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Varn Vlog
Dollar Dominance in a Fragile World with Emmanuel Daniel
What happens when the world's reserve currency faces a crisis of confidence, yet alternatives remain elusive? Emmanuel Daniel, author of "The Great Transition: The Personalization of Finance," offers a fascinating perspective on this paradox that defines our current global economic moment.
The dollar's remarkable resilience stems from an unexpected source – American indifference. "The US doesn't care. And that's how the dollar became global," Daniel explains. With approximately 70% of dollars circulating outside American borders and about 130 countries maintaining trade surpluses with the US, the dollar has become the de facto medium of exchange worldwide. Despite numerous attempts to challenge this hegemony – from the euro to China's renminbi to BRICS initiatives – no viable alternative has emerged. The fundamental obstacle? Trust. Even BRICS nations don't sufficiently trust each other's treasuries to establish a shared currency.
We're witnessing a profound economic transformation that extends beyond currency matters. Daniel describes our transition from a markets economy (defined by buyer-seller transactions) to a networked economy where value derives from function and participation. This shift helps explain phenomena like cryptocurrencies, which puzzle traditional investors precisely because they operate on network principles rather than market principles.
Most fascinating is how digital innovation, particularly stablecoins, is actually extending rather than undermining dollar dominance. These predominantly dollar-based digital assets, backed by US Treasury bonds, create new channels for global dollar use. As traditional financial systems face digitization, the personalization of finance accelerates – putting more control in the hands of individuals rather than institutions.
This great transition presents both challenges and opportunities. Countries embracing technological change can leapfrog development stages, while education systems emphasizing learning discipline over specific content better prepare students for an AI-driven future. Despite internal challenges, the US maintains its economic edge through innovation and adaptability.
Ready to understand the forces reshaping our financial future? Subscribe now to explore how the personalization of finance is transforming our world in ways we're only beginning to comprehend.
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Hello and welcome to VarmVlog, and I'm here with Emmanuel Daniel. A thought leader, author and advisor on global finance and geopolitics and the author of the book the Great Transition the Personalization of Finance, is here and we're going to be talking today about the seeming ruptures in the global economy and the stickiness of the dollar. What does it mean? That the dollar value seems to be declining and there's distrust in the Treasury, but we don't seem to have anything clearly replacing it. Not even gold seem to have anything clearly replacing it, not even gold.
Speaker 1:Uh, so, um, um, the the global market has changed a lot, even though your book came out two years ago. Um, where, um, there's been a lot of predictions for a while that bricks was going to replace the dollar. I remember hearing about this in left-wing circles as early as like 2009. That hasn't seemed to happen, and yet the dollar does seem to be taking a pretty big beating for self-enforced error in the last couple of weeks, couple of weeks. Why is it that the dollar doesn't seem to completely, ever fall, despite the fact that there's more and more distrust in the US government?
Speaker 2:There are any number of countries Derek anywhere in the world. Actually, you mentioned gold. I'm in Botswana today. They mine gold just a few miles out of where I am right now.
Speaker 2:Any number of countries have had the ambition of wanting to replace the dollar with something acceptable to themselves, but the reason that agenda has accentuated a lot lately is, well, a number of countries say that the US has weaponized the dollar, has made use of the privilege that it has to dictate who gets to use the dollar and for what reasons, and, especially after the invasion of Ukraine, the US actively worked against Russia having access to the dollar market, russia having access to the dollar market, um, and all of russia's friends china, india, you know, saudi arabia, you name them uh, looked at it in disgust and said, oh, my goodness, if they can do this to russia, they can do this to us, and so, uh, so that agenda has accentuated, um, you know, and no large economy in the world would like to be held ransom the way that Russia was held, you know, just invading Ukraine. And it's funny, like you know, you can't tell who's the good or bad guy anymore. The way I explain this the role of the dollar and how it got to where it is today. In simplistic terms, the way I explain it is the US doesn't care. And that's how the dollar became global. It became widely used, a deeply traded currency, and 70% of the dollar circulates outside the US and the US just doesn't care about that. I mean, you know there are other reasons. The US was, has been and still is the largest importing nation in the world. You know any number of countries I think about 130 countries have a trade surplus with the US and that's how they generate wealth that they get paid in dollars and then they pay each other in dollars. And the US spends all this money by exasperating deficit, trade and a deficit you know, budget, budgetary deficit and then has to generate even more dollars in order to pay for all the things that it buys from the rest of the world. And so in the last 30 years the US has got into a situation where it's got a huge budgetary deficit and, you know, economists essentially say say that it cannot go on this way. And the real trigger for the end of the dollar is when either the US defaults or the trust in the ability of the US to meet its dollar commitment just fades away for whatever reason Outside of that, to get another country or another currency to have the liquidity out in the global marketplace that the dollar has has not been possible to build, and before the renminbi, the euro was an attempt to create such a currency and the euro failed.
Speaker 2:So you know now that there's a lot of talk in the renminbi becoming a replacement currency. There's a lot of talk in the renminbi becoming a replacement currency. They have to understand first all the things that the euro needed to learn in order to be a global trading currency. In the case of the euro, it's simply because the euro did not buy as much from the rest of the world as the US did. The US was still by far the largest buying economy. In the case of the renminbi, it's not even a starter because it's not a tradable currency. It's the capital and current account convertibility just doesn't exist and therefore there is not enough renminbi circulating outside of China. And the way I put it to the Chinese is you care too much that you don't want your currency to be shorted in the FX markets in London or something like that, and therefore you exert a lot more control over your currency.
Speaker 2:And then when you look at all of the attempts especially the BRICS currencies, and attempt, or supposed attempt, by the BRICS countries to come up with an alternative payment mechanism. They're still working at it, but the conclusion that they came to in Kazan, which was the in October last year, was that it was mechanically or technically impossible to come up with a BRICS currency. They didn't say this. You know, president Putin actually had a press conference right after the Kazan meeting and I watched that one-hour press conference. He answered this question and he said we're not going to come up with a BRICS currency. That's not on the cards and that was in the communique in Kazan. The reason not stated is that none of the BRICS countries have it in themselves to trust each other to be able to come up with a currency where one of the BRICS countries has to provide the base currency from which the reserves for that other alternative currency can be built. The BRICS, worse than euro, does not have a trusting economy. They do not trust each other's treasuries. They do not trust each other's annual budgets and intentions in terms of providing that reserve currency. So this is the state of play as it is, but I track just about every assertion that there will be an alternative to the dollar and there is every attempt to make that At best.
