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- [00:02]
Martin Wolff
So I think he thinks the job of the Federal Reserve, which is my bank, just as the government is my government, is to make sure borrowing, which is part of what he's done with his fiscal policy. He's got a massively expansionary fiscal policy. I control the bank. I can force people to lend to me cheaply. So why am I not doing it? Why is this person stopping me from doing this?
- [00:32]
Yasha Munk
And now the good fight with Jasia Monk. I am really confused about the state of the world economy. You have seen a set of policies that seem to be really damaging to the United States and to the world taken by Donald Trump over the course of the last year. Sky high tariffs, the announcement of an investigation into Jerome Powell, the chairman of the Federal Reserve. And at the same time, the US Economy seems to be humming along quite nicely. Stock markets are near record valuations. So to help me understand what is going on with that, I invited perhaps the most prominent economic commentator writing today, Martin Wolff, the chief economic commentator for the Financial Times. We talked about the ways in which Trump has and has not transformed the world economy over the last years, about whether tackle the idea that Trump always chickens out will remain true for the three years of his term that we are yet to experience. We discussed why it is that the independence of central banks like the Federal Reserve is so important to long term economic performance and how that makes the investigation of Jerome Powell so dangerous. And then we talked about the other big economic issue that is going to shape not the next month, but the next years and perhaps decades of our economy and our world artificial intelligence. I asked Martin whether he thinks that artificial intelligence will decimate the middle class or make all of us richer. Is it going to lead to mass job loss or are we all just going to have different, perhaps more interesting jobs? We also talked about what artificial intelligence will do to the prosperity of poorer countries or countries that are now middle income. And we talked about the crisis of meaning that artificial intelligence will herald for creative professionals who may suddenly see AI bots do their work as well or better than them and to humanity as a whole. For that last part of a conversation about artificial intelligence, please become a paying subscriber. You have one week left to claim my most generous discount of 30% off an annual subscription. That means you're paying about a dollar a week. Go to writing.yashamunk.com 2026 writing.yashamunk.Com 2026 to make sure you don't miss that really fascinating part of my conversation with Martin and to make sure you support the work we do here. I'm very grateful. So it is Friday, January 30th. Maarten, we had a wonderful conversation yesterday about the current state of the economy and of course we talked about the Federal Reserve and Trump's attacks on it. And we were planning to release the episode tomorrow on Saturday, when many people are probably listening to this. And in between, Donald Trump announced his pick for the new chair of the Federal Reserve when Jerome Powell retires in a few months. It's Kevin Walsh, given that you know just about everybody in that world. Martin, I imagine you might have met Kevin at some point. Tell us about him and what you make of him.
- [04:20]
Martin Wolff
Well, I have met him, I've heard him. He's very articulate and confident in his way he's expresses himself. The honest truth is there are some real puzzles about him. There are things we don't, I don't and friends of mine don't really understand about him. Clearly, by comparison, first point, by comparison with a number of the other candidates, he's a relatively credible figure. He's not a significant academic economist, but actually there have been some very good chaps who weren't. I mean, Alan Greenspan, for example, at least pretty good till the end when he let things rip. He has lots of experience in markets, he's politically astute and he has been a governor of the Fed and quite an influential one during the financial crisis when Ben Bernanke relied on his judgment about markets significantly. So he's think a reasonably qualified figure. I don't think there's much doubt about that. Then there's a question about his judgment. He famously and historically is an inflation hawk. And in 2010 he delivered a speech which is very well known in New York in which he stressed that that's our job. Fed independence is in order to manage monetary policy and it's our duty to ensure inflation doesn't rise too fast. And it's absolutely clear we shouldn't be funding the government with low interest rates and expanding the balance sheet beyond a certain limited degree. I won't go to that in detail. And he was already, this is in 2020, worried about surging inflation. And people like me at the time and many others, Paul Krugman is probably the most famous thought that was mad. I mean there was no fear of inflation in 2010. The worry was the economy was in a slump. Seemed extraordinary that he should worry about that. It looked very purist, sort of ultra right wing, let the markets go where they might if we have a very deep Recession? Well, who cares? It will sort things out. And in any case, the only real worry was inflation. In fact, inflation didn't rise for 10 years, and I think for very different reasons from what he was focusing on. So it seemed a bad judgment, but it also finally seemed that, well, he really was an inflation hawk, so that's what he really felt. But then more recently, of course, in the run up to this decision, he's been indicating the monetary policy should loosen, interest rates should loosen. But again, if you're an economist looking at where the US Is now, that doesn't look at all plausible. We've got. Inflation is pretty resilient, the economy is very hot, the labor force is being shrunk because of the people being driven out of the country. Really, should interest rates be struck? And then that leads you to the conclusion that really Walt drives him. And this is the point Paul Krugman has been making is politics. He's politically loyal, in which case he's not really an inflation hawk at all. That was just the convenient thing then, because the Republicans were attacking the Democrats in 2010 for pursuing inflationary policy, though they really weren't. And what he's really saying is, I'm a political figure and I'm going to support Donald Trump. And the truth is, I think going through those possibilities, I don't know which he really is. If he's really an inflation hawk, there will be some real ructions between him and Mr. Trump. And if he's not an inflation hawk, then I'm a bit worried.
