Steve Hsu: Welcome to Manifold. My guest today is Russell Clark. Russell is a hedge fund investor. He was recommended to me by an institutional investor who listens to this podcast and who reads Russell's writing. Russell I think had two fairly recent articles, one on the Japanese economy and one on the Chinese economy.

And I thought I would bring him on and have the conversation about those topics. Russell, welcome to the podcast.

Russell Clark: Thank you for having me.

Steve Hsu: It's great to have you on. And we were just chatting about your background and I always like to do a little bit of that biographical narrative at the beginning of every interview. And I think you started by saying that you grew up in Australia, but you spent a year of high school and some college as well in Japan.

So maybe we could start by telling you about that.

Russell Clark: Yeah, absolutely. I think it always sounds weird to do that to people from Europe or the states. But back in the eighties and nineties, Japan was like the first rich country you got to when you left Australia. And back then as well, Japan was by far the biggest trading partner for Australia and my uncle lived in Japan.

So for my family, the idea of sending kids to study at high school for a year. Seems to make a lot of sense because you, you know, learn a language, a lot of useful skills. yeah, so I did that in 91, which is sort of really the very top of the bubble economy. and was probably the first time in my life I really felt quite poor.

I went from Australia, Japan, everything was like three, four times the price. and it was very, you know, it was such a different way of living to what you had in Australia. It was just mind blowing. And in the end, I ended up doing the Asian studies and economics degree at university, specializing in Japanese.

So I went back and did another year of university exchange, in 94. Uh, both of those times we were in the Kansai, Osaka, Kobe region. And then I think around sort of that period, you realize the Japanese economy was in deep, deep trouble. so I tried to take my Japanese language skills and convert them into Chinese language skills which I didn't really get that far in, but I did spend a year in Hong Kong in 98 and Sort of learned that, yeah.

Steve Hsu: Can I ask you a few questions about Japan in the 90s? Because I also spent some time there. I'm older than you, but as a young physics researcher and professor, I spent some time in Tokyo and it's very timely because I don't know if you're watching the show Tokyo Vice.

Ever heard of this show?

Russell Clark: Oh, I've heard of it, but I haven't seen it.

Steve Hsu: So it's on HBO and season one has already happened. It was quite popular and they brought it back. And now they're sort of in the middle of season two. And there were actually books, I don't know. In that era, I don't know if you read these books. The guy, the person that the main character is based on, is a guy called Jake Adelstein, who was an American guy who became a crime reporter in Tokyo.

And this is at a time when the Yakuza were still a big thing. And so the show is, it's actually produced by the same guy who produced the show Miami Vice back in the eighties, I guess that was an eighties show and now, and this is called Tokyo Vice. So, anyway, it's set in the exact era when you were in Tokyo.

So you might enjoy it. but yeah, I mean, totally different from today where now Tokyo is kind of like a pretty good value for money. Vacation destinations at the time were staggeringly expensive for foreigners. And maybe you could just tell me, let me ask you a pointed question. So for old Tokyo hands from my era, have you ever heard of a club called Juliana Tokyo?

Russell Clark: I have heard of Juliana Tokyo. I was living in the Osaka.

Steve Hsu: Oh, Osaka, okay.

Russell Clark: Yeah. So it has a very wild nightlife and even more Yakuza in Tokyo. I think that's like this, that's a stronghold for that. That makes sense.

Steve Hsu: So any, any good, what's, what's your favorite story from that era living in Japan?

Russell Clark: There, there's quite a lot because I sort of skipped out when I was talking to you before, but, uh. So Australians can get working holiday visas as well. And I took a year off university and spent six months working as a bartender in Osaka to pay for being a backpacker around Europe. And we used to see all sorts of strange things because this bar was open very late.

I think the thing that was most crazy about this bar is it was open till 5am. And then there would be bars that would open at 5am for the people who stopped at these bars that worked really late. And that's, and it'd be full of people like me, Australians and Brazilians and stuff. It was a very strange lifestyle because most of the bartenders foreign bartenders and other stuff other people didn't have proper work visas. So they would disappear for Korea for a day or two and maybe they would come back or maybe they wouldn't. But they just stay there and then disappear.

I think the thing that I find most Interesting about that time was, you know, when it's just sort of early mid nineties is that you could teach English on the side and make around 2000 yen an hour, which for unqualified work, you know, you didn't need any qualifications was fantastic money at the time.

However, if you go, it was great at the time. It was about, you know, I would say like, you know, three, maybe three to four times what you could earn for similar jobs in Australia. so you can really save a lot of money very quickly. The weird thing is that the wage for teaching English in Japan has not changed from really the early nineties.

Which it gives you, so Japan hasn't really, it's sort of gotten cheap because the exchange rates fall, but it's also gotten cheap because prices just haven't moved. and it's just, it is quite amazing how that's happened. I think what you find with Japan now is that and still talking to friends who live there, like anything that's very international.

So the international hotel chains, they charge the sort of international price, but if you've got the ability and the bravery to access, like, Japanese focused hotels you can pay really extraordinarily low rates for really, really high quality. So it's like almost a bifurcated economy in Japan, like an international economy when the domestic economy that's still very weak, if that makes sense.

Steve Hsu: Yeah. I think for people in the 90s, they never could have guessed this would be the situation because it would, you know. things were so expensive then and, and I guess you were there when the sort of the bubble had burst and you could see the Japanese economy was going to be in a kind of dismal state for, for a while.

But in the 80s, the Americans actually were worried that Japan would displace them. That's the number one economy. In the world and actually took active steps to prevent that from happening.

Russell Clark: Yeah. Well, it's being repeated now with China. And so you know, and there's a classic sort of, for me, it's always American sort of capitalism is about making as much money as you can, but also. making sure no one comes and eats your lunch and using whatever means that possible. and yeah, that was Japan back in the eighties.

And then when Japan started a week in the nineties that fell off and now China's been strong and now you know, U.S. Is using various measures to try and keep China down, where we'll be effective or not. I don't know. It's a, it's a, it's too early to go into that.

Steve Hsu: We can get into that. That's the main sort of focus of our conversation. But I want to get through a little bit of your interesting bio before we turn to that. So, now, a little bit later, late 90s, you are actually living and working in Hong Kong. Is that correct?

Russell Clark: Yeah. So I ended up in, my brother was living in Hong Kong and I had taken another year off doing my degree. It took me a long time to finish my university degree. I ended up in Hong Kong needing a job and I had good Japanese skills. So I worked for this company, taking Japanese clients up into factories in southern China.

