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This is an audio transcript of the Rachman Review podcast episode: Gideon and his team review 2021

Gideon Rachman
Hello and welcome to the Rachman Review. I’m Gideon Rachman, chief foreign affairs commentator of the Financial Times. This is the last podcast of 2021, and to review the year, I’m joined by my FT colleagues, Martin Wolf and Gillian Tett. So how bad was 2021? And what, if anything, do we have to look forward to in the new year?

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We’re coming to the end of a tumultuous year, which began with the unprecedented storming of the US Capitol by supporters of Donald Trump.

[Protest noise]

News report
The peaceful transfer of power, the cornerstone of American democracy, seemed a highly abstract concept today. As Trump supporters clashed with police as they tried and succeeded to storm the Congress, where America’s elected leaders had gathered to certify the election victory of Joe Biden.

Gideon Rachman
And the year ends with the pandemic still raging, inflation on the rise and Vladimir Putin threatening to invade Ukraine.

News report
As Russia massed troops on the border of Ukraine, Biden spoke directly this week to Putin, the Ukrainian president and neighbouring states to head off a Russian invasion. The question now is there anything the west can do to prevent Putin from moving in?

Gideon Rachman
I started our discussion by asking Martin Wolf what he feels the main themes of the year have been.

Martin Wolf
Well, I suppose for the economics point of view, the big theme has been recovery, considerably stronger recovery than was generally expected a year ago, above all, in the developed countries, largely because of the success of the vaccine programmes, at least up to now. And also within the economic theme, the divergence, in that while emerging and developing countries still grow faster than the developed countries, they have recovered back to trend far less than the developed countries. So these are big economic themes. And the end of the year, of course, with Omicron we wonder whether and how this will continue. I think the second big theme again, and here we’re dealing with political and economic aspects, is the continued increase in tension between the US and China. The discussion of decoupling though I think it hasn’t gone that far yet. But still the awareness that the opening up of the two economies to one another of the last three or four decades is clearly under pressure and in reverse. I think the most interesting indication of that is the retreat of Chinese companies from American capital markets. And then just to throw in the final point, I mean, clearly, this is a year in which the crisis of American democracy has become incredibly visible to all. And that is a singularly disturbing fact for those of us who live in what we used to think of as the free world.

Gideon Rachman
Yes, Gillian, I mean, certainly I remember very vividly where I was watching the Capitol being stormed on January the 6th. I guess all of us do. It got the year off to a very disquieting start, and, okay, Biden has been inaugurated, but how much do you share Martin’s concerns about the direction of American democracy?

Gillian Tett
Well, if I had to think of a phrase to sum up the year, it would be “dazed and confused”. Because, you know, the underlying theme of all this is that many of the certainties that people used to rely on when they looked to plot their future have been blown apart. Whether it’s the idea that we knew how politics works in a country like America, whether it’s the idea that we knew roughly what would happen when we went into recession, or whether we knew how monetary policy worked or almost anything, you know, that business leaders and financiers rely on when they’re trying to chart a course for the future. And so certainly when it comes to the question of American democracy right now, there’s a huge amount of uncertainty. Yes, the potential insurrection on January 6th was suppressed. Yes, we have a new figure sitting in the White House as a result of an election. But one of the signs of just how dazed and confused everyone is is that when everyone talks about what could happen in 2022, with the important midterms coming up, there’s a lot of discussion about whether or not people will actually believe the results. And what’s even more remarkable is that the person who is seen as being behind this insurrection on January (inaudible) is being deemed a significant contender for the 2024 presidential race.

Gideon Rachman
Yes, Trump is indeed looming over everything, but Gillian, but just before I come back to Martin, how would you assess Biden’s first year in office? I mean, you know, when I was finally able to get travelling again, I was in Washington in October and it seemed to me already by then, a certain sense of gloom had settled over the Biden team. His poll ratings had turned. Congress was a bit stuck. And I think maybe the Afghanistan withdrawal and the chaotic nature that had marked a bit of a turning point and a loss of confidence in how the administration was doing. How do you see it?

