Russell Napier: Asia, financial repression and the nature of capitalism

Russell Napier talks to Merryn about financial repression – or "stealing money from old people slowly" – plus how Asian capitalism is taking over in the West; why active management could be back in favour; and why you should probably buy some property.


Merryn Somerset Webb: Hello, and welcome to the MoneyWeek magazine podcast. Thank you very much for joining us today. With me today –and this is a special treat, yet another special treat –with me today I have investing guru, markets guru, strategy guru, Russell Napier.

Russell is the author of the Solid Ground newsletter. He's the author of Anatomy of a Bear –one of the best books on markets you can read. If you haven't read it, please do go get it and read it.

He is also the author of a new book just about to come out: The Asian Financial Crisis 1995 to 1998. Russell was present for much of that crisis, as indeed was I. So lots of interesting stuff to talk about there.

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Oh, and one last thing before I finish introducing Russell, he is also the founder of the library of mistakes in Edinburgh, which I think is definitely the best library of financial books and information I have ever been to. It's open. Should you be in Edinburgh, please do visit.

Russell, thank you so much for joining us today.

Russell Napier: Not at all, thank you.

Merryn: And perhaps we could start by –as I say, to you and me this doesn't feel very far away. But maybe to some of our readers, it might feel (a) long way away, or (b) be something they haven't really engaged with before. So I wonder if we could just have a little rundown of the general subject of the book, the Asian financial crisis, what happened and why.

Russell: Sure. Well, there's always a moment in these crises. Most people here know the Lehman Brothers moment; the equivalent of that in the Asian financial crisis was the devaluation of the Thai currency. But also, with the Lehman's episode, you'll know that that was happening well through the crisis. So this crisis was culminated, or really triggered or really accelerated on that day, which was the second of July 1997.

But prior to that, and the reason that this became a Asian crisis and not a Thai crisis, was because of the currency policies then operating in Asia. They'd linked their currencies to the dollar; that encouraged lots of locals to borrow dollars, because you can borrow dollars a lot cheaper than you can borrow Thai baht, Malaysian ringgit, Indonesian Rupiah, or the Korea Korean won – interest rates in America were lower. So a lot of corporations borrowed dollars.

To borrow the dollar and to invest in a dollar instrument or a dollar generating business is not that risky. We all know that leverage is a level of risk anyway. But the real risk is when you borrow in one currency, ie, a dollar, and invest that in any asset that produces income streams in the local currency. Some of those assets were portfolio assets, financial assets, but many of them were actually real businesses, cement factories or whatever.

But ultimately, the revenue that supported the dollar debt was generated in local currency.

There was huge universal agreement among all investors, local and foreign, that if anything was going to happen to these exchange rates relative to the dollar, they were going to go up. And you can see that there was massive upward pressure on all of these currencies. And the reason there was massive upward pressure is because foreign investors were pouring money in.

That had started in the early 90s with foreign direct investment, which is very sticky. It builds machinery and equipment, it doesn't leave easily. But as the years progressed, and when I arrived in Asia, which is when this book begins, in 1995, it was becoming increasingly short-term portfolio capital. And there was a belief somehow that it would only go in one direction.

To give you some ideas of how extreme this was, and I cover this in the book, the British pension funds had more money in Asia ex Japan, than they had in US equities. Now, it's a stunning, stunning fact. But it's true. And it gives you some idea of how much of this portfolio capital was sloshing around.

And then suddenly, really from the summer of 1996 and specifically in Thailand, people began to say, well, wait a minute, there's actually downward pressure on this currency. A company runs a huge current account deficit, as really everywhere in Southeast Asia did, and the capital isn't all just going in one direction, some of it starting to go the other way.

And then we have the consequences of that, as a consequence for those with even an older memory, who will remember from the United Kingdom, which is September 1992 – the Exchange Rate Mechanism. The consequence of defending your exchange rate – if there are net sellers of that currency, if you're running a current account deficit and capital starts to leave – is your interest rates go up.

The Thai financial system, after years of boom, was incredibly fragile, not dissimilar to Lehman Brothers. It was just as badly managed as Lehman Brothers. So it really couldn't cope with high interest rates. So we all went through this period from the summer of 96 to the summer of 97 watching Thailand get into trouble defending its exchange rate, watching interest rates go higher.

