FULL DISCUSSION: BlackRock, Citadel & Lagarde Clash Over $38 Trillion U.S. Debt, AI & Market Risks

We have an extraordinary panel here to join me in conversation. Larry Fink is here from BlackRock. Of course, he oversees now 14 trillion dollars and I should also mention is the co-chair of this year's World Economic Forum and you've done an extraordinary job.

Ken Griffin is here. He's the founder and CEO of Citadel. He oversees $65 billion investment capital and he has been at the forefront of finance over the last several decades and has been one of really the most prescient about where the economy has been headed and we're going to talk to him in just a moment as well.

And then we have European historian Adam Tooze here. He's also the director of European Institute at Columbia University. He's the author of five books including The Deluge, The Great War, America and the Remaking of the Global Order 1916 to 1931. So that will capture some of the period we're talking about.

And in just a moment, Christine Lagarde is going to be joining us and we are looking forward to talking to her as well about this. But I'm going to start with Adam if you could to sort of help us set the table to give us some historical context to this moment because there are some remarkable parallels. We are going through a remarkable boom right now. Some of it's technology related. There was a technology related issue then there were all sorts of monetary issues then tariffs which came a little bit later but you can start to see what that looks like.

Thank you so much. It's a real pleasure to be here and I do want to express my thanks I think for putting on this Davos the way he has. It's been quite an extraordinary experience, a real privilege to be here. And yeah, I want to take up exactly where you left off, Andrew, because I think you're right. I don't think we should be in the business of doing automatic repetition type stories about history. I don't think that's how history works. Mark Twain's great line about history not repeating, but rhyming is a useful one. And I do think there are various points in the 20s that are very pertinent to our current moment.

One is the technological side. It really was a moment of a new era especially in electrical technology but also in mass production. So this is the era of Ford quintessentially. This is when Fordism becomes a global phenomenon and also a kind of social model. It's a high wage, high effort, high consumption bargain which stabilizes in the best case high levels of consumption and the growth model of the 20th century.

But I think more ominously and I've really got Mark Carney's speech from yesterday, a really astonishing speech in my mind is that one of the things we prefer to forget about the 20s is that it is to most contemporaries the first moment of unipolarity. This is the moment they think liberal power is triumphant. Why? Because the liberal powers won World War I. The 20s follow World War I, an epic revolutionary war, the first total war. And the powers that prevail are the powers that in a sense for a while still held the ring and whose the end of whose hegemony Mark Carney was talking about yesterday afternoon.

In other words, the British Empire, the French Empire and the United States. Two republics, the liberal empire par excellence and Russia was their only ally and it succumbs to revolution in 1917 and becomes a more radical power. And the basis for their power was money. It was finance. It was the dollar's hegemony in the 1920s that was supposed to anchor this world that was otherwise really fragile.

So for me the haunting evocation of the 20s is this was our first hour. I mean collectively people like us's first effort at stabilizing the world and we failed at the politics famously at Versailles and in the League of Nations. We thought that a good substitute would be technology and finance. And for a while in the 1920s that formula looked like it would work because in the end the gold standard system became an increasingly dollar centered system and the hubris and the failure of imagination and the failure of politics never provided the underpinnings for that structure.

That was not a moment I expected to have in my life to be speaking about the 1920s and have Madame Lagarde appear on stage. [laughter]

But the discrepancy between the power of economics, the power of production and the reliance on money and notably the dollar and the failure in that context to build deep political connections for me is really what the 20s stand for. And that is why for me it's so resonant in the current moment because the crucial power here is the United States. The crucial power in the 20s was the United States. Those new technologies were American. The money that mattered was American. And it's America that essentially both for essentially for domestic political reasons defaults on its hegemonic obligations.

Madame Lagarde, want to welcome you. Thank you for joining us. We're very happy to have you. And I would actually go to you if I could just for a moment. Just now. And but I'll tell you why. Because you gave a speech back in the fall of 2024 and you said that you believed actually that there was a parallel taking place between the AI bubble in the 2020s and 1920s and you said today like back then we are seeing setbacks in global trade integration at the same time as strides forward in technological progress and we were trying to sort of put this moment in a historical context and so I was hoping you could elaborate and explain what you meant by that.

Very happy to. Thank you so much for having me and I'm sorry I'm late but initially it was scheduled at 9:00 and I had something really committed at 8:15 and I had to run from wherever I was. So I trust that Adam went through the political similarities divergences and I don't want to venture there. What I meant in my speech which was back in 2024 so things have changed since then and they have not changed for the better. What I meant to compare is the technological breakthrough that took place in the 1920s. Whether you look at the size and scope of the electrical grid, whether you look at the combustion engine and its developments, whether you look at the assembly lines that were developing, those were technological breakthroughs that took place in those years and decades.

