Niall Ferguson, one of the world’s most influential and controversial historians, talks exclusively to The Wealth Report’s editor Andrew Shirley about the big issues facing the world and its wealth creators
Niall Ferguson is in high spirits when we meet at the Hoover Institution at Stanford University, California, where he is a senior fellow. He’s just become a father for the fifth time, his latest book has been getting good reviews – and I’m probably one of the last things standing between him and the Christmas holidays.
But over the next hour and a half, it becomes clear that Professor Ferguson is deeply concerned about the world we live in and what lies in store for future generations. Unsustainable levels of government debt, the implications of an increasingly connected world, religious fundamentalism and rising inequality are just some of the issues preying on his mind.
My first question is a very simple one, suggested by my 10-year-old son when I proudly told him I was interviewing somebody ranked as one of the world’s 100 most influential people by Time magazine: “Dad, just ask the professor why everybody in the world can’t live peacefully together.”
Initially it seemed like too naive a query to put to such an august figure. But reading Professor Ferguson’s new book 'The Square and the Tower', which examines the battle for power between traditional hierarchies and emerging social networks, I’m struck by the realisation that some of the early proponents of the internet did, in fact, believe that they had found the key to creating one big happy global family.
“When the internet came into being, and particularly in the 1990s when it was in its first great investment boom, there was a story that was told by many people. That story was that once everybody could email one another and share web pages, everything would be awesome,” explains Professor Ferguson.
“We would all be able to exchange views and news, understand one another better, and ultimately form a kind of global community, or republic of cyber-space. It was a tremendously attractive idea, that greater knowledge and greater connection would lead to greater harmony.
So what went wrong?
“Greater connectedness, far from producing a global community, tends to result in greater polarisation because of a phenomenon that the network science people called homophily. We are inclined to be attracted by people like ourselves – birds of a feather flock together – and when you create a large social network, we can more easily cluster into like-minded subgroups.”
What makes the “everything will be awesome” internet cheerleaders sound even more naive is that this phenomena isn’t at all unique to the 20th and 21st centuries. “The bad news is that history is against this hypothesis,” says Professor Ferguson bluntly.
The same thing happened 500 years ago in the Reformation. Martin Luther thought that if everybody could read the Bible and see his sermons thanks to the wonder of the printing press, then there would be a priesthood for all believers, as foreseen in the gospels.
"Instead, what actually resulted was 130 years of religious strife, for the simple reason that not everybody agreed with Luther. in fact a great many people violently dissented and that ultimately led to the Counter-Reformation.
"I think what we see today is a very similar version of that same story. The idea behind 'The Square and the Tower' is a very simple one. It is that people in Silicon Valley know almost no history, and people who write history know almost nothing about network science.”
It’s this that drew Professor Ferguson to Stanford in the heart of Silicon Valley, home to Google, Facebook, Uber and many of the other tech companies that have up-ended our daily lives. “The history of our times, to some extent, is being written here,” he says.
The more you consider the polarisation of opinions that Professor Ferguson describes in his book, the more it becomes apparent just how much of today’s news agenda is being driven by the phenomenon. The rise of populist movements around the world, from Brexit to Trump, to political events in the Middle East, has been turbo-charged by social networks.
Surging populism is something that clearly worries the wealthy. The results of The Wealth Report Attitudes Survey this year reveal almost 50% of respondents believe it could impact their clients’ ability to create and preserve wealth.
But what exactly is populism and are the wealthy right to be concerned? On his Fox News show I hear Steve Hilton, once an adviser to former UK Prime Minister David Cameron, describe it in almost folksy terms; it’s the common man taking back power, embracing old-fashioned family values. To others, like Princeton professor Jan-Werner Müeller, it’s almost the opposite: anti-plurality, anti-debate, often dangerous and largely based on a false premise.
“I think both of these views are in fact consistent with each other, it’s just that one is the view of somebody sympathetic to populism, while the other comes from somebody hostile to it,” reckons Professor Ferguson. “Populism is essentially a revolt against elites. It comes in two flavours though; the populism of the right, and the populism of the left, and this is often the source of the confusion.
“The populists of the right tend to say, ‘Your problems are all due to immigration, free trade and corrupt financial elite.’ The populists of the left tend to say, ‘Your problems are all the fault of corrupt financial elite.’ The populists of the right say, ‘If you could restrict immigration and impose tariffs on imported goods, and imprison the corrupt financial elite, everything would be better.’ The populists of the left say, ‘Just tax the corrupt financial elite’.
