China Will Not Surpass the US with Mike Green - Ep. 022
- The time period that I just think we're so much like is the transition period between the Roman Republic and the Roman Empire. The low effectiveness level of our governing institutions is increasingly leading in the direction of thinking that we're moving towards a more autocratic system. (upbeat music) - Welcome back to the Empire's New Clothes. I'm your host, Bradford McArthur.
Just as a quick reminder, if you like what we're doing here, make sure to like, subscribe, rate and review. That's the best way to help us out so we can keep producing really great content every week. And also we have this on podcast and YouTube version. So if you're on one, just so you know, the other one exists too. We're about to speak with Mike Green.
So some of you may be familiar. He's with Simplify, and he does a lot of work with passive investing and macro economic analysis. But today we're going to jump into the rise and fall of empires. What creates them, what causes their demise, and then looking at what times in history might be similar to the US.
We even jump into AGI and the future of humanity. It's a wide ranging conversation and so I hope you enjoy. Mike, thank you for joining today. I really appreciate your time. - Brad, it's a pleasure. Thank you for having me.
- Of course. So you spend so much of your time in the investment world, but you also spend a lot of brain power and thinking on what are just macro forces at play in our world today. And, I listened to you on different podcasts and stuff and I'm so curious, what's your trajectory? What brought you, how did you become so interested in so many things and then what brought you into the investment world? - Well, you know in terms of being interested in so many different things, one of the nice things about what I do for a living is just that at least historically, when markets were closed, there was time for thinking, right? And so-- (Bradford laughing) you know, being given the flexibility and the access to information and data that that was more challenging for most people right, 20 years ago. Today, it's very easy for anyone to find almost anything on the internet. But 20 years ago, it was a little bit more challenging. And I was fortunate to be in a career that gave me the opportunity to read and study and dig into stuff.
The other component of it is, is that 30 years ago when I started my career and full disclosure right, I came out of possibly the most traditional path in asset management you possibly could, So I went to the University of Pennsylvania, the Wharton School of Business. Graduated, went into management consulting with the objective of trying to learn as much about businesses as possible. And almost one of the very first things that I was exposed to in my training program at Bain & Company is an analysis that highlighted the 85% of the return of any individual security is tied to its industry or its sector, - Interesting. - And so, the first place that you're going to start if you're investing and you're thinking about it in that construct is to pull yourself back and ask yourself, what are the macro forces that are affecting the industry? And, I've been very fortunate that that's served me well throughout my career.
As you think about it on the broader macro stage, then suddenly you're forced into variants of history doesn't repeat, but it rhymes. And so you're forced to seek out what are historical examples or what are ways to think about where the initial conditions of an experiment are similar to what they are today. And I think that's actually a really important thing that most people don't spend a lot of time thinking about, is, models are the only way that you can actually try to approach the world because you have to dispense with some of the finely detailed features of a world, or there's no point. You can't run a simulation of the world incorporating all of the variables. You have to choose to exclude certain ones.
And the minute you do that, then you're trapped in this issue of models become extremely sensitive to the initial conditions. And so understanding what is quote unquote true and what is not true is one of the primary ways that you can improve your model outputs or the outcomes from your models. And so I've been fortunate to catch through my investment career, catch a number of macro events, things like the housing crisis or things like the Volmageddon events or the devaluation of China, or Abenomics, various other components. I've been fortunate to catch those types of events.
But what you often find is that those who most aggressively play those events are actually operating from a position of, well, it can only work this one way. And I don't think that's often true. I think that you really need to embrace what's referred to as the stochastic nature of events. Stochastic just means we are uncertain about it, and we have to have some form of humility around the randomness of the potential outcomes. Again, when you do that, you basically have to figure out what are the system of constraints, what has to be true. And so the US housing bubble for example, is a great example of that.
Where, if you watch the movie, "The Big Short," you would presume that the answer was, well, people can no longer afford their homes when interest rate hikes occurred. And that was one of the huge narratives associated with the housing market bubble was this idea that interest rates were going to be hiked and therefore people could no longer afford their homes, and people were going to be forced out of their homes in a repeat of the 1927 housing crash or the 1929 type events. That just didn't happen. I mean, here we are, 15 years later sort of thing, and home prices are higher, interest rates are lower. The actual events around 2006, 2007, 2008, where the interest rates were cut, and in most situations houses became more affordable on a payment basis.
What really caused that event was a breakdown in the financial models that had been built around structured products. So, residential mortgage backed securities had certain assumptions embedded in them in terms of the default characteristics that led to tremendous demand for synthetic structures and for product to be pumped through. What really drove the events of 2008 were what are referred to as first payment defaults, which was just rank speculation and fundamentally people committing fraud on their mortgage applications.
