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Trump’s Tariffs: Art of the Deal or Economic Disaster? w/ Darren Brady Nelson – Bonus Episode

Are Trump’s tariffs a masterstroke of economic negotiation or a blunder with global consequences? Show host Gene Tunny and returning guest Darren Brady Nelson debate the rationale behind punitive tariffs, the backlash from markets, and whether this is all part of a broader deal-making strategy. They also discuss Elon Musk’s DOGE initiative and Darren’s run-in with a wild turkey on Wisconsin’s special elections campaign trail.

Please let Gene know your thoughts on Trump’s tariffs and any questions or comments regarding this episode by emailing Gene at contact@economicsexplored.com.

You can listen to the episode via the embedded player below or via podcasting apps including Apple Podcast and Spotify.

Timestamps

  • Introduction and Market Reaction to Trump’s Tariffs (0:00)
  • Darren Brady Nelson’s Run-In with a Wild Turkey (1:45)
  • Assessment of Trump’s Tariffs (6:51)
  • Formula for Calculating Tariffs (12:26)
  • Impact on Consumers and Businesses (19:59)
  • National Security Considerations (37:06)
  • DOGE’s Role in Identifying Waste and Fraud (44:07)
  • Wisconsin Special Election and Voter ID Law (55:14)
  • Australian Election Predictions (1:00:42)
  • Final Thoughts and Closing Remarks (1:05:44)

Links relevant to the conversation

Trump’s Executive Order “Regulating Imports with a Reciprocal Tariff to Rectify Trade Practices that Contribute to Large and Persistent Annual United States Goods Trade Deficits”:

https://www.whitehouse.gov/presidential-actions/2025/04/regulating-imports-with-a-reciprocal-tariff-to-rectify-trade-practices-that-contribute-to-large-and-persistent-annual-united-states-goods-trade-deficits

Statement by IMF Managing Director Kristalina Georgieva:

https://www.imf.org/en/News/Articles/2025/04/03/pr2587-statement-by-imf-managing-director-kristalina-georgieva

Darren’s 2018 article “Trumpʼs tariffs: free, fair or foul trade?”, in which he discusses Adam Smith and free trade: 

https://drive.google.com/file/d/1xQEt4n1bJ-W3RN2-H7_0w3q6vcI3eBCc/view?usp=sharing

Dan Mitchell’s “Six Visuals to Understand Trump’s Suicidal Tax Increase on Trade”:

https://www.imf.org/en/News/Articles/2025/04/03/pr2587-statement-by-imf-managing-director-kristalina-georgieva

CNN reporting, “This is the dubious way Trump calculated his ‘reciprocal’ tariffs”:

https://edition.cnn.com/2025/04/03/economy/reciprocal-tariff-math/index.html

Axios reporting, “Trump’s surprisingly simple tariff math”:

https://www.axios.com/2025/04/03/how-trump-calculated-tariffs-trade-deficit

CNBC reporting, “Trump open to tariff negotiations, contradicting White House aides”:

https://www.cnbc.com/2025/04/03/trump-tariffs-live-updates-stock-market-trade-war.html

Note this reporting: ‘Top Trump trade advisor Peter Navarro denied that Trump’s new tariffs are being used as a tool to negotiate better trade terms with other countries.’

Great Reset discussion with Darren from 2020:

https://economics-explained.simplecast.com/episodes/the-great-reset

DOGE’s reported savings:

https://doge.gov/savings

Lumo Coffee promotion

10% of Lumo Coffee’s Seriously Healthy Organic Coffee.

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Transcript: Trump’s Tariffs: Art of the Deal or Economic Disaster? w/ Darren Brady Nelson – Bonus Episode

N.B. This is a lightly edited version of a transcript originally created using the AI application otter.ai. It may not be 100 percent accurate, but should be pretty close. If you’d like to quote from it, please check the quoted segment in the recording.

Gene Tunny  00:00

Gene, welcome to the economics explored podcast, a frank and fearless exploration of important economic issues. I’m your host, Gene, Tunny, I’m a professional economist and former Australian Treasury official. The aim of this show is to help you better understand the big economic issues affecting all our lives. We do this by considering the theory evidence and by hearing a wide range of views. I’m delighted that you can join me for this episode. Please check out the show notes for relevant information. Now on to the show. Hello and welcome to the show. This is a special bonus episode of economics explored to talk about, among other things, what else but the new reciprocal tariffs that President Trump announced in the Rose Garden earlier this week. We’ve seen the S and p5 100. It’s fallen around 10% ASX 200 it’s down 4% over the week. So big impacts on global markets. The IMF Managing Director has called the tariffs a significant risk to the global outlook at a time of sluggish growth. Before we get into it, I should say this episode sponsored by Lumo coffee, they’re high quality, organic coffee from the highlands of Peru. It’s jam packed full of antioxidants. So economics explore. Listeners can get 10% off. So check out the show notes for that link. Now, back to the show. We’re going to be talking about the tariffs. We’re going to be talking about Doge, and also elections that we’ve had in recent, elections in the US, in Wisconsin, the upcoming Australian election. My guest who else? It’s my good friend, Darren Brady Nelson, who’s joining me from Milwaukee, and he’s just he’s had some recent run ins with Turkey, Turkeys on the campaign trail in Wisconsin. Darren, good to have you back on the show.

Darren Brady Nelson  02:06

Great. Yeah, good to see you too. Thank you. First, you got to

Gene Tunny  02:10

tell me what happened with that Turkey. I heard you had a run in with a turkey on the campaign trail.

Darren Brady Nelson  02:15

I did. I did. Yeah, I’ve been doing sort of, you know, you know, like you, well, a little bit similar to you. I mean, you, you actually set up your own firm, and all adept at economics and all that sort of things. You You certainly taken, you know, being, if you like, a freelancer, independent, to sort of higher levels than I have, I’d kind of just go fly solo. And that’s what I do, kind of economic stuff, mainly. But sometimes I get weird stuff, like elections. So, you know, I did the, obviously, the Trump election, I think we spoke about that, you know, last year at some stage, or in the wake of last year, and then more recently, I got, you know, kind of involved in the Wisconsin Supreme Court election. So in the US, pretty much most of the courts, the judges run for office like, you know, politicians, the only exception being the US, you know, Supreme Court. So anyway, so there’s a big election for one, you know, one, one seat was up for contention in Wisconsin, and so, you know, I’ve been doing that for the past five weeks or so, you know, literally going out there and knocking on doors and speaking to people and, you know, handing out literature. So, you know, I’ve become, the past couple of years, the door knocking economist, but as you mentioned, I’ve also become the turkey fighting economist as well. So what happened is there’s a suburb called Wauwatosa in in Milwaukee County. So Milwaukee County’s got the City of Milwaukee, which is dominates, but it has a bunch of other kind of subsidiary cities or suburbs, including Wauwatosa. And just just one morning, when I meet on the second house, I went to Wauwatosa. You know, just after 9am I was walking up to go knock on the door, and I heard this hissing behind me, you know, you know, I don’t know what I was thinking, I guess. I thought maybe cat or something, I suppose. And then I turned around this really huge Turkey. I didn’t even know turkeys could get this big. Was kind of like chasing me. Essentially, I didn’t even know it was until I got up to, you know, nearly to knock on this, this person’s door. And, you know, it was a big male Turkey and all puffed up and all this sort of stuff was like, you know, like, about four feet tall. The thing was huge, you know, a meter. And obviously they puffed themselves up. So, you know, obviously it took me a little bit unawares. And, you know, I tried to shush it off and scare it off with loud noises, but it was not going down for that. And fortunately, there was like a, you know, winter is, you know, pretty much over. But, you know, they had, like a kind of a plastic shovel. Lot of Wisconsinites just keep their shovel just sitting outside. I say most people don’t just steal people’s shovels, I guess. But anyway, it was there. It was, it was, it was plastic, so it wasn’t like a big metal one. So I grabbed that ice, tried to, you know, like, you know, poke it and, you know, have it scare away. But I sat there for like, up to 10 minutes, literally fighting this turkey with a shovel, it would not it kept on coming. In fact, I hit it like several times. Usually when you hit something once it runs off, right? But this thing would not run off. And I actually got saved by just some retired lady and her rather large dog cut me going for a walk, and she sicced the dog on on the turkey, and it finally took off. So, yeah, there’s my weird story about, you know, getting attacked by a turkey, obviously, um, you know, I certainly wanted, um, you know, Brad Schimmel to win pretty badly, but I’m not sure about, you know, fighting a turkey for him, right?

Gene Tunny  05:58

Okay, so Turkey’s protected. I mean, you didn’t harm the turkey, did you? I mean, you just sort of

Darren Brady Nelson  06:05

harm that Turkey because it because they have these, these, you know, really, I mean, they’re not going to kill you, but they could, they have these spurs on their, on their, you know, their feet, so they could, you know, you know, cut you up pretty nicely. So they’re not harmless birds, right? They’re not like, you know, maybe not like an emu or something like that, which is obviously far bigger and, you know, can probably, you know, break your ribs or something if it kicks you. But they’re not, they’re not harmless. They’re not like, gonna kill you, but they’re not harmless, right? So, no, they’re not protected. In fact, while with toast, has had a problem with wild turkeys for quite some time. They need to probably call them actually,

Gene Tunny  06:45

okay, well, thanks to that old lady and a dog. So, yeah, the

Darren Brady Nelson  06:51

dog, the dog was great. So it was a really large sort of golden retriever or something. So, yeah, okay, so

Gene Tunny  06:57

you’re, you’re able to answer my questions regarding Trump’s tariffs, among among other things. So, Darren, first, what’s your assessment of the market reaction? I mean, the market reaction has been pretty bad. It’s it looks like a mark of disapproval for the tariffs. What’s your assessment of it, please?

Darren Brady Nelson  07:15

Um, yeah, that’s not, yeah, that’s a reasonable assessment. Do I think it’s going to be some sort of like even medium term thing for the markets. No, I think they’re going to bounce back fairly quickly. So, you know, my, you know, we’ll obviously get into a bit of, you know, I’ve been kind of like changing my views on tariffs in recent times, not to the point of being like pro tariffs or pro protection, or anything like that. But, you know, I mean, I think that the White House statement, the executive order, and the accompanying statement, you know, sets it out pretty well. I think, you know, the reasons for it, and the whole backdrop, I think it’s actually a and, you know, it’s actually one of the best written executive orders I’ve actually seen, you know. So I don’t know who actually wrote that, but you know it certainly, you know, doesn’t it’s not, you know. I mean, Trump talks in terms of, and sometimes he speaks and he and he trolls people talking about beautiful tariffs and, you know, that sort of stuff. And but you know, I know people have been in the Oval Office with him, and I don’t think he he is a protectionist, nor does he think tariffs actually, you know, ultimately, if that’s all you’re doing, it’s not going to, you know, really create wealth. It’ll help domestic industries, for a time, certain domestic industries, but you know, at the end of the day, it’s not going to, obviously, we’ve seen what happened to, you know, the the automobile industry in Australia, eventually, you know, tariffs and subsidies and all the right and regulations that all directed to help them, eventually they collapse and fail. But that’s what, what Trump’s trying to do is really more art of the deal, and I’ve kind of first started to get a feel for that. You know, that that’s what he was trying to do in, I guess, probably 2018 particularly talking to, you know, a a former Cato economist, who, obviously Cato is, you know, like kind of the libertarian think tank in Washington, DC. So if he was convinced that that Trump wasn’t a protectionist and was just doing it for Art of the Deal purposes. You know, that’s that’s pretty good evidence, on top of what I’ve also seen since then as well,

Gene Tunny  09:29

right? Okay. Now, who do you think drafted that order? Was it Peter Navarro? Is Peter Navarro still involved in in the White House?

Darren Brady Nelson  09:41

I understand he is, I don’t look it’s hard to say who actually, literally drafted that I’m sure was, you know, I’m sure if someone drafted it, and there was a team with input, but you know, it just like, you know, I’ve seen a lot of government stuff across multiple countries, and it just, you know, you know, particularly, I guess, you know, Trump has, you know, him. Self, obviously, what’s what the weave? You know, how? Obviously he does the weave when he’s actually speaking. You heard that term, the we, yes, yes, yes, yeah. You know, he kind of, you know, wanders around and goes kind of off on tangents and comes back and all that, you know, like, you know, I’m not sure how he writes, To be honest, I’m, you know, but I doubt he wrote that, but, so, you know that, I mean, in a nutshell, what I understand, and I remember this, you know, particularly after a g7 meeting, I think in 2018 and I wrote an article about it, which I sent to you. You know, we’re, you know, basically the the g7 leaders were complaining about, you know, some of the tariffs, obviously. And then Trump, you know, hit back with, like, you know, hey, Canada, you’re doing this, you know, these partners are doing these ones. Okay, fine, let’s all get in a room and let’s get rid of all our tariffs, or, you know, or at least significantly reduce them down to, you know, very small numbers. And of course, Trudeau and everybody else backed off from that idea, you know. So that tells me, you know, these criticisms aren’t really necessarily some big stance on principle about tariffs, and not even just simply, hey, you’re harming us with this tariff, which, of course, yes, you know, there’s, there’s that, but I think, I think there’s some broader stuff and bigger stuff going on we can get into later, but, but, you know, at a simple level, I think, again, it’s art of the deal. I think Trump’s doing this. And, you know, as Dan Mitchell, who’s, you know, and you know, essentially, I’ve seen ardent opponent of terrorists, but he’s kind of a little bit of an ardent opponent of Trump, no matter what he does. But he, you know, he says, you know, he points out rightly, these aren’t simply reciprocal at times, like, you know, not just the same level as, you know, China or Canada or the EU that’s true, as far as I understand. But they’re punitive. But they’re punitive with a point to get these people into a room, basically to do a deal, to ultimately, you know, sort of get better trade arrangements, lower tariffs, and not just tariffs, but other non tariff barriers to trade, which there’s plenty of. And because, you know, the US, you know, certainly seems like they’ve kind of allowed countries to kind of hit them harder with stuff over the years, and the US not sort of retaliating, and now they finally are, and they’re making up for lost time.

Gene Tunny  12:25

Yeah, look, Darren, I think you there’s some interesting points you made there. Now the issue about Yeah, you rightly acknowledge these tariffs aren’t genuinely reciprocal. They are. Some of them are punitive, and a lot of economists and market commentators have been shocked by the formula that was used to calculate them. So it’s it’s either 10% or it’s the if there’s any sort of restriction on any imports, then it’s a minimum of and that could be for biosecurity reasons, as in Australia. So one of the things they’re concerned about beef, and I mean, we’ve got very strict regulations on food that can be imported. And so that’s one of the points of contention. But it’s basically, what was it? It was the trade deficit with a country divided by the the exports of that country to the US. And that’s a that’s a percentage, and they divide that by two, and it’s, it’s either that or 10% whichever is greater. So an economist are just sort of scratching their head, how does this make any sense? So that’s one of the, one of the concerns. You mean, where’d you get this formula from? Well, that’s the formula. That’s how that’s basically what everyone’s what everyone’s reporting, how they figured out, how they

Darren Brady Nelson  13:39

actually I contend whether that’s actually in the executive order. But anyway,

Gene Tunny  13:43

that’s, you can work that out from the chart that, you know, the chart he held up on the, yeah, the Rose Garden. So that’s, that’s essentially how he’s come to this. There’s this bizarre formula that that no one can figure out. So that’s one of the concerns. But I think that’s good. You’ve acknowledged that these are punitive. You think this is about the the art of the deal. Now, this is what Scott Besson, the Treasury Secretary, was saying. He was trying to hint, oh, okay, this is, look, we want to have a negotiation with these countries. But then Caroline Levitt, or someone from the White House, has come out and said, Oh, no, this is final. So, I mean, what’s your so is your? Is your view that this is the start of a negotiation with different countries, and so we will have lower tariffs eventually. Or how long is this going to last? How do you see this playing out?

Darren Brady Nelson  14:32

Look, you know, it’s obviously hard to say how long, and it’ll probably be be on a country to country basis. I think some will kind of go all right, you know, like, let’s we’ll come to the table pretty quickly. I didn’t hear the comment by Levitt that you’re saying that doesn’t sound accurate. That doesn’t sound in keeping with, you know, not just Trump over, you know, his previous presidency in the start of this one, but obviously he’s famous for the art of the deal, his book. So. I don’t think Trump’s change on that that, you know, I think he’s changed in terms of the art of the deal, with dealing with Democrats and and the kind of the his ardent left opponents, I don’t think he’s given up that you can’t do a deal with them, right? But that’s not applying this. That doesn’t apply in this setting. I don’t think and, and, you know, in terms of, yes, I think you can do a deal with any country, you know, Canada, China, EU, all that, even though there’s obviously people there who you know, are reluctant to do any deal with with Trump, because they just don’t like him, right? They don’t like what he stands for. They don’t like his style, etc, etc. And then there’s kind of that long standing and growing kind of European disdain for the US anyway, that that’s a separate issue, I suppose, but so, yeah, I totally see it as art of the deal. You can find a statement or something, but that’s not I think that the weight of evidence suggests it’s art of the deal. It does get more complex, because Trump is a bit of a troller, and he and he’s, he’s loose with language. But, you know, I was thinking that too. And I was thinking, Wait a second, maybe not so much, because if you’re doing the art of the deal, if you make it explicit that, well, this is the art of the deal. I don’t actually believe in tariffs, and I don’t really want to keep them on, you know, people might balk and go, all right, we’ll just wait it out for a while, because, you know, you know, he doesn’t really believe in this, and he’ll eventually just get rid of him, right? He’ll, he’ll, he’ll bow to the, you know, the pressure, if the markets don’t recover quite the way we think they will, or, or of the political pressure, or, you know, Republicans in Congress, you know, get weak knees. So I think, you know, actually, to give him a little bit more credit, I think sometimes this trolling also does have a purpose besides the fact he may enjoy the trolling in the first place because you let your opponents note leaner, you know, or your negotiating partners, know, look, I’m not really serious about my position, then that that really undermines your art of the deal. Basically, does it not so. But I think ultimately, you know, he’s not a believer in protectionism, or, you know, like tariffs are somehow the long term path to even domestic growth of industry. So, you know, I think the way to the evidence is, you know, in that and you could certainly, you know, I, you know, I haven’t looked at their formula that you, that you suggest they’re using, and if maybe that is true, I didn’t see that in the executive order doesn’t say that it doesn’t exist, just because it’s not an executive order. But I didn’t get that impression from the executive order. And, you know, ultimately, you could certainly make a cost benefit analysis, you know, case, you know, like, obviously discounted over time, if Trump is doing an art of the deal and he gets a lot of these lower tariffs and other non tariff barriers to trade, putting side, obviously, we can talk about the defense argument too. I think you could certainly make a case, because I think that the world, the WTO and all these things, have just not been doing. They’ve been doing a very bad job, you know, over not just years, but probably decades. Actually, it just hasn’t been really particularly when it comes to non tariff barriers to trade in particular, that I think there’s a reason why Trump and some others are just starting to move to these bilateral trades, because the WTO is just kind of captured by dei and green stuff and all the rest. You know, it’s no it’s no longer devoted to free trade as such,

Gene Tunny  18:37

right? And so do you think that these the failure of the WTO, this is behind the large trade deficits that the US has with China and other countries. Is that the is that the contention definitely

Darren Brady Nelson  18:52

with China, I think, I think it’s huge. I think, I think these trade deals, you know, particularly when they’re like, 8000 pages long, etc, like the, you know, the Trans Pacific Partnership. It’s just a lot of just like, Yeah, you know, we’re gonna help my friends over here. We’ll help your friends over here. We’ll help my friends over here. Blah, blah, blah. They’re not free trade agreements. They’re not even vaguely like, free trade agreements used to be done, you know, once upon a time, I’d argue, you haven’t even had a free trade agreement. You know, maybe you could say, in the early days of these, of these multilateral, you know, gat and stuff, maybe there was some, you know, a period of time where you really were, you know, and probably were moving the in the direction, back in the direction towards free trade. And I say back, because really, since World War One onwards, you haven’t seen much in the way of actual free trade agreements, which used to be very small and didn’t have to say a whole lot, you know, as you’d expect, a free trade agreement too. You know, you’re not sitting there picking winners and losers, which is what they do now. And sadly, you know, they were so keen to get China into the WTO, they just threw all sorts of, you know. Unfair sort of advantages their way. There’s no way Communist China that could do nothing well, all Sun is this, you know, turns into this powerhouse of capitalism purely because they were really good at stuff, or even purely because they had cheap labor, because a lot of stuff that’s going over there is even capital intensive sort of manufacturing and other items, which you know, obviously, over time, China got better at this and that, no doubt, but you know, to suggest, all sudden, almost overnight, China is super awesome at all these things. I know I don’t think so well, what

Gene Tunny  20:37

are some of the unfair advantages you do? You think that China has had thrown its way that, you know, that the White House would be concerned about, what do you think? What is it specifically the Trump administration is concerned

Darren Brady Nelson  20:50

about? Well, clearly, they’ve bought off a lot of politicians. I mean, you know, over the years, you know, to get these sweet deals. They’ve been, you know, the Bidens, the Clintons, the Bucha, over the years, they’ve thrown a lot of money at these people to get kind of sweeter deals. And it’s not always, yeah, it’s not always the stuff you can just pick up the Trans Pacific Partnership and see the bias in there, although you can still see it in there too. But I think it’s, kind of, kind of, if you like, the shady stuff behind the scenes that have been done,

Gene Tunny  21:28

yeah, yeah. I mean, it’d be, I mean, I’m, no doubt there are. I mean, I’ve had guests on this show

Darren Brady Nelson  21:33

labor in Australia, too. I mean, it’s just like, there’s a lot of stuff that’s gone down that’s, you know, it’s been documented. Some people have actually been prosecuted for saying something. Some people have not. So, you know, some stuff, you know, obviously hasn’t gone to court or trial. So you could say, well, that’s just conspiratorial, yeah, yeah, maybe, maybe not. You know, the world’s not sort of, you know, there’s a lot of nefarious things that happen this world, you know, I don’t know why people seem surprised as though, like, this is, you know, everything’s above board, you know. I mean, China’s clearly set out its strategy, and it’s not, oh, we just want to be, you know, just compete in free trade agreements with the world and just be a part of the international community. They fairly well documented their grand strategy in particular, you know, China, I’ve seen particular has so they’re not, you know, they’re not, sort of like, Oh, we’re not going to do shady deals, because, you know, that’s beneath us,

Gene Tunny  22:36

right? Okay, what I would, what I’m wondering about, Darren is, what does this mean for us, consumers and businesses? Because China has become the new workshop of the world. Our mutual friend Dan Mitchell, who you mentioned before, he’s pointed out the tariffs there are tax so you can argue about to what extent the the tax is borne by by foreigners, by by exporters, who might have to cut prices to be able to keep selling to the US or to sell elsewhere. But there’s no doubt that they are a tax, and us, consumers and and importing businesses, will pay more Dan quotes, some estimates that it could cost Americans 2000 to $4,000 reduction in disposable income. What do you think will be the impacts on consumers of the Trump tariffs, please? Darren,

Darren Brady Nelson  23:34

yeah. I mean, I would say that analysis sounds fairly incomplete, because you have to take in in account the whole sort of, you know, gambit of taxes, like the ones that the people who are now paying more tariffs weren’t paying in terms of domestic taxes, you also have to take into effect, obviously, you know, Trump has a huge tax reduction package that’s that’s going to be coming up, so you have to factor that in as well. So to just suggest that it’s just purely tariffs, and there’s going to be no changes to other taxes. So Dan’s right, it is a tax, which means you have to look at the whole sort of like, what’s Trump doing on all the taxes, basically, that are obviously under his disposal at the federal level, of course, and includes, obviously international as well. So again, you could certainly make it a case. I think it’s not unreasonable to, you know, particularly if you’re going to have a trade off and you’re going to have lower income taxes, lower corporate taxes, maybe lower capital gains taxes and that sort of thing, and then you you know, I’m not going to talk about these particular punitive tariffs, but I can see, you know, you know, a sensible level, obviously much lower, once you get, hopefully, people in the room, and you start getting tariffs and non tariff barriers lowered, at least on a bilateral basis, bilateral, bilateral, bilateral, that you could end up with an actual lower tax burden on American consumers over time. Even though you putting aside, like the spike, obviously right now with tariffs. And also you have to throw in the fact the US, unlike a lot of countries, is less reliant on foreign trade than it has historically been. It’s got a huge domestic market, and there’s competition domestically now, again, like I’m saying, in principle, I don’t favor like, hey, we’ll just throw tariffs on because, you know, we want to help out industry a over industry b. Or, you know, domestic industry a versus its its foreign competitors. Like I said, I think in the context of this, I believe this is Art of the Deal. It’s not, they’re not going to keep these in place, they’re going to, you know, massively lower them when they get deals, you know, with each country, China and the EU will probably be the last to come to the table. In fact, I would argue EU will be the very last China will come to the table, much quicker than the EU will, actually, because I think China is so reliant on, you know, you know, sort of, according to the US, I think it’s, it’s, you know, G, G’s pride. At the moment, the EU is a bit different. They, like I said, there’s such a, weirdly enough, I don’t think G. And oddly enough, the Communist Chinese, even though they obviously want to ultimately be the number one power in the world that, weirdly enough, there’s not at the same time, there’s not this kind of decades grown up anti Americanism that you have the EU. So that’s kind of interesting kind of dynamic that’s going to make doing a deal with the EU probably the most difficult. I think, ultimately, weirdly enough, yeah, I know it’s weird. It’s kind of, in one sense, China should be the most difficult, because obviously they want, they want to, you know, supplant the US as the top strategic power. But then you have the EU, you know, with its long standing disdain for American culture, and particularly, obviously, for Trump and mega, Chinese probably don’t, you know, they kind of have, probably have a weird respect for Trump and mega that the EU does not. That’s interesting.

Gene Tunny  27:12

Who is it the Chinese blame for the century of humiliation? I mean, would that be primarily the British because of the Opium Wars? Probably is, I guess

Darren Brady Nelson  27:21

so, yeah, I guess so, yeah, you know. And look, let me put this all in the context of, you know, you know, I was straight up Dan liberty, Dan Mitchell, Libertarian, slash, classical liberal view of tariffs. But the thing is that what I’ve noticed is a lot of people like Dan, and he’s my friend. He’s, you know, he’s turned into a religion, as though, like, you know, like he won’t complain about other taxes so much, but tariffs are, like, sacrosanct, you know, like they’re not, they’re a tax, you know, like they’re not a super special tax, in some sense, you know. You know, they behave like a transaction tax for the most part. And as you mentioned, yes, they get shared between producers and consumers, whether they’re domestic, and in this case, obviously the producers will be the foreign ones. Whereas, you know, normal transaction tax analysis, you’re thinking in domestic context. But that’s fine. It’s, it’s, it’s pretty much the same thing. Well, it’s been on elasticities of supply and demand, obviously, you know, in particular markets, you know how much, which will depend, obviously, on competition versus, you know, how, how much of a cartel type of industry it is, etc. And what you mean, what are the substitutes and compliments, etc? But yeah, I’ve noticed this weird thing. And I think I also had this once about time, like, tariffs, oh, they’re the special tax that you can never, ever do, any ever put on for any reason whatsoever, even if you actually lower taxes elsewhere. You know. So, no, I think, I think that’s kind of ridiculous sort of stance. Well,

Gene Tunny  28:53

I think the point you make about you talked about elasticities. And I mean, if the Trump tariff formula actually had an elasticity or two in it, then you might think, oh, okay, there’s some logic to it. And there is that concept of the optimal tariff for a large country like the US, which can actually affect the terms of trade. So but, I mean, my concern is just how, just the formula that’s been applied, how wide ranging it is. It doesn’t seem I mean, I can’t understand it. I mean, I don’t think they’ll last either. I mean, I think we both agree this is, this is temporary. I have a different hypothesis to why it’s temporary. I think it’s it’s going to be temporary because the people on Wall Street, the people in Connecticut who had got the hedge funds, they’re going to be knocking on the door of the west the West week, saying you’ve got to stop this. This is, yeah, this is costly this week.

Darren Brady Nelson  29:48

Yeah. What’s the sorry, forget the name escapes the who’s the UK Prime Minister that these sort of people pushed out the door fairly? Liz truss, sorry, yeah. Let’s trust Trump is not. Liz truss. They’re not going to be able to to they can come knocking on the door as much as they like. First of all, Trump knows the game as well as they do, right? So he’s he, you know, I’m not sure Liz really understood it as much. And I’d say the US is a much bigger, more powerful country, etc. But also, Trump has almost been killed. I don’t think the hedge people are going to be able to pressure him like you know, maybe they could have in 2017, 1819, but they’re not going to be able to this time Trump. Trump’s sticking to his guns on all these things. Obviously, we’ll talk about Doge as well, but he’s sticking to his guns. I The hedge fund people in Connecticut? No, they got zero influence on Trump. Well, the

Gene Tunny  30:44

benefit, the the what Trump has in his favor is that there’s still a huge demand for US Treasuries, right? There’s still, you know, they talk about the safe asset shortage, so people want to hold US Treasury bonds, because they’re seen as safe. And even, like, if you have global turmoil, people still want to hold US Treasury bonds because they’re seen as safe. So whereas with the UK, I mean people, you know, the people in the markets, go, Oh, we’re, we’re concerned about their ability to repay all this debt, and yeah, we’ll punish them in the in the bond market. So yeah, that’s, that’s really what, what brought down Liz truss? So, yeah, I think he’s a lot in a lot firmer position than than trust. I think he can, yeah, I don’t see any threat to him. I mean, he can’t be kicked out, like Liz truss. I mean, he doesn’t have a he’s in for the next, next four years, isn’t he true?

Darren Brady Nelson  31:38

And it’s actually have said, or the, you know, like, you know, some of the stuff, you know, I mentioned, you know, the kind of the dirty deals and the that are done, you know, I never thought about these things much prior to the 2020s and I probably would have been like, you like, oh, you know, like, you know, kind of like, oh, I don’t know about that. But now here’s the other context, the West globalists. There’s a war against Trump and people like Trump. So this is also and a lot of these people are hedge managers, so there’s that. So they’re trying to make the markets look tanked and make Trump look bad as much as they can as well. So it’s not just purely, yes, there are people literally are scared and whatnot and but there’s also people because, you know, we have BlackRock. It’s not like these markets are. There’s sort of cartel elements to these markets. They’re not these purely competitive markets, and no one’s really influencing it. And this is purely just a sensible market reaction to stuff it. It’s partly that, but it’s also partly people trying to make this happen as well, the black rocks of this world as well. They who are just ardent opponents of Trump, right? And they’re opponents of Trump, they’re opponents of, you know, me lay their opponents of Orban. They’re opponents of all these, you know, these Trump like movements. I know Milo is a bit different, but he’s also, you know, he’s a strong ally of Trump as well, even though, obviously he takes kind of a more libertarian approach that Dan Mitchell would approve of in Argentina. But they’re both on board with fighting, sort of the globalists, right? The Black Rocks, the the weft and all that sort of stuff.

Gene Tunny  33:19

Darren wasn’t Wall Street, weren’t BlackRock and Ray Dalio and all the hedge funders. I mean, maybe not Dali. I can’t speak about him specifically, but my impression was that they were all in favor of Trump, and the didn’t the stock market have a bit of a boost when he got elected. So, I mean, people, people that you’re talking about, were actually excited about Trump, but now they’re not, because they see that the diet, the adverse consequences these tariffs. Did you see Jim Craver Cramer was on with Aaron Burnett on CNN the other day, just saying, What madness it is. I mean, the I just can’t understand that argument. I mean, wasn’t

Darren Brady Nelson  33:54

Wait a second. When were they on board? I don’t I never heard them release statements Well,

Gene Tunny  33:59

I mean, well, the markets were, the markets got a boost when Trump was elected, and when he and he is Trump, was actually claiming that. Well, he was claiming credit for the markets going up when they were starting to think that he could get elected. So, yeah,

Darren Brady Nelson  34:13

look, he does, you’re right. I mean, all politicians start doing that. They claim, you know, markets go up purely because of them, and then when they go down, that’s not to do anything with them. Obviously, it’s a mix of both. But no, there’s the black rocks. And people have never been on they didn’t also turn to Trump, you know, this time around, he has, you know, this is like a drop dead war to the death, almost, you know, actually, literally, maybe also death, you know, between sort of globalists and the kind of, like the nationalist sort of movements of Trump and Orban and Milo and people like that. I don’t know why you’re smirking at me. This is fairly

Gene Tunny  34:53

honestly, Darren, I don’t, I don’t understand. And I mean, most of these people just want to make money, don’t they? I mean, I don’t know about this. Whether you how you can call them. Maybe they they’re more, yeah, definitely, they’re going to be more in favor of, you know, free or globalization, than, say, the people in the current White House. But I just, I just can’t understand this well, I think deliberately crashes the market. That doesn’t make any sense to me. We’re talking

Darren Brady Nelson  35:19

about Soros did the exact same. Soros, back in the day, did the same thing, not for some market driven purposes, for his political agenda. Soros did this, you know, once upon a time. So these people, I mean, Bill Gates, is long removed from like, Oh, I’m just trying to make a profit at Microsoft. I mean, they’ve moved on from this. They have other agendas that they’re using their wealth for. This stuff’s pretty well documented, and it’s not documented on fringe websites. It’s documented fairly well, you know, maybe not on CNN, but it is documented on Fox Business and plenty of other sort of websites like that.

Gene Tunny  35:59

I think if you can send me some links to that. Darren, I’d appreciate it. Yeah, honestly, I’m, I’m skeptical. But look, it just doesn’t, it just doesn’t appear that. It just doesn’t make any sense to me that they would want to crash the market in that way. There are a lot of people who, from what my impression is that there are a lot of people on Wall Street who are mad at Trump at the moment because of what’s happened in the markets due to his tariff announcement. So these

Darren Brady Nelson  36:27

people support, you know, the COVID restrictions that I mean, this little mini crash from Trump and his tariffs is nothing compared to what happened, you know, under the very end of Trump and, you know, for another, you know, the first year or so, Biden and these people were very supportive, yet they were getting smashed in the pocketbook. Were they not? So people aren’t just motivated purely by profit, and even people in Wall Street and et cetera, aren’t just purely profit, particularly if they have kind of, you know, obviously, if they’re not in a position where, if they lose right now, they’re gone. You know, as long as they can recover and they have other purposes, and they can have other influences and and hopefully make a buck, obviously, as well as, you know, pursuing, you know, what are their sort of broader goals they have, like a Bill Gates or, or George Soros or, you know, Larry Fink, because they all have broader goals and, and, you Know, weff in particular, you know, their website sets out those goals, and they’re not just to, oh, let’s we want more free trade. That’s not their goal,

Gene Tunny  37:29

right? It’s the great reset you’re talking about. We had an episode on the the great reset a while back. People

Darren Brady Nelson  37:34

always go like, they go like, Oh, I’m skeptical. And then I immediately send them the link to their actual website that talks about the great reset. It’s like, it’s that it’s not like a crazy conspiracy theory. They set it out quite clearly. What they’re trying to do,

Gene Tunny  37:46

what I’ll do is, I’ll put a link in the show notes to our chat about the great reset, and because I think we had a good conversation about that a few years ago. So just finally, on the tariffs, Darren, you you mentioned, you know, other considerations, or other considerations, I presume you’re talking about national security. What do you see a national security aspect to these tariffs?

Darren Brady Nelson  38:12

Yeah, I think there is. I don’t think that’s the main one. Obviously, if you go through the big list, you know, there will be for China, without a doubt that that’s actually with China. It’s, that’s, that’s actually maybe the number one reason, actually with China. I think you can probably, you know the notes, you know where Adam Smith sets out the three exceptions defense is not before he tried to free trade. Yes, yeah, where he sets out the exceptions to free trade, you know, where it is legitimate to do, you know, tariffs or whatever else, right? So defense is number one, and then the next two are almost kind of the same thing, a little bit different. The second one’s the reciprocal, you know, straight up reciprocal. And the third one is the punitive one. And he sets out for a goal, though not punitive, just to be punitive, obviously punitive to then get them back to the negotiation table, and then, you know, open up both markets, if you like. Are, you know, more than just two markets, perhaps. So Adam Smith sets out the himself, sets out the reason for the punitive tariffs, right? So, you know, which we obviously spent a lot of time on previously. So you know, Adam Smith himself, who is obviously against mercantilism, if you like mercantilism, obviously thought like this was a good long term strategy, right? You know, mixed in with the concept of, like, we want lots of gold and all that sort of stuff. But that’s obviously not an issue nowadays. So, yeah, defense definitely it. You know, I’ve surprised in recent years to learn that just the amount of stuff that, you know, the US military relies on China for, you know, inputs, it’s that’s just like, No, it’s like, it’s one thing to rely on Canada or Australia, obviously, or even like countries that may not be your allies, but aren’t literally. Your rivals and could be your enemies overnight, you know, if something went, you know, you know, in Taiwan, if something happened, for instance, which, of course, the US doesn’t rely on Russia in any way, for, for, you know, defense related inputs, but it does for from China,

Gene Tunny  40:17

right? Okay, so national security. I mean, this is interesting that you think that’s, I mean, that’s part of it. But the the biggest story is you think that you agree with Trump, that you think America is getting ripped off. I mean, I’m just trying to understand what the what is it? How are they getting ripped off? I mean, what’s, what are the consequences of that, that jobs and factories have gone overseas, and the idea is to reassure those jobs and factories, is that the idea? Well, look,

Darren Brady Nelson  40:43

you know, I think it’s partly that. I mean, I’ve just purely as an, you know, you know, the evidence I’ve seen, you know, has looked like the US has done a lot of bad deals that that have, if you’ve like, skewed things in favor of Mexico, in favor of Canada, even in their, you know, their overall North American agreement. But more importantly, obviously, you know, through the WTO, things skewing towards China and other agreements. So, you know. So I think they are trying to rebalance, you know, basically, in a nutshell, to others like, you know, look, I can’t speak for Navarro. And all his views, I think you seem to know a lot more about you know him, and you know where he comes from than I do. Maybe he’s got something, a grand strategy that’s beyond just, hey, let’s kind of, you know, level the playing field, you know. I think this is ultimately just kind of aimed at that, because I don’t think you know Trump, or you know, a lot of Americans don’t feel as though they can’t compete if the fields you know more level than it has been in recent decades you know, particularly from you know, probably Clinton onwards, perhaps longer, but at least since then. So you know, that’s, that’s my take on it, that, you know, ultimately these punitive tariffs and putting again, defense to the side for the moment, defense is a different issue, and I think you’ll have to treat it separately. But of course, you know, you can get, you know, obviously the there’s a danger the military industrial complex claiming things are skewed. You know, you know that things are important to them when maybe it’s not. So there’ll be a lot of you know that obviously this will have to be looked at closely to make sure that it’s not just you end up just protect, if you like, really end up just protecting industries over a longer period of time, rather than, you know, having really good, you know, national security reasons for, for, you know, sort of like taking, you know, so making it hard for China to have an input into, you know, this or that particular, you know, crucial security or defense aspect,

Gene Tunny  42:50

yeah, okay, okay, Darren, I think we’ve chatted plenty about tariffs for the time being. Let me it is totally out of the deal. Yeah,

Darren Brady Nelson  43:04

go ahead, yeah. Look, I think this is, you know, something about this tells me I’m right when, when people get, like, just overly emotional about it, like, particularly economists. I kind of kind of not saying you but, you know, but I’ve been talking to libertarian and classical liberal economists, and they don’t even want to consider that. You know, that maybe these trade deals have not been very good and skewed. They don’t want to consider that. They don’t even want to consider that this is Art of the Deal. They don’t want to even consider that the Trump is anything but a protectionist. They don’t want to consider that tariffs, oh, yeah, their taxes. Remember, their taxes, you know. Thus, let’s look at the overall tax mix, including tariffs. They just have, like, this is like a sacred cow. You can’t ever put a tariff up for any reason or put a tariff on even if you can actually say, you know, these Adam Smith reasons, defense, reciprocal, punitive, to then recapture a more free trade arrangement. I’m surprised at the amount of people who they have such emotive responses to it. And they’re not. They don’t go, oh yeah, okay, let me consider this, you know, or you know. Okay, fine, show me some of the evidence for that, etc. No, there. It’s usually a very visceral reaction right away. Perhaps 10 years ago, I might have had the same or maybe seven years ago, I might have had the same reaction too. Well,

Gene Tunny  44:29

that’s what I’d like to see. I’d like to see what is that evidence that that is being claimed, that of these skewed trade agreements, I think it would be good for for the White House to put that out and then have more targeted. I mean, if the genuine reciprocal tariffs, or if they’ve got a beef with a specific country, then then actually, you know, provide the evidence for that, and rather than just what they’ve done. But look, if you’re saying, look, I mean, maybe it is out of the deal, well, I don’t. Know what’s going on in Trump’s head? Yeah,

Darren Brady Nelson  45:02

look, I would, I think, I think, I think you may have relied too much on reporting and what they’ve done. I think, look at that, go, go to the source, and I sent you the link to the White House, their whole, you know, the executive order, plus their whole rationale for that order. And then, you know, judge that alongside of the commentary of whoever else.

Gene Tunny  45:24

Okay, right? Oh, Darren. I think we’ve chatted plenty about tariffs before we better get on to Doge. Elon Musk is, I think he’s finishing up his what was it 130 days as a special government consultant. And I mean, what’s your assessment of how Doge has performed? It’s been controversial. There was a whole, I mean, USA ID was shut down. There are concerns about what that means for Well, for the countries that it used to support, there are concerns about what it means for us soft power around the world. What’s your assessment of how Doge has performed,

Darren Brady Nelson  46:03

they’ve actually opened my eyes. They’ve actually performed better, you know, even though they don’t, you know, it’s not like, you know, typically, you know, if they, if the White House would have asked us, you know, hey, you know, you know, let’s see. We probably would have got a team of economists or whatever. And there’s nothing wrong with that. Of course, that’s typically how it would be done. But it’s interesting in this, you know, given, yeah, it’s interesting that they’re the tech people, the tech gurus that they got, and they AI wizards, I’ve been, you know, and I’m not a, you know, I’m a skeptic of AI like, you know, and this kind of tech in general, you know, like, I’m kind of like, you know, sure, I have to use tech, and I’m not like, against AI or anything like that, but, you know, I’m skeptical. And I’ve been like, they’ve kind of opened my eyes, like, wow, the stuff they found and how quickly they found it, and how broadly they found it. And then, you know, I was also like, you know, when the first thing they went after it was us a ID, and I’m glad you pronounce it that way, because I used to go USAID, and because it gives it, it gives it a sound of because it isn’t really a foreign aid organization. That’s the thing. I thought it was too It isn’t that, you said soft power. That’s being kind, that’s being very kind to what they do, you know, the, you know, Clinton Foundation and all the other stuff that they fund. I’m not sure. You know, it’s not quite the foreign aid organization that people kind of thought it was, including me, the the amount of Basic Black Ops, political black ops that this thing funds is like that surprises me, too. I didn’t realize that’s what it largely does. You know, for every mosquito net that it may provide in Africa, it’s that’s like, that’s mini skill for what it actually really does. So it’s not just that it’s inefficient and waste, if you like, wasting taxpayers money. It’s, again, it’s far more nefarious than even I kind of thought it might be, to be honest. So now understand why they went after it first. It wasn’t purely like, yeah, you’re wasting taxpayers money on this or that, including, you know, political donations and all these things. And of course, to only one side, it’s far worse than this. So I’m impressed by that, and also things like, you know, finding even though, obviously, social security isn’t really something that you know was going to be a reform target for the Trump administration, in fact, they kind of said the opposite. And obviously, pretty much Republicans and Democrats have said this for decades. We can get onto this, and I think they should just copy the Australian reforms in the 1990s they’re not perfect, but, boy, they’re pretty darn good by comparison. But anyway,

Gene Tunny  48:53

this is, you mean, the individual retirement accounts, superannuation, superannuation, yeah, it’s not

Darren Brady Nelson  48:59

perfect, you know? And then there’s the labor unions and all the, okay, it’s not perfect, obviously, but, you know, it’s, it’s, you know, the US Social Security Systems, clearly, the worst system in the Western world, it seems, as far as I can understand, but, but, you know, Doge is just targeting the the weird stuff, like, Why do you have people on the rolls that are 160 years Old? Clearly, no one is 160 years old, right? So, you know, all that sort of stuff, you know. And as if we went in there, we probably it would have taken us forever to get to that sort of stuff, right? You know. No, no, I think you know, over time, you know, Doge, if they keep it around, I think they need to, obviously, bring in economists and you know, and hopefully they’ll work closely with OMB, which they probably are, I’m not, you know, I don’t know, in Treasury, although the US Treasury doesn’t quite have the same broad role that the Australian Treasury does. You know, it’s very much focused on tax and debt, not so much spending, which is weird. I kind of was surprised to find that the US Treasury doesn’t. Even though they dole out money, they they leave it to OMB to do that, right? So that’s kind of what OMB kind of focuses on, spending and stuff like that. Well,

Gene Tunny  50:10

yeah, I’ll have to look at the specifics. I thought, how they how Doge has been so successful, is that they actually, no, I’m saying that it’s part of Treasury.

Darren Brady Nelson  50:18

Your Treasury doesn’t focus on, they have the data, but they’re not like the way that you’ve worked in the Australian treasury, yes, and state treasuries, you know, they’re heavily involved in what gets spent, right? You know,

Gene Tunny  50:33

yeah, to an extent. I mean, you

Darren Brady Nelson  50:35

know, by agency, by agency, there’s a, there’s a negotiation process, yes, yes. They don’t do Treasury doesn’t do that. It’s they kind of leave it to OMB to kind of do that in along with the Congressional Budget Office. And, you know, it’s kind of a, it’s a, kind of a different sort of system. But yeah,

Gene Tunny  50:52

from what I saw, that they were able to tap into some Treasury system that gave them really amazing data on all of the payments going out from US government. It’s quite extraordinary, and that’s how they’ve been able to be, you know, do as much as they’ve done.