It was a really interesting job. I enjoyed it a lot, but you could see the amazing infrastructure that the Chinese were putting in. You could see how competitive prices were. And yet for me, it was a real eye-opener in where I think China was going to go, you know? and so I sort of, for me that was like, okay, I need to, become like a China expert and be very bullish on China when it, when it really wasn't.

Back in the early 2000s because of the Asian financial crisis and other stuff, people were very negative on Asia as a whole. and think of, and so it was very difficult to find jobs actually that got you into China in the early 2000s. It was very, very difficult indeed.

Steve Hsu: And things were very rough then. I mean, much, much compared to if you go to a tier one Chinese city now, things are so developed, the metro system and the airport are pretty clean. And but early two thousands or even the nineties, it was so incredibly rough, right? Like early Shenzhen was like nothing.

And they had, you know, I remember going there and they didn't have sidewalks. They would put up a skyscraper and then there would be like dirt sidewalks around the, around the thing and muddy roads and stuff like, just insane.

Russell Clark: Yeah, well, my brother was a lawyer, so we used to go a long way south to try and like intellectual property lawyers. So we'd be going to like weird markers trying to find counterfeit goods. I remember one day, so we could get a ferry, like a hydrofoil, back to Hong Kong. So we got on this hydrofoil, this old Russian one from the 80s.

Everything was written in Russian. And they, you know, and it was like a four hour ride. And they said, we'll put a movie on. It was a pirated movie. Then halfway through, the camera had fallen on its side and they'd still kept pirating it. So you just have to sit there like this watching it. and it was just crazy.

And yeah, I mean, that was I mean, I was only like 24 at the time, so I loved the, Wild wildness of it, you know, you get a bus to go somewhere and it was such a wild capitalist places like the bus driver would send then sell you to another bus driver because they're trying to get the buses full. So if they didn't have a full bus, they go, okay, you're now getting on this other bus, which was, and that was just the way it was, you know, you know, they just, everything was free and crazy.

And now it's much more developed. I'd love to go back. I haven't been in China for a long time now. The high speed rail just looks amazing among other things.

Steve Hsu: I had a guy on the show named Louis Gave, who runs this Gavekal Research out of Hong Kong. And he made this joke, which I thought was just spot on and I love to hear your reaction to it. He said, you know, actually the Japanese would be the most natural communists because they're very collectivist.

And top down and the Chinese actually should be the ones that have the crazy free market system because they're much more entrepreneurial and individualistic. I'm curious whether that uh, that resonates with your experiences.

Russell Clark: Yeah, I mean, it's, it's a tricky one. I used to think that myself. but then when I look at modern Japanese policy, it just seems to be about impoverishing the worker. uh, for no apparent reason. I mean, I, the Japanese economy is, it's so strange. I mean, they could solve most of their problems if they just gave everyone a pay rise.

And yet they resolutely refuse to even think that, you know, government, government driven pay increases are even, would be acceptable which puts them more in a sort of capitalist type situation, I think. yeah, it's interesting. so my thoughts on that are very varied at the moment, you know, looking at how the world works.

Yeah, I think we perceive the Japanese as being socialist because they definitely have a sort of social construct like that. But then they're very capitalistic in the way they look at profits. and the distribution of that. So it's, yeah, it's interesting.

Steve Hsu: So from those early days in Hong Kong, how did you get into the, I guess, buy side financial industry? And what, what, what's your main, what are the main markets that you have experienced trading in?

Russell Clark: Yeah. So when I lived in Hong Kong, that was when it's probably lost to the market memory for most people, but it was the tail end of the Asian financial crisis. And a bunch of hedge funds tried to break the Hong Kong dollar peg. Yeah. and they had a jewel straight for you. It looks like you remember this.

So they were shorting the Hong Kong dollar, but they were also shorting the Hang Seng index, which was mainly made up of property developers and the logic of it was, and I thought this was fantastic, was that they have to raise interest rates to defend the peg. But it's going to crush the stock market because it's mainly leveraged property developers.

And then, and you know, the early guys made tons of money, but then the Hong Kong monetary authority came in and burnt them badly. But I was so fascinated by economics and how that was working. I thought this is what I want to do with my life. So I went back to Australia, finally finished my degree.

Got a graduate trainee job with UBS. I worked in Sydney for two years as a graduate trainee and because that went well, they allowed me to try and apply for jobs overseas. Like I said, in 2002, I was like, or 2001, I was looking for jobs in Asia. Hong Kong would have been ideal, no hiring at all. So the closest I could find was an emerging market analyst for a hedge fund in London.

So I joined that and my thinking was at the time, believe it or not, China was a very small part of the emerging market investable universe. you had, you know, Malaysia, Taiwan were all big markets. and I was thinking, well, if I'm right in where I think China is going here then China will become a sort of emerging market index and that was probably correct.

And so I ran that. So I started off as an analyst and then 4 years later got headhunted to start a hedge fund. which I did and, you know, around 2011 or so, you could see that the Chinese story was falling apart and it was going for me the same way as the Asian economies of Korea , Taiwan and Thailand.

So, you know, I started to aggressively short China related names and that was really sort of what made my name cause I think people were very bullish on China in 2011-12. And then, you know, someone coming out and saying it's all falling apart I think really sort of set me on a different path.

But I think the world's changing again, And yeah, yeah, I think it is. I think what China is doing is very interesting. I don't think it's as bad as people make out. and I think, you know, when I look at it, I think the U.S. Reminds me more of Japan in 91. Now, if that makes sense, like it's the economy has been pumped up so much and price levels in The states are so out of whack with what you see in a place like Europe.

and it's the same sort of belief. I mean the weird thing about the states is, typically when you have such a booming economy, the government is not running a fiscal deficit of 5 6 percent of GDP, that's,

Russell Clark: That's not usual. You know that's, you know, something's going on there.

Steve Hsu: You're also not usually a late stage declining empire. We'll get, we'll get into all this stuff, I guess. But that's a great place to segue, and I think for the listeners now, I think we've established your bona fides in a sense, because you've lived in Japan, you've lived in Hong Kong, close observer of both economies. Chinese and Japanese economies. And actually made some successful long term macro trades it sounds like in the 2000s and 2010s.

So I think often when I, this is just my perspective, I'm not attributing it to you, but when I talk to younger people in finance who didn't live through all that they tend to have, I would say often miscalibrated views, especially about China.

And right now, I think there's a kind of crescendo of propaganda. Like, if you read the Wall Street Journal or F. T. or New York Times, there's this crescendo of propaganda about how the Chinese economy is collapsing, but I don't really see signs of that so much. so maybe we can discuss that. What do you do ? It seems like you have a slightly contrarian view now about China relative to everybody else.

Maybe you can just express that.