At the same time, you also had a stock market that was doing very well. And what we observed in the 20s and maybe Adam you went through that is a significant change in the global trade. I wouldn't call it a collapse but it went from 21% of GDP roughly down to 14% in a matter of a few years.

So what we're looking at now is galloping digitalization of our economies with a particular focus on artificial intelligence. We're seeing stock markets that are doing extremely well, particularly well not only in advanced economies but also in emerging market economies. And we are seeing a fragmentation of geopolitics. More on that and to be continued. Which is accompanied by an increase of the tariff of the import and export restrictions in almost all categories of products.

So and this is unprecedented as long as WTO observes those restrictions. We're not seeing yet the collapse of trade in the numbers that I have mentioned. Not yet. It's still holding. It's declining a bit, but it's still holding. Question is, is that going to hold? But the key point that I would like to make if you give me a little more time is that the big difference between the 20s and now in a way which makes the current situation more unpredictable and probably more icy. I just came back from this cold out there. So icy is a good word for that is the fact that those breakthroughs of the 1920s could diffuse to use a colloquial language could diffuse within boundaries within national territories.

You did not necessarily need in those days the scale the network effects that you need now. Now if you ask the big G's in digitalization and the big spenders in artificial intelligence and just for memory to develop a frontier model today requires about 1 billion dollars. If you ask them what they need, they will say access to data as large as possible. They will say scale in order to really amortize the investment cost of the development of models.

Now that would be significantly jeopardized if we have limited access to data because of different privacy laws around the world and more protectionist barriers that would prevent the scaling of these investments. Now I might be having an overly negative and pessimistic view of what we are seeing at the moment but I think that's a real threat and the development of AI the gain of productivity that we hope for is difficult to reconcile with fragmentation in terms of standards, licensing access and I would contend that this can only be remedied by a degree of cooperation that is going to be a factor of willingness of people to accept and tolerate different paradigms, different cultural preferences and different views of the world. It's difficult.

Larry, speak to that if you could because I can tell you you're thinking about it.

Let me ask you let me go to Ken on this and but I and it's reflective though of something actually Larry's talked about over the past couple years. You actually Larry wrote a letter called the democratization of finance. That was a phrase used in the 1920s. There was a real effort to democratize finance to raise funds from the public. There was a huge amount of debt that helped finance the decade. And I wonder how you think about this moment and sort of when you think about the systemic risk of this moment, the concentration of AI the debt that's financing some of it. And I know some of the hyperscalers obviously enormously powerful and have extraordinary funds but there is also a lot of debt behind all this that's sloshing around.

So first of all it's a pleasure to be on the gloom and doom panel. The 1920s were an extraordinary period as I said at the beginning it's not pre-ordained the endote of the 1920s which was of course the great depression. Andrew, so let's take a step back and talk about where we are right here, right now.

The area of recklessness is the spending of governments around the world who are all with little exception all spending well beyond their means. That's the recklessness of this moment in history. This is not a parallel to the 1920s in terms of the recklessness of the private capital markets. It's a story of the recklessness of government spending.

Within the private sector, there's a huge question as to where AI will take us and I was carefully taking notes and listening to what Larry has to say or to what Madame Lagarde has to say because this is one of the big issues of our moment. Will AI create the productivity acceleration that is honestly just hoped for in Washington and in the halls of government around the world as a way to overcome the profligate spending that we're currently engaged in.

Like the world needs a savior and the hope is that AI is the savior that we need for productivity. And the challenge with this is it may or may not be. We just don't know yet. Now, there's a tremendous amount of hype around AI. And in some sense, the large AI companies need to create that hype to raise the tens or actually hundreds of billions of dollars of investment that are going into the field.

Like you wouldn't be able to raise hundreds of billions of dollars. We'll spend and Larry can probably correct me on this but roughly $600 billion this year in capex for data centers in the United States. I think it to be larger.

But does that mean that it's getting hyped up too much or it's just the hype is required as a sales mechanism?

Madame Lagarde, can I ask you a question to take on the issue that I think Ken raised just about the amount of debt in the system today, not talking about corporate debt, but sovereign debt and the reason I ask is back in the 1920s, at least in the United States, there was a budget surplus. I believe there was actually a budget surplus in a lot of other countries as well. Not everywhere, of course. But today in the US there's $38 trillion of debt. And the playbook that we all learned actually in the aftermath of 1929 is what do you do when there's a crisis to stem it? You throw money at the problem. Ben Bernanke learned this and effectuated in 2008. We did it again during the pandemic. And the thing that I've always thought about is the next time there is a panic of some sort and there will be a pullback of some sort, whether the politicians say, 'Well, we now have the playbook. We know what we're supposed to do and we're going to write a check for $5 trillion because that's what we're supposed to do.' except that we keep wondering is there some kind of invisible line in the bond market around the world that turns into a red line where the investor class says we're not doing it anymore and then you sort of by the way you get into sort of an austerity vicious cycle.

