Speaker 1: Today we're going to be speaking with Gary Stevenson, who's an inequality economist
and former interest rates trader.
Gary, really great having you on.
I appreciate your time.
Speaker 4: Thanks for having me.
Speaker 1: So, I mean, maybe just to start with a little bit about your background, interest
rates trading, how how does that work?
And with whom are you trading?
Speaker 4: Okay.
So I worked as an interest rates trader from 2008 to 2014 at Citibank, just here in a skyscraper
off to my left.
2008, you probably remember we the year of the Great Financial Crisis.
Yes.
At that time, all the interest rates in the whole world went to zero.
So as an interest rates trade, the my job was basically to bet on when those interest
rates come back up again, which is kind of a proxy for when will the economy recover.
You expect that when the economy recovers, we get demand coming back and rates start
to come back up.
What's interesting about that is every single year from 2008 to 2020, markets predicted
that rates would be normalized the following year, which was wrong almost every single
year.
So I made a lot money by betting that they would stay zero for a long time.
Speaker 1: One of the criticisms that many will make about that, that type of industry
is that it is not economically stimulative in the way that making shoes and selling shoes
to someone who then then wears them is right.
This is a common criticism that we hear about derivatives trading and financial markets,
Wall Street, etc., having been inside of it.
How do you feel about that claim that trading interest rates compared to, for example, running
a restaurant or a dry cleaning business or manufacturing eyeglasses, are fundamentally
different in terms of what they do for the economy.
Speaker 4: Yeah, listen, you won't get much argument from me.
I'm afraid I didn't go into that industry to be economically productive or stimulative.
I went to industry because I was really poor and I didn't want to be poor anymore.
Right.
And from that perspective, it worked.
What I would say is, you know, I've worked in economics for a long time now in a lot
of different spaces.
I've worked in finance.
I've got a master's degree from Oxford University here in England.
I've been in media talking about economics for a while now.
I've been sort of bouncing around sort of activism, think tanks.
And what I would say is.
The markets are the only place where somebody like me can be the number one guy.
Within a couple of years.
Because if you're really, really good and you're right.
Year after year, you get noticed.
And, you know, I put an Oracle up two years ago at the beginning of Kobe saying that we're
going to see at the end of Kobe a massive crisis of inequality, of inflation, of cost,
of living.
And I put a video on YouTube saying the same thing.
Those predictions were exactly correct.
Now, I did the same thing when I was working as a trader.
And within a year, two years, you're famous.
But in this world, if you're right, people are not really risen to the top.
So what I would say is trading is an interesting space because a younger pullback can get famous
by being right.
In economics, I mean, there's not that many spaces where you can do that outside of that.
Speaker 1: So you mentioned inequality.
I want to focus in on that a little bit.
You know, sometimes discussions about inequality, particularly in in the U.K., in the United
States, the conversations become sort of like ethical and moral conversations.
Does it does a wealthy country have a responsibility or a duty to provide some bottom, some floor
to standard of living?
And who has earned what or who deserves what?
That's one side of the discussion, and different people might have different feelings about
that.
I've also argued from an economic and financial standpoint that there should be an incentive
for the wealthy to also guarantee some minimum standard of living and reduce inequality.
Because it's also, if you consider a sort of demand side stimulus approach, it's also
good for the rich people, it's good for the businesses.
It's good to have more potential customers who can afford whatever it is that you're
selling.
And having reduced inequality reduces crime.
It reduces a lot of other costs.
Now, I would still make a moral and ethical case as well, but I want to explore maybe
the financial and economic case to be made.
Does that track with your beliefs about the damaging reality of inequality?
Speaker 3: Yeah.
Speaker 4: 100%.
I mean, I don't come from a political family.
I didn't want to be an activist.
I didn't want to be a political YouTuber, which, in a sense, is what I've become.
Mm hmm.
But my job was to bet on the future of the global economy.
And I worked in an industry where every single year, the markets as a whole said next year,
things will get better.
And for the first three years I worked the industry, things didn't get better.
And, you know, this is a problem, right?
Like, if you if you have a doctor who says every patient is going to get better and the
patients keep dying, you've got a problem.
Right?
Because these guys, the economists and it's not just traders, it's also guys in central
banks, governments in academia, they keep saying things are going to get better and
things don't get better.
Right.
So it's clearly a fundamental problem.
Then for me, you know, I thought a lot about what what is the reason why we're not getting
the recovery.
Basically, what is the fundamental reason?
I think I think actually one of the reasons why I was able to be such a successful trader
and at one point I was Citibank's most profitable trader in the world is because I actually
am one of the few traders who comes from a very poor background.
