Andy Haldane: bitcoin as money is a fanciful idea that should fill us with horror

Transcript

Merryn Somerset Webb: Hello, and welcome to the MoneyWeek magazine podcast. I am Merryn Somerset Webb, editor-in-chief of the magazine and we have had a lot of treats here recently, but we've got a special treat today. 

With us is Andy Haldane, a lifer at the Bank of England – 30 years Andy has been at the Bank of England and you can take from that what you will, but it's been a successful life. He is the chief economist at the moment, but he will soon be retiring to enter something sort of like the real world – not quite the real world as we know it, but something – he's going to be chief executive of the Royal Society, of which I'd quite like to be a member, by the way, and we can talk about that later. Welcome. Thank you so much for joining us today.

Andy Haldane: Merryn, thank you so much for that kind introduction. And please join, absolute snip at £180. You'd make a wonderful fellow, as would your listeners.

Merryn: Thank you, can I just join or do I have to be chosen somehow?

Andy: Oh, you have to be chosen. But you know people there, it should be fine.

Merryn: Pull strings, excellent. Thank you. 

Now what I would like to start with talking about, if you don't mind, is the UK economy. Now you and I disagree on so much, which is great. I love that. 

But one thing that I think we have agreed on – and you much more importantly than me – of course over the last 18 months has been that there was always going to be a huge and quite exciting V-shaped recovery in the UK economy. 

And we are now beginning to see that, aren't we? Absolutely everything is booming. Every number tells us that things are really going very well indeed.

Andy: It does. I'm pleased we're finally found something after 30 years that we agree on Merryn. It is the recovery because it is going great guns. I would say that's not so surprising. 

The reason we sort of fell off a cliff last year was of course the necessary restrictions. And as those restrictions come off, it will seem reasonable we'd see an atypically sharp bounce back in activity and demand. And that is exactly what is happening. If anything, that is running ahead of everyone's expectations. We see it on the high street, we see it in the pubs and restaurants. We even see it in the GDP data. 

We have GDP data now to April – I think May will see further significant leg up due to the loosening of restrictions – and that will mean as of now Merryn, I reckon we've pretty much made up all of the GDP lost ground from last year. And we're back roughly to around pre Covid levels on the back of what is a really very punchy recovery, which I expect to persist, certainly throughout the remainder of this year.

Merryn: Interesting isn't it because there's been two elements to this. This was the weirdest recession ever, because it came with a demand shock and a supply shock at the same time. 

But the thing that is unusual about it as a recession is that – if you can even call it a recession in the normal way – is that demand itself hasn't really been affected by it. So we've pretty much replaced the majority of incomes, in some cases maybe more than replaced incomes. And so we come out the other end with the demand part of the equation intact, but the supply part of the equation, not quite intact. 

There's been, presumably, quite a lot of long term supply destruction over the last 18 months. So we come from an environment where you've got normal demand and maybe even better than normal demand bumping up against unusual levels of supply.

Andy: That's right, I'm hoping that the disruption even to supply is a temporary thing rather than a longer lasting thing. One of the reasons we threw the kitchen sink at it in terms of both monetary policy – I'm sure we get onto that – and fiscal policy is to cushion the effects on jobs, to cushion the effect on businesses and therefore to reduce the longer lasting hit to the economy supply side. 

But you're right, there are some shorter run supply side bottlenecks that we're now bumping up against as demand recovers at pace. Businesses are opening but they take time to find their feet. Workers are returning to work, but it takes time for them to find their feet. 

And therefore we are seeing as demand returns, supply bottlenecks of various types popping up, not just in the obvious places like IT and hospitality but on a pretty broadly based basis across many sectors of the economy. That in a way is a sign of success. It's a sign of the economy returning to its feet, but of course it also comes with some potentially adverse implications for price pressures, which are pretty broadly based across all those sectors, and a few more besides.

Merryn: Let's come back to inflation in a tick and just talk about this supply crunch that we're seeing. 

We look at it now and we think, well, this is just a function of Covid, it's very transitory, all our supply chains will come back to normal shortly. But might it also be reflective of the economy, a multi decade inflection point. 