Gillian Tett
Well, I think three things become clear during 2021. Firstly, that almost the only thing that glued Democrats together in the run-up to the 2020 election was a dislike of Donald Trump. And insofar as Donald Trump has receded slightly from the scene, the divisions within the Democrats have become more and more clear. Secondly, it’s become very clear that Biden arrived with such sky-high hopes, at least on the left, that he couldn’t possibly fulfil the role. And in many ways, he wasted a lot of political capital on things that may not have been the wisest thing to focus on up front. Thirdly, it’s also very clear that the economic vision and programme that he arrived with was something that was to a large degree, sort of pre-cooked even before the pandemic, very much a leftwing vision of how they wanted to change the economy. And one doesn’t get a lot of feeling that he has changed it in response to the fact that the coronavirus pandemic has really inflicted deep changes on people’s mindsets in terms of how they’re looking at family and work, how they imagine inflation and so on. And so one of the problems he’s dealing with right now with the catch-up, do we actually need a stimulus bill which is as large as he’s been trying to introduce? Should we be talking more about gig work, remote working, flexible working, things like that? And all of that has added to a sense of disappointment. And when you’re looking at issues like Afghanistan, again, there’s a feeling that he came in with a fairly clunky old-time vision of what he was trying to achieve on the foreign policy stage. He doesn’t necessarily have the personnel with great experience in the key roles. There’s a lot of staffers so someone like, you know, Antony Blinken is a very, you know, respected staff official with a long career behind him. But they don’t have a lot of people who can stand there and challenge Biden or his team inside the White House. And that appears to have contributed to the problems that erupted in Afghanistan, which I think are gonna haunt the administration for a long time.

Gideon Rachman
Yeah, I mean, Martin, before we leave this question of Biden and how the US is faring behind, I know that you are working on a book at the moment on the crisis of democratic capitalism. So would you situate his particular issues within that? I mean, to put it more directly, do you think any president would struggle in the current situation of the United States?

Martin Wolf
Yes, I have a slightly different perspective on this from Gillian, which is not unfamiliar to us both, and that’s good. That’s good. I haven’t been surprised at all by the, where the Republicans have ended up. It seems to me pretty clear that this is where they’re going back in 2016 with the selection of Donald Trump as their leader. And everything that has happened since has confirmed my view of the profound significance of that. And I’m one of those who believe the Republican party is his party or perhaps can be looked around, looked at the other way round, he is their chosen standard-bearer. And what is going on within the American constitutional arrangement, which will be supported by the Supreme Court, which is now, of course, a Republican court and which is going on in the States, will be, in my view, a profound subversion of the electoral process, which will make their national elections for the presidency and the House and possibly even the Senate virtually impossible. So I think that America’s beyond the watershed here. I may be too pessimistic. I hope so. Now that, this is very, very important in judging Biden. Biden was clearly a very imperfect candidate, but the least bad. I agree utterly with Gillian’s view of the divisions among the Democrats, that’s obvious. The Democrats are the inverse of the Republicans. They are not a united party around a single standard-bearer. I find that rather attractive, actually. But there are two points to make about Biden. The first is that in some ways, he’s been remarkably successful. I mean, he’s got from absolutely staggering spending bills through, despite essentially a divided Senate and not much of a majority in the House. He is going to do a lot of what Democrats want. He inherited, I mean, unspeakably bad global hand for foreign policy. And my basic view is that he’s, he is, one, that he has actually achieved a remarkable amount of what people might have expected. No one can criticise how much he spent to talk about the economics of this. But the problem is it doesn’t make enough of a difference. And that’s just, I think, a measure of the scale of the crisis the US now has. It’s not clear that anybody on the Democratic side can conceivably reverse the currents that are now underway in the United States. And certainly it was inconceivable that Biden with his political position could, as many in the Democratic camp I think expect him to be, end up as another FDR. That option is simply not available.

Gideon Rachman
And of course, he, like everybody, is operating against the background of this pandemic. I guess if we’d started the beginning of the year, we would all have hoped that by now, we would be back to whatever normal is. And I think, you know, we’ve all experienced meetings that are, conferences that are, invitations are hopefully issued and then cancelled and, you know, cancelled again. So Gillian, do you think we’re ever going back to normal? How does it feel? Are we in a new kind of situation? I mean, you did say that you think that the pandemic has changed some things permanently.