Darren Brady Nelson  51:07

Yeah, Treasury has got data, but it’s weird. It’s like they have it, but they’re not like, they don’t actively use it, and they’re not involved in the process of spending like an Australian Treasury is, or even the Queensland treasury. So, but you’re right, yeah, they, yeah, I understand, you know, I’ve seen some of their data, which is public, obviously, and obviously, Doge has got access to much deeper, and I’ve data than, than what we can get at the public level. Yeah, yeah. Okay. So I’m impressed by just, you know, just the way they get, you know, even when, when, when, you know, the the Republicans in Congress were going to go along with this ridiculous, you know, spending budget. And, you know, Doge got onto it really quickly and went, Wait a second. They found all this stuff really quickly, you know, like the speed and the depth and this, you know, scale and scope. It’s like, it’s fairly impressive. Now, ultimately, when they kind of do the report, you know, by the Fourth of July next year, maybe it’ll probably come out on the Fourth of July, I suppose, you know, it’ll be a grant, you know, kind of a ribbon cutting exercise, maybe, type of thing, you know, if they continue to carry on, or whatever, however they hand us over, maybe to OMB. Then, obviously, OMB has got plenty of economists, you know, but I’m impressed by the tech people, and I still think they should be involved and rolled into an OMB and a Treasury or whatever CBO, because, you know, they’re, you know, quite impressive. What they can do so quickly, just on going

Gene Tunny  52:43

back to us a ID, what evidence is that they is there that they are running Black Ops? Is that just a Is that for real, or is that just a talking point from the doge folk?

Darren Brady Nelson  52:53

No, they said it out. They said they put out a great detail. They give you the numbers and stuff. You know, you mentioned the Treasury data stuff. They weren’t, yeah, they’re not. Such as a talking point. Obviously, it gets turned to a talking point for both sides, you know. You know, one side who says, yeah, and then the other side goes, no, that’s not the case. No. Doge, I found that, you know, they don’t just talk they they provide data, you know. And yeah, like I said, I didn’t, you know, like, six months ago, I didn’t, you know, I didn’t have a particularly strong view one way or the other, towards USAID, to be honest, you know, you know, except for, like, just the broader argument that a lot of economists have made, how foreign aid just doesn’t really work. It’s not, you know, East Asia and other places. You know, using market reforms has done way better than Africa, South America, etc, through this, this, this foreign aid. You know, plenty of economists have documented that, you know, conceptually. So, you know, I guess I had that view of it. But, you know, I was surprised that it really wasn’t really much of a foreign aid, you know, outfit, which is why it’s officially called a ID and not actually aid. You know that lot of people are careful not to call it US aid, to make it sound like a straight up foreign aid organization, which I didn’t know really, to be honest, I was kind of surprised too, you know. So they kind of opened my eyes at the, you know, corruption, which is beyond just inefficiency and waste, you know. I think you know, when it comes to corruption, that should certainly be the number one target. Then, you know, waste, and then you know, just kind of efficiencies, if you like, third. And I kind of miss that. I missed that kind of the corruption element of things, I suppose, I guess I realize that there’ll be elements of government that are corrupt to whatever extent, and fraud too. Obviously, that’s what they’ve been highlighting at the Social Security Administration, not suggesting the Social Security, you know, the SSA are fraudulent in them. Cells, but they’re being taken for a ride at times, I think, is what Doge was suggesting, right? It might

Gene Tunny  55:08

have to come back to Doge and have do a bit of a deep dive on some of these, yeah, some of these issues. Just, just so, yeah, I better do, sounds like, I better have a closer look at some, you know, some of what it’s found, and just try and figure out what’s going on. All right, just before we go, Darren, I gotta ask you about the Wisconsin special election. So the Democrats won is the US falling out of love with Maga

Darren Brady Nelson  55:32

no Wisconsin’s kind of Wisconsin’s always weird, but it’s a purple state. It does these weird little swings. It’s not a referendum on Trump. I mean, two things, it’s certainly, I guess it’s a silly referendum on some of Trump’s supporters of Wisconsin who couldn’t be bothered to get out to vote. And I think it’s also a referendum. The weird thing, because I was involved, you know, I did the Trump sort of campaigning stuff last year, and it was all hands on deck by, you know, all sorts of organizations. It wasn’t all hands on deck this time for the Supreme Court, even though it’s very important, because it has national consequences. Basically, the Republicans could maybe lose two seats in the house because of this? Right? Yeah, right. Two seats in the house, in the House of Representatives, not talking about the state legislature. Talk about the in Washington, DC, right? So, and some other stuff too. There’s other things, important things that you know, the Wisconsin Supreme Court will decide on that that have, obviously, state significance, but they also will have, you know, some federal significance too,

Gene Tunny  56:42

because of the boundaries. Is it the electoral Yeah,

Darren Brady Nelson  56:45

you know, gerrymandering? Yeah, both parties do it, but you know, that’s Australia did the same thing. It’s not like no one’s clean on the gerrymandering thing, but so, yeah, gerrymandering, essentially,

Gene Tunny  56:59

we turned it into an art here in in Queensland, I think we were the best at it for a while. Some of those large, all of those regional like we had these huge electorates in the cities, but the these electorates in the in the regions with far fewer people, and so, yeah, there are many more regional members that are the city. It’s

Darren Brady Nelson  57:19

exactly the same thing Wisconsin. That’s the Democrats complain that that that’s the case. The Republicans are, you know, making it a bit too suburban or rural and not urban enough. And, you know, so, yeah, so, yeah. So, so, basically, so, two things, you know, the trump the mega supporters, they didn’t take the election seriously enough. They didn’t come out. And also the various groups, even the one I was involved with, we didn’t get started till the end of February. This is something that should have jumped in by the bare minimum, the beginning of January, probably really mid November, you know, like once Trump won, get stuck into it, because this was such an important election, I’m not gonna, you know, I won’t blame the Schimmel campaign, because, you know, they only have, you know, they certainly attracted a decent amount of money, you know. And obviously more money was poured into Schimmel and Crawford. These were the two opponents, Brad Schimmel and Susan Crawford. So Brad Schimmel was the Republican, Susan Crawford was the Democrat, with the weird caveat of, they don’t actually officially run as Republican and Democrat. You know, kind of how they do at, you know, like City Council like Brisbane, yeah, and in the US, they had the same convention that council level, they don’t officially run as Democrat or Republican. But you kind of figure them out fairly quickly. Although you do get at council level here, you do get some people literally aren’t either party, you know. They’re just people who’ve been in the community, like I mentioned, wabatosa. There was this guy I kept on seeing his sign up, and he was the only person I saw his sign up next to Schimmel and next to Crawford. At times it’s like, Who is this person? Like both sides, like him, you know. So he’s got to win. He was just kind of a local guy sort of thing, you know. So, so anyway, so it was combination of, yeah, they didn’t get out the vote early enough. They didn’t make, you know, an effort. They poured a lot of money into stupid TV ads. I think that everybody on both sides complained. Were just awful. You know, from both sides, everybody, like that was the feedback I was getting. It’s like, no one liked anybody’s TV commercials. They just weren’t very good. So, anyways, yeah, but, but what did get up is the voter ID constitutional referendum, the Wisconsin State Constitution. So that will be in the Wisconsin State Constitution that you will have to have voter ID. Now it’s also in the context of there already are voter ID laws here, right? Yeah, you can change laws, right? So, and the Democrats were looking to change those laws to not have voter ID. Basically, um. Which, you know, does seem weird, because, you know, even labor, I don’t think has ever suggested that you shouldn’t have voter ID, have the greens. I wonder if the Greens have ever suggested that.

Gene Tunny  1:00:10

I’m unsure. I honestly don’t know. I mean, the greens are more I mean, they’re, yeah, they’re focused on the big issues for them are obviously the environment, but also housing affordability. I mean, housing affordability is pretty dire here in Australia at the moment. And I mean, the Greens have a lot of policies on that. I don’t think they’re the right policies, but at least they’re, you know, they’re concerned about it, and they’re and they’re, you know, they’re making a lot of noise about it. So, yeah, I mean, we’re having an election that’s coming up on third of, think it’s the Third of May. It’s early May. So, yeah, I don’t know if you’re keeping an eye on that, Darren, if you have any thoughts on what we’re in for over here.

Darren Brady Nelson  1:00:50

Yeah, look, I don’t have strong thoughts on it. I have, you know, kind of fairly shallow thought because it, you know, it’s like, I mean, obviously, even in the internet age, obviously, I have access to all the same information as you do sitting in Australia as you do with the US. But it’s funny, when you’re not sitting in the country, you just, there’s kind of you just don’t soak the stuff as much. So, you know, look, I obviously listen to, you know what? You know friends like you or or mutual friend, Alex Robson has to say about, you know, what he thinks about the election and others. So I understand it’s, well, I don’t know. It’s kind of going back and forth, is it not? My feeling is Dutton will win, or, you know, Dutton, it’s not like Dutton literally wins, obviously, but the Dutton government will win. But, you know, maybe scraping it in, I guess it will be a landslide mandate sort of thing. Anyway, it’s

Gene Tunny  1:01:43

actually swung back to the government, to the Labor government, being returned, at least as a, probably as a minority government with support of TEALS, those, you know, those independents.

Darren Brady Nelson  1:01:57

I think dun will still win. That’s all I’m saying. Yeah. Okay, interesting. I think you’ll still win, because the poll, the polls, they’re always a little bit biased against conservatives. Right now, that’s on steroids in the US, right particularly when Trump’s on the ballot. You know, the polls are just like they were wrong. They were dead wrong. They were, they weren’t even close in the US right now, I’m not saying they’re like that in Australia there, but they are skewed and biased a little bit away from conservatives in Australia as they are, I believe, in UK, Canada. So I think you need to factor that in a bit. It was scomo. I mean, like scomo the other he’s got, you know, really not much of a chance. You know, now,

Gene Tunny  1:02:42

was seen as a bit of a disappointment in the end, I think so. Oh no, no,

Darren Brady Nelson  1:02:47

I agree. I mean, I’m not depending scomo How he performed, what he actually won, yeah, but he was, he was not, he was not, you know, favored in the polls very often, right in the lead up to that election.

Gene Tunny  1:02:59

Oh, not to for 2019 That’s right. He, that was a, that was a real surprise. He, he had a good campaign in 2019 but in 2022 I think

Darren Brady Nelson  1:03:08

everyone, well, I’m talking 2019 sorry, yeah, early 2019 Yeah, yeah, just Yeah. I mean, the mainstream media is left leaning. It just is, you know. And their biases, you know, come through, you know Murdoch? Yeah, Murdoch’s in the middle. He’s not right wing, he’s not left wing. He’s murdered Rupert Murdoch, that is, I’m not. His kids are left wing, lock Lachlan and all the rest. But, you know, give Rupert credit, you know, he’s a, you know, he talked about, you know, he said, Oh, Wall Street, you know, these people just want to make a profit. But that’s Rupert Murdoch, to be honest, you know, like he’s backed left and right over the years. I don’t see him as an ideologue. He owns more left wing publications than he does right wing ones, you know. And it was Roger Ailes, you know that, you know, kind of was the brainchild behind Fox News. Murdoch just saw an opportunity. Like, wait a second. I mean, he’s not blind. Freddie, you can see all the mainstream media was all left, left wing, right in the US at the time, and the new cable. Well, CNN wasn’t all that left wing back then. To be honest, they were. They kind of did actually have a decent mix back in the day CNN, but he certainly saw a market for a rate leaning cable TV, Fox News, you know. So I’m not

Gene Tunny  1:04:27

sure what left wing publications you think Murdoch owns, unless you’re claiming the Times and the Wall Street Journal are left wing. Oh,

Darren Brady Nelson  1:04:36

he owns lots of stuff around the world. He still own a lot of stuff that lean left. You know, I’m not sure if he, if he’s divested of some of that stuff over the years, the times, sorry, what did in London? Yeah, he owns the times. That’s, that’s that leans left. Yeah, definitely. And the Wall Street Journal is, at best, a neocon sort of Reg, um. Of it’s basically a combination of neocons and Neo Neo liberals. So whether you call that left or not, I don’t know, but it’s certainly there hardly free marketeers at the Wall Street Journal.

Gene Tunny  1:05:13

Certainly everything’s nothing’s like it once was Darren. I mean, it’s we live in, live in interesting times, don’t we? Right? I think we’ve, we’ve had a we’ve had a good chat of, I think it’s, it’s good to catch up with you on tariffs, and what’s been happening with with Doge, and your experience in Wisconsin, your your story about the turkey, I’ll have to look out for them. I mean, we have those little bush turkeys in here, scrub turkeys in Brisbane, you’d be aware of, but you wouldn’t get cornered by one of them for 10 minutes.

Darren Brady Nelson  1:05:49

I’ve seen, you know, my, my, my niece’s cat chases those things around. So no, you know. Do you have any, you have any views on the the Canadian election?

Gene Tunny  1:06:00

No, I think it’s extraordinary. Mark Carney was it was parachuted in. I did, didn’t see that coming. I don’t follow Canada closely enough. I know that he could get a benefit from the spat with the dispute with the US. I mean, that could actually help him out, couldn’t it? I mean, that could help the liberals in in Canada, yeah, yeah.

Darren Brady Nelson  1:06:22

Actually, the person who saw that, apparently, and probably not the only one, but, you know, some years back, was a Tucker Carlson, how’s that, right? Yeah, yeah. He saw that, yeah. He saw that, that he’d probably be parachuted in for Trudeau at some stage. Yeah. But interesting enough, it seems that the, you know, the opposition leader there is, he’s, he’s doing an uncomfortable game of, you know, trying to be, I’ve seen the conservative alternative a little bit Trump, like on certain issues, but on tariffs, not like Trump, you know. So it’s, it’s not going to be an easy balance for him to do, I imagine. Yeah, well,

Gene Tunny  1:07:00

lots of fascinating, fascinating things to always talk about with you, Darren. I really enjoyed the conversation. Anything you want to say before we wrap up, you can have the final word.

Darren Brady Nelson  1:07:11

Okay, well, look, you know, I predicted shimmel And I didn’t get that right, you know, hopefully I’ll be better on Dutton and the Canadian election. Because, you know, yeah, I hope, I hope those two governments win, but we’ll see what happens.

Gene Tunny  1:07:26

Well, I hope you’re right about the art of the deal, that’s all. I just hope this is part of his negotiated strategy.

Darren Brady Nelson  1:07:32

Well, yeah, I am too. I’m no supportive, like you have tariffs for tariffs sake. No,

Gene Tunny  1:07:38

yeah. Okay. Very good. Darren Brady Nelson, thanks for joining me. I really enjoyed the conversation. Thank you.

Credits

Thanks to the show’s sponsor, Gene’s consultancy business, www.adepteconomics.com.au. Full transcripts are available a few days after the episode is first published at www.economicsexplored.com. Economics Explored is available via Apple Podcasts and other podcasting platforms.

Categories
Economic update

Oz Federal Budget, Brisbane Olympics, & Trump’s Tariffs Chat w/ Damian Coory & Dan Petrie

Is there a brilliant ‘Art of the Deal’ strategy behind Trump’s tariff policy? It has been a big failure for the US so far, as attested to by the 7% fall in the US share market since inauguration day (see the chart below) and a 12% fall in consumer confidence from January to March, according to the Conference Board. The US has inflicted more harm on itself than its trading partners.

Theoretically, there is the possibility a large country like the US, as opposed to a small country like Australia, can impose an ‘optimal tariff’, as Nicholas Gruen and I explain in an article published in CrikeyWhy Trump’s tariffs are better than you think — and much worse. We note:

“When large countries trade, they move prices. That means foreigners do effectively pay some of their tariffs.”

A member of Keynes’ Cambridge Circus,  Richard Kahn, wrote the best and most lucid paper on the so-called optimal tariff, Tariffs and the Terms of Trade, published in 1947. Based on Kahn’s optimal tariff formula and plausible values for the parameters, an optimal tariff for the US could be around 20%. However, this calculation is based on a theoretical model without retaliatory tariffs or macroeconomic implications. The benefits of the terms of trade improvement can be quickly outweighed by the costs of retaliation and a global trade war, as well as the fact that tariffs increase the tax burden on American consumers and businesses and will have adverse macroeconomic impacts. Nicholas and I aren’t defending the Trump tariffs. Indeed, we’re supporters of free trade, as you would expect economists to be, but we are pointing out that the terms of trade impact must be considered when assessing the tariffs. Based on the fall in the S&P 500, American investors have judged that the adverse macroeconomic effects of tariffs will outweigh any possible terms-of-trade benefits. 

Earlier this week, I spoke about Trump’s tariffs, the federal budget, and the Olympics with fellow Queenslanders Damian Coory and Dan Petrie on Damian’s The Other Side Unplugged show. You can watch the interview here:

I’ve included the time stamps below so you can jump to my remarks on the latest federal budget, the Olympics, and Trump’s tariffs, if you’re interested:

  • Federal Budget Overview and Critique (0:00)
  • Jim Chalmers’ Values-Based Capitalism (5:38)
  • Structural Deficits and Bracket Creep (10:56)
  • Government Spending and Debt Concerns (13:55)
  • Olympic Games Plan for Brisbane (30:52)
  • Trump’s Tariffs and Their Economic Impact (41:15)
  • Alternatives to Promote Economic Growth (54:39)
  • Final Thoughts and Future Directions (55:57)

This post has been cross-posted at Queensland Economy Watch. Please comment below or email Economics Explored host Gene Tunny at contact@economicsexplored.com.

Categories
Podcast episode

How Global Events are Affecting Coffee Prices w/ Raihaan Esat, International Coffee Traders – EP267

Coffee prices have surged dramatically over the past year, with green coffee increasing by 78%. In this episode, International Coffee Traders GM Raihaan Esat joins hosts Gene Tunny and Tim Hughes to explore the key drivers behind this spike, including harvest shortages, supply chain disruptions, and geopolitical factors. Discover why your morning brew may soon cost more and how the coffee industry is navigating these challenges.

If you have any questions, comments, or suggestions for Gene, please email him at contact@economicsexplored.com.

You can listen to the episode via the embedded player below or via podcasting apps including Apple Podcast and Spotify.

About our guest: Raihaan Esat, General Manager, International Coffee Traders

Raihaan Esat is a passionate and seasoned coffee professional with extensive experience across the coffee industry. From working in bustling espresso bars and competing at the highest levels of barista competitions to managing roasteries and developing quality control systems, Raihaan has cultivated a deep understanding of every facet of coffee craftsmanship.

As General Manager of International Coffee Traders (ICT), a green coffee sales business, Raihaan connects both commercial and home roasters with premium green beans and equipment, sharing his love for exceptional coffee. Inspired by mentors like Phillip Di Bella and a history of innovation, Raihaan is also spearheading coffee events at The Coffee Commune, fostering a thriving community of coffee enthusiasts. Dedicated to excellence and driven by a lifelong passion, Raihaan continues to inspire others through mentorship, entrepreneurship, and a relentless pursuit of the perfect cup.

Source: https://www.roastmagazine.com/roastsummit/events/raihann-esat 

Timestamps for EP267

  • Coffee Market Overview and Initial Discussion (0:00)
  • Factors Contributing to Coffee Price Increases (7:36)
  • Quality Concerns and Market Dynamics (19:41)
  • Consumer Behavior and Market Volatility (26:44)
  • Impact on Coffee Shops and Consumers (47:07)
  • Geopolitical and Weather Impact on Coffee Prices (54:20)

Takeaways

  1. Green Coffee Prices Surge: Over the past 12 months, green coffee prices have increased by 78%, impacting every part of the supply chain.
  2. Major Producers Facing Challenges: Brazil and Vietnam, responsible for a large share of global coffee production, are experiencing lower yields due to weather conditions and harvest quality issues.
  3. Geopolitical Factors: Disruptions in trade routes, such as those caused by Middle East conflicts, have further strained the coffee supply chain, driving up costs.
  4. Changing Consumer Expectations: As prices rise, consumers may need to reconsider what they expect for a $5 cup of coffee and the value they receive in return.
  5. Sustainability of Cafes: For cafes to survive, they need to adjust their pricing to reflect increasing costs in labor, rent, and coffee supplies.

Links relevant to the conversation

Our previous conversation with Raihaan, “The Future of Coffee: Climate Change & Rising Prices w/ Raihaan Esat, International Coffee Traders  – EP217”:

https://economicsexplored.com/2023/12/06/the-future-of-coffee-climate-change-rising-prices-w-raihaan-esat-international-coffee-traders-ep217/

Raihaan’s slide explaining factors driving up coffee prices:

https://drive.google.com/file/d/1JAhmCl_TmfSoWRkh9wF9fDFU395mPnyL/view?usp=sharing

Chart of the green coffee price:

https://drive.google.com/file/d/1qnX28VagJ3FtD40JntMujADsNKI-NhBs/view?usp=sharing

International Coffee Traders at the Coffee Commune:

https://www.coffeecommune.com.au/international-coffee-traders

ABC News article “Coffee prices hit record high after bad weather”:

https://www.abc.net.au/news/2024-12-11/coffee-prices-hit-record-high-after-bad-weather/104711708

Greensquare coffee roaster app:

https://www.greensquare.co

Lumo Coffee promotion

10% of Lumo Coffee’s Seriously Healthy Organic Coffee.

Website: https://www.lumocoffee.com/10EXPLORED 

Promo code: 10EXPLORED 

Transcript: Is DeFi the Future of Finance? Exploring VirtuSwap’s Vision w/ Prof. Evgeny Lyandres – EP262

N.B. This is a lightly edited version of a transcript originally created using the AI application otter.ai. It may not be 100 percent accurate, but should be pretty close. If you’d like to quote from it, please check the quoted segment in the recording.

Gene Tunny  00:05

Welcome to the economics explored podcast, a frank and fearless exploration of important economic issues. I’m your host, Gene, Tunny, I’m a professional economist and former Australian Treasury official. The aim of this show is to help you better understand the big economic issues affecting all our lives. We do this by considering the theory evidence and by hearing a wide range of views. I’m delighted that you can join me for this episode. Please check out the show notes for relevant information. Now on to the show. Hello and welcome to the program. It’s the 20th of December, 2024 we’re rapidly approaching Christmas, and I’m here today at the coffee commune with my occasional co host, Tim. Hughes, Tim, good to have you on the show again. Good to be here. Thanks. Gene, yes, and we’re catching up with Ray at from international coffee traders at the coffee commune. So, Ray, good to have you back on the show. So good to be back. Excellent. Ray, so there’s been a bit of news regarding the coffee market. We’ve seen stories about how coffee prices have spiked. Can you tell us a bit about what’s happening in the market? Please?

Raihaan Esat  01:17

Yeah. I think in the last episode we recorded, I made some predictions, and I said, Oh, you know, the coffee market could go one or two ways. Things could get very, very, very expensive, or things could level out and flatten out and become more stable. Turns out, things got very, very, very, very expensive. Yeah. So, you know, there’s a huge amount of reasons, and I hope, hope we can tackle some of those things today in the podcast on why the coffee market has become so expensive, especially around green coffee, which is the input source for so many roasters who roast the green coffee, produce it into drink, produce it into roasted coffee, send it to cafes, who then produce it into drinks. But it starts as at the raw material, at the source. Okay,

Gene Tunny  01:59

so in terms of very expensive what are we talking about in price terms? Okay.

Raihaan Esat  02:04

So in a nutshell, coffee is traded on an exchange in us, dollars per pound, and roasters need to buy coffee based on the market rate at the time. Yeah. So historically, the market used to change no more than a couple of cents a week, you wouldn’t see that much volatility. Coffee prices were relatively stable. Then after COVID, things got a bit more volatile. But in the last 12 months, coffee has increased something like 78% we’re talking about green coffee here. The input that goes into roasters, 78% price increase in the market. That’s massive over 12 months. And that’s not something that a business can just absorb. It has to get passed on down the chain, down the supply chain, and eventually into cafes. So eventually you’ll see cups of coffee prices increasing quite substantially. And everyone’s kind of worried about it. You know, there’s a lot of talk in the media about we’re not willing to pay more than $5 for a cup of coffee, that sort of thing. That’s a value discussion that we can get into a bit later. But, you know, it’s unsustainable for businesses to continue charging what they’ve been charging up until now. Things have to move down the chain. You know, because the supply chain costs. The value increases through every step it’s it gets passed on. And it’s not just green coffee that’s gone up. Gas and electricity has gone up. Everyone’s feeling it, on water, on wages, on every single other input cost that goes into manufacturing coffee. It’s not just green coffee,

Gene Tunny  03:40

yeah, just on that, on the $5 coffees. I mean, I guess I’m paying that already at quite a few places, but yeah, I guess there is that sensitivity to the price of it. Maybe there are some places out I’m wondering what we won’t name any particular cafes, but I’m just just thinking, because a lot of Yeah, the coffee prices have started to rise already, haven’t they? I mean, we’re Yeah, I think

Raihaan Esat  04:03

so. I think we need to start asking a different kind of question here. Rather than asking, uh, you know, is $5 too much for a cup of coffee, we need to ask, if you’re gonna pay above $5 for a cup of coffee, what do you expect to get for it? Yeah, right, if you’re gonna pay six or $7 for a cup of coffee. What do you expect to get for it? Yeah, in return, what’s going to make it a valuable transaction to you? I’m sure we can find some sort of trade where you’re willing to sec to pay $7 for a cup of coffee, but what? What are you willing to going to receive in return? Yeah, are you going to receive incredible service. Are you going to have a barista that remembers your name and says hello to you joyfully the next time that he sees you? Are you going to have a very, very, very delicious cup of coffee? Are you going to have something that’s a little bit more premium in feeling? Is the paper cup going to be the cheapest paper cup on the planet, or is. Going to be something a little bit more substantial, something that feels nice to drink out of, is the environment that you step into, welcoming and friendly. I think all of these things contribute to how good a cup of coffee tastes and what it’s worth. So that’s

Tim Hughes  05:15

very much the experience, rather than just the coffee and the price of a coffee bean, it’s

Raihaan Esat  05:19

high value as well. How do you put a price on, you know, the atmosphere in the cafe, but it’s something that contributes to your perception of value. Yeah,

Tim Hughes  05:29

that’s a it’s a good point, because not every, I think we’ve all experienced that. When we go into a place where you don’t get that, and you don’t get a great coffee, and you don’t get any kind of experience, and then you go to somewhere, like we went to this morning, yeah, and the coffee we had, we remarked on it. It was so good here at the coffee commune, I’m gonna say it, you know, like, and it was a special blend that was put together for Christmas. It had shortbread in it. We tasted it. I could taste whiskey in it, yeah, which there wasn’t, but I could taste it. So it was that thing. It was an experience. It was beyond a coffee.

Gene Tunny  06:05

That was the taste of shortbread. It didn’t actually, literally have shortbread in it. Did it? No, no,

06:10

no. But that’s the thing. Like it was all

Raihaan Esat  06:12

done through the experience, right? That’s exactly right, yeah, yeah. And I’m not going to argue that cheap coffee shouldn’t exist. I think Cheap Coffee definitely has a place. It’s just the the the arbitrage, the the gulf between cheap coffee and expensive coffee will get wider and wider. And I think anything in the middle is probably gonna gonna need to rearrange themselves or reevaluate their business and figure out, do they want to be budget coffee or do they want to be experienced coffee? Yeah.

Gene Tunny  06:39

Yeah, exactly. Okay, Ray, we might get on to I want to ask you about the drivers of the price increase, but before we get there, Tim, do you have any follow on questions for Ray after that? No,

Tim Hughes  06:54

it’s funny, because I think we get hung up on price all the time. Yeah, but it’s absolutely, I absolutely I absolutely agree that the experience of whatever it is you’re having, and you see it in cinemas as well, like I think of cinemas often with these comparisons, the experience at a cinema is very different from one place to another. Yeah, the film’s the same, but the experience is different. And so, yeah, you can put that over to many different industries, but especially when it comes to coffee, going beyond just the price, how else can it be better and a different or better experience?

Raihaan Esat  07:26

Okay, so we’re going to get stuck into some green coffee talk, right? I

Gene Tunny  07:29

think so. So you, you did a presentation recently which itemized or identified, I think it’s nine different drivers of the price increase. Can you tell us a bit about what was that presentation? And then if we could, if you could tell us what you think the the drivers are, and I guess you know what the most significant ones are in your view. I know it can be hard to

Raihaan Esat  07:53

Okay, yeah, but So in a nutshell, the last 12 months have been a roller coaster for everyone in the industry. And my role has not just been to source coffee, but also to help educate roasters and understand what’s going on in the market so that they can make informed and educated decisions for their business in the future. So some of the drivers, some of the fundamental things that are affecting Green Coffee pricing, and I’ll just run through them really quickly, and then we can go deeper into them and talk about them one by one. But first of all, like I said, 78% cost increase on raw materials, green coffee, the base price, has gone up by that much, 78% and some of the factors that contribute to that, the two main producers, this is number one, the two main producers, Brazil and Vietnam, they produce close to 60% of the world’s coffee production. It’s massive how much they contribute to the world’s coffee they’re looking ahead to the 2025, harvest season, and they’ve said our harvest is not going to be that great. So there’s some speculation about the quantity of coffee that’s going to be available in 2025 second, you’ve got two main types of coffee. You got Arabica and you’ve got Robusta. Now, generally, there’s been an arbitrage between the two. Robusta is usually the cheaper option. Arabica is the more expensive option. But when you’ve gotten got a when you’ve got a shortage on the cheaper option, what happens? All the supply shifts back to the more expensive option, the Arabica, and vice versa. So you’ve had a couple of shifts towards Robusta and back towards Arabica through the year, which has created a lot of volatility, right?

Gene Tunny  09:38

Can I just ask you about that, in terms of that substitution, what’s the degree to which that can occur? I mean, is it within a certain Is it is it bounded? Or is it just or could it be 100% could you just shift completely, 100% from one to the other, the

Raihaan Esat  09:56

way I look at it? Okay, so everything is an ingredient, like a chef. Would a chef would choose the mushrooms for his pasta, right? Okay, yeah, I can’t get field mushrooms today, but tomorrow I can get Swiss mushrooms. Okay, right? There is a degree of substitution that you can do, yeah, but there is an impact. A Swiss mushroom doesn’t taste like a mushroom. Yes, it’s a little bit different. So there, there are some of those things to manage in the process, but there’s no reason why you couldn’t, from a purely fundamental point of view, right? Okay, interesting. Other things that have been affecting the Green Market, US politics. We’ve got President Donald Trump is has just been elected and is going to take office in the new year. So his promise has been to strengthen the US economy. How does that affect us in Australia and other countries around the world, while a strong US economy strengthens the US dollar, so we’re going to be seeing some effects based on transactions that have to happen. Coffee has to be financed, it has to be transported around the world. So you’re gonna, you’ve got, you’ve got effects from that decision by the US to elect President

Gene Tunny  11:03

Trump, and you’re buying coffee in US dollars, aren’t you? You have to, yeah, you have to. The contracts are written in US dollars, yeah, gotcha

Tim Hughes  11:10

on that note, because I know that he’s made a point about talking about tariffs as being his favorite word, and there’s a small question about how that affects the consumer, as to whether that actually makes it more expensive for somebody in America or not. So I’m putting that to Eugene, I guess yes, you How does is that a thing that the tariffs can ultimately make it more expensive for a US consumer? Yes,

Gene Tunny  11:34

because it’s the tariff is essentially a tax on, well, it’s a tax on imports and so, yeah, it’s passed on to local consumers or businesses. I mean, I think one, one of the problems is it’s going to impact both consumers and businesses, because they’ll face higher input costs. That’s why I think some of the people in the market expect that a lot of us is just tough talk from Trump, and he won’t go through as much as as he’s threatened, because, you know, ultimately, it will be counterproductive if they do this like, I think the markets are hoping that this is some type of negotiating tactic with China to get them to make some concessions, but who knows? Yeah, but it’ll definitely cost consumers. Yeah, it seems

Tim Hughes  12:17

to be a little bit more complicated than it would initially appear, where tariffs, you would imagine, is going to be to the expense of whoever is exporting to the US. But it’s not necessarily the case. Well, the

Gene Tunny  12:28

Tariffs applied when the at the when it’s imported, right? So it’s applied at the by the, you know, on the imports into the US, yeah,

Raihaan Esat  12:37

the producer doesn’t wear the cost of that. It’s the importer that weighs the cost of that and has to pass it on to to the to the next level,

Gene Tunny  12:44

yeah, I mean the so the producers in China could be it affected to the extent there’s an impact on the demand for their product, right? So, and maybe they have to discount to some extent to to compensate for the the tariff in the other country. Like there could be some impact, but the major impacts going to be on the consumers in in that country? Yeah, so that’s why, I don’t know how many dozens of economists, like prominent economists, came out critical of of Trump’s tariff plan, and the only argument you can make in favor of it is it’s some sort of strategic strategy. It’s a it’s a negotiating position to try and get some concessions from China. So it

Tim Hughes  13:23

would help American companies who for any products that can be produced in America. There’s an advantage given homegrown stuff, but where all those imports clearly, there’s not enough coffee being grown in America. In

Raihaan Esat  13:36

the context of coffee, and you’d expect these tariffs would protect a local industry. There’s not a lot of coffee grown in America. There’s nothing to protect. Everything has to get imported. Are they going to risk? You know, tariffing coffee, which is, which is 98% imported from overseas, yeah.

Gene Tunny  13:53

But if you know, and China’s not exporting coffee the US, is it all so?

Raihaan Esat  13:58

Well, China is an emerging origin. At the moment, they are producing a heck of a lot of coffee. The government is investing massive amounts into improving the networks, the processing facilities, everything around coffee production, to increase the amount of coffee that China produces in green form. So that could be a target for Donald Trump, if he specifically wants to target China, but that just means it’s got more coffee available for us, right?

Tim Hughes  14:25

Because China’s coffee consumption per capita has increased somewhat, yeah,

Raihaan Esat  14:30

massively, massively. Actually, this is another, another major factor that’s happened this year is the China’s very, very strongly growing in coffee consumption. They’re traditionally a tea drinking company. Country. However, we see brands like luck and coffee and Starbucks expanding very aggressively. And in fact, there’s been a deal done between luck and coffee and the Brazilian producers to to purchase. $1.4 billion worth of coffee from Brazil in the next harvest. So they’ve already contracted a huge quantity of coffee that hasn’t even been produced yet. Yeah, that’s what they’re expecting to need. That’s what they’re expecting to use. Now, the way that that affects us is, you know, we can’t access that coffee. That’s coffee going to China. That’s coffee off the market now. So there’s technically a shortage of Brazilian coffee for the rest of the world. Gotcha,

Gene Tunny  15:32

this is probably something that you probably don’t, you probably can’t answer. But you know, like, How significant is that as a share of the total market? I mean, 1.4 billion sounds like a lot of money, but a billion dollars doesn’t go as far as it once did. You know what I mean. So that’s a big global market, so look,

Raihaan Esat  15:51

it’s significant enough that everyone is worried. Okay, you know it’s enough to cause a stir in the market, because there’s a significant quantity of coffee behind that. And it’s an indication, more than anything else, that this is the direction that China is going in. They are willing to pre contract huge amounts of coffee well in advance and take it off the market. So, you know, if that’s their move this year, what’s the move in? 2026 going to be 2027 2028 right? So, so there’s a bit of forward thinking going on here that, geez, China’s Making Moves. You know, we should be thinking that far ahead as well. Should we be contracting that far ahead? Maybe we should,

Gene Tunny  16:30

yeah, well, I mean, so there’s a scramble, yeah, by you, you mean maybe we should, you talk, you’re talking about international coffee traders here, yeah, yeah, gotcha, yeah.

Raihaan Esat  16:38

But I’m not the only one thinking like that. There’s, there’s many traders and importers also starting to think like that and going. It’s creating a bit of a scramble to go, oh, well, okay, that coffee’s off the market. I better secure mine now. So we have this inflated demand for Brazilian coffee that’s been caused by this China deal,

Gene Tunny  16:58

right? Okay, very interesting. How

Tim Hughes  17:01

far ahead do people normally do those kind of deals? Like, is it like a six to 12 month sort of, you know, foresight, or is that now being extended to to longer periods with what’s happening with China? Yeah,

Raihaan Esat  17:13

generally, generally, you can, you can contract out, you know, something for next season. Producers generally don’t offer anything past that. So if the next harvest is coming up, for example, in February March, they’ll they’ll say, okay, you know, we’re expecting to produce this amount of coffee in February or March next year. We can start taking contracts against that now, you know, pair that up with what I just said previously, where Brazil and Vietnam both both forecast a lower production than expected. That creates a situation where there’s an increased demand and an expected shortage in supply. And so the price effects are crazy, because everything is so sensitive, because everyone is speculating. There’s people wondering, are we going to get our coffee? Are we not secure it now, even if it’s a high price, there’s other people sitting on their hands going, price will come back down. This is short term wait. And then they can’t wait any longer, and then they buy at a high, even higher price, yeah. So there’s this huge speculative effect that’s also feeding the volatility in the market, right? It’s, it’s really, I mean, if I was, if I had a box of popcorn and I could just sit back and watch it, it’d be very entertaining, but I’m in the middle of it, and it’s, uh, can get kind of stressful sometimes. Yeah,

Gene Tunny  18:38

it’s fascinating market dynamics. I mean, one thing I learned when we said, sat down earlier for a coffee, you’ve got a platform. Maybe we talked about it last time we caught up, but you’ve got a there’s an online platform where you do these trades, where you got all the data on the market. And what’s that platform called? Again,

Raihaan Esat  18:54

there’s a few different ones I use. You can look at just the basic C market. You can look at that on almost any trading platform that that that gives you data on any commodities like gold, silver, zinc, wheat, cotton, they’ll usually list coffee as well, yeah. But I have a platform that we look at called green square. It’s it gives us up to date data, all that every day. But there’s some other functionality that’s useful for us as well.

Gene Tunny  19:26

Good. One, okay, so we’ve have we covered one or two factors so far. What we covered, the demand, the shock to was it one, Brazil and three. I think we’ve got three. Rough three. Okay, okay, yeah. What else is

Raihaan Esat  19:41

there to mention here? There’s quality concerns over the next, next harvest in a number of countries, all because of these high prices. So I was just in China recently looking at some coffee farms there and connecting with some new producers. And one of the, one of the guys I spoke to, he said, You know, there’s, there’s some high pricing. Right now, farmers are very excited by it. They are getting paid higher prices for their coffee, but the result is they’re not sure if the high prices are going to last, so they’re just picking everything. They are harvesting coffees that should not be harvested yet. They’re not ripe, or they’re taking coffee that’s overripe and that’s outside of the acceptable quality, because they can get money for it. Yeah. So the quality is a little bit all over the place. Having said that, the way that they’re picking as well is that they’re just stripping coffee off the trees. In some cases, that affects the tree for next season, that tree will not produce the same amount of coffee next year, if it’s harvested incorrectly, if it’s basically just, you know, stripped of all of its coffee,

Gene Tunny  20:47

right? What’s the correct way to harvest? Well,

Raihaan Esat  20:50

I spoke to a farmer about this, and, you know, he said, When the coffee is ripe, if you’ve ever seen a coffee cherry before, it’s a red cherry. It’s beautiful. It looks delicious. You’ve got to grab it, you’ve got to pinch it, and you’ve got to twist it, and that breaks it clean, and that doesn’t do any damage to the branch on which it’s growing. If you damage the branch, like if you pull it and you strip some of the bark away, that area will not produce coffee again.

Gene Tunny  21:19

Yeah, that makes sense. So you know, it’s

Raihaan Esat  21:21

not just an impact now, but there’s an impact down the line of how you harvest that ensures whether you’ll get a good harvest next year or not. Yeah. So the short term thinking is, look, I can get a high price for my coffee now, get everything off the tree as quickly as possible. But the long term effect is, next year you’re not going to get as much coffee. Yeah, okay, that all makes sense, yeah. So you’re affecting next year’s supply, and I think there is some understanding in the market right now that next year’s harvest is not going to be quite as good. There are going to be some effects because of that, and people are willing to pay a higher price now to ensure that they get coffee, and to some degree, even stockpile coffee to see them through some part of next year, right?

Gene Tunny  22:04

So, yeah, everyone’s concerned. And I mean, how are we? How’s ICT? I mean, you guys, fine, you’ve got to talk about it. If it’s okay. If it’s

Raihaan Esat  22:12

No, I can’t. I can’t personally confident. There’s some things I can’t say, but some things I could definitely can say. ICT works on both sides. We work with producers and we work with roasters. Yeah. So, you know, traditionally, a trader will bring coffee into Australia, have it in their warehouse and say to a roaster, right, here’s 20 different coffees that I have available, right? Choose what you want, and this is the price. Yeah, that’s the traditional coffee trading model. ICT is a little bit different. We we go to our clients and we go, what do you want? We’re gonna go find it for you. Give us your price parameters. Give us you give us your idea for what you want, for flavor, what you want for quality, and let’s see if I can find that for you. If I can’t find that, let me, let let us take our knowledge of coffee, our understanding of roasting, our understanding of production and operations, and give you some good alternatives. Yeah, so even though you’re asking us for organic certified Peruvian coffee, you know that that has a high triple A antioxidant, high antioxidant content. Thank you very If I can’t, you know, if I can’t find that for you, I’m going to bring you three alternatives. One might be from Ecuador, one might be from Uganda, one might be from Siberia. I have no idea what I’m going to find, but unless I go looking, I don’t know what I’m going to come up with. Yeah. So we’re okay, from that perspective, because the coffee is pre sold already that we’re selling in the market. You know, we agree on a price, we agree on terms and conditions and everything before we sell the coffee, before we even bring the coffee into Australia. Yeah. So everything is kind of pre, pre agreed. Of course, all the volatility in the market makes those discussions a lot more difficult, but that’s why we do things like this? We put out a lot of media. We have discussions one on one with our clients to say, Hey, this is the situation on the ground. So you can make informed decisions for your business. Here are our recommendations. But we’re not the only people with knowledge out there. Go and do some research, find out, get other quotes from other traders, and you know, see what’s the best option for your business. But

Gene Tunny  24:22

so in terms of your clients, teams, one of your your clients, is that correct? Tim, a client of ICT. Yeah.

Tim Hughes  24:27

So I just want to explain. ICT is International Coffee traders, for those who don’t know, and based here in Brisbane. So it was through these guys that I was able to launch my coffee business, Lumo coffee. So, so yes, essentially, and that whole process that Ray just described was what we went through. And because it was such a specific brief, I was able to use the connections that Ray had had built over the years, and no way I could have done that on my own. And the and what they do here with the ray. Interesting as well. So the all of those connections. It’s a very complex business like I guess many businesses are, when you get into the nuts and bolts of it, but it just shows how those relationships that are built, and the dependency on the weather, the global economies, local economies, whether all of these things that we’re talking about now. It’s fascinating to see it play out. What goes on to get a cup of coffee in front of us. Yeah,

Gene Tunny  25:28

have you been impacted by the rising prices this year? Not

Tim Hughes  25:31

yet. So this, and this is one of the things, because this is normally six to 12 months out, so it’s a conversation we get to have when

Raihaan Esat  25:38

Tim’s coffee runs out. Yes, he will be impacted, but we’ve got foresight on that. You know, Tim. Tim knew what his price was going to be for the stock that he secured. And you know we’re holding that stock for him. It means that he knows exactly what his price is going to be. And guess what? When it when we’re running at, say, 25% of what’s left, when we know we’re at that level, 25% of stock remaining, we can go, Tim, this is your replacement cost for the same coffee. Gotcha. So you can make some decisions for your business.

Gene Tunny  26:07

Oh, that’s very good. And

Tim Hughes  26:08

that’s also the nature of I knew that at the time, whenever you get a supply of something like this, it’s not necessarily going to be there forever. You go with you have to be flexible. And we spoke about that at the time. You know that there’s, there are comparisons that you can draw with other ones. We’d have to test it because of the nature of what we do with the high antioxidants. So we need to find something that’s as good as, if not better, but that’s, we sort of knew that was likely to happen. So that’s always been part of the plan is to have contingencies and other options open and so, yeah, they’ll get explored if our supply gets impacted in any way,

Raihaan Esat  26:48

right? Yeah, I think we take it for granted that coffee is an organic product. It’s it’s an agricultural product. It’s something that’s grown on a tree. It has to be harvested. It’s not available all year round. It is seasonal, you know, and it’s something that has to be grown, harvested, produced, processed, dried, shipped halfway around the world, roasted, turned into a beverage and then served in a cafe. There is a huge supply chain behind getting a cup of coffee to a consumer at the end of the day. So, you know, the more that we can understand the supply chain and the pressures behind it, the more that we can do better, better business. You know, on both sides, we need the farmers to be sustainable. We need to be sustainable, the roasters need to be sustainable, and then the cafes need to be sustainable as well. You can’t have too much pressure on the supply chain in one spot, otherwise, things start to break. Yeah,

Gene Tunny  27:41

yeah, absolutely. Okay. It’s been a lot of pressure lately, that’s for sure. So Ray, so far, we’ve covered the harvest there. They weren’t what was expected. So that’s been an impact. We’ve we’ve covered quality issues. We’ve covered, uh, yeah. Buyers get it all, you know, the the traders getting ahead of the trying to get ahead of the market. They’re worried that price will be, will be higher later on, so they’re trying to secure supplies now. Or they’re worried about, yeah, they’re worried about the availability later on. What else is there that we, that we should, that you should mention, I

Raihaan Esat  28:14

think, since we’ve been talking about farms and talking about farmers and producing countries, there is an under undercurrent of producers are starting to understand that they can affect the global market. They, in the past, were kind of held to the bodies in their in their governments, or in their local areas, just sort of dictating prices. But producers are starting to understand now that if they withhold stock, they can drive the price up. Withholding supply into the market means that they create an artificial shortage, and the price will naturally increase as a result of that. So we’re starting to see traders all around the world, or sort of like producers all around the world starting to go withhold coffee if they feel like the market can move up, and then they sell coffee at the right times. They’re not just selling everything all at once. So So do

Gene Tunny  29:11

you is this? Is this coordinated? Is it? Are you saying there’s some sort of cartel like behavior in the coffee market? I

Raihaan Esat  29:17

don’t. Wouldn’t go so far to say it’s a cartel like behavior, but something like a communal behavior, there is an understanding, because the coffee producers are moving into a new generation now, okay, traditionally, you know, coffee producers were families that have had farms in their family for, you know, two, three generations, and It was just something they did. But the new generation, of coffee producers, they’ve been educated, they’ve gone to Europe, they’ve traveled the world. They’ve, you know, seen how business gets done, and they’re going back to their home countries and going, we have this coffee farm that’s capable of so much we can produce coffee, and it’s very good coffee. And. Let’s get what it’s what it’s actually worth,

Gene Tunny  30:02

yeah, which is fair enough. And so I mean that. So I’m just trying to understand to what extent, because economists are generally fairly skeptical of of of cartels. Cartels are very difficult to to enforce and to keep everyone, uh, cooperating, because there’s always an incentive to cheat, to go behind the back of the cartel. And, yeah, try and undercut the cartel. And so that’s why, you know, OPEC, historically is sort of waxed and waned in effectiveness. And yeah, so I’m just wondering to what extent there’s an actual genuine collusion or a cartel, because, because otherwise it’s hard to see how that could I mean, it’s an interesting hypothesis. I just have to think more about how that could work in what I

Raihaan Esat  30:45

should just preface this by saying that coffee actually has been too cheap for too long. Okay, and we’re suffering the effects of that now, coffee is probably back where it’s supposed to be. This is, this is a more sustainable price for the entire supply chain where we’re at now, it was just too cheap for too long. If you look at some of the historical data, coffee has had these spikes of volatility through its life. But then from the same mid 90s right up until the mid 2000s coffee price was actually going down, and it was getting cheaper and cheaper and cheaper a green coffee price, and that was because producers didn’t know the value, the actual value, of their coffee. Roasters were demanding cheaper and cheaper coffee. There was a lot of pressure put on the supply chain to deliver cheaper and cheaper products, but that was becoming very unsustainable, especially on the producer side, and now, because of this volatility, now we’re paying what we actually think the coffee is worth, but it’s a shock to the system, because it’s coming, because it’s come all at once, yeah, if it had happened gradually over the last 15 years, you know, this sort of price increase, we wouldn’t even have felt it. Yeah,

Gene Tunny  31:58

yeah. Gotcha. Gotcha. Okay, so what does

Tim Hughes  32:01

this look like by the time it gets to a cafe like so coffee’s sold in cafes underpriced, in your view, right?