Russell Clark: Yeah. So I think, you know, when you look at, if I look at how the world used to work, let's say up until 2016 in a sort of free market capitalist world, what you found was whenever a major nation got into credit problems, so like the States or Europe, Japan Asia back in the nineties or the Latin American nations in the sort of eighties and two thousands, the typical choice then from governments was to devalue.

And the logic of it is that by devaluing, A, you, you, you make that credit problem easier to deal with and B, you're sending half your problems to your trade partners. That makes sense. Yeah. and you know, and it was like, that is just with standard policy.

Now, what were you, the problem with it was that anyone that had dollar debt or foreign debt, would then suffer dramatic consequences for a while, but then the sort of in a sort of sort of classic trumpeterian sort of views, you clear out all the dead capital to allow, you know, just allow new businesses to thrive.

And that would be pretty much the way I think policy has been run since the 1980s. And, When I, you know, and so what was weird is in 2016, China got into trouble, you know, there was definitely some panic, there were devaluation fears. And then suddenly China said, you know what, we're not going to devalue.

We're just going to close our capital account. We've got control of the banks. And we're going to keep our exchange rate relatively strong. I know people talk about being weaker than it was, but if you compare it to some of the other exchange rates you see, like especially what the Yen has done, the Yen's been weak and the market loves it and so, and there's no way, you know, it's just a perception thing.

The Chinese Yuan's been very strong. I guess, and then, A few years later, probably my last big trade before I decided to shut down the fund I was running, because I suddenly realized that the world was working in a different way, was, you know, in 2021 you know, I was reading the newspaper and I was talking about how the Chinese regulators had decided to have a chat with Alibaba and Tencent and IQI uh, and who else?

Weibo. Well, big. So this is interesting. And basically what the regulator was saying, the thing about it is it's very hard for me to get super negative on the Chinese because a lot of their policies make a lot of sense. So they basically said to these tech guys, do you know what? We have no problem with you collecting data. But you can only use the data for the businesses it was collected from. All right. So if you collect a business on a real estate website, you can only use it for that real estate website. If you suddenly sell it to another person or use it in another arm of your business, that's, that's not gonna, that's no good.

And I was reading this and the market at the time loved Chinese tech and I was thinking, this sounds really bad. You know, they're really sort of going for it. the tech business model, which is sort of like vertical expansion, using your existing position to dominate. So I showed them, I made a lot of money, but my only problem was that I thought, well, if Chinese tech goes, U.S. tech will follow.

And actually what happened was the U.S. Tech did this. Chinese tech did this. And I suddenly realized, you know, it's not the same market where all assets move in the same way. You've got China doing its own thing. I couldn't understand why I wanted to do that. I couldn't understand why it didn't devalue his exchange rate.

I couldn't understand why it was destroying its champions. and all of it was sort of political. I really needed it. Some time out to have a think about why the Chinese were so different to elsewhere. That makes sense.

And I think the Japan-China comparison now is actually very germane in that you know, the Japanese have decided they are tired of deflation. So they devalued like crazy. Yeah. And super weak, everyone knows it's cheap, but I don't see any particularly strong benefit to Japanese workers. In dollar terms, they're back to where they were in 1990. And I think, yeah, and the more I look at it, just to me, China is actually sort of more socialist in that it wants to keep real wages strong and it doesn't really care what profits do. That makes sense. Whereas the Japanese, more than I'd say, is more about, you know, we don't care what happens to wages, we just want to keep profits strong.

And I think that's the big difference, I think, between those two countries at the moment. And actually, if you look at hard indicators of activity, Chinese activity is not that poor.

It's just the stock market's bad, you know,

Steve Hsu: Just, to drill down on that a little bit, because I think our listeners would be interested in this. Of course, this Chinese stock market has been very poorly performing in the last few years. but if you look at their trade surplus, which is kind of approaching, I always think in terms of round numbers, but it's kind of approaching a trillion dollars a year in trade surplus.

Yeah. And you look at specific industries like autos or solar, you know, very big industries that I think are going to have a global impact. Their companies seem to be extremely strong, actually. So I think there's a little bit of a disconnect between the way the financial markets are performing and the actual, in a sense, core strength of their economy.

Now, it is true that they have had a property bubble, which the government has been well aware of, and now maybe it has finally taken steps, right, to pop this thing. And of course, that's going to cause some period of malaise in the economy, but in terms of the underlying fundamentals, I don't see it as being as weak as what, you know, U.S. media would report. Maybe you can react to what I just said.

Russell Clark: Yeah, no, I, I would agree with that. I mean I think, I think the thing about China is that it's sort of a one party dictatorship. They can't really let economic problems get out of hand because, and if they burst, it becomes a political problem very rapidly. So, you know, they have, I think, gone out and tried to actively, you know, get rid of the property bubble that was definitely existing in China.

And trying to make life easier for workers. I think that's where that policy is, is aimed at. and we'd leave in like the UK. I'm not sure where us property prices are now, if they're crazy expensive.

It's hard to tell. yeah, I was thinking that. Well, London, they're also London UK. They're quite high and it's become a huge political issue. And so, you know, if you look at conservatives in the UK, they're going to get destroyed. They probably have a generational loss at the next election and lose, you know, a vast number of members. So if the Chinese Communist Party, which has control over all the leaders of the economy says, well, we can't have that type of political loss.

They act, I think earlier. And I think what my view is, we sort of slowly see the rest of the world following. Yeah. Interesting. In the UK, what I find really fascinating is that with labor looking like they're going to win the election, suddenly the Bank of England is talking about selling its entire bond portfolio and exiting QE entirely.

because I think partly I think QE is a sort of a sort of pro capital policy in that. This idea that ever rising asset prices can lead to great economic outcomes. It does lead to good economic outcomes, but it also leads to bad political outcomes. And those are from a sort of, if you're a conservative voter, that's been realized and that the conservatives now are unelectable in the UK.

And if I look at the US or the, the new Republican party looks nothing like the old Republican party, which was a very different beast. and so you can see these machinations happening and China has got the same issues, but they've dealt with them in a different way, I think.

Steve Hsu: This is the first I've heard of the Bank of England selling its bond portfolio. I mean, you know, in the case of the U.S., the, you know, the, the action of last resort is just to add stuff to the Fed balance sheet and nobody, nobody's really looking at that apparently. So you can just put whatever on there you want and solve whatever, solve whatever economic problems you have by just having the Fed take it over.

But what would happen, like, if you mark that portfolio to market, what, where would it leave the Bank of England? Are they, is now a good time for them to sell their bond portfolio?

Russell Clark: Well, I think that's part of the issue is that they, when they first built out the portfolio, they made good money

And those profits were repatriated back to the chancellery. And then in recent times have been losing money. And so they're going, I think they're saying, okay, let's get out of this, let's just dump this portfolio.