“So, the policy programmes are quite different, and that means that populism can look more or less alarming, depending on where you sit. Most people who write for the liberal media are much more scared of the populism of the right and often confuse it with fascism, even though it’s actually quite different. If you are a member of the corrupt financial elite, you’re probably more worried about the populism of the left, because it’s much more single-mindedly focused on you.”
But whether left or right-leaning, populist movements are often driven by nostalgia. And that means that ultimately, they are almost always bound to disappoint. “There is inevitably an element of disillusionment in any populist backlash,” says Professor Ferguson. “You can never really get what you want with populism.
"More or less anything that’s promised is going to fall short. If you restricted immigration to the US completely, if you imposed punitive tariffs on Chinese imports, the effect on the ordinary American household would be to make them worse, not better, off.
“In the same way, I think we’ve just more or less calculated that the cost of Brexit to the UK so far, per week, is roughly the same amount that the Leave campaign said Brexit would make available to spend on the National Health Service.”
Professor Ferguson says the populist wave that swept Donald Trump to the White House appears to be losing impetus, partly due to concerns over his tax reform legislation. “It adds more than US$1 trillion to the deficit over 10 years, which is not something that I can enthusiastically condone, and it’s not popular.
“So, from a political point of view, it seems to me the backlash is already gathering momentum. It’s the backlash against the backlash if you like; the backlash against populism.”
The professor is also sceptical about Brexit, which he likens to an extremely messy divorce. “I’m afraid that the outcome is bound to disappoint in one way or another. Either Britain is going to end up being de facto subject to European regulations, and perhaps even to the free movement of people, or it’s going to have to pay quite a high price outside the European Union.
“It doesn’t seem to be me immediately obvious that Britain can do a bunch of better deals with other countries than the deals that it has with the EU. It’s highly unlikely that in a short space of time, Britain can compensate for the hit to leaving the single market.
“I understand why Remain lost, but don’t be naive about what this divorce is going to cost, how long it’s going to take, and where you’ll end up. One thing I’ve learned from my own experience is that it’s very easy to blame all your problems on the spouse that you’re divorcing, but there comes a moment when you realise that actually some of the problems are down to you. The low productivity of the British workforce, for example, is nothing to do with Brussels whatsoever.”
It seems an almost impossible time to be a politician, I suggest to Professor Ferguson. To win power you need populist policies, but to deliver them you’d need to raise taxes to politically suicidal levels. Is there a way that mature governments can actually break the circle so that giant leaps into the dark, like voting for Brexit or Donald Trump, aren’t really seen as the only option?
“It’s very, very hard to get out from under the nasty, fiscal arithmetic of debt,” he admits. “Most developed economies without large natural resources, and that includes most EU states and the US, have really substantial public debts, and often even more substantial unfunded liabilities that don’t appear on any national balance sheet.
“This is an extraordinarily difficult question in political economy, because it’s about generational imbalances. Right now, the dice are loaded in favour of the baby- boomers, people like me who were born in the two decades after the end of the second world war, and they’re loaded against newborns, kids and the unborn.
"This is a striking pathology of modern times, this breach of contract between the generations. It’s very hard to fix because the unborn and kids don’t get to vote and the elderly now tend to stick around long after retirement age, and they vote in rather large numbers.”
Warming to his theme, Professor Ferguson goes even further: “I think this is the central problem of our time. In 2001 I published a book called The Cash Nexus, and in it I predicted that the politics of the future would be about generational conflict, not class conflict.
"Well, we’re here now. But most of us don’t really have the vocabulary to adapt, because we’re still used to thinking in terms of class, or percentiles: the 1% against everybody else. That’s all anachronistic. The real issue now is, who pays? Is it going to be granddad, dad or the kid?
“The solution is clearly to try to strike a balance between the interests of the generations, but that must involve some elements of increased taxation, and some elements of welfare reform. Those are two difficult things.”
It seems a bleak outlook and raises the question, where do countries like the US and UK go next if democracy can’t solve their problems? “I think it’s extraordinarily difficult, even with the best will in the world, to get this kind of thing done in democratic systems,” Professor Ferguson admits.
