The More Things Change: Banking, Bailouts, and Business as Usual in American Capitalism

This Feature appears in vol. 75, no. 1, "Insecurities: The 75th Anniversary Issue, 1947-2022" (Fall/Winter 2022).

An Interview with Mark Blyth

Mark Blyth is Director of the William R. Rhodes Center for International Economics and Finance and the William R. Rhodes ‘57 Professor of International Economics at Brown University. His research focuses on how uncertainty and randomness impact complex systems, particularly economic systems. The Journal spoke with Professor Blyth, who took us on an irreverent tour of the contemporary political economy landscape, the prospects for political reform and a more responsive political process, and why inflation and COVID-19 and climate change are serious problems that nevertheless won’t result in lasting positive change.

Journal of International Affairs (JIA): Could you briefly take us through your history of the global economic system from 1945 to 2008 and your framework of different “softwares” organizing the global economy?

Mark Blyth (MB): Let me give you background on how this came about. When I want to do research, I look at the academic literature. And then I think: “Is there a real world that this actually references?” So when I did the book on austerity, I wanted to meet bond market vigilantes, because apparently, they exist. So I went off to meet them. And what you find is that for bond traders, most of them care about portfolio stability; very few of them are vigilantes. And it’s not at all what you read about in the papers. In order to get inside their heads, I need to get inside their conferences. To get inside their conferences—which cost like $5,000 for two days, which I can’t afford—I needed to figure out a way to get in. For me, that was basically to start going in as a speaker. I talked about Europe, and they would tell me about bonds, and there were gains in trade.

This was so much fun that I decided around 2015 that I wanted to figure out if this hunch I had was right, which was that most of the stuff that goes by the name of “tech” is just bullshit. This was around the time Theranos was starting to be seen as what it is, so I wanted to figure out if I was right. I started going to tech conferences.

Now, what were the gains in trade for me to speak at tech conferences? Tech people actually do kind of want to know about global macro. But you can’t start giving them the chapter and verse that you normally would to an academic audience; you needed a metaphor to make it work for them.

I settled upon this metaphor of talking about economic systems as computers with hardware and software. Our hardware is the basic institutions of capitalism: everybody has a labor market, everybody has a product market, everybody has a capital market. But they are very differently configured: the components are linked to each other in different ways. But nonetheless, there’s a kind of commonality, if you will, of the motherboard in certain historic periods. And then there’s a set of software instructions for running the hardware, which are our ideas about how to run economies.

So if you think about the software as the economic ideas, and then you think about the hardware as the economic institutions, then you can tell a story whereby when you run this computer for a while, you begin to build up bugs in the software because you’re overstressing the system. Eventually, that creates a system crisis, and the entire thing collapses. At that point, you might be able to get away with rewriting the software, but you might have to actually reconfigure the hardware.

Let’s use this metaphor starting from 1945. Back after WWII, pretty much everyone (except the USSR) decided that we really couldn’t have fascism or communism again because when we tried that, everybody ended up dead. The new policy priority became full employment.

If you want to have full employment as a policy target, what do you need to do? You need to have pretty restricted capital movements, so everybody moves towards relatively closed economies, at least in terms of finance. Trade and things that you can drop on your foot were good, and trade in money and bonds were not so good.

What else do you need? You need to have big labor market protections and labor market institutions like big capital, big labor—corporatist institutions to control wage inflation. What else? You need to have a big state that basically either occupies the commanding heights of industry, or otherwise guides investment—dirigisme in the French case, corporatism in the German case.

This was all served by a series of ideas about how the economy works called Keynesianism. Keynesianism basically emphasized the role of aggregate demand in steering the economy and believed in a Phillips curve trade off and all that fun stuff.

But a couple of things happen if you run a relatively closed economy with a full employment target for about 30 years. The most important thing that happens is that your median wage gets bid up, and the wage at the top end of the distribution gets bid up even further. Now, you can have a welfare state and taxes and all the fun things that you can finance in that system as long as you have relatively stable inputs, and you can always augment productivity to pay for real wage increases. If you get to the point where your labor markets are super tight, and continue to be tight, then you will generate wage inflation in excess of your ability to offset it with productivity gains. That was the crisis of the 1970’s.