So we don't have to ask, you know, ask for money from the government to sort of hold, you know, to make the portfolio whole. So, and I think also if, if you look at labor policies, they're very big into building a lot of houses, they're probably going to be increasing public spending, raising taxes.

So an inflationary policy mix. and so I think they're trying to prepare. the policy space to react to that. So if they know they're going to take a huge loss on a lot of their bonds, cause they're going to be jacking rates up. It does make sense to try and sell it preemptively.

Steve Hsu: Somehow the market doesn't [know]. The Bank of England knows this is how it's going to play out and the market doesn't know this is how it's going to play out.

Russell Clark: uh, you see it surprisingly often in, you know, I think. What I found really interesting, my personal view is that we are now into this sort of cycle where we need to sort of reduce income inequality. And the easiest way to do that is to push up wages rather than collapse asset markets because we don't like that.

And so the wages are going up and so interest rates need to. Go up much more. I sort of thought 10 percent would be the right level at the end of the cycle. And everyone has that face on and I go, well, you know, interest rates have been 10 percent not that long ago, certainly in my lifetime. And What I think it is when I, when I talk to people, is that people can't, asset owners can't accept the idea policies could be negative, you know, would negatively affect them. It's just so beyond their comprehension. Whereas if you go back to the 80s, when we were defanging unions, allowing factories to move to, you know, China or wherever.

Yeah. Yeah, if you looked at what voters in the power of unions in the seventies and then look what happened in the eighties or nineties, you know, that would have been mind blowing to them what the government's gonna allow, you know, cut tariffs and allow us to factories to move to Mexico and elsewhere.

That's exactly what happened because that's where the votes were. and I think that's a similar type of thing. I think people just like it. You're trying to, you know, no, I can't, that can't be right because then I would lose money. That can't be right. You're like, do you, what do you have the votes for? That's the question.

Steve Hsu: I think in the US system, it's can you, if you're going to harm capital, if you're going to harm the 1%, can you get elected? And, under certain circumstances, yeah, maybe you can, but it's kind of a, I think in the recent era, the sort of uniparty, the sort of centrist Democrats and Republicans really have been very pro, I think pro-capital.

And so you know, it would be a kind of change into a different kind of political regime for that to happen, but maybe it has to happen.

Russell Clark: Well, the States, you know, American corporations are very well run and very intelligent people. So a lot of the rule changes in recent years have made US elections so expensive and it's almost impossible to get enough political power without having corporate sponsors.

I'm sort of another you know, what's interesting is the sort of populous politicians that come from the right.

it sort of makes sense in that a lot of the old economic policies aren't popular. So you need different types. The issue is whether you get a sort of left wing reaction to that at some point. Whether you get like the sort of democratic Reagan, I don't know who that is,

You know, but it may take time. I find a very interesting way of thinking about it because You know the implication it sort of adds lots of different investment implications to the history and sometimes makes for very counterintuitive investment cases.

But yeah, I find it very interesting.

Steve Hsu: coming back to the property bubble in china, which the government now is taking steps to You know pop that bubble and I mean, of course prices have come down quite a bit So in a sense they clearly are in the process of popping it and they're now going to suffer the knock on effects you know in terms of employment and people being much less secure in, you know, maybe their major investment thing is they own some apartments or something In some city in China so that they're dealing with those consequences. The question is, you know, is it something that I do have a view on whether this could actually turn into a crisis in China, or whether it's something that they'll be able to manage?

Russell Clark: I think economically I don't see it being a big problem to manage and they've still got a lot of levers that they can pull on. I mean, one of the things about China, which I think people forget is they still have that big division in their internal market, like the So not everyone can move to Shanghai, right?

It's not free like that. They've really made a lot of adjustments, but there's still a huge internal adjustment that they could do. And the other thing I always think about is that if you're looking to sort of reduce income inequality a bit, what that really does imply is that cities will tend to underperform relative to rural areas.

Steve Hsu: hmm.

Russell Clark: That makes sense. And that will be a policy and you can sort of see, even in the States, you sort of see that sort of town versus country type political divide, if that makes sense, like New York and San Francisco and L. A. are seen as bad places and, you know, like, you know Ohio or, you know, Illinois, you know, these sort of more rural areas are seen as better, you know, there's that type of dynamic at play.

Okay. And you know, the thing about China, I always, you know, sort of staggering for me is like with such a large population, no one can really know exactly what's going on. You know, yeah, okay. Maybe unemployment's high in Shanghai and yeah, it's like a 25, 30 million people city, you know, is big, but actually in the big scheme of things in China, it's not actually that

Steve Hsu: Yeah, it's, it's that city alone is bigger than Taiwan. And, you know, similar to, like, a lot of medium sized European countries, but you're right. As a fraction of all of China, it's quite small.

Russell Clark: Exactly. and so it's a, you know, it's, it's always, I normally say to people that what I find very weird about Asia and China in particular is that the further people are away from it, the more confidence they have in their opinion of what's exactly happening. Whereas I mean, what I find a lot is how a lot of sort of old expats from Hong Kong tell me, heck, Hong Kong is dying.

What do you mean? I said, oh, Lung Kwai Fong is not as busy as it used to be. And we went, well, Lung Kwai Fong, if you know Lung Kwai Fong, it's for a very small part of the Hong Kong population. the vast majority of Hong Kong Chinese, you know, Chinese live out in the new territories in these very different types of places too.

And essentially, you know, Hong Kong is just becoming a Chinese city as it should be. you know and you know, I would be, well, it's, what's quite extraordinary. I think what the Chinese communist party probably could rightly point out is that, you know, Hong Kong was, you know, originally a British city or, you know, was originally a Chinese city, but the British really made it.

just across the border in Shenzhen, it's a Chinese made city, and Shenzhen has developed far more new innovative companies than Hong Kong has. Hong Kong's just owned by five families who basically all run oligopolies and haven't actually invented a new business for a long time while Shenzhen, you've got loads of different companies.

Steve Hsu: Yeah. I mean, as a Chinese American I had a girlfriend who was from one of these wealthy families in Hong Kong, actually one of the famous ones. and my wife and I, who are both academics, were actually at one point considering moving to Hong Kong university of science and technology, which, you know, they have that campus out overlooking the, yeah, exactly.

So, I'm pretty familiar with the dynamic there, and it's exactly what you said. There's not that much dynamism in Hong Kong. It's a bunch of people who own property and old companies, and all the dynamism is not just Shenzhen, but that whole Pearl River Delta area, which is being developed in a very formative way.

