Trading in his dorm room at Harvard and in the decade since has built one of the biggest and best hedge funds in the world and biggest and best market makers in the world. So, it's a pretty impressive achievement. But the reason I'm really excited to have this conversation is that Ken Griffin is one of the few people I know where I am sure that he will say what he thinks. And in this day and age, that's pretty rare. So, I hope you live up to that. That happens most times we have a conversation. And I want to start actually with the here and now. Everyone here is talking about Greenland, but I actually want to start in a completely different part of the world, which is Japan. Something big has been happening in Japan. The long bonds in Japan jumped dramatically in yields. I think the 40-year bond hit JGB hit 4% for the first time yesterday. That was a pretty big jump. Is something important going on there? Is this a Liz Truss moment in Japan?
Like I said, she's going to start with a really tough question. So, let's go back and talk about the Liz Truss moment to level set 2022 UK. The sense that the budget proposal from Liz Truss and her administration did not reflect the fiscal realities of the UK put the UK bond market literally into a state of chaos and it required massive intervention by the UK central bank to bring both price stability to the marketplace and a sense of confidence that the UK market was open for investment. It was the first major loss of confidence in a sovereign bond market of a tier one issuer in modern history. And Japan just 48 hours ago appears to have had a Liz Truss light moment.
That's what the kids say. Yes. So if you look at what happened in Japan, it was one of the biggest moves in yields in this century. It does reflect a sense of apprehension by market participants that Japan's fiscal house is not in order. The thought that the government would be in a position to cut taxes, which of course increases the size of the government deficit, created a bit of a panic in the Japanese market. The reason it's worth emphasizing is it's the second time in recent years that a major bond market has gone into a state of chaos because of a sense of a lack of fiscal discipline. The bond vigilantes are back and the big question is when do they show their force in America. The United States runs a deficit of close to 6% of GDP. Debt to GDP is approaching highs post World War II. The United States is in a more fiscally precarious position than it has been in decades. And the risk of the bond vigilantes coming back into the marketplace and expressing their distaste for the profligate spending of the US government could come into play.
So why don't you answer your own question? When does that happen in America? Is America the country you're worried about next or are there others that you're particularly concerned about?
So big picture, the fiscal picture in countries like Japan or the UK or France in many respects more fragile than the United States, smaller investor bases, not as universally owned debt in terms of global ownership. The United States has a very broad global ownership of its bond base. So we're more likely to see these events happening in countries outside the United States. But the difference is if the United States bond market has an event like this, the financial implications for the world are far more devastating. If you think about the Japanese bond market, for example, virtually all the Japanese bonds are owned by Japanese households and Japanese domestic institutions. In contrast to the United States where a substantial portion of all debt is held by sovereign wealth funds, international pension plans, a huge number of investors around the world outside of America.
And do you think market participants are underplaying that risk in the United States? Are we being too sanguine about it?
So I think there's an appreciation that household wealth in America is very deep. So we have the resources in the United States to service our debt for the foreseeable future. So there's a sense of tranquility, but I believe that might be misplaced. And my biggest concern is that the longer we continue to accumulate debt in America in this moment of let's call it tranquility towards the numbers, when the inevitable correction happens, the far bigger that correction is likely to be.
So, Secretary Bessent yesterday mentioned the fact that the deficit was lower, was coming down and he argued that the US under the Trump administration was on track and that you know the revenue from the tariffs was helping and that spending was being brought under control. Do you agree that this administration is on the right fiscal track?
So this administration is very much pursuing an all-in pro-growth strategy hoping that we can grow our way out of our current fiscal position. They started this experiment back in the first administration. We'll never know how that experiment was going to end because of the pandemic. So what's really frustrating from an economics perspective is Trump and team went for this playbook in the first administration, promising signs it was going to work. Then the pandemic happens and with that came a surge in unemployment, of course the concurrent hit in GDP and a period of incredible government spending. Most people don't remember that we spent as much in the pandemic as a percent of GDP as we did to win World War II.
It's a lot. It's a staggering number. And of course, in one of those two events, we saved the free world. And the second of the two events, we warmed our couches. So the amount that we spent in the pandemic really put the United States in a much, much more precarious position fiscally which makes the Trump bet that we can grow our way out of the situation a higher stake bet than it was back in the first administration.