Speaker 2:It's arrived to a point where there are bilateral arrangements between large countries which have high trade balances with each other. So when China buys from Saudi Arabia buys oil from Saudi Arabia, for example Saudi Arabia in turn buys $180 billion, $200 billion worth of goods and services from China. And off the back of that kind of trade, each country provides a balance against each other. In fact, to make up for the balance trade surplus or deficit, china, for example, provides a swap arrangement for many countries in order to be able to pay in renminbi, and this is entirely on a bilateral basis and there's a price to pay for the use of that swap arrangement and the renminbi never leaves China. The account is settled in China or against a bank in China or in Hong Kong, which is the international trading station for the renminbi. So you will hear a lot of bilateral arrangements being called an alternative to the dollar, but which are actually just arrangements between two very specific countries.
Speaker 2:Then the question is will the US lose this advantage over a period of time? So the thing I say in my book, by the way, two years ago. So the thing I say in my book, by the way, two years ago, is that the way in which the future of finance is predicated, is created, is shaped desperation and intention, to, you know, solve an existentialist crisis of a different kind. You know, and that's been the case in the way in which you know, in 1907 or 1908, there was an economic crisis. 1911, the Federal Reserve Banking System was created. 1911, the Federal Reserve Banking System was created despite the fact that the US saying that, you know, since its inception, the one thing the US didn't want to create was a Federal Reserve Banking System that was similar to the Bank of England. You know, the US just kept putting it off for years until a crisis precipitated that. And then, when you look at the Bretton Woods arrangements, the US was trying to keep, and a lot of economists, american economists, believed in the role of gold providing the trade-weighted exchange rate between countries or between currencies, and the US believed in that, until it couldn't believe in that anymore.
Speaker 2:And so we are now at another inflection point where the US, you know, budgetary deficit is so high, you know it's debt now it's, you know it's in $30 trillion way larger than the size of its GDP and its ability to pay is today a moot point. If all of the debt that the US Treasury owes comes back to roost today, it will not be able to make its commitment to ruse today, it would not be able to make its commitment. And so there's something else that I say in my book, which is that debt is the economy. There's no running away from that anymore.
Speaker 2:And so when debt becomes the economy, the role of treasuries not just the US, japan, china, china today, which a lot of the developments that have taken place in the last 20 years have been on the back of new debt that China had created to build its infrastructure and the big question that a lot of these large countries face is will there be bias of our debt out there is.
Speaker 2:Will there be bias of our debt out there? Either we circulate it within our economy or we export it and internationalize it that someone else will hold our debt, and that's where the US has what was called an extreme privilege that the US debt is sold by the rest of the world as an asset. You know and it's a question of when that becomes due or when the trust is failing and the US is unable to generate even more debt in order to keep its economy going. We are getting there very sharply and there's a question given the current administration's approach to trade, but the US seems to have the ability to keep pulling out a new trick out of its head, so let's see how this one goes.
Speaker 1:I will say one of the things that does seem to be happening is that in the last month and we're talking in April this will come out probably about a month after we're speaking, so who knows? But the assumption that dollar weakness would equal treasury holders taking a lower interest rate, the assumption that dollar weakness would equal, um, treasury holders, uh, taking a lower interest rate and people buying more treasuries, just doesn't seem to be the case. And it doesn't just seem to be the case of, like Chinese or Japanese dumping, because that's only that that could only affect maybe I mean 20%, 25%, a lot, but, um, you know, 20, 25% of bond treasury holders. So is some of the lack of faith in the dollar internal to the US. Now, is that what's happening?
Speaker 2:Because that does seem like that will be a lot harder to deal with happening, because that does seem like that will be a lot harder to deal with. There are two streams, concurrent streams, that are driving this. One is the attractiveness of treasuries as an asset class to be held by any investor, and that's a legitimate business decision that countries and investors make. And in that scenario, what's actually happening is that a lot of investors in treasury bonds are actually moving from short-term bonds to long-term bonds. The longer-term US bonds are more secure, the yields are better and there's a movement in that direction. And then it's a question of the return on investment against other assets, and US treasuries are not as attractive to other assets that exist out there in the marketplace. So that's a there in the marketplace. So that's par for the course. You know, there are times in history where treasuries are really attractive and there are times in history when they're not.
Speaker 2:It's not just the Chinese who have been parring down their holding of treasuries, us treasury bonds. It's also the Swiss, some of the European countries, some of the A-rated countries, and you know they curate their holdings to be maximum in its returns of it. And does it make sense to, you know, par down the holding of US treasuries in order to teach the US a lesson. I think the Chinese are doing that right now to some extent, and so there are dual you know goals in terms of what the Chinese do in order to, you know, to maximise their holding of foreign assets. And holding foreign assets are very important to these countries because that's what gives the backstop for the valuation of their own currencies right. So it's not simply a case of you know that the world is turning against the US in that regard. So the net effect has been that treasuries are not as attractive currently, but when they become the most attractive asset class for sovereign you know asset holders, you know it will sort of net off. It will sort of net off. In fact, the US Treasury foreign holders has broadened out than it had been previously. Previously it was the major countries China, japan were the most important holders, and now it's broadened out a little bit. So it's not as clear as some people would like to say it is, and the US still has some runway to figure out how it's going to play the game.
Speaker 2:What's interesting to me is the fact that, by embracing stable coins and the fact that 80% of stable coins existing out in the world are dollar stable coins and they are backed by US Treasury bonds in the holding of the issue of the stable coins, in this case usdt and usdc, that sort of extends the life of uh and and the ownership of uh, uh us treasury bonds. And, which is very interesting, um, if you use uh stable coins for trade and for payments anywhere in the world, at the back end you have a very AAA asset class that is held to give its value. So what I see in my book is that the US is actually extending the life of its ability to issue debt indefinitely by digitizing its currency effectively. It's not doing it again, it's not doing it out of design, but it's moving in that direction, and so it buys even more time as a result. And then, in the face of the fact that there's no other options out there, different from crypto other than its treasury backings?