- [08:30]
Yasha Munk
Thank you. That's a really fascinating set of coordinates to help make sense of who he is and to at least get a sense of it, sort of terrain of the puzzle that he presents in light of this, what do you think is going to happen? Do you expect that Walsh would go along with any attempts by Trump to undermine the independence of the Fed? Do you think that he might be soft on inflation despite some of his monetary commitments? How is this going to play out over the course of the coming years?
- [09:03]
Martin Wolff
Well, the way he's described his view on independence is as follows. It's very interesting, actually. There's monetary policy there. We should be independent. He said it was very clear. That's what he said consistently through the crisis. And one would have to assume if he's serious about that at all, which is a very big question. He hasn't had this job before, and the responsibility that if inflation were to pick up a great deal, and it's obvious that it's picking up a great deal, Though he might be too slow about it, he would type monetary policy severely even if the President hated it. Well, we don't know if he will do that when everyone doesn't know that until you see it. The most famous case when the Fed did do what the President wanted, when it was precisely the wrong thing to do, was under Arthur Burns in the early 70s. And that basically led or played a big role in the great inflation upsurge of the 1970s, which was sort of a monetary policy disaster. And it's how we learned how important independent central banks and control of inflation was. So we wouldn't want to see that happen again. Will that happen? Well, it depends on whether there will be an upsurge in inflation if he cuts interest rates as he is indicating he would like to, and how he would then respond. And we honestly don't know. But if he did, then it would be very worrying. We'd be back in quite a big miss. He has said, and this is very important, that in other areas, notably regulation, consumer protection, things like climate also, those are areas in which the Fed should not be independent and should bow to other institutions. For most of those, I don't really worry very much. But the Regulation 1 is important because one of the big lessons of the financial crisis of 2007-2009 was that if banks aren't carefully regulated, and we saw this again with Silicon Valley bank, and they allow their balance sheets to become too leveraged and particularly with a large amount of long term debt, then they become very vulnerable to runs and then you get crises. So if he really decides to take a back seat on regulation and the administration continues with what look like some very risky regulatory positions on quite a number of things that that might also turn out to be a problem. So I would say there are these two areas of risks, monetary policy with Trump and regulation, financial regulation. And we'll have to see which is the real Mr. Walsh.
- [11:57]
Yasha Munk
Assuming that Kevin Walsh gets confirmed and as he takes office, what standards should we judge him by in the first years in his job? And where do you think are the areas where he might end up in conflict with Donald Trump? Where we're going to want to see whether he's able to stand up for expert economic decision making or whether he's allowing himself to be steamrolled by the President?
- [12:25]
Martin Wolff
We have to judge him like any other chairman. They're supposed to be guided by the evidence, the data. He's clear about this. And the data is sometimes ambiguous, in which case you give them the benefit of the doubt to some extent, and he's argued we're going to have a huge productivity upsurge because of AI, so we shouldn't worry too much about inflation. This is rather similar to the argument Greenspan made in the middle of the 70s when he said, don't worry, we've got a huge productivity upsurge, and so it's reasonable to allow it to go. It's not going to be inflationary. And he turned up to be right. So if the Fed argues we've got this productivity upsurge that's going to keep inflation low and we shouldn't raise rates and it turns out to be right, that's a perfectly reasonable judgment. One has to give him the benefit of the doubt. If, however, it becomes obvious that inflation is really surging and the President wants him not to do anything about it, but his job clearly is to do something about it, then the way he moves becomes much clearer. There are often doubts about this. You're doing something in relationship to an unknown future well in advance, because monetary policy has long lags. And sometimes there's a perfectly reasonable debate, but sometimes it's already clear that the Fed is too late and possibly as it was actually in 2021, 22, and then you have to act and then you'll have to see what he does. And that's the biggest test of all. Similarly, though, this is a lesser test. If he goes along with massive declines in the capitalization of banks and other financial institutions, the rise of leverage, of hidden forms in ways that are potentially dangerous, and he doesn't say anything about it, that also would be a bad sign.
- [14:27]
Yasha Munk
Martin, thank you so much for taking the time at short notice on a busy day to jump back on and answer these questions. Martin Wolff, welcome back on the podcast.
- [14:43]
Martin Wolff
It's a pleasure.
- [14:45]
Yasha Munk
It's always a pleasure to see you, Martin. We've now had Donald Trump in office for a year. What has changed in the world economy since then? Are we still living in the same world, or are we, in economic terms, living in a completely different world?
- [14:58]
Martin Wolff
There are two answers to that, I think, in terms of expectations, some policy parameters, and the perceived future. Increasingly, we're living in a different world, and that creates a disjunction because, of course, the actual economy doesn't change very quickly unless you have an event like a world war, which, thank God, we haven't had for a very long time, which does change things incredibly quickly. Essentially, economies go on doing what they're doing. So most of the transactions are continuation of previous transactions, the businesses are essentially the same. Trade flows continue, financial capital flows and so forth, continue. You look at growth rates where they're all something incremental on what was there before. So I think it's very, very important for people to remember that actual economies, people's livelihoods, what they go out to do every day, it doesn't change that quickly unless you've got a stupendous shock like a pandemic. Well, that changed things, or a war, I mean, a major war. But the framework, and I've written several columns on this, within which all this activity is going on has become at the least wildly uncertain and unpredictable, and in some obvious, important ways has actually changed. So we're living in one of those, to use a cliche, Wiley Coyote moments when you think you're going to go over a cliff, but actually you're not going over a cliff because you can't go over it that quickly, or at
- [16:43]
Yasha Munk
least you haven't felt the impact of going over the cliff until you look down and then suddenly you plummet to the ground.