And of course, the speculation was, is this a Thai thing? And does it lead to the devaluation of the currency, or is this an Asian thing? And it turned out on the second of July 1997, that it was an Asian thing. And that's when things really began to take off. It was a movement in that currency which led to many other devaluations.

Merryn: Can we just go back to two earlier things? The very beginning of this is the Asian countries deciding to link their currencies to the dollar. Now, why did they do that? What actually started this whole process?

Russell: Well, emerging markets are called emerging markets for reasons. They’ve got a very volatile past and the volatility was worrying to policymakers. And frankly, linking your currency to the dollar was easy. I mean, it was really as simple as that.

Obviously, it is even easier if you link it at an undervaluation. If you link at an undervaluation, you tend to have an export boom, you tend to have an economic boom. And it became an easy policy rather than let the thing float.

I'm not being over critical, because if you let a small currency float in a world of the free movement of capital, and remember, that's the word we moved into, really, from the late 1970s, into the 1980s, you get a huge volatility in the exchange rate, which is economically difficult, politically difficult, particularly if you're living in a country where there's lots of poor people and the currency goes down and they need to import lots of food.

So dampening the volatility in the exchange rate, particularly at the undervaluation, which they all started with, certainly by the 1980s, early 1990s, was a nice, simple economic policy to have. And remember, these were put in by politicians, they weren't done by central bankers, they weren't done by economists.

And the politicians, what do they get? They got an undervalued exchange rate, they got a lower volatility of the exchange rate, and ultimately, as a capital port they got lower interest rates. So what's not to like? nd that was part of the problem.

Many, many people could see that this was leading to excess. But the politicians love the excess, they weren't going to be against the excess, there wasn't going to be a proactive action against it. Many of the technocrats in these countries saw what had to be done, but you couldn't persuade a politician to end a particular party.

In our world, the developed world, we tend to think of independent central banks as supposed to do this sort of thing. But that's not the situation. When you manage your exchange rate, you don't have an independent central banker. So the politicians love the upside. And then, of course, they had to try and see if they could love the downside.

Merryn: So it started as just a policy to make life easier, make life more straightforward, prevent the problems that come with a floating currency. And then of course, once it looks like you're having an economic miracle, it's very hard to pull back from that.

The next thing you said was that capital starts to go the other way. So capital started to flow out of Thailand, as opposed to just flowing in. What brought that change about? Just because people were beginning to think, well, this doesn't look quite right? Or what sparked that turnaround?

Russell: Well, I arrived in Asia in 1995, and started suggesting to people that they should get their capital out.

Merryn: So it’s your fault?

Russell: It's my fault. And there were certain members of the authorities in Thailand and Malaysia, that did think it was my fault. Obviously, it wasn't my fault.

Nothing goes in a straight line, the portfolio investments of Asia ultimately have to be justified by higher corporate earnings. Higher corporate earnings were not really materialising. The great economic growth of Asia was not really finding its way into corporate profit growth.

One of the great bets, of course, when you put portfolio investment into a company with a huge current account deficit is they're going to take that capital invest it, and then turn that current account deficit around. That was a big, big problem for all of Asia.

I don't want to overestimate how important it was, but it was really one of the most important things if not the most important thing. And that is in 1994, China devalued the renminbi. It wasn't just that it devalued the renminbi, it simultaneously mobilised hundreds of millions of peasants, that's a very impolite term, let’s call them farmers, hundreds of millions of farmers left the land and went into factories and the Chinese exchange rate was lower. And that was a huge competitive problem.

So the idea that all the Asian countries would take this capital, build lots more productive capacity, export more, and the current account deficits would shrink, as 95 became 96 became 97, we began to realise that that wasn't happening. Partly for a big structural problem, which wasn't going to go away. China was competitive, and there were still hundreds of millions of Chinese farmers to come in to the workforce,

So a myriad of reasons. And the foreign currency debt in itself was a problem. Because if you started to begin to worry that maybe the currency wasn't going to be steady against the dollar, you started to repay it, and that's a capital outflow. So I would put China on that list.