Like that whole thing once it's fully developed, will be one of the big economic drivers of the whole global economy actually, because it will include. Shenzhen and Hong Kong, but also, you know Guangdong and other areas. the academics that I know, the, the, so Hong Kong University of Science and Technology, it's a little bit like an MIT type school.

They're all looking forward to getting integrated into the Pearl River Delta economy because they want their graduates to be able to go into Shenzhen and start companies and build companies and. And do all this stuff. And, and so that's really the picture. I think all this old style thinking in terms of property or even, even finance as the driver in Hong Kong.

I think that's kind of going to get dominated by all this other stuff that's in the, it's in the region.

Russell Clark: I, well, I think that's where they're going with their policy. I think they are. actively trying to discourage, you know, models, you know, building your own cartel, which has sort of become the US, US business model is sort of, you know, capture the market and then raise prices. and they're trying to discourage that to sort of encourage more investment into hard tech.

The real problem I think for anyone, you and me included, is ever since it's become like a trade war or a cold war, getting data from China is really, really hard. And a lot of the data that you see or news articles you see, In the West obviously, you know, for me, not tilted, you know, you've gone from being excessively optimistic to now excessively pessimistic.

And you know, I always find it extraordinary. I was reading The Economist one week, this a few months ago, and, you know, The Ukrainians had fired their general and they're saying this is because corruption is being reared out. This is really positive. And I thought, okay, I guess so. And then in the same article, China had just fired a general for corruption and the conclusion was, this shows how bad China is.

And I went, they literally did exactly the same thing. You know, and I just say, you know, and it's like, You know, I think, you know, I, I sort of see that, you know, corruption was obviously the problem in China and, you know, they've tried to deal with it. Obviously, there's a political aspect to that. but my real gut feeling, and I talk about this recently, is I think the real problem between China and the U.S. is the same problem the U.S. had with Japan, is that US wants to be number one, and that does imply with a country as big as China that you have to keep it relatively poor on the GDP per capita basis, otherwise the US, China becomes bigger. And I think that's the real problem you know, cause that is actually, I think really at the heart of it is the problem of it.

Steve Hsu: You know, in the, in the eighties, Japan with, you know, roughly half the population of the U S maybe even less than that threw a scare into Americans. I mean, I was growing up at that time. So I remember there were books like Japan as number one by Ezra Vogel, the Harvard professor, and there were movies like Black Rain with Michael Douglas.

I don't know if you remember this movie, but they were really Americans. Yeah. Americans were really worried about Japan in the eighties. People, people, younger people now don't don't know about any of this. But now, in the case of China, you have a country which is 10, literally 10, little more than 10 times larger in terms of population, greater national, natural resources, and isn't still occupied by American bases, you know?

So it's a totally different situation and it's exactly what you say, if they just even have kind of a normal pace of development, eventually it's going to threaten the U.S. status as, as global number one. So, I think. I think there's no avoiding the U.S. really taking a very aggressive stance vis a vis, this is the, what people often call the Thucydides trap, right, that number one is always going to react in a very aggressive manner to suppress number two, and then the dynamic is that, that, that just, it's very tough to avoid, like out of control escalation that leads, maybe leads even to war or something like that, but that dynamic is really hard to avoid.

Russell Clark: Well, what I find really interesting is like you know, so when Russia invaded Ukraine, You know, the U.S. put a lot of sanctions on it but most of the large emerging markets are just ignoring those sanctions.

Steve Hsu: Yeah. Yep.

Russell Clark: Including India, which India is supposed to be a big new ally for the U.S. And the way I think about it is, you know, Indians are very clever people, long term thinking as well.

I think they look at the China U.S. problem and go, well, that could be us in 20 years. So, you know, so I think that's why they have a very mixed reaction to it. That's huge. They're not fully supportive of what the U.S. I Am trying to do that. and I think that for me, it's sort of very logical and natural.

You know, the real problem, the issue, I think, is that the U.S. can do what it wants to, as long as it retains its reserve currency status. and if it doesn't, that's when it all falls apart, you know? And that is what I think is a real key question for me. Is that people do people, people keep buying treasuries.

I don't understand why they do, but they are, you know, why would you buy these IOUs from a state that doesn't seem to be able to balance this budget even during a massive booming economy?

Steve Hsu: Yeah. I, myself , can't get my head around this. I would probably make a terrible macro trader because I just don't understand how other people think about these things. But yeah, I mean, it seems to me it's not a good move to accumulate treasuries. but something, there's still so much inertia in the system, right?

I guess, I guess there are plenty of people who would step up and defend the dollar hegemony lasting for many more decades. And they would, I guess they would just say like, well, what's the competitor? Like, why would you, you know, do you really trust the Chinese government? Do you want to hold yuan?

You know, I guess that's, that's the kind of counter argument they would give.

Russell Clark: I, you know, I think it all ultimately is sort of political. I think for me at the moment, the reason why I think a lot of people, I mean, in finance is very typical in finance. Unfortunately, it's not like theoretical physics where you get good research and people make reasonable arguments.

I think most arguments in finance are typically based on what's happened over the last two, three years. And they say extrapolate forever. I think where I'm, my current thinking ties back into Japan is that Japan is the biggest holder of treasuries outside of the U.S. or, you know, any other country.

And Japan is also a big lender to the U.S. economy for many of its institutions. And so, what I think Japanese policy has done is that a weak yen has put a lot of pressure on all Asian nation currencies. So it's created that downward pressure on the yuan. You go to countries like Mexican peso, which historically are very weak at being very strong because they favor them, they're being helped by U.S. policy.

And so Japanese policy of very low interest rates and devaluing the yen has created natural support for the dollar and they only buy treasuries. The Bank of Japan only buys, it doesn't buy any gold. Historically, you bought gold only.

Steve Hsu: Can you comment on that? So, why is it just like a kind of cultural hangover that this is the way the bank of Japan has always done things. So they're just going to keep doing it. Is it the fact that, you know, if you talk to a leftist. quasi Marxist Japanese professors, even physicists, they'll say, yeah, we're still a U.S. colony. Like, we don't have that much autonomy. So we, that's, and that's why the, you know, Bank of Japan is always buying treasuries. But I'm curious what your interpretation is of this.

Russell Clark: Yeah, I think there's two things. One, of course, Japan was bankrupt after World War two, so had no gold or any pre-existing gold at that period. And then it does have the U.S. Bases and there's a very close U.S. Ally. But I also think Japanese are very, I think Japanese are excellent investors. They tend to think very long term.

And so Japan is a big importer of natural resources. Mhm. Right. So if they have these spare dollars accumulating from trade surpluses, why would they buy gold, which actually promotes higher commodity prices, which is the actual opposite of what they're trying to achieve. whereas if they buy treasuries, they keep the yen weak and they promote growth in their major trade partner.