Speaker 1:and and why do you think, uh, congress has kind of fallen into using it. As you know, it's being more and more talked about, but it's existed for a while, not a super long while, but you know, uh, it being a big priority in congress is like a this year thing, but it's you know, you've you've been talking about it for at least three or four years. So what's the difference and why is it becoming so important?
Speaker 2:Bitcoin was created 2007, 2008. It sort of raised the heckles of all the central banks, who were worried that their fiat currencies would be disintermediated by this thing called crypto. And so they rushed out and within a 10-year period, you started hearing this thing called central bank digital currencies. This was supposed to be the central bank's pushback on cryptocurrencies, especially Bitcoin, but at the same time, cryptos could come in any form. You and I can create a crypto, like any one of us can create a crypto. It's really a sense of whether the person you're giving the crypto to trusts what you've issued and would trust the valuation that you assign to it. And that's where you get someone like Sam Bankman-Fried saying you know, my crypto is worth $180. And as long as there are lots of people out there willing to buy and trade on that $180, that's what gives the crypto its valuation. But in the case of Sam Bankman-Fried, he had nothing to back at the back end. In fact, he leveraged off it and made a mess of that.
Speaker 2:Stablecoins is a class of cryptos where the crypto holds the value of the currency in which it's issued. So if you want to say a dollar stablecoin, it's worth a dollar. What the regulators have insisted is that when you say it's a dollar, it has to be backed with a dollar's worth of investments or assets, and so what the major crypto issuers have done is to buy up treasury bonds and have it in their holdings, and also bank deposits and so on, to be able to guarantee that that crypto is worth a dollar. And what a crypto, what a stablecoin does is, it is an ability to use this dollar's worth, or to use what is worth something in the fiat world, in the digital world. So you go out into the internet, you buy and sell. Instead of using a crypto, you use a stable coin, and that's been much more acceptable to central banks around the world.
Speaker 2:And in fact, you know I have a spiel which has to do with the Bank for International Settlements having originally promoted the idea of central bank digital currencies, and the countries that are experimenting with central bank digital currencies have discovered that you know they don't really work and they create all kinds of unrelated, unwarranted problems, all kinds of unrelated, unwarranted problems. And so, you know, even for large countries that have a lot of pilots underway and they sometimes even promote their pilots at the back end I'm learning that you know they want to be able to scale down central bank digital currencies, and one of the reasons is that it's what's happening on the technology front. What's happening on the crypto front is that, because of open source technology, a lot of new technologies are being introduced by thousands of programmers just adding functionalities to different cryptos to do different things, and that moves a lot faster than what central banks can do with central bank digital currencies. So it's a lost cause. But the most important reason for the lost cause is that the US Congress has made it very clear. They've legislated that the US will never have a central bank digital currency. In fact, I watched that whole episode, that whole debate go through, because Janet Yellen and even Jeremy Powell were in favor of central bank digital currencies. I don't know what it is about. Central bankers Sometimes they take on a theme that they are in love with, you know, even when the average man on the street is up against it.
Speaker 2:And I think that the general sentiment to central bank digital currencies is that, hey, I'm not going to allow the state to have data on me, you know, and be able to shut down on me if they want to, if they wanted to, and I think that central banks, central bankers just kept going on it until the US Congress, you know, legislated that the US will not have a central bank digital currency. Then the question is, what would a good alternative be? And I think we are now moving in the direction that it is not inconceivable that any bank in the US will be able to issue its own stablecoin, dollar-backed stablecoin deposits, where banks will be encouraged are being encouraged right now around the world to tokenize ordinary deposits to make them look like stable coins and enable the end user to be able to use it as a technology token to make payments to people, to make it interchangeable, all of that stuff. So there's a lot happening on that front that we'll see that we will go into a tokenized world for sure. And when we go into a tokenized world, it's different from a digital world, which is where you and I send money to each other on the back of our bank accounts. In a tokenized world, we actually carry the token wherever we want to on the phone, on a device and so on and we don't actually have to use a bank to transmit that.
Speaker 2:What I see happening is that around the world I mean Africa this week the use of stable coins, especially the dollar, stable coins in the two big ones, especially Tether, actually more than Circle, it's being used to facilitate trade where the banking system has been failing the local economy. So you take any distressed economy around the world, you take Tanzania, you take Nigeria. The traders, the small businesses in these economies, are increasingly looking at stable coins to be paid in, stable coins, which they then can convert into the local currencies where they are and have their payments made. They do not have to succumb to all of the KYC, the know your customer rules that banks have put in place in order to onboard a new user in the banking system.
Speaker 2:Now, those numbers are still small. They are less than 10 percent of total global trade. But when it's, when they reach a certain number and you know the inflection point for any transformations that take place in finance, it's never when they become 50 percent. When they become 20 percent, a few things happen Prices collapse, alternatives start becoming commercially viable, all of that. So that's where we are, and I think that the current administration in the US is encouraging that trend. They are halfway there. They are putting in place legislation to see more stable coins, and take this from me that it's not inconceivable that they will start the FDIC, especially will start to allow banks in the US to tokenize the deposits and that will be a game changer in a big way.
Speaker 1:What are some of the downstream effects of tokenizing like that? I can definitely see it in the developing world, but I don't necessarily understand the effects in the developed world.
