“I would never bet against China” Desperate cry for help from Israel: “They are slaughtering us”

Of course, we should first talk about the yield on US government bonds with a ten-year term, the T-bonds. It has exploded in recent days. What’s happening there?
James Johnstone: First the markets expected a recession in the US economy, then everyone was suddenly enthusiastic about a soft landing – and now the wind has changed again.

Why? American consumers continue to shop like there is no tomorrow, and new jobs are plentiful.
Yes, but the national debt is growing and the Fed’s monetary policy has become stricter. This strengthens the dollar and increases T-bond yields.

That’s all?
No. There are currently not enough buyers for the T-bonds. Russia, China and Saudi Arabia are keeping their hands off it – and they have all traditionally been important buyers. As part of the so-called risk reduction, banks have also become more cautious.

In short: is there a demand problem?
Exactly, and the laws of the market say that the price then rises, in the case of T-bonds this is the yield. Moreover, the rapid rise in interest rates has put the financial world on the wrong track.

The year has been surprisingly good for the financial world so far. Why the change in mood?
We have had very low policy rates for a long time now. People are simply not yet used to the new circumstances, and certainly not to inflation. Moreover, many working-age people in Western countries have not yet returned to work. Unlike China, by the way. There, the return to work was overwhelming.

On the other hand, the Chinese have record high youth unemployment.
This will be a temporary phenomenon. In the West, on the other hand, there are not enough young people entering the labor market. That and the interrupted supply chains are a major reason for inflation. Add to that the war in Ukraine. Wars are always the driving force behind inflation. And the fight against global warming. We’ve spent five trillion dollars on this in the last few years. We live in a completely different world today than before the lockdown.

In this world, the emerging markets are the big winners, was your statement when we last spoke. Is this still true? The Financial Times has just reported that the economies of Asian countries are in worse shape than they have been in a long time.
This applies to the rich Asian countries, countries such as Taiwan and South Korea. They are suffering from the massive collapse in demand for chips and electronic devices.

And again: what about China?
The government is doing everything it can to ensure that the economy becomes less dependent on investments in infrastructure and wants to stimulate consumption.

I’ve been hearing this for at least ten years.
Yes, but this time they are serious. They are not implementing huge budget packages, the so-called bazookas, but are doing everything they can to build an economy in which private consumption plays a driving role. And let’s not forget: Over the past decades, the Bank of China has done excellent work. I certainly would never bet against her.

What have the Chinese done better than the West?
The Chinese started removing excess money from the system much earlier. We, on the other hand, have pumped trillions of dollars into the system – and are now surprised that inflation is happening. In contrast, most emerging markets’ central banks raised key interest rates early, some to double-digit levels. The Brazilians, for example, but also the Chileans.

Has there been some kind of role reversal between the industrialized and emerging countries?
You can see it like this. Moreover, the demographics also speak in favor of the emerging countries. Unlike us, with the exception of China, they have a predominantly young population. Countries such as Bangladesh and Vietnam also benefit from large-scale Chinese investments there because Chinese wages have already become too high.

What role does India play in your considerations?
India has been a great success story in recent years. The second sector, industry, will remain an important factor in this success story. To reduce its dependence on China, Apple is already moving factories to India. However, India is a huge country and now has the largest population.

And – unlike China and Vietnam – India has a poorly educated population. Indian primary schools have a terrible reputation.
That’s right. China has the capacity to mobilize 750 million skilled workers. It was therefore able to manage the transition from an agricultural to an industrial society. To control global warming and many other problems, we need new production facilities with well-trained workers. So far, China has been able to provide that. But who will fill the void if China no longer plays this role?

All Western countries are trying to reduce their dependence on China under the heading of ‘de-risking’. Who jumps into the hole?
Countries like Vietnam, Mexico or Morocco. But whether they can fill the void remains to be seen.

Maybe we don’t need a Chinese replacement at all. We now have artificial intelligence (AI). Or not?
AI may put many doctors, lawyers and other service providers out of work. But AI won’t make custom t-shirts and sweat dresses. Maybe 3D printing and other things will make these processes more efficient as well. But countries like Bangladesh are already very well developed in this area. In any case, AI will become a threat to the service sector in the West.

How do you assess the situation in Europe?
I fear that people are not yet fully aware of what is going on in emerging markets. The world lacks two things: young workers and raw materials. Both are found in emerging markets. Vietnam and Bangladesh are promising examples. It will be interesting to see how Africa develops.

How will Africa develop?
South Africa is showing hopeful signs. Primary schools are doing reasonably well. They are currently having a problem with their electricity grid. However, this should be solved thanks to renewable energy. Ethiopia, Kenya and Tanzania are also developing in the right direction. In North Africa, Morocco is worth mentioning. More cars will be produced this year than in France.

The Gulf states also have great ambitions. Saudi Arabia wants to become the new Europe, Dubai a leading financial center. What should you think of this?
As we all know, money is important – and there is a lot of money in the Persian Gulf.

Because of the high oil price?
In real terms, oil is still relatively cheap. Despite high inflation, the price of a barrel of oil is still below the peak value reached in 2008. The Gulf states, together with Russia, now want to impose an oil price of 100 dollars per barrel. They also want to sell their oil while this is still possible. At the same time, they are trying to follow the example of Singapore and Hong Kong. They want to make the Gulf region a hub for trade and finance. At the same time, they also encourage the expansion of tourism.

The new world order is starting to take shape. What could derail her?
A war like in Ukraine. However, I think it is unlikely that a similar war over Taiwan will occur. The mutual dependence between the US and China is far too great to jeopardize. This is different from Russia. The majority of Russians are still very poor and therefore have nothing to lose. By the way, this is one of the reasons why Putin ordered the invasion of Ukraine. Their economy has developed very well.

Where else do you see potential points of conflict?
Who will enter the White House will be extremely important.

And who do you think it will be?
If it will be another duel between Biden and Trump, you cannot make a prediction today.

What are you most worried about right now?
Uncontrolled actions by the tax authorities in the West. Governments spend the money their central banks print. How on earth will Europe finance its pension provision in the future? If it only happens through the money printing press, one day we will experience our blue miracle. We have already seen a taste of this in Great Britain, when the financial markets reacted strongly to Liz Truss’s plans. We are currently experiencing it with the aforementioned returns on American and German government bonds. I’m actually concerned about a loss of control in Western financial markets.

The obligatory final question: how do you see Switzerland’s role in this new world order?
Switzerland is in a very good position as a fortress of stability. It can only benefit from the general uncertainty. Thanks to the newly formed UBS, even more wealthy people will consider Switzerland as a safe haven. And you have a wonderfully solid industrial base.