So let's talk about the kind of ingredients of the overall Trump policy because I think it's not just fiscal policy. There's a huge transformation going on in geopolitics. There's a huge transformation going on in economic policy and at the same time we're in the midst of this AI revolution and all of those three are going to have a big sort of impact together on where the US ends up. So let's start with economic policy changes. There's fiscal as you said, huge change in trade policy. The US has become a tariffing country. It may not have been as higher tariffs as we expected on Liberation Day but still 10% or higher effective rate tariffs and the use of tariffs as a weapon very clearly. And the other big supply side change has been a total clampdown on immigration. Are those two as economic policies helping the US?
Well, let's first of all take a step back. I think there's two things that are important to keep in mind. Number one is Trump ran on these policies. And to his credit, unlike most politicians, he ran on a clear set of policies and he is delivering on those policies in his actions. So, we may agree or disagree with the policies, but the American voters elected him and selected these policies when they cast that ballot. You know, I remember back when President Obama won, he ran on hope and I was with a friend of mine and I said, 'So, what policies did he run on?' And she's like, 'I don't know. Hope.' I said, 'Okay, but hope for what?' No answer. Trump ran on a very clear set of policies and he's moving quickly to implement those policies. Now let's talk about those policies. Tariffs, a dream that will bring manufacturing back to America. A dream that will reduce our dependency on foreign nations for critical items, whether it's pharmaceutical products or other items that are of importance to national security. That policy has had some of its intended effects, but we have yet to bring manufacturing jobs back to the United States. And I think the biggest issue is no one's confident what the US tariff policy is going to be 2 years, four years, 6 years, 8 years from now. And before you spend hundreds of millions of dollars or billions of dollars to build a manufacturing plant, you really want to believe that the policy that is the anchor of that decision will be permanent in nature. And because the United States has had such a long history of having lower or no tariffs, I think people have a very hard time believing that the current tariff regime is going to persist. That's issue number one.
So it sounds like I'm just tossing up on the balance sheet. It sounds like that's a negative.
I personally I think it's been a negative. I think that we have seen higher inflation due to the tariffs. We have disrupted long-standing trading relationships because of the tariffs. And we've obviously increased the amount of cronyism in America as corporate CEOs have lined up in Washington trying to argue why their business should be exempted from tariffs and many have prevailed. So I think we've ended up in a pretty unfortunate position with the tariff policy. But again, the president ran on these policies and he implemented them.
How damaging will the immigration policy be for the economy? I know he ran on it, but how damaging will it be?
So it's a tale of two worlds. First of all, no country's borders should be open to mass immigration that is literally uncontrolled. And if you looked at the video footage or imagery of the southern border of the United States over the Biden administration, it was just chaos. And the president to his credit did exactly what should have been done years ago. He secured the southern border of the United States of America. Now the challenge with that is that the southern border of the United States of America was the source of a tremendous number of people who are willing to do tough, difficult jobs for relatively modest wages. Whether it's picking the crops in California, cleaning dishes in restaurants, helping to build buildings and houses, these are people who did a lot of very, very difficult work, very modest wages, which helped reduce the level of inflation in the United States. Losing that supply of labor over the years to come is going to come with it higher prices for housing, higher prices for foods and grocery stores. That's a negative. The bigger problem for the United States is we're potentially losing access to the best and brightest minds from around the world who have immigrated to America who have created just a tremendous number of jobs in the United States on the back of their creativity and ambition. You know, the majority of the AI startups are run by either immigrants or the children of immigrants. In fact, most of the Silicon Valley, the majority of the Silicon Valley is either run by immigrants or children of immigrants. The immigrant population of the United States has been transformative to our economy because we are able to bring so many of the world's best and brightest to America. Not trying to take away from the UK. I was with the leadership of a major UK institution recently, major UK educational institution and they spoke about all the great startups that were launched by the graduates of this institution in the UK and then the ones that got traction go to the US.
But that sounds that overall immigration policy is a net negative too.
So now let's turn to what you called the crony capitalism. You warned in September about the risks of crony capitalism in the US and since then we've seen the administration take stakes in a company. We've seen the president push around CEOs. Is America now a crony capitalist country?
I think it's really hard to extrapolate 12 months of what we've seen into the statement that America is a crony capitalist country. In fact, most the CEOs that I know find the idea of lobbying for favor in Washington to be quite distasteful. They want rules of the road. They want to understand the markets they're going to compete in. They want less regulation and they want to get on with business. They don't want to be in Washington trying to curry favor because they know that that's material in the long run.
But they may find it distasteful, but they know that what they need to do is get the president's phone number. I am struck whenever I talk to US CEOs. The single most important thing is do they know the president and how can they talk to the president? This is to me a kind of exhibit A of a crony capitalist country.
