China’s Rise Challenges The Western Liberal Order | Sir Paul Tucker

Sir Paul Tucker, research fellow at The Harvard Kennedy School and former deputy governor of The Bank of England, joins Forward Guidance to discuss ideas from his latest book, “Global Discord: Values And Power In A Fractured World Order.”

Tucker tells Jack Farley that China’s growing economic might and rejection of liberal values poses a challenge to the U.S.’ role as global hegemon, and he details ways to reinvigorate international cooperation during the current period of geopolitical strife. Tucker shares his views on the recent turmoil in the banking system, weighing on Silicon Valley Bank, Credit Suisse, and the acute need for bank resolution that can maintain financial stability while winding down ailing banks. Tucker and Farley also discuss concepts such as the Triffin Dilemma, the offshore (“Eurodollar”) dollar system, and central banks’ role as lenders of last resort.
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More about today’s guest:

For over thirty years, Sir Paul Tucker was a central banker, and a member of the Bank of England’s Monetary Policy Committee from 2002. He was Deputy Governor from 2009 to late 2013, including serving on the Financial Policy Committee (vice chair) and Prudential Regulatory Authority Board (vice chair). He was knighted by Britain in 2014 for his services to central banking. Internationally, he was a member of the steering committee of the G20 Financial Stability Board, and chaired its Committee on the Resolution of Cross-Border Banks to solve “too big to fail”. Tucker was a member of the board of directors of the Bank for International Settlements, and was chair of the Basel Committee for Payment and Settlement Systems from April 2012. After leaving central banking, Tucker was chair of the Systemic Risk Council from December 2015 to August 2021. He now writes at the intersection of political economy and political philosophy as research fellow at Harvard Kennedy School's Mossavar-Rahmani Center for Business and Government. In addition to “Global Discord,” Tucker is also the author of “ Unelected Power: The Quest for Legitimacy in Central Banking and the Regulatory State” (2018).
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Timestamps:
00:00 Intro
00:55 The Rise Of China Will Have Immense Consequences On A Global Scale
04:44 Shortcomings of Trade Policy and Enforcement
10:41 Downsides of U.S.' Trade Deficit
20:18 The Bretton Woods Regime
21:59 The Triffin Dilemma
26:32 The Eurodollar System
27:31 The Fed's Swap Lines In 2008
28:49 Importance of Multi-Disciplinary Understanding For Policymakers
31:17 The Debt Ceiling
21:27 Thucydides' Trap
25:57 The Contest Between China and The U.S. Is "Everywhere"
39:26 Document 9 of The Chinese Communist Party
45:29 Inflation
49:37 Regional Bank Failure In The U.S.
55:43 The Takeover Of Credit Suisse By UBS
01:02:49 Defining A "Bailout" As A Use Of Taxpayer Money
01:07:09 Bagehot's Dictum
01:15:31 Credit Suisse Contingent Convertible ("CoCo") Bonds
01:17:55 Tying Geopolitical And Banking Together
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Disclaimer: Nothing discussed on Forward Guidance should be considered as investment advice. Please always do your own research & speak to a financial advisor before thinking about, thinking about putting your money into these crazy markets.

[practiCalfMRI]

This is the third or fourth interview I've heard with Sir Paul recently and it was the most informative by far. Several really important takeaways. So good, in fact, that this time he closed the deal, I'll be buying his book! Please ask him to come back in a few months when we've seen what happens with the regional banks.

[pueblobeefcorn]

Jack Farley is hitting it out of the park with his recent interviews. Historic journalism. Great service in public education.

[oliviawoodson]

Jack, I love that you listen to the guest and ask follow up questions that deepen the convo. I wish more interviewers would to that. excellent work.

[GenXstacker]

Yet another phenomenal interview, Jack. Feels like we're getting the inside scoop from those in the know. Blockworks is the best thing going these days.

[l.a.mottern]

You have knocked it out of the park with Sir Paul Tucker's interviews!

[dubnet]

You guys have been pumping out some of the most incredible and informative in dpth material of the time. We need it. Its so hard to get a grasp on reality and there is so much goofball level narative going around, people are being transformed into goofballs and lives are being destroyed. Thankyou for giving us a good line of standards to base things off of.

- Fanboy from NZ

[msmarialr]

Stellar interview, Jack! What a wonderful and knowledgeable guest. Thanks for making it happen

[JamesMullarneyIsAFraud]

Another awesome guest and interview. Thank you Paul and Jack!

[DeFi-Macrodosing]

Solid contribution to the conversation.

[TheBitcoinRevolution]

He was Deputy Governor from 2009 to late 2013, including serving on the Financial Policy Committee (vice chair) and Prudential Regulatory Authority Board (vice chair). He was knighted by Britain in 2014 for his services to central banking. Internationally, he was a member of the steering committee of the G20 Financial Stability Board'. Laughable. Chickens coming home to roost. Excellent interview, I concede.