Raihaan Esat  32:10

So I think cafes are where it’s going to hurt the pockets of the consumer the most, right? Because that’s where the consumers go, and that’s where they feel the effects of any price increases through the supply chain, cafes traditionally have also behaved like the supply chain, where they’ve just gone. We’ll bear it. We’ll bear it. We’ll bear the cost of labor increase. We’ll bear the rent increase. They’re not passing it. Haven’t passed it on well enough. So you know, if you think back 10 years ago, how much was a coffee? 350, $4 yeah, 10 years ago, yeah. And what is it now? Maybe $5 yeah. So $1 increase over 10 years. That’s nowhere near keeping up with CPI, with inflation, with interest rates, with everything that’s happened over the last 10 years on cost increase. So you know, cafes need to move their prices along with price increases, not just with green coffee from their roasters, but you know, the on all the input costs, actually, the biggest cost to a cafe right now is rent, not rent. Apologies, labor, yeah, especially in Australia. In other countries, probably not so much. But in Australia, most cafes would be running at least 45% labor. Yeah? Well,

Gene Tunny  33:21

yeah, yeah, yeah. Actually,

Tim Hughes  33:24

there was an interesting there was a good article in the ABC recently, Australian Broadcasting Corporation, for those in America,

Raihaan Esat  33:31

yeah, I think that article that you’re referring to actually showed labor at about 35% is on the low side. Yeah,

Tim Hughes  33:38

that’s what Gene said exactly that he thought that was lower, but I was interested to see, and if this sounds about right to you, so they had the coffee at around 11% and milk around the same. In fact, milk was a little bit more. And so we were talking before earlier, about just that. And the with milk, it’s including soy all the alternatives, which, of course, are a lot more expensive than regular milk, but that has a significant contribution towards a coffee price as well. So we were talking in the you know, for instance, if people just had espresso or long black, short blacks, basically anything without additives, that’s fundamentally a cheaper coffee for them to drink and for a cafe to produce. Do you think that might be reflected in how the pricing is changed in the future, with cafes to really reflect that in someone who’s having a grand day with, you know, almond milk,

Raihaan Esat  34:34

if you just drink black coffee, it’s definitely the one with the least amount of inputs into it. There’s still the labor, there’s still the rent, there’s still the cup to wash afterwards. Someone’s got to do all of that. But there’s no milk. There’s no extra syrups or any additives to it to make it more expensive. So if you’re looking purely from an economical way of drinking coffee, yeah, probably, probably black coffee. Is the way to go. But at the same time, am I going to encourage people to to give up their cappuccinos and start drinking black coffee? Probably not, because if you went to a restaurant, would you say, oh, you know, it’s cheaper for you to get the burger patty without the bun and the lettuce.

Tim Hughes  35:18

Yeah, I would do that. I would do that, but not everyone would not for the price just to not eat the bread. Yeah, I’m hearing it. I’m hearing it, yeah.

Raihaan Esat  35:26

So, you know, there’s that discussion to have on consumer preference. And I think with all of these rising prices, consumer behavior is something that’s very interesting to observe. You know, people making decisions on value now and really considering where they spend their money, how they spend their dollars, whether it’s on the production side, whether it’s on the cafe side. You know, we’re going to see some interesting observations. And the thing that I have about, I mean, I studied economics at university. I love economics, and it’s a big part of what I do. And the thing about supply and demand is that it assumes everyone is logical. And when have you ever met a logical human being? So that’s the that’s the only thing that like that that comes into preference, that comes into how consumers behave, how people behave based on emotion rather than logic, because that’s a decision making process. Sometimes emotion matters, and that’s one thing that, you know, it’s hard to measure.

Gene Tunny  36:29

Yeah. I mean, we like to think that markets tend back towards more rational outcomes over time, that there is an incentive to be rational, right? So you’ll go out of business if you’re irrational, or you’ll you’ll suffer if you’re irrational. So there’s a, there is a strong incentive for people to to act rationally and eventually or figure things out. But yeah, the markets can be markets, collectively can be irrational. And I guess that does reflect some irrational behavior. There’s a famous quote, was it? John Maynard Keynes, it was someone who said that the market can remain irrational longer than you can remain solvent, which is just a reminder that, yeah, you can have some outcomes that look a bit a bit irrational. Oh, well,

Raihaan Esat  37:14

I’m going to say that if the market is behaving in an irrational way, yeah, the best decision to make is an irrational decision, because it’s consistent with the market, right? If you’re making rational decisions in an irrational, behaving system, you’re almost fighting against a grain. You’re making a risky decision there, because you’re assuming it’s going to behave logic, yeah, yeah.

Gene Tunny  37:39

I guess there’s a bit of insurance too. So a lot of people are trying to take out insurance against things being worse in the future, the shortage in the future. So they’re scrambling to get get coffee now, yeah, that’s right,

Raihaan Esat  37:50

but the decisions are not based on logical reasons. The decisions are risk aversion,

Gene Tunny  37:55

yeah, yeah, which I guess, you know, maybe that is logical. I mean, if you had perfect foresight, it probably wouldn’t be but I guess we don’t have perfect foresight. So big questions here Ray about about markets and expectations and rationality. That’s

Raihaan Esat  38:11

also sparked a thought in my mind, when you said people are taking insurance by buying more coffee. Now that’s created another pressure on that’s on finance, yeah. So you see, not just not just us, not just small businesses, but even very large traders are starting to have financial difficulties right now, because in a market where the price of coffee has nearly doubled in 12 months, how do you finance that you know when you when you’ve got a Finance Facility of let’s just pick an arbitrary number here. If you’ve got ten million a year to spend on coffee, and the price of coffee doubles, your ten million doesn’t go as far as it used to last year. So how do you fund the coffee that you need when banks, financial institutions, prefer to lend on your balance sheet rather than on your stock holding, yeah, or on your stock requirements, yeah, yeah. There’s some really difficult situations that businesses are facing now when it comes to funding their coffee, because you need to buy your product before you’ve sold it. In most cases, you’ve got to buy it, get it here, into Australia, and then sell it. So you only get your money back after you’ve sold it, and sometimes that can be three to six months later,

Gene Tunny  39:26

right? Okay, so is this something that’s increasing the costs of to the Yeah, the producers. Is

Raihaan Esat  39:33

it? Well, the, it’s not so much the cost to the producer. It’s a cost now on the on the roasters side, roaster Yeah, yeah, the roast the roasters. The Coffee Roasters have to spend more on their coffee because they’ve got to finance it for longer terms. There’s a risk that they may not get it next year. So they’ve got to buy more coffee and hold it for longer Yeah, you’ve got store, extra storage costs now, yeah, to you know which increases the cost of your coffee and. And, you know, the finance rates haven’t been cheap lately. You know, think back to the to the mid 2000s the finance was quite cheap, but then interest rates went up and up and up and up to try to control Fla inflation. And that was, you know, that was monetary policy from the government side. They wanted to control inflation. Interest rates were going up. That’s the tool that they’ve got. But how that affects us? We are importers in Australia. Australia imports, not just coffee, but so many things, all of that has to be under finance that contributes to the increasing costs. So, you know, while it’s not a fundamental supply and demand sort of discussion on finance, it affects the price to the end consumer, because it’s an add on cost. Yeah, it’s important

Gene Tunny  40:47

to consider. It’s something you’re, you’re, you’re obviously dealing with, I think, in terms of the storage. I mean, you guys here, you’ve got those big silos downstairs, haven’t you? Yeah, that you can stick the,

Raihaan Esat  40:58

yeah, we store coffee. We store coffee here, but that we burn through that in no time. That’s only temporary. What we have downstairs in the silos, two ton silos. It’s probably only about a week supply. Okay? We have a warehouse over near the near the port that has a couple of 100 tons waiting, waiting to get pulled in and used. So we are holding enough stock, and we’ve got enough stock on the water to see through the contracts and see through our see through our clients for the next 12 months. Not everyone is in that position.

Gene Tunny  41:30

That’s impressive. I didn’t realize that. I mean, I guess I hadn’t thought about it in any great death, but that the amount of throughput you’re talking about is massive. So is this, I guess, I guess, compared with say, say, NES cafe or something up at Gympie or whatever, you’re smaller, but you’re still significant in terms of, where are you in the tunnel?

Raihaan Esat  41:53

We are international coffee traders. Is a very small coffee trader. In the grand scheme of things, there are many much larger coffee trading businesses in Australia. Okay? Last year, I’ll give you some numbers. Last year, we bought and imported something like containers, 20 tons of coffee, and we did about 30 containers, source, that’s 600 tons of coffee into Australia. That’s tiny in the grand scheme of things. What that makes in terms of, if you did the numbers, it, how many coffees could you make with 600 tons of green coffee, something like 1.9 million cups of coffee? Yeah, okay, okay. But the in Australia, 1.9 million cups of coffee. That’s not even a day, yeah? Days for assumption for the whole of Australia,

Gene Tunny  42:40

yeah, yeah, yeah. That’s right, yeah. I think I’ve seen stats like that somewhere. I’ll have to dig them up and put them in the show notes. I think Arturo, who works in my business, did an article on that. But, yeah, that’s interesting to think about it that way. It’s still impressive, like thinking about that many tons of coffee flowing through coffee commune that’s amazing, or ICT that you’re handling, yeah,

Raihaan Esat  43:02

look, ICT supplies green beans, not just a coffee commune, but to many roasters around Australia, right?

Gene Tunny  43:09

Gotcha. Yeah, extraordinary. Too many questions. No,

Tim Hughes  43:15

actually, I did have a thought, just going back slightly, because with coffee, for instance, like it is, you know, for instance, the emotional attachment that we have to coffee. You know, when you catch up with someone for a coffee, it’s never just to sit there and drink a coffee. It’s what comes with that where, whether it’s business, personal, whatever. So it’s this thing, of like, it’s, we have an emotional attachment to this product that is beyond just the drink itself, you know, it represents an opportunity to catch up with other people and exchange so that’s part of the experience that we attach with coffee, you know? So, yeah, it’s an interesting product to be talking about because it’s part of our DNA now, and especially over the last 20 years. For instance, living in Brisbane, I’ve seen that change in somewhere like Brisbane. There are certainly parts of the UK where that hasn’t happened, and you can imagine it happening. I’m sure it’s happening in the bigger cities, but out in the sticks where I come from, it hasn’t transferred it to be the same kind of cultural sort of norm coffee and tea and beer rather would have those but certainly not coffee yet.

Gene Tunny  44:21

Yeah,

Raihaan Esat  44:22

yeah. I’ve always wrestled with this, with this idea of coffee, because on one level, coffee is a commodity, just like other commodities, just like wheat and cotton and soya beans and products like that. And I don’t have the same attachment to those products yet. Wheat we consume every day, if you eat bread, and cotton is on all your clothing. And you know, coffee is lumped into commodities, just like those things, and it’s traded as commodities, just like those things, but we have such a deep emotional attachment to it, yeah, and even the people that don’t drink coffee have an opinion about coffee. Yeah. Up. So everyone’s got something to say about coffee. Well, I

Gene Tunny  45:03

mean, coffee was, you know, there’s a good case to be made that coffee was responsible for the growth of capitalism. I mean, well, essentially, because, you know, it powered all of the, all the business people in London, when all the coffee, the coffee houses opened up. And it was also responsible for the enlightenment, because all

Raihaan Esat  45:21

the coffees were actually called Penny universities, yes, because you could, because of the people that it attracted into the coffee houses, and they would have these high profile discussions. They would have educated debates over cups of coffee. And so people would pay a penny to get a cup of coffee, yeah, and they could be surrounded by these, uh, academics who were discussing, discussing intricate theories and concepts, and it was like going to university. That’s why they started being called Penny universities, exactly.

Gene Tunny  45:49

And didn’t Lloyds of London start out as a coffee house, a coffee house that, right?

Raihaan Esat  45:53

And then it became an in the world’s most well known insurance broker, yeah, yeah. And in fact, a lot of the workers in Lloyds are still called waiters. Is

Gene Tunny  46:02

that right? Yeah, okay, that’s interesting. Love to do a show about Lloyds sometime, yeah, and also the history of coffee, and it’s linked to capitalism and the enlightenment. Because I think I was, yeah, I was basically freestyling a bit there, right? Oh, okay, a couple of things we should pick up on. Tim, you were talking about the costs of a cup of coffee. And I think, did you ask, like, what’s the flow through from this thing? Like, we’re talking about a large increase in green bean prices, the figure, the figures you were quoting. Tim, so 12% of the cost of a cup of coffee is the beans, but that’s roasted beans. So that’s so the actual cost impact of the green beans on the cup of coffee is going to be smaller than that. So if you’re talking like you may have a large increase in the price of green beans, but it might translate into a relatively small increase in the price of a cup of coffee,

Tim Hughes  46:57

but it might eat into considerably the profit per cup, which we were talking about. So part of that, I’ll let you explain this ray in detail, like so if we talk about, say, three main sizes of coffee here in Australia anyway. So would you say the smallest is a six ounce, or is it an eight

Raihaan Esat  47:14

ounce? Yeah, generally, six or eight ounce is a small coffee in Australia. Then we got a 12

Tim Hughes  47:18

ounce and a 16 ounce. So sort of small, medium, large. What would that look like if, because currently you feel they’re underpriced?

Raihaan Esat  47:26

Yeah. Okay, so I’ve done a lot of research on this, and we’ve got about 700 cafes on our network here at the coffee commune. So, you know, we get a lot of data from those cafes on what they’re charging, what consumers are thinking, that sort of thing. There’s two parts to this. The first, first is a question I need to ask. If Green Coffee goes up by $1 Yes, how much does a cup of coffee need to go up by? Yes? Cover it exactly. All right, the answer may shock you. Okay, it’s only about three cents. Yeah.

Gene Tunny  47:55

And I think that makes sense, given what the figures Tim was saying, yeah, yeah. So

Raihaan Esat  47:59

if Green Coffee goes up by $1 the cup of coffee at the end of the line is impacted by about a three cent increase. Yeah, because one kilo of coffee makes about 40 cups of coffee, you know. So the increase gets spread over quite a large quantity. Yeah. Now the problem is those increases haven’t been passed on over the years, and so now there’s a bit of shock in the system, because all of it’s coming all at once, because businesses are failing, and businesses are finding it very difficult to maintain their prices. So you’re finding larger increases being delivered in the market, which don’t really refresh reflect the size of the increase on the green side, also, coffee is only 10 to 15% of the total cost of a cup of coffee. There’s all the other inputs as well. The second thing that Tim mentioned is you’ve got different cup sizes, and I think fundamentally, what the data is showing us is your small coffee, whether that’s a six or eight ounce, is roughly priced around the 480, to $5 mark. Your medium coffee, which is usually a 12 ounce coffee, is something like maybe $1 more, 50 cents to $1 more. So that’s 550, or $6 and then you some cafes even do a larger, large coffee, like a 16 ounce or a 20 ounce. And again, generally they go up by 50 cents to $1 the extra milk, the extra labor, the extra coffee that goes into the larger coffees is not being valued correctly for the most part. And I’d like to see cafes really nail down their costings, and what they’ll see is that their small coffee is the most profitable. Yet the 12 ounce, the medium and the large is what’s most popular. So they’re selling lots of those coffees which are much less profitable than the small coffee. So pricing strategy we’re now getting into behavior you can dry. People to buying the more of the small coffee by increasing the price of the large one. Yeah, right. So you can keep the small one the same, you can actually discount that a little bit, yeah, and offer that as a value option for a cafe, you can say our small coffee is going to be 450 we’re not moving the price, but the big ones we are. Yes,

Gene Tunny  50:20

yeah, that’s interesting. And consumer education, is there a consumer education piece in in that? Do you have to, yeah?

Raihaan Esat  50:27

Look, you need to know how to cost a product. You know? You have to be able to say, right, I buy 1000 lids at this price. What’s one lid cost? Yeah, I buy 1000 cups at this price. What’s one cup cost? When I build my coffee. It’s a lid, plus a cup, plus a shot of coffee, plus milk, plus a person to do it, plus a person to take the money, plus F plus charges, plus, plus, plus, plus, plus. You look at everything that runs your business, all the dollars in, all the dollars out, and you figure out the cost per unit, yeah,

Gene Tunny  51:03

yeah. So much depends on utilization. I was just thinking about this earlier, because if you can, if you can do more coffees an hour, your labor, cost per coffee falls. So yeah. So there may be scope to Yeah, cut, yeah, if you can increase the demand for your product by cutting the price. Yeah, so shifting demand from the larger coffees to the smaller coffees? Yep, and you could end up the company, the business could end up being better off.

Raihaan Esat  51:30

Yeah, you can make more coffees in less time because you’re doing the small ones, not the large ones. Oh, yeah. There’s a lot of lot of additional benefits to this. There’s here’s here’s another thing that that’s always been on my mind, is I, this is a consumer behavior sort of discussion. If I increase the price, even if I sell less coffee, I can sell that coffee. It’s more profitable, but I can sell less of them. Yeah, so there is already some parity that comes back just because of that. Making less coffee means I can do so with more quality, because I’m not rushed off my feet to make 400 coffees a day. Now I only have to make 300 coffees a day. I can deliver better service. I can use less staff to do it, and I have less input costs like milk. I’m using less cups. I’m using less less less less less. So I think there’s an optimum for every cafe on how many cups a day they should be producing, and then they should price accordingly. If they’re over producing, they need to increase their price and actually produce less. Or if they’re under producing, you know, discount a little bit and produce more. So there is some pricing to quantity ratio that that needs to be optimized, not, and I think that’s something that’s not well, scienced, if that makes sense.

Tim Hughes  52:48

Yeah, there is some, sorry, the that’s taking the experience into consideration and using that as a commodity, I guess, in a way, like it’s a focusing more on the experience rather than just the production,

Raihaan Esat  53:01

yeah, yeah. It’s very hard to produce more and maintain quality, right? So at some point you go, Well, I’m just going to increase my price. So that way, that way I actually keeping people away.

Gene Tunny  53:11

Yeah, yeah. It reminds me of Jerry Maguire. Show me the money. No fewer clients, more time, yeah. And then all of his colleagues just go,

Raihaan Esat  53:23

Yeah, but, but it, but it works. If you’re in that situation where, you know, you can’t really produce more,

Gene Tunny  53:30

yeah, that’s interesting. I have to think, yeah, that’s another consideration. So I mean, the way economists will often think about this is that, you know, to the extent that the demand is price inelastic, so demands not that responsive to price. You can increase the price, and then you can, you’ll get more from the higher price that compensates for the loss of some some customers. Yeah. And there’s always

Raihaan Esat  53:52

been the discussion on the green coffee side that, oh, if we increase quality, we can charge more. And now what we’re finding is that we can charge more because there’s a shortage, and it’s easier to do that than to do it on quality. And that’s a consumer mindset thing. That’s a production mindset thing, that I think we’re more risk averse than we are looking for better products. It’s an interesting trade off between the two. Yeah, it’s

Gene Tunny  54:19

amazing to get all these insights into the market, right? It’s great. We might go back to the just these nine factors, and I’ll put these in the show notes, because I think that slide you’ve you prepared for that presentation you gave here, which sounds like it was a ripper of a presentation. I mean, like, that’s some great insight in that that slide, I guess, to some to finish off with, what do you think the major factors are like, if I had to put a percentage contribution to each of those factors, what do you think the top one would be, and would it be about 50% or would it be about 40 or 30? I mean, do you have a sense of that?

Raihaan Esat  54:59

At the one that’s in the news that’s the most important, but, and that might be different every day, okay, so, you know, there’s one that was very topical about two weeks ago. It drove some prices up quite significantly, and that was, that was the I’m trying to try to figure out what’s a nice, neat way to say this. There was some conflicts in the Middle East. Oh yes, that were, that were a Frick affecting trade supply routes through the Red Sea. So through the Red Sea, you’ve got the the canal, and a lot of shipping lines use that canal to shortcut their way through to Europe and through to this part of the world now, with attacks on shipping vessels in protest of conflicts in the Middle East, all the shipping lines went we’re not shipping through that channel anymore. Guess what? There’s a container shortage now in Ethiopia, you can’t ship coffee out of Ethiopia. It’s had a massive effect on global supply chains, yeah, and that news going out to the world meant that everyone kind of overreacted. And was like, Oh man, we gotta buy coffee. We gotta get it out now we gotta there was caused a massive reaction. But then the news of, you know, that sort of dies down and quietens down, and then no one’s really acting on that, even though that that stuff is still happening right now. So whatever’s topical, whatever’s in the news, is kind of has the biggest impact at the time. At the moment, whatever’s being covered, there’s nothing, I don’t know how to say it, but, but there’s so it’s all about news. It’s all about what’s brought to our awareness.

Gene Tunny  56:41

But that impact on the supply side, on the harvests you mentioned, was it weather conditions in was it Brazil and Vietnam?

Raihaan Esat  56:49

Yeah, especially Brazil has had an unusually hot season, very little rain. So that’s, you know, there’s, there’s some speculation that that’s already caused crop damage for next year. So there are, there are some bodies in Brazil, like agricultural associations and stuff, that will report on this stuff, yeah. And, you know, with us, we deal directly with producers as well, and we can get on the phone and ask them, how are things looking, and they’ll go, we’re concerned, we’re

Gene Tunny  57:20

working, yeah, but now that must be one of the bigger drivers of what’s been happening with the price, because

Raihaan Esat  57:25

there’s a saying in the coffee industry that if Brazil sneezes, the whole world catches a cold, right? Yeah, because they are 30% of the entire world’s production. So they have a major impact on on pricing, on availability, on what happens in the world of coffee. Brazil, massive, absolutely massive. Vietnam, I would say the biggest contributors out of the things that we spoke to today, geopolitics, like the war in the Middle East, because that affects oil prices, transport prices, transport, trade routes. And that’s, you know, we need to get coffee from halfway around the world to Australia, Brazil and Vietnam and finance, those are probably the three biggest and then everything else after that. Yeah, okay,

Gene Tunny  58:11

right. This has been a really good summary of what’s going on the coffee market. I mean, if you’re listening and you got any thoughts or any questions on the coffee market, please send them through to contact at Ekta economics, explore.com and I’ll want to

Raihaan Esat  58:28

keep this discussion going. There’s a lot going on in coffee, and it means a lot to everyone. So I don’t mean to be the bearer of bad news, but I want to, want to, you know, voice what’s happening in the world right now of coffee and so that people understand what’s going on

Gene Tunny  58:43

Absolutely. Well, we’re realists on the show. We deal with reality, so we want to know what’s happening and and how do you best position yourself to deal with that reality? Tim, any final questions for Ray,

Tim Hughes  58:55

you had me at coffee? Very good. No, it’s great. It was really good. It’s funny. I wasn’t expecting it, but it’s such a big part of it, like is the experience that you talk about, as far as the value of a coffee is a really interesting prospect. And as humans, the probably the most interesting thing that we can look at, you know, like so I think it’s really good having that as part of the conversation. Yeah,

Raihaan Esat  59:26

I think my final thought for this podcast would just be on the consumer side. You know, we’re all consumers. We all go to coffee shops. We all go to restaurants, whatever it is, we’re all consuming coffee to some degree. And I think we can all be more mindful of the places that are doing a really great job and support them. Pay more for your coffee, but get value in return. It makes it worthwhile that we support the businesses, the local businesses, doing a fantastic job, and it allows the entire supply chain to be healthy if we’re pricing things correctly on the. Consumer side, it all flows back through for a healthy supply chain.

Gene Tunny  1:00:04

Okay, so support your favorite cafe everybody. I think that’s a that’s a good message. And yeah, the Yeah, recognize that they have to charge these prices to cover their costs, and those costs are rising. So I think that’s a important point, right? Oh, Ray from international coffee traders, thanks so much for your time. It’s been a lot of fun. Appreciated it. Yep, it’s been terrific. Tim, always a pleasure to catch up any to have on your show. And finally, 10% off Lumo coffee for economics explored. Listeners. Details are in the show notes. Okay, thanks. Gene, good on you.

Credits

Thanks to the show’s sponsor, Gene’s consultancy business, www.adepteconomics.com.au. Full transcripts are available a few days after the episode is first published at www.economicsexplored.com. Economics Explored is available via Apple Podcasts and other podcasting platforms.

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Podcast episode

Trump & Trade, France in Crisis, Global Capitalism’s Flaws & Job Losses from AI w/ Jean-Baptiste Wautier – EP266

This episode explores the economic implications of Trump’s re-election, France’s political deadlock under Macron, and the future of global capitalism. Jean-Baptiste Wautier, a private equity investor and World Economic Forum speaker, shares insights on trade wars and deficits. He argues that short-term profit motives undermine the global capitalist system. Jean-Baptiste also discusses AI’s transformative potential. Please note this episode was recorded on 11 December 2024, before French President Macron appointed François Bayrou as the new PM. 

If you have any questions, comments, or suggestions for Gene, please email him at contact@economicsexplored.com.

You can listen to the episode via the embedded player below or via podcasting apps including Apple Podcast and Spotify.

Timestamps for EP266

  • Introduction (0:00)
  • Economic Implications of Trump’s Re-Election (2:55)
  • Potential Global Trade War (5:50)
  • Global Trade and Economic Interdependence (8:29)
  • Challenges Facing France and the Fifth Republic (13:55)
  • Risks to the Eurozone (20:07)
  • Flaws in Global Capitalism and Potential Solutions (27:34)
  • Examples of Enlightened Capitalism (33:01)
  • The Impact of Artificial Intelligence on Jobs (39:59)
  • Final Thoughts and Future Directions (44:50)

Takeaways

  1. Trump’s Second Term Risks: His proposed tax cuts and tariffs could reignite inflation and exacerbate the US federal deficit, leading to global economic consequences.
  2. France’s Political Instability: Macron’s government faces gridlock, which could potentially destabilize the Eurozone due to France’s growing budget deficit and political deadlock.
  3. Global Trade War Unlikely: Despite harsh rhetoric, economic interdependence makes a full-scale global trade war improbable, in Jean-Baptiste’s view.
    • Capitalism’s Short-Term Focus: Jean-Baptiste argues the current capitalist model prioritizes short-term profits over long-term sustainability, causing inefficiencies and negative externalities like mental health crises and economic inequality.

The Role of AI: AI is transforming industries at an unprecedented speed, raising concerns about job displacement and the need for economic adjustments, possibly extending to UBI (Universal Basic Income), depending on the scale of the displacement.

Links relevant to the conversation

Jean-Baptiste Wautier’s website:

EXPLAINER: Why is natural gas still flowing from Russia to Europe across Ukraine?

https://apnews.com/article/russia-ukraine-war-natural-gas-f9f00df7195d01404f8cb2a43152a8b1

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Transcript: Is DeFi the Future of Finance? Exploring VirtuSwap’s Vision w/ Prof. Evgeny Lyandres – EP262

N.B. This is a lightly edited version of a transcript originally created using the AI application otter.ai. It may not be 100 percent accurate, but should be pretty close. If you’d like to quote from it, please check the quoted segment in the recording.

Jean-Baptiste Wautier  00:03

You look at all the negative externalities that our current system produced, they just gigantic. Think in terms of health, mental health, in particular, the younger generation. If you look at inequalities, not inequalities in the sense of, you know, morally, but inefficiency, the concentration of 10s of billions or hundreds of billions in the hands of a few individual means that they’re not going to be able to spend in a productive way this this amount of money. It’s yet another inefficiency when it comes to the economy. So there’s a lot of negative externalities that our system is producing and which is not making neither the best use of the resources we have, nor having the best impact on people’s well being.

Gene Tunny  00:56

Welcome to the economics explored podcast, a frank and fearless exploration of important economic issues. I’m your host, Gene Tunny. I’m a professional economist and former Australian Treasury official. The aim of this show is to help you better understand the big economic issues affecting all our lives. We do this by considering the theory evidence and by hearing a wide range of views. I’m delighted that you can join me for this episode. Please check out the show notes for relevant information. Now on to the show. Hello and welcome to the show. Today, I’m joined by Jean Baptiste wartier, private equity investor, visiting lecturer and speaker at the World Economic Forum. We cover the economic implications of Trump’s re election, the potential for a global trade war, the challenges facing France and the state of Global Capitalism. Finally, we touch on the rapid advancements and the risks of job displacement associated with AI. Special. Thanks to Lumo coffee for sponsoring this episode. This top quality organic coffee from the highlands of Peru is packed with healthy antioxidants. Economics explored. Listeners can enjoy a 10% discount. Details are in the show notes. Now let’s jump into the episode. I hope you enjoy it. John Baptiste, welcome to the program. Thank you. Thanks for having me. Gene Of course, it’s great to chat. It’s such a interesting or what’s the word, suppose it’s challenging, and I mean, maybe vexing time for the global economy. There are, there are really some big things that are that are happening that it’s unclear what, what the ultimate impacts will be. So I want to chat about some of those with you today. And I mean, in brief, the election of Donald Trump to the second term, which I think has has surprised many, and that’s going to have implications. Of course, what’s happening in France is at the end of the Fifth Republic. What does that mean? And then also your thoughts on global capitalism? Because I know that’s something you’ve commented on. So to begin with, can I ask about the election of Trump to a second term. What are your thoughts on what that means for the global economy? Well,

Jean-Baptiste Wautier  03:06

thanks, Gene. I think it’s, as you said, it’s incredibly the objective I would use is consequential, because there’s going to be it’s not only a surprise, as you said, not not so much a surprise to some, because you could tell that the way the polls were measuring the real intention of votes for Trump was sort of not completely capturing what was going on and, and I think people were surprised by the popular vote in particular, but, but in terms of its consequences, first, you’re going to have major consequences on the US economy. And I think the first one that comes to mind is inflation, because all of the planned tax cuts and tariffs all have inflationary impacts. And as you know, and as probably most know, inflation is not completely tamed, and central banks are right now hesitating as to what they should do next. And there’s been a sort of a very surprising pose by the Fed and by other central banks, because, again, they observing underlying inflationary trends, and that’s before the Trump measures. So I think the first thing to watch is going to be certainly high. Inflation can be reignited, or will be reignited by those measures. And I would say the immediate second red flag in terms of the US economy is how they’re going to manage the deficit, the federal deficit. These numbers are now staggering. If you look not only at the debt service, but also at the total debt to GDP of the US and how it’s it completely skyrocketed over the last 20 years, we now at levels that we last time so right after World War Two, and we now have. A debt service, and we say that service, but it’s actually interest. So just the interest charge on the public debt, that’s already 20% of receipts, and could go up to 30% so we’re talking about roughly a trillion of interest that need to be paid every year, which even for the US, is a huge number. It’s bigger than the total spend on the US Army and total defense budget. So I think these are incredibly powerful forces that could be unleashed. And I don’t see an easy exit. Whether there’s, you know, some some new inflation trends in the next six to eight months, whether, suddenly, you know, you have all sorts of issues with the how deficits are being tamed. These are going to be major issues that US economy will face very soon. Yeah.

Gene Tunny  05:53

Yeah, absolutely. And what do you think about the potential for a global trade war? Is that a is that a real risk. I mean, we’ve had Trump threaten tariffs on Well, I mean, you know, tariffs against China, a big tariff against China, 60% or wherever, or 100% even 20% across the board, tariffs on Mexico and Canada, unless they control immigration. What do you see as the as the potential, all the risks there of a global trade war and consequently, global slump.

Jean-Baptiste Wautier  06:28

Yeah, I think this one worries me less, despite all the rhetoric that we’ve heard. And it’s not only Trump, it’s you hear that from China. You hear that from also the European Union, who’s talking about, you know, we need to protect our internal market more. We need to tax Chinese cars and all sorts of things. I mean, there’s, there’s, there’s a lot of rhetoric out there. Certainly, the reason why I’m less concerned is even though, you know, we should acknowledge that the world have a lecture at at transport Paris, which is called Global and multipolar world. And it’s indeed a multipolar world. So we have, for sure, exited this sort of Pax Americana and an economy that’s really dominated by the US economy, and where it’s all about globalization and free trade. I think now we have more regional powers. Now we still have a very global and interdependent economy. And despite all of the the efforts from the US, from Europe to try and relocate some of the supply chain, there’s still a lot of dependency. You know, if you look at the production of semiconductors, if you look at commodities, if you look at energy, there’s a dependency on very few places in the world. And I think it’s going to be very hard to really go aggressively with tariffs, even for the US and despite still the dominance that the US has. So I think it’s being used as a tool, as a threat, as a way of negotiating hard. And probably there will be, you know, a few things here and there which are going to be more symbolic than real, real tariffs that shut down the economy. I think it’s just not attainable these days for any economy, even the US,

Gene Tunny  08:21

yeah, yeah. Well, let’s hope sanity prevails. I like that point you made about just the connectedness of the global economy and the the importance of keeping trade open for critical, you know, for those crucial materials that are sourced from, you know, various particular parts of the world. And there’s a good book by Ed Conway recently on the material world, which I loved, which I think really illustrated that quite, quite well. Can I ask you mentioned a was it a lecture or a seminar in Paris, global and multi polar world? What was that? Again? What are the specifics, please?

Jean-Baptiste Wautier  08:58

Yeah, it’s, it’s, it’s a lecture I give to first year master students in Paris. And it’s really about trying to understand the new global economy, which, again, is a combination of exactly as you summarized. It’s global. Supply chains are global. This trade is at its peak compared to global trade at its peak compared to any time in history. But at the same time, there’s dependency on certain, certain parts of the world, on, you know, think of, I don’t know, batteries for electric cars, where all of those, those rare minerals, are only produced in one or two parts in the world, right? You know, in China, in Russia, like two or three countries, think, of course, oil, oil and gas. But also think manufacturing in general. You know, if you look at things like compounds that they use for many for drugs, those. Compounds. Half of the production is in India today, sort of the primary compounds that are being so this is what this seminar is about. It’s really about understanding how this interconnectedness, as you call it, is has become incredibly prevalent, and it’s very hard to revert, at least in short order. And that’s where sovereignty has become an issue for, you know, sort of regional economies like like the ones in Europe, but even for the US, again, you see this constant debate about the importance of Taiwan and the supply of semiconductors coming from, and how strategic this is, because there aren’t that many places that provide semiconductors, and at a time where it’s all about your ability to build data centers build artificial intelligence capabilities, you know, these are incredibly critical, not only to those to those industries, but also to your sovereignty. So it’s all about understanding this level of interdependency, and how, despite all the rhetoric in the world, there’s a limit to what you can do. I love that. There’s one. It’s a tiny example, but it’s so to me, it’s so telling. Which is the supply of natural gas from Russia that goes through Ukraine and then serves Europe is still functioning. So you have sanctions on Russia. You have a war between Russia and Ukraine. Ukraine has been invaded by Russia. And despite all of that, there’s still some gas produced in Russia going through Ukraine and, and, and, and being, being, being delivered to some European countries and, and it’s just because there’s no other way, you know, there’s this so that that tells you how this sometimes is a disconnect between the rhetoric and the actual dependency of the various economies.

Gene Tunny  12:00

Rod, hang on. So there’s a there’s a pipeline that goes through Ukraine, and so the Why don’t the Ukrainians sabotage it? Because the Germans are telling them, oh, you can’t sabotage that, because we need

Jean-Baptiste Wautier  12:16

so good question. It’s even worse than you think, because, because Russia is paying Ukraine for the pipeline, right? And, and they all interdependent. Russia needs to sell its gas. Ukraine needs the royalties from having the gas going through its pipeline and its country. And then the countries in Europe need, need, need the natural gas, and, and, and it’s, it’s a bit like, I don’t know it’s, it’s like Russian oil, you know, Russian oil, and ends up being recycled through a fleet, a ghost fleet, of tankers and ghost insurance companies, and that it gets acquired by in India or China, which To refine it and then sell it back to the European countries. It’s the same. It’s the same irony. There’s the sanctions, but then there’s reality of, we need, we need gas, yeah, and Europe doesn’t produce any, yeah,

Gene Tunny  13:14

it’s extraordinary. I mean, there are, there’s a story like that, I think, from the First World War, which is similar. And Ed Conway tells that in his book, I think there’s a story about how the British had to do a deal with Germany during the First World War, that it was in a bit of conflict with, you know, millions of men dead. And it did. It was, I think it was a range through Switzerland. It was a deal for for optical glass, but that they needed for binoculars. Because, yeah, the Germans were the leaders, you know, Zeiss and all of that in in optical glass. And I forget what the British maybe they provided them rubber, because the British had the plantations in Burma or so, yeah, just extraordinary. I have to look into that. That’s it is, yeah, incredible. So you’re, you’re teaching, you do some teaching in Paris. What’s happening with France? I mean, like I remember going to the the Bastille Day celebrations here in Brisbane, at the so Patel in 2017 which is a couple of months after Macron was elected. And there was so much enthusiasm about Macron and and so much excitement about what he could do for France, and it just all seems to have disintegrated, and now there’s a risk of talking about, is this the end of the Fifth Republic? Could you tell us a bit about what’s going on there? Please? Jean Baptiste,

Jean-Baptiste Wautier  14:36

of course, yeah. And it’s, you know, the French like to make it incredibly complex as always, but it’s, it’s, it’s, indeed, an incredible turn of event, because, you enthusiasm was shared by many people when Macron was elected as someone who was, you know, very modern, pro business, balanced and could really take, take the country further. Um. He did a few things, but not that many during his first mandate, then got re elected, and unfortunately, there’s two issues at play right now. The first one is Macron got elected, but it you know, we could say the same about the UK, probably, and other other countries in Europe. Macron got elected, not as a positive vote from the majority of the French voters, but it was elected against Marine Le Pen. Who’s this? You know, very extreme right, a very nationalist Populist Party, but which has, effectively, over the years, become the leading party in France. They today, they represent anywhere between a third and 40% of the total votes you take all of the last three elections. And she, she was always around around that mark. So that’s pretty high. And the second, the second party was probably elect Marcos party back back back in 22 during the presidential election, but it was far behind, like it was 10 to 15 points behind, and the only reason why he got reelected is because all of the other parties voted against my Le Pen and therefore said I don’t like Macron. I don’t like his policy, I don’t like what he stands for. I don’t like his personality, but it’s better than Le Pen. And so it’s, it’s, you know, you start off of wrong premise here, which is, it’s not, it’s not that people think is the right guy with the right ideas and the right program. It’s like, No, we just want to avoid the populist and the extremists. And then there was a European election in 24 earlier this year that Macron again lost, but it was just a reflection of if you if you looked at the first round of the presidential election, it was already pretty much the same numbers the one I just gave you. So Le Pen came in France with a third of the votes, and then it was not even Second. Second was a coalition of the left parties, and then Macron was third. So it was really a proper defeat. And and he had a very emotional reaction, you know, couldn’t believe that he was he was such a negative vote against him, and they decided to dissolve the assembly, which the President can do once a year, according to the Fifth Republic constitution. And so when you do that, you have parliamentary election. So even though there had been parliamentary election in 22 where already he had no majority. So keep that in mind, even though he’d won the presidential election, and that’s again, because of what I explained, that he didn’t really command a majority. Anyway, he lost again this parliamentary election, but by an even bigger margin, and now no party is commanding any majority in parliament. You have may Le Pen is still the biggest, but thanks to the way the voting system works in France, they don’t have 40% of the seats. Even though they had 40% of the votes. They have like more, like 2025 then the sort of Macron coalition of, you know, center right and center left have roughly another 30% and then there’s, there’s a large coalition of the left, but from extreme left to center left, which has another third. And so you have, you have a deadlock parliament. Is that nobody commands a majority, and everybody’s taking a very extreme position, like no one wants to work with one another. And this is the other very typical French thing at play here, which is France is a lot is long on the ideology, short on pragmatism, the opposite of the Anglo Saxon world. And so all of those three, those three thirds, if you wish, are really sticking to their guns in terms of ideas and programs and what they think should be done. So Macron thought, again, he could have the upper hand because he’s so smart and he’s going to manipulate all of these people, and he’s going to get them into a rhythm. But he actually failed, because again, the Prime Minister he appointed three months ago was was voted out by the parliament. Because again, there’s no majority, and there’s still no emergence of majority. Now is it the end of the Fifth Republic? I think not yet, because it’s a very high bar to change the constitution, and if you you can’t even pass a budget, which is right now, the dynamic at play in France, it’s going to be even harder to have a new constitution unless you put it to to a referendum. So I think you’re going to end up it’s going to be a bit like, like Belgium. Him as seeing for, you know, for two years, you’re going to go from one government to the next. Macro is never going to leave. I think it’s just too that’s his personality. I think he will never want to leave, and he doesn’t have to to be fair. And I think you’re just going to see trials and errors. Trials and errors probably budget never, really, never read, adopted, and they’re going to continue to function in that sort of very transitional mode until the next presidential election, which is in 27 so it’s not going to be it’s not going to be good for the country, because nothing’s going to happen. People are going to be very unhappy. Budgets are not going to be balanced, which is also bad because France is now running the largest deficit in the eurozone and needs to get its acts together, but without any majority in parliament, it’s going to be very hard to balance. So I think it’s, you know, it’s also a real threat for the European Union and the eurozone, because dysfunctional France for another two and a half years, it’s going to be a real issue for the for the entire region. Yeah,

Gene Tunny  21:05

yeah, that’s what I was wondering about. Just what does it mean for for the stability of of the euro, and whether there are any risks of of a Eurozone breakup at some stage? Is that actually a realistic prospect, or is that just something that you don’t think will ever happen.

Jean-Baptiste Wautier  21:23

So I don’t think it’s a zero probability, because again, France right now is running a deficit which is around 6% of GDP as a total debt to GDP of 120% and given the current political dynamic that we just talked about. It’s not going to balance its books anytime soon, and so far, because France is such a foundational country for the European Union and the Euro zone, together with Germany, the commission has been incredibly lenient, and as given France three years, and then five and now seven years, not not even to balance its books, to get back to 3% of GDP for its public deficit, which is the benchmark that you’re supposed to observe. But even if it does that in seven years, the debt is still, you know, it’s still spiraling. And so I see the risk of a Greek episode or a trust episode on France like a real possibility. So not necessarily the fact that the Eurozone is going to completely implode, that I think is a low risk, but I think there’s a real risk of sovereign crisis and the cost of the French debt suddenly spiking. It has already gone up significantly when you look at the spreads with Germany, but I think it could go much, much higher. When it starts to go much higher, you’re going to have to have like, like, in the case of Greece, back in the days, an intervention of ECB or IMF or both, which are going to force reforms on France in terms of balancing its budget, reducing its spending, so that, I think as a real probability. I wouldn’t say it’s, it’s, it’s certain, because there’s been a good amount of leniency so far, but I see that as a real probability of occurring. That would save the euro, but that would be a disaster for France.

Gene Tunny  23:28

And just briefly, what is the cause of the budget deficit? I mean, obviously too much spending relative to taxation and other revenue. But is it entitlement programs? Is it a an excess a blighted public service. Do you have any thoughts on that? So,

Jean-Baptiste Wautier  23:43

yeah, yeah, absolutely. I mean, first of all, if you to put things in perspective, Mark quandry during his seven years when he took over the French, total debt, total public debt, was 2000 billion euros. He added 1000 billion euros during his seven years, which is mind boggling. So when, when you try and disaggregate where this, this came from and and also to answer to your question on, on public deficits, of course, COVID is part of this, but COVID is only a third of this 1000 billions that were added. So a lot of money has been has been spent on two fronts. One Macron tried to make companies more profitable, more competitive, make France more attractive when it comes to investment. So a lot of money has been spent on reducing tax, both for companies and for wealthy individuals. So is introduced a flat tax wait when it comes to capital gains and on the corporate side, he’s reduced the overall tax rate, and he’s introduced a lot of exemptions, and that that is 10s of 10s of billions of euros. Yes, in terms of the spending, and then on the other side, the other source of deficit, and that was a lot of very, I was going to say generous, but crazy, excuse my term, but crazy spend on, you know, helping people with inflation, helping people with energy, helping people with all sorts of subsidies and public spending on things that would never have any structural impact. So you were just helping people for the next six months. But then, you know, and then what? And so they’ve been throwing, again, 10s of billions like this over the last two years, probably also help, you know, hoping that it would appease the country and it would help with people purchasing power and all the rest, but the budget was already in deficit, so you never had that money in the first place. And then the last thing that happened over the last 12 months, which frankly, is is farcical, is they made. They made mistakes in budgeting 2425 because they were hoping that their revenues, which follow the trend of the 2122 fiscal years, whereas these years were rebound from the COVID years. So they were not sort of a normative level. So again, then they didn’t size properly the spends, because they completely overestimated their revenues, and so that’s what created that huge deficit that that we’re seeing now, that’s been widening in less than a year, right?

