Washington, DC -- (ReleaseWire) -- 03/08/2016 --DAWN BENNETT: Pippa Malmgren was the Deputy Head of Global Strategy at UBS and was the Chief Currency Strategist for Bankers Trust. She also served as Financial Market Adviser to the president and the White House and on the National Economic Council from 2001 to 2002. Today she serves on the boards of the British Ministry of Defense Working Group on Global Strategic Trends and Greater London Authority Infrastructure Advisory Board, as well as the the Legatum Institute at MIT, which makes her the perfect guest to ask this particular question: has subdued global growth and trade become the norm in the post-crisis world?
MALMGREN: Thank you for having me. Well, yes, it's interesting. In the post-financial crisis world, many things are happening that are not what everybody expected. You know, I think globalization continues to occur, but versions of it are less acceptable to people. So they turn against things like what's happening with immigration in Europe right now, as an example. But on the other hand, businesses are becoming more international than ever, and more able to conduct their business from a variety of different locations and sourced from around the world. So I don't know; I'm not convinced that globalization is coming to an end; it's just redefining itself. And as one example of this, more and more manufacturing is returning from China to the middle of the United States. So is that an anti-globalization movement, or is that actually further globalizing? That's the question.
DAWN: There are other warning signs out there, though. The Baltic Dry is in a veritable free-fall. Germany's manufacturing juggernaut is showing signs of faltering. The BRICs have ceased to be a reliable driver now of global growth. U.S. freight volumes are falling for the first time in years. The list goes on and on. And we've seen this burst of globalization, and don't you think we're at the point of consolidation and maybe even a little bit of retrenchment? At the same time, Pippa, do you think that this is what's keeping central bankers up at night or are they sleeping through the night?
MALMGREN: Yes, I fear they are actually sleeping through the night at this point.
DAWN: That's my fear, too.
MALMGREN: Is it because really the world economy is so weak, or is it because we juiced the system up with so much quantitative easing that we reached these completely unsustainable valuations, for everything from stock markets to the famous so-called unicorns out of Silicon Valley to commodities, right? We were betting on a world that had an upward growth path, on a trajectory that was just impossible. So yes, a pull-back. But does that mean we're going into a 1929-style slowdown that stays with us for many years? Not necessarily. And I'm not sure it's such a bad thing to re-price risk to a more normal level that does not assume that we give quantitative easing forever. Having said that, I think that we have to be very careful. Central bankers are indeed nervous, but not prepared to do a whole lot more stimulus. So instead, the strategy is going to be to continue on the path that assumes growth is coming, but go incredibly slowly.
DAWN: One of the conversations or comments that are coming out at the G20 meeting is that the G20 leaders all are behind Britain staying in the EU, and that if it would exit, there would be a "shock". Really, though, if London decides to leave the European Union, do you think even Europe would even notice?
MALMGREN: So, I am in a small minority. Most people, most economists believe that Britain's better off inside the EU, and a Brexit would be a shock to the system. I'm the other direction. I think that the public is going to vote against staying in the EU, partly because the deal that's on the table today is not the one the British signed up for many years ago. It's a much more centralized approach, much more invasive, a lot more red tape, and the British really are really uncomfortable with that. But I also think that Britain is sufficiently competitive that it will do well outside. They say 50 percent of British trade goes to the continent, and I'm like, 'Listen, the continent's not growing. No one's buying anything in Spain or France or Portugal.' If they re-diverted that economic activity to, say, the U.S., their GDP would go up, because they'd sell more stuff, because the US is at least happening, to some extent. So I'm not sure the cost of leaving is as high as everybody makes it out to be. But it's a hugely controversial subject.
DAWN: Great Britain is an entirely separate country, isolated from the European Union, and it doesn't even participate in the Euro.
MALMGREN: That's right, and so, again, what happens if it leaves? Well, the sterling devalues, that is to say the currency weakens, which has already begun, just on the possibility that it might leave. But that's a huge advantage to a manufacturing-based export economy. And let's face it, the Bank of England has repeatedly said they want the inflation rate to go up. Well, there's no quicker way to get it to go up than a devaluation. So it actually aligns with all the interests of the economy at this point. Now, I personally am a bit of an inflationista. I worry that we're going to end up with more inflation than we want. But for the majority of the people involved in the economy, they think inflation's too low, so they welcome this.
DAWN: Just as the UK government did to the lead-up to the Scottish referendum in 2014, it appears to me that David Cameron's kind of resorting to this so-called project fear.
MALMGREN: Yes, that's exactly right. This is really important; what's driving this is the critical question. And I think it's part of a global phenomena. It's, number one, an anti-establishment vote. It's just the public saying, 'Whoever these guys are that have been in charge, the decisions they have made have not benefited me.' And this tone is apparent in lots of different places. I think it's partly what's contributing to election outcomes in United States.
DAWN: That's right.