So in that after the 2008 financial crisis, we weren't getting that recovery.
We had to ask this question of why aren't people spending more money?
Well, I was one of the few people who could go and ask my friends and family, ordinary
people, why are they spending more money?
And ask people now.
Nine times out of ten, you'll get the same answer because we don't have any more money.
Speaker 1: Right.
Speaker 4: And if the vast majority of people don't have any extra money to spend, you are
going to have economic crises of demand.
And that's what we've been for, you know, 15 years, essentially.
So for me, this is and of course, you're 100% right when you say that there's a moral, ethical
argument here.
But there's also 100% plain economic argument.
And I'm not just saying this memo standpoint, I've made millions of pounds betting on this.
If you do not deal with inequality is inevitable that your economy will decline and decline
over time.
Speaker 1: I'm curious, do you have a sense of the prevailing political views among the
people that were your fellow traders?
I mean, was was it a sort of supply side right leaning group of people were.
What was it like?
Speaker 4: So trading is an elite profession in the sense that it is one of the best paid
professions.
You can you can get into it.
So for that reason and nowadays very, very few people get in who are not from originally
pretty wealthy backgrounds.
So you're getting people coming in generally who are quite wealthy.
A lot of them have got economics degrees.
And I think when someone has an economic theory, they tend to have kind of absorbed into themselves
some certain ideas which which you might describe as quite right wing ideas.
But at the same time and what I think is interesting about trading is these guys are very, very
strongly rewarded for being right and harshly punished for being wrong.
So I think especially people who I worked with, you know, I've said it here, I was one
of the most productive traders at the bank and I was very vocal about it.
I always said, look, we are never going to get an economic recovery because of a crisis
of inequality, you know?
And I was saying that in 2010, 2011.
So obviously, people who are working with me, then they see that I've been right for
ten, 11, 12 years.
It's in that world.
The main thing is that you have to be right.
So I think people who I've worked with tend to, you know, eventually they see these guys
want to make money and they see the guy who's right and that's me.
So they come around to my point of view, which is, okay, inequality is killing the economy.
The problem is inequality is not killing the economy for everyone, right?
For rich people, inequality is absolutely fantastic.
And these guys are making half a million pounds a year, £1,000,000 a year.
So as much as they can see that there's a disaster happening, they're not the best incentivized
to fix it.
Speaker 1: When it comes to reducing inequality, there's a lot of different ideas and approaches.
They're often very much tied in to one's prevailing political beliefs.
And it's not just a question of what does the economics necessarily show?
What sort of framework or approach do you think would be the most effective?
Speaker 4: So I think there's there's basically two two ways to answer that question.
One is what would be taking the most effective way to reduce inequality?
And one is what is politically achievable?
Because this is a really like hot political conversation right now.
The thing which I generally tend to advocate for is a wealth tax, because I think that
is the one which will most likely to get people on board with.
But, you know, there are loads of ways you can reduce inequality.
You know, you could, for example, bring in you could encourage or force the rich to spend
much, much, much more money which would drive wages up and give us an economic boom.
You know, this would be effective as well.
But I think what's important to understand is.
In the absence of intervention, inequality rises super, super quickly.
And this is like a very simple thing, which I think people need to understand.
When people have high amounts of wealth, that wealth makes wealth.
So if somebody has, say, $100 million, they're going to make in an average year, three $5
million from that money.
So these guys will get much, much richer over time.
And, you know, in the first year of COVID, I think the first two years, the average billionaire
doubled their wealth in the U.S.
So these guys will get richer if we don't do anything.
So I think.
It's really a case of how do you prevent the crisis from worsening.
But I think.
You have to look at the tax system because at the moment we have a tax system where I
come from a poor background.
I made millions of dollars.
I paid 50%.
But if you come from a wealthy background and you have money in the family, you can
pay nothing.
And you can be much, much richer than I am.
So if you have a system where the super rich pay nothing and people like me pay 50% inequality
and never going to rise.
Speaker 1: Right.
And this is where you start to get into resistance, where you will hear sort of like prepackaged
talking points.
Like, for example, if you do that, you will kill innovation and the job creating wealthy
will not create jobs.
You know, when I look at it, I think to myself the cost of hoarding the money has to be high.
That's how you incentivize people to do something more productive with the money, make it expensive
to just sit and earn the interest, which sounds sort of like what you're saying here.
Speaker 4: But look, there's two ways.
There's two things that you need to grow the economy.
Yeah, of course.
You need people making investments so that you can have those productive investments
in growth, but you also need demand.
Look, I'm a wealthy person, okay?
I live off my investments.