And that makes a lot of sense to me. Go remember though, you know, sort of big, big non gold foreign reserves is actually a very, very recent economic phenomenon, you know, and Japan basically invented it, Japan invented it. building foreign reserves and treasuries and they invented Kiwi. you know, so they've been at the forefront of these various new strange economic models that we have.

And yeah, it's, I, that for me is the logic of it. And also trying to, I think a quid pro quo for having all the bases in, in Japan. Was, you know, basically funding the U.S. government. but I think the problem you have is, you know, the Japanese are very rational people. If they can see that, you know, China is not going to go away and the U.S. is. struggling to fund itself. I could see them doing a deal with the Chinese.

Steve Hsu: Yeah, I think the big, the big, sorry to interrupt you, the big geopolitical deal that I think most East Asians think about is, you know, what point will China basically neutralize South Korea and Japan vis a vis the U.S. rivalry, and can they do it? And, you know, maybe 10 years from now or 20 years from now, but that's like a big, big swing that may or may not happen.

Russell Clark: Yeah, I mean, I think that I read a very fantastic book called Beyond Tamerlane which is talking about empires and it was interesting. This is like, you know, sort of empires have tended to absorb economically rather than go out and conquer, you know, see trade. Merchants move there and then, you know, it's been a sort of different way.

I think that's the sort of Chinese modus operandi. So just keep trading you know, you know, developing influence rather than go out [unclear].

Russell Clark: I mean, the other thing as well is like you know, I've always I mean, I do need to get to China, but you can just see that China reminds me in some ways of how its technology has sort of moved ahead of the West in so far that they've adopted facial recognition technology. So you just walk into a store and they automatically get your account. you know, which I'm sure Visa and Mastercard would push against massively in the States.

Yeah, I mean, I just find it really, you know, an interesting time from that perspective. Yeah, I worry about how it ends a little bit, you know, hopefully cooler heads will prevail.

Steve Hsu: On this dollar reserve currency question, do you have a view on when you think that will start to weaken? I mean, we're already, I guess we're already starting to see, maybe we will see, you know, oil increasingly traded in other currencies other than the dollar.

Russell Clark: Well, I think the U.S. is digging its own grave here in that, so if you go back to the sanctions that push up on Russian energy exports, right, the idea is no one would buy Russian energy, it would collapse. And what's happened in practice is a whole bunch of nations have said that they will buy it, and the discount fund will buy it.

And so I'm assuming that they pretty much avoid using any U.S. financial institutions and use the US dollar because any, in the previous sanctions people have used U.S. banks or U.S. dollars have been then sanctioned by the U.S.

Steve Hsu: Exactly. Yep.

Russell Clark: So I'm pretty sure there must be financial infrastructure that's being built to facilitate the payment of Russian energy imports. And we know that Brazil, South Africa, India and China are all going to be big players in that because they're all big buyers of Russian energy. So, the funny thing is, you don't have to go back that long. You know, even 10 years ago, Russia was already trying to get people to pay for their oil in renminbi or Chinese yuan or gold.

And no one was doing it because it's such a chore, extra cost, there's no equity. And then basically the US government forced, not forced it, but has helped Russia in a way that they could never do on their own, if that makes sense. And you know, I think some of the tariffs on Chinese exports has then meant it's being redirected through, you know, Southeast Asian nations as well. And again, you know, there's going to be infrastructure there to make it U.S. sanctioned safe. So in many ways, I think the U.S. is digging its own grave because it's reducing, if you think about it from a tech echo flywheel perspective, you know, The more people use Facebook, the more likely you have to use Facebook, right?

Now, the U.S. dollar is the same sort of thing, except it's the, oh no, now you can't use U.S. dollars for this transaction, and you can't use U.S. dollars for this transaction. They go, what do you want us to do? Not trade at all. And then, you create this new ecosystem. And it's, at some point, we'll reach this sort of quantum where somewhere like Japan or Korea, staunch U.S. allies will be like, we're going to have to participate in this, in this financial ecosystem as well, because we're starting to lose market share to people who don't use it, if you get what I'm saying.

And like I was, well, I found it really interesting as well. I sort of wrote in a recent note, if you can sort of see it beginning to happen.

So in. Vietnam is like the new trade power in Asia. So South Korea is a huge investment as the trade surplus with the U.S. is bigger than Japan now. All right. But the Vietnamese are not accumulating U.S. treasuries. They're falling. so I think we've already sort of crossed the Rubicon a little bit. yeah, it's just, I'm, and having been around for a long time, what I find interesting is, I know you'll, I don't know if you'll find this interesting or not, but I find it interesting.

It's like after the GFC, everyone was like, inflation is coming, super bearish bonds, super bearish treasuries. Super various JGBs again, and I was like, guys, I think, you know, if you look at the policies of austerity, you know, no wage increases, probably China blowing up, you need to be buying bonds. It's deflation for as far as I can see.

And people are like, well, you're crazy. And I said, nice. That's just where the policy mix is. and yeah, I made a lot of money from buying bonds, various different bonds over the years, loads of money. And then no, it's true. Like just loads and then. You look at the world now and I'm like, well, wages are going to go higher to rebalance the economy.

We've seen tariffs go up, taxes have to go up, everything is inflationary. Everything's inflationary. And yet people sort of go, oh, you know, 4 percent on the 30 year treasury. Give me some of that. I want to lock in 4 percent for 30 years.

Steve Hsu: Yeah.

Russell Clark: And it's weird how mentalities change that way.

Steve Hsu: Post GFC I, I had the same view as you. So people thought all this stimulus was going to be inflationary, but I thought, yeah, it's, it's, it's a stimulus, but it's on the back of a huge catastrophe in the economy. So it's like, it's like, yes, we have this huge problem and then there's some stimulus. I don't see a lot of inflation, so I agreed with you.

I agree with you. I had the same view as you right after the GFC.

This view has that a lot of what the governments have to do now sort of has to be inflation. I think. You know number one just kind of like chiseling away at their debt. The standard operating procedure is to have a little bit of inflation, right?

I think the ideal thing the Fed would never say this, but probably isn't the ideal thing to have like a little bit higher than normal inflation and just kind of like reduce the burden of their massive, you know massive government debt. It wouldn't be their best case scenario going forward.

Russell Clark: Well, you see, I think, I think central banks have zero control over inflation. They're like the remainder after you put all the and the bigger drive for inflation is really policy, both fiscal policy and institutional policy. So if you see from like, you know, from the seventies, eighties tariff rates were falling, globalization was increasing and unions were being defanged.