The portfolio capital exodus was really towards the end of this. It was a combination of both bankers pulling dollar credit loans, but also portfolio capital index, and we began to realise just how incredibly powerful the Chinese economy was to become.

It's easy to look back in hindsight and say it was really very obvious. But at the time, there were lots of arguments as to why China couldn't be more competitive than the rest of Asia.

Merryn: And then we have these extraordinary devaluations in the emerging market currencies, in the Asian currencies. One of the things that you've mentioned in your book is the amazing falls in GDP per capita measured in dollars, so Indonesia, down 56%, South Korea, much the same, Thailand 27%, Hong Kong 58%. Really fairly extraordinary numbers.

Russell: Yes, a lot of that was due to the fall in the currency. But the actual declines in GDP, even in local terms, were extreme. We had financial systems that effectively stopped working in these particularly distressed countries.

If you're going to look at a financial asset market where the prices are going to decline precipitously, it's probably associated with the collapse of the financial system itself. We did obviously see that after this in America.

And that is where we were, we wondered every morning, whether these banks were going to open, and some banks didn't open. I mean, they were actually closed by the IMF more than by their own proprietors. But we did have a situation where you would go into the bank, and you couldn't get your money. Now, that was something as a financial historian that I had read about in the 1930s. But depending on which of these Southeast Asian countries you lived in, that's how bad it got.

Now, when you can't get your money out of the bank to spend it, you can imagine what the implications are for for GDP. Famously, we probably came pretty close to that here in the United Kingdom in October 2008, but we stopped short. Some of these companies didn't stop short, particularly Thai finance companies, which weren't necessarily banks, but people had a lot of money that they thought were deposits locked off, that, they just couldn't get. And the same thing in Indonesia, some of the banks there closed their doors.

So this was no ordinary – I think it's worth stressing –this was no ordinary recession. This was a collapse of the entire financial system.

And the worrying thing is, it spread to north Asia, and north Asia was much more, particularly to Korea and Taiwan, and that was much more important because they were huge exporters. And therefore, that's what threatened to take this to the entire planet. And it did have an impact outside of Asia, it had a huge impact outside of Asia. And that's what the book tries to cover. But, no ordinary recession, something much bigger than that.

Merryn: Well, let's move to the impact outside of Asia in a tick, but one of the big themes of the book is this idea that the whole period, and still now, was part of this conflict between two different types of capitalism, what you call financial capitalism, and what you call north Asian capitalism. So what was that class all about? And what's the difference there?

Russell: Yes, well, I'm going to read you a bit from the book, and not my words, actually the words of somebody else, but I think it helps put into context what was going on. And these are the words of Kentairo Aikawa, chairman of Mitsubishi Heavy Industries, a statement he made on the 14th of January 1998, which I picked up on at the time, and it's now in this book.

And this is what he said. And, as you listen to this, contrast that to – if you have read finance at university, contrast it to what you learned there. But even if you read the newspapers, contrast it with what you see in the financial newspapers, and this is what Akawasan said in January 1998:

"For some time, I've been asserting that the business practices of Mitsubishi Heavy Industries puts more stress on employment than on profits. We pay absolutely no heed to such concepts as return on equity, because they play no part in setting management targets.

“The main part of managing a manufacturing business is to use facilities and labour in a stable manner. And at a maximum capacity. And management tends, therefore, to focus first on the volume of orders it can pull in. If we look likely to make more money than we were originally expecting, we take on orders at lower prices in order to adjust the figure.

“It is absolutely essential that our business practices take social effects into consideration and due controls are maintained. If the stock has no appeal, investors can sell it, but our employees do not have such freedom of choice."

Now, that was from a Japanese corporation, I think I would say the Korean corporations were very similar. Taiwanese corporations, somewhere in the middle, but similar ish.

And of course, the new player on the block then was China. And that was very much the business model of a certain proportion of the Chinese business sector, more the state orientated bit, but still a very large bit of it.

So what you had is you had this, let's call it an ROA oriented form of business, which is what we have in the developed world coming into conflict with this other form. That's what was going on here. This was the great battle.