At that point in time, there needed to be a system reset. The economics of it were pretty straightforward. You needed to open up, to integrate, to privative, and to eventually globalize— basically make the national international and remove the ability of labor to influence both production and pricing. What happens on the political side is the Reagan and Thatcher revolutions. And inside the economy, it’s the birth of neoliberal economics and the reemergence of supply side thinking.

So what does that lead to? That leads to a very different type of reset, one whereby there’s a physical resetting of the hardware, which is the rise of independent central banks as the policy shifts from full employment to price stability. At that point in time, you get financial dominance rather than fiscal dominance, you get the rise of the financial sector and the integration of markets, et cetera, all of which takes pricing power away from labor and gives more and more of the returns to capital. A simple way to think about it was that the crisis of the old computer was an inflationary bug that caused the profits crisis. Neoliberalism was the reset on the software and hardware side, which basically allowed you to kind of restore the value of capital and restore profit.

Now, this was fabulously successful, except it was too successful. One way to think about this was when Mrs. Thatcher and her friends were thinking about doing the Big Bang for the City of London in 1985, what they were imagining was a world in which finance would basically be freed from shackles and would invest in British industry, and it will have a rebirth. Unfortunately, what actually happened was that finance figured out that doing mortgages and inventing various financial products was far more profitable, and asset stripping industry and shipping it abroad was even more profitable, so we ended up with a world in which increasingly the returns went to capital. We now call this the world of inequality that Thomas Piketty uncovered for us some ten years ago.

But there’s also a lot of problems with this—what are the bugs in this system? Well, if you basically squeezed labor’s share of national income, but prices are continuing to go up; if you turn housing into assets; if you have cheap money relative to the ability of assets to grow, then you benefit an asset-earning class to the detriment of the wage-earning class, and inequality explodes. And this is what we’re beginning to see all over the world.

How do you continue to do your stuff when your wages aren’t growing? Well, the financial sector has an answer for that: it’s called private sector credit. So we just doled out as much credit as we could. We went from a situation where only millionaires had credit cards to a system where your grandmother and everybody else had thousands of dollars of credit, we turned our houses into ATMs—all of which ends up creating an enormous amount of leverage on the balance sheets of the private sector.

That’s where the origins of the 2008 recession come in. Basically, the reset causes an inequality skew that’s filled in with cheap credit, but then the cheap credit becomes too cheap and it gets levered up to a point that can’t be sustained. That’s how you get the Global Financial Crisis.

Now at that point, you would think that there would be a big reset, but there wasn’t that hardware modification of the 1980s, where we gave basically monetary authority, and therefore a heck of a lot of power to independent central banks, meant the government’s been told for 30 years that they can’t do economics, they shouldn’t do economics, and if they try, it will only make things worse.

So governments hand the crisis off to the technocrats in the central banks. The central banks are thinking, “Shit, we’ve got a huge crisis, what are we going to do? Well, clearly, we can’t let all these assets go to zero, because that’ll be the end of the world. So we’re going to have to bail them out, and we’re going to have to have zero interest rates, and we’re going to have quantitative easing.” What they were basically doing is making sure that asset holders don’t actually take any losses. But the cost of this is ever increasing debt loads, which then becomes the “austerity crisis,” leading to cuts in public expenditure, particularly in countries in southern Europe. It also happened voluntarily in the United Kingdom, where places like Preston in the north of England—which were already living off of government transfers, given the way the economy had grown around London and not anywhere else for decades—lost 30% of consumption through voluntary central government cuts, which led to a huge rise in poverty.

The recent work on public health shows that if you basically estimate excess deaths over this period, some 300,000 deaths can be linked to policies of austerity. There were incredible acts of self-harm that came about in this effort to stabilize the system, because there was no fundamental reset either on the political side or on the hardware side. What we did was fix the system by just chucking more and more liquidity at the problem.