And we saw nationalization. These are all deflationary policies and I see, I see all of these policies now reversing and government's becoming more pro labor. And so what I, what I suspect is, well actually it's not suspect what is happening and what I think will continue to happen is that growth will always be much better than expected.

Constantly prices and inflation will be much stronger than expected. and central banks will have to raise interest rates more. I think. They've been lucky so far that the Chinese policy of crushing the property bubble has been globally deflationary. So it's offset a lot of the inflationary policies in the West, but that's not, you know, they've really a long way into that bubble bursting.

And so I think the surprises all going forward are inflationary and very inflationary in fact.

Steve Hsu: Do you have any longer term predictions about either the Japanese or the Chinese economy? Like, in terms of the Japanese economy, when you look at their debt burden, which I guess is mostly held domestically, right? Can they just sustain that forever? Or could they, could they have a crisis?

Russell Clark: Well, it's an interesting question because, you know, the large, most of that debt now sits in the Bank of Japan, and they certainly don't have the equity available to, to cover losses on those bonds, you know, but they theoretically, you know, you could do what they normally do is say hold them to maturity.

so they get back par value and, you know, and they can just ignore that. you know, for me, what I think is, you know, way I sort of think of debt, debt burdens I think the best way to think about debt burden is like, you know, if you go back to the seventies, right, when we had inflation and high interest rates, there was no fiscal debt. It collapsed. Right, and then in this sort of deflationary period, government debt burdens have risen massively. And I think the reason for this is that if you and so I also used to do emerging markets. So, and emerging markets always used to have inflation, it's always there. And you know why they always had inflation, because typically about two months before any election, they would raise public servant salaries, 20 to 25%.

Right? Re-election. Now what I find strange is if we want inflation in any country, why don't we raise teachers salaries by 20 to 25 percent? What is actually stopping us from doing that? Nothing except politics.

Steve Hsu: Mm hmm.

Russell Clark: You know, if you go out and raise public servant wages, you don't get elected, at least in the States.

I think in the UK it's probably different now. There's, I think, a real appetite for public sector wages to be, to, to rise. What I'm trying to say is inflation is not, it's not an economic phenomenon, it's a political phenomenon and it represents a different way of getting elected. And what I find really interesting and why I think inflation in the States is coming is that historically speaking, If you had 3 percent unemployment, stock market all time high, property prices doing well, Biden should be cruising for re-election.

And also Trump back in the day, you know, back in 2020 should have been cruising for re election. Same in the UK, we have the same dynamics. We don't, because I think this asset price policy, asset led policy models don't actually win votes anymore. People are tired of the inequality.

Steve Hsu: Well, what do you think of this hypothesis that most of those assets are held by a couple percent of the U.S. population? I don't think most people, just if I go, I live in Michigan, if I go out and just talk to people and I ask, hey, do you think the economy is good? I think most Americans don't think that at all and haven't thought that for a long time.

So those things could be somewhat decoupled because the people who are actually holding, you know, when you say, oh, stock market's doing great. Okay. But who owns a stock market? Do average people own the stock market? No, you know average people, I think maybe I think some economists would argue their real spending power hasn't increased in decades in the United States.

And so, I don't know if that's true, okay, but some people claim that, and it does seem that way. It seems like now, here, both parents have to work full time jobs to make ends meet in most families, and, you know, that certainly wasn't true when I was growing up. And so, I think people don't, don't feel times are that great.

Russell Clark: I agree. I think, well, that's the thing it is like, I think post World War Two policy, this is something I wrote about, but like if you look at, I use the UK cause the UK is very simple. We only really have a house of commons. We don't have all these different states and all this stuff. But I think what happened in the post World War Two period was that we wanted to avoid the great depression.

So they had these policies of expanding state and expanding unionization. But what I think the labor government found was that Expanding unionization, expanding nationalization actually creates more labor voters. You know, if you're a union member or you work for a nationalized company, you're more likely to vote labor.

So there was this sort of using the tech term, this, you know, windmill flywheel of policies. Becoming more and more entrenched. So when Thatcher and Reagan broke that, because if those policies start to fail, when they broke the political hold, you had the reverse thing happening where home or every, they tried to make as more, most, more, as many people as possible as homeowners they tried to, and they privatized many businesses to make unions as small as possible.

And the more people, the more that people owned homes, the more private sector work the more they were shareholders. So the UK had big privatizations that were marketed to retail investors, creating more naturally conservative voters, if that makes sense.

Steve Hsu: Uh huh.

Russell Clark: It's like a flywheel. And I think we're now at that transition point where the benefits flow to too few people, so the political machinations have changed.

and that's where I think we are. That's why I'm, I'm very, actually, I'm very convinced that we are in a, a new inflationary world. And I think inflation rates will go much higher. But actually growth will be very good. I think it'll be very, very good. Unemployment will be low. The only problem is that leverage players, people who have a lot of leverage will get into deep trouble, which I personally have no problem with.

I hate private equity. guys drive me nuts. I hate speculators who have done really well. And also you can see that policy with, so Biden's announced tax policies are like share buybacks, wealth tax to a degree. So the incentives to push up asset values to excessive levels is going to. change as well.

And so we're moving to a very, I can see we're moving to a very different world. I can see it quite clearly. It's just taking this time. But if you look, once you understand or think from that perspective, it's happening everywhere. It's happening everywhere all the time. That's the movie title anyway.

But yeah, yeah, it's fascinating. The really weird thing is it's happening in China. The only country that is not happening is Japan. I wonder if that's because their property prices are so low in Japan so that there's not that same pushback,

Steve Hsu: Yeah.

Russell Clark: But then.

Steve Hsu: It's interesting,

Russell Clark: To be honest with you, having lived in Japan and speak Japanese, I am sure there's some sort of negative political pushback to basically having loads of Korean and Chinese tourists.

You know, if I just, I just feel like there'd be like older Japanese in particular going, didn't we used to be richer than these guys, you know, why, why are they visiting us? We should be going to them. Which doesn't, you know be like,

Steve Hsu: It's interesting that we've come back to Japan because one of the things I do for fun is, for some reason, there are a ton of YouTube channels where people just go around Tokyo or Osaka and they just interview people on the street. And I love to watch those just to hear what the average Japanese person is thinking.

And you might, if you go on YouTube and search around for these, you might find these interesting too. Yeah, I, I don't know what the feelings are, but it seems like younger Japanese are very, what's the right word? Herbivore. Like kind of accepting everything. Like even if you ask some questions about like, would it be okay if tons of people from Vietnam immigrate to?

or India, immigrate to Japan. Most of them are just like, yeah, that's cool. It's usually only the older Japanese that remember that they used to be rich and, and maybe are a little bit outraged that the Korean tourists and Chinese tourists are all over the country. So I don't, I don't know. It's a, it's a, it's a fascinating question.