Globalisation has been such a huge factor in the economy and the global economy over the last ten years or so it feels like it's beginning to reverse; demographics are changing. These last 20 or 30 years where our economies have been driven by super low interest rates, by very smooth supply lines, by the constant availability of low priced labour, and of course, by local corporate tax rates, etc. 

All these things combined to give us these wonderful last few decades, but are they beginning to turn and we're confusing what might be Covid and what might actually be that change in long-term trends?

Andy: Well, I think we've seen Covid probably amplify and in some cases bring forward what were pre-existing trends on both the fronts you mentioned, which is both on globalisation, and broadly speaking demographics. 

So even pre-Covid, as we all know, there have been signs of a fraying or, indeed, in some cases retreat, in the free flows of goods and services, and indeed, peoples across borders. Brexit added something to that, and Covid has added an additional amplifier, I'd say with many countries seeing the case for building greater resilience into their domestic supply chains off the back of international supply chains having in some cases fractured during the Covid crisis. 

And then on demographics, we have seen some changing patterns of flows of people. Most obviously a slowing and possibly a reversal in the numbers of EU migrants into the UK. 

Taken together that means, as you say, after several decades of cheaper goods and cheaper labour, some of those trends now appear to have stalled, possibly even to reverse. 

And therefore, the disinflationary impact of those forces, you'd also expect to abate or even reverse, which takes us back to inflation. Which, not just for Covid reasons, I think, has a better than even chance at picking up from where it's been.

Merryn: Let's look at wages. One of the things that I think we may have discussed years ago – or may not I can't remember – was this idea that the flow of labour into the UK from the European Union, etc, did not affect wages in the UK. 

You'll remember the hordes of studies about that showing that, well, the common sense view on supply and demand might have been, “gosh, hordes of new labour, that's going to keep wages down”, because of supply and demand, which is a bit old days, I know. But we were told that absolutely wasn't happening. 

But now, suddenly, there's a shortage of supply of labour, because we no longer have those waves of EU immigration or emigration from other areas in the same way, suddenly supply and demand matters. 

And when there's a shortage of labour, it is pushing up wages, because we are beginning to see that. I understand not across the entire labour force, but certainly in the areas where we know there are shortages, we're told there's something like 180,000 open jobs in the hospitality sector. 

And now we're beginning to see reports of wages rising by 10%, 15%, etc, also in the retail sector, where there's a shortage. So how can this be that it works one way but not the other way?

Andy: Well, I don't think it was ever said – certainly not by me – that there was no effect of overseas workers on pay. Studies on this – we've done a few ourselves at the bank – suggested that in certain sectors, and in certain parts of the wage distribution, particularly the lower end of the wage distribution, there were some signs of effects of migrant labour on particular sectors, and on particular parts of the income distribution. 

But overall, that wasn't a whopper impact on aggregate pay rates across the UK for the reasons you give, because migrant labour adds to both the demand and the supply side of the economy and therefore is a bit of a wash in terms of net excess demand. Now we're seeing some of that show up, as you say, a bit more clearly now. 

There's a combination, I think there, both of some migrant labour effect, but also the broader effect, of course, is just that many sectors have sprung back into action rapidly. And it takes time for businesses and workers to spring back into action as well. So it's hard to figure out how much of this is really a foreign worker effect versus those other effects. But little bits of both, I would say, particularly in some sectors and in a way I'd say that mirrors what we saw on the way in as well.

Merryn: So we may not see wage inflation across the board then if this is just kept in small sectors. And of course, as people start to come off furlough, the supply of labour will begin to rise anyway. So it may be that this is not a long term shift in wages, it's just a short term uptick. Transitory, as it were

Andy: It could be. And that's certainly plausible that, as you say, as people get back, businesses start up, people get back into work, pay perhaps picks up a bit, and that induces others to come into the workforce, and that dampens matters. I don't think that's an inevitability I should say. 

Those longer run demographics have been reducing the UK labour force now for the past ten years. If we see price pressures, consumer price pressures picking up, which they will, during the course of this year, if there's a shortage of supply of workers, that increases their bargaining hand to put in for pay increases over and above those higher rates of inflation. 

