GM102: China Built a Trap. Germany Set It. America Fell In. Europe Is Next ft. Michael Pettis

**Michael Pettis** (0:01)
Basically, if you think things have gotten bad in the past couple of years, well, you ain't seen nothing yet, because nothing has fundamentally changed. What really matters is if the US is able to get its act together and address its trade imbalances. And I think eventually it will. The US has to reindustrialize, and as part of that, it must bring down its trade deficit. That's when things really start to get rough for Europe.

**Niels Kaastrup-Larsen** (0:32)
Welcome to Top Traders Unplugged. In markets, success doesn't come from predicting what happens next. It comes from being prepared for what you can't predict.
In each episode, we go deep with some of the world's most thoughtful minds in investing, economics and beyond, to understand how they think, how they prepare and how they decide, and the experiences that shaped how they see the world. No noise, no short cuts, just real conversations to help you think better and invest with confidence.

**Alan Dunne** (1:06)
Welcome back to Top Traders Unplugged. My name is Alan Dunne, and this week, I'm delighted to be joined by Michael Pettis. Michael is a Senior Fellow at the Carnegie Endowment for International Peace. He also has taught economics and finance in China for 20 years or so. Prior to that, he worked in Wall Street and has JP Morgan and Barry Stearns. He's the author of several books. The most recent one, Class Wars, are Trade Wars with Matt Klein.
Michael, great to have you on as a guest. How are you?

**Michael Pettis** (1:34)
Very good. Thanks.

**Alan Dunne** (1:36)
Well, as I mentioned, you're the author of Trade Wars with Matt Klein, and we've had Matt on the floor, and that was a great conversation. So I've been really looking forward to this one as well and have followed your work for some time. You have a very interesting background. You started off in Wall Street and then you've integrated into teaching and research. What got you interested in economics, markets, finance in the first place?

**Michael Pettis** (2:02)
Well, you know, when I was on Wall Street, I was running fixed-income trading in capital markets desks, specializing in Latin America. I have a strong Spanish and Latin American background.
And one of the things that had occurred to me, which occurs to everyone who spends a lot of time writing Latin America, is that you really need to understand Latin American economic history to get a sense of where it is and where it's going. So I spent a huge amount of time studying Latin American economic history. And from there, I sort of became a economic and finance history junkie. And that sort of led naturally into thinking about economics and the development process.

**Alan Dunne** (2:50)
Very good. And I think I'm right in saying you're not formally trained in economics, in the sense that you don't have a Ph.D., you have an MBA in finance. Is that right?

**Michael Pettis** (2:59)
Yes. I have degrees in finance, but not in economics. And not to be nasty, but that means I probably make fewer mistakes than people with Ph.Ds in economics.

**Alan Dunne** (3:13)
Well, that was my question. I mean, it is interesting. Some people say he's an economist or he's not. What qualifies somebody to be an economist? Obviously, you're a well-known and well-regarded economist, I would say, now, without a Ph.D. But I mean, you probably think that gives you an advantage over people who are more classically trained. Is that fair?

**Michael Pettis** (3:33)
Well, yeah, I'm very much a systems guy. And one of the things that really worries me about economics is that, as you know, there's very little connection. Economics started as a description of the economy, but it sort of developed its own sort of processes that have been divorced from the real economy. It's almost a cliché to say that whether economists are right or wrong has almost no impact on the credibility of what they are saying, on the prestige of what they're saying.
So I would argue when you have two systems with their own internal processes and no feedback mechanism between the two, the tendencies that inevitably that they separate. So what I would argue is that academic economists do a very good job of describing a particular type of economy. Unfortunately, that economy doesn't exist, probably never has existed, and bears very little relationship to the Anglophone economies and even less relationship to the non-Anglophone economies and are almost incompetent in dealing with something like the Chinese economy, which is a very different economy.

**Alan Dunne** (4:48)
Okay. I mean, the economists will say their models are a simplification, but they can still draw reasonable inferences from their models. But I guess you disagree with that.