That was really what the catalyst was. And so again, that would just be a great example of where you really want to dig in, make sure you truly understand the narrative. Why did the crash of 1929 happen? Was it because of the fed hiked interest rates? Was it because the fed had enabled the bubble? Was it because of financial innovation? The answers to those radically affect the way that you want to model the world going forward. - Well, as you say, truth is so important to know, what's true to put into the model. Luckily today we have no problem deciding what's true. It's very easy. - Exactly.
- So I do want to jump into you kind of mentioned history doesn't repeat it rhymes. So it's important to look at times in the past that have been similar to today. I'd love to jump in, but in the beginning when you started speaking and doing your research 30 years ago for the gen Zers out there, what is that like to-- markets close and now you want to learn something about whatever in the background's percolating, where do you go to find your sources? Are you at the library every day? Or do you have some resources at home? What's that journey like? - Well, I used to be at the library all the time. So, I was fortunate in being in Boston and having the resources of Bain & Company, and then a firm called The Parthenon Group on the consulting side.
And so I was one of the biggest users of Lexus Nexus and the old expensive data sets and just reading and reading and reading. I also took advantage of Harvard Business School's library, which has basically every case study or analysis that had been done at that time. And regularly found myself just sitting there and pouring through the stacks.
On a personal basis as books became cheaper and my income rose against it, I've accumulated a ridiculous number of books in my house. Somebody, I took a picture of a bookshelf in my house one day and somebody online actually broke it all down but there's at least 3000 books in my house. Something like that. - Well, you're not ostentatiously displaying them behind you like is so often on a Zoom call. - I know I actually, my problem is that I have overflow. So the majority of my bookshelves are now in my garage, where most people have garden tools, and I have those too, but I literally have three giant bookshelves that are just filled with books in my garage.
- Well, it's a fun thing to collect those as well. So, let's jump into what moment in history best represents what we're going through now in America, in your mind? Or maybe there's a few patchwork of events. - Well, so the thing that I find most interesting about the United States right now is broadly, it's perceived that we are the dominant empire on a global basis.
We are the global hegemon with China rising up underneath us effectively. And rising to the point of challenging us. If you look in times past where there were similar dynamics, it rarely occurred on the global basis because the difficulties in logistics and transportation meant that the world was much smaller then. So, today we can transit the globe in 25 hours and then it would have taken six months to a year to circumnavigate the globe, if not longer. And so you have to kind of think about things on a different scale. The other thing that I think that was really interesting is the characterization of the US as an empire.
And so an empire, it can be thought of in a couple of different ways. One is its geographic reach. So the British Empire, its ability to expand itself around the globe, the sun never sets sort of framework. The other is the literal definition of an empire, which is a society that is ruled by an autocratic individual, an emperor. We are not yet an American Empire in that construct. We are functionally a very munificent global superpower.
But in no way, are we trying to, in an integrated fashion, express the will of one individual on a global basis. And to me that naturally draws me to time periods where something similar has occurred. And there's a tension between the democracy or more accurately, the republican features of the US and its elected representation in Congress, et cetera. And prior periods where we have seen a dominant regional power that has a democratic or republican form of government and you're naturally drawn to prior analogs in places like Greece or in Rome.
And the time period that I just think we're so much like, and I think you can read the examples of history and you can almost pick it up and shift it back to that point in time is the transition period between the Roman Republic and the Roman Empire. And I think we see that so much in the United States, So that's roughly a transition period that occurred from the Battle of Cannae in 2012, ah 2012, in 212BC to give or take the rise of Julius Caesar and the ultimate triumph of Augustus in I believe 39BC. That process of stripping the representative characteristics and effectively saying that our representatives in the form of the senatorial class or our Congress and Senate in America today. And increasingly just feeling they don't represent our interests and objectives and our confidence in those institutions has fallen to the point that you can tangibly feel Americans increasingly say some variant of what you've heard in prior periods where democracies have fallen in favor of autocratic regimes.
Somebody needs to make the trains run on time. The low productivity level, the low effectiveness level of our governing institutions is increasingly leading me in the direction of thinking that we're moving towards a more autocratic system. And if that happens something incredible will have been lost. That's in my view, that's an unquestioned loss of individual freedoms and the potential for a diverse set of views directing society. But there's paradoxically also an extraordinary gain in productivity or effectiveness of the public sector when that occurs.
It collapses from what the many want to what the few want. And that feels like the direction that we're heading. - So what signposts would you be looking out for as a concern or keeping your eyes open for a possible transition from what we are now to a true empire? - So typically when you have those types of events, there tends to be a societal catalyst that people react to and say, hey the government has to be there.
And the Romans very explicitly had the role of a dictator. A Caesar that was created specifically to fill that role, of recognizing that a government by elected representatives with a diffuse set of views broke down in kind of the discussion phase when a crisis emerged. And so the dictatorial powers were increasingly handed out in variants of martial law to various players. The most famous obviously being Sulla and then Julius Caesar himself. When you look at that type of environment today, I would suggest the things that you're going to be watching for are increased use of executive authority.