- [16:51]
Martin Wolff
You're coming to the ground, which actually, so far we're not. And this is linked, I think it's very important with us, partly with the fact it wasn't as revolutionary as all that, and partly what my friend Robert Armstrong, a colleague, has called the taco. Trump always chickens out. His bite isn't nothing, but his bite is less bad, much less bad in his bark, which means that actually he hasn't changed everything. It's just everything has become uncertain.
- [17:21]
Yasha Munk
So the stock market should be at an interesting intersection of those two things, because valuations of stocks are partially based on last quarter's earnings and the business that is ongoing. But it's also a bet on the future. Right? It's the expectation that markets have about how well a company is going to do over the next many years. And so why is it that the stock market is not quite at record highs as we're reporting, as we're speaking, because it's gone down a little bit over the last couple of days, but very close to record highs, higher than it was a year ago, at a time when tariffs are much higher than they were a year ago. And it was widely predicted that that would harm the economy in a very serious way. We see the investigation, then potentially prosecution of Jay Powell as the head of the Federal Reserve. We see extreme political pressure on the Fed to lower interest rates and the likelihood that a new appointee, which Trump is going to be able to name relatively soon, is going to be a partisan, a ratchik who just does the bidding of the White House. All of that should at the very least make investors less certain about whether Amazon and Apple and Nvidia and all of those companies are going to continue to bring in the returns that have earned them those outsized valuations in the stock market. And yet the market is up. So what's going on with that? How can we make sense of this?
- [18:49]
Martin Wolff
There are several answers. One answer is I've never regarded the market as a very good predictor of what is actually going to happen. And that's consistent with the evidence in the medium to long run. But I think it's important to disentangle what we're talking about. You're talking about, it's very interesting. You are, you're talking about the market is the US market. The US market is very, very important. Of course, it's the most important stock market in the world and has now been for a very long. But actually, strangely in the last year, it's non US markets that have been doing particularly well. European markets have done much better than had been expected. In a way that's even more surprising because you'd think that Trump's tariffs, whatever they do to the US should hit the rest of the world even harder. But that doesn't seem to be the way it has been playing, playing out at all. There are a number of. It's not about, it's not just about the US It's a much more complicated story. But I think there are several answers on this. The first is that, and it's something I pointed out in a column I think a week or two ago. I can't remember exactly the world economy since the pandemic. Overall it's been doing really well. And not just the American, it's clear, but generally that we've had a very strong recovery from the pandemic. Profits have been doing very well. And over and above that, we have a very big technological revolution going on centered on the US also now increasingly on China and whose benefits ought to be available to everyone in the world. So it's not just about the profits of those companies, but the opportunities that will be created by using these new technologies.
- [20:50]
Yasha Munk
You mean artificial intelligence? Of course.
- [20:51]
Martin Wolff
Yes, I mean artificial intelligence. And it's also important to remember that betting that the world economy will grow and that profits will be made by new businesses had been pretty consistently a good bet. There have been ups and downs for at least since the 70s, which is a very long time, well outside the time horizon of most investors. So, and very last thing. Well, this is an era of easy money. You might be a bit worried about inflation. Yes, reasonable. But in an inflationary age it's quite sensible to hold real assets. And gold is a real asset, so they're doing very well. And silver's a real asset, but so are stocks. Yes, there could be disruption, but a reasonable assumption is in the long run, medium to long run, equities are a good hedge against inflation. They're not perfect. You can get profit squeezes of various kinds. But if you're worried about inflation, sell bonds. That's the most obvious thing to do. And that might be a real problem for some of our governments. But equities are not unreasonable. But for all these reasons, I don't find what we are seeing in the markets worldwide and the optimism about growth unreasonable. And it is worth stressing in addition that the tariffs per se as they ended up are clearly a disruption, but they are, interestingly, tariffs of the US against the world. And the US is a very big market. But as I point out to com today the US only accounts for 17% of world's imports of goods and services. Of course that's important, but there's another 83% and they're continuing to trade. Not only continue to trade as before, they're just finishing big trade deals. Look at the EU, India deal, it's a very big trade deal. We haven't abandoned trade, the US has. So I think people are basically saying to themselves, Trump isn't as bad as they think, the US isn't actually going to blow up, the rest of the world is fine and coping quite well and the best thing to do is bet that capitalism will basically continue to perform. This might be wrong, but I think that's what people are saying and that's
- [23:17]
Yasha Munk
a very strong reconstruction of why that optimism isn't obviously silly. And I think there's a tendency among opinion journalists, whether op ed writers or podcasters, to assume that everybody is stupid and nobody understands things. And when the markets are so high, they may very well be betting on the wrong horse and they may very well be underestimating some of those tail end risks. But you first need to understand the logic that leads a lot of very sophisticated people with a lot of money riding on making the correct calls before you can then go on to criticize them.
- [23:50]
Martin Wolff
Remember, markets are expensive, so that is a reason for believing correction. But it's not obvious to me that what markets are betting on is insane.