Speaker 2:In the developed world. The banking system is archaic, it's got a huge historical legacy, it's expensive, it's slow and it's not innovative. We are coming to a point where ordinary people want the right to be able to, you know, transect in the way they want. They want to add functionalities to their transactions, they want to be in control. The end user and that's why the title of my book was the Personalization of Finance is here, in that finance is moving. The power in finance is moving from the institutions to the end user and in the case of the US, it's got such a well-built, pre-existing financial system that disintegrating that is so difficult. And that is why an African out of Nigeria or Ghana, when they go to visit the US and I was at a conference in Vegas and there was a group of Africans who had attended and they were attending a session on payments At the end of the session they were saying oh my goodness, the US is so behind on payments. And that's because the payments infrastructure in the US is so highly developed. If you swipe a credit card, the number of players who benefit from that transaction, who provide the processing service at the back end, can be easily 12 to 15 different organizations before that payment is settled. Whereas in Africa a payment between two people on the back of a mobile phone is just peer-to-peer, it's between me and you and there are no other players except the telco providing the payment infrastructure, the rails. So they are surprised at how slow and archaic and expensive transactions are in the US. And so it's just a matter of time before the institutions start to lose that privilege that they have and technology becomes increasingly possible for the end user, and that's the driver for the developed world.
Speaker 2:And the developed world is always laggard in taking on new technologies because of the legacy infrastructure that they have.
Speaker 2:But when they do make that transition, there's always a huge inflection point on which it just moves on faster and then it becomes a game changer.
Speaker 2:And when it becomes a game changer, we would not even recognize what the past used to be. If you take credit card transactions, for example, since the 1960s the US had built this amazing credit card infrastructure dominated by two major players. Major players, but the beneficiaries, the banks on both sides of the transaction, the issuers and the acceptance points and the fee at the back of it, even if it's 3.5% or something like that, it's shared between many different players in the system and today around the world, in Europe, in a lot of Asian countries and in the UK, which pioneered this idea of instant payment, the rise in instant payment off the back of debit card, where the fees are lower and it connects bank accounts to each other, has been far more profound than the growth of credit cards. So credit cards have been sort of leveling off and then when the new technologies off the back of tokenized assets come in, it will accelerate even further. So we are there, the numbers are showing that that transition is taking place right now.
Speaker 1:That's kind of a big thing. I don't think most people who use credit or debit cards actually understand the amount of processors and process fees that go through with that. I only recently have really boned up on that and I was surprised. And, yes, it can be 12, 13 institutions all taking a minor cut, but once you add all that together, those costs add up and someone's paying them. Um, and my experience traveling abroad, uh, I lived outside of the united states for about a decade and even in countries that I mean you know, I lived in egypt during a during a fiscal collapse, when they floated their currency. But, um, I was surprised at how much more innovative the banking systems were in terms of like security, and I mean particularly when I was in south korea. I was, I was astonished at what you could do at an atm or just having my bank passcode to a tax auditor and they just hit a button and my taxes were done. And these kinds of things just don't happen here for a variety of reasons legacy systems, overly complex regulations, which I'm not necessarily. I know people are saying I sound anti-regulation. I'm not, but when you build regulations for a different system that lasts 100 years and you haven't updated them because Congress is not particularly functional, then you get problems.
Speaker 1:There's another thing that your book talks a lot about. I believe it's the third chapter. That talks about the financialization of everything. And I was thinking I've been thinking about that a lot because we kind of I mean, the average person understands a financialized corporation after the end of Fordism in the 1970s. I think most people who are educated have a basic grasp of that. But you kind of illustrate in your book that we can financialize things that you don't think we can financialize and that has profound implications. What does that mean for the real economy? How is current instability going to accelerate that and how might a world there? It seems like political forces are pushing against globalization but economic forces still are very globalized. How's that all going to interplay when things are more and more fragmented and financialized? It's a big question, but still.
Speaker 2:I'll take that one level higher and I'll say where are we heading as economies? There was a time when the US was the world's largest manufacturer of everything, and then it sort of slipped off the hands, deliberately exporting low-cost manufacturing to low-cost countries or low-end manufacturing to low-cost countries, and then, over time, even high-end manufacturing, then focusing on services, the countries that the US has a trade surplus most of it is on the back of services. And then, after services, what? It's the more important existentialist question to ask in order to understand where the current administration and I've deliberately not mentioned the Trump administration, because really it doesn't matter whether it's the Trump administration or anyone else being in power in the US They'll be faced with the same issue, which is where is the US economy heading?
Speaker 2:I say this in my book that in the mid-2000s the Bureau for Economic Analysis in the US had started to redefine what constitutes GDP as the basket of products and services that constitutes the GDP, and they started to add things like movie rights, software rights and intellectual property and all of that. These are intangibles. And then it just keeps going and I'm sure that the BAA will be redefining what constitutes GDP. It also includes leveraged assets, in other words, the leverage itself adds to the GDP. So the GDP, the idea of GDP, is becoming increasingly ephemeral. It's no longer on the back of hard assets being created in the economy, and it's not just the US that is going through this. Every country that goes through its phases in evolving as an economy starts with the manufacture of low-end goods and then goes up the value chain, and China is going through exactly that same process. And the thing I say to any economy is like, when you look at the US, you're actually looking at yourself into the future, and so some of the problems that the US faces, any country that is going to be as developed as the US will face the same issues. Then the question is do you then try to bring back some of the low-cost manufacturing in order to create employment and so on? And new technologies like artificial intelligence is making even that unfeasible, because it is today possible to run the entire factory without anybody in the factory and fully automated, and as a result of that, it doesn't matter where the factory is based, whether it's in China or in France and I say France because Renault discovered this that it costs the same to manufacture some of his cars in France or in China, you know, because of the high level of automation of its factories. Because of the high level of automation of its factories, it's a question of what do you want to manufacture? You know EV, you know autonomous vehicles and stuff like that.
Speaker 2:So the thing is that as our economies digitize, that's where what I say the financialization of everything begins, and in fact, that's the title of my next book, because we need to start thinking about what our economies will look like when we financialize our assets. So you take a company like GE, a very good example of a company that used to be strong in hard manufacturing of very high-end technology goods, where the CEO, jeff Immel, 10 years ago, said in the future, our assets is going to be the data on the back of the goods and services that we manufacture. There will be value in that data and anything that produces data enables that data to be packaged, to be put out there and traded. So you take a Tesla, for example. The amount of data generated by a Tesla is in the terabytes. Every single car manufactures a lot of data and that data lends itself to introduction of all kinds of products and services, many of them financialized. You can sell that to insurance companies. You can sell that to actuaries, you know, and they can come up with products that take a bet on how long you're going to live, you know, and sell you assets that puts money in your hands that you can use on the back of your promise to live long enough, stuff like that.