Gillian Tett
Well it depends what you mean by normal. And if you define normal as being the last two or three decades of the 20th century, when there was a sunny assumption in the world, particularly after the Soviet Union collapsed, that the west knew best, that it was perfectly normal to plan for 10, 15, 20 years ahead with a sense of confidence, that essentially you had an unbroken, upward sloping line on the graph when it comes to this kind of spread of globalisation and free market capitalism, democracy around the world, and when you assume that all innovations were good, if that’s your version of normal, then the answer is no. We’re not heading back to that because essentially what we’ve had really started since 2008. There had been a series of rolling shocks which have shaken our sense that history goes in one straight line. Instead, it goes in pendulum swings. And then we have the financial crisis, which severely dented faith in the western vision of financial capitalism. We’ve had a series of explosions of populism, and we’ve had these mysterious quantitative easing on a massive scale, which has turned many of the normal monetary assumptions upside down many of the normal economic assumptions upside down. And now, of course, we have this extraordinary healthcare crisis, which has shaken us all to our core. And at the same time, we got this dash to digital, which is changing our vision of how work could and should operate. And in many ways, this move towards digital was underway in a remarkable degree even before the pandemic and the pandemic has accelerated it significantly. So I sometimes think in some ways, you know, we’re dazed and confused. Many of us are living in a sort of modular mode, which were more familiar, frankly, to peasant farmers in developing markets or other parts of the world during history in the sense that, you know, work and family life is blending. We’re all operating from small, localised spaces. None of us feel much confidence about what the future might be. Our time horizons are changing. Our sense of certainty about things is declining. And as a result, it’s a pretty alien world from where we were five years ago. But guess what? This was pretty normal for much of history and most parts of the world.

Gideon Rachman
I was reflecting on how abnormal my normal life was before the pandemic. I mean, looking back at schedules in which I would be in China, Europe, New York, all in the space of one month, that was quite sort of common. That specifically, that brings me to, Martin, the question of China, because I think both of us, Gillian too probably, got used to the idea that we would go to China at least once a year if you would try to sort of follow the world economy or world politics. China now seems to be sort of sealed off because of the very kind of harsh zero-Covid policies they’ve adopted. You have to quarantine for three weeks, maybe four weeks. So people aren’t going. Do you still feel you have a good sense of what’s happening in China? Because a lot clearly is. I mean, there’s a there’s a slowdown in the economy, a crackdown on Big Tech, Xi Jinping preparing to extend his rule long into the future, growing threats towards Taiwan. You know, we talked about a potential crisis, unfolding crisis in the United States, what have we learnt about China in the past year?

Martin Wolf
I think we’ve become more aware of the idea of uncertainty since the financial crisis. We’ve also become aware since the financial crisis, and I was already writing columns about this seven or eight years ago, of the weakening of the impulse towards globalisation most obviously shown in trade. And today one very obvious example, China’s very standard economic measure, the ratio of trade to GDP in China reached incredible levels just before the financial crisis. It was comparable to that of South Korea, which is quite weird given how vast China is in general, very big countries trade much less than smaller ones. So this is really extraordinary, and it started to shrink really as soon as the financial crisis happened. So I think it’s important not to emphasise the newness. Again, China’s growth rate started to slow very sharply, and they were willingly accepted by the government from about 2012 onwards. So more inward looking, slower growing, and of course, Xi Jinping has been there now for nearly 10 years, and it’s been very, very clear that his view of China, the way China will evolve is radically different from that of his predecessors. So I wouldn’t exaggerate the newness of all this. Obviously, as you rightly say, Covid has greatly increased the uncertainty, and of course, it has allowed, perhaps encouraged, Mr Xi to close his country off. So the question is where are we now? It looks to me, it’s in this respect you see now this Covid has been an accelerator, and where we are is indeed that it’s much more difficult for most outsiders. Certainly those who don’t have deep connections with what’s going on in China to read what exactly is going on. But of course, the sheer suppression that is going on of different opinions that we used to read and hear also has made it very difficult to read the country. And then of course, we’re not visiting and we’re doing less commerce with it and the companies are withdrawing so they are moving with some speed into a separate world. And of course, this is happening at the same time as — this is in your area — there are very significant geopolitical conflicts emerging, conflicts for influence within the Asian region, which have a security, military aspect as well. So I think we are definitely seeing an acceleration of this reversal and an increase in the associated uncertainty. And I take the view now that in the relationships between China and the west, both economic and political as it were, anything can happen in the next few years from a maintenance of an uneasy peace in which a vast amount of trade and economic intercourse that continues or even recovers to really a complete or almost complete breakdown. And this is part of, that’s a particularly important part of the uncertainty that Gillian rightly expresses.