So exhibit A of a crony capitalist country though is much uglier than this picture. Much uglier than this picture. This president has come into office with an enormous amount of energy and an agenda to accomplish in four years. He's willing to break more glass. He's willing to step outside of traditional bounds of what the president would do because he knows he has a very small amount of time to accomplish what he wants to accomplish. So I think you need to balance the sort of in his mind the race against the clock trying to correct things that have gone wrong. And here's an important point, he has a willingness to listen to these CEOs.
That's true. Right? Like everyone says, 'Well, you know, why won't people speak up about the president and the president's policies and at the same time they're asking for his phone number?'
They know that President Trump will listen. They want to have a chance to advocate for their positions. Perhaps too much behind closed doors. Perhaps they should be more outspoken in what their concerns are in the public forum partially to keep the House and Senate informed as to what's important for American business. But President Trump, to his credit, he does listen to people.
That is definitely true. And certainly and we'll come to the positives because this is not just a list of negatives on the ledger. This is an administration very focused on helping business that it thinks is important and deregulating and removing barriers. But there's one more, two more negatives I want to talk about. Attacks on institutions. This is a presidency where if you are critical, you are punished. And if you don't do what the president does, you are punished. And let's take the attacks on the Federal Reserve, which are very, very obvious. Just a few days ago, you know, Jerome Powell, chair of the Federal Reserve, the Fed announced that they were subpoenaed for evidence in a criminal investigation with regard to the renovations, blatant pressure, as Chair Powell made very clear in a very powerful video. How damaging is that onslaught against the Fed?
So, I'm going to answer this slightly differently. What I don't understand is why does the president want to be so tightly associated with control of the Fed? Because often the Fed has to make incredibly unpopular decisions from a political perspective.
But surely because the president wants the Fed to make decisions that are popular from a political perspective and then wants it to do what he wants.
Well, okay. So let's take a huge step back. Why was President Trump elected?
To on largely on accounts of affordability and immigration?
Right. So I think that would be universally agreed upon. Immigration and inflation were two issues that really drove voters last November in the elections. November, a year and change ago, of course. All right. How do you control inflation? Inflation is controlled by the Fed making a politically unpopular decision to raise rates when need be to slow or cool the economy. I mean, Volcker was hated as he was doing this decades ago and now he is revered. But you want to have a level of distance from the Fed if you're the president in my opinion because you want the Fed to do the tough job of controlling inflation would need be even when that causes a rise in unemployment and causes real pain for American households. The easy money policies that Trump is trying to encourage the Fed to pursue increases the risk of inflation and I think puts both he and his party in a more precarious position.
And does the actual act of putting pressure on the Fed itself cause problems because you are seeing an independent institution being politicized?
So, clearly to the extent that you're seen as putting political pressure on an independent institution, you're making yourself own both the good and the bad that goes with that institution. And if I were the president, I would just look to create more distance.
Have you said that to him?
I've made this clear to members of his administration. I've not made that specific statement to him directly, but I have certainly made that clear to members of the administration.
Let's talk about geopolitics which is obviously obsessing everybody here in Davos. The question of Greenland is the question of the moment. What is the president trying to achieve and how would you characterize American foreign policy right now? I mean there people talk about America first. Is it America unconstrained? What is the sort of way you characterize it and is it good for America's economy?
There's a lot in that question. There's a lot in that question. All right, so let's take a huge step back. I mean, first and foremost, in contrast to the prior administration, this is a president who has a very active foreign policy agenda. And frankly, I do think that Trump portrays an America that's strong. We may have been in a very different place in Europe if Trump had been president. I dare say, would we have a war in the Ukraine if Trump had been president four years ago? Because he certainly projects a very different America than we saw with the Biden administration. His first big pivot obviously is to make sure that North, Central, and South America is not under the control of any other country in the world. He's trying to solidify America's footprint in our hemisphere and I think that there is amongst the American people support for that policy. Now the big wild card is where does this put the United States vis-a-vis China? Because today the geopolitical landscape is really the story of two superpowers, China and the United States both vying for their position in what is a rapidly evolving new world order. And clearly the United States, we have frayed our relationship with our European allies in ways that I don't understand or appreciate. But there is a push here to get Europe to step up both to be in a position to be more militarily capable. And what is not said, but what should be said is that Europe needs to grow its economy more quickly. A wealthier West is a more powerful West. And we need to see Europe really embrace a radically different set of policies. Go back and pull up Mario Draghi's report and implement it.
I don't think anybody in this room would disagree with that or indeed watching. Absolutely.