So don't do anything about this, that's inevitably short term, I think there's a chance at least, that we might get some mini game of leapfrog between rates of inflation and rates of pay. 

And the second half of this year into the first part of next, which generates a degree as we found in the 70s and 80s, have persistence in those price pressures beyond the immediate opening up bottleneck effects.

Merryn: OK, so workers may suddenly get used to the idea that wages can go up as opposed to just stay static. So generally speaking, you are clearly a believer in inflation at this point. 

But when you talk about inflation, and you wrote recently, didn't you – hang on, I've written this down, "inflation is blinking into the post pandemic light". Where do you see it going? Are we talking about inflation at 3%, about inflation at 5%? I'm talking about CPI, by the way. Are we thinking about it? People may not notice 3%, but they'll certainly notice 5% or 6%.

Andy: I think they'll notice three. It's starting from a low level, we're still well below our 2% target as things stand. We expect here, partly for purely mechanical reasons, that rate to pick up over the course of this year as the energy price rises from earlier in the year feed through into the cost on the petrol station forecourt and beyond. So I can see inflation going through the gears from here. 

It wouldn't surprise me if we have a big figure three during the course of this year. The big question is, is that indeed just a kind of temporary effect as petrol prices and other energy prices and other cost prices feed through, or the start of a slightly more persistent trend upwards from that big figure three. 

I don't think we're remotely talking about numbers the likes of which we saw during some of the 70s and perhaps even the 80s, but nor do I think it's nailed on that three and a bit will be the high watermark for inflation, I think there's at least a risk and indeed a rising risk that that won't be the peak. 

And we could see greater persistence, and indeed a higher level of that peak into next year. Nothing's assured about that. Anyone who tells you hand on heart, they know with any degree of certainty where inflation will be next year is pulling your leg in the current circumstances. Nonetheless, I would say...

Merryn: I'm looking for certainty from you, some degree of certainty.

Andy: Well, you're looking in the wrong place, Merryn. We don't even have certainty at the Bank of England. What we can provide is clarity I hope on what the drivers are here. 

And currently, we have the pipeline of cost pressures affecting UK businesses which is very considerable. It's hard. We speak to businesses right now – there'll be a number listening to this podcast I imagine. Pretty much everything input wise is going up at the moment. Not just petrol and diesel and gas but bricks and concrete and cement and plaster board and chips. And that's before you get of course to things like houses and equities and bonds. 

So we have these generalised price pressures among businesses, they have yet to pop up very largely in the prices facing consumers. And that in some ways is a big question. Will these costs be taken on in businesses’ margins? Or will they have the pricing power to pass them through to end consumers? And therefore we see them in CPI for a more persistent period? Yes, that's an open question. 

Others of my central banking colleagues and brethren think those effects will be fleeting, I am of the view they could stick around for a bit longer, could linger a bit longer. And therefore we could be looking at a breach of our 2% inflation target for a somewhat lengthier period than we are currently factoring. 

And certainly the risks have tilted materially that way. And significantly that way, over the course, just the past couple of months, as we've seen those price pressures, pick up as bottlenecks. materialise, of course, the other cost that's going up is the cost of labour. We see skill shortages pretty broadly based on that showing up in the in pay packets now. 

And if you have businesses facing both an increased cost of non-labour inputs and an increased cost of labour, that increases the chances they have to pass on those costs for fear of having their margin squeezed further. So there's no certainty in that. But on my balance of probability, next year, I could see price pressures building, not abating.

Merryn:  17:06

And why are you so sure that this kind of inflation will stay at this reasonably low level? You said earlier that we're not going to see anything like the 1970s, or like the 80s. What stops this turning into the same kind of wage price spiral that we saw last time?

Andy: The Bank of England. Relative to that, we've been through an institutional reformation since then. So back then we didn't have a target for inflation, our nominal anchors were all over the place. We didn't have an independent Bank of England setting policy. 