So instead of a budget or a stimulus package going through congress and originating as intended in the US constitution for all bills are attained or spending to come from congress, if they begin to emerge from the executive branch. If executive decisions and executive authority is increasingly used to drive that type of behavior, that would suggest to me we're on that path. And we've been on that slow path, I just want to emphasize this, roughly since the end of the 19th century. So you could point to the first leanings of autocratic regimes under the Roosevelts. And I would argue that that has to a certain extent accelerated in the last 20 years.
We have been extraordinarily ineffective in our systems of governance in terms of congress. Our faith in congressional representatives is collapsed. - No. (laughing)
- We know this is true and unfortunately-- - Yes, unfortunately. - What's our solution set to it? Is it that they suddenly become more effective out of some random event or is it that we strip them of their authority and put it in the hands of somebody that we think is competent? And we're just increasingly leaning towards the idea that behind one man or one woman lies the solution. We're looking for that leadership. - So almost the biggest red flag would be a crisis. So we clearly just had one. - Well the crisis becomes the catalyst, the crisis becomes the catalyst for the next stage where people just say, you know what, we got to fix things.
The system is not working. - Yeah. - I would suggest that the move to autocratic or authoritarian systems like, if you go back to September of 2000, the idea that I would go to the airport and put my hands up in the air and allow myself to be scanned and have to take off my shoes for the privilege of transiting would have felt very foreign. Today, we don't think twice about it. The idea of the type of shutdown that we had associated with COVID, where the government dictates what I am and am not able to do in terms of my freedom of assembly, unprecedented, truly unprecedented. And yet we've accepted it.
It's very difficult for me to see that pattern reversing itself. And so the next crisis, "just keep us safe. - I agree. - We'll do whatever you want." - Yeah, please help me.
So I'm going to give you an over-simplification of a very large macro arc and you're probably going to tell me how it's too simple. We can't think of it like that. But the question is, can we condense an empire, or the rise of an empire to a single factor? So as an example, the Dutch Empire, Fractional-reserve Banking, Britain, Sailing Technologies so they could access all of those resources, America, geography, this open land mass with incredible borders.
Is it possible to think about the rise of an empire like that, kind of having one central core theme or is it just much, much too complex to even begin to simplify things like that? - Well, clearly there's an element of that. So the enabling technology tends to take the form of either a communication or a transport logistics technology that facilitates a expansion of an organism. And an empire is no different than a slime mold.
It will expand to fill all the available, and I don't mean that in a negative way. Slime molds are something-- - No no, that's just your quote from this discussion right there. - Right. It will expand to fill the available resources.
And in times of plenty, it will expand outwards. And in times of distress, it will contract inwards and move back towards a core. The enabling technology, you highlight the dynamic of Fractional-reserve Banking for the Dutch. I would actually just more broadly characterize it. People who have watched me before have heard me reference a famous 1980s TV show called Connections, which was I believe it was James Wilson, but the idea was that there are enabling technologies that allow things to come together. So church bells or the casting of church bells ironically gives rise to the casting of cannons.
The casting of cannons destroy the fortified cities and castles of Europe. And so things change. In the 14th and 15th century there was a radical change in the use of sailing vessels and the design of sails. We went from rectangular and square sails to triangular sails that allowed you to sail against the wind. That facilitated the growth of exploration out of Europe and along the coast of Africa for the Portuguese, across the Atlantic Ocean for the Spaniards under Columbus, and facilitated the growth of those technologies.
And then of course the accounting technologies have to grow alongside that, so you need to have mechanisms for communications. How do you send instructions on far-flung empires? The United States was, I would argue, a slightly different enabling technology or the New World was a slightly different enabling technology. In that what you had was the discovery of an extraordinary labor surplus that coincidentally was depopulated for us. So as tragic as the Columbian Exchange was for the native Americans in terms of the introduction of diseases that broadly depopulated the Americas by roughly 90%, that created the opportunity for people to come over from the Old World into the quote unquote New World and face relatively little resistance.
If I decide to move from France to Germany, I'm gonna face tremendous resistance because there's a population that's already there. If I'm expanding out across the American plains, while there certainly were displaced individuals, the fraction, the relative fractions were completely imbalanced, right? The second feature that I would suggest enabled the growth of the Americas was the continuous immigration that that land surplus encouraged from the Old World. And so a lot of people think about the US emerging as a global power or as "the streets are paved with gold" sort of construct, following the victory in World War II. That's where it became completely apparent. But most of the historical analysis would suggest that the standards of living were dramatically higher in the United States, as early as the beginning of the 19th century. So the 1800s relative to the Old World.