MALMGREN: I mean, who's winning all the votes? All the anti-establishment candidates. On the left, that's Bernie Sanders. On the right, both Cruz and Trump are anti-establishment candidates. So the Brexit is, number one, an anti-establishment vote. Number two, it's hard to find a British person who can name something that official membership in the European Union has brought them, but they can easily name lots of things that are a problem for them. And right now, the number one problem that they'll jump to is immigration, and they feel they'll have more control over that if they're out. So I think the establishment is going to be quite surprised at how ferocious the support for Brexit is going to be.
DAWN: Cameron and the UK military leaders are warning that the Brexit actually is going to threaten national security; that's the card that they're playing.
MALMGREN: That's right. But we've had people like Liam Fox, who was the Defense Minister, a conservative in the United Kingdom, come out, and David Owen, who's a left-wing politician in the UK, very pro-EU, both of them saying, 'If we're hanging our hat on the European Union defending us militarily, we're already up the creek, because they don't have any capability. They spend nothing on defense. There is no European defense capability. So if we're waiting on them to protect us from the obvious issues...' number one these days would be the fact that the borders are unsound, and number two would be that Russia is becoming much more forceful in pursuing its national interests. I think actually the argument's going to be exactly the opposite. Britain can defend its national security interests far better if it's out than if it's in.
DAWN: The financial press is claiming Britain's possibility of leaving the EU is actually hurting the pound. But is it not being party to the EU really bad for Britain's economy? Wouldn't separating from the Eurozone's high taxes and high regulations and flat growth actually be a positive for the UK economy?
MALMGREN: Well, that would be my view. They will lose all the EU-led red tape and onerous intervention by Brussels; they'll gain greater freedom and control over their own fiscal and tax policy, which in theory they have right now, but the fact is they have to abide by or comply with EU regulations. So I think it will give Britain much more flexibility and freedom. And the fact is that the only people on the continent who are buying stuff from Britain would be the Germans, and the Germans will continue to buy, because Britain just makes the best quality, particularly when it comes to very sophisticated manufactured goods. So I think there's a market that they're going to be losing, and there's a lot of freedom that they'll be gaining.
DAWN: I understand, too, that David Cameron this week announced that he'd struck a deal that improves Britain's membership terms with the EU. Do you think this will be enough?
MALMGREN: That's the thing; everybody went, 'Okay, what's the deal?' and then nobody could even find any details. You know, bottom line is there's nothing substantial enough there to make the public say it's worth staying in. And that's the problem, is this idea that somehow if Britain is in, it has a voice at the table and it can compel the European Union to be sort of less interventionist, less socialist in its approach to economics and more market-oriented. This is not turning out to be true in any way. They're on the path they're on and not likely to come off it, even if the British beg them.
DAWN: I think the European Monetary Union is actually doomed for further political integration.
MALMGREN: Well, exactly. I think this is the key, and I've been saying there may be nothing to exit. I mean, we talk about a Brexit, a British exit from the EU, but right now the EU is having its own implosion problems. The fact that, for example, one of the most important elements of the EU has been the free movement of people inside its borders, particularly inside what they call the Schengen Treaty Area. So that's all the members of the European Union; once you enter Schengen, then you have relatively free passage. If you're Polish, you can work in Britain. Well now, because of the refugee crisis and the incredible numbers-- I mean, to give you an idea, the Germans have just announced that they lost 130,000 refugees. In other words, they let in way more than that, that's only about 10% of what they let in, but those guys just never showed up at the immigration center they were supposed to go to; they're just loose. Now, we have the same issue in America. We've got a lot of illegal immigrants wandering around and becoming part of the economy, so I'm not saying that it's all bad. But the perception is that if countries can't even cover their own citizens' interests, in terms of paying out benefits and providing what the state is supposed to provide, and now we have an immigration issue, the perception is we don't have enough money to make ends meet as it is, let alone with these new folks, and how come my interests are still not being met? And I think that is going to cause commitment to the EU to implode, even internally.
DAWN: Do you think that if the UK decides to leave that Berlin and Paris will actually do more to prevent London banks from making further gains? What do you think it's going to do to the financial system over there?
MALMGREN: Again, I'm in a very minority position on this, but I think Britain's financial capabilities will be stronger, because I look at Singapore, Hong Kong, frankly even Dubai these days. These are all locations that have extremely strong banking capabilities, but almost no economy, no real economy behind them. So actually capital will go to wherever it has the greatest freedom and the most advantages to work. And right now, the United Kingdom has the best tax environment for international capital of any location in the industrialized world. So you get rule of law, and you get a relatively low tax regime. Britain also has a real economy behind it that's actually improving, just like the U.S. is improving, slowly, but surely, so I don't think that Britain will pay a big price. Now, if the Europeans want to be spiteful, they can make it hard for British products to enter the EU, they can make it hard for deals to get done around the city. But it's to spite themselves. That means they will decline working with the most competitive player. It doesn't actually hurt Britain that much, but it hurts them. And at the end of the day there's also no financial center on the continent that can even begin to compete with London, let alone New York, Dubai, Singapore, Hong Kong. The EU is not famous for being a financial services area.