In the Bank of England I joined all those years ago, the best single predictor of interest rate changes in 1989, when I joined the Bank of England, wasn't the path of GDP or inflation. It was whether Mrs Thatcher had lost a by-election. So it was all about the politics then. And the regime now could not be more different. 

And those are the reasons why think we aren't going back to the 70s or 80s, we have a clear target. And policy is set with a clear idea to hitting that target. So that's why I've got a huge amounts of faith in what will be my ex-employer from September this year in doing the right thing, and as on average, hitting our inflation target and not approaching those scary double digit rates of back then, nonetheless, could we sit through a period of persistently missing our target our inflation target that strikes me as a risk that's on the rise.

Merryn: And what would that be a bad thing? Or might it even be quite a good thing? 

One of the things that we've talked about over the years is the extremely high levels of debt in the UK, both consumer and public. And one of the obvious ways – and the thing that we talk about a lot at the magazine – one of the obvious ways to make that go away is to attempt to keep inflation at something like 4% or 5% for maybe eight or nine years and to keep interest rates below that – what we call financial repression. 

And obviously, we talk a lot about financial repression outside the Bank of England. But do you ever talk about it inside the Bank of England as an actual strategy to help both consumers and the state to deal with their levels of debt and perhaps to squeeze us out slightly of the QE problem?.

Andy: I can say hands on heart, I've never been to a Bank of England discussion about the case for financial repression and inflating away debt. It's almost anathema to the central bank, partly because we're not allowed to by statute. 

We're only independent for a very narrow thing, which is the setting of interest rates. We don't set the target, the target is set by Parliament, and we are sent to the Tower of London if we don't meet that target in the setting of our interest rates, it's not our job. 

We're not permitted by Parliament to just say, oh, you know what, we'll just hang loose on that inflation target thing for a bit. Because it will help inflate away the debts of whoever it might be – businesses, households, governments – we aren't permitted those choices, rightly reserved for parliament. 

And I should say, if I was ever asked for my advice on this topic, I would say you're doing the thin end of what is a very thick wedge. But ultimately, as soon as people rumble this is the name of the game, the game collapses around your ears, because all of a sudden, that inflation premium gets built in to borrowing costs to bond yields. And the act is ultimately self defeating. 

So not only do I think it's not a thing the Bank of England could ever do, by statute, I think it's also the thing the bank should never do, because it's ultimately self defeating. And we've seen that movie, we saw it through parts of the 60s and 70s, it did not end well. Let's not repeat that movie now.

Merryn: So if we see inflation coming to 3%, rising to 4% and sticking there for a year or so we can realistically expect a sharp tightening of monetary policy and rising interest rates?

Andy: Well, there's sharp and there's sharp.

Merryn: I mean interest rates are well below 3% at the moment. So you've got this big gap between interest rates and inflation already, which is something that is not historically normal. So we're already in a rather unusual situation. 

If we see inflation rising, surely from what you've just said, we should expect to see interest rates come up to compensate us?

Andy: Inflation will rise this year. That is as close to being a given as makes a difference given those kinds of base effects and those energy effects that I mentioned earlier on. The real question is, having risen this year, will it keep on rising through next year or will its effects fade, as 2022 dawns? 

I think if they don't fade and those pressures do indeed look to be more persistent, then you would expect, to meet our inflation target, the bank would wish to tighten things up somewhat faster, perhaps, than is currently factored into financial market prices. They are currently factoring the most modest of rises interest rates over the next three or four years. If the price pressures stick around, you might expect a path that's a little bit steeper than that. 

But still we're a world away from the pace of tightening, the scale of tightening, that we saw in earlier decades, we're still talking about global levels of interest rates that are incredibly low by any historical metric. 

If it were to happen, it would come as a surprise to people because the truth is, probably the majority of people with mortgages these days haven't really experienced a rate rise. And therefore, surprises of that nature are not in many people's lived experience. And that may mean the impact of them is a bit more than might otherwise be the case. And that's something to be mindful of. 

So, sharper than expected, perhaps a nasty surprise. But we're not talking…  in my lived experience at the Bank of England, I can remember time, a day – 16 September 1992 – when interest rates rose by 5% on one day, right? Relative to that, the sort of rate rises we're talking about are incredibly modest, even if those price pressures pick up. So reasons for caution, but not for alarm.