And so one of the easiest ways, if you just think about it like an electron potential or a gradient, one of the easiest ways you can improve your standard of living was to pick up from Italy or Scotland or England and move to the United States where you would experience land surplus that allowed you to own your own land, for example. That was, we tend to take those things for granted, but throughout most of Western Europe's history, as an individual the prospect of me owning my own farm or owning my own land were relatively limited. The odds were very high that I was on somebody's manor and existing as a serf at the pleasure of the local lord. I could radically improve my standard of living and my prospects for self advancement by picking my family up, traveling three months across an ocean in a rickety ship and depositing myself on the shores of America. That created a surplus of human capital that allowed the filling out, the said differently, if you think about it in economic terms, the capital labor ratio was dramatically higher in the United States because of the surplus of land and other resources than it was in almost anywhere else in the world. Russia certainly had plenty of land, but it was owned by the emperor.
So my claim on it as a peasant was very low. That doesn't count. That requires somebody just shipped me out against my will to go farm in Siberia. It doesn't sound like a great choice in terms of improving my outcomes. - Not quite. So I know that you have used that China might not be the next empire, which I'd love to get into.
But as we're on this topic, let's just say China was the next empire. What might be this core theme of China's rise? - Well, so the core theme of China's rise is, first of all, I don't think that, and for many of the reasons that we just articulated, China is relatively land short, So it needs to increase the capital labor ratio by accessing more land capital, et cetera. That requires them to move outwards.
And unlike the United States, China shares borders with, I believe, 17 different countries, each one of which has fully populated, each one of which has understandable resentment at the idea that China is going to take their land and resources. So in every respect, they are bound on that framework. Their ability to expand outwards on the oceans is also limited by the first island chain, which would incorporate things like Taiwan, the Philippines, Okinawa and Japan, et cetera.
A barrier, a natural barrier has been built up to prevent them from doing that. And it explains part of the reason why they're so focused on countries like Taiwan. Far more eloquently than I could ever talk about it, if you look at the work like Peter Zeihan. He's done an incredible amount of work in this area.
And I generally think that he's broadly correct in his assessment of it. The story of China's relative rise has been very similar to what we saw with other Asian tigers that have emerged. So you've taken a resource reallocation, you've taken relatively low productivity workers off of the farm and put them into factories. And that move from primary industries to secondary industries and ultimately tertiary industries raises the aggregate productivity and increases the surplus that's available in society.
We call surplus wealth. And so China appears to be rising very, very rapidly. On the other side of that, though, is how far that transition has occurred. How far have we taken people off the farms and moved them into factories? And increasingly what we're seeing in China is a transition from factory to tertiary industry. Tertiary industry would be things like services. The product, one that's significantly less traded on a global basis.
So there's much lower ability to export tertiary industries and services relative to the secondary stuff, which China has done a very good job of exporting in its relationship with the United States and Europe. It has effectively become the manufacturing powerhouse to the world on the back of positive trading developments with the rest of the world. As it moves to services that becomes harder. You can't export real estate, for example, you can't export mortgage servicing for the most part. It tends to be harder.
The other issue that you have with China is the point that people will make about China as the future is they will highlight the focus that China has made on investments in human capital. And so, they'll highlight the fact that China spends roughly 40% of household income on educating their children, which is a significant premium to what the United States spends for example. The downside to that is that if you're gonna spend 40% of your household resources educating a single child, how many children can you have? At most-- - Not a whole lot. - Right, 'cause you can't have two then at 80% there's nothing left over for anything else. And so you're forced to make a decision. Do I reduce the resources that are available to each individual child and therefore position my progeny in a weaker, relative sense versus others, even as I increase the quantity of them.
The second thing that you need to struggle with as you think about that is the dramatic improvement in living standards that occur if you have no children 'cause suddenly I've got 40% more household income to spend on myself, whether that's in the form of retirement savings or handbags or trips abroad, or whatever else I want to do. And so the minute you create that huge gradient to go back to the same analogy we were talking about before, you disincentivize people from having children. And this is exactly what we see in China. And so now China's historical surplus in labor where human beings were largely dispensable and were in tremendous surplus, is now beginning to turn into a shortage.
And so if we look at the resources on a human capital framework that China has, their graduating high school classes are roughly 50% smaller today than they were 25 years ago. That's just an extraordinary collapse in population that tells you that the demand for housing, the demand for goods, products, services domestically et cetera, is going to fall. Or at least is not going to receive the same impetus in rise that it has historically. The only way you can grow it is effectively by growing the pie for each individual. And again, that then places pressure on future population growth.
So when you look at China, I actually think what you're looking at is a society that is remarkably fragile. It has the perception of dramatic improvement, but underneath there's a tremendous rot that is setting up a significant crash. - I think that is such a strong case.
And now I'm going to throw a curve ball at you. - Sure. - When you think about AGI, so artificial general intelligence. - Yep. - Let's just hypothesize China gains this technology, dominates it before any other power.