You end up with the absurd world we’ve had recently where you have tech firms with billion-dollar valuations that don’t make anything. We had SPACs,[i] we had crypto, we had all this stuff that’s only possible when money is literally negatively-priced and you can’t do anything with it. There’s a high inequality to this—there’s a shortage of good assets, and people will buy anything to get in the game.

So by the time you get around to 2015-2016, the world’s not a happy place, and that’s the moment when the populace of all stripes, both left and right, say, “The system’s fixed,” because in a sense, it was fixed for asset holders. And it still is because we haven’t fundamentally addressed this in any way.

In the 1970s, there was a crisis and we had a hardware and software reset. But in 2008, there wasn’t either of those—we just bailed the system out with more and more liquidity. The consequences of this were, of course, populism, and secondly, the sort of fractured and polarized politics that we see now.

JIA: So why did policymakers choose to bail out finance? Was it because of a lack of economic ideas on how to engage in a reset, or was it just a lack of political will?

MB: It was the ignorance on the part of politicians, gullibility on the part of politicians, and also real fear. The standard model of financial governance in the pre-crisis period was an idea that if you made individual banks safe by giving them enough safe assets—usually defined as government bonds— then they will always be able to sell them and they will not have a liquidity crunch. If you make them all safe, then the system is safe.

What we found out was that it had nothing to do with the formal banking system. It was the so-called shadow banks like Lehman Brothers—nondeposit-taking financial intermediaries who have huge amounts of leverage on the balance sheet—that, once are cut off from things like overnight liquidity markets, they collapse. That was the discovery of what we call “systemic risk,” or more colloquially, “too big to fail.”

Now, once you know something’s too big to fail, it gives you a bit of a choice, doesn’t it? You can let it fail anyway and hope it’s not nearly as bad as you think and—if you’re a vote-seeking politician—basically guarantee that you’re throwing yourself out of office. Or you can listen to the technocrats that have been running everything for 20 years when everything seemed to be going quite well, at least for your asset-holding class, and tell the people that we can afford this, despite telling us for years and years, “There’s no money for hospitals, schools, or anything nice, but we can instantly find trillions of dollars and bail out the financial sector.” Because, after all, it’s their assets they were bailing out.

I think that message of “too big to fail” was a very, very powerful one that all-too-many politicians were willing to listen to. 

JIA: Why do you think populism and its message of “We can take back our country” was able to come in and fill the vacuum that was left in the wake of the 2008 crisis and the failure of neoliberalism?

MB: Simple: it’s basically on political entrepreneurship. I mean, if you think about Trump, what he did was utter genius. He would walk into a factory in Wisconsin and say, “You’re all hurting, aren’t you?”—rather than saying, “Everyone’s doing well!” which manifestly isn’t true—and argue, “You guys used to have it good here, but then they shipped all the jobs to China.” He’s the first person who broke the free trade consensus, and actually said this, since Ross Perot! That deeply resonated with the communities that felt that that’s exactly what happened to them, and absolutely no one had any interest in recognizing it.

Politicians of all stripes will try anything: they’ll try and politicize immigration, see if that works; politicize trade, see if that works, et cetera. It usually doesn’t work unless there really are underlying problems which nobody else in the political classes wants to attend to.

It was real political entrepreneurship that did it for Trump and other populists—there were real problems and they were willing to highlight them. Were they willing to do anything about them? Well, that’s open to debate, but nonetheless, they at least recognized them.

JIA: So then how does the COVID-19 pandemic change things?

MB: I’m not sure it does. Why do you think it has?

JIA: Governments issued trillions of dollars in aid to the economy and spent much of that on individuals, through extended unemployment benefits and direct stimulus, in addition to Paycheck Protection Program (PPP) loans, among other forms of support.

MB: But isn’t that exactly what they did in 2008?

JIA: The U.S. government response to COVID seemed on a much larger scale and on a much faster timeframe, as well as for a greater fraction of the American people.

MB: It was basically, “Oh look, we can find money after all,” and they chucked money at the problem. That’s what they did in 2008—it’s the same governance model, nothing changed. It’s just the same thing on a bigger scale.

JIA: You don’t think the conventional wisdom that we’re in a paradigm shift towards Bidenomics is warranted?