Merryn: It's a matter of percentage, if interest rates are half percent, and they go to 1%, they've gone up 100%. Whereas, five to ten is also 100%. So it isn't a matter of that kind of proportion, even if interest rates went up a small amount. 

You've talked in the past quite a lot about the housing market. Obviously, that's one of the preoccupations of my listeners. And a small increase in interest rates could change the dynamics in the housing market quite quickly. On fire at the moment, boom, bubble, whatever you like to call it, possibly out of control. What happens, if interest rates rise, to that market?

Andy: Relative to times in the past, when rates have risen, the housing market and people's borrowing costs are immunised to a significant degree because of many more fixed-rate mortgages now than was the case back in the 70s, and the 1980s. And even people rolling off a fixed rate mortgage now, will probably be rolling off into rates that might be no higher and could even be lower than the rate in which they rolled on, five years ago, such has been the compression in mortgage spreads over that period. 

So, if the brakes did need to come on, and interest rates did need to rise, I wouldn't expect that by itself to be a cause of a housing market collapse. 

What is true, as you and all your listeners know, is that the housing market in the UK is also really going through the gears and has been pretty strong pretty much for a year now, helped, of course, by the stamp duty rebates holiday and the extension of that holiday. But not just by that. 

I think people’s attitudes towards housing are changing in the light of working from home that is having a bearing on things. I think the stockpile of savings that have been accumulated by households, that's probably north of £200bn, is beginning to leak into the housing market used as either a downpayment for a first mortgage or as a means of trading up in the housing market. 

These are pretty potent, and pretty chunky forces acting on housing demand right now, at the same time, as people are showing a reluctance to move. So you have this imbalance between the demand side of the housing market and the supply. And that's why we've got house prices probably rising in double digits on an annual rate at the moment, which is, which is, that's punchy.

Merryn: Feels unsustainable, doesn't it? I think really, one of the main things there is that, when we looked at the housing market in the past, in the last few years anyway, interest rates are very low, affordability looks very low when it comes to payments, but the problem has been raising the deposit, and the pandemic has enabled people to save and hence raise the deposit. 

So you've got suddenly what we never had before, which is genuine pent up demand in the market, things that people want and can afford, as opposed to want and can't afford, maybe that's the change.

Andy: I think that's bang on. I think the savings lake will help on the deposit front. And there was pre-existing pent up demand from the market having closed in the first part of last year. So those effects seem to be playing through. 

And we know, don't we, from the past, that the housing market is a very important motor of the consumer, not just for financial reasons, equity extraction reasons, but also because it puts a spring in people’s step, adds their confidence. 

And it's not coincidental that we see levels of consumer confidence back above Covid levels, as well. Confidence not just in the general economic recovery, but confidence in people's personal finances. Ultimately it's the second of those that's the catalyst for spending.

Merryn: Would you buy a house now?

Andy: Can't afford to Merryn, I'm moving to the charity sector.

Merryn: All right, I'll tell you what you can afford, you can afford bitcoin. Would you buy a bitcoin now?

Andy: Well, far be it for me to be offering independent financial advice on bitcoin. Not qualified – that's your job, not mine. Well, do you mean Bitcoin? Or do you mean general digital currency.

Merryn: Digital currency – and I'm not going to ask you to buy bitcoin, certainly not publicly.

Andy: Thank you. It is important, these distinctions are important, actually, because bitcoin is a different sort of animal than many of the digital currencies that we're now talking about. Of course, it was the original crypto, but it is crypto, it's backed only by cryptography and not by any real asset. 

And the sorts of digital currencies that are now being spoken about, the sort of stable coins issued either by the private sector or by central banks aren't Bitcoin-like, because they are backed by something real. They are backed by assets, liquid assets, safe assets, government assets of various types, that is the expectation. 

And that's also I think, important from our perspective, because if you're going to call yourself a payment system, or call yourself a money, you need to be backed by something other than cryptographic code and promises, you need to be backed by an asset. We're very clear about that. And how we've approached private sector digital currencies, the likes of which Facebook and others have spoken about. 