- [23:59]
Yasha Munk
Now, one of the foundations of this is the idea of tackle that Trump always chickens out. There's two concerns I have about that. One is a straightforward one, which is that he has chickened out, particularly on economic policy, repeatedly over the course of the last year. He seems to be chickening out on Greenland in certain ways. So this is something that might apply beyond economic policy as well. But of course, a, he is quite unpredictable and he has done some things for the more extreme than people would have predicted, certainly over the course of the last year. And so the fact that he has chickened out a number of things during the first year of his administration does not predict of certainty that he's going to continue doing so in year two and year three and year four. And of course, I'm sure that Trump is well aware of the term taco at this point. And given that he is, if nothing else, a proud and a man of vanity, he probably wants to disprove that that applies to him. The second point, which is a slightly more subtle point I've seen somebody make on social media, is that the dynamics of Taco are going to get more and more gnarly, which is to say that at the beginning, Trump makes an announcement, I'm going to raise all these tariffs. Immediate panic in the financial markets. Stocks go down a lot. Very strong signal. That's what makes all of Trump's allies say, you can't do this, and he backs down. Right. The next time that Trump makes an extreme announcement, the market reaction is more muted because people start to think, well, he chickened out last time, perhaps he'll chicken out again this time. But that means that the mechanism that made him back down last time has become a little bit weaker, but it's still enough. And he chickens out again. Right. And then the third time that he makes an extreme announcement, the markets say, ah, tacko. I've read the column. I know the term. Let's just ignore this. There's barely any reaction in the markets. And then perhaps Trump thinks it's safe to go ahead with this. So is taco a kind of resource that gets whittled down and consumed over time? Because sort of a game of chicken that is involved just keeps getting more to knife's edge. The driver has to jump out at a later and later stage for the mechanism to get going?
- [26:08]
Martin Wolff
I think that's not implausible. So I've never been fully confident that one should rely on it. And I think foreseeing what Trump will do is certainly be way beyond my pay grade. But it does seem to me there's an argument to be made that the areas where he's really passionate about sort of breaking the mold are relatively few. I mean, if I compare him with other autocratic leaders with big ambitions, and I'm not making any of the comparative, but just think obviously of Mr. Hitler. It was pretty obvious exposed that he actually wanted to change the entire world and among other things, conquer the whole of the east and repopulate it. That was a suspect, spectacularly big, indeed insane and criminal ambition. But what does Trump want to do? He wants to change trade policy. Lots of tariffs. He doesn't want to break the world, but he wants to change trade policy. He's done that. He wants to eliminate the US deficit, but he hasn't actually taken any of the main measures that will be needed to do that. And I'm sure he's surrounded by people who must be telling him that he wants to be a big presence on the world.
- [27:40]
Yasha Munk
Sorry. And in fact, it was just a new story, as we're recording in the New York Times today, I'm sure in the Financial Times as well, that the US Trade deficit is now at record highs, that as a result of economic policies over the last year, the trade deficit has increased. Which is the opposite of what he wanted.
- [27:53]
Martin Wolff
Yeah, exactly, because he's not coherent and not logical. And he's replaced Mr. Maduro in Venezuela. I mean, this is about as small a thing as you can do. He wants to give Putin a big chunk of Ukraine, what he wants to do in Iran. All I'm saying is this is not a man who wants to revolutionize the world. He does want to withdraw the US from its post war hegemonic role. That seemed very important, but it's one of those slow motion changes. So I just sort of think one mistake where he does, I think, really want to change things is the way the US works. And that's why I think ICE and how it operates may be the most important thing he's doing. But I think increasingly when I look at this guy in the world, he's sort of a small. He's conservative and revolutionary in some sense of the same sound. But his ambitions are quite small. So tacko is not required to change anything. Very radical. It's not clear to me that he actually wants to shake the world as a whole from top to bottom. He just sort of wants to withdraw from it, which has very big implications, but very different implications from a revolutionary. So if I were an American looking at this, I would say, as I really sort of wrote in my book on this. I mean, the real issue is, will our democracy survive? That's very important. But is Trump going to. Does Trump really want to shape the world in a meaningful sense, as other great revolutions have? My instinct is no.
- [29:36]
Yasha Munk
It's a really interesting point, a churlish way of saying this. He doesn't want to revolutionize the world. He just wants to put his name on it.
- [29:41]
Martin Wolff
He wants to put his name on it, and he wants to take America home, which is a very big change, and it will change things. And you can see it's changing Europe now. And this is all very important, but it doesn't mean that it shakes the world. When we begin to realize that, is the whole monetary system of the world, the whole economic system of the world going to be utterly different tomorrow? It doesn't feel like that.
- [30:05]
Yasha Munk
I sort of understand Trump's obsession with tariffs. I think it's a misperception of the world. But you can see how somebody who has a certain set of economic instincts about the world thinks, why am I walking down Fifth Avenue and there's all of these Japanese and German cars? And he's on the record in 1980 saying that, I want it to be American cars. And how do we make sure to do that? Well, we put up tariffs so that we spend bad. German and Japanese cars can't come in. I sort of see why he is so obsessed with that. It's easy to understand where that comes from. I'm a little bit more surprised by the fact that he clearly is very deeply committed to having low interest rates. Is that because of. If you're a real estate guy, low interest rates are helpful because you can take out mortgages more cheaply. And so he's always wanted low interest rates throughout his career for that reason. Is it that there is some theory that's coherent so far as it goes, that low interest rates stimulate the economy and the economy is going well, then I'm going to be more popular and people are going to think it's a Trump boom. Is it that economic theory is just right insofar as it goes? But of course, if you go too far, then inflation shoots up and you have all the problems. But ironically, probably elected Trump the second time, among a host of other reasons. Why is it that he's so obsessed with putting pressure on the Federal Reserve to lower interest rates faster than its governors think? Sensible.
