisis strikes, countries which should be attempting to rebalance their economies by spending more than taxation will be forced to cut and therefore deepen the crisis. So the euro actually caused the depth of the crisis for the Greeks. And you got – then they had to pay high interest rates because there was a high risk of default. The government could have defaulted. So all this stuff only works if you're working with a country that doesn't issue its own currency.

[00:24:22] So – and the reason they got into that situation in the first place was because they – because they were being told to reduce their government debt or – Initially, look, because of the euro, the whole idea of the euro was to get – standardised across the entire continent of Europe. And the difficulty – they're trying to emulate America without being American. That was the whole idea of the European Union to match America in power.

[00:24:48] Some of what Trump actually says about the euro being formed to screw America is actually correct. They were trying to get even with America or at least create an equivalent power to America. But, of course, they didn't change from what the Americans did in a sort of evolutionary way over time. More and more spending was focused in Washington. The states became recipients of that spending rather than creators of the spending.

[00:25:14] Whereas in Europe, of course, national governments still set national budgets. But then they've got to get the money from the euro – the money is created by the European Central Bank in a very complicated system, far more so than the simple way that other countries create government money. And therefore, when everything was hunky-dory while the economy was booming, as soon as a crisis hit, they were all trashed. And that was not just Germany – not just Greece.

[00:25:44] It was Spain as well, Italy, et cetera, et cetera. So what Wyn Godley predicted came to pass. Right. So I'm still trying to figure out the process by which that happened, though. So they joined the EU. They're holding hefty debt. And so there's just a lack of confidence. What's to stop things just carrying on, just the way they were? Well, a large part of it is a sudden collapse in credit-based demand. Again, the people who say, you know, as soon as you talk about money creation, they say,

[00:26:13] Weimar, they don't understand how governments create money, nor do they understand how the private sector creates money. So when you look – so Spain is probably my favourite example because the change in Spain was quite dramatic. Spain was the only country, when the euro began, that qualified to be part of the euro, OK? Because they had a rule that you had to have government debt of less than 60% of GDP and a government deficit of less than 3% of GDP. And the only country in Europe that qualified to be a member was Spain.

[00:26:44] Germany didn't qualify, right? You know, so what then happened, though, I think the level of government debt fell from roughly 60% of GDP in 1999 to 30% in 2007. So Spain was absolutely the poster child. Booming economy. Why was it booming? Because private debt had risen, I think, from something of the order of 100% of GDP to 240% of GDP. And, you know, they're worried about a deficit of 3%.

[00:27:13] The rate of change of private debt, which is credit, that's how the private sector creates money, it was equivalent to 40% of GDP in 2007 and minus 20% in 2010. They had this huge plunge. Greece didn't have quite the same scale, but the same basic story. So while the economy was relatively booming courtesy of private money creation via credit,

[00:27:41] they could live within the Maastricht Treaty rules of government debt. Then when the private sector debt collapsed, the instantaneous impact was that the government had to spend more. So being told to spend less, which is what the euro rules made, actually drove Greece into a serious collapse. And if you were to say, you know, to follow the line of reasoning for the neoclassical economists who set up the EU, they would normally be saying, well, OK, we don't want the government to spend more. We'll just lower interest rates.

[00:28:11] You know, we'll lower interest rates and it wouldn't happen. But they'd say if we lower interest rates, then that private credit will increase because people will invest. And that was feasible. Countries which had their own currency could do that. But the EU doesn't allow it because it doesn't allow it. Yeah. And so if you have one country that's doing badly and other countries doing well, then, which is actually pretty much where Europe finds itself right now, in fact, isn't it? You know, a whole mix of countries, all subservient to the interest rate that is determined by the ECB.

[00:28:38] So those countries that are actually doing really well right now are settled with high interest rates that normally would be a lot lower, which would help them to prosper even more. Yeah. Yeah. So it's, again, it's government rules and like talking about collapses of countries, it tends to be political decisions that are disastrous or military outcomes that are disastrous. And then the currency collapses or the currency goes through hyperinflation. If you still, as in the case of Germany, you didn't lose World War I and become a vassal state of France.