Gene Tunny  26:31

Okay, yeah. I mean, we’ve had the energy subsidies here in in Australia, and yeah, I guess we’ve made forecast errors in the past, but not, not quite that sounds extraordinary, if they’ve ended up with a Yeah, it is seven, 6% deficit, extraordinary. Okay, well, that’s it is. I’ll keep an eye on what’s happening in France for sure. Yeah. Okay. We’ll take a short break here for a word from our sponsor.

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Gene Tunny  27:29

now. Back to the show. Last thing I want to cover Jean Baptiste is this question of capitalism. So you’ve you’ve been involved in World Economic Forum, and you’ve so you’ve been a in financial markets for decades, and so you’ve been a long term observer of what we you know, our capitalist system. And you’ve got some thoughts on like, what you see is the flaws in it and how it can be improved. Could you tell us what do you see as the flaws or the problems with our current system of Global Capitalism,

Jean-Baptiste Wautier  28:05

of course. I mean, the to me, the if you start at the very macro level, and you look at all the negative externalities that our current system produced, they’re just gigantic. Whether you look, I mean, the first one that, of course, comes to mind is, is global warming and environment and all the rest. But to me, it’s, it’s far it’s far bigger than this. Because I also think in terms of health, if you look at statistics, in terms of in terms of obesity, for example, whether it’s in the US or in Europe, if you look at mental health and how social media function, and how they impacted mental health, in particular the younger generation, if you look at inequalities, not inequalities in the sense of, you know, morally, but inefficiency, the concentration of 10s of billions or hundreds of billions in the hands of a few individual means that they’re not going to be able to spend in a productive way this this amount of money. So I’m not, I’m really not approaching this, you know, with a moral aspect and just it’s, it’s yet another inefficiency when it comes to the economy. So there’s a lot of negative externalities that our system is producing and which is not making neither the best use of the resources we have, nor having the best impact on people’s well being, simple as that, and and the planet well being so so that that is, to me, the issue right now. And when I try and look at the root cause, the root cause is, over the last, I would say, 3040, 50 years, capitalism has really shifted to becoming incredibly short term and becoming solely focused on profit maximizing, short term profit. And it’s not always been like that. If you if you go back in history, and you look. At the the great industrialist in the US, you know, the great billion of the Rockefellers of this world, the carnegies, the perspective was much more medium to long term. And we’re going to build companies to solve a problem. And if we solve that problem efficiently, profit will be the consequence of solving a problem, problem efficiently for the further society, as opposed to, is going to be the objective. And if you go even further back in history, and you look, you go back to Adam Smith, that’s exactly what Smith, you know, sort of theorized. So even if you go back to the father of liberalism and capitalism, that was already the way it was, it was conceived. So I think this is, this is the issue we facing right now. We’re trying to lay a regulation, you know, in the hope that, oh, we’re going to reduce carbon emissions, we’re going to reduce the use of plastic, we’re going to reduce energy consumption at its and it’s just not working. It’s not working. Because if you look at the global energy consumption in the world, it’s going up. If you look at where it’s coming from, it’s still coming 80% from, you know, fossil fuel. If you look at all the innovations, look at the energy consumption of a Google and Microsoft, it’s the size of a country consumption. You look at, again, you look at the impact on people of all the social media, you know, it’s not, you can’t argue that there’s a lot of negative there. And you look at obesity prevalence in the US or in most developed countries in Europe, it’s going up, up, up. And, you know, it’s, it’s, it’s neither good for the people, not for the society. So all of these things are not going in the right direction and and it’s, it’s not by regulation, by regulating, because we already over regulated, especially in Europe. It’s already impossible to know all of the regulation, and you can never capture it’s too complex. You know, the these, these are too complex to monetize, to measure, to regulate. It’s just impossible. So I think the only way is two things. One, to try and be longer term in terms of how company and investors make decisions, because again, time horizon does matter here. And the second thing is in terms of, again, investors, governance, the way we incentive boards and management, and it’s all about what is the problem which you’re trying to solve, as opposed to maximizing exported profit. And as long as we don’t turn this onto its head and and sort of make profit as a consequence rather than as an objective. I think we’ll continue to, you know, go in circles and observe negative externalities more and more and never come up with a solution. It’s still, you know, it’s a very, it’s a very fundamental issue. It’s not, it’s not one that can be sold easily, but it’s, it’s, I think it’s one we should be concerned with.

Gene Tunny  33:04

Okay, so just to understand, are you arguing that? Well, there are a couple of ways you could look at this. Should, should people have this in concept of enlightened self interest, where they they see beyond the immediate, and they see, well, we’d actually be better off if we thought longer term. So that’s one thing that so there’s that possibility, or are you arguing that they should take into account these wider social or environmental impacts, even if it isn’t of benefit to them directly, because they should have a wider concept of well being than just their company could. I’m just trying to understand what your position is precisely, please. Sean Baptiste,

Jean-Baptiste Wautier  33:49

yeah, no, of course. And it’s no absolutely, and it’s actually both. It’s both changing the time horizon and focusing on on a higher purpose, as opposed to just the bottom line and the profit that you’re going to generate for the fiscal year. So time horizon? Why? And this is something I’ve observed, you know, I’ve spent more than two decades in private equity, and private equity, despite what people may think is actually quite long term, because you invest in companies for 456, years, and then you need to sell this company to someone who’s going to hold it for yet another at least five years, if not more. So when you invest in a business, you need to think the next 10 years. And when you do that, I’ll give you a stupid example. You not going to buy a an incredibly profitable company that makes disposable plastic bags, because you know that the trend is not your friend. So you might look at amazing financials, amazing cash flow generation, amazing management team, blah, blah, blah. You know, great market position, but you know that in five years time, nobody would want to buy this of you. So. So that’s what having a long time horizon brings you, is you will automatically factor in those negative externalities that instantly may not necessarily impact your everyday profit, but in the long run, will, will will no longer be able to be monetized. And the second thing I’m advocating, because I’m trying to, I’m trying to, quote, unquote, see how we can save capitalism and liberalism, because I’m still a great believer in those two capitalism, because that’s the best way we found to create wealth for all you know, collectively, by rewarding risk taking and hard work. So I think we should preserve that, because that works, that engine works and liberalism, because that’s the world I want to live in where I have agency and freedom of starting my own company and freedom of speech. So I’m trying to see, okay, how do I save that? But by getting rid of all those negative things that you know, impacting our societies, and that’s where I’m thinking. Instead of layering regulation which is already impossible to navigate, let’s do this bottom up and have companies which now not only elongate the time horizon, but also focus on what problem are we solving and what is, what is our net benefit to society, not only how good is our product, but also, you know, the well being of my employees, of my suppliers, of my and the society around me, the community. So it’s, it’s what people call stakeholder capitalism. So you really factor in all of the the impacts that you have, direct or indirect, and that’s how you you manage your business, as opposed to what’s going to be my net income, net income for next year? Yeah.

Gene Tunny  36:51

Do you have any examples of companies that you think are doing this well, or could be examples to others?

Jean-Baptiste Wautier  36:57

So there are. There are fascinating examples of companies which are owned by foundations and which have been, you know, one that makes the headlines is Novo Nordisk, which, you know, has made this ozempic product that that is concurring the world. But you have, you have more and more companies, especially in Scandinavia and in the north of Europe, that are being owned by foundations, and those foundations are the shareholders and the way they look again at their businesses. I’m not obsessed with how much dividend can be paid up next year. I’m looking at my purpose, my competencies, my 1015, 20 years horizon, and profit will come if I if I’m doing things right, and if I’m doing things that really bring value to society, I’m going to be a profitable business. And again, that’s what Adam Smith theorized, and he was right. And so you’re seeing more and more examples of this, of, you know, this small, more inclusive capitalism, or companies which are so there are examples, it’s, it’s, it’s nowhere near the majority of companies today. But you know, if you combine those owned by foundations, those owned by families, or founders, very successful founders. I don’t want to it’s a bit of a funny example I’m going to use but, but if you look at musk, there’s a lot of negative things in terms of how much wealth is now being concentrated into his hands, granted. But on the other side, the way he’s built this business. Was never obsessing over next quarter profit. You know, he’s been people were saying, Tesla is going to go bankrupt because they’d been burning cash for so many years. And then when he launched SpaceX, people were like, what i How can you make a profit? You know, sending satellites and going to Mars, there’s no business for that. And Mesa is doing it better than you. And look at where we are today. So he’s an example of an incredible entrepreneur, whether you like him or not, you know you have to look at what he’s achieved. It was never thinking, I want to, I want to be worth 300 billion in 2024, which he, incidentally, he is now. So there’s more and more example that that, that one can can find of, you know, if, if we manage to really turn this onto its head, I think, I think there’s a there’s a path. It’s not an easy one, but I think there’s a path.

Gene Tunny  39:38

Yeah, absolutely, I think, yeah, certainly worth, worth considering, I think Musk is a, he’s a good example of that Bucha nearing capitalist. I mean, is the closest thing we’ve got say to someone, you know, I guess Howard Hughes many years ago, or, yeah, you know, I guess some of the great industrialists you mentioned in Carnegie and all of that. Yeah, absolutely, yeah, absolutely, right. Oh, this has been fascinating conversation. John Baptist, anything else before we we should go anything else that’s that you’ve been thinking about and things worth, worth covering before we wrap up,

Jean-Baptiste Wautier  40:13

right? Thank you, Gene. I enjoyed it. I mean, there’s so much, as you said in your introduction. You know, it’s not just these, these tectonic shift on the geopolitical front, and we only we talked about some of the hot topics, but talk about the Middle East. We haven’t talked about Russia, we haven’t talked about China, and there’s so many things happening there. So it feels like all of these tectonic plaques are moving right now at the same time, and just as if it wasn’t enough, I think artificial intelligence is the most, is the quickest, most far reaching industrial revolution of our times. So you’re overlaying on a world that’s sort of rearranging a massive industrial revolution, which is going to change so many things in our lives. I think we live really fascinating times, and I really enjoy talking about this, because I think we should all have eyes wide open and watch and learn. Yeah, absolutely.

Gene Tunny  41:17

I think just on AI, what are you most excited about? What are there some, are there some develop? I mean, we’ve seen chat, GPT and all of the large language models, but are there certain things that are that are exciting you at the moment? So

Jean-Baptiste Wautier  41:33

I think, well, what’s exciting me is, apart from things that really needs very human emotional intelligence or human presence. There’s so many and some element of judgment, but there’s so many jobs, so many things we do in our daily lives that are a few years away of being replaced by artificial intelligence is just mind boggling. And the only thing that was, you know, sort of delaying it is progress in terms of quantum computing. And you would have seen Microsoft announcement, I mean, the So, so we’re just a few years away of doing so many things with it in everything we do, I think humans will all will be social animals. So we’ll always need, you know, we’ll always need to meet in person. We’ll always need to share motions, to share ties together. When you try and think of care, and there’s certain industries or art investment where you need a lot of judgment at times they will, they will still be pockets where you need human input. But I don’t know, more than half of the things we do can be more or less replaced by by a computer tomorrow. And so that’s that fascinates me. And you know, medicine could be so much better. There’s so many things that could be so much better, but at the same time, it’s a revolution that has very little content when it comes to jobs, employment. All the previous industrial revolution, it was the creative destruction of Schumpeter, right? So they were sort of destroying some industries, but some others were being created. And the level of wealth and productivity was was going up this one not only is going faster than the previous ones, because it’s more like 20 or 30 years as opposed to 50 or 80, but on top of that, it’s not creating jobs. You look at the ratio of market cap of the largest tech companies to the number of jobs they have. I mean, it’s ridiculous. Yeah, we’ve never seen such a bad ratio and and that’s, that’s what worries me, on the flip flip side is, what are we going to do when we can replace, you know, so many things, and it’s not only that, it’s going to be efficient, it’s going to be very low on cost, so it’s going to be a no brainer to replace man by machine in minutes. What are we going to do with all of these job that we’ve destroyed and with all these people that become an employee? That’s that’s the one that worries me. Hopefully excited.

Gene Tunny  44:12

This is why some of my guests argue in favor of UBI So, yes, I mean, I’m not necessarily advocating that, but I think you know that if that scenario, if that’s what happens, and then UBI becomes, becomes more compelling, I’d say, so, yeah, absolutely okay. Thanks so much for the conversation. I really enjoyed it. You’re right. There are so many other issues we could have, we could have covered, but then I’d probably be talking to you for two or three hours, and we might have to have another schedule, another chat, subtitles. I found this very, very enlightening. And, yeah, I think, like the idea of that, course you’re teaching the global and multi polar world. I think that’s so important. This, this whole idea that, since certainly things are. Different from what we expected after the end of the Cold War. We saw the US dominant, but now we see Yeah, just yeah, the multi polar world, as you say, or even a G zero world as Ian Bremmer, yeah, says, Absolutely. I enjoyed it. All right. Thank you. Gene Thanks. John Burt, right. Oh, thanks for listening to this episode of economics explored. If you have any questions, comments or suggestions, please get in touch. I’d love to hear from you. You can send me an email via contact at economics explored.com, or a voicemail via speak pipe. You can find the link in the show notes. If you’ve enjoyed the show, I’d be grateful if you could tell anyone you think would be interested about it. Word of mouth is one of the main ways that people learn about the show. Finally, if your podcasting app lets you, then please write a review and leave a rating. Thanks for listening. I hope you can join me again next week.

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Credits

Thanks to the show’s sponsor, Gene’s consultancy business, www.adepteconomics.com.au. Full transcripts are available a few days after the episode is first published at www.economicsexplored.com. Economics Explored is available via Apple Podcasts and other podcasting platforms.

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Podcast episode

Trump 2.0 w/ Top Wisconsin Door Knocker & Economist Darren Brady Nelson – EP261

Economist and returning guest Darren Brady Nelson shares insights from his time as the top door-knocker for the Trump campaign in the battleground state of Wisconsin. He explains why Trump’s messages on inflation, immigration, and cultural issues resonated with voters. He breaks down Trump’s economic vision for the second term, including plans for Elon Musk to lead a government reorganisation. Show host Gene Tunny and Darren discuss the prospects for repairing the US budget and the possible economic implications of Trump’s fiscal and trade policies. 

If you have any questions, comments, or suggestions for Gene, please email him at contact@economicsexplored.com  or send a voice message via https://www.speakpipe.com/economicsexplored.

You can listen to the episode via the embedded player below or via podcasting apps including Apple Podcast and Spotify.

Here is a clip from the video recording on Elon Musk Reimagining Government:

Timestamps for EP261

  • Introduction (0:00)
  • Darren’s experience as Trump’s top doorknocker in Wisconsin (3:00)
  • Why Trump won (11:40)
  • Illegal immigration (15:05)
  • Trump and monetary policy (27:30)
  • Elon Musk and government efficiency (33:00)
  • Trump and trade (48:15)
  • Final Thoughts (57:00)

Links relevant to the conversation

Bio for Darren Brady Nelson available here:

https://economicsexplored.com/regular-guests/

Statistics on illegal immigration in the US:

https://cmsny.org/us-undocumented-population-increased-in-july-2023-warren-090624/

https://lamborn.house.gov/issues/illegal-immigration

Stanford University briefing on China’s Use of Unofficial Trade Barriers in the U.S.-China Trade War:

https://sccei.fsi.stanford.edu/china-briefs/chinas-use-unofficial-trade-barriers-us-china-trade-war

Relevant previous episodes:

Is Uncle Sam Running a Ponzi Scheme with the National Debt? w/ Dr Dan Mitchell – EP235 – https://economicsexplored.com/2024/04/17/is-uncle-sam-running-a-ponzi-scheme-with-the-national-debt-w-dr-dan-mitchell-ep235/

US infrastructure: lessons from Australia, with Darren Brady Nelson – https://dashboard.simplecast.com/accounts/a4c530a8-52a1-4290-95a3-19c00e80602c/shows/a3789cf6-a26b-464a-ab7f-551db331ee09/episodes/6134a946-eab5-4a0c-bbe3-dfae5a6bf200/ 

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Transcript: Trump 2.0 w/ Top Wisconsin Door Knocker & Economist Darren Brady Nelson – EP261

N.B. This is a lightly edited version of a transcript originally created using the AI application otter.ai. It may not be 100 percent accurate, but should be pretty close. If you’d like to quote from it, please check the quoted segment in the recording.

Gene Tunny  00:05

Welcome to the economics explored podcast, a frank and fearless exploration of important economic issues. I’m your host, Gene, Tunny, I’m a professional economist and former Australian Treasury official. The aim of this show is to help you better understand the big economic issues affecting all our lives. We do this by considering the theory evidence and by hearing a wide range of views. I’m delighted that you can join me for this episode. Please check out the show notes for relevant information. Now on to the show. Darren Brady Nelson, welcome back to the program.

Darren Brady Nelson  00:38

Thank you. Good to see you again.

Gene Tunny  00:39

Good to see you again, Darren, you’ve been busy these these last few weeks, so you’ve been campaigning in Wisconsin and keen to chat with you about the result, obviously, the Trump victory. And yeah, there’s been a lot of commentary about it. Lots of people surprised. I mean, you’re someone who probably isn’t surprised. But to begin with, I’d like to ask, yeah, what

Darren Brady Nelson  01:07

was your How did you guess that I wasn’t surprised? Yeah,

Gene Tunny  01:11

with your Make America Great Again. Cab, very good. So what was the experience like for you? What was it like working for the campaign? Can you tell us about that place.

Darren Brady Nelson  01:22

Yeah, well, as as you know, you know, and I guess anybody who’s watched this show before and seen me, I’m an economist like you, so, you know, the past couple of months, though, I’ve just been, you know, just a grassroots door knocker, you know, I can tell you more about how that happened, but so that’s what I’ve been doing in Milwaukee behind me. That’s kind of what the the little sort of setting in the background is, is a view of Milwaukee. I am actually in Milwaukee. It’s not just a computer hologram in the back. And, yeah, that’s, you know, what I’ve been doing for the past two months, you know, trying to do my part and help Trump win Wisconsin. As you may or may not know, you know, whoever actually gets one more vote in the state of Wisconsin wins all the electoral votes for Wisconsin. And that’s the way it works for most states, except for, you know, I think Maine and Nebraska are almost that, but not quite that they have, you know, kind of they split up the state, their states a little bit. So, you know, no one, you know, sometimes you see this commentary where, you know, be it CNN or Fox, and they’ll, they’ll break it down by like, county or something like that. You know, that’s interesting, and that’s kind of useful information, but it’s not actually no one wins Milwaukee County or anything like that as such. So, but you know, you know, the more obviously votes you can get out for Trump in Milwaukee County, the better. Helps the state total. And that’s what I’ve been doing. And interesting enough, you know, I actually finished as the number one door knocker in Wisconsin. I knocked on more doors than anybody else in the state on behalf of Trump. I don’t, can’t speak for Kamala side, but for Trump’s side anyway. Okay,

Gene Tunny  03:01

did you have an unfair advantage because you’re in downtown Milwaukee, you’re in a high density area?

Darren Brady Nelson  03:08

No, actually, I had the opposite. I had the disadvantage because everywhere that was actually within walking distance from me was was secured apartment blocks I couldn’t get into, right? Yeah, so full of, you know, sort of high rise hipsters. So look, I got to thank, you know, some of my colleagues who, and actually some church friends too, who actually would drive me out to what they call walkbooks. And both sides kind of do a very similar approach. We have an app. We have, like, you know, 100 or 100, 150 doors to knock on that day, and the app just leads us to those doors. So both sides are trying to target our voters. We’re trying to target mainly low propensity voters. So like, you know, someone who is a republic, who’s voted at some stage right, for president or something as a Republican, but they don’t do it all the time, right? So they’re not necessarily lazy, although sometimes they can be. So we just try to get out, you know, our party’s voters, but the databases aren’t great for either parties. And you get, you get a lot from the other side. You get a lot of under, you know, at least some undecided people. So it certainly makes for an interesting, you know, time when you get out there and you you think, or you hope, you’re knocking on a Republicans door, but you get a dirt Democrat, or you get it undecided, which is kind of interesting, yeah, yeah,

Gene Tunny  04:31

okay. Like to Yeah. Before we go on to how, I’m interested in how some of those conversations when, but first we you, were you employed by a Super PAC? Was it a super PAC that employed you? I mean, I, I’m not fully familiar with the system over there. Could you tell us about that, please?

Darren Brady Nelson  04:48

Yeah, both, both parties really rely on these packs, the political action committees, so they’re under the tax law. You know they’re different from, say, a c3 which is a three. Think Tank, you know, where you get a tax exemption all that there are c4 so C threes can’t be political. I mean, there’s some wiggle room. But, you know, you don’t see the Heritage Foundation or or Cato saying, you know, vote for candidate A, you know, sort of thing c4 is, can literally do that. So, so I was working for kind of an unusual arrangement. I was working jointly for 2c fours at the same time, which was turning point action, which is ultimately run by Charlie Kirk and America pack, which is ultimately run by Elon Musk,

Gene Tunny  05:36

right. Okay, so, I mean, you know, clearly Elon Musk has had a huge influence on the campaign, and will have a huge influence on the administration, it appears, at this stage, unless he has some falling out with Trump, which isn’t beyond the realms of possibility. This is the mood, just hypothesis. We can talk about that a bit later, and what Musk has role in the administration could be but so what

Darren Brady Nelson  06:01

was, to be honest, though, the people who fell out where Trump were kind of like backstabbers and people who weren’t really Trump’s in the first place, there might have been the odd exception, but, you know, and I think there was, you know, like, Well, that’s true. I’d say 8020 was people that shouldn’t even been this administration in the first

Gene Tunny  06:20

place. Yeah, yeah, that’s probably right, if you think about what Trump’s views are, and where he comes from, and the types of like he got sort of traditional repub people you’d see in, say, the Bush administration, like, either the Bucha administrations, right? And that probably didn’t suit Trump, whereas, yeah, Musk is, yeah.

Darren Brady Nelson  06:40

Well, to be honest, people in the Bush administration, one cert, the when, you know, wouldn’t actually be go, well, in a Reagan Administration either. So put that context in there. So it wasn’t just Trump, you know, the Neo cons, those sort of, Oh yeah,

Gene Tunny  06:53

yeah, yeah, very, yeah. Good point. Okay. And what would, how did the conversations on the ground go. I mean, you mentioned that where you were in Milwaukee, or parts of Milwaukee there, you know, it’s more for one of a better term, hipster, more like inner city, you know, new farm here in Brisbane, or, yep, so how did it or fortitude Valley? How did it go? How did you how did those conversations go? Were people generally receptive? Like we get the impression over here that there’s a, you know, there’s huge conflict over politics in the States, and people are just aggressive. No one wants to talk with people from the other side. How did it how did you feel on the ground? How did it all go?

Darren Brady Nelson  07:37

Look, that’s actually largely correct, sadly. But put it into other contexts. I was going throughout Milwaukee County, which is, you know, more than just walkie city. And even within Milwaukee city, the hipster areas don’t account for most of the city. So there’s, there’s heaps of, you know, working class and middle class sort of areas where you’re, you know, the more working class it got, the more trumpet got, right, and the more middle class, but then starting to get away from the city, also, the more trumpet got. But what surprise, you know, that wasn’t obviously surprising, although it’s still kind of to some extent surprised me, particularly amongst migrant groups. Boy, they were just like, even, on average, more Trumpy, you know, than than you know, like a white suburbanite would be, or, you know, I didn’t really go in the rural areas, so you know, that would probably be even more sort of Trump again. But what all you know, what surprised me was, you know, even some of these hipster neighborhoods, or these, you know, quite avant garde sort of suburbs, you know, you mentioned, kind of like fortitude Valley. But I guess you could have mentioned a new farm, but you could have mentioned, oh, what’s the place we went to dinner in? What’s that, you know, in South Yeah, West End. You know, there’s kind of West End type suburbs here, obviously, in Milwaukee as well. So there you wouldn’t, obviously get a lot of Trump, but then you would, but there would be some, you know, like there was, you know, to me, I went in thinking, I’m not going to meet one person, you know, that’s going to be going for Trump in a suburb like that. And you’d actually see the huge Trump signs here and there, and those sort of sub suburbs, which surprised me. And so the conversations, you know, there was certainly, you know, look, overall, the Democrats I came across, you know, were at least somewhat polite, which to say that there was somewhat polite. So my stick was basically, you know, we were getting out the vote for Trump. So we weren’t even getting out the vote for Republican Senate, Senate candidates or Congress candidates, much less state level stuff, right? So we were very laser focused on Trump. That was all our mandate was. There are other groups who are doing something broader. Sure. So my shtick was basically, you know, I knock on a door. Someone answers, you know, I smile. I politely say, Hello, I’m getting out the vote for Trump. Are you considering voting for Trump? That’s it. That was my whole shtick. And usually, even before I got to the end of that, I could almost see in their eyes. They were like, you know, kind of light up, like happy, or whether, you know, sort of staying, or anger was it was in their eyes, I usually got from the Democrats, kind of, at least a kind of semi polite disdain. They would often say, Absolutely not. They make they may have some pleasantries at the end, like goodbye, or they might just simply slam the door, right, yeah. But sadly, I got some, like, really mean Democrats who just would basically swear at me, yell at me, tell me getting off their property just in the wake of my point stick right? And I had like, a little badge, you know, with Trump, blah, blah, blah, and, you know, speaking to, you know, people out there who are Trump supporters in Milwaukee, it doesn’t actually go both ways. It doesn’t actually go both ways. You know, like at least 8020 when a Democrat comes up to Trump’s house, they don’t get that sort of level of hate and vitriol and return, they might kind of laugh at them, like, really? Kamala, you serious? You think? You know, there might be maybe an impolite sort of, like ribbing of them, or something like that, but it doesn’t actually go both ways. So the division shouldn’t be portrayed as though it’s equal 5050, it’s not rod

Gene Tunny  11:39

Okay, okay, I’d like to ask you about why you think Trump won, because it’s come as a great Well, I mean, it wasn’t a surprise to you, a surprise to me, and I think to many around the world, because, I mean, we got the impression that he’s upset so many constituencies as concerns about reproductive rights or access to abortion there. There are concerns about what he means for, you know, various different different groups in the community. There are concerns about just his, you know, perceived, you know, instability, I suppose, concerns he’s the fact he’s been convicted, the fact that he allegedly launched a insurgency on January 6. So you know, all of these concerns about about Trump. And so a lot of people are thinking, how on earth could he get reelected? But he was. And so the the hypotheses that have been advanced, that I’ve seen are the major issues are inflation, incumbency, the fact that the Democrats have been in and things haven’t been you know, people perceive that things haven’t been going well. I mean, there’s, there’s clearly a lot of signs of that, and then also concerns over cultural issues, about this concern about wokeness and dei What’s your take on what were the issues that really changed the situation and really meant that Trump had quite an emphatic victory after all?

Darren Brady Nelson  13:11

Look, yeah, those concerns have been basically trumped up on one side. Basically, there’s plenty of evidence to suggest all those issues you mentioned are at best, exaggerated and exaggerated, obviously for political purposes. As you know, the media is not neutral. You know, you know, be something different if there this was a world of neutral truth seeking media. And then, you know, if those, if the media was talking about those as, Oh, these are my concerns, that would probably have more weight. But as we saw it, over the course of the, you know, the the first Trump administration, I think the whole sort of, you know, the whole elitist Industrial Complex has been exposed. I think for what they are, they’re not neutral, they’re not truth seekers. They have an agenda. This guy is a big threat to them. So to get back to your kind of more tangible points, yeah, I think, you know, look, a lot of you know, sort of Trump supporters don’t buy any of that stuff you just mentioned, right? And the people in the middle are focusing on those kind of, like, bread and butter issues, you know, like, yeah, inflation has been terrible under the Biden administration, and Harris has been there the entire time, so she’s in a comment, so I’m, you know, running on as though, like, you’re going to be some change. How do you how do you do that? Like, she goes, like, you know, as you know, that famous, you know, line of hers where, you know, what would you change? And she couldn’t think of anything. So what? Okay, so you support everything Biden did, but then you’re a change so that, you know, that doesn’t add up, obviously, for people who are kind of on the fence, and interesting enough, I was surprised how many people were on the fence. You know, it just in my campaigning. It’s like, I kind of figured there’d be next to no one on the fence, either you kind of loved Trump or you hated him. And sure that. That was also my experience as well. So you’re right, cost of living, you didn’t mention illegal immigration.

Gene Tunny  15:08

That’s right, yeah, yeah, yeah, that’s the one I forgot it correct, yep,

Darren Brady Nelson  15:12

big, big issue, just for law and order, but also for things like housing prices and all that sort of stuff, too, and jobs and, you know, sort of coming in and undercutting what Americans could actually legally do, you know, like they can’t even work for those the rates that some of the legals were working for so and, you know, law and order more broadly, and the whole sort of cultural issues, but, but also how the cultural issues actually tangibly impact, you know, the people’s ability to have jobs, you know, the DEI stuff, you know you’re not meritocracy flies out the window sort of thing. And you know, so that those are all but huge issues. And the wars you know, like, you know under the Democrats, that you know, there’s just they’re either fueling the Ukraine, Russia war, which I think, or at best, they’re just not, they’re very incompetent at doing anything to, you know, what’s resolved this somehow, you know. And you know, the Hamas stuff and Hezbollah stuff took took off under their regime, in part because, you know, Iran was on its knees, you know, at the end of the Trump administration. And they just basically threw a bunch of money at them to revival, you know. So revive them for, you know, around the you know, cause trouble, not just in Israel, but, you know, as you probably well know, the Arab states are not very happy with with that, either. So you know, which is, you know, why, obviously, at the end of the end of the Trump administration was able to get the Abraham accords. You know, even if the Arabs are in love with Israel, they were, at least, you know, realizing, if nothing else, there’s a bigger threat from Iran, and from their perspective, yeah,

Gene Tunny  16:54

gotcha Okay. On immigration, I’ve heard some, some incredible numbers. I don’t know whether they’re even plausible, but are they saying there’s something like here, Trump was claiming this up to 20 million illegal immigrants in the US and and there’s going to be he’s aiming to deport a lot of the illegal immigrants. Do you think that’s even plausible, that sort of level of immigrants? Do you know, I mean, how, like, you’re mentioning that that was an issue. How do you see it on the ground? What are the impacts of it? Do you what sort of level of illegal immigration do you think is, is credible?

Darren Brady Nelson  17:31

Um, look, you know, I don’t, I don’t know for sure, the numbers, they are big though, you know, they’re that. They’re, you know, it’s not like on a level that hasn’t been seen in the US ever, you know, and it was intentional. It’s not as simple, like, oh, Kamala just dropped the ball. So anyway, putting, you know, they’ve lost their out, whether it was intentional or unintentional, the numbers are huge and they has tangible effects. I mean, our friend Tim one off has seen it personally in Denver, because that’s one of the places where, you know, if you like, sanctuary cities, where they’ve, you know, and it’s caused all sorts of law and order, sort of chaos, you know, also the drugs that come come in with it, as well, heaps of child trafficking, and then again, just the tangible stuff, like, Well, you know, you know. So we have all the these governments that make it very difficult, you know, for new housing to be built, just like in Australia. Yeah, they know. You have new people, okay, let’s say they were all fine citizens. We still have, we’re going to stick them all right. So you have all sorts of problems. And, you know, look, I, you know, from what I heard, like, I went to Trump’s rally in Milwaukee, you know, I think it was, yeah, last Friday or Saturday, I can’t remember. And the focus for deportations is going to first and foremost be the people who’ve been committing crimes in the country. And that’s very tangible to do something about that. Yeah, the numbers are big. But, you know, ice is actually quite big. They just haven’t been allowed to do their job, right? So and so they have a lot of intelligence on who these people are, where they are. I think Trump will soften his stance on the law abiding people the company. I don’t think they’re gonna give them immunity and just let them stay. But they might be come up with some arrangement, you know, that’s not like actual full on deportation, you know, they might be able to get, you know, you know, maybe there is some solution where they can maybe physically stay in the country, but, you know, but they’ll have to be a process, you know, behind it, you know, before they can actually be allowed to legally stay, maybe they could do a deal with Mexico. Because, you know, Mexico has been, you know, basically part of the problem. They’re not Mexicans coming in, but they’re the ones who’ve actually allowed them to all kind of come into the southern border. So, you know, Mexico has really got to, they’ll be under pressure to at least come up with an arrangement. You know, be it Australian Christmas Island type of arrangement or whatnot. So I think there’ll be a, certainly, a softer stance on, you know, basically law abiding illegal immigrants, but with the ones who’ve committed crimes, it’s going to be harsh, and it should be, yes, yeah,

Gene Tunny  20:18

I’ve just looked up some some stats. And yeah, it looks like it is a large number. So there’s a a report or a on the the web page of Congressman Doug lamborn from Fifth Congressional District. He’s quite quieting a figure of 17 million illegal immigrants in the US. There was a something from the Center for migration studies of New York, that it had 11.7 so a lower figure. But I mean, yeah, it’s clearly, yeah, it’s over. Looks like it’s over 10,000,010 to 20 million is probably a reasonable estimate. So yeah, really, yeah, obviously, very significant. And what does that mean for the the economic impact of it? Is it the case that the American economy does rely to a significant extent on, I mean, immigrants and illegal immigrants, people working in in agriculture or in domestic service? Do you have any thoughts on that? Darren,

Darren Brady Nelson  21:19

look, well, that, you know, that’s kind of the allegation, if you like, that, that, you know, one of the reasons, you know, the corporates, if you like, go woke, is to cover their their love of having as cheap a labor as they can kind of get a hold of, you know, inside the country, or through deals with China, where, you know, obviously in China, There’s some people who are literally slave labor there. So look, you know, that’s kind of not my area of expertise as such. But, yeah, I mean, you have those sort of numbers coming in, you know, and that’s going to sort of like, certainly put some downward pressure on at least certain categories of wages that may have not been pushed down if they didn’t come in. And, you know, which is obviously, of concern, obviously, if there’s jobs that could have been had, because the Biden administration is not, has not been a, you know, if you like, a pro market sort of government, right? So, you know, sure they’re happy to help their their corporate buddies out, but they’re not so sort of people like open up the economy to more competition and economic growth in general. So, you know, so there’s, you know, people are competing for, you know, less jobs than there would be, I suppose, if then we saw, for instance, you know, under the Trump administration, where things really did take off and people didn’t have jobs before. You know, who you know, for instance, like African Americans, who may have normally had, you know, been on welfare also, and had these jobs, you know. So I think that’s going to return as well. You know, you mentioned some of these concerns, as though, like, you know that just, it’s just completely false, as though, like, you know, Trump supporters are just a whole bunch of angry white men. That’s not at all. And I see the statistics now make it blatantly clear, you know, he really, unlike the Democrats, he really did have, if you like, a multi racial, multi cultural, multi background, multi income coalition, more, far more than the Democrats. The Democrats taking out Joe Biden is like a party on the decline. You know, they’re increasingly, you know, just some rich white ladies and and some welfare blacks, basically, and even. And they’re losing the welfare blacks, thankfully. You know, as we we’ve saw, you know, Hispanics are totally moving in the direction of Trump, as are all you know, most migrant groups, be it Indians and and Muslims too. You know, we saw that. Obviously, you know, Trump went to Michigan and spoke to Muslims. You know, the Harris campaign didn’t, and I saw that in my travels around Milwaukee when I went into these, you know, migrant neighborhoods of you know, particularly Hispanics, Indians and Muslims. Also throw in the Eastern Europeans to as you would guess, if they came from former communist countries, they were like the most rabid Trump supporters that I met along my sort of campaign trail. So it was interesting to see, you know, what kind of what I thought, you know, as an economist and a policy person, you know, dovetailing pretty well with what I saw on the ground, and actually on the ground, actually reinforcing things, if you like, even more so than I thought,

Gene Tunny  24:36

just on I want to get to Trump’s economic policies. You mentioned that you didn’t think the Biden administration was doing enough on competition policy or something along those lines. But what about Lena Khan at the FTC? Isn’t there a concern about is there a concern about her future under under the Trump administration? Because if anyone’s do it seems to be. Doing positive things in the Biden administration as her, she seems to be going after big tech. She seems to have an agenda to promote competition. Do you have any thoughts on that? Darren,

Darren Brady Nelson  25:11

none her specifically, I must admit, I haven’t really been following her. I guess I mentioned competition in the context of, you know, like the discussions we’ve had in the past on national competition policy Australia. So not like, you know, using, using the sort of, like the American equivalent of the ACCC with a big stick. I personally don’t think that’s a you know, that really makes no great difference in terms of actual, you know, like, broad sense competition in the economy. It’s basically getting government out of the way. And I think, you know, Trump doesn’t have like, a, like a, literally, a policy on competition, you know, look, I would love to, obviously, you know, get a job administration and maybe do something on that front, because I think there’s a lot of stuff, but, but it’s, it’s, it’s mainly like, you know, back in the 1990s to the early 2000s it’s government getting out of the way. It’s not government going in with a big stick to target this company or that company. I mean, okay, fine, I guess you got those laws. What’s at least use them in a more because in the US, they tend to be just politically driven. You know, they tend to go after a company that’s kind of lost political favor more so than under some legitimate, you know, sort of like anti trust reasons. So look, I don’t have any particular strong feelings on that person, and you know what should happen under the Trump administration. So I think brought more broadly, as you know, Trump may not have as an explicit a policy to get government out of the way, as like Reagan did, for instance, or even, you know, maybe even Bill Clinton eventually, you know, with his sort of joint partnership at times with Newt Gingrich, were doing that sort of stuff, even if, you know, Bill maybe wasn’t necessarily fully on board with the philosophy he certainly, you know, helped put in place those sort of policies in the in the 90s, as Reagan did in the 80s. But there’ll be some quite good people with Trump, I think, who will be looking to do that? Obviously, you know, trying to cut government spending, hopefully with Elon Musk, and, you know, an efficiency commission or efficiency department, certainly lowering taxes of various sorts. And they certainly recognize, you know, sometimes, you know, Trump’s kind of like, not as clear sometimes on, you know what monetary policy is, but, but I think you know, certainly he recognizes, you know, the Feds printed a lot of money, you know, since, in particular, since 2020, and actually, unlike, say, some of the other central banks haven’t ratcheted back as much as some of the other Western countries have. You know, they’ve done it some, but not as you know, you know, particularly m zero, for instance, they, you know, they’ve, you know, ratchet that back some, to some extent. You mean the money, do you Yeah, sorry, sorry, yeah, money supply, m zero in particular, which is kind of the, you know, the more very central bank oriented calculation, as you know, you know, whereas you start bringing in, yet, the banks and stuff, you start going to, you know, M, 123, so, you know. But if you look at what they’ve unwound compared to, like what Volcker had to do in the 80s, it’s, you know. Whoa, you know, you know. So in the meantime, they better get some pretty growth, pro growth, greater private sector policies, which can, you know, that can also offset a lot of that. And thus, you know, I guess there might be less reason or need to unwind some that money supply, although they will have to deal with to some extent. And you know, there’ll be a fight, I think, you know, because Trump definitely wants a new head of the Federal Reserve, and the current person said he’s not going to resign. So, yeah, that should be an interesting battle. I don’t really, don’t know how that’s going to play out exactly. I mean, that’s not very good. I mean, you know, if the new president because that the chairman is definitely a political appointee, everybody knows that. So, you know that’s, that’s, it’s not good, you know, it’s pretty bad form, or worse. You know, for the chairman to say, blatantly, I’m not gonna, I’m not gonna leave, even though the new president doesn’t want me.

Gene Tunny  29:30

So it’s interesting what you’re saying. I mean, yeah, clearly they have to unwind. I mean, you know, keep shrinking the the Fed balance sheet. Now that is a quantitative tightening, so to speak. That’s what I think, how they’re describing it. Now, I thought the impression I got is that the concerns are that Trump would want to interfere. He’d want to interfere with the Federal Reserve and and more likely. And then under Trump, we would have easier monetary policy, wouldn’t we, because Trump would want to keep interest rates low, to keep the you know, to promote economic growth. So isn’t the concern under Trump that we would end up with higher inflation and hence higher interest rates?

Darren Brady Nelson  30:18

Um, but look, that concern, to some extent, is, I think, legitimate, because, you know, Trump hasn’t been, you know, he’s not Ron Paul, right? He’s taking, like, a pretty clear stance on on money printing and sound money and all that. He’s sometimes kind of been there, and other times he’s kind of easy money. But look, you know, it depends on what the demand for money is. So if the economy takes off, you can kind of, to some extent, not have to unwind the money supply to the same extent or tighten things up. You know, I would dismiss every President has a big influence on on money, a bigger influence on monetary policy then, you know, people really quite realize all the you know, they’re like I said they’re the chairs are political appointees. Yellen was not going to be doing something vastly different from what the presidents that she were was under wanted, right? I mean, you know, they’re nominally independent, but they’re, it’s semi independent, right? So I don’t think Trump’s any different from from Biden or Obama or anybody else. He’s not going to come in and be something, oh, wow. That’s different. You know, he’s going to try to influence the Federal Reserve they all have, right? They’ve all had done that wrong. But I think with, you know, I think you know the big difference, you know whether he’s kind of not going to be, if he’s going to be not that different on monetary policy from from the Biden administration, he’s going to be vastly different on, on his his pro growth policy, he’s going to, he’s, obviously, he’s gonna be expecting the private sector to be the one who drives growth, where the Biden administration explains the government to grow, and okay, you can kind of get away with that in the GDP statistics, because government’s such a huge chunk of those statistics. But it’s smoke and mirrors. You know, government doesn’t create its own wealth. You know. So, whereas, you know, and also, if you want to say, inflation, will see what happened in the first administration with Trump, you know, CPI didn’t grow very much at all. So I expect that to be the case under Trump as well. Yeah,

Gene Tunny  32:36

look, I agree with you that if, if the economy is, if your measured GDP is only growing because you’re, you’re undertaking activities in the public sector that are, you know, are inefficient or really of low value, then that’s not good for your living standards. I agree with that, and not good for your the productivity or economy. I think that’s a that’s a fair point. Can I ask about fiscal policy. I’d like to move on to that, because you made the good point about how you know Elon Musk is going to be involved in some sort of efficiency commission. I mean, I think this is one of the, this is one of the positive things that could come out of the Trump administration, if Elon Musk can reimagine what government looks like, right? I mean, this is quite incredible, right? Like to have someone who’s who doesn’t have that sort of standard model of what government does, or what the political constraints are that say I have because of an ex Treasury man in Australia, so I’ve got an idea of what’s achievable, what’s not how the government works. He’s just gonna, he could come in and just completely, you know, reimagine things. I mean, it could be the biggest reorganization of the US government since FDR, I mean, in the other direction. But so what are your thoughts on what Musk could do and what he should do?

Darren Brady Nelson  33:55

Yeah, look, I totally agree with you. You know, basically, you know, the way you set this up, you know, like, that’s, that’s, you know, in some ways, that is the most exciting prospect, you know, to bring in, you know, I guess a guy who’s considered a business genius. We know, business and government are not exactly the same thing, but there’s, there’s overlaps, there’s things that can be learned, obviously. I mean, Trump’s a business person, obviously. And, you know, I think overall, his first first term, except for, you know, when COVID and BLM and all that hit, it was a great success, you know, up until then, certainly economically, you know, putting aside, you know, you know, the other stuff. So that is very exciting. I would love to, you know, be a part of that, if I can somehow be a part of that. You know, obviously you work to me on, you know, when we first did that CPI minus x for the state of Maine, and then I kind of took that idea and applied it to the federal government on behalf of the Heartland Institute. So, you know, there’s a report or a plan, there’s really something. You know, if, if I can somehow get that in front of an Elon Musk or Trump’s people, doesn’t mean that’s the way you have to do it. But, you know, that’s just, you know, at least part of the toolbox. You know, I’m happy if, like, you know, Elon’s got an even better idea, or if he’s maybe comes in, like the president of Argentina almost, although, you know, maybe even maybe that’s a bit, you know, sort of a bridge too far, perhaps for a Western country, if you like, or for the US. But I think you know if anything big is going to happen, as you said, you know, like something huge, like, sadly, FDR, did in the opposite direction, because most of the federal government of right now, was set up under FDR, yeah. And, you know, including all the agencies that even the federal government doesn’t know exist, you know, because that was the big surprise when I did my Heartland reports. Like the Treasury, the US Treasury, doesn’t know all the agencies. Like, how can they not know how many agencies there are? Yeah, and who they I mean, we obviously know the big ones, like the top 20 or something like that, yes, but there’s all these. And when was facing that’s most of the the budget, obviously, is, is the ones they do know, obviously. But there are all these other little ones too, you know, which is just a little bit of a worry. Now, you know they’re not going to be, for the most part material. It’s not like you’re going to find, well, 50% of the federal government’s in this agency I’ve never heard of. You know that? You know, it’s not that bad, but, yeah, but you know, at least the Australian Government knows the agencies they have, you know. So that’s kind of a good start. So Elon, you know, someone like me or whoever can at least be a help to Elon going like, you know, I’m not going to slow you down. I want to cut the government like you do, but be aware that even the Treasury doesn’t necessarily know all the agencies are there. So you kind of know you need to know that as part of the process. So, you know, there’s going to be some hurdles putting aside, you know, all the weird sort of processes and protocols in the Senate and stuff, you know, on budget but, but now they control, you know, the Republicans control the House, they’re on board with the Trump agenda. They control the Senate. They’re going to have to push out Mitch McConnell, basically, and then get someone in the Senate who’s going to also facilitate what, you know, Elon might want to do, yeah. I mean, there’s obviously, you know, in the US, you know, there’s obviously, there literally, is a separation of powers, you know, obviously, you know, in Australia, the Prime Minister is the head of the executive. He’s also the head of the legislature at the exact same time. Yeah. So things, whereas you know that, you know, the Congress is in charge of the purse strings.