But that doesn’t mean he’s given up on democracy.
“Don’t get me wrong, I still think democracy is the best option. Other systems may solve some problems easily, but they will find the bigger problems harder to solve. Expecting the middle class to accept life without property rights, and without representation, is not realistic.”
Talking of big problems, Professor Ferguson, who accurately predicted the 2008 global financial crisis, believes the world is not too far away from another recession. Why and when, I ask nervously? In terms of why, the counter-intuitive answer, he says, is partly because the world coped much better than he expected with the previous crisis.
“I was pretty much on the ball as to what was happening and how big it would be. So, pat on the back, well done Niall. What happened next was more remarkable, and I didn’t read that so well. I underestimated the ability of the central banks, particularly the Federal Reserve, to counter what was potentially a catastrophic chain reaction which they did first by cutting interest rates to zero, and then by engaging in quantitative easing.
“One of the direct consequences was that all kinds of financial assets recovered in price, and we didn’t go into a depression. People who held on to their stocks as well their bonds, not to mention their real estate, were made whole remarkably quickly. It was almost like a bad dream, and now it’s over and we’re all cheerful again. It's almost as if amnesia is beginning to set in.
That’s the very moment at which I feel obliged to ask,"so, what will the next crisis look like?"
"Nobody can be exactly sure, but I think there are a few reasons to watch out. One is the tightening of monetary policy we’re already seeing, starting with the Fed and the Bank of England. That is usually a sign that conditions are going to become less friendly.”
Another reason to be cautious is rising debt. But this time around it’s a very different kind of debt to the US sub-prime mortgages that broke some of the world’s leading banks last time around. Now, it’s all about China.
“That’s definitely the big question,” says Professor Ferguson. “Sustained growth in China was the other reason that we didn’t have a re-run of the Great Depression. If China hadn’t focussed much on credit creation, I think we would have had a much tougher time globally. It was the stimulus package that worked.”
However, the flipside of China's great crisi-fighting policies is a very high level of debt.
“With the emergence in China of some of the pathologies that we recognised in the West 10 years ago, like shadow banking and real estate bubbles, you have to ask yourself, as the IMF did just the other day: are China’s big banks well enough capitalised to cope if there was suddenly a downturn in the real estate market?
“So, China’s the place to watch. Of course, economists have predicted nine out of the last zero Chinese financial collapses. I’m not about to add to the list of failed predictions, but I do think it’s much more likely than the US to be the epicentre of the next crisis.”
I push him for a timeline. “I’m not giving you a date to liquidate your portfolio,” he responds, “but I do think that we’re entering a different era. The post-crisis period is over. We’re entering, perhaps, a new pre-crisis period.
“I’m not saying recession in January, February, or even December next year. We could sail through 2018 without any policy reverse, but I think the probability is rising that there will be a fundamental change in financial conditions, and the higher political risk that I think we’re seeing more or less everywhere is bound to weigh on assets sooner or later.”
As to how bad the impending crisis might be, again Professor Ferguson won’t be drawn. “It’s impossible to say anything about the next economic or financial crisis, except that it won’t be like the last one. The more regulation you dream up to avoid the last crisis happening again, the more certain you can be that the next crisis will be quite different.”
Despite not wanting to predict the future – “I’m an historian, I don’t have a licence for that” – Professor Ferguson certainly doesn’t just dwell in the past. Throughout the course of our conversation he is highly critical of the way recent certain political crises have been dealt with.
He is particularly scathing about Barack Obama’s strategy in the Middle East, the West’s reaction to Islamic terrorism and Angela Merkel’s handling of the EU immigration crisis.
“I haven’t ever set out to be a contrarian for its own sake,” he stresses. “But from a relatively early age, I can remember feeling a strong urge to disagree with what seemed to me to be wrong-headed conventional views. So, I’ve tended to read my way through the past, going from one question to another, itching to show that what you the reader think, is wrong.”
My final question for him is what kind of world he thinks his new son will grow up in, if it’s not one where everybody lives in peace and harmony. The answer is not reassuring.
“It will still be a frustrating world to be young in for our sons. All these oldies hanging on to their jobs for way too long, and blocking upward mobility. I think it will be a very unequal world, where the returns on innovation have gone to a tiny proportion of humanity.” In this instance, I very much hope it’s Professor Ferguson who is wrong.
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