[00:29:09] But France tried to cripple you at the same time. Well, then you get the collapse in physical resources. They lost the entire rural valley and the incredible need to send coal trucks to fans, et cetera, et cetera. And as Keynes argues in the economic consequences of the peace, this would have worked in a feudal system. You would destroy the productive capability. So what it will do in a capitalist system is it will cause – I don't think he actually mentioned hyperinflation, but he talked about economic disturbances.

[00:29:37] He said it will lead to a revitalization of Germany in anger at the impact of the Treaty of Versailles on their country. And that's what we got. We just said World War I will cause World War II. So just going back to Greece for a second. So if we look at their private debt in 2008, it was 75% of GDP compared to 110% for public debt. And that's 75% of GDP. I mean, was that bad?

[00:30:06] That's quite low. This is one – If you look at where – like the UK right now is 160% of GDP. Yeah, and Spain reached 240% at the same time as Germany. Greece was down at 75%. So Greece is an unusual case. Countries which have more government debt than private debt tend to be in a larger crisis overall, like Turkey is in a similar situation, for example.

[00:30:33] So you've got a private sector credit system which hasn't functioned. Like I let the bubble in Spain cause massive consumer – inflation in house prices. That's why there was a boom. People were monetizing, turning their house into an ATM to use the American expression. But when you've got a country where it's the other way around, it tends to be a rather screwed up country.

[00:30:58] But the standard situation throughout the world is that private debt is larger than government debt. And that's not a good thing. But ironically, when you get the other way around with a suppressed level of private debt, it tends to be you're not having – firms aren't borrowing to invest. You've got a low rate of economic growth, low technical development over time. So it's a hard one to differentiate. I'm in favor of reducing private debt dramatically.

[00:31:27] But when you get countries that get themselves in the trap that Turkey and Greece – crude Turkey is an increase was in at the time, it tends to be a dysfunctional private sector system. Do you want to see private debt reduced and government debt increased or do you just want to see less debt generally right across the board? Initially, in my idea of a modern debt jubilee would have increased pre-government debt. But what it would also mean with less debt on the private sector, it would actually get more economic activity.

[00:31:55] And the increase in GDP coming out of that would ultimately reduce the government debt level as well. Well, it gets back to my question about is the bond market actually the check and balance in all of this? If you've got a country that has – maybe it does have low private debt but it has high government debt. That high government debt means there's lots of bonds being issued. The more bonds there are, the argument goes – I mean I think it's got to be a pretty huge increase in the number of bonds.

[00:32:21] But if there's a lot more bonds then people are prepared to pay less for them because it's a bigger pool or maybe they just have less confidence in that economy more likely because the government is just issuing so much. Therefore, the cost of finance goes up. It depends on, again, whether you've got primary bond auctions because if you have a primary bond auction, you have a monetary system where the government creates a national currency.

[00:32:46] Then you're never going to have a private – a primary bond auction that isn't fully subscribed. It's what happens in the secondary market that gives you those effects because – but in both cases, if you're with a country that creates its own currency, the money that's used to buy those bonds is created by the deficit in the first place. So if you're going to discipline, you can discipline states like California, okay, and you can – with they issue bonds.

[00:33:13] They can't – California can't create American dollars, okay. So if people aren't confident that California will be able to meet those debt obligations, then they've got to pay an enormous interest rate on the bonds to reflect the possibility of default. So you need the possibility of default, and that only exists if you can't create your own money. Right, and that applies not just to states within America or states within Europe. It also applies to small countries where they have –

[00:33:43] That people won't accept their bonds if they need foreign money, yeah. So they have to basically operate in U.S. dollars. Yeah, and it tends to be an international currency. And that comes back to the importance of the trade deficit, which is something, of course, my MMT friends argue is a good thing. A large trade deficit will ultimately put you in the situation where you can't issue bonds in your own currency. You've got to – you know, Lesotho has to issue American-denominated bonds to raise the money,

[00:34:10] and because they can't create American dollars, then there's a danger of default, and therefore you can be disciplined by the bond market. And they will be in a precarious situation, a lot of those states now. And Donald Trump certainly isn't helping with that. Anything but. And so, you know, if you are a state that's struggling, perhaps you were getting U.S. aid, for example, to help. You were certainly trying to – you certainly relied on the U.S. as an export market, and that has been taken away from you.