Speaker 2:So that's what we mean by financialization, and so what I say in my book is that we are coming to a point where human society will try to financialize everything, and not everything will be financializable, and we will learn that over time but a whole new set of asset classes will arise which are highly financialized, which are accepted as a description of our, of the things that we value in that phase of human history. So when you take genetic coding, for example, the genetic data that we that we produce, you know, can be, can be normalized, can be, you know, can be put together with that of thousands and millions of people around the world, and the pharmaceutical industry can financialize even that. So that's what we mean by financialization, and it's a whole economy that puts value on something that doesn't exist today, that puts value on something that doesn't exist today, and a lot of it has to do with data. Then the question is how are we going to live as a result? What do we value as human society?
Speaker 2:And that's what I am working at in my next book and that gives us a glimpse on the kind of things that a country like the US has to focus on today to be a successful economy going forward, going back to base manufacturing.
Speaker 2:It has its plus and minuses, but it's a lost cause because there are no economies that are going to go back to base manufacturing. In fact, because of AI, countries like the large countries, the large economies like Vietnam, pakistan, indonesia, any country that has more than 100 million people has to reconsider what generating employment for its local population is going to be like in the age of AI, because if factories are going to be largely autonomous, then doing manufacturing alone is not going to solve the employment problem. Then what does its population do? What kind of assets do they deal in? And we're all moving to the point where putting power in the hands of the individual to be able to deal with data that's the starting point for trying to deal with the value of human life in the AI age. So I'm actually saying many things. I'm putting all of them together and saying that all of this is going to be financialized and a new realm in the global economy is on its way.
Speaker 1:This does sound like a very. This does sound like a very um, there's going to be a lot of fracture points, I think, as this this continues right. I mean, there's so many legacy institutions that are adjusting to this but are likely to adjust poorly. And I mean, one of the things that I think we see here in the States is that, you know, we are trying to adjust by trying to pretend that we're willing to run back in time, but even as data, as the Cato Institute put out and I don't normally quote the Cato Institute but even though a lot of people think it would be good for manufacturing to come back to the United States and I've been pointing out, even though we're a net importer, we manufacture a lot it just doesn't employ that many people, and it hasn't probably since the 90s, to be quite frank. And AI is just going to jack that lack of a need for people up and it is hard to imagine, I mean, it's hard for me to imagine what this kind of capitalist economy really looks like.
Speaker 1:Um, so what are the kinds of things that you think might um, change, shift, fracture, move around, as these things, you know, change? I mean, these are. This is a huge speculative question, but it it does seem to me that a lot of institutions, their first impulse is going to be to run to the past first, particularly if they have, you know, stable, long lasting legacy systems. The UK and the US are both proving that, and if the UK is an example where the US is going, that hasn't worked out well. So what kinds of things?
Speaker 2:do you think are going to break on this major change? I think that interdependence is a very important pillar to be built on, and the US was actually doing a very good job on that front. It created the current world trade order, the interdependency between economies, the competitive advantage of nations, that stuff. It's because of that structure that nation states have the ability to sort of leverage off each other as they evolve and nations that are moving slower can take on some of the flak, and then other nations can figure out how they want to evolve. And it's created opportunities for small nations to, you know, to excel. So you've got, you know, small countries like Switzerland or Singapore, which have become financial hubs because they trade in nothing but finance. You know they don't have any manufacturing or other. Their manufacturing doesn't account for a big portion of the economy. In fact, the financialized part of the economy is much larger than the real economy. So that's the world in which we exist right now becomes more definitive.
Speaker 2:I do see that countries that are poverty-stricken right now have an ability to sort of leapfrog that by educating their local population much faster than they could have in the previous period. And I think of countries where, because of politics, corruption and all of that. The end user of goods and services is at a loss in terms of how much information they need. And now you're putting information in the hands of ordinary people. And I see countries like Bangladesh, for example, that used to be a basket case, and today their GDP has now aced India, their neighbor, and Indians are not happy about it, but the per capita GDP of Bangladesh is a little higher than India right now, and that's simply because they've moved up the value chain of very simple industries like textile, and have energized the village. You know, women to move up their ability to not just pick cotton but, you know, set up factories, stuff like that, and so different economies will respond differently, and then they need to leverage off each other, and so, for all the things that the US cannot do and should not be able to do in an AI-defined economy, it should be able to lean on other economies that can provide all of that products and services. So trying to start a trade war and then to bring everything back on shore, to revitalize the Rust Belt, to give life back to what it used to be, yeah, that's a bit of a lost cause. And then the question is, how could it have been better played out? The US has another big problem, which is that the financialized economy has exasperated social divisions in a very, very profound way.
Speaker 2:The interesting thing about looking at the world from the US looking out there's always this question of is communism, can communism be trusted, is socialism good for the US and all of that. There should be a focus on the damage that capitalism has done. You know today, and that damage is extensive. You know the bifurcation of wealth between the rich and the poor, the access to financial services all of that is much more exasperated in the US than any other economy in the world, and actually it's capitalism that should be on trial, it's not socialism or communism. And I think that the interesting thing about socialism and communism is that it has demonstrated that, by having a much more unified approach to economic development, they can pick and choose the good things in a global economy and keep it more even-handed than capitalism does. What capitalism does best is it treats information, data flow in a lot more neutral manner, and because of that, it becomes a victim of. You know what data and information does to society. So you know there's a lot to be talked about in terms of the damage that capitalism is going through right now. That has to be accentuated.
Speaker 2:The Chinese when you know, when Xi Jinping, he put a stop to blatant capitalism. He started by working on education companies that were listed on the stock exchange and they were making lots of money, because lots of parents spend a lot of money on education. It caused a shock. It's like how can you stop education companies from providing this service? It seems like a very natural thing to do and it was on the back of a very simple idea that because the rich can afford education, they shouldn't be given an advantage to overspend on education and enrich these companies than the poor, and we should make it more even-handed that the existing school system should be sufficient.
