The novel coronavirus has disrupted the life of every person on Earth. How do you see the situation?
We are in a crisis, the worst crisis in my lifetime since the Second World War. I would describe it as a revolutionary moment when the range of possibilities is much greater than in normal times. What is inconceivable in normal times becomes not only possible but actually happens. People are disoriented and scared. They do things that are bad for them and for the world.
So how do you see the situation in Europe and the United States?
I think Europe is very vulnerable, much more so than the United States. The US is one of the longest-lasting democracies in history. A confidence trickster like Trump can be elected president and undermine democracy from within, but you have a great tradition of checks and balances and established rules. Above all you have the Constitution. So I am confident that Trump will turn out to be a transitory phenomenon, hopefully ending in November. He remains very dangerous: he’s fighting for his life and he will do anything to stay in power, because he has violated the Constitution in many different ways, and if he loses the presidency he will be held accountable.
But the European Union is much more vulnerable because it is an incomplete union. And it has many enemies, both inside and outside.
Who are the enemies inside?
There are many leaders that are opposed to the values upon which the EU was founded. In two countries they have actually captured the government, Viktor Orbán in Hungary (see Samira Shackle) and Jarosaw Kaczyski in Poland. But my biggest concern is Italy. A very popular anti-European leader, Matteo Salvini, was gaining ground until he overestimated his success and broke up the government. That was a fatal mistake. His popularity is now declining. But he has actually been [displaced] by Giorgia Meloni of Fratelli d’Italia, even more of an extremist.
The current government coalition is extremely weak. They are only held together to avoid an election in which the anti-European forces would win. And this is a country that used to be the most enthusiastic supporter of Europe. Because the people trusted the EU more than their own governments. But now the supporters of Europe are shrinking and the support for remaining a member of the eurozone is diminishing. Italy is one of the biggest members… too important for Europe. I cannot imagine a EU without Italy. The big question is whether the EU will be able to provide enough support to Italy.
The European Union has just approved a €750bn recovery fund...
That’s true. The EU took a very important positive step forward by committing itself to borrow money from the market on a much larger scale than ever before. But then several states, the so-called Frugal Five—the Netherlands, Austria, Sweden and Denmark and Finland—managed to make the actual agreement less effective. The tragedy is that they are basically pro-European, but they are very selfish. And they are very frugal. [This] led to a deal which will prove inadequate. The scale back of plans on climate change and defence policy is particularly disappointing.
Do you still believe in a European perpetual bond?
I haven’t given up on it, but I don’t think there is enough time for it to be accepted. Let me first explain what makes perpetual bonds so attractive and then explore why it is an impractical idea at the present time. As its name suggests the principal amount of a perpetual bond never has to be repaid; only the annual interest payments are due. Assuming an interest rate of 1 per cent, which is quite generous at a time when Germany can sell 30-year bonds at a negative interest rate, a €1 trillion bond would cost €10bn per year to service. This gives you an amazingly low cost/benefit ratio of 1:100. Moreover, the €1 trillion would be available immediately at a time when it is urgently needed, while the interest has to be paid over time… So what stands in the way of issuing them? The buyers of the bond need to be assured that the EU will be able to service the interest. That would require that the EU be endowed with sufficient resources (ie taxing power) and the member states are very far from authorising such taxes. The Frugal Four—now five, because they were joined by Finland—stand in the way. The taxes would not even need to be imposed, it would be sufficient to authorise them. Simply put, this is what makes issuing perpetual bonds impossible.
Can’t Chancellor Angela Merkel do something about it?
She is doing her best, but she is up against a deeply ingrained cultural opposition: the German word Schuld has a double meaning. It means debt and guilt. Those who incur a debt are guilty. This doesn’t recognise that the creditors can also be guilty. It is a cultural issue that runs very, very deep in Germany. It has caused a conflict between being German and European at the same time; and it explains the recent decision of the German Supreme Court that is in conflict with the European Court of Justice.
Who are the enemies of Europe on the outside?