Now, when the collapse came, a great hurrah went up from the return on equity capital guys in that we've won, they've collapsed. It's defeated. Now it's our turn to come in and restructure all of this and turn it around. And for many months, that was the narrative. But even at the time, I doubted that. It's certainly proven untrue since then.

The north Asian business model is powerful. I think we both know that Japan has shifted somewhat in terms of the statement that the chairman of Mitsubishi Heavy Industries made, but the battle continues. And it may be more powerful coming from China, but it's still in Japan, it's still in Korea.

I think it was Greenspan who said that this is the triumph of free market capitalism, when it wasn't so –and we'll probably come on to this –but I think actually what has happened to where we've ended up is that developed world capitalism is becoming much more like north Asian capitalism because of what the Asian economic crisis triggered, particularly in terms of terms of debt.

So running through this book is the story of the clash between these two forms of capitalism, really, I think, personified, more probably by Mahathir Mohamad, the prime minister of Malaysia, and some of his comments about financial capitalism.

But that was the start of a great cultural war – more than a cultural war – that will pervade the 21st century. It started in 1998. It isn't clear who won. But at the time people got it wrong. They thought this was the end of north Asian capitalism, but it certainly wasn't. And now we still live with that problem today and how to reconcile these two systems.

Merryn: Why did you think it was not the end of north Asian capitalism? Why did you disagree with the prevailing consensus at the time?

Russell: Because that form of capitalism is grounded in culture. And it's a great mistake to believe that you can change a country's culture. There is a communalism in north Asia, I don't call it communism – communalism. Not just in north Asia. One thinks of Lee Kuan Yew and his policies in Singapore, where the rights of the individual are less than the rights of the community. Now that's based on culture that goes back thousands of years and anybody who's read this book, quite weird in the different psychological makeups of different people, will know that free market capitalism is based on the culture and ethics of a small section of the global population, but certainly not the same as that in Japan, China, and Korea.

So yes, it may have been bankrupt. Japan wasn't bankrupt, but it was close, lots of the banks were going under. But just because that was happening, the people who saw the world from a free market mindset said when it goes bankrupt, the assets go for sale, we buy the assets, and we structure them to look like us. And it didn't happen.

Even in places like Indonesia, which were absolutely destitute, it is not true that the assets fell into the hands of free market capitalists who restructured them, and then turned them into more return-on-equity oriented businesses. There may have been a subtle shift in that direction, but there was certainly no revolution and transformation.

So the reason that I didn't think it would happen is that I just couldn't see Asian societies would live with and cope with the form of capitalism which the business schools thought was going to sweep across the planet. And to be fair, most professional investors thought it was coming to sweep across the planet.

Merryn: And in fact, you could, reading the papers today, or even any day, here and in the US, you could argue that north Asian capitalism appears to be taking over everywhere.

If you look at the shift from talking about shareholder capitalism to talking about stakeholder capitalism, and the long list of social responsibilities we expect corporations, particularly large corporations, to take on these days, you could say the battle has been won by the other side.

Russell: That is the argument I make in the book, actually, and I date that transformation, Merryn, to the Asian financial crisis.

It's a long explanation, but through various mechanisms this crisis set the scene for people to borrow, in the developed world, far, far too much money. And now we have got to the stage where we have to inflate that away. And the structure of the system you need to inflate away debts looks more like North Asian capitalism than what we might – I hesitate to call it free market capitalism, because I think it was more financial capitalism we've been living with for the last 30 years, with so much debt involved within the balance sheet, jiggery pokery going on.

But to inflate away our debts, we are indeed, you and I have discussed this online before, moving to an age of financial repression. And north Asia, at the heart of the north Asian business system, is a financial repression. So absolutely, we are becoming more so, there's a synthesis I suspect going on. But in five, six years from now, we will look a bit more like – quite a lot more like –north Asia than we currently would look like America.

Merryn: Can we go back a bit then and talk about, there are various mechanisms that allow people in the West or encouraged the West to borrow vast amounts of money to take us to where we are now. But I think listeners might be interested in the basics of those mechanics.

Russell: Yes, so I'll just focus on two of them.