Gideon Rachman
Yeah, Gillian, just briefly, I mean it does seem to me that almost the only thing the Republicans and the Democrats agree on is the need to have a tougher policy towards China. But one thing I haven’t sorted out in my head that, you know, Martin alluded to as well, is how far it is possible to unscramble this omelette of globalisation and integration between China and America that we made over the last 30 years. I mean, it wasn’t so long ago that Niall Ferguson was referring to them as one economy “Chimerica”. But there are moves, again, that Martin mentioned to kind of lessen the financial integration between the two countries. How far can this go?

Gillian Tett
What I think Ray Dalio of Bridgewater put it very well when he said, you have to think about no war on many levels. There’s kinetic war, which thankfully America and China are certainly not engaged in at the moment, and let’s hope they never will. There’s a trade war, which they’ve certainly been fighting for some time. Capital war, they’re starting to talk about, but haven’t really implemented yet on a significant scale. You’ve got a currency war, which has certainly been threatened but hasn’t really played out. And then you’ve also got a tech war, which is bubbling along there much of the time. So certainly the fracture is developing, but it hasn’t really caused a complete bamboo curtain, to use Hank Paulson’s phrase, the former Treasury secretary’s phrase too far. But I’d like to go back and talk about one thing that Martin mentioned, which is this issue of globalisation, because it seems to me the ghastly paradox the 21st century world finds itself in today is that we are still very closely integrated and in many ways increasingly closely integrated as a single global system, which means we’re all exposed to contagion the whole time, not just medical contagion as we’ve seen with Covid-19, where germs can flesh around the world very fast, but also financial contagion, economic contagion, political contagion. But the one contagion, which we’re not experiencing, is a contagion of mutual understanding. And quite the contrary, lockdown has physically kept us trapped in place with people who are just like us. It’s created a mood of myopia. And when we go online, increasingly we’re just going into echo chambers with people just like us in cyber space. So in many ways is it a polarisation in thought and priorities and incentives, coupled with an integration of a global system, which means we’re very prone to constantly being surprised by nasty shocks, whether it’s a pandemic, whether it’s some kind of unexpected development in China, or in political terms or almost anything else. And that’s a nasty cocktail which is adding to this mood of uncertainty.

Gideon Rachman
Yeah. I mean, Martin, we’ve talked about Biden. We’ve talked about Xi Jinping. This year also has seen, right this month indeed, the retirement of the dominant figure in European politics for the last 15 years, Angela Merkel. What do you see for the future of the European Union and the future of Germany without Merkel?

Martin Wolf
I think this is fascinating. One way of thinking about this and building on what we’ve already discussed is Europe is sort of in the middle or semi in the middle of these profound shifts. The EU is highly globalised. Its economies are highly globalised. Germany, particularly so, it’s a, it’s an exceptionally trade-dependent large economy, and it’s one of the few that, that is, this is sort of crude, roughly is dependent on Chinese markets as it is on America so it’s really torn between the two. It’s less true for somewhat less true for the others. It’s not a military superpower and has no ferocity, no desire to become one. But it is threatened by the security developments of the moment. Russia obviously, also China. It doesn’t really know how to deal with any of those. It wishes to maintain its close security alliance with America while very worried about the future developments of America politically and it hasn’t forgotten Trump. It wishes to continue to have good economic relations with China while at the same time very concerned about the threat of China to its economic and strategic autonomy in a number of dimensions. So I would say it really is caught in the middle. Now, the other point I would make about this is that, it’s not a point Gillian stressed but it’s very crucial, we are linked together in some very important ways, and the most obvious one is climate. And the EU is very keen on being a climate superpower, and it’s really gone ahead of the other superpowers in terms of what it’s committed to as I doubt about the scale of its climate commitments. And that means it needs very strong agreements with the US and China so that’s where it needs co-operation. And COP26 suggests that that’s gonna be very, very difficult to achieve. So I would say that if you look at it in the strategic context, the EU has massive challenges ahead of it. And where this new German government and indeed the leaders of the EU will take the EU in the next year or three in response to these challenges, I think, is really unknowable. But it’s very clear there are some very difficult choices ahead.