I live off my investment income.
It is very, very hard to make productive, real investments in this economy.
And, you know, we've had.
1213 years of zero interest rates, effectively negative real interest rates.
Interest rates still are aggressively negative, right?
What that means is if you are a rich person, you cannot get any interest on your money.
So there should be huge amounts of money flooding into investments.
But why aren't it?
It's because the customers are not that there's not enough customers to create that real growth.
You need two things.
You need two sides of the coin.
You need customers who can spend and you need people who can save and invest.
But when inequality gets too high, then all of that money is flowing to the super rich
who are trying to invest it.
But there are no customers at the end to spend.
And you see these crises at the moment.
And I think when we're in a situation of 15 years negative interest rates, these supply
side arguments have to be dead.
They have to be dead.
You would not get 15 years of negative interest rates if the problem was not enough people
investing their money.
Speaker 1: This next question may be tough because the current tax rates are different
in different countries.
And, you know, here in the United States, we have a progressive income tax and then
we also have capital gains and there's short term capital gains and long term capital gains.
And one movement is, well, tax capital gains as income taxes, which would be much higher.
This would be a way to make it to better incentivize the rich to spend and put that money into
something other than just collecting the gains.
The tax rates are different in the U.K. they're different in all these different countries.
Do you have some sense of what a more realistic framework should be about?
Two things one, where income tax rates should be, but maybe just as importantly, capital
gains, because capital gains rates being lower is often a way for the wealthy to avoid income
taxes altogether.
Speaker 4: So I think there's two things to think about.
One is the rates.
And one is avoidance, largely legal avoidance.
Yes.
I think one thing that needs to be recognized about capital gains is you pay capital gains
when you sell.
Speaker 1: Correct.
Speaker 4: So imagine you have a wealth of $100 million, which means you're making three
$5 million income a year on your wealth.
Are you going to sell?
Well, you're never going to have to sell while you're making $35 million a year income.
So rich people never have to sell.
If you're super rich, you never have to sell.
So the first thing is so you can bring the rate up to whatever you want.
You know, these guys never sell.
They're never going to pay.
And there is a movement to say, okay, well, we need to tax unrealized gains.
The most important thing is it needs to work.
It needs to work in the sense of it needs to effectively tax the very richest in society.
Right.
Because I know there are people in the middle that are worried you're going to try and tax
super rich, they're going to avoid it and then it's going to fall on me.
And if that is what happens, then it will be a failure.
So this needs to be rigorously tested against does it work on the very, very rich, the richest,
you know.
Is Jeff Bezos going to pay?
Is it going to pay?
Are they going to continue to pay very little tax on their wealth?
So raising tax on capital gains, raising the rate is one thing, but you need to get rid
of evasion.
I think really what you need to look at is what is somebodys income over the course of
their whole life and how much tax they pay.
That should be the measure.
How much wealth is this guy have and how much tax is he paid?
And if we're talking about numbers of less than less than 30, 20% for people who are
billionaires, you've messed up and you need to fix it.
Speaker 1: Right.
Is there one particular mechanism that you have found is most resistant to avoidance?
Speaker 4: To be honest.
The problem is often these taxes are brought in with a void.
It's kind of in mine because you have to consider the game the politicians are playing.
On the one hand, most ordinary people actually want the rich to pay higher taxes.
They think it's fair that the rich pay lower taxes than the rest of us.
They want higher taxes, but the political parties are funded by super rich people who
don't want to pay taxes.
So how can you make both of these groups right.
You can do is you can bring in a tax that's called a wealth tax, but you can put loopholes
in it such that the super rich can avoid it and then everybody wins.
Right.
You can say to ordinary people, we brought the tax in.
And you can say to the rich, but it doesn't matter because you have to pay it.
Right.
So I think there's a real problem here of politicians.
You know, often they themselves are super wealthy or become super wealthy after leaving
office.
And they're not well incentivized to bring in a system that works.
I think, you know, anything could work, really.
A capital gains system could work.
An inheritance tax system could work.
I've got ideas about putting wealth into a time limit.
Trust such.
You can only give it your kids for a certain amount of time.
All of these things could work, but they will only work with serious political will behind
them to actually make them effective.
Because at the moment the incentivisation of politicians is to pretend to tax the rich,
but actually not tax the rich.
And that's what a lot of the work I do is talking directly to ordinary people, because
these are the guys who have been hurt by the system we currently have.
Speaker 1: Yeah, a depressing but accurate note to end on, I guess I would say.
Gary Stevenson, inequality economist, former interest rates trader.
Really appreciate your time and insights today, Gary.
Speaker 4: Thanks, Dave.