When the Asians were destitute in 1998, one of the conclusions they reached is that they really needed to hold even higher levels of foreign exchange reserves. They need to have more, they need to be able to defend themselves. They didn't like the fact that when they were effectively bankrupt, the IMF arrived and started dictating terms to them as to what sort of societies should live in. It was fascinating.

The IMF in Indonesia was suddenly dictating whether there should be tobacco monopolies, who should own tobacco monopolies. And Paul Volcker at the time pointed out that's nothing to do with macroeconomic stability you're bringing, you're trying to bring in a whole new system.

So one of the things they said is we better protect ourselves against this. And how they did that is they undervalued their exchange rates again, and started to accumulate lots of reserves. Most of those reserves ended up in the US Treasury market. So it played a structural role in depressing the level of US interest rates. It made leverage cheaper than it would otherwise be, because they were buying so much.

Just China – by the time the crisis had finished, China still had 145 billion of reserves. But by 2014, it had 3,993 billion of reserves. Japan in 98 had 203 billion of reserves, by the time we get to 2019, it's gone from 200 billion to 1.2 trillion. You can go on and on with this. But even then, what we think of small countries, such as Hong Kong, which at the beginning at the end of 98, got to 441 billion.

So all of that was putting downward pressure on interest rates, which facilitated people borrowing more money. And frankly, if you can get foreigners to fund your government, it does free up your domestic savings to go and fund other things. And that's what was happening. Lots of things were being funded that wouldn't be funded.

The second mechanism was because these currencies were so undervalued by 98 – and that was locked in through this intervention – it produced a huge wave of deflation from these countries, another major structural role in depressing levels of inflation.Central bankers were terrified of deflation. So they kept cutting interest rates to make sure that they would never get deflation. And obviously, if you cut interest rates, you tend to make debt even more even more attractive than it previously was.

There is a kind of 90 minute presentation on the full consequences of these policies that followed the Asian financial crisis. But in a nutshell, those two things made borrowing incredibly, incredibly, incredibly attractive.

Sorry, one final thing. An event happened in September 1998 that fundamentally changed risk perceptions for people using debt for speculation. And that was LTCM, which was a hedge fund, which was underwater due to highly leveraged speculations in various financial markets. Now there was a lifeboat put together to save it. That in itself, I think was not the issue that changed the world. But what did change the world is the central bank was simultaneously cutting interest rates. Alan Greenspan started cutting interest rates.

Now speculators, and I'll call them speculators because they use a lot of debt, their conclusion was, it's not just that somebody will come along and bail us out. They'll actually cut interest rates. If we borrow too much money and get into trouble. They'll actually come and use the whole monetary policy of the country to bail us out.

I was fortunate enough to know Paul Volcker a little bit when he was alive. And the first question I ever asked him when I first met him is, where do you think monetary policy went wrong? And he said, “LTCM”.

So those three things together are a potent combination, to encourage huge levels of debt in the developed world system, and we're now living with the consequences of that, and that's taking us on to the age of financial repression.

Merryn: OK, so the consequences of this huge amount of debt, the only way to get rid of it – and we've talked about this before – the only way for that debt to be gradually disappeared is via inflation. So we're moving into an environment where – well, why don't you explain what financial repression is, rather than have me explain your ideas back to you.

Russell: We've lived with this before. Anybody who's really old, even older than I am, will actually remember it because it ran from 1945 to 79. Take yourself back there if you were there and remember it. Yes, even before 1966, a date that seems to be ringing around the internet these days.

So what it is, is to get the debt to GDP ratio down, there are things you could do, you could stop borrowing, you could pay back debt, you could default, you can have hyperinflation, but these things tend to be very disruptive and painful. So instead, people have tended to opt for something called financial repression.


And what that is, is creating a higher level of inflation, but crucially, not allowing interest rates to reflect that higher level of inflation. So it's incredibly good use if you’re a debtor – that inflation showing up in your wages, or it shows up in your corporate cash flow. And interest rates don't go up, then slowly but surely, over the long term your debt comes down, nominal GDP goes up, but that doesn't go up so much. It all sounds really rather wonderful –unless you're a saver.