MB: Well, first of all, the COVID response is not Bidenomics, because that means the whole world is doing Bidenomics. You’ve got to separate this out. The COVID response was basically because there was a massive supply and demand shock. We are telling everyone to stay at home, therefore we are voluntarily closing down 70% of our labor markets. This will be macroeconomically devastating and deeply, deeply polarizing, so we need to make sure we cushion the blow. It didn’t matter if you were left wing, right wing, whatever, you just opened all the money taps and told people to stay home.

Now, where does “Bidenomics” fit into this, if there is such a thing? Well, it’s really the Inflation Reduction Act, which is basically the watered-down version of “Build Back Better,” which is the rediscovery of industrial policy in the United States. Because it turns out that when you’ve given away your manufacturing base and you need to make stuff, it’s really hard. And when it turns out that you’ve given it away to someone who’s now appearing as a security competitor, that’s a total nightmare. The Inflation Reduction Act has nothing to do with inflation, and it has everything to do with basically trying not to lose any advantage we have in either green tech or new technologies going forward, particularly in the consumer computing space and fifth generation chips or quantum chips.

JIA: Do you believe the Biden Administration would have been able to get the IRA passed without the massive COVID response?

MB: I’d actually play it the other way around. If we hadn’t spent all our money on COVID, Biden would have gotten even more. The only thing that Republicans and Democrats agree on is that China is a bad actor and a threat. Now, if you hadn’t actually spent, what was it, 20% of GDP as debt essentially, on your COVID response, you might have even got more through Congress.

JIA: You seem to be suggesting that the presence of China is more responsible for the government interjecting itself into the economy than COVID, or a new paradigm shift.

MB: Yeah, that’s it. The Republicans couldn’t give a damn about COVID. They proved this over and over—they had a president who said it wasn’t real.

JIA: It should be noted that Republicans also didn’t vote for the IRA.

MB: But here’s the thing: many of them are willing to sign on to its provisions. For example, our favorite Florida senator is very, very keen on industrial policy, so there are ways in which this is definitely a bipartisan option. The American state only ever does anything if you can tie a security threat to it. There’s nothing else that ever gets done.

JIA: Do you then think that the revival of the government’s role in the economy is happening? For comparison, it’s worth considering the case of Germany, where the government was willing to engage in joint debt among the EU for the first time.

MB: That’s also not true. They did it one time, they haven’t spent half the money because they can’t agree on how to spend it, and they’re not going to do it again.

JIA: Will anything relating to COVID generate a paradigm shift in economic policymaking?

MB: No, honestly. My line on the European Hamiltonian moment is that it’s a Hamiltonian moment if you went to see the musical. Because it has just about as much impact—it makes you feel really good for about six hours, and then the effect wears off.

JIA: If we’re still in the neoliberal system that failed during the Great Financial Crisis, then how do we address the underlying problems that are still there? Will this lack of response come back to haunt us ten years from now?

MB: It’s will come back at the next election. I mean, it may not be Trump, but you’re going to get DeSantis, which is basically establishment populism.

JIA: How can the order’s fundamental issues be addressed to prevent that establishment populism?

MB: The way that we usually do it is through massive expenditure, through a sort-of national industrial state. We did it once under the guise of the Cold War, and we’ll build another one up with China. This is how we’re going to finance a lot of spending and a lot of transfers.

One really interesting thing is the breakthrough in fusion, which happened this week.[ii] I mean, you can bet now on the amount of government money that’s going to be mugged up to be thrown into that. If we really do have an edge over the Europeans and over the Chinese on this one, then this is the ultimate play. It’s utterly transformative, right?

That’s how America does things. America doesn’t do things by having a federal policy on X or Y—that just never happens. For example, we have a Department of Education. Can you tell me what American federal education policy is? Right. Part of the problem is this incredible desire, particularly among Democrats, to pretend that politics don’t exist. And there’s a technocratic fix for everything, so if we have the right policy, we can do anything.

A very simple example: you have enormous inequality in this country. And if you really want to do something about it, you would fund the IRS so you could raise more in taxes. But they don’t seem able to do that.[iii] Twenty-odd percent of all IRS audits are for people on the Earned Income Tax Credit, who are earning less than $30,000 a year. I mean, what the hell is that other than inverse class warfare?