- [31:28]
Martin Wolff
It would be absolutely insane for me to say that I understand the intellectual processes of Donald Trump, because I really don't. Because I think there can be few Men more different than him and me. But I have come to the view, so this is a hypothesis, that he really, really does view the world through the lens of a real estate developer. He thinks that it makes lots and lots of sense for America, like a good real estate developer, to borrow money. But of course, it's much better to borrow money if it's cheap. And unlike Trump real estate developer Trump president owns the US Government, which in his view includes the Federal Reserve. And the job of the Federal Reserve is precisely to do that from his point of view, because he now owns the bank, which he didn't in the past and when he was a businessman and that created lots of problems because he bankrupted himself or his projects, got bankrupted many times. So I think he thinks the job of the Federal Reserve, which is my bank, just as the government is my government, is to make sure borrowing, which is part of what he's done with his fiscal policy. He's got a massively expansionary fiscal policy. I control the bank. I can force people to lend to me cheaply. So why am I not doing it? Why is this person stopping me from doing this? Now they say because it's inflation. Well, Donald Trump has never thought about inflation. That's a systemic problem. He has no idea in his mind what the whole economy, how things add up in the whole economy. That's not how he thinks. I think similarly as a businessman, it's obvious to him if he spends more than his income on the products of some other company and he's running a deficit, in that sense, he is going to go bankrupt. So if the Germans insist, and the Japanese and the Chinese on selling more to him than they buy from him, they're going to drive him into bankruptcy. He doesn't like that either. Now, one way he can get around this, as Mr. Besant has told him, is to drive down the interest rates of the Fed. It's not as good as forcing them to rebalance and he's not going to go any further. But he thinks that's very bad, wicked of these people and they're defrauding the US and the final thing I think he thinks is when I look at my wonderful fortress country, when was it really proud and great and powerful? And the answer from his point of view, it was a proper booming the world's China, as it were in the late 19th and early 20th century, when we had huge tariff walls and we stopped all these wretched countries from sending anything to us. In fact, we built American industry. So we should go back to that these are very primitive, very basic, perfectly natural ideas for a not particularly intellectual and put it mildly business person like him to hold. They're not consistent or coherent, but I think I've come to the view that's actually how he thinks.
- [34:58]
Yasha Munk
Explain one thing to me that is sort of taken for granted in discussions of particularly the very contentious relationship between Donald Trump and Federal Reserve and this extraordinary announcement of an investigation into Jerome Powell. Now, part of this, as you're saying, is that I have argued for a long time at this point that a hallmark of authoritarian populism is the unwillingness to accept checks and balances via unwillingness to accept limitations on power. I'm the elected president. I should be able to decide what I want. How come there's this weird independent institution that kind of gets to defy my will, that is illegitimate. So that's a kind of relatively straightforward piece. But why is it that the independence of a central bank is so important? Because the case that 10, 15 years ago a lot of my friends on the left were making, and that now is some of the people in the Trump universe is making, is at least superficially compelling. Right? Where interest rates lie has big downstream consequences on economic life. When you have higher interest rates, you often have lower inflation, but you also have higher unemployment rates. When you lower the inflation rate, you often raise inflation, but you also stimulate the economy and it can lead to lower unemployment rates, to more people finding a job. That's not always true, and it's within limits. And you can complicate that picture in a million ways to make it more sophisticated than I as a humble political scientist have made it. But there's some amount of trade off there. And isn't that a political trade off? Isn't that something that elected politicians should decide? Isn't that something that we as the people should have a say over? Because it's a normative trade off between two different reasons, it's at least very reasonable for Prima Fasa case that this should be subject to democratic control. And that perhaps the fact that so many things haven't been subject to the to democratic control, including things like interest rates, are one of the reasons why people got pissed off and voted for all these populists in the first place. So having laid out that case, what is the reason why the independence of central banks is so important? What is the reason why, if there is this investigation into, and then perhaps prosecution of Jerome Powell, that's not just potentially an injustice, where an upstanding public servant is being scapegoated because they happen to be in the wrong position at the wrong time and. But not willing to bow to Trump's pressure. It's actually a problem for the long term, well being of the US Economy and perhaps the world economy.