So, in 1957, Harold Macmillan said we'd never had it so good. And I think for the man in the street, that was probably true. But if you were an owner of British government debt, you'd already lost about a third of all your money in purchasing power terms between 45 and 57. And things got a lot worse after 1957.

So that's what financial repression is. I can't really do it justice in such a short period of time, but it does lead to massive distortions in terms of where savings are allowed to be put because you can't put them wherever you want to put them. And the view is basically to take money from savers – I describe it as stealing money from old people slowly – and it is slowly, that's important because you don't want to frighten the horses.

I guess the final bit is that so far in terms of financial repression, we've never pulled off a successful one either in wartime or peacetime, without capital controls. So that's kind of scraping the surface of what this is. But in structural terms, it has characteristics, which, as you already said, are not dissimilar to north Asian capitalism.

Merryn: OK, now, the advice that you give people about this, generally, is first not to have your money in a country that is practising financial repression. And second, if you must have it in a country that is practising financial repression, not have it in any regulated products. Is that fair?

Russell: That's absolutely correct. I know that sounds dangerous, if I tell you to buy unregulated financial products, but you can do these things in your own name.

The problem with a regulated product is that the fund manager will at some stage be under regulatory pressure to invest in what the government wants them to invest, and it's already happening.

If you went to Google “Bank of England productive investment”, you will see that this committee with 17 fund management companies already on it is working to create a list of investments which are considered to be productive. And I do know that everybody on that committee will tell me that that is all about finding productive things for the economy.

But ultimately, it can morph into something where they will take your money because these people represent you. And they're not sitting with the government to work out where the government wants that money to be. That has not historically worked out well for savers. That's probably a euphemism.

Merryn: So to put that in a way that everyone will understand, let's say you have an auto enrolment pension with your employer. That's the kind of product we're talking about where it's entirely conceivable that the government may put some pressure on the managers of these auto enrolled pension funds to invest a percentage of them in what you might call –or might not call –productive capacity.

Russell: The government will play a key role in telling us what is productive. In fact, the opening line when this committee was launched, it defined productive as additions to capacity.

People can tell from my accent that I'm from Northern Ireland. And when I was a boy, a man turned up one day and said, I'm going to employ lots of people in Belfast. And they said, great, how much money do you want? The money was provided, and then they kind of decided to ask him what he was going to make. And he said, well, I'm going to make DeLorean motorcars. The reason the money was available is that he was going to employ lots of people. Whether he could sell these motorcars or not was a different question.

That's what I mean, when the focus is like that; you tend to see that was capital –government, public, our money –wasted on that particular venture.

And that's what I mean, it sounds like motherhood and apple pie to say I just want to invest in things that are productive, but actually behind that there is something else going on, which is I want to invest in things that employ lots of people and get me reelected.

And under the right guise of regulation, whatever form it comes in, you can actually co-opt the people who run your savings and regulated products to be involved in that.

Now, that wasn't the case with a DeLorean product, but it's going to be the case going forward. Green investment is the obvious one – I mean, who's not for green investment? I'm speaking to savers here, savers can see their money disappearing in pursuit of what are definitely socially good purposes. But we're speaking here as savers, and that may not be good for your savings.

Merryn: Now you promise us at the end of this book, you tell us that the age of debt was birthed in the crisis described in this book. Read the book everybody! How it developed, how it will end and what you can do about it, will be the subject of the next book, any chance for a quick preview? Because I suspect we might need it, possibly even before the next book comes out, as to what we can do about it.

Russell: Yes, well, so you spotted the problem. This book wasn't supposed to be a book. This was supposed to be the first chapter.

Merryn: Ah.

Russell: And it became a 370 page book. So maybe they're going to be seven volumes. But no, definitely the next book – this covers 95 to 98, the next book will definitely go from 98 to 2021, we're not going to do another three years and do it in bits.

So we've already covered a couple of things. Get your money out of the country if there's going to be financial repression. Now the entire developed world, by the way, has to go through repression. The only country you can really find in the developed world that doesn't have excessive levels of debt to GDP that they have to inflate away is Germany. And that's really pretty much irrelevant given that it's inside the euro and everybody else needs to inflate away the debt.