Speaker 2:Seen from a capitalist point of view, that is undermining free enterprise and the ability to have access to education if you can afford it. It also created unintended consequences, but that's how a socialist system deals with the uneven access to education. A capitalist system will just let it run its course and it creates a lot of destructive effects that society will have to pay for 10, 20 years down the road. So in that way, the answer is really how you want to curate each episode or each instance of inequality or inequality of access that the situation creates. So the financialization of everything.
Speaker 2:If we can have a global economy where the network effect of access to data and the ability to financial leverage and financialized data between all of the different economies, that's where some of the answer is Exactly what data? What is an asset? That's par for the course. A lot of what I'm talking about right now may sound theoretical, but we are well on our way there, and the assets on which these economies are going to be created are already being created. They already exist.
Speaker 2:It's not just the mobile phone. Every home appliance that you have is going to be generating data that is going to be useful for someone out there. So the question is you know how will that economy evolve? But, as we have seen in payments today, despite new technologies existing, you know that change doesn't come naturally. It might get dragged out 20 years, for example, but sometimes what happens is there's an inflection point. For example, with quantum computing coming on, it's going to accelerate artificial intelligence even higher, and that may force a number of issues that we are not even prepared for today, and that may force a number of issues that we are not even prepared for today, so it's very important to have an architecture in our head as to where this is all heading and then fill in the blanks as they occur.
Speaker 1:One of the things that leads me and maybe this will be something that I leave as our final question, but I work in education, that's my day job, and I've taught all around the world at this point how to handle education, including things like vouchers to private schools, which, if they were mass and mass, would undermine the point of private school selectivity as part of how private schools work. That's what their social capital comes from. Everyone has access to them. All of a sudden, they're not nearly as valuable in a capitalist market, but it does seem like, with the exception of a very small few, uh, we are dramatically under preparing young people for the future. Um, uh, uh, you know the, not just traditional literacy, but digital literacy, literacy around finance, literacy around AI. I mean, my students all use AI, but they use it poorly. They don't really know how to utilize it, and their teachers, to be fair, don't really know, for the most part, how to use it either, and the ones that do, like I try to, are learning on the fly, because even the people who design this stuff don't entirely know how it works. So it's it is.
Speaker 1:It does seem to me that a lot of these developing states who can, who have a lower threshold of investment into education, don't have a lot of infrastructure for that but also don't have a lot of path dependency and legacy systems in that world are going to have an advantage with dealing with this, like you say in Bangladesh. I think about this also happening in Korea in the 70s, but now on a much more mass scale. How would you advise you know developed countries like the UK, the EU and the United States to look at education in light of some of these major financial changes, because these things are feedback loops, view them as only tangentially related, or maybe as though we're just preparing the workforce, but they're not really thinking about the way that they intersect with each other in a deeper sense, and I think you see that in the Malays. You're seeing a lot of young students in America who feel like they're being taught stuff that doesn't help them.
Speaker 2:But yeah, I know I hire about 60 people around the world and I get to make a judgment call as to who comes from a better education system than the other, and I found very interesting sampling of the effects of different education systems. The UK used to have a very profoundly rigorous education system, but about 20 years ago they went liberal in a lot of ways and that's resulted in an entire cohort of young people who are technically unemployable for almost everything. You know they have a general education but they're not. They don't have the rigor and the and the depth of being able to handle anything specifically. And then China, who I thought had a rigorous education system on nothing in particular, turned out to be the country which, in the last 40 years, has invested in just primary education. You know learn how to. You know match your numbers right. You know memorize at least 5,000 Chinese characters. Learn how to dance in school on a Saturday. You know school is six days a week. And just the rigor of the education system has enabled an entire population, regardless of whether you went to college, the ability to absorb all of the new technologies that are coming on with open arms. They have a population that is able to take on everything that's been happening in technology today. And then I say I look back and I think just having a rigorous education system of learning that prepares them rather than whether what they learned was important or not, excuse me. So this is the effect of traveling a lot and like that I go around the world and you take a country like India, which has a rigorous education system, just like China, but not everyone has access to it, and there's a big difference for me between a country where you have 70% literacy, like India, and 99% literacy, like China, and then everything else in between. So it's very, very sensitive, those ratios in the level of literacy.
Speaker 2:Then comes countries where they have a working education system but the corruption and the politics in the country does not bring education far enough to you know enough of its young people and so on. And in these countries Malaysia being one of them, for example small, medium-sized economies in the post-colonial world, colonial world. I say post-colonial because these are countries that have the same social structures as the developed world, except that they didn't move fast enough because you know they were caught up in tribal stuff and all of that. In these countries the young people are able to leapfrog because they have access to YouTube. So before they even get to college, youtube has educated them on a lot of basic skills, basic knowledge and basic worldview, despite the lack of access to tertiary education. And so these are the many different ways in which many different economies are preparing their young or giving access to the young generation to become native to a lot of the developments taking place today access, except that the price points, and it has this, you know, appeal factor for branded education and stuff like that.
Speaker 2:So, at the top end, the US is still the leading economy in the world, the main reason being because of the liberal but rigorous nature of its education system, and so it still produces some of the best brains in the world, but at a working level it doesn't have enough skill sets to to contribute to its own economy, and that's why it's got to import talent. And that's where the problem in the US is. And the young generation also goes through that phase where you've got a whole cohort of Gen, Zs and now Gen as coming Alphas coming on stream, who have lived in a relatively prosperous economy and therefore are not motivated to participate in the economy like everyone else and their forefathers, the generations before them have created asset classes that they can't afford, so they're not well motivated classes that they can't afford. So you know they're not well motivated. So all of these put together, and then when you see the effects of AI, which makes it easier in some ways and harder in other ways. Easier in that if you want information, it's there, it's at your fingertips. You know, a person who is uninitiated has the same amount of information as someone who spent his life studying medicine, for example. But at the same time, it puts a huge strain on human creativity, on human exceptionalism, to be able to say what is it that I can do that an AI can't? And we're still in the process of answering that question and we're not done yet with all of the you know tricks and the bells and whistles that generative AI and agentic AI is going to create in society, and so that's a work in progress and it will shape the way in which we need to be organized in the future.
