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Peter Thiel is an American entrepreneur, hedge fund manager and venture capitalist.  He is Clarium’s President and the Chairman of the firm’s investment committee, which oversees the firm’s research, investment,[…]

The U.S. will be in a more competitive situation with other countries than it has been for a very long time.

Topic: America’s standing the world

Peter Thiel: There’s a very open question about how the U.S. is going to fit in with the rest of the world; how that relationship is going to evolve in the years ahead.  And you have a lot of big debates about whether the U.S is a declining power or wether its decline has been way too much foretold and is not at all the case. 

I do think it is the case that the U.S. will be moving towards a more competitive situation than it has found itself in for a very long time.  And that for much of the 20th century, the U.S. was sort of this unwitting beneficiary of the rest of the world doing crazy things and blowing itself up.  Sort of all the smart people fled to the U.S.  We had all the factories, and we’re, on a relative basis, in very good shape. 

That’s started to change.  I think the rest of the world has got a lot of crazy stuff going on in many places; but the absolute insanity level seems to have lessened quite a bit from what it was for much of the 20th century.  In that competitive world, it’s likely that we’ll end up with very, very different policies. 

One counter-intuitive instance of this is that I don’t think you will have a collapse of the dollar or massive inflation like we had at various parts of the 20th century. 

In 1971, when Connelly, the [Richard] Nixon Treasury Secretary, took the dollar off the gold standards, he famously remarked to the press, “Well it’s our money, but it’s the rest of the world’s problem”--because the rest of the world was stuck having no choice but to have dollars. 

Now that we’re in a more competitive world – and that includes competition between currencies, dollars, euros, and to a lesser extent pounds, and Swiss francs, or maybe even renminbi in China one day – you will not be able to take that sort of a cavalier policy, and there will be no hyper inflation I think. Instead we’re going to have a much tougher monetary policy. 

And that of course suggests that you have all sorts of bubbles.  Like the housing bubble in the U.S. at this time is probably a symptom in part of a belief that housing prices always go up.  That sort of expectation was bred by this 20th century history of inflation which was structurally linked to a world in which the U.S. wasn’t competing with anybody else. 

So I think there are sort of all these ways these big picture things intersect with some smaller ones.

Topic: Boom, bubble, bust.

Peter Thiel: I’ll give you a third example of something where I think is not at all been thought through very carefully, and that I think is a very strange fact about the financial markets. 

If you look at the markets over the last quarter century, there have been more booms, and bubbles, and busts than in all of previous history put together.  And they’ve been bigger in scope. 

So the first big one probably since Japan in the late 1980s where the emperor’s palace was deemed to be worth more than the state of California at the peak. 

You had another one in Asia in the mid-90s. 

You have the long term capital disaster in ’98 which was so bad that the mathematical models predicted it would not happen in a trillion times the history of the universe – much less.  Of course _________ nothing like that ever happened in the human history. 

Within two years you get the Internet bubble, NASDAQ hit 5,000, then again probably higher than any other stock market in history making all sorts of adjustments relative to GDP, relative to other measures. 

By 2003, you have a 10-year bond in Japan yielding 0.43 percent, the lowest in history.  Again a multi-trillion dollar market at extremes never before seen in history. 

Fast forward to today, and you have a housing bubble, a finance bubble, an emerging market bubble, all of which are, again, bigger than anything you’ve ever seen. 

So one thing that’s very, very strange when you have these enormous booms, bubbles, busts that are going on – and this is in complete contradiction to the prevailing theory that markets are becoming more and more efficient over time, and that the world is becoming a smoother and sort of more homogenous place – that it seems to me this mere fact suggests that the efficient market theory is, at best, very, very deeply incomplete. 

And one should think about why are we living in this world that’s prone to all these booms, and bubbles, and busts?  My best cut at an answer for why that is, is that it goes back to globalization. 

Every single bubble or boom in the history of the world has been linked to globalization in the last 300 years in the history of the modern world.  You can start in 1720 with the South Sea bubble, which was trade between Britain and the South Seas, the opposite end of the pole, literally the other end of the globe. 

Or the Mississippi Land Scheme in France in 1720. 

You had the railroads of the 19th century that were going to connect the world. 

In the 1920s, the boom was centered on car companies, of which there were 300 in the U.S.; and on radio, which was the new communications device which was going to connect people all over. 

And we’ve sort of seen this, and all of them had this element of globalization.  Even things like Japan, which is a completely insular country, the bubble was described as Japan Incorporated [sic] running the whole world because Japan had come up with a sort of ________ final synthesis of harmonious management-labor relations; and this represented the end of history. 

And the reason I think globalization is so prone to booms, and bubbles, and busts is that it’s very difficult to know how globalization is going to happen.  And you can look at it one way, and it looks like it’s going to be Japan running the world; or it looks like it’s going to be the Internet; or now it looks like it’s going to be a global market for labor – therefore the emerging markets, especially China and India, or global finance like hedge funds.  And you shift your perspective a tiny bit and you get something totally different. 

Like in the 1960s, for example, the bubble was not as big; but to the extent there was a major boom in the ‘60s, it was centered on outer space.  And the thesis would have been that the way you run the world would be that you control outer space. 

You change your perspective a tiny bit, you get to a very different account of how globalization is going to happen.  And I think we’re living in a world where one version of globalization is going to happen.  We don’t know which one it is.  And what we’ve seen over the last quarter century is this wild oscillation between these different accounts of globalization. Most of them, I think, have been largely fraudulent.  There definitely have been elements of reality to all of them.  Some are probably more real than others. 

And I think one of the challenges for investors, for informed citizens, for college students trying to figure out where they’re going to work in this world, is to try to make sense of this larger context.  I think you will do extremely well if you identify which of these is going to be the real trend that will lead to genuine globalization.  If you can figure that out, you’ll be set for the 21st century.

Recorded on: Sep 05, 2007