Would that change the dynamics here? Or are these macro forces you just laid out, it's just an element of truth as you mentioned earlier, that perhaps is stronger than even some revolutionary technology like that. - Well, so just give me an example of how you think that AGI could positively contribute. - So I'm just thinking, looking back in history, whoever has a new technology first, it generally can be, you mentioned communications earlier. So the radar, and now we look at social media, how it's been weaponized.
And so I don't have an argument right in front me lined out for you but kind of along that line of, if you look at history, whoever has this technology first has a first mover advantage, and they oftentimes can dominate their opponent for a period of time. Like nuclear weapons with the US and the world. Of course, that's a very different context. - Well, I don't think it is though, ultimately.
So if you think about the introduction of AGI, you have two separate issues. One is, do you keep it for yourself? And if you're keeping it for yourself, what is the objective of doing so? If it is better planning of your economy, for example, or better provision of services, what you're actually doing is just creating deflationary conditions under which those components where human content can be replaced by AGI, library services for example, have been completely replaced by Google. They will grow in terms of the size of the economy in terms of usage. So everybody has access to the texts that I used to be able to obtain only by going to the library. They're available with a few keystrokes today. But the cost of those services, the proportion of my budget that is now spent on those services collapses.
And so there's some very interesting work by John Fernald of the San Francisco Fed on exactly this, which is when you have that type of technological advancement, effectively all that does is eliminate the components that are affected as a fraction of your budget. So it actually has a very, very small impact. Nobody buys a calculator anymore. Why, because it's embedded in our iPhone. - Yeah. - So the fact that
superior calculator technology emerged, did that lead to more usage of calculators? Yes, did it also simultaneously mean that calculators are irrelevant in terms of GDP or economic growth? Absolutely. Now, if you think about it in a different construct, which is that AGI becomes a weapon that can be used in the same way that radar or nuclear weapons could be used, then you have a different question. And it becomes much more a question of, can others adopt that technology or can others obtain access to that technology in a manner that allows them to fight back? So you leave AGI as effectively the difference between Homo sapiens and Neanderthals. Homo sapiens had higher AGI as a population, but the ability of the Neanderthals to obtain that was zero. It was-- - I like that analogy. - There was no mechanism
for it to be obtained. When it's artificial and not tied to reproduction, it's hard for me to imagine a scenario, unless China tries a Blitzkrieg approach where they use their AGI to try to immediately defeat us in an aggressive battle, why would the US not pick it up as well? Why do you not almost immediately move to a stage of detente? In the same way that we did with nuclear weapons. If you're not willing to use it for a total war purpose, it kind of rapidly becomes irrelevant.
- Yeah. I think at least for me, and I'm not speaking for you or anyone else, but it's much easier to think about a wild card element like AGI in the economic sense than the physical conflict sense, even though AGI wouldn't necessarily be physical, you could just, it gets very sci-fi really quickly. And it's very hard to think about it in that way. But I really appreciate that perspective of perhaps these economic elements and deflation coming in is actually much more important than we would give it credit to. - Well I do think that there are elements of Sci-fi. That you need to, I've said this repeatedly on record, I'm just echoing words that a mentor of mine used many years ago.
Olly Peters, not Olly Peters, Owe Reinhardt, which is an economy is just people doing favors for other people. AGI creates the potential for a single individual through a corporate entity to deploy those resources to do favors for many other people more effectively. Effectively improving the productivity of the provision of those services for things that require intelligence. What are the implications of that? Well, everybody has a robot that cleans their house. Why, because cleaning house is actually a really hard thing to do. We see it with Roomba vacuums, which are kind of good at it, but not great.
In the same way, by the way that your dishwasher is not as good at washing your dishes as you are. If you were to individually sit there with a scrub brush and wash each of your dishes, you would have a better output than your dishwasher does. But your dishwasher does it well enough that nobody really wants to wash their dishes anymore. We'll move to the same thing in terms of the provision of household services. Everyone will have the equivalent of a maid.
Well, what does that do? That then frees us from the drudgery of household work to engage in other ways of providing favors for people. I can take the two hours a day that I spend making beds and cleaning my house and preparing food for my children, some of which I deeply enjoy, and some of which I'd be ecstatic to get rid of, to figure out other ways that I can contribute to society. Or to contribute to my general wellbeing. I could go hiking or do other things that create flexibility and freedom in my life. But the idea that we're going to solve the economy through AGI, to me feels like a very much a nonstarter because what you're, if what I'm trying to do is provide favors for other human beings, and I introduce a technology that changes the character of the favors that need to be provided, or that would be desired, I'm just opening up innovation that allows us to do it in a different way. And can that be sci-fi? Sure.
How amazing would it be if some of those features or services that are provided include things like my house takes care of itself. I no longer have to prepare meals. My nutrition is monitored and improved so that I live longer and happier than I ever would have before. Those are all great things. But does it change the relative standing of China versus the United States? I struggle with that.