Speaker 2:But whether the next generation is going to be able to take it on depends a lot on how much time they've spent in the art of learning, rather than what they've been learning exactly. I think that the discipline of education is just as important as the substance of education. And in the substance of education, it's okay to keep to the traditional sciences, to basic information, getting that right, because it contributes to the discipline of education rather than what you know and the what you know bit. We're now talking about lifelong learning, which is that as long as you have the ability to learn you know, then the challenge is whether you would continue learning. And I also see this in different economies, in that in some economies the population embraces change. China is definitely one of them, and so is Korea, and Japan has been losing that somewhat, and partly because the replacement rate for the next generation has been somewhat slower. So it puts a lot of strain on the older generation to continue learning, you know. But some economies just keeps resisting change for the sake of resisting. They don't want to change if they can. A lot of Southern Europe is like that, you know, and some economies. So it's this ability to absorb, so it is this ability to absorb to take on new forms of social cohesion that decides the effects that education has. I don't know.
Speaker 2:I now have a question about Ivy League education. I now have a question about Ivy League education Besides being a Rolodex, its functionality is overrated, totally overrated. An average kid working on YouTube will have as much information as an undergrad at Yale or Harvard. In fact, mit gives out free courses on YouTube. So if you just discipline your time, you get about the same education as a kid who goes to school goes to college. So then the question is what should education be worth in the US? And it's a question that has to be answered. In fact, I would even say that very well-run community colleges you know, in different parts of the US are just as world-class as the Ivy Leagues. You know. You have a lot of treasure institutions in the system which are totally underrated, which have to be recognized for the value that they create.
Speaker 1:Yeah, I've noticed that as well. My climbing up the class ladder in the United States has exposed me more and more to the Ivy League, and I have been often less impressed than I thought I would be. Um, uh, one thing that I think, this that I really would emphasize that you said that is my general experience too. When I first went to asia, I thought I was going to see them learning. You know tons and tons of sense things, so you go to school so much and, and when I went and watched a math class in south korea and I did this for a while I noticed that they just spent more time on the fundamentals in a very rigorous but kind of slow way, whereas I looked at our math curriculum here in in in the state that I live in recently and it's just adding more and more and more, and what happens is we don't actually ever have the kids master any of it. We, they move up. They move up fairly quickly, um, both through social promotion and through just, uh, in internal pressure. Uh, some of them probably do know enough math to have achieved a 60, but they don't grasp it in the same way because we push them to do too much instead of just slowing down mastering these basic things, and um, I do find that it, it, it is, uh, it does lead to a kind of anti-intellectualism, and I tend to be a little bit critical of national character questions Not that there aren't such things as national characters, but they're usually created by the incentives a nation sets up, not some in hate genetic, something or other in the water or in the gene pool, something or other in the water or in the gene pool and I do see what you're talking about where younger Gen Zs and Gen Alphas are just not incentivized in the same way to feel like, I mean, what is education going to get them exactly, after watching the generations directly above them get super educated and get very little for it? So, you know, we are going to have to rethink that. Um, uh, I, I think uh.
Speaker 1:One of the things your book um illustrates to me, though, is that these breakdowns of these prior systems, um are not inherently bad bad. We actually could build a decent world, even with the reality of financialization, even with the reality of ai, even with, you know, uh, bajillionaires or whatever, um, if we were willing to think about social incentives and and cooperation, and what a lot more. Um, what I find so frustrating in a lot of the developed countries and I think I my image of this is the uk and the us because I come from the anglosphere but um is that we have people who are dependent on an increasingly globalized economy but are now kind of cut off from it or from understanding all of it, to the point that they're doubling down on nationalism, but they don't understand that they've already participated to that being a hard prospect to bring back in a substantive economic or or you know, hard way. I mean you can increase border regimes or whatever, but then you're going to have labor shortages in certain fields. You're going to, you can, you can, uh, you can increase control over schools, but then you're going to have trouble getting people to teach in them, particularly if you've had a fairly liberal education prior and you try to reverse that overnight, uh, it's probably not going to work prior. And you try to reverse that overnight, it's probably not going to work.
Speaker 1:So I found your book actually weirdly hopeful, even though it was kind of an indicator that a lot of systems that we have assumed were going to be forever with us. After the post-war consensus seemed to be breaking down and in the long duration of history. I mean we should know that, but you don't experience the long duration of history. You just read about it so or listen to it on the podcast. So it feels like your book is is a way to feel a little bit hopeful about this. Just, capitalist economies can even benefit from this, like all kinds of economies can benefit from these scenarios, if we actually look them and accept what they are and also accept that you can't totally control all of them. There's no way to, you know. Uh, one of the things I got from your book is dysfunctional states can create powerful systems, actually partly because they're dysfunctional, which is not something that a lot of people think about, but it is an important lesson. Is there any closing thoughts or any? Where people, where can people find your work?
Speaker 2:Yeah, from everything you've just said, the part in my book that speaks to that is. I say that we are going to a transition from a markets economy into a networked economy and that is a very important transition and we need to give a lot more thought to that. And we need to give a lot more thought to that. So the current administration in the US, the way in which they are trying to resolve some of the challenges, both on the financialization side of the economy, but also on the functional side, the production side, and all of that, is that they've been trying to deal with it from a market's economy perspective. From a market's economy perspective, it's a case of a willing buyer, willing seller. You've got something that I need, I give you the best possible price that I think it's worth and you decide whether it's best possible price. The trade takes place, there's a winner and a loser, there's a buyer and a seller and it's a done deal that way, in a network economy, there are no real buyers and sellers. We all share the assets between each other, and the more networked we are, the more interdependent we become. The focus is not on the value of the asset, but the function of the asset in the economy. You know. So it requires a rigorous mental shift in the way in which we look at the economy and society today and what we need to look at going into the future society today and what we need to look at going into the future. So you know, in finance, the thing that I do to make this point much clearer is that everything that Warren Buffett says about Bitcoin is true. You know that it doesn't have an inherent value in itself. It doesn't understand how it works. He understands securities because he functions in the market's economy. He buys and sells securities, but cryptocurrencies are a child of the networked economy. The more it's shared, that's what creates its value and then creates even its functionality, and the young people understand that more than they understand the market's economy in which we exist, and we are making that transition right now. So some things are networked and some things are still very markets-oriented.