We’re not interested in making things, fixing things, we’re interested in ameliorating the symptoms, and keeping the advantages of the asset-owning class inasmuch as we possibly can.

JIA: Is there any way to prevent this?

MB: No, because they fund politics. And we vote every four years for which version of plutocracy we want! I mean, ask yourself this question, why is it—apart from the comedic value of destroying Twitter—that Elon Musk is in the news more than the president?

JIA: Entertainment value.

MB: He’s also a very, very rich guy that controls entire sectors. If you want to understand Indian politics, you can go talk to Modi, but you can go to Ambani and Adani, the two richest guys that together collectively own about 60% of the sectors of the Indian economy. You know, this is how it works.

JIA: Before the Keynesian system, though, the situation was similar to now, and then there was a shift toward a system that was more equal between, in your framework, these two classes.

MB: Exactly—plutocrats, bankers, and bandits. We’re right back at it. But we shifted because when the system broke down, we ended up with communism and fascism slogging it out, to 50 million people dead, so let’s hope we don’t have to do that one again.

JIA: Are you suggesting the only solution another World War?

MB: Or, you have a sort-of enlightened administration with enough power and enough durability to enforce very, very significant changes in public policy. But bear in mind that “the most pro-union president” just ended a rail strike by fear.[iv]

JIA: On the topic of inflation, you said in a March 2021 interview that a paradigm shift supporting government intervention in the economy would be possible if it didn’t produce inflation, but if that paradigm shift did produce inflation, it would also eventually stop it.

MB: And it turns out, it did. But it wasn’t just intervention in the economy. I mean, basically, it’s the massive supply shocks of making everything in China and then China closing down, and then China closing down after it closes down. And then a huge commodity shock because of those supply chains breaking down, and then the knock-on effects of shipping being in the wrong place. And then on top of that, the Russian invasion of Ukraine and what that does to oil prices and gas prices, then the fact that we are now major gas exporters to Europe to make up for the gas they’re not getting from Russia. I mean, if you want reasons for inflation, I can give you 20. And they’re probably all true.

But, you know what are we doing in our politics? “We spent too much on the stimulus checks!” It’s like, come on, really? The last stimulus checks— which were about $2,400 per person—were spent over 18 months ago. Honestly, telling me that the checks of $2,400 spent 18 months ago is still powering producer prices is just ludicrous.

JIA: Out of the many potential causes for inflation that you cited, none of them were monetary. Do you foresee a scenario in which the Federal Reserve overcompensates, overshoots, and sends the economy spiraling into recession?

MB: It could. But the thing is, the people running the Fed aren’t stupid. They understand that, too. The real constraint on Fed action is the fact that the U.S. dollar is the global reserve currency and the Fed is the de facto global central bank. But no one can say that in public, because all the people in Congress who want to audit the Fed and think that they should only have a domestic mandate don’t understand the global role of the dollar. Consider the fact that more dollars are manufactured in Euro-dollar loans outside the United States than are made by the Fed. Consider the fact that it’s 70% of global reserves and 60% of everything that’s dollar denominated and traded in dollars. Therefore, if you set the price of dollars—crudely, the interest rate—you’re de facto setting the global interest rate.

Now, when you push interest rates down to zero here, as we did in 2009 and onwards, everybody who wants a yield has to go elsewhere. So, you push all your money into South Asia, Turkey, India, Latin America. They started to get freaked out about it. It turns out, we could balance it out a little better than we thought, but there’s been a huge amount of dollar investment and dollar borrowing in these economies.

Now, you’re willing to go into Turkey, because you’re getting 7% real return with no inflation. But if inflation shows up, then you’re suddenly making, on 4% inflation, 3% real in Turkey. But if I’m getting 5% in a bank account for just showing up in the United States, and that’s risk-free, what am I going to do? I’m going to take my money out of Turkey.