Gideon Rachman
I’d like to sort of end the conversation by asking you both a specific and a general question. Specifically, one thing that seems to be coming back that we thought we’d forgotten about for many years is inflation, and you’re both economists and financial specialists. How seriously should we take that? And then just more broadly, I’d like to ask you both for a look ahead to 2022 and what are you particularly concerned about or hopeful about since some of this conversation has been a bit depressing? If you would think of something to be hopeful about, that would be good as well. So, Gillian, if I can start with you.

Gillian Tett
Well, I think the inflation outlook is more alarming than certainly the Federal Reserve and others have admitted to until quite recently. I think it needs to be seen in tandem with asset price inflation alongside consumer goods inflation. And I think the really key thing to watch now is what happens with wages because you’re seeing some quite remarkable developments in the mindset of workers. In a place like America, unionisation is rising. You’re seeing increasing pressure on wages, particularly at the lower end of the spectrum, or rather not just the higher but the lower end as well, which in many ways is incredibly, incredibly welcome and long overdue. But I don’t think, and haven’t thought for some time, that this was just transitory. So one of the big things we need to look out for in 2022 is what happens if there really is a significant shift in central bank policy and whether or not investors in the financial markets are positioned to weather a sudden jump up in the yields. I suspect the answer is probably no. Another big question, obviously, is what happens in the midterms with the US political system and whether we’re gonna see more an erosion of fundamental democratic institutions and rights, again, the issue that is potentially very alarming. I wouldn’t rule out more pandemic shocks or surprises. We’ve seen remarkably encouraging responses by the scientists around the world in terms of producing more vaccines. But one issue I think we will see to watch alongside the question of Covid-19 is what is happening in things like antibiotic resistance, which hasn’t had much attention recently, but certainly should. And last but not least, I think the growing not trend but dash into digitisation is reshaping our daily lives and how business and finance works in ways that, frankly, we’re still struggling to understand, partly because we’ve all been locked down and we’ve always got used to our dash into cyber space and are taking it for granted. But some of the longer-term consequences are really very significant, and it’s going to be something I think we definitely need to watch in the coming year.

Gideon Rachman
Martin, where do you stand on the inflation debate and also looking ahead to the next year?

Martin Wolf
Well, I largely agree with Gillian. I have been concerned about inflation for some time. I first started writing about it in, I think, May 2020. So I’m not surprised that inflation has been surprising on the upside. And my own guess is that it will continue to do so. This is very controversial among economists. But my view is that underlying aggregate demand will remain very strong. Monetary policy remains very highly accommodative. Indeed supportive fiscal policy is supportive, and I suspect the constraints on supply we are seeing are not going to disappear at all, and inflationary pressure will therefore rise. I would not be surprised at all if monetary policy tightens in general more than markets expect. Unlike Gillian, I think, in general this is a good thing. I do expect it to lead to quite a bit of turmoil in markets. That’s fine. Markets need turmoil from time to time. In fact, they need it quite often. Otherwise, crazy stuff happens. The big problem the recent past, and this is where I think I do disagree with Gillian, is that central banks haven’t had much choice about what they could do, but I think they will now and the sooner the better. I mean, postponing it for another two or three years could lead to really what is already unbelievably bubbly territory getting much worse. So I think we’re going to have some degree of turmoil. Now obviously, second, this is all related to what happens to the pandemic, and “we don’t know” is the best answer. We don’t know what this variant or subsequent variants might mean, whether we can handle this at all. But I suspect the 2022 to be quite a volatile year economically because the underlying sources of volatility are so obvious. We’ve got the pandemic and we’ve got clear sources of potential macroeconomic instability. And in addition to that, we have all the geopolitical instability we’ve been discussing. So it would be very remarkable if the next year was not one with quite a lot of excitement, and some of it will be quite disturbing excitement. That’s the sort of world we now live in. The idea that we will go back to what it was like before the financial crisis, that sort of world we can forget altogether. That’s just not where we are. It’s not where we’re going to be.

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Gideon Rachman
That was Martin Wolf ending this last edition for 2021 of the Rachman Review. Here’s wishing all our listeners a good break and a Happy New Year, and I hope you’ll join me again in 2022.

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