Speaker 2:By giving this mental framework on how to think about this transition that we're making, and that's why the title of my book is the Great Transition. It's a great transition that humanity itself is undergoing at the moment, and my book was written for a finance audience, but by the time I ended my book, I was saying that, oh my goodness, all of society is going to make this transition, you know, and we're all going to be financialized, but we're also all going to be highly networked, and that's what's going to define us in the future. Then the question is how should societies be organized as a result? And that's the question that the US is undergoing right now is answering for itself by giving itself a few tentative answers, which is that, hey, we're the buyers from the rest of the world, we want to get something out of this, so we're going to put up tariffs in order to bring back as much as possible. I don't think that the current administration is so dumb as to make it an end in itself. They are going to be learning that some things will not go the way they think they would like it to happen, and they will make the transition eventually.
Speaker 2:And the US is not going to make this transition out of design or purpose. You know it's going to be through a lot of trial and error and then we will arrive, you know, in a network economy where it's equitable, more equitable for individuals as well as for economies and even corporations, how they work with each other. There's so much happening in every industry. You know, in pharmaceuticals, in manufacturing, where raw material is going to come from many different parts of the world. And it's the US that has perfected this model to where it is today. If you take a plane manufactured in the US, you take a Boeing aircraft the parts come from, I'm know, creating the network effect around which it can create a complex.
Speaker 2:You know Canadian Prime Minister was saying that. You know you put you throw up tariffs against us. You have no idea how the manufacture of automobiles in the US comes from highly specialized part manufacturers out in Canada. You know andS will never be able to master some of these parts and the reason these highly specialized manufacturers exist in Canada, in Japan and all of that in Taiwan is because the US has perfected this system of a network effect that enables it to sit on top of a pile of high-end technology in that way. So if it just keeps going on that level and work out the economics at the back end, it has the ability to continue dominating the global economy and I think that whoever it is in the administration will discover that in due process.
Speaker 2:But like in everything in American history in this 260 years history, or 80 years history is that it's never made those decisions congenially or out of a erudite type of an environment. It's always through trial and error, you know, and so we just have to sit back and enjoy the ride. You know, and I think that you know, the US will continue leading, and I say all this not because I'm a big fan of the US or it is my job to be neutral, but I don't see anything having changed dramatically. This is a path of the course and we're just going through the processes. And my work, by the way, is on my personal blog a lot these days because I'm still writing my next book, so it's emmanueldanielcom and some of the random thoughts that I've been expressing here a lot more substantive when I write my short notes on my blog.
Speaker 1:I will put the link in the show notes so people can find your blog and there's a wealth of information there. Thank you so much for your time. I've really enjoyed this conversation, even a little bit more than I expected to kind of global perspective right now refreshing given the general rhetoric in. I mean, not, I wish it was just the United States, but it's not in the world right now. But I suspect that a lot of that comes from the fact that you're right everything's being kind of discovered by trial and error and and these transition periods are incredibly fraught and historically even sometimes quite deadly. So I mean, it makes sense that people are going to try to run to things that they feel like they understand more, even if they really don't. And I would tell people to check out your book, go ahead.
Speaker 2:And I would tell people to check out your book. Go ahead. Yeah, let me tell you this, like one other dimension that I spend time thinking about is the Roman Empire existed for more than a thousand years, you know. It even became even more authoritarian after Julius Caesar, right, and there were periods in the Roman Empire's reign where they were changing emperors, like every year almost. There was a period like every new year was a new emperor, and then it's also very difficult to say when the Roman Empire actually ended, and all of these, you know, we need to appreciate that the Roman Empire was not just an empire, like you know, like what we like to think about, but it was a phenomenon that created new dimensions in which human society holds together nation-state the idea of a nation-state, you know and what ruling mechanisms exist, and the Roman Empire had experimented with all of them. The Roman Empire had experimented with all of them and when it finally came to a decline, the successors of the Roman Empire were not any one empire. The Ottomans saw themselves as a successor, but that was way out in the 1500s by the time they came about. But the Germans and the Franks and the Spanish as well. But the Germans and the Franks and the Spanish as well, and none of them had the construction mechanism to ace what the Roman Empire was in its time.
Speaker 2:And once again, I started this conversation by saying this that the reason the US continues to dominate is because it doesn't care. And when I say that, you know, it sort of puts people off and say well, what do you mean by the US doesn't care? It doesn't have anyone holding the center. You know, it's got many different interest groups and if you're in the US, you'll realize that those interest groups start at the community level and that's something that really doesn't exist in many countries around the world. Many countries are ruled from the center and then radiated down to the end of the society. So in that regard, I wouldn't say that the decline of the US is underway in that way. I'm probably one of the few who's saying this. Ray Dalio talks about the rise and falls of empire and stuff like that.
Speaker 2:I'm dealing with the US as a phenomenon, and it's a fractured, it's a highly problematic phenomenon, but it's in the process of discovering itself that the rest of the world learns from, you know, and the period in which it goes into final decline is when it stops learning itself, you know, when it's got nothing to teach the rest of the world.
Speaker 2:So on that front, I'll say this that the best brain still comes out of the US, despite the rigorous education systems in many of the different other countries that I spend time in and my employees come from. I would say that, you know, some of the best conversations I have is in the US, and if AI is forcing us to do something, it is to continuously learn and continuously be able to deal with information as it's presented to us. You know, and culturally you know, the US still has that. So I think that you know I draw parallels between the Roman Empire and the US still has that. So I think that you know I draw parallels between the Roman Empire and the US as it exists today. And you know, nearly 300 years it's not, it's still got a way to run in that way. So in that sense, and you know, in that way, I'm more hopeful than a lot of Americans. So, you know, I think I'll leave it at that.
Speaker 1:Yes, yeah, there, you are All right. Thank you so much. Have a great, I guess, morning. Bye-bye.
Speaker 2:Yeah, you take care.