If they really push up interest rates to the point where it would really hurt—I mean, my God, real interest rates are still negative, right? If they really want to push this up, there’d be a giant sucking sound as all the dollar liquidity in all these countries disappears. I mean, if you think the East Asian financial crisis was fun, why not have a Latin American, East Asian, and South Asian financial crisis all at once, right? And then boom—the dollar goes catastrophic, right? That would be a really dumb thing to do. Spoiler alert: everybody in the Fed knows this.

JIA: What, then, is the chance of the Fed overshooting its inflation target and raising interest rates too high?

MB: I think it was the IMF or the Bank of International Settlements that pointed out, which is true, that there’s a kind of fallacy of composition problem. It’s individually rational for any state to tighten, but given the fact that everybody else’s demand is a function of somebody else’s demand, if everybody altogether crushes demand, the multiplier effect on demand destruction is more than the individual parts. You can collectively do more damage than you want to by individually raising rates, so you get this fallacy of composition where the effect on the whole is greater than the sum of the parts. And that’s probably true.

But it depends on who you are. I mean, the United States economy, for all its bumps and foibles, grows reasonably well, its companies are profitable, and everybody in the world wants to hold dollars. But if you’re the United Kingdom—you haven’t grown for a decade, your productivity growth is zero, and you’re a rentiers’ paradise because the way you make money in Britain is by owning assets and making everybody pay fees, which basically destroys business investment and any incentive to invest in new stuff—then you’re really in trouble with the high interest rates and inflation. But in the United States, it’ll be uncomfortable for a while, and then we’ll get through it.

JIA: What is the likelihood of the “soft landing” that Federal Reserve Chair Jerome Powell has been mentioning?

MB: What does that mean, you know? It’s just a silly, bullshit term, right? It depends who you are: if you’re in the bottom 40% of the income distribution in the United States, you haven’t had a soft landing in your life, for 20 years. And that’s where all the pressure goes. Higher interest rates do not affect college professors unless we’re buying a second home.

Where they really affect people is the people who are on the margins of the financial system, who already pay usurious credit rates, people who are just making ends meet. And when their costs go up by 30 bucks a week, they’re out of the game. As usual, we cure our problems by punishing the weakest members of our society. Soft landing? Please.

JIA: What is the mechanism to provide cushioning for the working class without a full system reset?

MB: Why do you think so many of them voted for Trump? Because from 2017 to 2019, their real wages actually went up for the first time in over 20 years. Not because of any government policy, but because of Trump’s radically deregulatory effects on labor markets and product markets and the Fed also running the economy “hot”—as they called it at that point—which led to real wage growth. And if you have real wage growth and low inflation, that makes people happy; that solves a lot of problems. If you have negative wage growth, and you have high inflation, that is a disaster for people, particularly for people who are further down the income ladder.

JIA: In a 2019 lecture, you said that climate change would force the next “software” governing the global economy to include a greater role for the government. Do you still think that climate change will have that effect?

MB: It already has, and it’s working out in incredibly interesting ways. I mean, today the Texas Legislature impelled a panel and subpoenaed BlackRock and the investment firms to come and explain why they were doing this terrible communist plot called “ESG investing.”[v] The GOP have already dialed up their next think tank, multi-million-dollar-funded campaign against “woke capitalism.” And what is it that they’re aiming at? The E—the environmental stuff—and the G—the governance stuff.

Why? Because if you think about the United States electoral map, the easiest thing to understand is to start in Alaska, walk down to the Dakotas, go through Oklahoma, get to Texas, hang left, do a 360 through Louisiana and Alabama, and you come up and end up in West Virginia. What have you got? You’ve got the core of the Republican coalition. What do they all have in common? Carbon assets. They are all involved in the extraction, the transportation, the refinement, and the transformation of carbon and its derivatives. And what exactly is ESG and the Green Transition and the Green New Deal that the Democrats like so much? It’s the end of their carbon assets.

Now those people have seen what Democratic policy on trade did to the Midwest. And you think they’re going to do it again? Do you think when Alexandria Ocasio-Cortez says, “We’ve got a Green New Deal, and we’re going to all retrain you as coders,” they’re doing anything other than laughing? So, the battle lines have already been drawn, and it’s exactly on the environment.