Gene Tunny  37:36

So the G the GOP has got control of the Congress, has it? Is that correct?

Darren Brady Nelson  37:40

Yeah, you know. And they got, they really got, not just in charge of the Senate, they, you know, they really did way better than I guess a lot of people expected. So they’ve, they’re totally in control of the Senate. They’re still in control. I think they’ve that. I could be wrong, but I think they increase their lead in the house as well. So they’re, yeah, it’s definitely in control of both houses, you know, they’ll need to, you know, push McConnell out the door gracefully, or not so gracefully, and then, you know, Congress needs to work, obviously, very closely with the Trump administration. Hopefully, you know, Elon Musk will be in charge of, you know, I think he wants to call it the Department of government efficiency for whatever reason, because he had that doggy. I’m not sure if it’s doggy or Doge, but so look, I’m sure he’s not gonna, like literally be running stuff on a day, but although maybe I could be wrong, maybe he will take time off to literally, you know, put his energy into this, you know, whether you know, I end up working for him or not. I hope he gets a good team, you know, can help him out. And certainly no one who’s going to try to get in the way and constantly say, You can’t do this. I can’t do that.

Gene Tunny  38:58

Yeah, well, you can send him a note and say that you’re is you were his number one door knocker in Wisconsin, weren’t you?

39:06

Yeah? Well, yeah, I was absolutely

Gene Tunny  39:08

and you got a lot of good, well, you got some, yeah, you got, you got some good ideas in terms of forcing them to make efficiency gains each year. So I mean that we can have a discussion. We had another discussion, another time about exactly how you’d make that work. I mean, there’s a, and you mentioned that, you know not, you don’t necessarily. I mean, your models one, there are other models that the idea is to have some type of, yeah, it gets some type of mechanism. Or that just works against the general tendency of government to keep expanding, right? To just keep growing with population and inflation. So I think that’s a that’s worth considering. I want to ask about before we wrap up, there are a couple of things I want to ask you about the deficit, and then we should just chat about trade and what Trump means for trade. How likely is it that Trump’s going to get the budget under control? Because. A the budget, the US budget, is currently in a structural deficit. Is it? I mean, is it a trillion dollar deficit? I don’t know the exact figure, but it’s massive. And you know, one of the figures Niall Ferguson is talking about. Now, I saw him at the ARC conference here in Sydney, and he was talking about how interest expenses on US debt are projected to exceed defense spending, right? And Trump’s want to he’s going to have a big tax cut. How? What are the prospects for him actually getting this under control the budget and limiting the growth of debt? Do you have any thoughts

Darren Brady Nelson  40:35

on that? I mean, you know, besides breaking my CPI minus x, which actually eventually takes debt down to zero and and gives, you know, over, this is over the course of 12 years, by the way, so that was like, it’s be assuming that Trump’s in for four years, and then Vance can actually be in for eight, you know. You know, obviously, that’s maybe stretching things a bit, but, but, you know, and then allows people, you know, he could get the just using my CPI minus x, and I think Elon Scott probably, I’m guessing, something even more heroic than what you know, I was doing with a CPI minus x, but simply under CPI minus x, which is focused on spending. Obviously, you know, I’m going to circle back eventually, but that would get rid of all debt. And, you know, some economists obviously go, Look, you should have some debt, and that’s fine, but you just like, theoretically, you could get rid of all the debt and also get back every average taxpayer every year, 19 grand. So that’s not bad. So you could do both at the same time. And I think so whatever happens on that front again, I’ll come back to really, you know what your question was, but you’ll need to, as you go along, not be obsessed with just getting debt and like, give no relief to taxpayers. You need to combine the two together somehow. But of course, now to get back to your question, it’s going to be what say Elon Musk or someone could do, because spending is the problem. Spending no problem. So if you can get spending under control in a big way, not just kind of play around at the edges, like they have often done over the years, like, Oh, we’ve slightly reduced the growth of spending. No, no, you got to. Can’t just reduce the growth of spending. You got to reduce the actual spending, right? And defense isn’t the problem. Really. Defense is like 10% of the budget, right? You know, we start adding up. You know, both social and corporate welfare. That’s where the biggest problems are. And then you throw in as as Trump called it many times, the green scam. That’s also a huge pile of money as well. So that’s, that’s where the work needs to be done. And and then just throwing the fact that, you know governments, in particular, it seems federal or national governments tends towards a lot of waste, right? Just a lot of a lot of fat, a lot of unnecessary, even if they’re doing something that you think is a core thing they should do, they often do it really badly and inefficiently, right? So there’s that too. So, so it’s basically spending, spending, spending, spending, and then also, you know, particularly in the 2020s but maybe also, to some extent, since 2008 that’s, that’s really what the Central Banks has been printing a lot more money for, really, is to for government at the end of the day, going through the the kind of, I think, somewhat pretend process of, you know, bond markets and whatever else fine, but ultimately, they’re just printing money for government, right? So, and particularly, you know, since 2020, onwards, and like I said, the the US Federal Government hasn’t ratcheted back that that kind of printing as much as some of the other Western governments have, right.

Gene Tunny  43:44

So just on the I think you make a good point about spending being the issue. And I’ve chatted with Dan Mitchell, who you know we both know. You know Dan. Well, you introduced me to Dan, I think, and Dan worked on that thing for me, you had

Darren Brady Nelson  44:00

actually introduce me to Dan, to the economic society that

Gene Tunny  44:04

may be the case. Oh, when John Humphries brought Dan over for the Oh, Wow, incredible. Oh, very good. Well, anyhow, what I remember Dan telling me once on one of the interviews I did, that there was a situation where, if you look in Europe, they increase, they brought in the value added taxes. And you’d think that having the all this additional tax would improve their fiscal situation, but 20 years after they introduced it, they’ve actually got more debt or something like that. Or maybe, you know, decades after they’ve introduced it, it didn’t improve their fiscal situation one bit. So I thought that was a fair point. So yeah, it’s definitely, you’ve got to keep the spending under control. I mean, you make the point about the social security, corporate welfare, etc. Now, the issue with the the entitlement program, so to speak, is that, I mean, they’re, they’re legislated, okay, people have entitlements. So it’s, I’m struggling to see how you apply. Your CP, CPI minus x, whereas you’re essentially saying government agencies have to apply this percentage reduction in in spending each year, which would be great if they could do it however, that it comes up against the issue that a lot of this stuff is legislated, so you need to have Congress make changes, don’t you to achieve what you’re after?

Darren Brady Nelson  45:21

Yeah, you’re right. And I think, like, Social Security in particular will just have to be tackled separately, right? And I’m not sure if we ever talked about this, but I think, I think Australia has got a great model, you know, like, what, what they did in the night. I mean, it’s not perfect, the superannuation system, but it’s like, light years better than the US Social Security system, right? So, yeah, I think there’s, you know, I think Australia is, like, an ideal model, at least, you know, a jumping off point to where you could reform Social Security and maybe that. I think that might have to be something different, you know, that might have to work hand in hand with, you know, Elon Musk’s outfit, but it should be something separate. And there’s some, I can’t remember the fellow’s name, but there’s a guy at the American Enterprise Institute in the US who’s also a big fan the Australian superannuation system. And by the way, Dan Mitchell, who you mentioned, yeah, did his PhD on Australian superannuation and how that could be, yeah, you know. So, you know, be awesome to bring Dan, you know, and maybe the guy from AI to kind of tackle superannuation separately, tackle social security separately. There’s a lot of other entitlements too in the US federal government system, but Social Security will have to be tackled separately, and obviously in a more sensitive manner, and in a way where you obviously grandfather people in who you know you can’t, it’s too late for them to you got to make it so no one’s worse off. You know, whatever there is, over time, it’ll probably take, you know, a more gradual reform than than you know you could with sort of other government related expenditures. So that had to be just tackled separately, I think. But I think Australia offers a great model for that, as I think it also does. It wasn’t much of a campaign thing for either side. But, you know, infrastructure, I think Australia also, particularly, you know, under national competition policy was a great model as well. And I wrote a Heartland paper on that in 2020 you know how that could work in the US? You know us being a federal system as well, you could put something similar as Australia did,

Gene Tunny  47:32

yeah, yeah. I’ll put a link in the show notes to that chat. We had a chat on infrastructure, but also spoke with Dan about his book, The Greatest Ponzi scheme on Earth, where we had a chat about superannuation as well. And you’re right, our system in Australia is not perfect. There are lots of debates over how we can improve it, and whether tax concessions for Super are too generous, whether people should be allowed to access their super for housing. I think they should. But there are other people who think that, Oh no, it’s the best thing is to leave it into it, let people leave their like, lock it up until they retire. I’m not sure about that. So there’s a big debate about some of the parameters of it. Right before we go, Darren, I should ask you about trade, because this is one area where there could be some big changes. I mean, Trump’s been threatening. Is it a 60% tariff on China, 10% increase in tariffs across the board, or something like that? Was it 20% what’s the potential for, I mean, this to be to have an adverse impact on us consumers. What’s the potential for a global trade war. How do you think about what Trump’s impact on the economy via trade policy is going to be?

Darren Brady Nelson  48:48

Yeah, look, that’s, that’s gonna be, that’s gonna be a tricky one, you know? So I’ll start out with, I’m not sure if you ended up having him on your show. Did you have Mark Calabria on your show? Not

Gene Tunny  48:57

yet. I haven’t managed to line him up. Yep, yep, yeah. Okay. Well, look,

Darren Brady Nelson  49:02

you know, if you do, I’m just going to kind of, hopefully I’m not giving away trade secrets. Hopefully he’ll talk about this too, if you can get him on. Is he, you know, he was the chief economist for Mike Pence during the first Trump administration. Then it towards the end, you know, he was appointed as, you know, headed, I can’t remember, because there’s multiple financial regulators of various sort. He’s one of the financial regulators, but, but the point was, he had been a number of meetings in the oval of office over the course of the four years. And, you know, unlike, say, Dan Mitchell, who, you know he he thinks Trump is, like, you know, philosophically a protectionist, right Mark, who also was a colleague from Cato with Dan, had the opposite view. He goes, Look, Trump’s not philosophically a protectionist. And I think bears it out like when that one time when he challenged when the g7 were upset with him about his tariffs. He goes. Right? Let’s all get together. Let’s lower, or even get rid of all our tariffs, you know, between us. You know, the in the g7 um, because there’s lots of terrorists that are, you know, allies are putting on each other, right? So it’s not just China, places like that. So I think for I understand Trump, it’s a strategic sort of approach to eventually get, if you like, less tariffs, but also not just tariffs, but, you know, just kind of overall, if you like, you know, trade agreements that aren’t slanted and massively so towards one partner, like, you know, like the ones that seem to be slanted towards China, and that would include all regulatory barriers and all the other stuff. And you know, the Chinese, even more so than the Japanese, once upon a time, are like masters of non tariff barriers to trade, right? So, you know, to sort of attack that sort of stuff. And I think if you kind of take, like a cost benefit or discounted cash flow approach, it can make sense, because it’s not like we’re in a world where there’s no tariffs, and also Trump throws these tariffs on, right? Not in that world. You know, we’re, sadly, in a world with with, not only plenty of tariffs, way too many sort of, if you like, non tariff barriers, as well. So I think, you know, I understand Trump. It’s a strategic way of getting a better deal out of a China or Europe or even Canada, you know, like I, you know, as a free market oriented economist, yeah, my natural instinct is, obviously, I don’t love tariffs or other barriers to trade, but at the same time, you know, I’m kind of skeptical of, you know, you need to at least take, you know, Ricardo model of comparative advantage with a grain of salt in a sense of the logic is sound, except for the fact that nations are not equivalent to individuals or businesses or even industries. You know, they’re not exact. They’re political entities. That what? That’s what makes them very different from comparing them to these other entities. So the model has a certain amount of usefulness, but you can take it too far if you forget that nation states are political entities, and they’re not they’re not like you know, businesses are humans freely trading with each other. They’re just different. They’re just different. They have different incentive structures. And you can take the traction a bit too far. So I’m very given, you know, how badly I think the WTO etc has performed compared to maybe their earlier years under, you know, GATT and all that sort of stuff there. I’m very open to bilateral trade agreements, because I think a lot of these trade agreements were terrible, you know, I’ve looked at the the Trans Pacific Partnership. It’s, you know, 8000 pages of, not so great, right? You know, first of all, why is it 8000 pages, you know, like, that’s just, yeah, yeah. That’s what a free trade agreement, you know, used to look like once upon a time. You know, they used to, it’s too much given favors your buddies, basically. So that, to me, they’re just putting in place a lot of, you know, barriers to trade. I mean, for every one they take out, they may be putting in two new ones. So, so look, I’m kind of, you know, more optimistic. I suppose you know, I’m wary of tariffs. But you know, if ultimately, we can then get, you know, to a point where we get China, or whoever, even Canada at the trading table, to like, hey, all right, let’s, let’s, let’s start to sensibly and in a more equitable way, lower tariffs, lower non tariff barriers to trade over whatever sort of time frame, then I think you might have to use that because, you know, China does not play fair at all. When you’re dealing with with businesses in China, you’re always dealing with the government. Yeah,

Gene Tunny  53:53

yeah. I’ve chatted with some people on my show about that, that enterprise China model, or China Inc, yeah, absolutely, with the non tariff barriers, you’re talking about things like, uh, quotas or inspections or, you know, just require, difficult requirements, difficult regulatory hurdles to get over to, to get into the market. There’s a, I found a briefing on Stanford Center on China’s economy institutions that I’ll, I’ll put a link to in the show notes, just for listeners who are interested in learning more about

Darren Brady Nelson  54:23

dei and climate stuff alone. The West, you know, China’s not doing it. China’s not doing it. Brazil’s not going to do it. Obviously, we’re not really having a whole lot of trade with Russia at the moment, but they wouldn’t be doing it. India. The BRICS, obviously, the BRICS nations, you know, having all these onerous regulations that you know only kind of you know, certain corporate elites in the West can meet, but no one else can. You know that you know, particularly small and medium sized businesses who aren’t benefiting from this stuff are often hurt by these things. So I think you know that’s going to. Of massively changed too, in the US is, you know, the DEI stuff is going to be it, you know, if it doesn’t like, literally, be go away completely. It’s, it’s going to be hugely de emphasized as our, you know, climate things as well. All right,

Gene Tunny  55:15

okay. Tara, this has been a fascinating conversation. Yeah, it’s good to catch up and, yeah, get your perspectives. I mean, again, like I said, I was, I was surprised. I mean, I guess I always thought there could be a possibility of Trump winning, but I didn’t think that was the most likely scenario, and now that he has won, yeah, we have to think about what those implications are for us. Economy, global economy. There are some pessimistic projections, forecasts out there from various economists like Warwick, McKibben. Warwick’s done some modeling of what the adverse impacts are on US consumers, on the US economy, on global growth. But then, at the moment, it looks like the markets aren’t seeing that. The markets have responded rather favorably to Trump with increases in the various stock market indices. And, I mean, we’ve got Bitcoin going up, I think I saw so I think actually, crypto is one thing we didn’t chat about. But I think there are a lot of people are excited about what Trump could mean for crypto. I don’t know. I’ll have to talk to I’ll have to try and cover that on another episode. So yeah, it looks like the market is is relatively positive. And one theory I heard is that might have been on Bloomberg or or CNBC, that Goldman Sachs has a view that, like it is just a negotiating position that the whole threat of the 60% tariff will it won’t quite be that at the most it end up being 20% or something, so would have a lesser, a smaller impact. So I think that’s their their view there. They seem less concerned about what the the possibility of a trade war than than others might be.

Darren Brady Nelson  57:03

But anyway, I would, before you finish, I would add, you know, let’s not forget, everybody’s got a world view. So, you know, Mckibben has got a very strong worldview, which is like, in the opposite direction from Trump. And you know, economists are never value free. Never had been. Sadly, they’re just, you know, they’re even further away from value free nowadays. So it’s easy to put together, you know, a paper with 100 you know, economists and Nobel Prize winners who say Trump is horrible and he’ll destroy the world, you know, I think that’s just, you know, it’s just nonsense. You know, he’s going to be the economy is going to be far stronger under Trump than you know, would have been, you know, under Harris, by far. And I think that’ll be good for Australia too, because, you know, Australia, obviously, a lot of times, just writes the coattails of the US, whether even if labor is in power and not being all that business friendly in the first place. So I think things can be, you know, happy days are here again.

Gene Tunny  58:05

Okay. Well, you’ve made a strong prediction there. Darren Brady Nelson, so I’ll have you back on at the end of the extra administration. See how the prediction, yeah, see how it goes. Yeah. Well, I think yeah, absolutely right. Everybody. Nelson, thanks so much for your time. I’ve really enjoyed the conversation and learning your perspectives. It’s Yeah, huge week of news, and you’re someone who’s been on the ground, and you’ve had some you’ve got some valuable insights for us. So thanks so much.

58:37

Thank you. Bye.

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Podcast episode

China’s Economic Future Under Xi & the Australia-China Relationship w/ Emmanuel Daniel – EP253

Show host Gene Tunny talks with Emmanuel Daniel, founder of The Asian Banker, about China’s evolving economic policies under Xi Jinping. They explore China’s state intervention, the country’s property sector, and the global implications of Xi’s economic vision. Emmanuel also shares insights into Southeast Asia’s rise, focusing on Indonesia’s growth prospects. The conversation concludes with a discussion of Australia’s role in the region, its economic ties with China, and its alliance with the US and UK.

If you have any questions, comments, or suggestions for Gene, please email him at contact@economicsexplored.com  or send a voice message via https://www.speakpipe.com/economicsexplored

You can listen to the episode via the embedded player below or via podcasting apps including Apple Podcast and Spotify.

What’s covered in EP253

  • Introduction (0:00)
  • China’s Property Sector and Economic Challenges (6:32)
  • State’s Role in Economic Development and Social Infrastructure (15:20)
  • China’s Economic Growth and Productivity (29:15)
  • China’s Geopolitical Challenges and US Relations (35:58)
  • Southeast Asia and the Rise of the Rest (44:50)
  • Australia’s Role in the Region and Economic Ties with China (53:38)
  • Final Thoughts and Future Directions (56:07)

Takeaways

  1. China’s State Activism: The Chinese state has reasserted itself in the economy, implementing policies restricting private sector growth with the objective of promoting long-term social stability.
  2. Challenges of State-Led Development: There are limitations to what the state can achieve compared to the dynamism of private markets, especially in frontier technologies.
  3. The Socialist-Capitalist Tension: China’s current policies reflect a unique blend of socialism and capitalism (aka socialism with Chinese characteristics), with the state playing a more prominent role than in Western economies.
  4. Global Implications: China’s economic trajectory under Xi Jinping will profoundly affect global markets, particularly as the state asserts more control over private companies.
  5. Rise of Southeast Asia: Countries like Indonesia are emerging as economic powerhouses, with domestic consumption and political stability driving their growth.

Links relevant to the conversation

About this episode’s guest Emmanuel Daniel:

https://www.emmanueldaniel.com/biography-and-contact/

Economics Explored ep171 on the Enterprise China model:

https://economicsexplored.com/2022/12/26/enterprise-china-what-western-businesses-need-to-know-w-prof-allen-morrison-ep171/

Reuters report “Indonesia minister says Musk to consider offer to build EV battery plant in country”:

https://www.reuters.com/business/autos-transportation/indonesia-minister-says-musk-consider-building-ev-battery-plant-country-2024-05-20

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Transcript: From Academia to Impact: TFranchising Fitness: Lessons from the Expansion of Spartans Boxing Clubs w/ Russell Harrison, CEO – EP252

N.B. This is a lightly edited version of a transcript originally created using the AI application otter.ai. It may not be 100 percent accurate, but should be pretty close. If you’d like to quote from it, please check the quoted segment in the recording.

Emmanuel Daniel  00:03

So the funny thing is that China, the state has become increasingly competent, and therefore became a lot more activist in the way in which the private sector is structured and the role it plays in the economy. I gene,

Gene Tunny  00:27

welcome to the economics explored podcast, a frank and fearless exploration of important economic issues. I’m your host gene, Tunny. I’m a professional economist and former Australian Treasury official. The aim of this show us to help you better understand the big economic issues affecting all our lives. We do this by considering the theory evidence and by hearing a wide range of views. I’m delighted that you can join me for this episode. Please check out the show notes for relevant information. Now on to the show. Hello and welcome to the show. In this episode, we’re taking a close look at what’s happening in China and Southeast Asia with Emmanuel Daniel, founder of the Asian banker. Emmanuel is very well informed about the region. He’s got some interesting perspectives that have really given me something to think about. Among other things, we talk about the direction of economic policy in China under Xi Jinping. Emmanuel alerted me to the fact that the Chinese Communist Party recently had a very significant policy meeting. In the communique from that meeting, they affirmed their support for fully implementing Xi Jinping thought on socialism with Chinese characteristics for a new era. What on earth does that mean? After talking to Emmanuel, I have a much better idea of what the Chinese administration has in mind. I think it’s worth hearing from him what he has to say. Okay, thanks to Lumo coffee for sponsoring this episode. This grade one organic specialty coffee from the highlands of Peru is jam packed full of healthy antioxidants. There’s a 10% discount for economics explored listeners. Details are in the show notes. Okay, without further ado, let’s dive into the episode. I hope you enjoy it. Emmanuel, Daniel, welcome to the program.

Emmanuel Daniel  02:10

Thanks for having me on, Jim. Looking forward to this conversation, and good morning, by the way. Oh

Gene Tunny  02:15

yes, yes. It’s 8am here in Brisbane, and you’re Are you in Singapore or Beijing or somewhere? Well,

Emmanuel Daniel  02:22

today I’m in Beijing, and it’s, you know, it’s 6am I think, so, you know. So I got up for this call, and I’m looking forward to this conversation.

Gene Tunny  02:33

Very good. Yes. So, I mean, you’re someone who has a having a close look at the global economy, and in particular the East Asia, Southeast Asia, and I’m keen to talk to you today about what’s going on there. It seems that there’s been some big news out of China recently regarding their approach to economic development that you alerted me to. Would you be able to tell us what’s going on their place. Emmanuel, well,

Emmanuel Daniel  03:01

you know, I’ve been in China, by the way, since 2000 as in, my first time visiting China was 1994 and then I started a business called the Asian banker. It’s a research publishing business and so on. And so I’ve had a very close view of developments in China, especially the economic, banking sector. And, you know, I’ve seen China make very important decisions that were, you know, like not taken seriously. You know, in the West, I guess, and I’ve seen them benefit from it, you know, like good things happen, you know, after, after a while, and you you see how it all comes together. And I guess that right now, they’re in the process of making yet another very important decision, and I’m now putting together all the elements that you know, will give me a very clear, a much clearer picture of where they’re taking this, you know. So you know, just to give you a background, like in the early 2000s 2001 was when China joined the WTO, you know. And I remember a conversation in 2003 in Washington, DC, where I was with a senator and a lobbyist, and they were saying that, you know, the US could afford a billion dollars a month, you know, to pursue the Iraq war, but that they were very concerned about the non performing loans of The Chinese banks. And I said, Okay, I put it at the back of my mind, and then 20 years later, you see which country actually had economic you know, or a banking crisis, or several banking crises, and which country kept growing quite strongly, you know. And then I look back and say. What were the elements that enabled China to grow strongly from, you know, about 2001 and it grew, you know, unabated until about 2014 you know, and then it started on to a decline. So right now, I think we all are, all of us are familiar with the fact that the party in China has come in and put lots of curbs on the private sector, you know, and and then we see that on from the surface, it looks reactionary, but when we look at the decisions that they made at the Third Plenum of the 20th Party Congress just a few weeks ago. It looks very deliberate, very well thought through and, you know, and very structured. So the one thing that I’ve come to realize about China is that whenever I say this, my my friends in the West, you know, like, like, raise eyebrows, which is that China is actually very transparent in its policies, at least in its economic policies. So it bears well to read what the decisions that have made and so on. So the third premium, they added more structure to where they want to take this economy. I think, about four years ago, the leader, you know, Xi Jinping, made this comment that houses are meant for living. And, you know, and there are three red lines that we cannot cross in terms of the property sector and so on. And at that time, even within China, the property developers thought that, you know, it was just wishful thinking on the part of the state. But as you can see, they have, you know, been very recorded in terms of the way in which they dealt with the property sector, you know. And then you’d think that, like in most countries, they would be more concerned about revitalizing economic growth and so on, but they were not in any hurry. And that’s that was the actual that was actually the feedback that lots of economists and analysts had outside of China to the decisions made in the third plenum that was just helped, which is that, hey, I thought that you’d be serious about revitalizing economic growth and so on. You know, I spend lots of time in China. I’m a friend of a number of the economists who actually contribute to national thought and, you know, to the State Council. They, you know, present papers and so on. And there are many different, you know, opinions floating around in the marketplace, but the state has taken the view that it has the resources to, you know, to take a socialist approach to creating an equitable society, you know, and it’s paying the price for it right now. And I think that for the rest of us, it bears to take a look at the decisions that they’ve made and, you know, the options that they have given themselves and what they’ve not given themselves, and see how far they can go with it. You know, I think that what they’re really trying to deal with is that blatant capitalism is not good for China. You know, that’s that’s a policy decision that the politicians have made. In fact, a couple of the economists have told me that there’s a big difference between what the economist think about, you know, spurring growth and creating a sustainable society and all that should, how that should work out, and what the politicians think. And it’s a there’s a big divide between the two. So the big question that we need to set for ourselves now is, will the politicians be able to afford the kind of economic system that they, you know, that they’re working on, you know? And you know, what will work and what will not work going forward,

Gene Tunny  09:13

right? Okay, look, there’s a lot to a lot to talk about there. Manuel, I think that’s, yeah, that’s a terrific setup for this conversation about China. A few things just to just so we establish the facts. First, you mentioned there were, was it three red lines for property, for construction, or did I miss

Emmanuel Daniel  09:40

it ago? Now, like you know that, that I forget what they are now, but one of it was that, you know, the property sector cannot borrow extensively from the banking sector and, and I can’t remember the other two. But so basically, you know, the state put out. Uh, guidelines in terms of what the property sector needed to do. The interesting thing with the property sector is that it was, until recently, the, the only, or the most important source of revenue for the provincial governments. So China operates, you know, in a centralized economy, but with a federated system, where the central government expects the, you know, the provincial government to generate their own sources of income. And so when the property sector just grew out of air, meaning, you know, it borrowed extensively from the from the banking sector, there was oversupply in some places, and property prices went up because property was basically the only asset class that most Chinese could invest in. China’s financial sector is not as broad based and as liberal as much of the rest of the world. So all these factors contributed to overheating in the property sector. And when the state put curbs on it, they did it did not give the provincial government, you know, much other options in terms of new sources of income. And so what you see now happening in China is that a number of the provincial governments have problems raising revenue and and then in turn, you know, has an effect on state owned enterprises, jobs and stuff like that right now. Gotcha.

Gene Tunny  11:38

Okay? And and, so what, what did the state do? So, you mentioned they put curbs on it, and what was going on with the property sector? I mean, we saw that there were, there was a whole bunch of development. I mean, you had ever grand, and it looked like there were, there were cities being developed, that were ghost cities, that, at least, that was the, you know, what was being talked about over here. I mean, what actually, what actually happened was it just a mania, a construction building boom. Was the state behind it? What was actually driving it? And then, how did they, how did they curb it? Well,

Emmanuel Daniel  12:14

they basically went after the biggest property developers and and curb, you know, the ability to borrow from the from the banking system, because they were very clear that if this, you know, if this sector overheats, it will have a reproduction on the banking system. But as I said, the real issue in the property sector was that property was basically the most important source of revenue for Provincial Government. So what they do, what they did was, you know, acquire land and hand it over to the developers, who then borrowed money from the banks to develop that and resold that, and that became a source of revenue for the provincial government, you know. And the thing is that you know this narrative alone, the idea that you know there were ghost cities and so on, belies the fact that there were good things that were achieved, you know, in the property sector. China today has easily 20 to 30 a grade cities, you know, relative to the rest of the world. I mean, in that it built very, very good cities in as many ghost cities that you find that were created in provinces that were either underdeveloped or, you know, where sources of income and jobs were not as well developed as the property. That’s where, you know. And then, because of rural urban migration, the concentration of population moved to the a great cities, and then leaving these other small towns emptied out. And I think that’s actually what happened. But if you look at the overall figure, the urban population of China is actually still underdeveloped relative to what you see in the West, in the US, I think in the US, I think about 80% of the population lives in urban centers. In China, it’s still about 60 something percent. So it’s still got a way to go. It’s just not well distributed, you know, and they are capable of working it through over time, you know, if this was the US, what we will be seeing is widespread bankruptcies, and you know, fallout from the from the parts of the country which economically not viable, in favor of the part of the country that where the concentration of jobs and in. Streets are so I think so it’s in my view, because I live here, I spend time here. That’s the redistribution. That’s what’s happening in China on the property front.

Gene Tunny  15:12

Gotcha, okay, can I ask about this, this new Well, what the Chinese administration is what it’s saying about economic development. It’s saying blatant. Well, this might have been the president blatant. Capitalism is not good for China. So to what extent is that? I mean, that’s self serving rhetoric in favor of the existing party, or is it? I mean, what’s the basis for that statement? Do they have any factual basis for it? I mean, capitalism, to the extent that they’ve embraced the market, hasn’t that been behind their economic development? Could you just tell us a bit more about what their what their justification for that statement is? Please. Emmanuel, the

Emmanuel Daniel  15:55

single most important justification is that the Gini Coefficient of China is almost the same as that of the US, so the rich getting richer and the poor being left behind is as much a phenomenon in China. In other words, it’s just as capitalist as the US, and they’re trying to reverse that and make it more equitable. But the way in which they’re doing it is that the state has become a much more, you know, dominant, capable force. And here’s, you know, here’s my structure by which I think through what the state wants to achieve and where it is in that evolution, you know, between 2001 and 2014 the state was putting in place very interesting policies that facilitated private sector growth. And you know, by the time you get to 2004 after China joined the WTO Goldman Sachs started to put out reports saying that, you know, the future is China. Is the future is the large populations the world, and then they come into China. And at that time, the platform players like Alibaba were just coming on on stream, and the Western, you know, capital markets funded these platform players dramatically, you know, and from the time that Goldman Sachs and Masayoshi Son, you know, the private equity the venture capitalists came in and took, You know, stock of potential winners in China. They led some of these to incredible growth. So at the height of its being listed in the US company like Alibaba, was able to be the capitalization was like $830 billion and when you’re capitalized to that extent, you visit a city like Hangzhou in Zhejiang province in China. And the, I call it the cascading effect of capital, the capital comes back into the city, and Alibaba invests in, you know, second tier startups which were, you know, which were the size of a few billion dollars, and those invested down the downstream to other startups. And you have a whole ecosystem of very good players. Now today, Alibaba is about 150 160 100 and $70 billion dollars in market cap and and that shows up in Hangzhou. Again. You go to Hangzhou today, there is widespread joblessness, and you know, and it’s very difficult to pick and choose which frontier technologies that they want to invest in and so on. And the state is saying that that’s okay, because not to worry. We will, we will fund you. We will, you know, guide you. And we will, you know, we will lead the economic growth. And there’s this huge debate whether you know how much of the next phase of economic growth in China should be led by the state, and which phase should be led by the private sector now, so between about 2001 and 2014 the state was happy with The role of facilitating some structure so that the capital markets, and especially the foreign capital markets, can, you know, can create winners out of the private sector companies like Alibaba. And after 2014 the the state started to become, I call it competent, uh. You know, the funny thing is that, and I think this phenomenon, by the way, is repeated in every other country in the world, including highly capitalized, capitalistic countries like the US. When the state becomes confident it creates gets a handle on how to manage, you know, huge infrastructure companies like Amazon and so on. It becomes intrusive. It becomes important, you know, it becomes involved in the in the structure that it’s creating. So between after 2014 the state put in place laws like, you know, data privacy rules, and then also took assertive influence in terms of where these companies go out to raise capital and so on. So the funny thing is that China, the state has become increasingly competent, and therefore became a lot more activist in the way in which the private sector is structured and the role it plays in the economy. Now the status other two other functions to play. One is to provide the social infrastructure, the, you know, the education, the healthcare and all of that. And it does that really very well, you know. And we shouldn’t undermine what China has achieved on that front. In fact, if you come visit China, you’d be, you know, you’d be very impressed with the quality of life in China. And then the second pillar, as I think, as I think about it, is the way in which the state funds or subsidizes frontier technology. So this is not the US capital market. Is the Chinese state looking out for, you know, next generation technologies and and infrastructure that it needs to invest in. And there it had. It had invested in a number of areas. So 5g for example, you know, China is one of the first, was one of the first countries that went veg. The state invested in it. But today I’m actually hearing a few speeches given by former ministers in China saying that, you know, we hurried up and built all this infrastructure for G but there are no applications, and a veg base station cost three times more to run than a base station, and if the applications can’t come on stream as quickly as they should, you know, the telcos don’t benefit from it. And, you know, the investment is way ahead of its time, you know, and and so the thing is that, when, when China, then, you know, says that, look, our EV car business is doing very well. It was the result of the state subsidizing 1000s of EV car initiatives in multiple cities. And then, you know, and that becoming affiliate, you know, a it takes up momentum, and it becomes takes a life of its own. So you can point to a few things where the subsidies have generated new technologies and new industries that didn’t exist before and become world players on top of it. But you can also point to industries that floundered and, you know, being left behind or being quiet. So now the state wants to be the, you know, most important investor in AI technology, you know. But the thing is that on the AI front, the capital that does the Chinese state can put into it, it pales in comparison to what the US is doing. So if you look at the top six AI players in the US, the capital that they are able to garner is about ten trillion I think, and that’s the entire capital market of China. So there is a limit to what the state, any state, can do. It’s not just China, but even the US is not able to fund its own frontier technologies. Is the, it’s the US capital market, which is the giant in this, in this, in this area. And then comes the role of the private sector. No, why can’t the private sector go out and raise its own capital and all of that? So that’s the lay of the land. That’s the, you know, the issues that China is facing. And the big question I’m asking myself, as I put all this together, is, will the state be able to afford the kind of economic structure that is trying to build?

Gene Tunny  24:59

Yeah. Yeah, okay, so I just want to, you know, talk a bit more about, you know, the nature of the Chinese economy. Because the just sort of, I guess I’ve reacted a bit to this statement, blatant capitalism is not good for China. I’m not sure to what extent they’ve had blatant capitalism. Because, I mean, my understanding of China, I mean, this may be wrong, but it’s, you know, it’s state directed capitalism or or it’s socialism with Chinese characteristics, as Deng Xiaoping described it, you know, many years ago. So, I mean, the state’s been heavily involved, and that brings all sorts of complications. You’ve got all these SOEs, state owned enterprises. There’s this enterprise China model that one of my guests was talking about a couple of years ago when I had him on. I’ll have to link in the show notes to that, the idea that, you know, once you get to a certain size that there’s a party official, you have to have someone on your your staff, who’s, you know, connected to the party. I mean, it just seems that the state is already very heavily involved in in business in China, and the idea that it could be getting more involved, I’m not sure that’s the that’s the recipe for for economic success, but that that’s just my my view, just That’s my reaction to that statement. So just interested in any reflections on that, or we could move on, please, up to you. Emmanuel,

Emmanuel Daniel  26:28

yeah. I mean, you know, thing is that the idea of the state becoming competent enough so that it has the confidence to involve itself in the private sector. That’s where China is today. For large state owned enterprises, they’ve always had a Communist Party official in there. The whole picture is one of the competency of the socialist state. And for the longest time, we’ve never had that, you know, the during the Cold War, the socialist state wasn’t competent. It wasn’t a good allocator of capital. You know, it didn’t motivate individuals to to be self reliant and you know, and generate capital, you know, and there, you know. It was just an inferior form of creating economics relative to patent capitalism. But when we put it alongside each other today, patent capitalism did has is destroying the US right now. You know, it’s, you know, it causes this great divergence in terms of the ability to, you know, even look after yourself. You know, the the rise of homelessness in the US and all of that, and the divergence in salaries. I mean, you got CEOs who earn hundreds of millions of dollars in salary for the same 24 hour work that that the last worker gets paid. So you get all these, you know, these courts in in capitalism, which is what China is trying to deal with, but you have a state that has come to a level of competence, that it thinks that it can pull this through. So, you know? So now I’d say we take a wait and see attitude. Now, what I say to myself is I missed the big picture in about 2003 2004 when I doubted China’s ability to generate economic growth given the non performing loans that set in the banking system. But they averted that by by hiving out all the bad, bad debt and putting it into two huge asset management companies. And as the economy grew, they were able to deal with that NPL situation. So now, with the slowing economy and geopolitics up against them, some of those options are not available anymore, so we will have to see. But however, given the fact that China has now come to about $12 trillion in GDP. It has sufficient internal momentum to keep growing, you know, but not in with the at the rate at which it was growing when it was, you know, much it was benefiting a lot from the global capital markets.

Gene Tunny  29:40

Yeah, and was the Chinese economic development story. Was a lot of it the migration of people from rural areas into the cities. I mean, it’s the old Arthur Lewis economic development story. You’ve got people underutilized or, you know, not very productive on the land. They move to the cities. You get a big bump up. Productivity is that, is that still occurring? That migration? Yes,

Emmanuel Daniel  30:03

well, the migration was a reallocation of human resources, you know. And China invested in 40,000 kilometers worth of high speed railway, you know. And and China Railway cooperation, and its, you know, related organizations about $800 billion in debt right now, but it’s a debt that they are able to absorb, because as long as the economy keeps growing, you know, it will be able to ameliorate the debt over a period of time and but as an infrastructure, it’s amazing. It’s going to stay for a long time to come, you know, but all of that did not really result in higher productivity gains, and China is the one economy that grew dramatically without a commensurate growth in productivity, and that’s interesting part of the story that it’s not very talked talked about. So, so now you have wages rising, you know, well beyond sustainable levels. And the state has come in and said, No, we can slow down a bit now, so that, you know, we spread out the wages to the rest of the economy, and bring up agriculture, for example, and revitalize the small towns this urban, rural urban migration was necessary at a time when, you know, China’s urban population was not developed enough to, you know, to take advantage of a lot of the export led, you know, industries. So they needed to create jobs in the big cities. But right now, they want to spread it out a bit more. And the cities that benefited were, you know, were not, were not universal. It wasn’t all cities that benefited, and that’s why we see the ghost towns. The there are many cities that try to become more urbanized, more industrialized, but just didn’t have the means to

Gene Tunny  32:16

so what is the Chinese economic growth story? Is it? I mean, is it foreign investment, or is it, it’s domestic investment in a supposing capital? What is it? What’s the story? So,

Emmanuel Daniel  32:31

exactly as I indicated earlier in this conversation, which is, there are three pillars of economics, okay, one is the state spending and building infrastructure. The second is the state subsidizing industries, and the third is foreign capital. And so what has drawn back now is the access to foreign capital, and the state thinks that it’s able to make up for that by, you know, by supporting private sector companies, which, as you indicated just now, have got Communist Party officials sitting in the company, you know, and second guessing the decisions that need to be made. You know, it’s this is as far as socialism has come as being a viable alternative to capitalism, you know, and they’ve taken it very far, you know, it’s a working system. It’s just that they now have the confidence to think that they can take it further. So like in the main cities, for example, in Beijing, in Shanghai, investment bankers used to be paid the same as investment bankers in the West, which is you try and second guess how much capital you’re able to raise for your client’s company, and you get paid on a success basis, and on a success basis, they paid incredible amounts of bonuses. And now the state has come in to say that investment bankers cannot be paid as they used to be, that those bonuses are illegal under, you know, Chinese style socialism and the capital market here is reverberate, reverberating from those decisions. Saying, Wow, okay, let’s see where you going to take us now. So it’s it’s work in progress, and when you look at states that eventually centralize the economy, a lot everything from Germany before World War Two to Japan in the last 30 years, the capacity of the state to to hold an economy together, especially a large state, can go a long way. You know, it won’t be the same as a, you know, a openly capitalist country, but, but it still can. Um, you know, this story can go go on for another 10 to 15 years.

Gene Tunny  35:05

Okay, what about this socialist approach to creating an equitable society? What types of measures do you think they they have in mind?

Emmanuel Daniel  35:15

It’s every facet of society, everything from the time in which they they banned, you know, educational institutions outside of this, you know, formal school structure, there were online learning systems that, you know, that were making lots of money. You know, people generally spend a lot of money on on things that they’re afraid of, healthcare, you know, education and so on. And you had this, this making, you know, a lot of money from parents, you know, fearing for the future of their kids and so on, you know. So it’s in every facet of society, the building of affordable housing, you know, access to health care. You know, China has got one of the best public sector health care system in the world, you know, and it’s, it’s getting better, Social Security, putting that into place, and ensuring that that, you know, people have income for the rest of their life, which is not pension, you know, in the like in the old days and so on. So I think that just touching on every facet of society, you know, right down to how much time a kid can should spend on on gaming, online gaming, you know? So, so then for the rest of us, looking in, we’ll think that, well, that’s a bit intrusive. And the state making lots of decisions for everyday life, which is, which is what it’s doing right now. So you know how far they’re able to take. That will remain to be seen.

Gene Tunny  37:01

Okay, we’ll take a short break here for a word from our sponsor.

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Gene Tunny  37:35

now. Back to the show. I’m sorry to keep talking so much about China, it’s just that it is so. I mean, it’s such a pivotal part of the global economy now, and that it’s it’s hard to talk about anything else so, and I have so many questions. I mean, I like, I agree with you. I mean, it’s been an incredible success story. I mean, it’s within our lifetimes that, I mean the predominant, like when we were young. I mean, they’ll, you know, the predominant mode of transport in China would have been bicycle, wouldn’t it? I mean, like, the amount of economic progress that they’ve had, particularly since, you know, Deng Xiaoping opened up, start open up progressively from the late 70s and the 80s is just absolutely extraordinary. So, yeah, just just incredible progress. What I want to ask is about the, you know, I have, I’ve had a few guests on my show, or maybe two, or maybe a couple, who are very concerned about, you know, the whole China, Taiwan. They’re concerned about China being aggressive militarily, and it looks like there are some very hawkish there’s a very hawkish pivot, or a tilt in the US State Department towards China. There’s more, rather than seeing, you know, 20 years ago, we had this view of cooperation, or, you know, the gains from trade and all of that. Now there’s a lot of concern about national security. Do you have any thoughts on that? I mean, how is, how do you see that as playing out over the next decade or so?

Emmanuel Daniel  39:09

You know, from about 2010 I guess I started coming across commentators who were, you know, putting China on and making it believe that it will become the next leading nation of the world, and all of that since Xiaoping’s economic direction and economic model did not include grandstanding and did not include trying to project itself as as a world power and all of that. In fact, there was a lot of work to be done in China. Was very happy to be, you know, a work in progress. In fact, one of the reasons I am in China is because they invited people who are experts in all kinds of different growth of the country. Three but after 2010 there was this growing assertiveness, and I guess the Americans reacted to that right and and China’s economic growth would not have been possible if the US didn’t allow China to join the WTO in 2001 and that that entry process itself was a long iteration before that. So you get a situation where, you know, the country that used to, you know, just provide the rest of the world with manufactured goods and so on, is asserting itself as a world power. The thing is that China is dialed back a little bit on that, on that narrative, because, from a business point of view, why would you, you know, get on the heckles of your most important client. You know, the business that China does with the US is larger than the business than that China does with any other country in the world, almost put together, right? So, so China has to figure out, you know, how to continue doing business and selling to the US. In fact, you now start hearing that there’s an effort to, you know, to soften that relationship with the US. But at the same time, there’s this thing called Xi Jinping thought which he’s promoting kids in school right up to presidents or banks have to study it, and the way in which it’s been put together is that he’s firing on all cylinders. He’s he’s working on all objectives at the same time, you know, so you get situations where he’s trying to promote regional trade and, you know, forming trade associations and trade alliances, while at the same time having border problems with, you know, all 14 of its of the of the countries on China’s borders. So you know, how will he, or how he will be able to, you know, build a sustainable narrative from, from, you know, pursuing all objectives at the same time will remain to be seen. I think that he will achieve a few of his objectives well, and some will have to, you know, he needs to stand down on them if he’s going to get any good will out of not just the US, but, you know, any of the other countries, with the Philippines, with Vietnam, with India, you know, and so on. So. So I think that he’s being incredibly ambitious. And I anyone in his shoes, will say that, yeah, we will not be able to achieve all our objectives, you know, and and some will have to go by the wayside. The thing about Taiwan is that when China sets itself up as a as Taiwan being a non negotiable, you know, item, it also sets itself up to be ridiculed by countries that want to find the soft spot of China. So, so it’s not, not surprising that the US would use Taiwan as a, you know, as a sore point that on which it could raise the heckles of China. So, you know, and by the way, don’t sell, sorry. Xi Jinping has has has given a mandate that by 2049 which is the 100 years you know of 2049 that that that that should be re reunification, so, so by giving himself a deadline, he reduces the number of options available to, you know, to make this possible. So, you know, I think that some form of military, militaristic approach is inevitable just by reducing the options given to themselves. So it’s, I’m not a, I’m not a, you know, military person, so I wouldn’t comment on how exactly that’s going to be carried out, but it’s the rhetoric that gets them there. Yeah,

Gene Tunny  44:30

yeah. I mean, it’s, it is a great concern. I mean, that certainly could be a, you know, huge Flashpoint globally. But yeah, I mean, yeah, I’ve had, had a few conversations about about Taiwan and the issues there. It’s all fascinating. Emmanuel, that’s been great on China. I really appreciate your insights. I think we’ve got a little bit more time. I’d like to ask you about the, what you call the rise of the rest. I mean. One country I’ve had a bit to do with is Indonesia. I’ve done, done courses for finance ministry officials there and for their economic development agency, I think Baba NAS, if I remember correctly, what’s happening there. At the moment, we’ve got riots. I mean, there’s a whole bunch of instability. What’s the outlook for Indonesia?