- Yeah, no, for sure. And this is a really interesting point that you bring up because I think a lot, well, some folks certainly look at AGI as this utopian thing. It's like, once we get there we can solve all our problems. And talk about history repeating. We've said that about countless, countless things throughout history. And that's actually quite a core theme of what we do with our program is, I don't actually bring this question up but it's kind of subtext for a lot of, the way that I approach it at least, is that we're so focused on finding the perfect system for humanity to solve our ills.
We never have. And so the question that I ask myself is perhaps it's not the system that's broken, but us. Because as a thought experiment, imagine the perfect system, whatever it may be, and plop humanity down in the midst of that, we're going to sabotage that thing so quickly and it's going to be back to just regular day to day after a period of time. And so looking forward to say AGI to solve our problems with China or solve societal issues, I just have a really hard time pairing that together.
And I see it more as, that's a very powerful thing. In the past, whoever gets it, is able to enact certain oppressions over the other in a more complex and nuanced and more powerful way. Do you, do you see, I mean, you've been touching on this pretty much the whole time, but do you see it like that in the same way? Or is it perhaps a little more different? - I think I see it a little bit differently.
I just want to emphasize that there are dystopian outcomes in AGI. It's a very-- - And that's not necessarily, yeah that's not necessarily what I'm saying either. - So it's a very scary, imagine if you were Neanderthals and you decided to create Homo sapiens. That's a bad choice. Congratulations you're-- - This analogy keeps crushing it yeah. - Right. So there is a very real risk that we give an objective function to AGI that ends up in a very bad place.
And you're obviously familiar with stories of the analogies of paperclip world where we give the wrong instructions say, make as many paperclips as possible. Well, next thing you know human beings are being recycled into paperclips and a soulless machine is saying, "Well, I'm just doing what you told me to do." You need to be very thoughtful about those types of frameworks. AGI that raises the quality and the quantity of services and favors that can be done for other people, feels like a great output. In the same way that nuclear created base-load energy in a lot of ways that facilitated tremendous new services that we've enjoyed.
I mean, you often find that comedians, as you look back through history, there's a reason why you have court jesters because they expose truth. Louis C.K. obviously has been canceled because of various bizarre behavior, but his observation that everything's perfect and nobody's happy is a hundred percent accurate.
We live in a world where magic happens on a daily basis. I get in a, I get in a two ton steed that doesn't need to be fed except this liquid that I pump through its inanimate feeding port and it transports me at remarkably high speeds anywhere I want to go along roads that have been also built by similar internal combustion engine powered steeds that were unimaginable to our predecessors. I get in a magic bird and I fly across the world, or you and I turn on magic boxes and we're able to communicate face to face across wide distances. You have this absolutely bizarre phenomenon where everything is radically different than anything that we could point to in history, and infinitely we are infinitely more capable of living lives that are rich and diverse and filled with experiences that many of our ancestors couldn't have imagined.
And that creates actually a general sense of ennui which is, well, is my life as good as Richard Branson's, or as my life as good as Elon Musk's or, 'cause you wouldn't have even known what their lives were like in the same way. So there's negative feedback loops for social animals as well. The work of Robert Sapolsky, the ethnobiologist, is quite interesting. He points out the most unhappy baboon is the baboon who's the second in command.
Or the baboon who is the second to last. Not the guy at the bottom, not the baboon at the bottom, 'cause he just has a generally miserable and constantly miserable existence. It's the person that's terrified of becoming the bottom or it's the person near the top who gets to see just how good the top guy gets it and is constantly scheming to try to get up there. And the guy that's up there is constantly scheming to try to keep him down. Or keep her down. Those sorts of social dynamics, I think are far more important than we tend to consider versus the absolute level of happiness, which on any reasonable metric, we're off the charts.
I mean, as a modern society, we don't deal with starvation. We deal with how do we deal with the fact that we have a surplus of calories that happens to make its way to our waistlines. I mean, imagine 500 years ago, explaining to people that human beings would have to go to a particular place to exercise so that they could burn off the excess calories that they get because they have so much access to food.
99% of the world would have looked at you like you had sprouted a second head. - And I can't imagine what that thing will be for us, people 500 years from now will be like, we have got to do this. Are you kidding me? What's wrong with you? - Right, I mean, we went through a pandemic where we ran out of the paper that we use to clean our backsides. I have a very hard time believing that 500 years in the future that we're relying on that type of dynamic.
- So looking, we've covered a lot of the macro forces impacting empire in China US relations, looking forward what are you hopeful about that that might transpire globally or with America or, I'm not looking for some cliche kind of hope we can just end this on patly, but do you have some kind of optimism for the future or any kind of hope that these big (indistinct) we have spoken about, what could transpire? - So the way I tend to think about cycles of history or cycles of whatever we'd call it, innovation and then exploitation. And so innovation is genuinely new discoveries that meaningfully change the trajectory of human existence. The discovery of fossil fuels. It tends to be very closely correlated to things like the discovery of energy technologies or communication technologies that change the effectiveness of a network of human beings.