Two things. I'm not going to address your question right away because I want to come back to a point that was made by both Larry and Ken, I think. And I'm not denying that investment in artificial intelligence can be extremely net positive and will deliver productivity gains. The amount of which is questionable and you have a spectrum that is quite large as to how much it will deliver. But I think that to come back to my cooperation needed for that we also have to consider that it's capital intensive, energy intensive and data intensive and we have to be mindful of the three in terms of energy intensity.

What kind of energy is being used to manage data will matter. What the consequences will be on the people will matter as well. So I think that in this cooperation approach that we have which will have to take care of data privacy for instance and preferences in different corners of the world we also need to be mindful of the energy consumption and what kind of energy it is and what impact it has on climate and number two we have to be mindful of the consequences for people because unless we move in this dream world of Ken's where working is a choice in a way which I don't see on the medium term horizon. We have to understand what consequences it has on people unless we want to risk a dislocation of society.

Now I come back to your point. Yes, debt has increased massively and is increasing in some corners more than others. I think the real question is what is done with that financing that the sovereigns are accumulating. Not all debts are the same. Debt that is invested in necessary productive projects or necessary for security purposes will always find people to finance it. That's my assumption.

Debts that are not for productive purposes that are not going to sustain growth on a sustainable basis that will be far more difficult. So I'm not going to tell you that there is a red line. I'm not going to tell you that central banks will always be around either. But I think that the nature of the purpose for which debt is subscribed will matter more than the actual volume.

Speak to what you did. You just said something very intriguing.

I'm not going to speak more to it.

No to this [laughter] to the idea that central banks might not always be around. What did you mean by that?

Look, I went through my lot of crisis as many of you have as well. And I remember the days when it was mentioned that central bankers are the only game in town. This is not the right approach to a balanced and durable equilibrium. Measures have to be taken by fiscal authorities. Reforms have to be undertaken. The purpose for which spending is organized has to be thought through. And the consequences on people if we want society to stay together.

So just not trying to put words in your mouth, but are you basically saying that in our legislative branches around the world, we have abdicated responsibility of being fiscally prudent and thoughtful as to how we use society's resources and have become overly reliant upon central banks to continue to try to keep the economy going in the right direction against this onslaught of reckless spending.

Yes.

I'm not suggesting it's the case now, but we have observed it in the past. I mean, the historic irony is that when people talked about central banks being the only game in town in the 2010s, what they were actually urging is more active fiscal policy, right? Because the problem was that we had a lowflation environment, a stagnant growth, including notable figures at BlackRock were arguing for a more assertive fiscal policy because there was a deep imbalance between the two levers of macroeconomic policy, which was also a lesson of the 1920s.

And right now what you're arguing for I take it is a more just abstract proposition that it is crucial to have as Ken's suggesting responsibility in every arm of government and that responsibility pertains not just to the macroaggregates I'm hearing you say but to the specific type of spending. Your distinction between the productive and the unproductive is not just for economic purposes but also for the question of political legitimacy and social coherence the crucial thing because the social bargain in Europe and in the United States but really in Europe is deeply stressed I think by the perception that modern welfare states are unproductive and a huge number of really vicious distributional struggles which are reawakening another 1920s ghost which is the ghost of fascism right the sort of political parties which certainly visitors to the conference would quite like us to give more platform to who are direct heirs to that kind of tradition.

They are mobilizing in Europe right now around the delegitimization of public spending which acts as on this productive unproductive national international migrant ethnic national and so that's why these politics are explosive.

It also depends on what structures you have again because the Europeans have job they essentially have part-time working systems which keep people in employment whereas America with surging unemployment in 2020 and no national unemployment insurance system that actually works has to rely on this sugar high trillion dollar check in the mail emergency bailout of American society and it's easy to overdo that. I mean in my view it's one of the great macroeconomic success stories of recent times. But you're absolutely right where the learning here since the 1920s is surely one of the dramatic we have not had another 1929.

That is a crucial point. I have a different question for Madame Lagarde and it's actually about the connection between the independence of central bankers relative to the political class and the reason I ask it is not just because of this particular moment.

It just happens to be Wednesday but this gets to an interesting parallel if you go back and look at what happened actually in the 1920s and 1929 particular. I read through some of the diaries of the Federal Reserve board members in the United States during this period. They were so worried about the politics of the moment. They were so cognizant of the politics. It wasn't by the way then that the president in that case President Hoover was telling them what to do exactly. It was that they were worried that the central bank unto itself would which was considered an experiment still.

Yeah. was still new. Yeah.

Would be disbanded. You talked about whether central bankers will be here. They weren't sure whether they were going to tip the balance and the Congress was going to say enough with you. And so I wonder and there are lots of times also during some of these crises where the central bankers have to work hand in hand with the treasury departments and presidents. So here we are in this moment. You publicly came out recently and signed a letter around what's happening in the United States and our Federal Reserve but how you think about that.