Emmanuel Daniel  45:21

I mean, Indonesia has been a success story for Southeast Asia. It’s a $1.3 trillion economy, so it brings it up to the level of the large countries in the world. But even as we spend time thinking about US China relations and the US, China, dynamics, and the rest of the world. I think what we’re seeing now is the rise of the rest, and not just in Southeast Asia, in different parts of the world, in in the Balkans, I see Serbia coming up pretty strongly in, you know, Latin America, you have Brazil, and these are what I call the middle income, the middle power countries, you know, not, not the the, you know, the Cold War belligerents, but the the second tier players. And Indonesia also has had the most successful, you know, move into a sustainable, democratic, you know, structure since the 1997 1997 Asian financial crisis, 1998 Asian financial crisis. It’s come a very long way, except that it’s now, you know, solidifying into a political structure which is sustainable now in the US, outside of the Democratic and Republican parties, there is no chance for independents to come on and and provide a different political agenda. You know, there’s no platform that makes any independent or a third party viable, despite many attempts to build that. And I think that all that is happening in Indonesia right now is that the incumbents who have become successful in, you know, in building their own political asset are now trying to, you know, centralize the assets and and to become, you know, the deterministic force in Indonesia, and this, essentially is Widodo political party and his family and his friends and the people that he wants to work with. So the as even as the new president is taking over, in fact, the in the best indicator of a very successful political process is one where you don’t remember the last six presidents. You know, in other words, the transitions have been going very well, but I think that there’s enough political assets that have been created where the political players want to solidify it by putting in place laws that that favor them. And people are going out on the streets and saying, No, we won’t let you do that, because we want to have a political system where new players can come on stream and challenge you if they wanted to. So I think that in some ways, it’s a natural evolution of stable political system, but on another level, it’s it threatens democracy because it reduces the number of players and entries into the democratic process. But at the same time, economically, Indonesia is doing profoundly Well, I think that we forget that it’s got a viable domestic consumption market, in fact, much more successful than China. And because of that, there is a desire for foreign investors to be invested directly in Indonesia. The Indonesian stock market is now bigger than that of Singapore, which is a regional finance supposed to be a regional financial center, and is, and just by the sheer size of the economy, is the most attractive economy in that part of the world, and so and in the same way, when we look at countries where populations on the increase, like like Vietnam, Philippines, Thailand, they GDP growth is being driven not by productivity gains or shifts in industries and so on. It’s just by the sheer size of the growth in the population. And as they do that, they need the political system to hold you know, the kind. Country together. So, so each of these countries have different problems that they’re facing and and they’re finding their way. And, you know, so it’s a work in progress, as it were, now. The The upshot of all of that is that some of the older developed countries in the region, Singapore, being one of them, are floundering because they are losing the role that they used to play, which is the regional, regional financial center, and they have to reinvent themselves to to be relevant to the rest of the region.

Gene Tunny  50:34

Okay, okay, yeah, that’s, yeah, that is a bit of a concern, like what you’re saying about Singapore, because it has had that reputation and, but, I mean, now it’s got a flourishing tourism sector, hasn’t it? I mean, it’s got a lot of advantages to it. And I guess there’s a domestic, you know, the services economy there. I mean, what are the prospects for Singapore and, and, I mean, other other countries in the region,

Emmanuel Daniel  51:01

it used to be the, you know, the financial center in which you raise capital, and today it’s got a capital market that’s smaller than, you know, several of its neighbors, smaller than Indonesia, smaller than Thailand, and less active than even Malaysia, which has had political problems. So what’s interesting is to see, you know, countries where the politics is unstable, but the economics is pretty good, and the economics is, you know, growing from strength to strength. And when I look at the numbers, and I try to figure out what the drivers are, on the onset, the most important driver, really is population growth, and then comes everything else. So if you’re going to be invested in Indonesia, you should be invested directly in Indonesia, and not, you know, come to use Singapore as a regional center and then get into Indonesia. So that’s where industries are right now, and everyone from Elon Musk to, you know, fund managers are directly invested in the countries that they are interested in. And so to that, Singapore has to reinvent itself. And you know, there are industries where by just being marginally better than the rest of the region, like ports, for example, or airports. It has the up effect that is, you know, you land in Singapore before you go to go off to any of the cities. But as the cities themselves improve their infrastructure, they become direct destinations themselves. So Singapore is, you know, has to work very hard to figure out its relevance. Now, having said that, it doesn’t mean that Singapore is going to be left behind. I think a rising tide, you know, raises all boats. So Singapore’s own GDP continues to grow, but not on the same elements that gave it the growth 10 years ago. You know, it just needs to be more relevant and more plugged in with to the rest of the region. Yeah,

Gene Tunny  53:09

yeah. I just pulled up of that’s an interesting point you mentioned about Elon Musk. So I’ve just noticed Musk to consider opening battery plant in Indonesia. So it looks like there’d be some deal done with the the administration, and probably some subsidy of some kind, so that, yeah, that’s interesting. I’ll put a link to that in the show notes. Okay. I mean, you’re, I think this has been terrific. I’m going to have to have you on again. I think, I mean, there’s so much to talk about, and you’re such a wealth of, wealth of knowledge and insights into the region. So I think we’ll have to wrap up for now. But any final words before we we do wrap up, and hopefully I can chat with you sometime in the future.

Emmanuel Daniel  53:49

Yeah. I mean, I’m very interested in how the world looks like from Australia looking out, you know, and Australia’s own, you know, role in the rest of the world. I think that Australia is a, you know, the largest exporter of commodities to China, and now that the relationship has been, you know, put on a more even footing, we find Australian wines back in the stores in Beijing, you know. So Australia is the middle tower, which has a very different dynamics from, you know, from the Geo, geographically centric model, which is, you know, if you are in Southeast Asia, it’s Indonesia. If you’re in the Balkans, in Serbia, if you’re in North Africa, it’s Morocco. But Australia sits outside of the of the ring of influence that it wants to play in. So, so that’s, that’s another conversation, and another day, yeah,

Gene Tunny  54:51

I think so. I mean, you’re right. I mean, we are so like, yeah, we’re such a big commodity exporter, and now our economy is so. Are tied to China’s at the moment, and, you know, it affects the the iron ore price and the coal price. It is extraordinary how connected we are and and yet, that’s why we’re having a big debate at the moment about, you know, they’re the orcas deal. Maybe we should talk about that another time. But there’s a big debate about whether us aligning so closely with the Americans and the British in this aukus nuclear submarine deal, possibly antagonizing China. Actually, I think we are antagonizing China doing that. What are the implications of that? We’ve, we’ve had a, I mean, while, I mean, I think there’s a lot of sympathy for the Americans. I mean, we’re, we have a very, very strong links with the United States, particularly because of the wartime relationship. I mean, I’m in Brisbane, here where we had Douglas MacArthur based, okay, and so we’re very grateful for for the Americans. But, yeah, at the same time, we’ve got a prime minister, Paul Keating, who was very, you know, very strongly, fervently nationalist Australian, very, and he was, he’s become very critical of that orca steel. So I think it is something to that we need to talk about some more in in this country, that’s more of a, more of a comment from me. Any any reactions to that before we close. Yeah,

Emmanuel Daniel  56:21

so it comes back to my the first point I was trying to make in this conversation was that if we take the labels off and, you know, and not deal with the desire of countries to build working economic systems and not call it, you know, capitalistic or socialist, we were able to evaluate them much more equitably and then understand the baselines from which they work. So China’s baseline is that it’s, you know, it’s the momentum that’s created for itself in the economy. It can go for a while yet, you know, despite, you know it being, you know the areas in which it’s made some mistakes, or it’s slowing down or or de prioritizing at the moment. So so let’s see where they go with that.

Gene Tunny  57:13

Very good Absolutely. Manuel, Daniel, thanks so much for the conversation. I found it really informative, and yeah, love your insights. Certainly want to chat with you some more. And yeah, keep up the great work. So thanks again for coming on the show.

Emmanuel Daniel  57:28

Thanks gene for having me on. And great conversation,

Gene Tunny  57:33

righto, thanks for listening to this episode of economics explored. If you have any questions, comments or suggestions, please get in touch. I’d love to hear from you. You can send me an email via contact at economics, explore.com or a voicemail via SpeakPipe. You can find the link in the show notes. If you’ve enjoyed the show, I’d be grateful if you could tell anyone you think would be interested about it. Word of mouth is one of the main ways that people learn about the show. Finally, if your podcasting app lets you, then please write a review and leave a writing. Thanks for listening. I hope you can join me again next week.

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Credits

Thanks to the show’s sponsor, Gene’s consultancy business, www.adepteconomics.com.au. Full transcripts are available a few days after the episode is first published at www.economicsexplored.com. Economics Explored is available via Apple Podcasts and other podcasting platforms.

Categories
Podcast episode

Dollar Dominance: Can the US Keep Its Edge? w/ Stephen Kirchner – EP246

This episode features a conversation between Gene Tunny and Stephen Kirchner about the dominance of the US dollar in global finance. They examine the reasons behind the dollar’s strong position, the effects of US fiscal policy and public debt, and the debate over the future role of the US dollar. Kirchner provides insights into how the US’s status as a net oil exporter influences currency dynamics and global trade.

If you have any questions, comments, or suggestions, please email us at contact@economicsexplored.com  or send a voice message via https://www.speakpipe.com/economicsexplored

You can listen to the episode via the embedded player below or via podcasting apps including Apple Podcast and Spotify.

About Stephen Kirchner

Stephen Kirchner is the Senior Economist at the Business Council of Australia, the former Program Director for Trade and Investment at the United States Studies Centre at the University of Sydney, and a Senior Fellow of the Fraser Institute. An expert in monetary and fiscal policy, financial markets, and trade economics, Mr. Kirchner was formerly a research fellow at Australia’s Centre for Independent Studies, an economist with Action Economics, LLC and a former director of economic research with Standard & Poor’s Institutional Market Services, based in Sydney and Singapore. He has also worked as an advisor to members of the Australian House of Representatives and Senate.

Mr. Kirchner holds a BA (Hons) from the Australian National University, a Master of Economics (Hons) from Macquarie University, and a PhD in Economics from the University of New South Wales. He blogs at http://www.institutional-economics.com and is active on Twitter (@insteconomics).

What’s covered in EP246

  • US dollar’s global role as reserve currency, benefits, and potential challenges. (0:00)
  • US fiscal policy and its impact on the US dollar’s global role. (8:40)
  • Monetary vs fiscal policy dominance in determining interest rates and exchange rates. (14:39)
  • US dollar’s role in global finance and its potential replacement by other currencies. (20:39)
  • China’s economy, currency, and trade agreements. (29:59)

Takeaways

  1. The US dollar’s dominant role in global finance is largely due to the unparalleled size, depth, and liquidity of US capital markets.
  2. Despite concerns about the US fiscal position, the demand for US assets remains strong, which supports the dollar’s value.
  3. Other economies, like the Eurozone and China, face challenges in rivaling the US dollar due to less developed capital markets.
  4. The US becoming a net oil exporter has altered the traditional relationship between the US dollar and commodity prices.
  5. Fiscal policy in the US, while concerning, does not currently pose an immediate threat to the dollar’s global dominance due to strong international demand for US assets.

Links relevant to the conversation

Stephen’s post on dollar dominance:

https://stephenkirchner.substack.com/p/dollar-dominance-if-you-can-keep

Stephen’s US Studies Centre article “The ‘reserve currency’ myth: The US dollar’s current and future role in the world economy”:

https://www.ussc.edu.au/the-reserve-currency-myth-the-us-dollars-current-and-future-role-in-the-world-economy

Stephen’s post on how the US dollar is now a commodity currency

https://stephenkirchner.substack.com/p/why-is-the-australian-dollar-so-weak

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Transcript: Dollar Dominance: Can the US Keep Its Edge? w/ Stephen Kirchner – EP246

N.B. This is a lightly edited version of a transcript originally created using the AI application otter.ai. It may not be 100 percent accurate, but should be pretty close. If you’d like to quote from it, please check the quoted segment in the recording.

Gene Tunny  00:00

Gene, welcome to the economics explored podcast, a frank and fearless exploration of important economic issues. I’m your host. Gene Tunny, I’m a professional economist and former Australian Treasury official. The aim of this show is to help you better understand the big economic issues affecting all our lives. We do this by considering the theory evidence and by hearing a wide range of views. I’m delighted that you can join me for this episode. Please check out the show notes for relevant information. Now on to the show. Stephen Kirschner, welcome to the programme.

Stephen Kirchner  00:36

Thanks for having me back. Gene,

Gene Tunny  00:38

oh, good to have you on, Stephen, you’re doing really interesting things in your newsletter. It’s, well, it’s a sub stack, the institutional economics sub stack. And I wanted to chat with you about some of the things I’ve been reading in your sub stack recently, and also some of these, you know, big international macro economic issues to start with. Might ask you about this recent post. You had dollar dominance. If you can keep it, could we start off? Could you explain what’s what do people mean by this concept of dollar dominance, please.

Stephen Kirchner  01:23

Mostly it’s referring to the fact that the US dollar plays an overwhelming role in as the currency of denomination for international finance. So it makes up the vast majority of global ethics turnover. It’s the currency of denomination for most of the world’s debt issuance and a lot of international lending as well. It’s about 60% of global FX reserves, and it’s the predominant currency of denomination for most of the global trade in goods and services. And so the US dollar plays this very prominent role, which I think is ultimately attributable to the fact that the US has capital markets that are really unrivalled in terms of their size, their depth and liquidity. And so that puts the US in a very good position to be a provider of financial services to the rest of the world. And I think that, more than anything else, is what underpins the role of the US dollar, where I think there’s been a lot of interest over many years, is how much longer this role can continue, and there’s constant speculation about the future role of the US dollar. And this speculation goes back a long way. So in my paper for the US study centre a few years ago on the reserve currency myth, I went back and pointed to lots of embarrassing quotes from the Economist magazine and various other sources predicting the dollar’s demise. All those predictions have proven to be incorrect, but it’s remarkable that half a week goes by, I would say, without an op ed in the FT speculating about the US dollar’s future, which I think about Oasis, sort of getting the cart before the horse. I think before you speculate about the US Dollars global role, you kind of need to think about what would actually change in terms of underlying fundamentals to really shift that position.

Gene Tunny  03:39

Got You Can I ask about that the role as the global reserve currency? Economists such as Joseph Stiglitz have argued that this, this gives the US an un an unfair advantage or an exorbitant privilege. Is that right? Is that? Is that a concern is, does it? Does it actually get is it? How, to what extent does it benefit from being that global reserve currency?

Stephen Kirchner  04:06

Yeah, I have a lot of problem with the idea or the term reserve currency, because I think it’s a little bit confusing. And if you look around trying to find definitions of what it means to be a reserve currency, most of them are somewhat tautological. And so when you invoke the term reserves, people will automatically think of central bank holdings, the foreign exchange reserves. And all central banks hold foreign exchange reserves. On average, about 60% of those reserves are denominated in US dollars, but I don’t think that’s what gives the US a dominant role in the US dollar, a dominant role in international finance. And in fact, if, if foreign central banks held no US dollars, I think that would actually have a fairly marginal impact on both the US dollar exchange rate and. And interest rates similar, because the turnover in foreign exchange markets on a daily basis is in the order of trillions of dollars. It’s probably eight or $9 trillion on a daily basis, and central bank holdings the US dollars in the billions. And so the effect that those reserves might have, and changes in reserve balances, I think you’re going to be very marginal. So the way I think, prefer to think about it is that the US provides a very deep set of capital markets which can accommodate the world’s saving and there is a demand for US dollar assets, and so that’s what I think of, in terms of the US dollar having a dominant role, or a reserve currency role, but it’s really a case of us being a supplier of safe assets to the rest of the world, and this is what’s responsible for the US Dollars roles. I think central bank reserves in this context are fairly marginal.

Gene Tunny  06:10

Yeah. Okay, so the couple of things to explore there in terms of, well, safe assets to the rest of the world. Are you talking about US Treasury bonds?

Stephen Kirchner  06:21

Principally, yes. So the US provides not only what is effectively a risk free benchmark asset for the rest of the world in the form of US Treasuries and treasury bills, but even in terms of a medium of exchange, about 40% of the US banknotes in circulation actually circulate outside the United States, so there’s a demand to hold the US Dollar as a medium of exchange as well.

Gene Tunny  06:53

Yeah. So does this all mean that that the US dollar its value in its exchange rate, so it’s more favourable than it otherwise would be. And so that means that Americans can get, you know, they can buy stuff from the rest of the world a lot cheaper than otherwise. Is that? Is that reasonable to say

Stephen Kirchner  07:17

that’s part of it? I mean, there are people like Michael Pettis, for example, who argue that the US dollar suffers from a structural overvaluation problem that’s because of its dominant role, as you say, would tend to contribute to a higher exchange rate than otherwise. But the way I think about it is in terms of the equilibrium US dollar exchange rate. You would want that exchange rate to reflect all underlying fundamentals, and this is just a one of the fundamentals that feeds into the US Dollars valuation. So I don’t see that as being a problem per se, and it’s certainly not a problem with the United States that there’s very strong demand to invest in the US, whether it’s in the form of debt securities, equity securities, or foreign direct investment. We had this debate in Australia for many years about whether the current account deficit was a problem or not, and I think most of those arguments carry over to the US setting, where it’s certainly not a problem that in the US there’s very strong investment demand, not all of that demand could be met through domestic saving, and it’s actually a vote of confidence on the part of foreign investors that they want to invest in your economy. Yeah,

Gene Tunny  08:39

it’s remarkable. Stephen, you just reminded me, if you go back to say, the mid to late 80s and then the early 90s, there was such an obsession with the balance of payments and the current account deficit. So, I mean, Australia’s now got a current account surplus, haven’t we, thanks to mining, which is a, yeah, very, very positive thing, but yeah, we were, we were obsessed about it, and there was a big debate about whether that made sense or not, or whether this was just a reflection of the great investment opportunities in Australia. So it was good to to remind me of that debate. Can I ask about the safe assets? So you’re talking about us, treasury bonds. And I’ve had guests on this show. I’ve had Romina from, I think she was a Cato. And I’ve had Dan Mitchell from, he’s, he’s got his own Centre for freedom and prosperity. He’s ex Cato, ex heritage. And Dan’s a prominent commentator. And I mean, they’re very worried about US fiscal policy as I am. I mean, it looks like they’re on a very, you know, very bad, well, you know, unsustainable trajectory. They’re gonna have to correct it in some way. But from what you’re saying, I mean, there’s still this healthy demand for US government bonds, isn’t there? So is how. Do. How do you actually reconcile these, these two facts?

Stephen Kirchner  10:04

Well, in fact, a lot of the commentary around the future of the US dollar over the decades has really turned on this question of is the US on an UNSUSTAINABLE fiscal trajectory, to the extent that this might actually compromise the US Dollars global role, and is certainly the case that the US, in terms of the debt held by the by the public, has reached levels that are just a little bit below the levels we saw at the end of World War Two, and the US government was obviously very heavily borrowing. The difference being, of course, that we’ve got this level of debt in the absence of wartime conditions, and with the US economy is still pretty much fully employed. So the question would be, what would happen in the event of an adverse macroeconomic shock when you’ve got such a bad starting point. So I mean on the one hand, the US debt position, the public sector debt position, is one which actually is useful from the point of view of providing a supply of risk free assets to the rest of the world. So there’s no shortage of demand to invest in US Treasury securities. And if there was going to be an issue around the sustainability of the US fiscal position, you’d kind of expect it to show up in the exchange rate and interest rates at some point. But if you if you’re not seeing that in the price, then I think there are fewer concerns about the sustainability of the US deposition. So one way of thinking about this is us, dollar exchange rate actually serves to sort of price this demand to hold us assets. I’d say there’s an excess demand globally to hold us dollar assets, and the US dollar exchange rate reflects that.

Gene Tunny  12:15

So is the market just thinking that, Oh, well, all of these fiscal problems, there still a fair way down the road, and it’s not going to affect our demand for five year or 10 year treasuries. Or are they thinking, Oh, well, the Americans that they’ll eventually sort it out in in Congress, I mean, that they’ll recognise the that they need corrective actions as they have. You know, the Americans managed to do that in the 90s with under Clinton and Gingrich. So is that what they’re thinking? I think

Stephen Kirchner  12:48

from the point of view of the exchange rate, you have to remember that the exchange rate is a relative price, and so it’s the relative price of US, output and assets compared to the rest of the world. And if you look at fiscal policy trajectories in other economies, they don’t look too great either. So Japan, Japan will be an obvious example of an economy which has an even worse net and gross debt position than the US. Fiscal policy settings in places like Italy, which is the world’s third largest market for sovereign debt, don’t look too flashy, either. So with exchange rates, you always have to ask yourself, how does a country look on a relative basis? And so I think the US still looks good in those terms. Yeah, of course, in an absolute sense, you know, I’d certainly agree that the fiscal position in the United States is of a concern. At some stage they’re going to have to address it. But they’re hardly alone in that regard. So thinking about the US Dollars role internationally, I don’t see the US fiscal position, per se as being a problem, okay, but ultimately, I think the issue for the US is that there’s a rising interest Bill associated with its public sector Debt. Just recently, that bill has eclipsed the US defence budget in terms of absolute science, right? And this in itself, is a constraint on US fiscal policy, because that rising interest bill ultimately constrains what the US government can do. Yeah,

Gene Tunny  14:39

yeah, that’s extraordinary. I’ll have to check that out. I mean, to think, I mean, given how large the US military machine is that, how large the Pentagon is, to think that that’s incredible, right? Why I asked that before Stephen was because you’ve got this fascinating chart from macro bond in. Your newsletter on dollar dominance. If you can keep it, I’ll add a link in the show notes that essentially shows practically no correlation between general government gross debt to GDP percentage and the 10 year government bond yield. And I mean, we all know that there’s challenges with doing cross country correlations. But what do you you know and inferring things from from cross country data? But what do you read into that, that that chart? What do you read into those, those data points?

Stephen Kirchner  15:34

Yeah, like the point I was making with that chart, and this probably applies more so to developed markets than emerging economies, but still holds broadly, I would say, is that the fiscal position of an economy is actually not a very good predictor of its borrowing rates, its government borrowing rates. I mean, most obvious example that would be in Japan, which probably has the worst fiscal position on a gross and net basis of any of the advanced economies, and yet has the lowest in interest rates. So I think what that’s telling you is that interest rates are ultimately determined by other things. So underlying productivity growth and monetary policy, and monetary policy, I think, is a much more powerful predictor of cross country variation in interest rates. So if you’re looking to try and predict movements in interest rates between economy and stuff looking at changing fiscal positions, I don’t think you’re going to get very far. And that then flows through to exchange rates, because, yeah, if it’s if it’s the case that interest rates are actually not that sensitive to fiscal policy, then it’s going to imply that exchange rates are probably, by extension, not going to be that sensitive either. So this comes back to the issue of monetary versus fiscal dominance, and that monetary policy ultimately is far more important in terms of determining interest rates than fiscal policy.

Gene Tunny  17:21

Yeah, I think that’s, I think that’s right, certainly in the I mean, I mean you, I can ask you this. I mean, you can, you may have answered this, but I mean, I can understand that in the short term, like I think about how market economists forecast the value of the Australian dollar, and they’ll look at the differential between you know, bond yields or or, you know, they’ll have different maturities, like they might be looking at, I don’t know whether it’s three three month bills or six months or a year, but they, I know they’ll have an interest rate differential or spread, and then they’ll have the terms of trade, for example, in there, but yep, they’re not going to have something like the, you know, what’s happening with the the debt or the budget, I suppose. Or maybe I’m wrong about that, but I take your point. I think it’s a it’s a good one. What does it mean for say, John Cochran theory of the fiscal fiscal theory the price level. I spoke with John Cochran at Centre for independent studies. There was an event we had last, last September in Sydney, and I asked him about the fiscal theory of the price level. What do you think this means for that theory? Have you looked at that at all? Stephen,

Stephen Kirchner  18:41

yeah. I mean this, I’ve addressed that in a number of posts on the newsletter, and I think this goes to your question about the long run. And the long run situation is a little bit different in that it’s possible to imagine fiscal policy and public sector debt getting to a point where it is so unsustainable that you enter a regime of fiscal dominance. In other words, fiscal policy ends up determining the price level, and that is certainly a possibility. So in that situation, the central bank is forced to effectively accommodate expansion fiscal policy. So it’s certainly the case that fiscal policy can play that role. But the way Australia, the United States and other advanced economies have set up their sort of macro policy frameworks is one in which, for the short term, at least monetary policy is dominant. So whatever the fiscal authority is doing with fiscal policy tends to get discounted by monetary policy actions. So as long as you have an independent inflation targeting central bank. Think, then I think you’re in a regime of monetary dominance, but it’s certainly possible that those institutional arrangements might fall apart in the context of a fiscal position that’s unsustainable in the long run, and then you are in that sort of fiscal theory of the price level type world,

Gene Tunny  20:21

yeah, yeah, for sure. Okay, yeah, I think that’s a good point. So if you’ve got an independent central bank, and it’s, it’s not just, you know, it’s, it’s setting monetary policy to target inflation, and it’s, you know, monetary policy doesn’t end up being determined by the government. I mean, if the gov, because you get into that problem in, say, some Latin American countries historically, or Weimar Republic, where the government just prints money to pay its bills, to cover its deficits, rather than borrowing from the bond market. And yeah, that’s where you end up in all sorts of strife, potentially even hyperinflation. So, yeah, I think that’s a fair point. Yeah. Just thought I’d ask you about that, because I think, yeah, John’s, he’s got a really fascinating theory there, and he’s a very, very compelling presenter, and a, you know, really top economist, obviously. So that that’s really good, one of

Stephen Kirchner  21:18

the Argentina, Argentina, good example of the sort of situation you’re referring to. So they’ve had a number of experiments with managed exchange rate regimes that have blown up, and the reason for the blow up in each case was basically that fiscal policy was incompatible with that regime, and it was fiscal policy the one out in the end. So the issue around Argentina, addressing both its inflation problem and the issues around its exchange rate ultimately depend upon it putting in place institutions that will constrain fiscal policy. Yeah,

Gene Tunny  21:58

one of the other posts that I’ll put a link to in the show notes, Stephen, I think it was a post of yours where you’re talking about how the US dollar, how it’s been or the exchange rate, how that’s been affected by the fact that the US has become such a Strong producer of was it shale oil and shale gas? I mean, it’s become a has it become a net energy exporter? Or have I got that wrong? Or how do you

Stephen Kirchner  22:29

Yeah, the United States is now a net oil exporter. Has been since about 2018, 2019, yep. And in fact, produces more oil than Saudi Arabia, which I think is a a fact that would surprise most people. Yeah, so. So the significance of this is that US dollar now trades, you know, as a positive correlation with its terms of trade. It’s it’s trading in much the same way as we’re familiar with here, where the Australian dollar has a very close relationship with our terms of trade. And so the US dollar is trading like a commodity currency. This has big implications for the Australian dollar exchange rate, because what it means is the US dollar is now positively correlated with commodity prices, and in terms of the Australian dollar, traditionally, the Australian dollar has exchange rate has been correlated with commodity prices, but we typically quote The Australian dollar in terms of the US dollar, if its correlation with commodity prices is increasing, then our exchange rates correlation with those prices is going to weaken. And you can see that in the data that the relationship between Australian dollar and commodity prices is essentially broken down since 2018 2019 coinciding with the US becoming a net oil exporter? Yeah,

Gene Tunny  24:06

yeah. But do we do? Is there still a correlation with trade weighted index? Do you know? I mean, I can check that myself, but just wondering, because I think that’s what, where you’re going at there. I mean, because we, we tend to, yeah, quoted in terms of US dollars, but there’s this broader exchange rate concept that you could use instead,

Stephen Kirchner  24:27

no, it affects the Australian dollar trade weighted index as well. So that was actually the charts that I used in that post were the Australian dollar twy. And the reason is, US dollar still has a big weight in the tui China has a big weight as well. But of course, China is running a managed exchange rate regime, largely targeting the exchange rate with the US dollar. Yeah, so China’s weight effectively becomes a US dollar weight in that measure. Gotcha. Yeah. Yeah. So this has huge implications for us, because it means that the with these australian dollar being less sensitive to commodity prices, we’re going to lose some of the shock absorbing role of the Australian dollar. The Australian dollar is not going to moderate those fluctuations now in terms of trade and quality of prices as it has historically. And I think one implication of this is that the reserve bank is going to have to become more activist in its conduct of monetary policy, because it won’t be able to rely on the exchange rate to do a lot of the heavy lifting in terms of setting monetary conditions. So if the exchange rate is not adjusting as aggressively as it has historically, then I think by implication, the cash rate is going to have to do more of the work. I

Gene Tunny  25:50

think that’s a really excellent point, because I remember when I was in Treasury, yeah, we always used to talk about that shock absorbing role of the Australian dollar. And there was a view that that’s why Australia got through the Asian financial crisis so well. So I think that’s a really excellent point. Just trying to remember where I was, where, what I was going to ask about the Yeah, so we’ve got the point about the the twy. I’ll the trade weighted index. I’ll link to that article. Is it China? Is that the in terms of who, which country could replace, the which currency could replace, the US dollar? Is it the the Chinese currency, or is it the euro? What are what are people speculating on? I

Stephen Kirchner  26:40

think the problem that people have there have trouble wrapping their head around is the idea that the US dollar and its role is somewhat disconnected from the relative size of the US economy and its importance in global trade. So the Chinese and the eurozone economies rival the US in terms of size, and they certainly rival the US in terms of their prominence in international trade. And people kind of expect that the respective roles of their currencies should reflect those GDP shares and trade shares where both Eurozone and China fall down is in terms of not having the capital markets that rival the US in terms of size, depth and liquidity. And so the US dollar’s role is essentially a function of the dominant role that the US has in global finance. Yeah, and I think that’s always going to be more important in determining the role that the US dollar plays. Certainly, when the Euro was launched in 1999 there were expectations that it would rival the US dollar and the ECB produces a an index which essentially tries to measure the role of the euro in global finance. So in terms of FX turnover, currency of denomination for debt securities, currency of denomination for global trade. And it does pick up a little bit immediately following the Euro’s launch. But of course, with all the problems in the eurozone and the Eurozone debt crisis, that role has essentially flatlined more recently. So I’d say the Euro has basically disappointed the expectations that were held for it in terms of taking on a global role, and the same with China. So China launched a campaign to internationalise the renminbi and toyed around with a more flexible exchange rate setting around about 2015 2016 but very quickly walked away from it when the exchange rate started to exhibit more volatility than they would like, and so they’ve clamped down in terms of exchange rate setting. They’re still running a managed exchange rate regime and a closed capital account, yeah, and if you’ve got a closed capital account, I think that’s always going to limit the prospects for internationalisation of your currency. And we saw exactly the same thing with the yen as well. In the late 1990s early 2000s the Japanese Ministry of Finance had this idea that they would internationalise the yen, make it the main currency of denomination for trade in the Asia region. They wanted to set up an Asian Monetary Fund without participation with the United States. And all of those efforts really went nowhere. Yeah.

Gene Tunny  29:59

Yeah. I think it’s Yeah, very good point, Steve. And I just remembered what I was going to note before, because why I thought that was interesting, that post of yours talking about how the US has become an oil exporter, and you were explaining why, more recently, the Australian dollar relative to the US, hasn’t got up to the highs that it got up to in the first in mining boom, mark one in the 2000s so where it got to parity, I think at one time. So I think that was a really good explanation of that.

Stephen Kirchner  30:36

I think the contrast is quite dramatic, because we had a big terms of trade boom around about 2011 when, as you say, the Australian dollar got about parity with the US. Well, the terms of trade actually got even higher in 2022 In fact, they were the highest terms of trades going back to about 1860 and yet you certainly don’t see that in the Australian dollar exchange rate. And so the difference is, by 2022 we had this situation where the US had become a very substantial oil exporter, and that just really changed the relationship between commodity prices and the Australian dollar. Yeah, yeah,

Gene Tunny  31:15

good stuff. Just for clarity. And I think this is a simple, I think this is a quick question, the capital control. So you’re talking about how they’ve got a closed capital account. So they’re, they’re limiting the the exchange of of their currency for others, they’re all, they’re limiting people’s ability to pull money out of China is that, is that what people will be concerned about and why they’re limiting the ability of investors to repatriate funds home? Is that why it it may be limited in its potential to be a reserve currency?

Stephen Kirchner  31:59

Yeah. I mean, part of it is just a function of having a managed exchange rate regime that you need to control your capital flows in order to do that, I think it’s worth pointing out that a lot of the outbound capital controls are really not targeting foreign investors. They’re targeting Chinese savers, who they worry might send, there might be capital flight from the Chinese themselves to offshore, and so they place strict limits on the amount of money you can take out of the country.

Gene Tunny  32:35

Yeah, good point. And we’re, we’re a significant recipient of that, aren’t we? I mean, if there was a lot more cap, if there was that capital flight, or a lot more of it, then, yeah, a lot of it would go into Australian real estate, I expect. So yeah, that’s more of a comment, right? Final question, Stephen, there’s a lot of talk about the breakdown of this agreement. That was apparent, I think, is it Jim Rickards, who I’m trying to remember, who goes on about this, but apparently there was some agreement in 1974 between Richard Nixon and the Saudis that all oil sales would be denominated in US dollars. And that agreement has expired. And so there, there are people arguing that this will have profound implications for the US dollar and the US economy. Are you across that issue? And what are your thoughts on it?

Stephen Kirchner  33:34

Yeah, I think people make too much of this issue of in which currency is global trade in goods and services denominated and there’s certainly been moves in the past to re denominate more of the global oil trade and other currencies, including euros. But I mean, in this sense, I think, you know money, the exchange rate is really just a veil. Ultimately, the demand for the US dollar is a function of people either wanting to purchase US goods and services or wanting to purchase US assets. And so that’s where the demand comes from. You can, and that’s a real that’s a real demand. You can denominate global trade in whatever currency you like. There’s no reason why the Saudis and the Chinese could not denominate their trade in oil in renby, for example. But ultimately, the US, US dollar exchange rate is going to reflect the demand for US goods and services and US assets. So, you know, I don’t think it really matters. Is that much what the currency of denomination is. So to give an example, a lot of our iron ore exports would be denominated effectively in US dollars, because it’s a US dollar market. But I don’t think that affects the issue of the demand for the Australian dollar, because ultimately, that money, to the extent that it comes back to Australia, has to be converted into Australian dollars. So yeah, the demand for Australian dollars still reflects the demand for international demand for our iron ore. Yeah,

Gene Tunny  35:38

I think that’s a good answer. I was just thinking about it then. I mean, so if you think about it, Say yes, say the Saudis are accepting US dollars. So they, they sell their oil, they get the US dollars, and then they’ll, they will want to convert it to either their own currency, or they’ll want to convert it to pounds because they want to buy properties in Knightsbridge or or Mayfair or wherever, or wherever they want to invest in around the world. So I think, I think that’s a fair point to make. That’s a, yeah, I think that’s a really good perspective, righto Steven, it’s been illuminating. I’ve really enjoyed this conversation, and I’ll put a link to your great newsletter, institutional economics. I think you’ll Yeah, you’re actually doing some really deep analysis. You’re thinking carefully about these issues, the theoretical considerations, the empiric so I’ve been really impressed by it, and I would recommend it. Are there any any final comments or any reactions to anything I’ve said in this conversation before we wrap up, please.

Stephen Kirchner  36:49

I think that’s been great. Gene. Thanks very much for having me back on.

Gene Tunny  36:52

Oh, it’s been terrific, Stephen. And yeah, keep up the great work, and hopefully we’ll catch up with you again soon.

Stephen Kirchner  36:59

Thanks very much. You.

Credits

Thanks to the show’s sponsor, Gene’s consultancy business, www.adepteconomics.com.au. Full transcripts are available a few days after the episode is first published at www.economicsexplored.com. Economics Explored is available via Apple PodcastsGoogle Podcast, and other podcasting platforms

Categories
Podcast episode

The Future of Coffee: Climate Change & Rising Prices w/ Raihaan Esat, International Coffee Traders  – EP217

Quality coffee will be much more expensive in the future, partly due to climate change, according to International Coffee Traders’ Raihaan Esat. Show host Gene Tunny and co-host Tim Hughes are joined by Raihaan in this episode. They delve into the global coffee market, discussing how Raihaan sources coffee beans from various countries and the factors that affect coffee prices. They also explore the impact of climate change on the coffee market. Take advantage of this deep dive into the fascinating world of coffee.

Please get in touch with any questions, comments and suggestions by emailing us at contact@economicsexplored.com or sending a voice message via https://www.speakpipe.com/economicsexplored

You can listen to the episode via the embedded player below or via podcasting apps including Google PodcastsApple Podcasts and Spotify.

What’s covered in EP217

  • [00:01:51] The impacts of climate change on the coffee market.
  • [00:06:52] Sourcing coffee from farms.
  • [00:07:31] Commercialized coffee farming.
  • [00:12:51] Farming practices and coffee flavor.
  • [00:18:34] Cafe Feminino and empowerment.
  • [00:19:23] Coffee cooperative communities.
  • [00:26:05] Quality differences in coffee sourcing.
  • [00:27:58] Specialty coffee.
  • [00:31:28] Antioxidants and coffee benefits.
  • [00:35:15] Coffee and sustainability.
  • [00:42:03] Coffee production and pricing.
  • [00:42:23] Coffee supply chain logistics and financing.
  • [00:45:21] Shelf life of green coffee.
  • [00:47:13] Coffee demand and market trends worldwide. 
  • [00:49:45] Emerging coffee markets.
  • [00:51:33] Climate change and coffee production.
  • [00:56:03] The future of coffee.
  • [01:00:07] Exploring coffee variations.

Takeaways

  • The biggest problem for coffee roasters is controlling costs and accessing good quality green coffee: the right coffee at the right price.  [00:05:57
  • Supply and demand determine the price of coffee at the end of the day. [00:36:42
  • High-quality coffee is going to get more expensive as supply is affected by climate change [00:53:26
  • You should spend some time learning how to craft a nice cup of coffee just like you would learn how to make great pasta or a steak or a dessert. [00:58:59]

Links relevant to the conversation

Coffee Commune and International Coffee Traders:

https://www.coffeecommune.com.au/

https://www.coffeecommune.com.au/international-coffee-traders/

Tim’s new coffee brand Lumo Coffee, “Seriously Healthy Organic Coffee”:

https://lumocoffee.com/

Cafe Feminino:

https://www.cafefemenino.com/

Aquiares estate in Costa Rica:

https://www.aquiares.com/

https://www.instagram.com/aquiarescoffee/?hl=en

Arturo’s Adept Economics website article on coffee:

https://adepteconomics.com.au/coffees-economic-contribution-in-australia/

Transcript: The Future of Coffee: Climate Change & Rising Prices w/ Raihaan Esat, International Coffee Traders  – EP217

N.B. This is a lightly edited version of a transcript originally created using the AI application otter.ai. It was then checked over by a human, Tim Hughes from Adept Economics, to clear up any confusion left behind by an otter in a rush. It may not be 100 percent accurate, but should be pretty close. If you’d like to quote from it, please check the quoted segment in the recording.

Raihaan Esat  0:03  

We see countries that never used to produce coffee starting to produce coffee, or traditionally weren’t coffee growing countries, because the climate now is starting to move in a range that is suitable for coffee production. So maybe they were too cold or too high in altitude to be sustainable for coffee production. But as the climate is generally warming up suddenly that, that geography of that area now is suitable for coffee production.

Gene Tunny  0:36  

Welcome to the Economics Explored podcast, a frank and fearless exploration of important economic issues. I’m your host Gene Tunny. I’m a professional economist and former Australian Treasury official. The aim of this show is to help you better understand the big economic issues affecting all our lives. We do this by considering the theory, evidence and by hearing a wide range of views. I’m delighted that you can join me for this episode. Please check out the show notes for relevant information. Now on to the show.

Hello, and welcome to the show. This episode is all about the coffee market. My occasional co host Tim Hughes and I are joined by coffee guru, Raihaan Esat, from International Coffee Traders which is based at Phillip Di Bella’s Coffee Commune here in Brisbane. Over the last 15 years, Rai has gone from starting as a part-time Barista to winning Australia’s most prestigious coffee industry award. The Hall of Fame Award at this year’s Golden Bean Australasia competition. Stay tuned for a deep dive into the coffee market thanks to Rai. We explore how Rai sources coffee beans from farms in Brazil, Peru, Ethiopia and other countries. And we talk about demand and supply factors that affect coffee prices. Rai gives us some deep insights into the impacts of climate change on the coffee market. He explains why he thinks high quality coffee is going to become much more expensive in the future. Let me know if you have any feedback on this episode. Are there any aspects of the global coffee market you’d like us to explore more deeply in a future episode? Please let me know. My contact details are in the show notes. Righto, I hope you enjoy our conversation with Rai from International Coffee Traders.

Raihaan Esat from International Coffee Traders, welcome to the programme.

Raihaan Esat  2:25  

It’s fantastic to be here. I’m really excited.

Gene Tunny  2:28  

Excellent Rai, we’ve got Tim as well. Tim, good to be with you again on another Economics Explored podcast episode.

Tim Hughes  2:36  

Yeah, always a pleasure, Gene. Good to be here.

Gene Tunny  2:38  

Yes. So we’re at the Coffee Commune which is this amazing venue in Brisbane. It’s on Abbotsford Road at Bowen Hills. And actually Rai, would you be able to explain what is the Coffee Commune and you know, what’s your role here, please?

Raihaan Esat  2:54  

Sure thing, from a high standpoint, I guess the Coffee Commune is like a village. It’s a village of many businesses all working together collaboratively, to help advance each other to accelerate each other’s potential. The Coffee Commune provides a lot of services around that. But it basically provides just the resources and access that, and educational opportunities that allows these businesses to really thrive. So it’s all based around coffee, coffee production, hospitality, and education.

Gene Tunny  3:26  

Gotcha. So when I come in here, I mean, our first introduction to Coffee Commune, well, I was, I gave a talk here last year I think, I was on a panel. And that was in the area, there’s a cafe restaurant or you know, an area where you have functions. And but you’ve also got, you actually do roasting here, don’t you? There’s a roasting part of the operation. You’ve got these big German, are they German machines?

Raihaan Esat  3:47 

They’re Italian.

Gene Tunny 3:51

They’re Italian okay. Yeah, for some reason I thought they were German.

Raihaan Esat  3:57  

There’s a lot of German bits and pieces in them, but they’re mostly Italian.

Gene Tunny  4:04  

Gotcha. And you’ve also got these silos full of raw coffee beans, green coffee beans.

Raihaan Esat  4:09  

Yeah, see, it would take me two hours to tell you everything that the Coffee Commune does. But in a nutshell, it’s solving the three biggest problems that are facing people in the coffee industry at the moment. And that’s access to resources, knowledge and education, and standing out from a crowd. So you know, within the scope of that, the Coffee Commune provides services and support to help people accelerate their business. If I can give you a very quick example, if you want to start a coffee brand, you generally need education, support and resources. Instead of buying your own and setting up your own facility to do that. You can come in and use the resources here. It’s like We Work for coffee.

Gene Tunny  4:50  

Yeah, and this is what Tim’s done. I mean, Tim, we can chat about your brand later, but you’ve set up Lumo Coffee using the resources here at the Coffee Commune which is pretty amazing. So we can talk about that.

Tim Hughes  5:00  

Uh, yeah, that’s right. I mean without these guys, Lumo Coffee wouldn’t be a thing. So, yeah, I’m uh I guess one of the graduates of this village.

Raihaan Esat  5:12  

Tim is one of the startups. Yeah, we have 75 Coffee Roasters all producing coffee here at the Commune. About 20 of them are startups, including Tim as one of them. And within that scope, I have two functions. Mine, first of all, is to import green coffee from farms directly and bring it into Australia and sell to coffee roasters. The second part is to introduce people to the commune, and grow the family.

Gene Tunny  5:38  

Gotcha. So is that what you’re the business you’re part of? International Coffee Traders, can you tell us a bit about that please Rai?

Raihaan Esat  5:45  

Yeah, so if I go deeper into International Coffee Traders, it’s, it’s a resource and for the for the coffee industry, for the coffee roasters in particular. The biggest problem for coffee roasters is controlling costs, accessing good quality green coffee, the right coffee at the right price. You have to start with a raw product, then roast it and then turn it into coffee drinks. That’s what coffee roasters do. So the raw product is what I specialise in. Sourcing that from farms, overseas countries like Brazil, Colombia, Costa Rica, Ethiopia, all the classic coffee growing regions. I source coffee from there, depending on what my clients want.

Gene Tunny  6:28  

Okay, so what does this sourcing look like? Are you hopping on a plane? Or have you got agents over there who help you out? How do you? How do you identify the right farms? Or how does it all work? That’s what’s that’s what’s fascinating me, are there, are the wholesalers? I mean I imagine there are wholesalers like how do you how does it all work? How does it get from the farm to Abbotsford Road in Brisbane, Australia? And, you know, farms in Peru or Brazil or wherever?

Raihaan Esat  6:55  

Yeah the coffee world is huge. And it’s so diverse. Country to country is very different. Each country has their own models of how you can buy from them. For example, in Ethiopia, up until very recently, you had to buy from something called the ECX, the Ethiopian Commodities Exchange, you couldn’t actually go to a coffee farmer directly and say, I want to buy your coffee. The coffee farmer had to sell their coffee to the ECX and the ECX then on sells to people like me. That’s Ethiopia is an example. Compare that with Brazil, which is highly commercialised, very, very well established and has huge, huge farms that are the size of small countries sometimes. You, there’s there’s one farm that Phil visited a few years ago, they have an airport landing strip on their farm. They have a dairy on their farm, you know, they’re massive. And you can go directly to the farm and say, Mr. Coffee farmer, I want to buy your coffee, and they will sell it to you directly. And then there’s infinite shades of grey in between. So in terms of contacting traditionally, yes, you had to go over there and visit the farms to make contact. But this is now 2023 borderline 2024. Everyone is on WhatsApp. Everyone’s on email. Everyone’s on Instagram. So it’s easy to connect with a coffee farmer literally on Facebook now and say, Hey, looks like you’re doing interesting stuff, can we, can we connect? Send me some samples? Let’s talk give me a guided tour of your farm on online basically.

Gene Tunny  8:32  

Yep and what criteria do you use to choose the suppliers? The farmers?