They are numerous but they all share a common feature: they are opposed to the idea of an open society. I became an enthusiastic supporter of the EU because I considered it an embodiment of the open society on a European scale. Russia used to be the biggest enemy, but recently China has overtaken Russia. Russia dominated China until President Nixon understood that opening and building up China would weaken Communism… Yes, he [resigned during impeachment proceedings], but he, together with Kissinger, were great strategic thinkers. Their moves led to the great reforms of Deng Xiaoping.
Today things are much different. China is a leader in artificial intelligence. Artificial intelligence produces instruments of control that are helpful for a closed society (see Darren Byler), and represent a mortal danger for an open society. It tilts the table in favour of closed societies. Today’s China is a much bigger threat to open societies than Russia. And in the US, there is a bipartisan consensus that has declared China a strategic rival.
Coming back to coronavirus, is it helpful or harmful to open societies?
Definitely harmful because the instruments of surveillance produced by artificial intelligence are very useful in bringing the virus under control, and that makes those instruments more acceptable even in open societies.
What made you successful in the financial markets?
I developed a conceptual framework that gave me an advantage. It is about the complex relationship between thinking and reality, but I have used the market as a testing ground for the validity of my theory. I can sum it up in two simple propositions. One is that in situations that have thinking participants, the participants’ view of the world is always incomplete and distorted. (“Fallibility.”) The other is that these distorted views can influence the situation to which they relate; distorted views lead to inappropriate actions. (“Reflexivity.”) This theory gave me a leg up, but now that my book The Alchemy of Finance is practically compulsory reading for professional market participants I have lost my advantage. Recognising this, I am now no longer a market participant.
Do you worry about the perceived disconnect between market valuations and the weakness of the economy? Are we in a bubble fuelled by the huge liquidity made available by the Fed?
You hit the nail on the head. The Fed did much better than President Trump who criticised it. It flooded the markets with liquidity. The market is now sustained by two considerations. One is that it expects an even larger injection of fiscal stimulus than the $1.8 trillion CARES Act in the near future; the other is that Trump will announce a vaccine before the elections.
You recently donated $220m to the cause of racial equality and black causes. How do you assess the Black Lives Matter movement?
It really matters, because this is the first time that a large majority of the population, other than black people, recognises that there is systemic discrimination against blacks that can be traced back to slavery.
In this revolution, statues are coming down, and political correctness is becoming paramount.
Some call it the “cancel culture.” I think it’s a temporary phenomenon. I think it’s also overdone: political correctness in universities is way exaggerated. As an advocate of open society I consider political correctness politically incorrect. We should never forget that a plurality of views is essential.
Many say that after Covid-19 and the remote working experience, cities and metropolitan areas are doomed. What do you think?
Many things will change, but it is too early to predict how. I remember that after the destruction of the Twin Towers in 2001, people thought that they would never want to live in New York [again], and in a few years, they forgot it.
If you could send a message to the people of Europe what would it be?
SOS. While Europe [enjoyed] its usual August vacation, the travelling involved may have precipitated a new wave of infections. If we look for a parallel, the Spanish Flu epidemic of 1918 comes to mind. It had three waves, of which the second was the most deadly. Epidemiology and medical science have made great strides since then, and I am convinced a repeat of that experience can be avoided. But first the possibility of a second wave has to be acknowledged and immediate steps taken to avoid it. I am not an expert, but it is clear to me that people using mass transportation should wear face masks and take other precautions.
Europe faces [an] existential problem: it does not have enough money to deal with the twin threats of the virus and climate change… The course on which the European Union has embarked will yield too little money too late. This brings me back to the idea of perpetual bonds. The Frugal Four or Five need to recognise this; instead of standing in the way they should turn into enthusiastic supporters. Only their genuine conversion could make perpetual bonds issued by the EU acceptable to investors. Without it, the EU may not survive. That would be a grievous loss not only for Europe but for the whole world… I believe that under pressure from the public, the authorities could prevent it from happening.