I'm fairly confident that we are very near tremendous breakthroughs in energy production that change the path in terms of what can be done. - Interesting. - And for me that leans in the direction of nuclear fusion, et cetera. So my general view of the world is that give or take 70 years ago, we discovered an entirely new and novel, 80 years ago now, an entirely new and novel energy source in the form of nuclear that is functionally identical to the discovery of petroleum in the 19th century. It took a long time for petroleum to diffuse and it became the dominant form of energy production on a global basis over the course of the next hundred years. In the 20th century, in the 1970s, we moved away from the use of oil in the production and so diesel generators, for example, in the production of electricity and to alternative technologies, nuclear largely filled that role.
It stepped in to fill that. Today we have natural gas and other components that are taking a temporary role in it. But ultimately my perspective is is that we will have such extraordinary energy surplus that we'll be able to do things that we couldn't have ever imagined before.
I've got notifications going crazy here for one second. I apologize. Let me see if I can-- - Wow, popular. - Yeah. So we have, my expectation is that we will move to such extraordinary energy surplus that we're able to do things we couldn't have imagined before. And so, think about a replicator from Star Trek.
What is the energy content that's required to have a box in your house that can fabricate almost anything that you want, including your meals from elemental components? Well, that's an extraordinary use of energy. Those are incredibly endothermic reactions. We currently rely on a transition process where solar energy comes down and causes grass or corn to grow. We then harvest that hay or corn or soybeans in the form of animal feed.
We feed it to animals. Those animals are laboratories that produce our proteins. We then send them to slaughterhouses.
We then distribute them via logistics, et cetera. And you think about the energy content that's used in all of that, and then collapse it down to, well instead, what if I pumped that energy directly into my house through a replicator. How does that restructure our society? How does it change things? The one constant is we will always use more and more energy. And the advantage of clean energy in the form of solar or wind is that it effectively has a relatively low cost of entropy in terms of the release of things like carbon dioxide. Well, nuclear trumps it in that framework. And, remember that solar is just nuclear with an extraordinary lag.
It is nuclear power that is produced in the sun, transmitted across an incredible space. We capture a tiny, tiny fraction of it. Basically a pencil spot of the energy that's being produced by the sun on a solar panel. And we celebrate that. Well, that's absurd. Just produce the nuclear power locally and you radically change the outcome.
When we have that energy surplus, what we'll be able to do with it, I can't even imagine. That's for our children and our children's children to figure out. But what I do know is that the services that will be provided around that, the goods and services associated with it, will make many of the shortcomings that we experience today look like absolutely nothing.
Or look like trivial issues. That's my hopeful view. The concern that I have is that we are caught in a regime where we resist that. We don't want to make those investments.
We want to accept that what we have today is the appropriate solution. The environmental movement is important in terms of recognizing we have a finite resource and that we don't want to destroy that resource. Well, anytime you hear somebody talking about the carrying capacity of the Earth and placing limitations on the growth of human populations, that is a fundamentally anti-innovation framework.
Because what you really want to do is you want to create a surplus of energy that allows us to have not 7 billion people on the earth, but 22 billion people on the earth. And the downside to the 20th century, 21st century, as I see it today, the appropriate way to tell the story of the 20th century is that it really began in roughly 1870. And it ended somewhere around 1960 or you could argue 2000, where we had this incredible change in technology that both facilitated the quantity of energy.
So the discovery of petroleum, et cetera. And at the same time we had innovations in terms of human healthcare that resulted in an explosion of the global population. So the 20th century was all about the fact that we started with roughly a billion people in the global labor force.
And by 2000, we ended with 5.5 billion people in the global labor force. That type of expansion and human capital and resource is completely unprecedented in history. It just doesn't exist anywhere else. If we look at the 21st century using generally accepted population statistics from the UN, which I think are way too optimistic, we go from about 5 1/2 billion people in the global labor force to about 6.2 billion people
in the global labor force over the next a hundred years. That's such an incredible downgrade in growth and potential versus what we had in the 20th century, that many of the phenomena that we see such as much slower growth or much lower interest rates, commodity prices that in real terms are relative lows make perfect sense in that construct. We do not have scarcity in the 21st century in the same way that we have in the 20th century, unless we develop new innovative technologies that encourage dramatically new goods and services to be created. So the concern that I have is, is that we're trying to fight a rear guard action, and try to make the 21st century look like the 20th century when it bears almost no resemblance on fundamentals. - We got to let you go here, but you just painted such a great arc. And I have to ask is the ultimate end result of all this silicon transcendence for humanity in your view or is? - Well that's to a certain extent, bringing back again the, do the Neanderthals create Homo sapiens? Do we create our successors? I don't know.