- [37:20]
Martin Wolff
Okay, there's no very quick answer to that, but I'll do my best to make it as quick as possible. I think there's a broad point and a narrow one. The broad point is, and I think you as a political scientist know this very well, I presume all your listeners do, and watchers do too, is that a democracy in which the government can do whatever it wants on any moment and for any reason will pretty soon cease to look like a democracy. There have to be constraining institutions, at the very least. There have to be institutions that ensure fair elections. You have to have institutions that ensure political rights and protect them against this government. And that pretty quickly gets you to the position in which you have to have some sort of independent rule of law which protects these things. We can discuss how far it goes. So a democracy ceases to be a democracy if an elected government can do whatever it wants. I think that's pretty clear. So absolute democracy is its own antithesis. I don't think that's very difficult. Then the question comes, well, what about money? Where does it fit? Should it be part of the political domain? Should it be outside the political domain? Or should it be somewhere in between? Which is where we are in that the politicians decide who the Fed chairman is or the governor of a central bank. The politicians set the law within which it operates. And that's absolutely clear. There is a very, not completely clear law, but the Fed is mandated to pursue low unemployment and price stability. It has a dual mandate which is itself more progressive than that. In, for example, Germany, which you know very, very well, where they. In Europe, we focus on price stability alone, but it's clear, it's within a political context, as have these other institutions, but it is given very substantial operational independence. Why is that? I think there's a general answer and a very specific historical one which is important to remember. The general answer is the power over money is immense. It's an immense power, but wielded irresponsibly. It's immensely destructive. Because the danger is that you get a government which decides, well, essentially we can print money without limit. We can finance any size of fiscal deficit comfortably with the printing press. We can use it to do anything, which means we can ignore normal budgetary procedures and rules. And that gives not only the government unmeasurable Power. But over time this destroys money. And we've had lots and lots and lots of examples of this, if I may say so, when just look down at the South America, at the history of Argentina. So it's not theoretical, but economists, almost all economists would admit there has to be some constraint on this and an institutional constraint, given that there are basically two ways we've done it. One is a tie to a commodity, the gold standard, an absolute tie that was basically blew up in the 30s. And nobody's gone back to that. I can discuss at length why it's not a good idea, but that will be an alternative. And there are lots of people in America, by the way, who believe you go back on the gold standard. That's certainly not what Donald Trump wants. And the alternative is to give it to an institution, institution, a good found independent institution. And in the post war period, at the beginning, as it were, the only two I'll leave aside, Switzerland, sui generis small, there were two major countries, the US and Germany, which had that sort of institutional arrangement, independent central bank which had its own mandate. And then most of the others, the British, the French and all the rest of it had a pretty politicized central bank after the Second World War. And by the 19, by about 1980, there was a consensus of basically everybody, all the economists that when you look back at the record, the governments that allow the politicians to tell the central banks to do whatever they wanted them to do, their economies just performed far better, worse, had worse inflation, worse unemployment, worse instability than the ones with a more stable and separate and independent institution. And the experience in the early 70s which led to the great inflation of the 70s, when basically President Nixon suborned the Fed confirmed to everybody in America and outside that showed that this idea of a central bank as at least having operational and substantial independence just work better. And why was that? Well, the economist who, or economists who argued this most persuasively was Milton Friedman. What he basically said, in the short to medium run, more inflation will make you feel all better, it will cheer people up. And that gives you two or three years or four years of great fun. And then you end up with very serious inflation. Inflation expectations go through the roof, interest rates explode. We get interest rates ultimately of 20% or so, vast bankruptcies, mass unemployment. It's a terrible trade off. The people who had properly independent central banks above all the Germans did best. And that's why in Britain and France and everywhere, people went into the exchange rate mechanism. In Europe, they created the single currency. So this didn't come out of nothing. The theory turned out to be true. It actually strengthened politics if we had a pretty sound central bank. And now we've forgotten that because this is half a century ago. And anything that happened half a century ago is essentially as if it was in the early Middle Ages for most people. But nonetheless, that's what most economists still believe. And this old man believes it too.
- [43:39]
Yasha Munk
I'm struck by two things. We were recently at a small gathering together alongside with some other wonderful former podcast guests like Audrey Tang, the Taiwanese digital minister, and Rachel Kleinfeld, the great researcher on violence as well as American democracy. And you said a really striking thing in that context, which is, I think you quoted somebody saying this to you, that people always worry that we're going to forget history. And that's not what happens. We learn the lessons of history and then we forget them. Which is really striking and may apply to the broader conversation about populism as much as about this. One of the pieces of data that you presented is that you can look at the impact of populism on the economy. And when left wing populists get elected, like in Venezuela, the economy immediately goes into negative territory and then becomes worse after that. When right wing populists get elected, the economy tends to be boosted by that. For a few years. They come in promising cuts to taxation, cuts to regulation, a business friendly environment. And for the first few years, the markets buy that, investors buy it, and things go relatively well. And then those places tend to nosedive and they end up in comparably bad territory. As the left wing economist populists, not quite as bad, but almost as bad.
- [44:58]
Martin Wolff
Not quite as bad. Fifteen years later, you're significantly poorer, about 10% poorer than you would otherwise have been is the estimate.
- [45:07]
Yasha Munk
And now presumably one of the mechanisms for this is that they tend to take control of a central bank.
- [45:12]
Martin Wolff
This is one of the mechanisms. And they tend to mess up public finances and that's why they have to take control of the central bank. They cut taxes too much. You can see this in the US Now.
- [45:24]
Yasha Munk
So my last question about Donald Trump, and then I want to move on to some other topics. Does this fit the pattern? The economy is doing reasonably well in the first years of him being in office, but soon he's going to be able to name the chairman of the Federal Reserve. He hasn't completely transformed the economic system, the tariff system, but you're certainly starting to see things that create drag for the US Economy. The trade off, this is up rather than down. Where does the US fit into that slide that you presented.