Raihaan Esat  8:38  

Yeah, so I’m really led by my clients. So for example, if a client of mine comes to me and says, I want a coffee with an organic certification, or Rainforest Alliance certification, which protects native rainforest as well, and it must taste sweet, fruity and vibrant. Those are my criteria to then go hunting. Traditionally, the client may have been using Colombian coffee. And roasters tend to play it safe, they tend to like, I was buying Colombian coffee so I was, I want to stick with Colombian coffee. But my job is to kind of challenge that a little bit and go, Hey, there’s also great options in Ecuador, or in Peru or in Guatemala, which may taste very similar for better value or better, better on the seasonal scale of freshness. They might be in season compared to the coffee that you’re using is out of season. So there’s a lot of, it’s a global perspective we have to take to try to find the right coffee at the right price.

Tim Hughes  9:43  

Yeah, it’s interesting because with so I remember seeing somewhere that coffee was the second most traded commodity in the world. Is that right?

Raihaan Esat  9:51  

Yeah, that gets floated around quite a lot. A lot of people sort of throw that stat out and say I’d say it’s the second most traded commodity in the world after oil. So coffee is traded on an exchange on a commodities exchange. And you can literally buy and sell futures on coffee, if you wanted to, you could jump on one of these trading platforms and buy and sell coffee. The difference between say coffee and foreign currency or any of the other others is that someone actually has to take delivery of coffee. It’s a physical product, it’s an agricultural product. So while it’s traded, there’s a lot of paper being pushed around. And then eventually, that coffee has to land up in someone’s warehouse. But it is very, very, very heavily traded. Especially because it seems sometimes as a bit of a safe haven when currencies are moving around a bit or interest rates are moving around a little bit. You know, how speculators work? Sometimes they’ll move investments from gold to foreign currency, depending on what seems to be the safer option at the time. Coffee is one of them.

Gene Tunny  10:56  

Yeah, so you’ll have speculators who they won’t ever actually want to take delivery of the coffee. Right. But they’re jumping into the market to try and pick up some plays.

Raihaan Esat  11:05  

Some plays on the movements.

Gene Tunny  11:09  

Yeah, yeah, gotcha. And what’s happening? I’m interested in the different countries, are there different flavour profiles for different countries? Or does it depend on the farm I mean I imagine it depends on climatic conditions on the soils, etc.

Raihaan Esat  11:24  

So I’m gonna make the wine analogy here, coffee is a bit like wine, where you have these broad characterizations based on country, you know, roughly New Zealand wine tastes a certain way, and French wine tastes a certain way. Similarly, with coffee, there are broad categorizations. But then within each category, within each country, there’s infinite amount of variables and agricultural practices that can then modify the flavour. So a practical example of Brazilian coffee generally, at a commodity level, tastes quite nutty. It’s, it’s mild, it’s mellow. It’s quite nutty. It’s coffee that tastes like coffee. And then you go to Ethiopia and the standard coffee that comes out of Ethiopia generally is quite vibrant, and lively, and sometimes has some fruit notes to it. So those are the broad categorizations. And every country has its own rough, sort of flavour profile. And that is somewhat dependent on the terrain, the variety, the commercial varieties that are grown there, and then the general farming practices. So I think the geography and the farming practices and the genetics are fairly self explanatory. But the farming practices can have such a huge impact on the flavour of the coffee as well. For example, in countries like Rwanda and Burundi, these sort of central African countries, up until very late recently, it was completely illegal to process your coffee using the what’s called a dry process. All the coffee had to be washed. And there’s a lot of stuff online, you can look up if you want to go deeper into that, what washed coffee is and what dry coffee is, but it was mandated by the government, that your coffee if you produced it had to be washed. Whereas you go to a country like Yemen, which is in the middle of the desert, but produces coffee, they have no water, so they cannot do washed coffee, they have to do all of their coffee as dry coffee. And that’s that’s a post harvest practice that has a massive influence on the flavour of the coffee. That’s that comes out at the end.

Gene Tunny  13:44  

Gotcha, but one other thing. What’s the difference? There are Arabica beans, and there are Robusta beans. Is that right? There’s a difference?

Raihaan Esat  13:54  

Yeah, I guess. They they both taste like coffee to some degree. But they’re like two different species. It’s like comparing an apple and a pear. They are slightly different species. And there’s a number of these sort of genetic families or species that exist within coffee. Arabica is very well known because of the marketing machine always says, drink Arabica. 100% Arabica, it is better than Robusta. Robusta generally is a little bit harsher, a little bit more bitter, has a lot more caffeine in it, and grows at a different altitude. But having said that, I’ve tasted some Arabicas that are so poorly processed, or so poorly created at the farm, I guess, that they taste worse than Robustas so quality of post production at the farm level does have a massive impact on the quality of flavour as well.

Tim Hughes  14:50  

Actually on that note, because I know there are three processes in having a great cup of coffee so the farming and the sourcing is one like how that part of the the process is done, and then the roasting is obviously really significant as to how it’s roasted and the temperatures and the time, and then how it’s made at the final stage. So if only one of those three stages isn’t done well, then the whole thing can be, well sort of fall apart a little bit.

Raihaan Esat  15:20  

Yeah, it’s like, the best analogy I can make is like, like a professional chef. Sourcing Green Coffee is like sourcing a great steak, or a great piece of ingredients that you’re gonna then transform into a delicious dish. That’s the roasting component of coffee. That’s where the chef takes a really amazing ingredient, turns it into something delicious. And then service at the end in the cafe is like the plating the final touch. They all matter, you can have the best chef make the best dish. If they don’t present it well. It just lacks something. So at any step in the process, whether it’s farming, whether it’s roasting, or whether it’s production in the cafe, it can all fall over and be butchered. So each each step in the chain is equally important. And each one is a craft. It’s a skill. It’s something that adds value to the coffee as it progresses along the chain.

Gene Tunny  16:16  

Yeah. You mentioned was it Rainforest Alliance Certification?

Raihaan Esat  16:22  

Yeah, so there’s a few different certifications that exist in the coffee industry for different reasons. Some are on sustainability, some are on farming practices, some are ethical standards. Rainforest Alliance, for example, mandates that a coffee farm should allocate a certain proportion of their farm to regenerating rainforest. For example, in Costa Rica, some of the coffee farms, the coffee farm that we deal with is a amazing coffee farm and community called Aquiares Estate. They are a community, people live on the farm, and they dedicate a lot of time to, to looking after the native rainforest. That is part of the ecosystem of their farm. It’s really, really an amazing community and encourage everyone to go and look up Aquiares Estate. They’re on Instagram there, they put up a lot of pictures of what they do. Their coffee is stunning.

Gene Tunny  17:19  

I’ll put a link in the show notes here for sure. Yeah, that sounds sounds sounds great. And I know that Tim your coffee is coming from, is your coffee coming from a community of women in Peru somewhere.

Tim Hughes  17:31  

The decaf is. So we’ve got the three coffees. Two of them are actually the same bean but a different roast. So that’s, and they all happen to be from Peru so that the caffeinated bean Luma Sol, as we’ve called it, we have a dark roast and a lighter roast. And so that is from a different place to the decaf. So the decaf, the one you’re mentioning, is the Cafe Femenino Decaf. And so I mean, Rai you’ve got more information on that, I know. But basically, it’s a co op of female farmers who, a lot of the profits go back into the community and libraries and schools. And it’s a fascinating, it’s a really, yeah, same Cafe Femenino. If we put it in the show notes, and if people could check it out, because it’s just one of those things, there seems to be in coffee, a lot of intent and purpose to do the right thing. And and Cafe Femenino was a really good example of that. Have you got anything to add to that, Rai?

Raihaan Esat  18:34  

Yeah. So this is an example of how some countries have structures in coffee that are not as simple as you might think. It’s not as easy as just going to a farmer and saying, I want to buy your coffee, for example, some of these farms at Cafe Femenino in Peru, they’re very small. They don’t actually have the resources to process their own coffee. So they grow coffee on the land that they have in their backyard, for example, or they may have a couple of acres of land and they’re producing coffee. But what they do is all the women producers in that area, then collect their coffee together and take it to a central processing plant where the fruit is removed from the seed, the coffee gets dried out and it all gets graded, the defects are removed. So they’re working together as a community. And they’re sharing a resource. It’s kind of a bit like the Coffee Commune here in Brisbane, where we have one resource and it’s being shared in the community. That’s how Cafe Femenino are working. And there’s a number of other countries that have similar styles of cooperative coffee production, so to speak, and they put so much back into their own communities from what they make.

Gene Tunny  19:49  

Yeah, with the grading. Is there an international standard for grading and who does the grading are there professional graders?

Raihaan Esat  19:57  

Yeah, that’s a great question. There, there is an in International Standard, it’s run by an organisation called the Specialty Coffee Association. They used to be an American Association, they’re European they have since merged. And they’ve basically set the global standard that is accepted everywhere. We have a lab here at the Coffee Commune in Brisbane, that is the only lab of its kind in Queensland, there’s a few around the country. But basically, we can look at a sample of green coffee, grade it, and then compare our results with labs all around the world. So hypothetically, if a coffee roaster looks at their green coffee and goes, I’m worried about this, I think it’s got a few defects in it, which you know, I wasn’t expecting, can you grade it for me, they don’t have to send the coffee back to the farm, to get checked, they can just send it to the lab here in Brisbane, we will check it and produce a report, which is, anyone around the world can read it as long as they are running the same the same systems as us which they are generally.

Gene Tunny  21:03  

And what’s being graded. Is it being graded for bitterness or I mean what’s…?

Raihaan Esat  21:09  

Yeah, there are two parts. There’s green grading, and then what we call cupping. So green grading is where you look at the green product that’s arrived. And if you think about it, green coffee is the seed of the coffee fruit. So it’s an it’s not a uniform thing. Every single seed is an individual. And there are many things that can go wrong in the process of producing that coffee. So if you imagine 1000 coffee plants all producing seeds that get harvested, some of those are going to be picked when they’re underripe. Some are going to be overripe. Some are gonna have insect damage on them. When they, after they get hulled and pulped. Some of them will get chipped or broken. Sometimes there’ll be mould that grows on the coffee. Sometimes they will be what we call sours or, and floaters, those are just immature coffees. So the the best quality coffee is what you imagine is the perfect coffee bean. It’s round, it’s shiny, it’s green, it’s got no additional defects to it. It’s got no mould growing on it. It’s not blackened or overripe. It was the fruit picked at its optimum ripeness, and then processed correctly and all the defects removed. Having said that defect-free coffee generally doesn’t exist. Right? There will always be to some degree some defects. So we categorise primary defects and secondary defects. So we couldn’t ask, for example, part of my job, a lot of my clients will say, I want this coffee and I want no primary defects in it. Primary defects are serious defects in the coffee. So for example, in the sample, if you take a sample of the green coffee, which is 350 grammes, and you look through it and you sort through it, you might find one which is completely encased in fungus.

Gene Tunny  23:10  

Haha, right? Yeah,

Raihaan Esat  23:12  

That would be a primary defect that that now eliminates that coffee as an option for that client. If we find no primary defects, there’s a whole guide book on this that explains every defect in coffee. There’s a number of them. We then look into secondary defects. Yeah, they might be like a little insect that has bored a hole into the coffee. One little hole on that seed might be a partial defect, but it’s not that serious compared to a full mouldy bean.

Tim Hughes  23:45  

And what’s the sample size of that Rai?

Raihaan Esat  23:47  

350 grammes

Tim Hughes  23:49  

350 grams sorry Yeah. Yeah, cool.

Raihaan Esat  23:52  

The next step is to do what we call cupping, which is to roast the sample of that coffee and then taste it. So there’s a sensory evaluation that has to happen. And the sensory evaluation is then scored out of 10. Well, sorry, it’s it’s out of 100. The, to qualify as specialty coffee, it has to score 80 or above. So for example, on the score sheet, we’re looking for things like flavour, acidity, balance, aftertaste, body, we’re looking for consistency across multiple cups. The score sheet is quite intimidating when you first look at it. But once you use it a few times, it’s actually quite straightforward.

Gene Tunny  24:36  

Yeah. So you’re looking at specialty coffees and you’re often going to what small or medium sized coffee farms is that right? Are there, I’m just wondering like, how is the market segmented because like, what about one of these, you know, what about Nestle? Or, or what’s the big, is it Dutch or the company that owns Moccona? I can never remember, I don’t know how to pronounce their name.

Raihaan Esat  25:03  

Douwe Egberts, JDE

Gene Tunny  25:07  

JDE, Gotcha. And like they must buy huge quantities of coffee. So they’re massive, do they just have massive coffee farms that are contracted to them to supply, are you dealing with the same ones?

Raihaan Esat  25:18  

Pretty much, pretty much so you can buy coffee on forward contracts. For example, JDE might say say, we project that we’re going to need 500 tonnes, 500 containers of coffee, each container being 20 tonnes next year. They can approach their producers and contract that coffee ahead of time and say this is the quality spec we expect. And we’re going to buy 500 containers from you over the next year. Now not every farm can fulfil that. So they may go alright, that farm can fulfill 20 containers, we have to now find other suppliers for the remaining balance of our requirements. So they do what I do, but on a much larger scale.

Gene Tunny  26:03  

Gotcha. But with what you do, does that mean you can get, like that they’ll have to go for something more, like are they basically going for something that is more mass market? And maybe they accept more defects than then you would? I mean, are there differences in in the quality of the coffee sourced? The the flavours, that sort of thing? I mean, you’re you’re producing specialty coffees, aren’t you? So you can go really niche? Is that right?

Raihaan Esat  26:30  

Well, I’ll, I’ll use Starbucks as a bit of an example for this because this is probably a better a better case study for your question. Starbucks buys very good quality coffee, what tends to happen is sometimes it goes wrong in the roasting or in the extraction phase, where if people tend to go “ah Starbucks is crap”, or they don’t like, they don’t like what they get from there. Starbucks has never promoted that they sell the best coffee in the world, but they’re very good at what they do. And they do buy very good coffee. And it’s all about setting up the requirements for quality before they go to market, just like you would in any procurement business. You set up what you need, what your requirements and projections are, and then you go to market and you try and find it or as close to it as possible.

Gene Tunny  27:19  

Gotcha. Would you be buying from similar farms to what Starbucks or JDE would be buying from?

Raihaan Esat  27:28  

Yeah. To some degree. So every every farm produces all levels of quality. A farm can produce absolute garbage, middle of the range coffee and super high quality coffee, because it’s an agricultural product, it then gets sorted, right? And so you get these different quality grades coming out of every farm on the planet. So it’s just about setting up the parameters of what you want. So we would buy, we buy everything from commercial grades of coffee, what we call commodity coffee, to specialty coffee, to super fancy boutique coffees, like experimental things, which haven’t hit the market yet. You know, we’re we’re funding where we’ve partnered with a producer in Colombia. And he wants to do some experiments. And we’re helping him set up the lab and the resources that he needs to do interesting fermentations using yeasts and bacterias to produce interesting and crazy flavours in coffee.

Tim Hughes  28:31  

That does sound interesting.

Gene Tunny  28:33  

And what’s Tim, is Tim, are you a specialty coffee Tim?

Raihaan Esat  28:37

Tim’s a specialty coffee yes.

Gene Tunny  28:39  

Right? Tim, you set some parameters for Rai didn’t you, how did that interaction work?

Tim Hughes  28:43  

Yeah, that was it was funny, actually, because it started when we came over last year when you were on that panel and got introduced to the Coffee Commune and seeing what you guys did here Rai was really interesting. And it was the right time with a lot of the work that I was doing, you know, my background in the health industry and listening to all the research on the health properties of coffee. Because it’s had a chequered past people, you know, that caffeine obviously sometimes isn’t great for everybody and overconsumption, you know, can be a problem. But the health benefits, the antioxidants, the polyphenols, chlorogenic acids, these properties are where the health aspects of coffee often comes in. So it was really interesting, and I had a chat with Rai about it. And I think at that time, no one had actually mentioned..

Raihaan Esat  29:31  

Tim’s request was one of the more unusual requests that I’ve ever seen in my life, but er…

Tim Hughes  29:36 

Thank you very much.

Raihaan Esat  29:38  

Normally people come to me and they go, Oh, look, I want coffee that tastes like this, or I want coffee that tastes like that, or it’s got to be at this price point. Those are 99.9% of the parameters that we work in. And then Tim comes along and he goes I want coffee that’s healthy for you. I went okay, we don’t have a measurement system for that. How do we measure that? He said I have, I’ve got a solution for that, we can do lab testing and figure out what the antioxidant levels are in coffee. And we want to do some testing and find out which one is the healthiest coffee that we can get. So, you know, that started the journey with, with Tim.

Gene Tunny  30:19  

Okay, we’ll take a short break here for a word from our sponsor.

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Gene Tunny  30:53  

Now back to the show.

Tim just a question for you. Why do we care about antioxidants?

Tim Hughes  31:03  

Good question. I mean, basically, from health terms, antioxidants are what would be the chemicals or properties that combat free radicals in our body. So the oxygenation process in our body where cancers can thrive and the ageing process and all of these things they are basically free radicals running around our our system, antioxidants are known to combat those. So antioxidants in our systems generally work well for us, they slow down the anti ageing process. They’ve been shown, this is where new studies are coming through all the time, they’ve been shown that they can help prevent heart disease. They’ve got, you know, improved cognitive function. There’s so many different areas where they’ve been shown to be beneficial for us. And coffee is a good way of getting those antioxidants into your system. They’re also a good source of fibre, which was a new thing to me, that was a fairly recent thing I heard from, Dr. Tim Spector is somebody who does a lot of work with the microbiome. And he was he was stating that coffee is definitely a health food because he’d had different, a lot of people have changed their minds on coffee. And he’s one person who had changed his mind on coffee. He said, Yeah, it’s definitely a health food. It’s good for the microbiome, you get about three grammes of fibre from a cup. You know, if you have three cups of coffee a day that can supply 25% of your regular daily allowance of fibre, which, you know, for a lot of people, there’s not enough fibre in their diet. So it’s not just the antioxidants, it’s all these other areas.

Raihaan Esat  32:40  

Yeah what really stood out to me when we did the testing was what the variability was from one coffee to another. So you know, there’s a lot of good research out there that says coffee has antioxidants, that it has these health benefits for you. But choosing the right coffee can really accelerate that. And you can get very different results, depending on what coffee you choose. And it seemed like just, you know, just off the small sample set of data that we had, that the high grown organic coffees tended to perform better than the lower grown coffees that were not organic. So that was really, really revealing to me, and I found that super interesting.

Tim Hughes  33:22  

And it’s that thing of like, you know, you could you could get a coffee with even higher antioxidant levels than than the ones we have, but it has to taste great as well, you know, so these compromises that you do, you can’t do everything, purely for the antioxidants. It’s, it’s a bit of a balance. And I’m really happy with where we got ours to but we’re constantly on the search like we’ve got other beans that we’re checking out from different regions at the moment. So it’ll be an ongoing thing we’ll add either add or or move out coffees as we go along. Because that actually, that leads into something I was, we were going to talk about anyway. So that maybe this is a good time, Rai to talk about the supply and demand for coffee. Because it’s a living growing thing. It must be hard to secure coffee sufficient to demand all the time. So there’s a few prongs to this question. One is, is the overall supply or sorry, the overall demand of coffee, is that growing or is it plateaued? And the supply of coffee, is that because it appears from different, different people that I hear from that it’s getting more challenging to grow the coffee because it’s quite a sensitive plant with the altitude and the conditions and with the changing climate that that can be affecting the future of coffee growth. So with that, have we plateaued with the supply? Are we good with the with the demand, etc?

Raihaan Esat  34:47  

Okay, so, short answer good news. We’re not going to run out of coffee.

Tim Hughes  34:51

That’s good news.

Raihaan Esat  34:53  

But there’s a couple of key factors and it’s a very big full bodied “but” that I have to put in here. There’s agricultural factors. There’s economic factors. And then there’s demographic factors that are really interplaying in interesting ways right now within the coffee industry globally. So we read, read the global food and beverage report for 2023. And that showed demographics wise, who’s drinking coffee? And where are they drinking coffee? So generally speaking, you’ve got sort of your professionals, slightly older generation tend to be drinking more coffee than the younger generation right now. So across the demographics, you’ve got one population drinking the same or more coffee daily, but you’ve got one generation that’s slightly in decline. So that will transfer later to probably a slightly declining requirement for coffee. But it’s not declining at the same rate as production is at the moment, there is a problem with agriculture. Coffee is not sustainable generally speaking, for a lot of producers, the variability in the markets, the climate change, the difficulties of producing coffee consistently, because it’s an agricultural and seasonal product. The demands of producing coffee to the level that we are demanding it as consumers is so difficult, and it’s actually forcing a lot of producers off their farms, or forcing producers to change to other crops, like avocados, which are more profitable for them. So it’s supply and demand at the end of the day, and we’ve actually seen coffee prices jump very, very drastically in the last 12 to 18 months, coffee prices on green coffee have gone up probably close to double what they were. And you know, how much does it how much have you seen that flow through into the cafes? It has started to happen, you’re starting to see cafes charging a bit more and more for their coffee, because everything has to flow through. So you’ve got economic effects, you’ve got the supply and demand, everything comes down to supply and demand, you have a shortage on supply, demand goes up comparatively to that. And then you’ve got all the demographic interplays that go on with it, we have further problems that are driving the price of coffee up at the moment, things like interest rates, every time our interest rates goes goes up, we have to finance coffee, to get it into the coffee, into the country, right? When you buy huge amounts of coffee it’s all under finance. Interest rates play a big part in what we have to factor into the price then, and you know, a half a percent or a quarter percent interest rate rise is quite significant across 20 tonnes of coffee. So generally, the price of green coffee at the farm level is going up, supply is slightly restricted and so that’s further pushing the price up. And then you have, let me call it political issues, as well that sort of come into play. For example, in Ethiopia, there was a like a civil war last year, what didn’t get a lot of news coverage, but basically, there was a civil war that was affecting transport networks and that made it difficult to get coffee out of Ethiopia. Now Ethiopia is one of the largest producers of coffee in the world. As soon as that becomes difficult to get coffee from one of your biggest producers. It puts a lot of strain on the other producers so anyone with a even a basic economics background can kind of see what’s happening here it’s it’s a difficult place, marketplace to do business that’s constantly evolving.

Gene Tunny  38:54  

Yeah I’ve got a couple of follows on from that. Broadly, what is the what range is the coffee price in and so is it is it in tonnes? Is it US dollars per tonne what is it?

Raihaan Esat  39:05  

USD per pound. Generally gets quoted in US dollars per pound on the market on the coffee market. It’s called the C market. And right now the level is sitting at if I’m not mistaken at about one $1. $1.70 USD per pound.

Gene Tunny  39:24  

Okay and so that obviously means like just thinking about what it costs to buy coffee in the shops after it’s been roasted and, or ground or whatever. There’s obviously a lot of value add from in the roasting and then the distribution and…

Raihaan Esat  39:42  

Yeah, so, 1.70 USD per pound is your baseline benchmark for just bog standard commodity grade coffee. Okay, as soon as you go up in quality into specialty, for example, Tim’s coffee wasn’t $1.70 US per pound. It was much more than that. because we added the organic certification, we added the quality of it, it’s at least an 83 point coffee, if I’m not mistaken. So we’ve now got a quality level that we have to compensate for, then when you get to roasting, so that coffee would have cost us quite a bit more, factor in the exchange rate, Australian dollar’s not performing that well against the US dollar at the moment. So as soon as we have to pay in US dollars, the underperformance of our currency means that we have to factor that and our coffee costs a little bit more. Come to roasting, here’s the bit that is quite a tragedy. If I put one kilo of coffee into the roaster, I don’t get one kilo out, you have about 10 to 12% moisture in the green coffee that just evaporates, basically, plus you have a little bit of carbonization, basically, you lose close to 20% of the weight of the coffee, just through the chimney of the coffee roaster. So you’re adding 20% on top of the cost of the coffee just at the roasting stage. Then there’s all the labour, operational costs that go into packing coffee, transporting coffee around the world, out to cafes, and then it has to be made into a drink, and coffee these days, I mean, if you go and just just stand in line at a coffee shop and listen to everyone’s orders, not everyone orders the same thing. I guarantee you seven out of 10 people will have a very different order from each other, one will be on an almond alternative dairy, one will have a syrup in it, one will be double strength, one will have chocolate powder on top. A cup of coffee is now a cocktail made by a bartender effectively. It’s, it’s not a simple product to produce at any stage. It’s crafted by hand and by skilled people all the way through the chain. And so if I can be honest, 5 or $6 for a cup of coffee? It’s too cheap.

Gene Tunny  42:10  

Hmm, interesting. I mean, Australian households struggling with interest rates may not agree, but I know, I know where you’re coming from. I’m just, I’m just joking. Yeah, that’s some really good points there Rai, and can you tell us about the the finance, you mentioned you had to borrow money, so you have to settle the contracts in US dollars is that right? Like what’s going on there?

Raihaan Esat  42:35  

Usually yes. So practical example, we are now buying coffee for next season, we’re in contact with our producers in Brazil. And we’re going right, we need to, we need probably six to 10 containers next year of coffee. They’ll say right, we can, we can settle six containers at, I’ll put a hypothetical number on it, five US dollars per kilo. Contract gets written as soon as the coffee ships from the port in Brazil, we get a bill to settle the contract. So the contract is in place. But it only gets paid when the coffee gets shipped. Now there’s lots of different Incoterms here and different contracts, setups and scenarios, you could pay at the farm directly when the coffee leaves the farm, you could pay when the coffee reaches, reaches the destination. But we generally work on as soon as the coffee ships, we pay the bill immediately. And that’s in US dollars. Most of the time.

Gene Tunny  43:41  

Yeah. And so where’s the where’s that? Where’s Why do you have to borrow the money, I mean, rather than going to the, okay, I’m just trying to think how this works.

Raihaan Esat  43:54  

Ok so think about it this way. It’s a cash flow problem, right? For us to produce coffee and supply to cafes. If Tim wants to supply coffee, if he were to buy coffee from the farm, he would have to pay for the coffee before he sold it.

Gene Tunny  44:13 

Gotcha. Yeah, that makes sense.

Raihaan Esat  44:15

All right. So the coffee has got to come and land in the warehouse so that it can be roasted so that he can sell it. And then Tim can collect the money from the sale and and then pay back the loan that he took to buy the coffee in the first place.

Gene Tunny  44:30

Yeah, yeah so it’s for your cash flow. So yeah…

Raihaan Esat  44:35

It’s a timing thing. Sometimes we land coffee here, three months in advance of when we need to actually roast it. And that’s because of seasonal variations. If the coffee is ready to harvest now, I might not need it for six months. But I’ve got to buy it now because it’s on the trees. It’s being harvested, it’s an agricultural product. And I think people take that for granted sometimes that coffee has to be grown on a tree, harvested by people and then there’s an interim period where there’s no coffee on the trees.

Gene Tunny  45:08  

Yeah. And how long would you typically have the beans, the green beans here in storage or in stock in your inventory?

Raihaan Esat  45:16  

Look, green coffee has a shelf life that’s a bit better than roasted coffee, roasted coffee tends to sort of lose its vibrancy and character after about 30 days after roasting, but green coffee, we can we can store it for sort of six to, six to 12 months, as long as the storage conditions are good, not not too much light, not too much heat, not too much humidity. If the storage conditions are good, we can store the coffee up to 12 months, and then it really starts to fade, in flavour, in in character. So it won’t be terrible after 12 months, it just does fade a little bit. So there is a quality drop if we store it for too long. So that’s the balancing act that we have to, we have to navigate trying to get coffee at its optimum, balance the agricultural cycle and the demand cycle from roasters.

Gene Tunny  46:08 

Gotcha.

Tim Hughes  46:10  

Now, it’s fascinating, I mean, and a good reason as to why I wouldn’t be able to do this on my own. You know, that’s why it’s such a great opportunity for what you guys offer here for, you know, the three stages of the coffee from the sourcing from the farm through ICT, the coffee alliance with the roasting and and then allows someone like me to, you know, benefit from all that experience and all those connections otherwise, yeah, yeah, so it’s from, from my perspective, it’s been great, very educational and very exciting. But yeah, it’s interesting seeing the dynamics behind the bigger operation, you know, and how far ahead you have to plan to get all this in place? I know, we talked about it with, with with my, you know, my business and the considerations that had to be made a long way ahead. And so yeah you have to secure those secure those, those coffee beans. It has all those different people? Yeah.

Gene Tunny  47:13  

Yeah, I found it interesting, you were saying, were you suggesting Rai that, I imagine coffee demand, it’s been growing has it, because the world economy is growing, population’s growing. But are you concerned that with these demographic shifts, I mean, I’ve found that extraordinary, but I guess that makes sense because the younger, the Gen Z’s in particular, they’re very health conscious. And maybe they, do they see coffee as not healthy, is that one of the concerns?

Raihaan Esat  47:43  

I just think that there’s a lot of, a lot of variety out there now, there’s a lot of choice. Let’s think back to say, you know, late 90s, early 2000s, anyone that wanted to look cool, carried around a cup of coffee with them. But now there’s so many alternatives. There’s bubble tea’s gone crazy. Right? So there’s an alternative for you. Tea shops in general have gone crazy. There’s an alternative for you. There’s so many other options for drink, hot and cold drinks. There’s yoghurt places, there’s milk bars, there’s so much different variety out there now. So I think there’s a lot of competition for choice. And that partially hurting the demand for coffee, even though the demand is still going up. It’s not going up at the same rates that it used to be.

Gene Tunny  48:34  

Yeah, I just wonder about some of the some of the bigger markets. I mean, I know in the States, they just all historically they’ve just drunk gallons of coffee and a lot of it in diners or wherever, just constantly pouring the filtered coffee.

Raihaan Esat  48:52  

People have changed where they drink their coffee as well. COVID was a big driver of this. When everyone started setting up home offices to work from home. What are the, what’s the first thing that they put in their home office? A coffee machine. Right? You, you could not buy coffee machines from white goods stores for six months, the demand for coffee machines went through the roof. So because everyone changed where they were drinking their coffee. So instead of say buying two or three coffees through the day, one coffee is now at home. And then the other two are out at work or from your local cafe. So the dynamics are changing a lot.

Gene Tunny  49:28  

Yeah, gotcha. But I’m just wondering, like, Are you starting, just like with the big markets, so say United States, China? Or is or is China a big market and India? I mean, maybe they’re not maybe it’s Europe, I don’t know what are the big markets for…

Raihaan Esat  49:44  

Yeah, China and India, Asia in general is, is an emerging market for coffee. They’re very traditional in, in tea. They’ve had long history of being tea drinking countries, and still are huge tea drinking countries, but what’s driving the growth in Coffee in those countries is this sort of middle, middle professional class, that’s growing like India has a huge middle class growing, that are professional people earning incomes really well. And they’ve got some disposable income. And so there’s time to spend on coffee because it’s the cool thing. Funny enough, though, in India, compared to Australia, Australia, coffee is a very morning thing. After two o’clock, it’s almost impossible to to get a coffee because all the cafes are closed, because no one’s really drinking coffee after two o’clock. In India, everyone goes out for coffee after work. Because they they have their day where after work, everyone goes out. So the coffee drinking culture is more evening time over there. Very, very interesting how the population uses the drink in a different way. For them, it’s more social. Whereas we’ve got a huge takeaway culture.

Gene Tunny  50:59  

Yeah, yeah, we do. I just realised that Arturo wrote a note on coffee and the market worldwide for my website for our website earlier this year. So I’ll put a link in the show notes. I think he might, we might have summarised the, where the demands coming from. But yeah, I found that fascinating that because of these demographic changes maybe here the growth will be moderated, or it won’t be as strong as it has been in the past. Or it could even mean demand could decline. Is that what you’re concerned about?

Raihaan Esat  51:33  

I’m more concerned about climate change, and the effects that it has on coffee production, because the demands for high quality coffee are so high right now, everyone wants the best of the best, or the best they can get for a given price. So the demand for high quality coffee is very high. But climate change is making it very difficult to produce coffee at a high level. For example, seasons are starting to change slightly. And there’s I’ll use a case study in Colombia, the farmer that we’re dealing with, never used to have a problem with what they call Broca. It’s the, it’s a beetle that bores holes into the coffee bean and basically eats it from the inside out. They are getting worse and worse and worse every year. And those beetles are actually very temperature sensitive. So they don’t like cold climates. As the temperature generally is increasing on average, these beetles are moving higher and higher up the mountain into the coffee plantations and destroying more and more crops. So to produce high quality coffee is becoming more difficult as a result of climate change. Weather patterns are changing as well. We’ve got rains happening when they shouldn’t be happening, triggering inconsistent flowerings in the coffee plants. And generally, it’s forcing producers to move higher up the mountain so to speak, right? The higher up the mountain you go, the colder it gets, the better it is for coffee, up to a certain level. But when you go up the mountain, there’s less mountain, there’s less land to produce coffee on. So I think there are some interesting pressures, especially on the climate change and geological side that are affecting coffee quite strongly. So finding high quality coffee is going to get more expensive, basically.

Gene Tunny  53:30  

Yeah I understand climate change. What do you mean by geological?

Raihaan Esat  53:33  

So we see countries that never used to produce coffee starting to produce coffee, or traditionally weren’t coffee growing countries, because the climate now is starting to move in a range that is suitable for coffee production. So maybe they were too cold or too high in altitude to be sustainable for coffee production. But as the climate’s generally warming up, suddenly that that geography of that area now is suitable for coffee production.

Gene Tunny  54:01  

Which countries are those?

Raihaan Esat  54:05 

So you’ve got countries like Nepal starting to produce some coffee. Some areas in Argentina are producing coffee as well. Cameroon. Those are probably the best examples. Ecuador’s producing a lot of coffee now as well.

Gene Tunny  54:23  

Gotcha. Right.

Tim Hughes  54:25  

That’s interesting.

Gene Tunny  54:27

Yeah. real example of climate change. Yeah, yeah extraordinary.

Tim Hughes  54:31  

Yeah, no, it’s that thing because I knew that those established countries were, yeah, having that problem of basically having a smaller, viable area to grow coffee, but um, yeah, it’s interesting, to, I hadn’t actually thought about it, but it’s clear that obviously those are the places that weren’t suitable and now becoming possible.

Raihaan Esat  54:50  

Yeah, yeah, look, another example is leaf, leaf rust. It’s a disease that affects the coffee leaves and it turns them from green into this rusty colour. And that also is seriously moving through coffee farms at a rate of knots and just literally destroying coffee plantations. So, you know, a lot of work is going by an organisation called World Coffee Research. We’re a supporter of them. And we actually sell little coffee trees that the Coffee Commune and all the proceeds go to World Coffee Research to find genetic varieties that are resistant to coffee leaf rust, for example.

Gene Tunny  55:28  

Yeah, good one. That’s great. Tim, what have we missed? Is there anything else we want to cover with Rai?

Tim Hughes  55:36  

No we’ve largely covered it. I mean, it’s so interesting. And I know that we could talk for a lot longer because it is it’s fascinating. Like, I’ve been immersed in this and been lucky to share a lot of time with Rai and use his expertise and ask him 100 questions. So this is a continuation of me asking in a broader sense, I guess, and learning more about the coffee industry as a whole. No, it’s been really good. I guess, what does the future of coffee look like would be the final point, I guess,

Raihaan Esat  56:03  

The future of coffee? Let me get my crystal ball. Where did I pack it, I must have left it in my other in my other bag. Hard to say at the moment, I think the coffee is at a bit of a point now where it can go one of two ways. Either, it’s going to get super expensive, because of all the pressures mounting up and and the result of that is we’re going to have to change the way that we drink coffee, which is only about probably 5, 10 years down the track from now. But if coffee gets to the point where it gets super expensive, let’s call it $10 a cup. I, we you’re going to be faced with the choice. Where are you going to drink your coffee? And what do you expect in terms of value for your cup of coffee? If you’re going to spend $10 on something, it had be, better be a damn good cup of coffee, and there needs to be a level of service that goes with it. I’ll use the burger analogy. I can go and get a $2 burger from a chain store. Or I can go to a fancy restaurant and pay $25 for a burger, right? Different level of experience that I received for my $25 compared to my $2, I think the same thing is going to happen with coffee, we’re going to see this widening spectrum of pricing, you’re going to still have the cheap coffees, and you’re going to have the more gourmet coffees, and there’s going to be a different level of experience that goes with them, the cafes, the organisations that nailed down that model correctly, will do well. And the ones that can’t keep up with it are unfortunately not going to do so well.

Tim Hughes  57:43  

That that’s actually really interesting. And just going briefly back to the point that you were saying about in COVID, all those coffee machines going out of stock, you know, as so many things did, of course, but I guess that’s one of the areas with with rising coffee prices. That third part, that last part of the stage of producing a great coffee, if it’s come from a great farm and grown well, if it’s been roasted well, that last part, which ultimately if you do coffee, you know have coffee at home, you have that responsibility yourself and there’s a massive growth opportunity for education as to how people can do that. Because it’s not easy making a great cup of coffee consistently. Like I’ve had some training. And it’s still hard, you know, to do something absolutely bang on each time as you do when you make a coffee. And I’m so impressed with the little designs you put in there as well, you know, just to top it off with but it really is an art form. But that’s I guess when it can become more affordable for a lot of people is if they have the capability to make good coffee at home. And it can be done reasonably inexpensively. But then it allows people yeah to, to save some money.

Raihaan Esat  58:56  

Everyone should have a good cup of coffee at home, definitely you should spend some time learning how to craft a nice cup of coffee, just the way that you would spend time learning how to make great pasta or a steak or a dessert. It’s, it’s part of a, it’s a ritualistic part of the process. It’s something that will enrich your life and gives you a lot of appreciation for what goes on in cafes as well. Because effectively when you go to a cafe, you’re paying someone to take your order to, you know, make and craft the coffee for you. Whereas you could do it yourself. So that’s probably where there’s there is a lot of scope for people to start exploring.

Gene Tunny  59:38  

I’ve got to ask you about that Rai in terms of you know, everyone can have a great cup of coffee. One of my favourite YouTube channels is the Whisky Tribal, or Whisky Vault I think they’re these guys in Austin, Texas, and they’re huge into their whisky. And they say the best whisky, because there are a lot of debates about whisky and whether you have single malt etc. The best whisky is the whisky you like to drink the way you like to drink it. Is that the same with coffee?

Raihaan Esat  1:00:07  

Very much so. And I think there’s a lot of room for exploration. Everyone is, generally speaking, how many times do you walk into a cafe and order the same thing, every single time. The coffee menu is generally quite large, there’s a lot of variation in drinks. So firstly, I’d encourage exploration, you know, explore the coffee menu and try different drinks, and then find the one that really does suit you. But the one that you like, might not be the same one every time. I drink a different coffee almost every day. Sometimes it’ll be espresso, sometimes it will be filtered coffee, sometimes it will be a milky coffee, depending on how I’m feeling on the day. And I’m sure the same thing goes for the whisky drinkers or for wine drinkers, if you just drank the same, the same beer every single day or the same wine every single day. Like, don’t you want to try something different? But some, but I understand some part of that is ritual as well. I want to, need to have some stability in my life. And coffee needs to be the stable thing in my morning. So I understand both sides of the equation, but I encourage explore exploration.

Gene Tunny  1:01:15  

Absolutely and given your own Economics Explored, and we’re all very much for exploration. I think that’s a good point to end on.

Raihaan Esat  1:01:23  

That was fun. Thank you guys.

Gene Tunny  1:01:24 

Very good.

Tim Hughes  1:01:25  

That was great. Thank you.

Gene Tunny  1:01:26  

Thanks Tim, thanks Rai, I really enjoyed it.

Righto, thanks for listening to this episode of Economics Explored. If you have any questions, comments or suggestions, please get in touch. I’d love to hear from you. You can send me an email via contact@economicsexplored.com Or a voicemail via SpeakPipe. You can find the link in the show notes. If you’ve enjoyed the show, I’d be grateful if you could tell anyone you think would be interested about it. Word of mouth is one of the main ways that people learn about the show. Finally, if your podcasting app lets you then please write a review and leave a rating. Thanks for listening. I hope you can join me again next week.

Speaker 1  1:02:18  

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Credits

Thanks to Obsidian Productions for mixing the episode and to the show’s sponsor, Gene’s consultancy business www.adepteconomics.com.au. Full transcripts are available a few days after the episode is first published at www.economicsexplored.com. Economics Explored is available via Apple PodcastsGoogle Podcast, and other podcasting platforms.

Categories
Podcast episode

The Invisible Hand: economic, religious, or mystical concept? w/ Dan Sanchez, FEE – EP185

The Foundation for Economic Education’s Dan Sanchez argues that the invisible hand is a legitimate economic concept and not a religious or mystical one, as some critics of economics claim. Dan and show host Gene Tunny discuss the efficient organization of economic activities by the market mechanism in a decentralized way, without the need for a central planner. The conversation turns to TikTok and economic engagement with China. 

Please get in touch with any questions, comments and suggestions by emailing us at contact@economicsexplored.com or sending a voice message via https://www.speakpipe.com/economicsexplored

You can listen to the episode via the embedded player below or via podcasting apps including Google PodcastsApple PodcastsSpotify, and Stitcher.

What’s covered in EP185

  • Introduction to this episode [0:06]
  • Dan’s article on the “invisible hand” [2:06]
  • The production of a pencil is like an orchestra without a conductor [5:25]
  • Is the invisible hand the hand of God? [8:34]
  • What is the problem with central planning? [12:27]
  • Central planners don’t like the idea of economic laws because they circumscribe their utopian dreams [15:45]
  • Dan’s views on big tech [19:23]
  • Is there a case for regulation or a ban on TikTok? [23:32]

Links relevant to the conversation

Dan’s bio: https://fee.org/people/dan-sanchez/

Dan’s Twitter handle: @DanSanchezV

Dan’s article on “How Atheist Anti-Capitalists miss the point”:

https://fee.org/articles/how-atheist-anti-capitalists-miss-the-point/

Von Mises book on the economic calculation problem

https://mises.org/library/economic-calculation-socialist-commonwealth

Article about problems with Soviet shoe production:

https://www.econlib.org/archives/2009/09/soviet_shoes.html

Bio of 19th century British free trade advocate Richard Cobden who Dan mentions:

https://en.wikipedia.org/wiki/Richard_Cobden

Transcript:
The Invisible Hand: economic, religious, or mystical concept? w/ Dan Sanchez, FEE – EP185

N.B. This is a lightly edited version of a transcript originally created using the AI application otter.ai. It may not be 100 percent accurate, but should be pretty close. If you’d like to quote from it, please check the quoted segment in the recording.

Gene Tunny  00:06

Welcome to the Economics Explored podcast, a frank and fearless exploration of important economic issues. I’m your host Gene Tunny. I’m a professional economist and former Australian Treasury official. The aim of this show is to help you better understand the big economic issues affecting all our lives. We do this by considering the theory evidence and by hearing a wide range of views. I’m delighted that you can join me for this episode, please check out the show notes for relevant information. Now on to the show. Hello, thanks for tuning into the show. In this episode, I chat with Dan Sanchez about the invisible hand, the efficient organisation of economic activities by the market mechanism in a decentralised way, without the need for a central planner, the great Scottish Enlightenment economist and philosopher Adam Smith observed, every individual neither intends to promote the public interest, nor knows how much he is promoting it intends only his own security and by directing that industry in such a manner, as its produce may be of the greatest value, the intense only his own gain. And he is in this as in many other cases, led by an invisible hand to promote an end which was no part of his intention. Is the invisible hand a legitimate economic concept or is it instead of religious or mystical concept as some critics of economics argue? My guest this episode, Dan Sanchez argues vigorously against those critics. Dan is the director of content at the Foundation for Economic Education. The foundation is one of the world’s leading pro free market think tanks, and it’s been operating since 1946. Okay, let’s get into the episode. I hope you enjoy my conversation with Dan. Dan Sanchez, from the Foundation for Economic Education. Welcome to the programme.

Dan Sanchez  02:06

Thanks, Gene. It’s great to be here.

Gene Tunny  02:07

Excellent. Dan, I was keen to get you on the show to chat about an article that you wrote for fi recently in the world in the last few months. So how atheist anti capitalists missed the point why they’re wrong, to sneer at the invisible hand and, and our pencil. To start off with Dan, could you just explain what you were reacting to? So what was the sneering that was being done at the invisible hand? And, and eyepencil, please,

Dan Sanchez  02:40

yeah, well, I tried to make it evergreen, partially because this is a criticism that is levelled at eyepencil and about free market economics in general, a lot. And another thing is that I just didn’t think that the I don’t even remember the author of the book that was in the latest smear, and the latest attack on Leonard Reid’s eyepencil was then I just wanted to sort of make a blanket case against that kind of line of attack. And what the line of attack is, is that is that free market economists believe in the invisible hand, that there’s a line and a pencil that says, Since only God can make a tree, I insist that only God can make me. And therefore free market economics is invalid, because ultimately, it is based on faith instead of reason. And that it relies on some kind of a supernatural divine intervention for the free market to work. So it was that line of attack that I wrote my article to counter attack.

Gene Tunny  03:55

Rod, okay, I didn’t realise there was that line in eyepencil, I’ll have to go back and have a look at it to see the context. eyepencil is a great article that explains how no one no one person knows exactly how to make a pencil. There’s all of these, you know, hundreds of or however many people 1000s of people involved in the supply chain and the production from the growing of the timber, and the mining of the graphite, and the assembly of all the components into into a pencil. And that’s all coordinated by the market system. I mean, what Adam Smith and you know, the, the invisible hand, this is this metaphor from Adam Smith. That’s about how he sees as there’s, it’s almost as if there’s an invisible hand at work in how the market coordinates people and we owe our DNA to the self interest of the butcher and the baker. So yeah, that’s what that’s broadly speaking, correct. isn’t enough characterise that, right?