So those things are quite different, money is absolutely existential, as for central banks. And the security and safety of that money is an existential issue for the public. And our job as a central bank is to make sure that any measure of money that calls itself money and act as a payments medium is beyond reproach, as safe as Bank of England cash as currently constituted.

Merryn: OK Andy, that's fascinating. But what about central bank digital currencies? There's a move here, which you've been working on for the last five or six years, to introduce a central bank digital currency, let's call it in the UK a Britcoin, that will be carefully designed to remove every single iota of financial privacy from every member of the population. Am I right?

Andy: Not 100% Merryn no. I know you're a fan. And we've had this discussion several times previously, we're considering it reactively. I've been talking about it on and off, quite quietly, I thought, for many years, but it's been picking up pace the last 12 months or so, the notion that alongside these private sector, stable coins, so called, we might want to issue one of our own central bank, one, to sit alongside cash not as a substitute for cash, to sit alongside the physical cash that sits in our pockets. No decision’s been made on that. But we're exploring the case, the merits and demerits. 

For me, the merits are pretty clear, actually, having something that, a digital equivalent to cash that's as safe as cash. But which is slightly less clunky, doesn't wear out as fast, you can use from your smartphone, rather than having to extract it from a cash point machine. That could even, imagine this, could even pay you a rate of interest. 

Because right now, of course, holding physical cash means that everyone's been affected, the value of that's being eroded by inflation. And you get no return from cash in a way that potentially could be true of central bank digital cash. So that there are some upsides

Merryn: Why would you get interest on digital cash, when you wouldn't get it on real cash? And by the way, all the things that you've just said – well, lovely, we have Apple Pay and PayPal for all that stuff. So we don't need to worry about the difference between a digital cash and taking it out of the cash point machine. So we park that one. 

But why would I get interest on digital cash if I wasn't getting it on, say, a deposit I had at Lloyds Bank? Why would I get it on a deposit at the Bank of England, unless this was part of the manipulative monetary policy that we have, whereby you give us interest if you don't want us to spend and then you create a negative interest rate on the money when you do want us to spend – that way you don't have to mess around with all this silly, general interest rate and money printing mark, you can just go direct to forcing people to change their behaviour.

Andy: Well, almost all types of money, with one honourable exception right now, do have the capacity, the ability to levy a rate of interest, to pay you something for holding something; for holding an asset, monetary or non monetary. And one exception to that rule is cash because it's impossible to pay interest rates on a cash instrument, on a physical note.

If it ever happens that we decide to issue cash in a digital form, It's not inevitable that we will pay interest on that asset as a holder, but it means we could if we wished to. That's going to be one of the key design dimensions for central banks. Does it want to remunerate, pay interest on the digital cash it issues and that ought to be a really good thing, if you are a holder of cash, because that rate of interest could be used to compensate you for your rises in the cost of living that would otherwise undermine and reduce the real purchasing power of that physical cash instrument. 

Now that's not the only argument or the, that's not the case open and closed, but it is a relevant fact, a relevant reason why digital currencies and digital cash would be a fundamentally different animal than what we have in our pockets currently.

Merryn: OK, but if you were, for example, to introduce a digital currency and for example, pay interest on that, at a time when nobody else is paying interest on deposits, and we can't get your interest on cash cash. You know cash cash would pretty much disappear. 

This idea that a digital currency issued by the Bank of England could sort of sit alongside cash, screams to me the kind of mission creep that we might have had with,for example, the three weeks to save the NHS. I get it, I can see that you don't mean that, what you mean is we'll say it sits alongside cash, but it won't be long before cash has disappeared completely. Because incentives. 

And that changes the way you operate monetary policy. That's the real point here isn't it? It’s not about, oh, let's compensate the lovely population for any loss of purchasing power they may be getting with inflation, but let's find a way to control monetary policy in a much more granular way than we've been able to so far.

Andy: Well, people have been predicting the demise of cash for many, many years. And it's true that the amount of it is falling, because people are finding alternative ways of making payments. Or what for them are preferable technologies for making payments. 