DAWN: In 2011 French president, Sarkozy, told Cameron, 'We're sick of you criticizing us and telling us what to do. You say you hate the euro, you didn't want to join anyway before, and now you want to interfere in our meetings.' Politically, I think maybe there's more than just Great Britain that wants to leave.
MALMGREN: Well, again, this would be my argument, that we have a number of countries that are increasingly uncomfortable with how things are being done in the European Union. So again, let me just give you a small example. How did this refugee crisis start? Well, one answer is the war in Syria and the Middle East. But the real answer is also-- you must include the fact that the Greeks are completely broke. It's a completely failed state, in the sense that it cannot conduct even the basic functions a nation has to conduct, like border control. So in April, 2015, they announced they were throwing open all the illegal immigration detention centers, because there's no one to guard them, because they can't pay anybody to guard them. So they said to all the illegal immigrants, 'You're on your own; nice to see you.' Now, that effectively punched a hole in the Schengen border of Western Europe. Next thing you know, you've got all these iconic photographs of immigrants storming into Greece. Now, within the European Union, everyone's going, 'Wait, we can't have this.'
DAWN: Pippa, my understanding is even if you think it's bad now? Wait until the weather warms up. As a matter of fact, there was an unnamed German official that told Reuters last month that Europe really has until March to come up with a game plan, because once summer starts, it's just going to get worse. And, of course, with all this there's been, unfortunately, a wave of sexual assaults, and it's been blamed on men of Arabic origin; I mean, it's just really quite said. And also a rising tide of nationalism is out there, and it's destabilizing the entire region. And this is coming from Germany and Sweden and Finland; it's throwing them into social upheaval. What a mess. What a sad, sad situation.
MALMGREN: Well, exactly. And that's why I say that you've got to connect the dots. When people talk about, 'Well, what is the EU? What is it that I'm belonging to?' the answer is it's an entity that can't even control its own borders, can't deal with this problem of a huge immigration flow, and it still has 40 percent unemployment of young people. And it's been assumed that all these young people will remain very quiet, the youth of Spain, the youth of Portugal. I think that's a misjudgment. These kids are depressed by their life circumstances, but at some point, they're going to rise up and say, 'You know what? If the trade-off is I get to stay in the EU, but I have to accept 20 years of unemployment, which means I never have a career during my lifetime, or I go against the EU, then I can get growth back,' I think we're going to find that even the southern continental Europeans are going to say, 'Why am I part of this thing called the EU? What has it done for me lately?'
DAWN: The British parliament actually recently banned Donald Trump from entering the country. Why is that? Is his political rise scaring them?
MALMGREN: Well, I think that specifically it was the comments he made about banning Muslims from America, which was not helpful, by any measure, in any context. I think there's a tendency for Europeans to assume that this is actually what he means to implement, and I suspect what he actually means is he's got a problem with illegal immigration, and in America, we have a long-standing argument about what to do about illegal immigration. But in Europe, that's always presented as we are anti-immigration altogether, and they don't make this fine distinction, which is extremely important. But here's another thing; the establishment likes dealing with people that they've met before, and the fact is, they love Hilary Clinton, because they've been in meetings with her, they know her over many, many years, so they kind of know what they're getting. Donald Trump, Ted Cruz, they're like, 'Wait a minute; who are these guys? They must be bad, because I haven't met them and I don't know them.' Same with Bernie Sanders. So there's always this European tendency to reject the new guys. Although how ironic, because what do we do every single time? We vote for a president that nobody ever heard of for years before. That's Bill Clinton, that's Obama. Frankly, even George W., who I worked for; nobody expected him to be president three years before he became president. So I don't know why they're surprised.
DAWN: I just think at the end of the day, here in America, we're kind of on a slippery slope towards failure. I think both parties here have become handmaidens of the state.
MALMGREN: Well, I think, again, that's back to the fact that this is an anti-establishment vote. The public in America's making it crystal clear, whether they're on the left or the right, that the incremental change approach that both parties had been pursuing was not working. And everybody is so frustrated they are prepared to effectively throw a bomb into the works. And all these guys constitute a bomb, in the sense that they're outsiders. What I hope and believe is that our institutions—the constitution, the institution of the judiciary, the checks and balances system we have—will be strong enough to withstand anyone that we can throw into the machinery. I think that we will be pleasantly surprised; we can survive anybody. And after all, having worked in the White House, everybody thinks you can solve every problem from the oval office, but at the end of the day, I'm not sure you can fix any problem from the oval office. So we may be able to withstand having somebody who doesn't know quite what they're doing yet, and it won't be as bad as everyone expects. I hope so.
DAWN: I hope so too. Maybe I'm hoping that Donald's momentum towards the White House will actually have one saving grace, his relentless campaign against the politicians, it's just going to knock out the hypocritical stuffings out of both parties, so maybe they'll clean themselves up.
BENNETT: Pippa, I want to thank you so much for being on Financial Myth Busting. You are always a great guest and thanks for sharing your insights.
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About Dawn Bennett
Dawn Bennett is CEO and Founder of Bennett Group Financial Services. She hosts a national radio program called Financial Myth Busting http://www.financialmythbusting.com.
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