- [45:55]
Martin Wolff
My view is that it fits very well. One, I'll come to this a second. The second point I would make, which is really, really important is of course the US is different from everywhere else. It's not a normal economy going into right wing populism. It's the US So it's the biggest economy in the world. It's certainly arguably the most technologically dynamic. I'm going to not engage in the debate between the US And China now. It's complicated, but it's got a fantastic reservoir of innovative strength, the world's most significant companies, and tremendous momentum. So messing up America is difficult. Okay, this is, and I never, I always say this. Messing up America is obviously completely different from messing up Argentina. That was true. You know, even if you look, compare it with Argentina, it was 800 years ago. So. But it does seem to me the trade policy has created wild unpredictability. And so is the investment policy. And this will affect investment. It's bound to affect investment. They have damaged some of the obvious wellsprings of American growth. Immigration, the willingness of, I suspect, the willingness of talented foreigners, given what's going on there, to come and live and with their families and so forth, there must be diminished. The lots of Chinese people are certainly saying, well, my future in China will be better than my future in America. The. I think they've damaged universities and research institutions. They're damaging the rule of law and confidence in the rule of law quite generally. You can see that. And of course, the public finance's soundness depends on getting the rates down. Why does he want the rates down? Because interest rates at current levels of debt, which are now back to where they were in 1945 after a world war, the debt ratios are that high. If he could halve interest rates, his public finance problems would go away. So of course he wants to lower interest rates because debt, interest is a huge part of his budget. But of course, once he says that, he's saying to all the people who hold Treasuries and other forms of us, this is a very unsafe place to put your money. Sell. Sell Treasuries and sell dollars. And you can see signs of that too. The dollar's rather weak. So we are seeing an immense machine which I never underestimate. But they are making policy mistakes of exactly the kind that I would expect to show up in negative form over the next 10, 15 years if they're not reversed, slowing the growth rate, slowing the dynamism, and certainly more immediately, a Real risk of crisis in the bond markets, the currency markets, and therefore in public finances. And that could generate a profound shift in wealth owners confidence in US liabilities, of which there are an incredible number. And that could generate a crisis which probably include a stock market crisis. That's the risk.
- [49:09]
Yasha Munk
So you just returned from Davos, you wrote a column about it in the Financial Times. You said that two topics dominated. The first is Donald Trump and we've got diverted a good half an hour to that topic. The second is artificial intelligence. So I want to make sure to pick your brains on that also, because I've been thinking about that topic a lot of late. To me, the fundamental economic questions about artificial intelligence is whether it is a normal technology, as two writers recently claimed, or a profoundly abnormal one. There is a view of the way in which it is going to automate away some jobs, which is that we've gone through that many times in history. A new technology comes in, it is able to fulfill a bunch of tasks that humans previously did at lower cost. Those humans lose their job. That can be very traumatic for people who have invested very heavily into developing highly sophisticated skills. Whether that's medieval monks copying books word by word, or whether that is telephone operators who with great speed and dexterity patch your incoming call through to the right recipient. New technology makes that obsolete. Bad for these people. Their life trajectory may be negatively affected. Their earnings may be negatively affected. If they're too old, they may not be able to retrain at a similar level of skill in some other profession. But good for the world as a whole because the talents of future generations are freed up towards more productive uses. There's a reinstatement effect where suddenly new kinds of jobs show up. We're directing human talent into better fields and that's how we all got richer. That's why the world is a lot richer today than it was 200 or 500 years ago. Now there's also, I think, the case on the other side, which is that virtually all of the forms of automation in the past affected manual rather than mental work. That they tended to affect a particular profession, a particular activity, a particular task. And now we have these general purpose technologies that can be dropped into virtually any mental task. Your AI system doesn't just patch calls through more effectively. It can potentially substitute for your lawyer or your accountant, or your social media manager, or, you know, your HR manager or 50 other kinds of white collar jobs. And that therefore there's not going to be a reservoir of need of demand for human labor in the same way that there was in the past. Where do you fall? Do you think that that's fairly framed and where do you fall on that? Do you think AI is going to be a big disruption, but one that ultimately leads to a bigger, more thriving middle class, or do you think it's going to decimate middle class jobs in a way that is disanalogious to previous technological transformations?
- [51:50]
Martin Wolff
So this is a very, very, very complicated question argument. So my answer to this is first, genuinely, I don't know. And I thought about it a bit, partly because I probably like the experiment expertise, but more important because I don't think we know. The discussions I've had with people in this area indicates to me pretty strongly that we don't know and I suspect will take a while. But the. So let me separate this out into three areas. First, the economic impact. It seems to me that the core argument you're making, which is that this is a substitute for if you like skilled trained thinking activities, is different. A computer augmented that in the past and now it appears it's going to substitute for it. And this is obviously very important because the people who do that are in some sense the core of our society and our economy. So something that displaces what they do, and most obviously it's going to start by displacing the young in these activities whose jobs entry jobs will disappear and are disappearing first, is going to have an extraordinary economic impact and because of that an extraordinary social impact. I'll come to that further. But if you imagine that the displacement is huge and the new jobs that you talk about will emerge as they usually do, really rather slowly, we could have social and political crisis that makes de industrialization look trivial. Because in the end, deindustrialization, though, I think is one of the biggest forces driving our world. Shock the working class, the male working class from top to bottom. But shaking the prospects of the educated middle class is socially clearly far more dangerous and I think explosive because it will affect them and their parents, who are basically the people who run our societies in every possible way. So it does seem to me that the thing you described, the nature of the displacement, is going to create challenges. Even if we get to a whole new set of activities, then the question obviously is what those new activities will be and how much will they be an augmented form of intelligent skill which we can't easily imagine now, and how much will they be something completely different? And what will those be? Will they be relations among people in some way? I did discuss this at some Stage, I won't mention this with who because it wouldn't be fair, but somebody who is young and obviously very brilliant, owner and creative, one of the leading firms, and I asked him this very question and all I can say is he didn't have an answer. So if he didn't have an answer, nobody does. So all I can say is, yes, logically we should be able to find something else. But the question is, will we find something else which somebody is prepared to pay for? And if not, well, how do we support all these people? Which gets back to the capital ownership, the structure of ownership. Can we have really a technology revolution that essentially benefits the shareholders and owners of about 20 companies or 15 companies? That's revolutionary. The final point I would make, and this goes beyond the sort of the differential economics and the impact and the question of what will replace in the end is, I think, a deeper question and I'd be interested in your reaction. I tend to think, and this is perhaps because what I do is. What I do is that thinking and creating through thinking is sort of the core of what it means to be a human being. That's what makes humans different from all other animals. Well, if it's true, and there's a huge debate out there, if it's true, we're moving into a world, I don't think LLMs are this, but in which machines do all that as well as we do or better. We basically made ourselves, deprived ourselves of any value in our own eyes as humans. So that would make it, if true, we live in a world with super machines and we know they're superior. If we live in that world, what are we going to think we as humans are for, if anything? And it does seem to me that's a profound existential question. So my instinct is to feel for all these reasons, it would have been a very, very good idea to bury this technology. As soon as somebody invented it, it was never going to happen. Competition ensures that it won't be regulated successfully. So we're going to go on this journey, but the journey is one, perhaps that's a sign of my age, conservatism, also the fact that I have a lot of grandchildren. I am very concerned and I think that thinking that is coming forward at a social level about what this means, how we control it, if we can, is jejune and beyond jejune. And the idea that it's all under the control of 10 or so billionaires who are, in my view, to a greater or less extent, psychopaths, terrifies the Wits out of me.