I don't know the answer, but yeah, I think there is some data. Now, the problem with these YouTube channels is that it's, it's somewhat selected, they show the interviews that are the most entertaining. to get clicks, to get views, but still it gives you some insight to the way ordinary Japanese are thinking about these things.

Russell Clark: yeah. I mean, it could be, it could be a new world. I don't know. I need to, I need to get, I need to get out of Europe and spend more time in Asia.

Steve Hsu: Yeah, you should travel.

Russell Clark: I know. I wish I could.

Steve Hsu: Yeah,

Russell Clark: I wish I could, but no, busy.

Steve Hsu: I see.

Well, hey, Russell, I, you've given me a ton of things to think about and probably the audience too. I really enjoyed this conversation. Let me, let me end with one thing that I wanted to ask you. Is it, if you just, whether you look at PPP or just, you know, nominal exchange weighted incomes, It seems like nowadays Americans are kind of like 1. 5 or maybe even two times richer than or earn more than not just people in Japan, but also like the UK and even in Europe. And does that seem like a distortion to you? Or is that like the way things should be given the performance of the relative performance of the economies?

Russell Clark: You know, it's you know, so like back when I first started working dot com bubble salaries in the States were probably like three, four times salaries in Australia.

Steve Hsu: Oh, wow.

Russell Clark: So Australia, Australia was really tied into the Asian cycle. So it was a very depressing Asian cycle, you know, and then you went to other parts of Asia and people were very poor.

So mainland China was super poor back then. So from that perspective you know, not so much, but you know, the, I always find it, it's very tricky to compare apples for apples. because there are a lot of things in the States that you have to pay for. Other countries don't charge you for things like healthcare or health insurance.

It's also hard to compare because the tipping is quite high in the States. You know, you have to pay the 25 percent for

Steve Hsu: Yes.

Russell Clark: You know, and so you get, like I said, it's hard to compare apples for apples. You know, and there's virtually no public transport. So yeah, it's, it's, I find it very difficult to compare.

you know, and yeah, again, you know, it was reading The Economist who was talking about photo phones, the big UK. Mobile phone operator here, and it was saying, look, you know, it can only charge one third of what the big U.S. One of our poo in the U.S. One's a three times higher and I was thinking to myself well, you know I pay for mobile phones Yeah I mean, you know like big 10 15 quid a month from the data Whatever that seems to me about the right price for a very old technology.

That's fully depreciated, you know. And this is a thing in the States. They allowed you to get to three operators that didn't have a T Mobile bus print or something like that. And I don't understand why you only have three operators. You know, it's the same with the airlines when JetBlue got bought by One of the other operators and then suddenly the market fell to three and prices went through the roof, right?

Now is that the sign of a? Does that make you wealthier? Does that make a better economy? I personally don't think so, but the way GDP is measured, it is, and you know, there's a lot of, I tried to do the numbers once, but like so in the UK, you know you know, drugs are priced very affordably, right?

Typically in the States, drug prices are much, much higher. and we've no obvious health benefits here. The life expectancy in the States is now lower than the life expectancy in the UK for men anyway. so you've got, you've got a whole sector that probably generates lots of profits, has much higher revenue, but has no obvious benefit to GDP life expectancy or anything else.

So how do you compare that? If that makes

sense.

Steve Hsu: Yeah, no, I

Russell Clark: again, yeah,

Steve Hsu: just had the same conversation regarding China versus the U.S. because I think, I think healthcare now is some, something like 17 percent of U.S. GDP, it's some, it's some very high chunk of our GDP and doesn't seem to be, except maybe in the, for edge cases where you really need special care and we're, we're pioneering new drugs and research and stuff like that.

Yeah, we are the world leaders, but in terms of the care that the average person gets for most of their life, it doesn't seem to be that much better. And our life expectancy, I think, is now equal to or maybe slightly less than China. So yeah, it seems like we're spending a lot of money for something, but I'm not sure exactly if we're getting value for money.

Russell Clark: No, but it creates a lot of wealth. So, you know yeah, I mean, it's, it's, it's the, it's the US free market capitalist way of doing things. you know, allow people to generate as much wealth, but I think that creates a bigger GDP. You know, like I said, the biggest surprise for me is why can't the U.S. run a balanced budget given all these benefits? and I have very, you know, I wonder if it's a philosophical thing where the states, because there are a lot of people in the Republican party and in the tech sector who basically believe that, you know, the federal government shouldn't exist. So they're trying to starve out of revenues.

The irony of that law is that as soon as there's a recession, they're begging the federal government to spend stimulus checks and often guarantees. But, you know, from a profit maximizing point of view, I understand where they're coming from. but, you know, typically you don't see any, I wouldn't see any change in the States.

until you see some sort of debt crisis don't see a debt crisis until the Japanese get rid of negative interest rates because with negative interest rates, anything looks good. you know, so it's when Japan changes its policy, so then we can start seeing what happens with the States.

Steve Hsu: Yeah. In my lifetime, we went from Bill Clinton talking about the bond vigilantes to slowly, slowly, the, you know, the government realizes it can just, you know, spend as much as it wants and there doesn't seem to be any negative impact. Right? So until a correction is issued, maybe in terms of a shock, we're probably just going to keep doing it.

Russell Clark: Yeah, exactly. And that that is a capitalist way is like exploiting any underutilized asset until There's some sort of reaction. And I think the bond market is that underutilized asset and they're going to keep explaining it until something gives medically either outside. So that'd be foreign is not going to buy dollars anymore or internally where labor starts demanding a much larger share, which creates inflation.

So there is a theory of interest rate, political interest rate theory, which I personally subscribe to, is that interest rates rise and it's just a way of making sure that labor stays under control. So you only re, interest rates only rise when you need to keep, get wages down again. and that's why they were so high in the 70s, because unions were so strong.

Steve Hsu: I see. Well, Russell, thanks a lot for your time. I really enjoyed our conversation. I, when I uh, prepare the show notes, I'll put a link to your writings. And is there anything else?

Russell Clark: Oh, yeah, exactly.

Steve Hsu: Are you also on Twitter? Should we link to your Twitter account? No.

Russell Clark: I don't use Twitter much anymore, it's, it's, yeah, I just use my Substack. I have far more subscribers on my Substack these days anyway, so. Exactly. I find Substack works quite well for me. I like it. So that's just the Substack's fine, which is www.russell-clark.com.

Steve Hsu: Great. All right. Well, thanks a lot for your time.

Russell Clark: Thanks a lot. I appreciate it. I really enjoyed it.