[MissLizaYangonMyanmar]

I would love to see you moderate with Caitlin Long and Sir Paul. Now that would be fire!

[Rogcljon]

I will admit to expecting a British Peter Zeihan and turning it off half way through. I was totally wrong one of the most comprehensive and informative interviews I have watched in a while. Definitely will be buying the book. Disappointed to hear of the way the federal reserve/FDIC have carried out their role of regulator more recently. The conspiratorial part of me wonders whether the difficulties of the smaller banking sector plays into the hands of a CBDC ultimately. If that has some actual truth behind it what a dangerous game they are playing with all our futures.

[steviechang]

Did Jack put on a tie for SIR Tucker lol! Great interview as always, Jack!

[freedomall]

By FAIR the BEST one I have seen From Here.

[Julian-pjzi]

Thanks Cred, always look forward to Monday Markets 👍

[tomchambers]

Very impressive and fascinating interview.

[PhilipWong]

The US national debt is more than $31 trillion, with 38% of it held by foreign entities. The US also has $38 trillion in unfunded Medicare liabilities and $17 trillion in unfunded Social Security liabilities.

The US dollar is the dominant reserve currency, backed by its perceived strength, allowing the US to print unlimited dollars as long as the world maintains trust in it. The US dollar is the backbone of US power, and any actions that undermine confidence in the currency threaten to destabilize its position of dominance. Each unilateral sanction imposed by the US risk damaging the stability and credibility of the US dollar, leading to dire consequences for the nation's power and influence. The US is the only country actively undermining the strength of the US dollar. The freezing of Russia's $300 billion currency reserve by Western governments may lead countries to reconsider investing their funds in US Treasury bonds.

A significant portion of US dollars is held outside the US, estimated at 60-70% of all US dollars in circulation, due to its status as the dominant reserve currency and wide use in international trade and finance. The one trillion dollar trade deficit of the US is a consequence of being the reserve currency, as a strong dollar makes it difficult for US businesses to export goods and services while simultaneously making it easier for other countries to sell to the US. Countries are shipping goods to the US in exchange for green pieces of paper.

The US budget deficit is $1.38 trillion in 2022 which must be paid for by selling more Treasury bonds. The interest on this debt is greater than the military budget. To pay the interest on its debt, the government sells more Treasury bonds, leading to a cycle of increasing debt. The US printing of dollars has been exporting inflation in other countries for decades, but will eventually increase US inflation. Raising interest rates to fight inflation decreases consumer and business spending, increases the trade deficit, and higher interest payments on government debt. Other countries will respond to the US raising of interest rate by raising their interest rate, risking global recession. The Plaza Accord addressed this issue in the past, but it will be challenging to implement such measures now.

A well-run country collects taxes to fund essential services and infrastructure. In the US political system, wealthy corporations and individuals can lobby for tax breaks. The shortfall in funding for the US government has reached $31 trillion. Instead of collecting taxes from wealthy corporations and individuals, the government pays interest to them.

Banks hold Treasury bonds for their safety, liquidity, regulatory compliance, and potential profitability. When interest rates on Treasury bonds rise sharply, the decrease in bond values reduces liquidity and makes it harder for banks to raise cash quickly. This causes depositors to lose confidence, triggering a bank run. In response to the current bank run, the government is issuing Treasury bonds to raise funds to compensate depositors for any lost funds. There are $19 trillion in deposits in US banks. The estimated unrealized loss on these treasuries is 1.7 trillion. The total size of US banks' equity is 2.1 trillion.

The new Bank Term Funding Program (BTFP) help prevents discounted bondholders from taking losses when they have to sell them urgently. The BTFP accepts discounted bonds at face value to be used as pledges for loans to inject more money into the economy. More inflation.

It's a Ponzi scheme.

[joelucid]

Apparently (ex) central bankers still don't understand that targeting low and stable inflation in a fiat monetary system with high income inequality and banks which primarily lend for the acquisition of assets necessarily leads to asset inflation, debt growth and financial instability. And that the vast amounts of currency held in investor accounts and thus not contributing to the narrow CPI based inflation metric come back into the real economy once the population retires in size - like now.

You can't deflate asset prices as that will bankrupt the financial system. And you can't keep CPI inflation low since asset holders now compete with workers for an output produced by fewer workers. Future generations will not hand over the vast majority of their produce to a class of asset holders for the only reason that they came first.

The coming years will therefore be the time when the decade old contradictions in central bank policy finally come home to roost. And even with some distance to the job they have no idea of what's coming. And all this just because monetary policy setters were willing to count the effect of money growth only when sitting in accounts of consumers.

[Ivelin]

Super educational and fresh perspective on banking policy.

[roadtested]

I would love to see Sir Paul and Michael Pillsbury together.