There's two different-- - Well like merge with it or something. - Yeah so. - Something past it. - But I mean, that's where you carry out eukaryotic cells emerged. It was the merging of two prokaryotic cells.
So no nucleus, two nuclei cell. Do we do the same thing? Do we become cyborgs effectively? It's a choice. It's a genuine choice. Or do we modify our DNA dramatically so that we accelerate and we introduce a separate form of humanity? There's tremendous dangers around that.
So again, a dystopian view of this, it goes back to Orson Welles or not Orson Welles, H.G. Wells, and his very short story, it's a phenomenal book if you haven't read it. "The Time Machine" by H.G. Wells, science fiction classic. Humanity splits into two separate groups.
Morlocks and Elois. The Morlocks are underground dwelling, generally miserable, but creative and innovative individuals. And the Eloi are functionally human cattle. Living a perfect existence above ground, except for the fact that they happen to be food for the Morlocks.
I regularly challenge my kids and ask them, do you want to be a Morlock, or do you want to be an Eloi? And there are legitimate arguments in both directions. I know that I personally, cannibalism aside, would want to become a Morlock. I don't want to go live a life of leisure.
I want to explore and do innovative things. Does that ultimately mean that I have to make the choice to embed silicon and the native components associated with it? Perhaps. I think it's unknowable at this point, but I do want us to be very cognizant that that fundamentally means the end of humanity as we describe it today. And we need to have a very real discussion on a societal basis, or at least on a family type basis of the implications of that. Do we bring all the population along or do we wipe them out in the way that the Homo sapiens wiped out the Neanderthals? And I don't know the answer.
- Yeah, however it's fascinating to consider and think about. And I love that recommendation for reading the H.G. Wells book. So Mike, this is really been a tremendous conversation I've super enjoyed. We've taken it from ancient Greece, all the way to futuristic cyborgs. Who knows. Where can folks find more of your work? And maybe, I know we didn't speak a lot about investment vehicles and stuff, but I know that some listeners are gonna be interested in the specific products that you all do at Simplify.
So maybe, also explain a little bit about what are some of these ETFs you're producing because I think they're very interesting. - So, what we just discussed and spent an hour on is kind of my flights of fancy around the way the world is developing. What I'm actually most known for is the work that I do on market structure and the implications of things like the growth of passive investing or index investing on market structure. At Simplify, we've taken advantage of a change in regulations and rules to introduce non-linear or complex ETFs that embed things like derivative overlays.
What that does is it allows us to facilitate participation in a market that increasingly feels disjointed or disconnected from fundamentals for people. And I tend to support that. I would encourage people, you mentioned how can people learn more, just Google my name, Michael Green and hedge funds or passive or anything else, you'll find tons of stuff on YouTube. You can find me on Twitter at @profplum99, which has no resemblance to me. It's the Vizzini character from the "Princess Bride." When you pull that up.
Or you can go to Simplify's website, www.simplify.us to gain access to our writings about our products. But the overwhelming philosophy behind the production of the ETFs that we have is to introduce alternate return streams or nonlinear return streams so that you're able to participate to the upside, provide protection to the downside, key people invested in what feel like increasingly crazy markets with alternative ways of participating.
We're incredibly fortunate that the rules changed to allow us to do this. We're taking advantage of that and growing quite rapidly. There's a very clear need for more complex solutions for investors today than what we have experienced to this point.
And so basically that addresses your question to where you can find me in and what to look for. - So, just a real quick question, are some of those ETFs, are they actively managed in the background or is it algorithmically? - So all of our ETFs fall into the category of what's referred to as actively managed. They all have an algorithmic component to them. So we are establishing a set of rules.
We have flexibility about the implementation of that, but you try to minimize the amount that you use that for the very simple reason that it inhibits your ability to actually show predictable results and help people understand how things behave. Again, the unique feature of my work and research is around how do market structures change? We talked about the dynamics of how society has changed around the rules that exist. Simplify exists because of a rule change in the structure of ETFs. It was adopted by the SCC last year. That changes the actual behavior of a system. And so we're trying to grow like a slime mold into the opportunity that that creates.
I would just suggest that that is broadly underappreciated. So John Maynard Keynes is famous for his expression, "When the facts change, I changed my mind. "What do you do dear?" When confronted with, you changed your mind about something, I would suggest that people tend to under appreciate that when the rules change or the participants in a market change, it changes the character and behavior of that market. And so what we're trying to do is to take advantage of both those rule changes and the market structural changes to deliver a superior return stream to investors.
- I love that. You have certainly carved out a really, very fascinating role for yourself in this space. I really admire that. (light music) And Mike, I just want to say, thank you so much for joining today.
I've really enjoyed this conversation. It's been superb. - Awesome. Thank you very much, Brad. I enjoyed it as well.
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