What’s going to happen if the Republicans win in 2024 is that we’re going to double down on carbon. We’re going to basically go for every last drop we can because the world, because of the war in Ukraine and other factors, is carbon short. And also because when the wind drops and the sun don’t shine, you can’t use renewables. If you want to fly a plane, you still need kerosene, so we’re going to go mad for it for at least two electoral cycles, and basically burn, dig, and drill, baby, drill.

It’s going to be disastrous, climatically, but it certainly isn’t going to tip anything long term. Why? Because we have the ridiculous idea that unless America leads, the rest of the world falls apart. But you need to remember that Bush left the Kyoto Protocol and global climate change technology and deployment accelerated, and that Trump left the Paris Agreement and China installed more solar last year than the rest of the world has. Nobody gives a crap, so we can go off on our little carbon binge and make some money for ten years.

What’s going to happen is that the EU, who are very serious about their green transition, are going to cooperate with the Chinese. Why? Because the Chinese have the refinement capacity for all the rare earths and all of the metals you need to do green tech, and the Europeans don’t have any supply. So if they want to do the green tech stuff, they need to be nice to China, despite how much we don’t want them to be nice.

My ten-year bet is that there’s a big rapprochement between the EU and China on climate tech. China has every incentive to do it. They’re facing what’s called “wet bulb temperatures” within ten years in their northern cities, whereby you cannot exist without air conditioning.

They’re completely aware of this problem. They are massively investing in green tech and every possible sector, whether it’s hydrogen, solar, et cetera. And those existing relationships that happen between large European industrial conglomerates that work on green teach—for example Siemens, the German company, and the Danish windmill manufacturers—they already have deals that have been going on for 20 years, whereby they do the high-end version, China does the commercial version, they bring it to scale, and then they split the profits and the license fee. They’re perfectly happy to continue those relationships.

Climate is going to be the thing that drags the state back in, but in a very different way. And America is going to drag us to double down on carbon. And then ten years later, when we wake up from the carbon binge, we’re going to be buying Chinese and European tech to get out of it.

JIA: What does that mean for America’s role as a global leader in the event of a “carbon binge?” Does China become the world’s hegemon in that scenario?

MB: No, and I think it’s a mistaken way of thinking about it. What does it mean to be a global hegemon? To me it means one thing: you issue the reserve asset, and you have a currency that everybody else uses as the banking asset. The Chinese can’t do that, for reasons that are too in-depth to go into in this interview. But essentially, it comes down to the fact that their economic model doesn’t allow them to open up their capital account. The Europeans are basically a giant export platform, and therefore they can’t do it because if they did, their exports would suffer, and so you’re left with the dollar.

On a short-term basis, if you want to make money over the next ten years, go buy carbon assets in the United States. You’re going to make an absolute fortune. Short-term, and in simple economic return terms, this is going to be boom time for the United States. Is this leadership? I mean, beyond the fact that everybody uses dollars and most of them are generated outside the United States, I don’t really know what that term means anymore. Are we really going to send the entire Pacific Fleet across the Pacific to hold on to Taiwan? Really? Is that leadership? What happens when you get sunk? Are we then going to then invade China? Like what are we even talking about when we say these things? These are just nonsense words at this point.

[i] Special purpose acquisition company, a shell corporation that exists to purchase a private company without issuing an initial public offering, therefore avoiding the associated legal requirements.

[ii] On December 5, 2022, scientists studying fusion energy at the Lawrence Livermore National Laboratory in California announced the first fusion reaction in a laboratory setting that produced more energy than required to actually begin the reaction.

[iii] Part 3 of Title I, Subtitle A of the Inflation Reduction Act (IRA), passed by the Biden administration in 2022, appropriated to the IRS and other agencies $79.6 billion in additional funding through the end of FY2031 to “bolster taxpayer services and enforcement of the tax code, among other purposes.”

[iv] On December 2, 2022, President Biden signed legislation to block a national U.S. railroad strike over paid leave for railroad workers.

[v] In December 2022, The Committee on State Affairs of the Texas State Senate called on BlackRock to testify on its Environment, Social and Governance (ESG) policies.