[00:34:39] So all of a sudden, the – you know, what commerce you did have within your country is now struggling. Certainly your exports have fallen away. You're left with sort of domestic demand, or you've got to find new export markets. To find those new export markets, perhaps you need to spend money. To spend money, you've got to issue more bonds. You've got to borrow more money. The cost of borrowing is going to increase because there's going to be real concerns about your ability to pay. I mean, they are an impossible situation.

[00:35:07] So, I mean, we'll leave the discussion here, but there's going to be many more failed states as a result of Donald Trump's regime, aren't there? Quite possibly. And this is – like when you get a country which has got a massive foreign debt to begin with, and therefore it's got to service that as almost a first priority, or it goes into fault, then it's going to be paying huge interest rates, and it's going to be directing its production, not for what the domestic people need, but for exports to cover that foreign interest charge.

[00:35:35] And those are the countries where I've got to agree with MMT that, yes, well, the trade deficit is not a good thing. I put them in that situation. But it means they're exporting stuff they could better use back at home, and therefore exports are a cost for them, and imports are a benefit for the Americans taking advantage of that. So that's where – that half-baked argument actually makes some sense. Yeah. Yeah. But, I mean, they've got to get money coming in.

[00:35:59] Yeah, which means they've got to have export sales, so they prioritise export sales over production for domestic consumption. Sell the farm. And therefore you get the type of crisis that MMT sort of uniformly argues will happen if you run a trade surplus. You're just exporting more than you bring importing back, and you're giving away stuff you could use domestically. That's where their argument makes sense. And what do you think are the warning signs that an economy is going to fail? Well, to me, it comes back to the trade deficit.

[00:36:28] If you're running a trade deficit, you're actually – your trade deficit creates money in the countries with which you have a deficit. When you do the double-entry bookkeeping, which I've just now done just recently, what I expected to find is that a trade deficit has the same impact on domestic money supply as a government surplus. It reduces the amount of money in existence. But a government surplus just reduces it for your domestic economy.

[00:36:52] A trade surplus – sorry, trade deficit, so you're importing more than you're exporting, creates money in the countries from which you're importing. So the countries running a trade surplus, part of their money creation is coming out of countries with trade deficits creating it for them. And therefore, they've got a higher level of money, turnover, higher level of potential investment, and they grow more rapidly and develop more rapidly.

[00:37:18] That doesn't apply to the country with the world's biggest trade deficit. You mean America? No, America is creating money for the rest of the world. And on this front, the Trump administration is correct. Having read – the arguments might be a bit oscure, but having read – I think it's Steve Moran, or that's the name of the chief economic advisor for Trump, he argues that the trade deficit has meant that America is creating money for the rest of the world and not industrializing sufficiently itself.

[00:37:47] On that front, he's completely correct. All right. But it's surviving. Oh, yeah. Well, I don't think I'm going to use the final line from the Vulcans on that front. Maybe he survives. Live long and prosper, but I'm not sure about the prosper. All right. Very good. Okay. I mean, that's a conversation for another day. I was going to, you know, think that maybe we should talk about it's not whether, you know, economies are collapsing, but, you know, economic quagmire. Are we – and maybe the final point on that.

[00:38:14] I mean, is that the real risk, actually, that we don't see major states fail? Well, we just get – like Britain is in now. You know, I don't know how Britain gets out of itself, but it is a quagmire, isn't it? Slow growth, low standards of living. People are getting progressively worse off. There's no actual any sign of how they will get out of the situation. And they've got the twin deficits of – well, they've got a government deficit but also a trade deficit. Yeah.

[00:38:39] And they've tried to go – Maggie Thatcher's idea was to grow by services and services grew longer so long as you could sell debt to people around the world via the city. And that ended in 2007. Yeah. Okay. There must be a plan B. She must have thought of a plan B, surely. What a shame she's dead so she can't tell us. I'm sure she had an answer. Anyway, good to talk, Steve. We will catch you again next time. Thanks.

[00:39:03] If you've enjoyed listening to Debunking Economics, even if you haven't, you might also enjoy The Y Curve. Each week, Roger Hearing and I talk to a guest about a topic that is very much in the news that week. It's lively. It's fun. It's informative. What more could you want? So search The Y Curve in your favourite podcast app or go to ycurve.com to listen.