But lots of people – and Merryn, I think you may be one of them – have a strong affinity with using cash. And that's absolutely fine. If people want to use that they absolutely should. What we found through history is that, many multiple monies, lots of M's in there, can sit alongside each other: private monies, public monies, ones that pay interest, ones that don't, some rise, some for some die, some thrive. 

This one should be one more – potentially, no decisions made – one more to add to that stable of monies. And the key point is it would be stable. That's the crucial ingredient.

Merryn: I see. One of the things you say, there's been lots of different currencies throughout history and times when different monies have coexisted together. But one of the constants is that the state is always very unwilling to give up its monopoly over money. So when you see other monies rise, you very often see them squashed very quickly too.

Andy: Well, I think there is an important role for the state in securing the stability of money, either by issuing it themselves, which has been the practice for many thousands of years, or through regulating those that issue money on society's behalf, namely, the banking system. 

And we've got plenty of examples of what goes wrong if either of those two legs of the stool are kicked away. And now's not the time to be kicking away either leg of those stools, we can't afford to be in a situation where money is seen as being unsafe and unstable. 

And the notion that bitcoin could ever play the role of a payments medium, it's totally fanciful and should fill us with horror, I think.

Merryn: With horror because it's private and volatile?

Andy: Volatile as a money medium. Absolutely fine as a speculative asset but not as a money medium. That's a different thing and requires different characteristics. And bitcoin is not well equipped to serve those needs of society.

Merryn: Well there are a lot of speculative assets about at the moment. One of the things we haven't talked about, but let's go on to quickly is, we talked about the housing market, and how prices there seem to have gone a little bit bonkers. But we haven't talked about other asset markets. 

The stockmarket, of course, is the main focus for MoneyWeek and for many of our readers. The US stockmarket, obviously, is very overpriced. But we've written a lot about how the UK stockmarket is in something of a sweet spot. We've got our amazing recovery here. And we've got valuations that are slightly lower, I'd say significantly lower than some of the global markets. 

But we could also say that the UK market, like all other markets, is being driven by the money that has been shovelled into the economies by fiscal and monetary authorities. And I just wonder if you think that it is sustainable, or whether you think we may have entered a bubble across all asset markets.

Andy: I think you can make a decent case, a good case on fundamental grounds for the valuations that are currently out there across UK markets. I won't make a call on US markets, because we have a compilation of at least three factors going on there pushing the same direction, Merryn, one of which is the low level of yields and the effects that has from a kind of pure discounting perspective. The second is the sharp turns and the fortunes of the economy – vaccine led – which would justify higher future cash flows. And the third would be risk premium. 

I think risk premiums on all assets have been declining at a rate of knots over the course of this year. And that's not just because of the effects of vaccines and Covid. In other words, Covid uncertainty is dissipating. But we've also seen Brexit happen. So any uncertainties around that have been dissipating during the course of this year, though have not yet disappeared. 

And a third uncertainty, that's much less now than would have been the case at times in the past is that about the resilience of the financial system. The financial crisis cast a great cloud of uncertainty, but through the Covid crisis, actually, our financial system has stood tall, it's been part of the solution rather than part of the problem and the language that Mark Carney used, 18 months ago now I think, as those three uncertainties – GFC, Brexit and Covid – abate, you'd expect that to show up in a risk premium that has underpinned the valuations that we've seen. 

So, I don't know whether it's undervalued or overvalued, but the rise we've seen is considerably justified on fundamental grounds I think.

Merryn:  Brilliant. Andy, thank you so much. I think I've taken up enough of your time. It was absolutely fascinating. And I look forward to interviewing you in many months in your new role, possibly when I'm a member and you're in charge.

Andy: Yes. When you become a fellow, which I hope is soon Merryn, I look forward to keeping you in touch on these issues. I'll be watching closely from a safe distance on all matters finance in the period ahead and wish you and everyone listening all the best with all of that.

Merryn: Thank you very much. And we just hope that your optimism about the UK which obviously matches with us is correct. Thank you.

Andy: Thank you, Merryn.