- [58:04]
Yasha Munk
So, a few thoughts. This is really interesting. I've written an article called the Third Humbling of Humanity. Now this draws on a concept by Sigmund Freud, who identified the first humbling of humanity as the realization that the universe doesn't revolve around the earth. And the second humbling of humanity as the recognition that we're not God's special creation, but rather descended from apes. And of course, for the third great humbling of humanity was Freud's discovery of the unconscious, which I think is a little bit too much self regard. So I discount that, which is why I think that artificial intelligence is going to be the first big humbling of intelligence of humanity. I mean, what is it that defined humanity? If you look at a lot of writing about this 200 years ago or 20 years ago, it's the fact that we are capable of acts of intelligence and artistic creation which set us apart from other primates, which set us apart from cats and dogs and cows and whales and other intelligent animals, as the fact that we can compose poems and write short stories and make movies and sing songs. And if AI will soon be able to do all of that about as well as we can. And according to some studies, humans already prefer poems written by AI to some of the greatest poets in history and translations of the Odyssey composed by AI to the translations of the various well known translators of it. That I think poses a really deep existential challenge to us at the level of a species. Now, I'm a creative artist. I'm a writer. That's a form of creative art. I sadly do not have talents for music or painting. You really wouldn't want to hear me sing a song or look at a picture I painted. But I also think about this from a perspective of creative artists and how our role changes through that. Now I think that I will always want to write out my own prose because I learned laboriously how to write clearly. I grew up in Germany where clear writing was not prized. And I owe it in many ways to your country, Martin, where I went to university, to have had a couple of teachers who said, spare me with this convoluted stuff. Write as clearly as possible. And it's the way that I make sense of the world and my own ideas. I also am somewhat optimistic that my audience will still want to hear me talk and not some AI and see me write and not some AI but if we get to the place where it'll be easier for me to put two lines of some idea and my past writings into an AI and it can write my article better than I can. I'm still going to be writing my own articles, but it'll change my relation to the work. And the way that I think about this is the Etsy store problem. So, you know, if you are in the 18th century and you are, you know, making socks for your children, the reason for that is that you want them to stay warm through the winter. And it's an essential activity. It makes you feel needed. It is something that has a very direct utility which makes the activity satisfying. If you today have an Etsy store in which you sell handmade socks, that's a nice novelty item. It's a nice luxury to have. I respect people who have Etsy stores and I respect the people who buy handmade socks, but everybody knows that the factory made sock would probably be more durable and more warm and so on. So it's essentially a kind of indulgence. And I worry that acts of artistic creation are going to go from something that is essential to making sense of a world and that in some abstract sense have real value to add feel like a necessary activity to a glorified Etsy store. A kind of novelty. Oh, look, this is a human written text. And that is a crisis of meaning, perhaps less important than the broader one at the level of the human species that I evoked earlier. But that to people who take part in creative processes, I think is going to be dramatic in its way and require a lot of adjustment as well. Thank you so much for listening to this episode of the podcast. In the rest of this conversation, we dive more deeply into the question of whether AI will create jobs or decimate jobs, whether it will make us all richer or whether it'll be the end of the middle class. We also talk about its implications for countries that are not yet rich, countries that are stuck in the middle income trap, or perhaps countries that that are really poor today. Will it allow them to escape poverty or ensure that they get stuck in poverty? And Martin expresses why he thinks that one of the deepest dangers of artificial intelligence is not directly economic, but should rather be understood in terms of existential meaning. What does it do to humanity and what does it do to each of us if machines we created are suddenly smarter and perhaps one day even more creative than us? To listen to that part of a conversation to support your human creators that are using their work and their energy to create this content, please go to writing.yashamon.com and become a paying subscriber. You have one more week to claim the most generous discount I offer go to writing.yashamonk 2026 for 30% off your first year of subscription. That makes it the price of about a dollar a week for two podcasts every week. Thank you for supporting us. Thank you so much for listening. Sa.