Dan Sanchez  04:57

Yes, that’s exactly right, Leonard. Reid is actually the founder of the organisation that I work for the Foundation for Economic Education. And he wrote this classic essay I pencil. And really what it is, is it’s a, written from the perspective of a pencil, like the pencil is the narrator. And the pencil is giving his family tree, his ancestry. And the point that he has to make is that, as simple as he is, like a pencil is not a super high tech product. But as simple as it is, its production is vastly complex, really, involving millions and perhaps 10s, and millions and hundreds and millions of people in its production, because you might think that the components are relatively simple, because there’s wood, and then there’s the lead and the eraser, but each one of those components had to be manufactured. And oftentimes, those the capital goods that were used to manufacture that they have to be manufactured, and it just keeps radiating out and out. And when you really trace what it all that goes into the production of a pencil, it is an orchestration of millions of people. But it’s an orchestra without a conductor. And that’s the, that’s the marvel that eyepencil really reveals is that there’s no mastermind, there’s no central planner, a lot of people would like to be central planners, they’d like to centrally plan pencils, and they’d like to centrally plan everything, but it is way too complex for them to be able to do that. And yet it happens every day without a central planner, because of the market price system. And, and that market price system is very orderly. But it’s not order that comes from the mind of any single participant of it, that that it’s an order that emerges out of the interactions of all these people pursuing their own little corners of order. And so there’s a transcendent order that emerges out of that. And so Adam Smith and Leonard Reid characterise that as, as sort of like an invisible hand, because all these wonderful things are coming out of the market, like a pencil, that wasn’t the intention of any single participant of it, a lot of people involved in producing things that go into producing a pencil, don’t even realise that they’re contributing to a pencil. So like someone who is, you know, manufacturing an axle that goes onto a truck, that ships the wood that ends up in the pencil. That person never thinks about his work as contributing to pencils. It’s not his intention, it’s not his order. But the market price system coordinates that all so that he actually does very effectively contributes to a pencil. And so like Adam Smith said, that it’s as if an invisible hand is ordering people’s actions to yield results. That was not any intention of their own. That you could see that that Leonard Reid and Smith and and also Frederick Basia that you could see like the hand of God in that, and that’s where the critics pounce because the critics say, Aha, you’re talking about God so therefore, everything that you’re saying is invalid. But in my article I explain how, how that actually is not a valid criticism.

Gene Tunny  08:57

Broad Okay, so we’re Smith and last year and read with a religious Did they say they compared the market mechanism to the to the hand of God is that what is that correct?

Dan Sanchez  09:09

Yes, they were all they were all Christian. And Leonard Read had that line that I mentioned, Frederick Basquiat in one of his essays warned against, quote, rejecting the order, God has given it, referring to the market and cautioning against social schemers who, who want to reject that order. And so a lot of free market thinkers see that there is something divine in it, that the order of the the world including the social order, is because of God it was created by God. But the thing is, is that even people who maybe are atheists and who who disagree with with Basquiat and read, they have no cause for disagreement with their conclusions, because as I explained in the article, the way that they reach their conclusions, was not through recourse to any kind of divine intervention. And it was not like God exists, therefore, the free market or anything like that, they reach their conclusions through economic reasoning, and through observations about human nature. So when, when Adam Smith explained the invisible hand and the workings of the market, he talked about the division of labour and exchange and prices and incentives and, and the logic of the market, resulting in that. Similarly, when Leonard Reid talks about eyepencil, and the wonders of the market, again, it’s all about about human action and exchange and the prices that result from it and the coordination that results from that same thing with with Bostian. And they think of that order as having been created by God, but, but they don’t say that, like, it relies on continuous divine intervention all the time. And they don’t rest their conclusions on, you know, holy scripture or anything like that. And so, in my article, I compare it to Sir Isaac Newton, Isaac Newton was also Christian, and was also religious, and also saw something divine in the physical order that he was describing. And that, I think there’s a double standard here, because these, these critics, they, they wouldn’t then say that, you know, Isaac, Newton’s physics were invalid because of, of his, you know, religious perspective. Because his optics and His laws of motion and everything that they were derived from using reason and using experiments and using observation, and they don’t have that criticism for him, because they don’t have an axe to grind against physics, they have an axe to grind against capitalism. And so they’re going to level this unfair attack, in this case and not in the other.

Gene Tunny  12:27

Yeah. Yeah. I was just thinking, Dan, I mean, I first came across eyepencil, I think it must have been in one of Milton Friedman’s books, because Friedman might open one of the chapters in Free to Choose talking about it, I can’t remember exactly. And Friedman love that example. I mean, the way Friedman always explained it in terms of the market, it provides us clear signal is that price signal that, and that’s all you need to observe in the market. And if if there’s a shortage of say, timber than the price of timber is going to increase, and that’s going to send a signal to the loggers to, to harvest more, more timber. So, yeah, he talks about that efficient signal. And, you know, 30 or 40 years ago, there were, it was much clearer that that was a better approach than central planning, because we had real life, socialist economies, the centrally planned economies still, that were failing to produce the goods and services, the consumer goods that that people wanted. And I might try and dig up some of those examples of those, you know, just the inefficiency of production, the failures to when you got central planning, and you don’t have the market to tell the factories, what needs to be produced, you have all sorts of bottlenecks and problems in production. So yeah, but we seem to lack that now those it’s not as clear anymore, because we’re not in that. There’s not there aren’t in real life. I mean, maybe there are some in Cuba and North Korea, but we don’t see we don’t hear a lot about them. But we’re very conscious of what was happening in the in Eastern Europe and Soviet Union back in the day. I don’t know if you have any reflections on that at all.

Dan Sanchez  14:12

Yeah, and even in those cases, the Socialist quasi socialist economies aren’t really fully socialist because they have recourse to market prices that are generated from capitalist economies. So the problem about socialism that you can see in eyepencil, in Leonard Reid’s discussion of central planning and my pencil but also in Ludwig von Mises is explanation of the calculation problem is that without market prices, production is just arbitrary that that there’s there’s no way of balancing one production course of action against another course of action because you just don’t have prices and you don’t have the the gun either profit and loss to know whether, you know whether one line of production is any better than another. And so it’s just arbitrary. But but at least if, if you have a socialist economy and the capitalist economy exists elsewhere, at least you can use those prices as a as a rough metric to have some kind of rationality in your production. But in a completely socialist world, it would be utter chaos, like there wouldn’t even be that so it would be even worse.

Gene Tunny  15:34

Yeah, you know, it’s good. You reminded me of that. Sorry, Ludwig von Mises the calculation problem, I’ll have to refresh. My understanding of that. It’s a very good point that that he makes there. Okay, there’s one thing I wanted to dive into with your article you write that those who try to dismiss eyepencil do not want to admit that they or their favourite social schemers cannot outsmart or outdo the transcendent order of the market, those who sneer at the invisible hand won a free hand to remould society as they please. Okay, I largely agree with you what I just want to ask you about your thoughts on, there’s a lot of concerns. Now. I mean, there’s concerns about inequality, and housing, I mean, we’ve got their housing prices are out of control, a lot of young people are concerned about whether they’ll be able to afford a house, there are a lot of particularly the millennials and the Gen z’s. They’ve got a more favourable view of socialism than then older generations. And I’m always conscious, I don’t want to have a not that I’m a boomer. But I don’t want to have that burger mentality. Like there are a lot of people who are so try to see where people are coming from. There are a lot of people who think that the market, this is a problem with the market. This is why we’ve got all of these issues. How do you respond to that? Do you think it is such a transcendent order? If we do have this perceived issue of inequality and lack of housing affordability? How do you respond to the people who are critical of of capitalism, or neoliberalism or whatever you want to call it for delivering these outcomes.

Dan Sanchez  17:24

So a lot of the times what central planners or would be central planners, what they want to do is they want to basically pander and demagogue to people to pretend that they would be able to outdo the market, and provide them with more goods and services than then the market would provide. And so they don’t like the idea of economic law, because it puts a crimp in their plans, because it it shows that there are just some things that can’t be done, just like in the realm of physics that, you know, there’s a law of gravity, a president can’t walk off the presidential palace and expect to be able to fly. Similarly, a president can’t impose price controls, and expect there to not be shortages. It’s like these these economic laws, circumscribe the utopian dreams of these demagogues and the central planners, you know, that relates to housing as well. So for example, rent control, central planners don’t want to believe in economic law, because economic law means that they can’t impose rent control, without creating housing shortages for the very people they pretend to want to be able to provide for. So that’s why they are really averse to any kind of notion of a transcendent order any kind of order that that is beyond what a central planner can can encompass, or some kind of an ingenious social reformer can’t outdo, but they do get away with it to a large degree, they are able to put one over on the people to make them think that they can outdo the market. And so they do manage to do a lot of interventions. But then those interventions create a lot of these shortages. They blame that on the market, and then that buttresses their case for even more intervention if people don’t actually understand economics. And so So yeah, it’s true that there are housing shortages, there’s lack of options for living, housing is unaffordable, but it doesn’t make any sense to lay the blame on the free market. Because when you when you trace what is causing these problems, especially in in certain areas in particular is that you, you see policies like rent control, and you see policies like zoning restrictions and all these anti production policies that that put a strict limit on the production of new houses. And if you have fewer houses, then they’re going to be more expensive. Again, it’s an economic law of supply and demand.

Gene Tunny  20:22

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Gene Tunny  20:57

Now back to the show. One of the other concerns I hear expressed from people who aren’t sympathetic to Foundation for Economic Education, is this point about monopoly. There’s a growing concern about monopoly in well, in tech, in particular, surveillance capitalism. How do you think about that? I mean, is that part of the transcendent order? Or is that is that something malignant? There needs to be policy action, perhaps antitrust action against? How do you think about that?

Dan Sanchez  21:29

Yeah, I think a lot of the problems that we’re seeing with big tech, again, can be traced to government intervention, we saw with Twitter files, how much the FBI has been in Twitter’s DNS. And I’m sure if we ever had the YouTube files or the Facebook files, that, you know, we’d see the same results. I think that it is really short sighted, especially for conservatives to want to use the power of government and antitrust policy, to give the government even more power over these big tech companies, and expect that to solve the problem when when, if anything, that’s just going to give the government more leverage to be even more censorious against critics of the government. And so it just seems really, really short sighted to me. And the answer is to free big tech in the tech industry and social media and media in general of government and influence. Because if there wasn’t so much intervention, a lot of these behaviours, they’re doing it because of government pressure. It’s not because of, like a market demand for it. And if that government pressure was was released, I think people like freewheeling conversation and don’t like censorship. And and I think market demand would leave these these big tech companies to either them or their competitors and their successors, to not be abusive in their practices. And a lot of times big tech companies, like incumbent, like already dominant big tech companies, they actually like regulation, because it places a heavier burden on upstarts than it does on them. Yeah, even if you want, you know, giants, like like Facebook and YouTube to go under, again, you know, because of abusive practices. Again, the answer is to get government out of it. So that there’s less regulation, and there’s more room for competition.

Gene Tunny  23:32

Yeah, fair points, has feed on any thinking on tick tock, because it’ll mean tic TOCs, a company that there’s a bit of concern about in terms of privacy and security issues has feed on and you thinking on that? Is that is that a special case where there might be case for regulation, or a ban of some kind?

Dan Sanchez  23:50

Tick tock? Like, really, I think the reason why there’s so much pressure on banning Tiktok. For one thing, again, it’s anti competitive. The biggest supporters of a ban on on Tik Tok are Facebook and YouTube, because basically, they want to crush the competition. But the actual bill that would ban Tiktok doesn’t only ban tick tock it gives the government sweeping powers over monitoring and censoring the internet in general. And really, I think it is a a Trojan horse, on one hand for these big tech companies to to eliminate competition and on the other hand for governments to have even more power regulating speech, because ultimately, the biggest threat to our own civil liberties is not China. It’s the American government. Thankfully, it’s the American government that that is having this constant siege on our liberties. And this is just this is just part of that really.

Gene Tunny  24:56

That’s an interesting perspective. I thought I’d ask you Here’s it’s I mean, one of the things I’ve been trying to figure out through my conversations with people is, is China and how big of a threat is China? And does that mean we need to decouple from them? No, that’s not what we’re talking about today. I’ve had conversations with different people. And I know that the it’s a huge concern that a lot of people are really concerned about national security. But yeah, I think that’s a that’s a good point you make about the legislation and the wider reach that it could have. So I might have a closer look at that. That’s been great. Dan, thanks so much for your time. Are there any other points about your article or what you’ve been thinking about lately, you’d like to get across before we wrap up?

Dan Sanchez  25:44

Yeah, I mean, something that about I pencil that is brought to mind by the whole question of decoupling from China is that, you know, what the eye pencil story is, is a story about this vast division of labour, that is at the root of our prosperity, that millions of people are coordinating through the market system. And because of that vast coordination, that vast division of labour, because of the efficiencies of that, that is why we have hot, such high living standards, that we can have this huge population, but living better than any time in human history. And China is a big part of that. Because China, and having integrated with the global economy, that contribution to the division of labour, That is a big reason why we are as prosperous as we are. It’s also a big reason why the relations with China aren’t even worse. Because when peoples are interconnected through trade and through exchange, then that does create an interdependence. But that’s actually a good thing. Because that is what prevents wars, like once people are completely separate, then the only way that they can benefit from each other is through violence is through war. It’s like, there’s a saying that if if goods don’t cross borders, armies will, and that kind of separation, if anything, it would lead China to become even more totalitarian. Because it would create such a like a crisis situation and in times of crises, like the tyrants get are able to gain even more power. And so one thing that, you know, Leonard Read and people like Richard Richard Cobden talk about is that the more that exchange and the diverse division of labour knits people together, the more peace and cooperation and harmony and prosperity it creates,

Gene Tunny  28:00

here so Richard Cobden, an English radical and liberal politician, manufacturer and campaigner for free trade and peace. Yep. Okay. So very good. I’ll put a link in the show notes. So I remember, I’ve read some of his stuff many years ago, but it was a good, good reminder. So very good. Dan, thanks so much for your time. This is this has been really great. And I loved your thoughtful piece on on Smith, and Bastiat and what the the atheist ad capitalists get wrong. So that was excellent. And yeah, again, thanks again and keep up the great work and yeah, hope to see more of your stuff in the future.

Dan Sanchez  28:40

Thank you, Gene. I really appreciate it. Very good.

Gene Tunny  28:49

Okay, I hope you found that informative and enjoyable. I was really impressed by Dan’s insights into the invisible hand and his passionate defence of the free market. I think the main takeaway of this episode is the efficiency of the market mechanism in organising the production of goods and services. The invisible hand is a beautiful thing. Dan describe the market is bringing about a transcendent order, because the results transcend the intentions and efforts of particular individuals in the economy. As Dan noted, Smith, Bastiat and read demonstrated that transcendent order using economic reasoning and empirical observations about human nature, that demonstration did not rely at all on religious premises. Whether those men saw in that transcendent order something literally divine has no bearing on the validity of their reasoned demonstration of that order. I fully agree with Dan on that point. Dan has certainly given me some ideas for future episodes. It’s probably worth talking about the economic calculation problem posed by von Mises in a future episode. Von Mises argued socialist economies would fail because of the huge computational problems they faced They will have to centrally plan and direct the flows of resources across various industries and the distribution of products to consumers. Something the market mechanism does in an efficient decentralised way. In a future episode, it would also be useful to explore some of the failures of central planning in the former Soviet Union. There are various stories about recurrent shortages of bread and toilet paper and about uncomfortable and unfashionable shoes no one would wear but it would be good to delve into some specific well evidenced examples. I’ll see what I can do. What do you think? What either of those future episodes interests you? Let me know. And please let me know what you think about what either Dan or I had to say this episode. You can email me via contact@economicsexplored.com. Thanks for listening. rato thanks for listening to this episode of Economics Explored. If you have any questions, comments or suggestions, please get in touch. I’d love to hear from you. You can send me an email via contact@economicsexplored.com Or a voicemail via SpeakPipe. You can find the link in the show notes. If you’ve enjoyed the show, I’d be grateful if you could tell anyone you think would be interested about it. Word of mouth is one of the main ways that people learn about the show. Finally, if you’re podcasting outlets you then please write a review and leave a rating. Thanks for listening. I hope you can join me again next week.

31:33

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Podcast episode

Top 10 Insights from Economics – EP129 show notes & transcript

In Economics Explored EP129, show host Gene Tunny reviews his top ten insights from economics with Tim Hughes. These include insights regarding specialization and trade, opportunity cost, and the price mechanism, among others. Applications to traffic congestion and climate change, among other issues, are explored.

You can listen to the episode using the podcast player below or on Apple PodcastsGoogle PodcastsSpotify, and Stitcher, among other podcasting apps. A transcript of the conversation is included below.

The e-book which is the basis of this episode is available to subscribers of the economicsexplored.com website.

Links relevant to the conversation

On comparative advantage:

https://www.economicsonline.co.uk/global_economics/comparative_advantage.html

https://www.khanacademy.org/economics-finance-domain/ap-macroeconomics/basic-economics-concepts-macro/scarcity-and-growth/v/comparative-advantage-specialization-and-gains-from-trade

On California’s emissions reduction scheme:

https://ww2.arb.ca.gov/our-work/programs/cap-and-trade-program

Transcript: Top 10 insights from economics – EP129

N.B. This is a lightly edited version of a transcript originally created using the AI application otter.ai. It may not be 100 percent accurate, but should be pretty close. If you’d like to quote from it, please check the quoted segment in the recording.

Gene Tunny  00:01

Coming up on Economics Explored. But can you imagine what traffic would be like in central London if you didn’t have a congestion charge? I mean, it’d just be mad. Well, you wouldn’t be able to move.

Tim Hughes  00:11

It was. I remember the few times I was there, and it was like every European city. It was just chockers. But regardless, I don’t mind those kind of charges. But I do resent the fact that they’re not straightforward.

Gene Tunny  00:25

Welcome to the Economics Explored podcast, a frank and fearless exploration of important economic issues. I’m your host, Gene Tunny. I’m a professional economist based in Brisbane, Australia, and I’m a former Australian Treasury official. This is Episode 129, which is about my top 10 insights from economics. And joining me today is my occasional co-host, Tim Hughes.

Tim Hughes 00:49

Hey, Gene. How are you?

Gene Tunny 00:50

Good, mate. Very good. Thanks for joining me for this mini episode in a way. I just want to go over my top 10 insights from economics. So I’ve prepared an e-book. And if you’re listening and you’re interested in getting it, you can subscribe to the website, the economicsexplored.com website, and you’ll get a copy of that e-book. So Tim, I just wanted to go through what I think those top 10 insights from economics are. And one thing I should note is we’re recording this on the 2nd of March, 2022. Currently, there’s a huge crisis in Ukraine with the Russian invasion. We’ve got no idea how that will play out.

Tim Hughes  01:36

Hopefully swiftly and peacefully.

Gene Tunny  01:38

Yeah. But look, I mean, huge, huge risk to the world. And yeah, just feel for the people of Ukraine who are suffering from that invasion.

Tim Hughes 01:48

Absolutely.

Gene Tunny 01:48

Just terrible. Okay, so should we get into it, Tim?

Tim Hughes  01:53

Yeah, let’s do it. Can I ask if this is one to 10 in any sort of preference or order? Is it just top 10 all round?

Gene Tunny  02:00

This is one to 10 in the order that they occurred to me as I was jotting them down.

Tim Hughes 02:05

Cool.

Gene Tunny 02:06

So I think I’ve tried to order them in what I think are the most important insights. But having said that, I recognise that there’s possibly insights that other economists would put ahead of the ones I’ve chosen, or maybe they don’t agree with what I think are insights. And so if you’re listening in the audience, and you have a different view, or if you think I haven’t explained something exactly correct, then sure, please get in touch. So you can send me a message via SpeakPipe, there’s a link in the show notes, or email contact@economicsexplored.com. We’d love to hear from you, as always.

So Tim, just to begin with, I mean, this is one that I often point out when we’re just chatting is that insight about how $50 bills or $50 notes aren’t just lying on the sidewalk, waiting to get picked up. There’s a famous joke about the two economics professors walking along the street and one of them sees a $50 note and says, “Oh, there’s a $50 note there.” He’s about to bend down to pick it up, and the other one says, “Don’t be silly. If it was a real $50 note, then somebody would have already picked it up.” So it’s the idea of opportunities for profit or gains from trade are rapidly exploited in a market economy. So it’s that sort of insight, this idea of arbitrage, so the fact that you don’t have exchange rates being out of alignment. If you think about what we trade, say Australian dollars for US dollars, and then US dollars for British pounds, they all sort of make sense collectively. You’re not going to get an opportunity to, say, take your British pounds, buy Australian dollars, then sell them for American dollars, and do better than if you just sold your British pounds for American dollars. So those gains will actually be arbitraged away.

Tim Hughes  03:58

So if there is a $50 note on the footpath, it’ll get picked up so quickly that it’ll be unnoticeable on the macro.

Gene Tunny  04:04

Well, yeah, exactly. And I guess it’s a philosophy for life too. It’s something that Seth Godin, world’s number one marketing guru, will often say, that look, someone’s going to be number one, or someone’s going to win in this game. Someone’s going to be the top YouTuber. Somebody’s going to be Joe Rogan.

Tim Hughes  04:24

It’s probably not going to be you. Still hope yet, Gene, there’s still hope.

Gene Tunny  04:32

So I’ve always thought that was an important lesson from economics. That’s a key insight. It’s important in economics, because we’ve got all of these models in which there’s optimising behaviour. So we’ve got businesses trying to maximise profits and consumers trying to maximise their utility or their satisfaction. And generally if you assume competitive markets, then businesses can try to maximise profits all they like, but the force of competition means that they’re just earning a reasonable return on their capital. I mean, they’re being compensated for their investment, for their assumption of risk. But they shouldn’t generally be earning monopoly profits. Of course, then there’s that issue about, well, what about if you’re Amazon or what about if you’re Facebook, and so clearly, there are some monopoly profits or supernormal profits being earned. But the way that some economists rationalise that is that they’re being rewarded for the innovation. And you really need those supernormal profits to stimulate innovation in a way.

Tim Hughes  05:40

Yeah, it’s an interesting one, because, I mean, there are so many of those big companies. Certainly Amazon is profitable, but a lot of the big ones who aren’t profitable, just to get scale Uber, and I don’t know if Airbnb are profitable, but you know, it’s those ones that are massive to market. Spotify, for instance so they’re actually making money. But they’re getting market share. So it’s interesting to see how that’s possible without turning a profit. And it’s obviously on the future promise of reward.

Gene Tunny  06:15

It’s all based on future earnings. And so this is what’s interesting in this world of low interest rates, because interest rates are so low, and you can borrow money so cheap and invest for the long term. If you look at what these companies such as Uber could be earning in the future, and you make assumptions about, oh, well, we could all be using Uber, no one will own a car anymore, and look at what the potential revenues could be. If you’ve got very low interest rates, then if you discount those future earnings back to the present, they’re worth a lot more. And that pushes up the value of those companies, because in a way, it could make sense to borrow a lot of money now and invest in those companies, because interest rates are so low, and these companies have such huge potential earnings into the future. So that’s why you’re seeing a lot of these tech companies having such high valuations. And as soon as interest rates start increasing, that could reduce the value of these tech companies, because well, people would rather get the money in the short term, because the opportunity cost of money is higher if the interest rate is higher. Does that make sense?

Tim Hughes  07:32

It does. Yeah. Yeah. I mean, is this still along the lines of the $50 note on the on the street?

Gene Tunny  07:38

We somehow got onto that issue of … You’d talked about the tech companies.

Tim Hughes  07:42

It was my fault. I guess what it is is that they all lead from one to the other, but without getting off that first one, because it is a thing, for instance, of like, yeah, if there is innovation, and if people can copy it, then it will be copied. And generally more people will be doing it, so that general movement away, so that opportunities get taken advantage of by more than one person, obviously. If it works, then other people will copy it and follow and it becomes more dispersed. That would naturally be how it works. So I guess we’re talking about exceptions to that rule with these big, massive companies that are all on the promise of future reward, whereas most companies can’t operate that way. They have to be more instantly profitable if they’re going to survive.

Gene Tunny  08:29

Yeah, look, I may have gone on a bit of a tangent there. But that’s insight one. We might go into insight two. And that is this concept of, there ain’t no such thing as a free lunch. Now a guest I’m having on in hopefully next episode or the episode after is David Bahnsen. He’s a fund manager over in the States. And he’s written a great book, There’s No Free Lunch. And this is the idea that, look, there’s always an opportunity cost with any action. And so my insight two is it’s opportunity costs rather than cash outlays that matter in economic decision making.

Now, I think the original idea or the original, is it a proverb or a saying about there ain’t no such thing as a free lunch, came from bars in the, might have been late 19th century or early 20th century USA, where they advertised as having a free lunch to get the patrons in the door. And they’d know that they could cover the cost of the free lunch by selling them drinks, or maybe they inflated the prices of those drinks a bit while having the free lunch. So there’s that idea.

But also, if you think about it, you’ve got an opportunity cost. Someone could offer to take you to lunch, but that’s an hour of your time and that hour is worth something Time is money. I mean, that’s one of the things we often do in economics in cost-benefit studies. We value people’s time and we work out well how much benefit could erode or a new bridge provide through the time savings. There’s an Australian government estimate. I think it’s $32 an hour or something, on average, you can value people’s time at.

Tim Hughes  10:11

I think it’s a good rule of thumb. You know, there’s usually some reason for something being given freely. Sometimes if it’s charitable, then that is what it is. But in many cases, I think it’s tied in the process of reciprocation, in the form of something else, the other party reciprocating in some form or other, or an opportunity to sell a product or service at some stage. So I think everyone’s aware of … I think that’s a fair one to have in there, Gene. That’s a good home truth, I think.

Gene Tunny  10:49

Yeah. And it’s important because you’ve got to recognise the opportunity cost of your own assets. If you’ve got assets, and they’re not being used, then you’re losing the income from that. So you’ve got to recognise that. It might make sense for you to offload something that’s just sitting around, like an old car or something, that’s costing you. You’re losing money on it through depreciation every year. So yeah, why not get rid of it? So I think that’s an important concept, this idea of opportunity cost, what are you giving up through your current course of action, your current actions.

Okay, insight three, comparative advantage and gains from trade. So this is the classic principle from David Ricardo, the British stockbroker, member of Parliament I think he was, economist from the 19th century, which is essentially arguing that there’s generally going to be gains from trade. Even if a country can produce most things, or in his model, it’s even if a country can produce everything better than another country, more efficiently, it still makes sense for one country to specialise in particular goods and services, relative to another country. Then that maximises the total amount that can be produced, and then you trade amongst each other. So it’s an argument in favour of specialisation and then trading.

Often the examples are given … I think they have the example of England trading with Portugal, and they use the commodities of cloth and wine. And there’s a numerical example that shows why it makes sense for, I guess it was England specialising in cloth and then Portugal specialising in wine. What’s neat about it is it doesn’t actually matter. If one country is superior in productivity to another country, it still makes sense to have specialisation.

One of the ways it’s often explained in economics classes is if, say, you’ve got a professor, and the professor has a secretary. And the professor could be as good as the secretary in administrative tasks, or even better. They could be an even better typist, or better at the admin stuff. But they’re also a great researcher. If the professor gives up an hour to do the admin stuff, that’s going to cost them a lot in terms of the great research output they could produce, whereas the admin person, they’re not going to be able to produce in an hour. If they gave up an hour, they’re not going to be able to produce anywhere near what the professor could in terms of research output. And it makes sense collectively. If you look at it collectively, it makes sense for specialisation to occur. So I’ve got some examples in the insight in the e-book. It’s essentially the benefits of specialisation.

Tim Hughes  13:56

And then maximising the available time within that sphere of specialisation as well, I guess. So for instance, like if you’re educated to a point of being a specialist in a certain area, like in your example there, so you want to be operating in that area of specialisation for the most amount of your available time.

Gene Tunny 14:16

Exactly.

Tim Hughes  14:17

This would speak to scale though, I guess, as well, wouldn’t it? For instance, certainly around my part of the world, originally Manchester, and cotton or linen production around there was huge. And so if you do that to such a scale, then per unit cost or square metre or however you measure the product, that would be ultimately cheaper to produce than if everyone tried to do it somewhat on a smaller scale.

Gene Tunny  14:47

Yeah. I think it’s related. I mean, definitely the gains from scale, the economies of scale, that will come from specialisation. And this is I think what Adam Smith was getting at. He was talking about how just the productivity and efficiency gains from specialisation, the division of labour. Ricardo’s model, his theory of comparative advantage doesn’t depend on that though. It is related. That’s a good point. I mean, maybe I needed insight about increasing returns in economies of scale in this in this e-book. I haven’t got one at the moment. I think that is an insight. That’s an important insight.

Tim Hughes  15:33

For instance, I don’t know what Portugal’s opportunity or capability was to manufacture cotton or linen, but I know the vineyards of Manchester wouldn’t have cut it as far as supplying the local areas with wine. I don’t know if anyone’s tried, but I’m certain that we would have heard about it if it was any cop.

Gene Tunny  15:51

I’ll have to put some examples in the show notes, a link to them on comparative advantage, because there are neat little numerical examples. And, I mean, yeah, it’s just not going to work in the podcast, but I’ll link to it in the show notes if you want to check it out.

Tim Hughes  16:06

I’ve just googled Manchester vineyards and it’s just tumbleweed blowing across my screen.

Gene Tunny  16:13

What about with climate change? See what happens.

Tim Hughes  16:15

Maybe, maybe.

Gene Tunny 16:16

See what happens. I shouldn’t be joking about that sort of thing, because there was a new IPCC report that came out. Was it yesterday? Just saying, yeah, still urgent. Something has to be done. We’re not really doing anything.

Tim Hughes  16:37

As far as climate change and crops.

Gene Tunny  16:39

We’re not doing enough. I think that’s what the message is.

Tim Hughes  16:41

Yeah, absolutely. There’s a different podcast on that one. And I know we’ve talked about it. But absolutely, I think, just very quickly, urgency would be a good thing. No matter whether people believe in climate change or not, urgency in the right direction, of all the changes that would make this planet cleaner, would be a good thing. Anyway, I’ll stop it there.

Gene Tunny  17:05

We’ll have to come back to that. I mean, there is one insight where we could talk about climate change. Insight nine, we can use market mechanisms, taxes or subsidies to correct market failures. So climate change can be thought of as a market failure, because businesses aren’t … At the moment, unless they’re paying a carbon tax, or there’s an emissions trading scheme of some kind … There aren’t many of those around the world. There’s one in Europe. I think there might be one in California. I’ll have to put that in the show notes. If they don’t have that, then they’re not paying the cost of the pollution. They’re not facing that cost. So the idea of the emissions trading scheme or the carbon tax, they’re two different ways of doing the same thing. It’s a way of putting a price on the carbon dioxide that’s emitted. So forcing people to pay for it. So the polluter would essentially pay for it. They’d have to buy the emissions permits. So they would pay the tax based on their emissions. And then they’d pass it on to consumers,  to an extent. That’s one of the insights.

So now, the challenge is, of course …  That sort of makes sense.  It’s a global problem. That’s the problem. So we really need a scheme that operates globally, or there’s some sort of compatibility or trading between different countries, the schemes of different countries. Otherwise, I’ve made this point many times about Australia. It doesn’t make sense for Australia to do much to reduce emissions if the rest of the world isn’t. If China and the USA aren’t doing it, what’s the point of us imposing these costs on our economy?

Tim Hughes  18:55

It’s a fair point, because it is that thing of like, why hobble yourself if other people … Then you’re just giving an advantage elsewhere, and making it harder. But here’s one of those things, it’s like one in all in, which of course, is different around the world, like people from different circumstances or Third World countries who are going to struggle to try and meet a matching scheme. But I’m certain that whatever the future holds in the way of making things better, I think technology and breakthroughs in cleaner energy and all these different things, they’re probably the areas which will get taken up, because if you can make it cheaper for someone to have clean energy, compared to digging fossil fuels out of the ground, or having something that’s not clean energy, as soon as it becomes cheaper, then you’ll have uptake naturally. You won’t have to have schemes or anything in place. That will be widely accepted and welcomed, because you’re going to be better off doing it.

And so those kind of breakthroughs, I think, I can only hope that that would be the sort of game changers. Of course we’re talking about future technology in most cases, but given the right intent behind doing that, and the right minds, the right backing, I’ve got no doubt that that would be a reality. And so that’s where the support globally could come from, if that’s supported, to go down that road and follow that opportunity, because there are opportunities there. Then that would be the global uptake, rather than … I think it would be too hard to try and expect everyone to join a global scheme. I think that is hard. And maybe that’s just an intermediate sort of measure. Maybe that’s an intermediate measure between those who can and that still would make a difference. But anyway, again, I don’t want to get off your top 10 here, Gene.

Gene Tunny  20:47

Okay, we’ll take a short break here for a word from our sponsor.

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Gene Tunny  21:21

Now back to the show. Okay, we better rip through these pretty quickly, because you’ve got to get going in about five to 10 minutes. So far we’ve got through … I think we’ve done four insights now. I’m up to insight four, the magic of the price mechanism, or you can ration by price or by queuing. So this is another point I often make about how a lot of the problems we’ve got is because we don’t have appropriate prices, or we’re not charging for scarce resources.

And a classic example is car parking, the high cost of free parking, as Donald Shoup I think it was, who was a professor at UCLA, that’s what he calls it. And part of the reason you can never find a park is because the councils, at different times they’ll allow people to park for very little cost or for free on the streets. And so they’re not appropriately charging for the scarcity of that resource, the fact that yeah, street park is valuable, and it’s not necessarily going to the person who would be most willing to pay for it.

Tim Hughes  22:40

So going against the supply and demand model, you’re suggesting? Is that right?

Gene Tunny  22:43

Yes.

Tim Hughes  22:44

Because normally supply and demand would go to-

Gene Tunny 22:46

Economists, we’re great believers in supply and demand.

Tim Hughes 22:48

That makes sense.

Gene Tunny 22:49

Another example is congestion. And so economists for years have argued that there’s a lot of benefit to congestion charges. There’s a congestion charge in central London, and I think in Singapore. It’s terrible, isn’t it?

Tim Hughes  23:04

I got stung. I got stung. Don’t get me started, Gene. I haven’t got time to go through.

Gene Tunny  23:11

You get confused at Marble Arch and you end up in the centre of London.

Tim Hughes  23:17

Just very briefly, we were there for two days, like five years ago. And we left central London and paid. We knew there was a fee. We weren’t sure if we were in the central area or not. We were told we were just outside it, had a higher car, etc. But you’re supposed to pay by midnight the following day. And we did it the day after that, and it was 80 quid. It stung massively. It’s like, come on. It was not straightforward or easy to make those payments. And that’s my issue with any of this stuff. Happy to pay for … It was 12 quid a day, I think whatever. That sounds about right. But to then be fined 80 pounds in such a short period of non-payment, which by anybody’s standards, by midnight the following day was like, hang on.

Gene Tunny  24:07

Can you imagine what traffic would be like in central London if you didn’t have a congestion charge? I mean, it’d just be mad. Well, you wouldn’t be able to move.

Tim Hughes  24:13

It was. I remember like the few times I was there. It was like every European city, it was just chockers, you know. But regardless, I don’t mind those kind of charges. But I do resent the fact that they’re not straightforward. When you went across the Sydney Harbour Bridge 40, 30 years ago, whatever, you threw coins into the tollbooth, and off you went. It was very clear if you paid or hadn’t, etc. There was a little bay to pull over into if you couldn’t find the loose change or whatever it may be. Whereas now those costs are far less visible, I find. You just ticker over on these costs, which come out. I think there’s an element of rot in a lot of this, which I’m not so keen on.

Gene Tunny  24:54

Tim, I agree. That’s an implementation issue there. We’re dealing with the high level ideas here.

Tim Hughes  24:58

Sorry, Gene. I got sidetracked there. It’s a personal thing, and I said I wouldn’t talk about it, but I did.

Gene Tunny  25:02

It’s fair enough. Insight number five, ignore sunk costs. Bygones are bygones. Economics is forward looking.

Tim Hughes 25:11

That’s timely.

Gene Tunny 25:13

Well, it’s true.

Tim Hughes 25:15

That’s right, just forget about it, write it off.

Gene Tunny 25:18

But we often fall into the sunk cost fallacy and we just throw good money after bad. I mean, we spend a few billion developing a Concorde jet that we figure out pretty early on is not gonna be very commercial, or it’s just a money pit. The British and the French government just keep investing in it. And it turns out it just wasn’t commercially viable. Beautiful aeroplane.

Tim Hughes 25:41

Yeah, definitely.

Gene Tunny 25:43

Amazing technological feat, but the economics just didn’t make sense. You just couldn’t pack enough people on the Concorde.

Tim Hughes  25:50

I never knew the economics behind it. It was a tragic end to the Concorde era when it caught fire, which was awful, however many years ago that was. But I wasn’t aware of the economic cost of it at all.

Gene Tunny  26:07

I think the economics of it were bad, so never going to recommission them or to build new ones because I think the problem was you need so much jet fuel to get hypersonic. I mean, it was hypersonic, wasn’t it?

Tim Hughes 26:19

Supersonic.

Gene Tunny 26:20

Supersonic, that’s it. Supersonic, that’s right. And so you need a huge amount of jet fuel to get supersonic. Beautiful design, but it was very sleek.

Tim Hughes 26:32

It was stunning.

Gene Tunny 26:33

You couldn’t pack as many people into a Concorde as you could a 747, could you?

Tim Hughes  26:39

No. I mean, I guess looking back at the time, that was very soon after the lunar landings, and around that sort of time, so it was very much a modern forethinking sort of thing to get involved in. So there’s probably a bit of ego involved in the whole thing.

Gene Tunny  27:01

Yeah. It was British and French prestige. I mean, they wanted to play with the big boys. I mean, they wanted to play with the Russians and the Americans. There was a space race, and the Brits and the French wanted to, I don’t know, I guess they wanted to show that they were technologically advanced as well.

Tim Hughes  27:24

I was just a kid at the time. But I remember there was pride in the Concorde. Pictures of it were plastered everywhere. And it did, it looked amazing. You did take some pride in that in some way. And I guess that, yeah, maybe if they felt that there was other benefits from having that kind of visibility of something that modern looking. I don’t know.

Gene Tunny  27:50

Yeah. Well, it’s a shame. But anyway, it’s the example I give about sunk cost, because they just kept throwing money at this thing, even though it was a really bad investment. So you’ve got to ignore what you’ve spent already, and just think about, is the additional money you’re spending on this endeavour, is that going to be worthwhile?

Tim Hughes 28:09

So cutting the losses?

Gene Tunny 28:10

Exactly, exactly. We better rip through the rest of them pretty quickly. Insight 10, that’s an easy one. We’ve chatted about this one before. Inflation is always and everywhere a monetary phenomenon. So that’s something from Milton Friedman. I’ve chatted about that enough on this programme. So far, we probably don’t need to elaborate.

Insight six, redistributing via the tax transfer system can be superior to redistributing via fixing prices. What I’m talking about there is, a lot of times governments try to fix prices, try to set wage rates or try to fix prices of different goods and services. Rent control is one example, generally a bad idea, because that can discourage investment in new apartments. And that can make the situation worse for people. It’s good for the people who’ve got a rent-controlled apartment, but it’s not good for the majority. So economists tend to think that rather than trying to fix prices, you’re better off letting prices adjust, because there’s the magic of the price mechanism that economists talk about. And then if people, they’re doing it tough,  because there are people who need help, then provide that through the welfare system. That’s an idea. That’s one of the insights there.

Tim Hughes  29:30

So now we’ve got something to talk about more in more depth in that area as well, coming up. It would be good to expand on that because it’s certainly an area where it’s getting very, very difficult for new homeowners to get a foot on the market ladder. And I know there are different schemes in place around the world. I know Singapore has got a scheme whereby the government buys the buildings and allows people to get homeownership through a scheme that they basically provide the building or the land.

Gene Tunny  30:08

It seems very interventionist to me. But yeah, we should chat about that in a future episode.

Tim Hughes  30:13

There were a few things. I know we never talked about having that. But it’s along the lines of this, because that still basically isn’t a fixed thing, but it’s more of an assisted service or assisted package.

Gene Tunny  30:26

Insight seven, collusion and monopoly power can be a concern and may require regulatory action. That’s probably pretty self explanatory. I mean, economists celebrate the market generally.  We think the market system’s great. But of course, there can be situations where companies become extremely dominant, they can abuse their market power, and hence, you might want to have some antitrust action against them. I mean, we’ve got an Australian Competition and Consumer Commission here in Australia to do that sort of thing. The United States has got a Federal Trade Commission, I think, or they’ve got the Department of Justice. So there’s a lot of talk now about should we break up big tech companies like Facebook, like split Facebook proper from Instagram and WhatsApp,  is there something that they should do with Google, should we break Google away from YouTube, etc. There’s  all that debate going on at the moment. I’ve covered that on the show before

Tim Hughes  31:23

 It’s a thorny issue, isn’t it?

Gene Tunny  31:28

It is. And I think what my takeaway from economics would be that, yeah, it can be a problem in some circumstances. And there’s some guidance in the literature. I’ve offered that as an insight. And I guess it’s a topic we should come back to in a future episode, because there are a lot of issues to consider pros and cons, because you don’t want to eliminate that process of creative destruction as Joseph Schumpeter, the Austrian economist, who is at Harvard, called it, because that’s important. We like that creative destruction. New companies are rising and innovating and offering services that everyone enjoys. I mean, Amazon. I’m not a great Facebook fan. Maybe Google’s a better example. I think Amazon and Google have certainly provided a lot of value to consumers and to people in the community,

Tim Hughes  32:25

it seems to come down to ethics, I think, and that’s maybe the direction to take. That would be my feeling on it, because it’s hard to put limitations on a free market. The less governance I think is always a good thing. But then there comes responsibility with these massive companies then to do the right thing and to employ people under good conditions, etc, all those kind of areas, you know. That money should be going back into society at some level. If the profits are so huge, then yeah, it would be, I think, a fair thing to tax those companies more, to give back to society.

Gene Tunny  33:07

Yeah. So there’s a big issue there on multinational tax avoidance. So that’s covered on the show with Pascalis Raimondos.

Tim Hughes 33:13

Outrageous, yeah.

Gene Tunny 33:14

Important issue. Final insight for now, inside eight, because we’ve already covered nine and 10.

Fallacy of composition and the paradox of thrift. So what’s good for the household is not necessarily good for the economy, so just the idea that in economics, you’ve got to think about how everything fits together, just how does everything connect together. And this comes from Keynes in the ‘30s. There are a lot of people who are negative about Keynes and think it’s a very … It’s the economics of depression, you could argue, but the idea is that it might make sense for a household to cut back on its spending if the breadwinner loses their job or one of the household members loses a job. But if everyone in the economy does that, it’s bad for the economy collectively. It’s less spending, less income, less production. So that’s the paradox of thrift, that what could be good for the household may not be good for the economy.

Now I’m not necessarily advocating a Keynesian viewpoint or Keynesian fiscal policies. But I think that is a key insight, that you’ve got to think about how everything collectively fits together. And if you think about governments, back in the ‘30s, when the revenues fell due to the Depression, a lot of the governments thought, we’ve got to tighten our belts, we’ve got to cut spending, to make sure we balance the budget. Sound public finance was what was going to help us in the Depression. But it turns out that wasn’t the case, because when they cut spending, that meant they weren’t spending as much on their public servants or on infrastructure projects. And that meant less activity in the economy. So it was a perverse fiscal policy.

Tim Hughes  35:13

That’s interesting, because now that’s happened more recently, when there have been cases of the government handing out money to people just to get the stimulus packages, for instance, just to keep money moving around and keeping businesses going in it. The first time it happened, it seemed like the craziest thing. I’d never seen that happen before. I’m trying to remember when it was.

Gene Tunny  35:37

2009, Kevin Rudd, the Rudd money.

Tim Hughes  35:39

That’s right. Yeah, it was the GFC, wasn’t it?

Gene Tunny  35:40

$900 checks.

Tim Hughes  35:42

Yeah. And it was just like, it seems insane. But it appeared to work, which is remarkable. But it’s exactly what you’re talking about, I guess, isn’t it?

Gene Tunny  35:51

I’d say it’s got a mixed record historically. But that’s the idea that comes from John Maynard Keynes in the 30s. That’s why Keynes is seen as revolutionising economics, because up until the ‘30s, in 1936, when he published the General Theory of Employment, Interest and Money, everyone thought that idea was crazy.

Tim Hughes  36:12

It seemed counterintuitive. We’re in tough times, and you start spending. But there was sense to it.

Gene Tunny 36:18

What’s counter?

Tim Hughes 36:19

Well, for instance, the stimulus package, like at the time, a GFC.

Gene Tunny 36:24

Oh, I see.

Tim Hughes 36:25

It would appear. And at a household level, you’d think, yeah, tighten your belts and sort of, like, hold on to everything, whereas like, it was completely the opposite. Here you go, put this into the economy, like keep everything moving. The value of that on the greater scale, on the national scale, was really effective. It was impressive to see.

Gene Tunny  36:52

Exactly. So I’m not in any way endorsing Keynesian fiscal stimulus, because there are all sorts of issues with it in terms of timing, are we gonna get the timing of it right. There’s a possibility you could actually add instability to the economy, that sort of thing. Crowding out impacts, all that sort of thing we can cover in another, or I’ve covered with Tony Makin in a previous episode. Tim, that’s been great. Thanks so much for sitting in, as I’ve sort of done this quick tour of my top 10 insights of economics. You’ve given me some things to think about. I want to add something in about economies of scale or increasing returns to a future addition to this. But at the moment, if you’re listening, you’re interested in this, please get on the website and subscribe so you can download it. Tim, thanks so much. Really enjoyed that conversation.

Tim Hughes  37:37

Thank you, Gene. That was great. It was really interesting.

Gene Tunny  37:39 Thank you. Okay, that’s the end of this episode of Economics Explored. I hope you enjoyed it. If so, please tell your family and friends and leave a comment or give us a rating on your podcast app. If you have any comments, questions, suggestions, you can feel free to send them to contact@economicsexplored.com, and we’ll aim to address them in a future episode. Thanks for listening. Until next week, goodbye.

Credits

Big thanks to my guest Tim Hughes and to the show’s audio engineer Josh Crotts for his assistance in producing the episode. 

Please get in touch with any questions, comments and suggestions by emailing us at contact@economicsexplored.com or sending a voice message via https://www.speakpipe.com/economicsexplored. Economics Explored is available via Apple Podcasts, Google Podcast, and other podcasting platforms.