So that leaves the emerging markets, somewhere of interest because they would have to do this. It's more about the type of equities you want. So negative real rates. Everybody just says buy equities. I think that initially that's absolutely right.

And that's the world we live in, today negative real rates are very positive for those who own equities, ie, the growth rate is up. We measure the growth rate in nominal terms and inflation means growth rates are up. And the discount rate doesn't go up. Net present value calculation – what is the value of your future cash flow? It actually goes up in a situation like that. So it seems simple to say just own equities.

However, we have also discussed how savings institutions may be forced to put money into government bonds. Therfore they'd have to sell something. And that would be equities.

But within the equity space, remember it's a huge, diverse jungle when it comes to listed corporations. There will be companies and they will be under owned currently, that can cope very well with this and actually benefit from very low interest rates, and very high inflation.

I know we always come back to this, but you need a stock picker who can find those types of companies, and they definitely won't be the indices. So it would be a plea for active management more than anything else, active equity management.

I do know all the problems associated with it historically. And we have lived in a momentum market and active managers, particularly by the momentum market. As we both know, it's incredibly difficult to find those good active managers. But within the equity asset class, there are ways that you can protect your purchasing power.

Gold is another way to do it, and reasonably cheap residential property is another way to do it. You'll say, well, you don't know any relatively cheap residential property...

Merryn: I don't think I do, no..

Russell: ...well, then, let me let me challenge you. Hartlepool. I don't know the actual price of property in Hartlepool, but I would suggest that Hartlepool property, in a world of levelling up – now you may be deeply cynical about the Prime Minister's commitment to levelling up, but inflation is a levelling up, because it is wage inflation.

So this is not the property owned by plutocrats. This is the property of the average guy in the street, who if we genuinely succeed in moving wealth from savers to debtors. The value of the property that the average guy can afford will go up. So there is cheap property in the United Kingdom, it may be in Huddersfield or Hartlepool, it may be in Ellesmere Port, it may be near some of the free ports that we're putting it in this country. But if you believe that levelling up comes out of government policy, or through inflation, there are lots of very cheap property markets.

And of course, it's not just here. The United States also has many parts of its country that are in a similar situation, and residential property prices will do well there, and if the prices do well and of course, the beauty of residential property is, you get to borrow against it. And that is a good thing to do in a world of higher inflation, particularly if interest rates don't rise.

Merryn: I'm worried I haven't got enough debt, Russell, I'm going to rush out and try and get some.

Russell: I'm sure people listening to this will be approaching you with lots of wonderful ways that you can borrow money.

Merryn: And buy lots of but-to-lrt houses in the north. Haven't we been through that cycle before?

Russell: Well, the property doesn't look expensive to me. I mean, I wouldn't say it looks particularly cheap, but it doesn't look particularly expensive either.

We can both spot and point to parts of the United Kingdom where property is grossly overpriced. But there are also bits that are reasonably priced, that I wouldn't be too concerned about borrowing to, borrow as long as possible. That's the secret.

One of Boris's great ideas is the 25 year mortgage. And I mentioned it last October and I haven't seen the details. You may have seen it. But if you are a first time buyer, and Boris has genuinely created a 25 year mortgage, then this is a great time to get it.

Merryn: Wonderful. I think we have to end it there. Russell, thank you so much for joining us. If you'd like to hear more from Russell, obviously go and buy the book immediately. The Asian Financial Crisis by Russell Napier, published by Harriman House.

Should you want 20% of your copy, which I think is something of a bonus, you can go and order direct from the Harriman House website and put in the code AFC30. And that will get you 20% off –yet another thing we want to thank you for Russell,

If you'd like to hear more from us, please go to our website, where you can sign up for our wonderful daily newsletter Money Morning, usually written by John Stepek with contributions from others including Dominic Frisby.

You can follow us on Twitter @moneyweek or follow john on twitter @John_Stepek. And of course, you can follow me on twitter @MerrynSW.

And finally, please do leave us reviews if you would like to. Mostly we prefer good reviews. You can do that at your podcast provider, podcast provider of choice. Thank you very much.

And once again, thank you Russell

Russell: Thank you