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Speaker 1: Bloomberg Audio Studios, podcasts, radio news.

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Speaker 2: Let's go over to the IMF headquarters where Lisa's standing

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Speaker 2: by with a special guest. Lisa, we're going to throw

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Speaker 2: it over to you.

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Speaker 1: Thank you so much. John. I am here at the

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Speaker 1: IOMF headquarters with Gita Gopinath, the first a Deputy Managing

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Speaker 1: Director for the IMF at a time of highly fraud

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Speaker 1: geopolitical tensions. All a discussion about fragmentation. You wrote a

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Speaker 1: paper that was fascinating about fragmentation. Just how much of

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Speaker 1: it is actually happening, the on shoring, near shoring, reshoring, etc.

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Speaker 2: Yes, So, Lisa, if you look at the data, and

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Speaker 2: if you look at just a superficial number, which is

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Speaker 2: a ratio of global trade to GDP, Now that number

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Speaker 2: is holding up really well, and you think everything looks fine,

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Speaker 2: But if you look under the surface, you're absolutely seeing

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Speaker 2: signs of fragmentation. And if you look at trade between

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Speaker 2: US centric block versus a China centric block, that's true

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Speaker 2: has gone on by much more than trade within geopolitically

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Speaker 2: aligned films. That's also true for foreign direct investments. So

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Speaker 2: we are seeing these shifts, but at the same time

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Speaker 2: we're also seeing the role of connected countries like Vietnam

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Speaker 2: and Mexico that are coming in and read channeling supply

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Speaker 2: chains around the world, and all of this can raise

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Speaker 2: the cost ultimately of goods for countries.

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Speaker 1: Which is really the key question here, which is how

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Speaker 1: much structurally higher is inflation in this new era of fragmentation.

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Speaker 2: This is a main concern and these are numbers that

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Speaker 2: we have to determine it now. We're still at an

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Speaker 2: early stage, so we aren't looking at very dramatic movements

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Speaker 2: over here. But if this process continues, it could lead

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Speaker 2: to much more inflationary pressures.

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Speaker 1: Or do you have a right in mind about is

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Speaker 1: it three percent or four percent? Is at the kind

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Speaker 1: of way we can imagine in this world.

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Speaker 2: Right now, based on the scale at which is happening,

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Speaker 2: I wouldn't say it would be that large, But again

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Speaker 2: the risk is fit heads in a muscle wars direction.

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Speaker 1: It seems like this is the path of travel. Everyone's

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Speaker 1: talking about fragmentation, everyone's talking about protectionist policies in an

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Speaker 1: era O where so many countries seem to be rejecting

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Speaker 1: free trade.

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Speaker 2: What's the IMS role? We have a really important role

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Speaker 2: to play as a multilateral institution. You know, the world

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Speaker 2: is moving away from a rules based trading system. So

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Speaker 2: what needs to happen is diplomacy and pragmatic approaches, and

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Speaker 2: that's what we're trying to push forward through this meeting,

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Speaker 2: getting countries together to work with pleas on areas where

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Speaker 2: they can agree on, like on services trade. There's must

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Speaker 2: more progress that's happening on services trade. We need to

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Speaker 2: work together on debt issues, on climate issues that will

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Speaker 2: hopefully rebuild trust and slow the process of fragmentation.

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Speaker 1: We also see an increase in geopolitical tensions, and we

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Speaker 1: saw this so fornight with the attacks in Iran. There

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Speaker 1: were some more questions around with the price of oiolage

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Speaker 1: it to nothing, but that says people are talking about

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Speaker 1: de escalation. At your tend yesterday was talking about the

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Speaker 1: possibility of an oil shock against the nineteen seventies with

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Speaker 1: oil prices going to one hundred dollars a barrel. Should

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Speaker 1: this escalate, do you foresee a similar type of thing happening.

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Speaker 2: This is a risk we worry about. If there is

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Speaker 2: a serious escalation, which means a much more wider regional

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Speaker 2: escalation than what if we've seen so far, then yes,

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Speaker 2: we could have a severe oil shock, but we're not

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Speaker 2: there yet. And as you can see in terms of

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Speaker 2: oil prices went up some but it's come back down.

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Speaker 2: We have supply excess capacity in Saudi Arabia, we have

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Speaker 2: non Opeque countries putting a lot more oil out on

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Speaker 2: the market. So there are other sources supply that can

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Speaker 2: you know, buffer these these shocks. But if there's a

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Speaker 2: large scale escalation in the Middle East, that is a problem.

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Speaker 1: Is that the line in the sand one hundred dollars

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Speaker 1: a barrel and now it consists of the shock.

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Speaker 2: I think you're going up one hundred dollars a barrel

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Speaker 2: will be problematic. But even going from here two hundred

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Speaker 2: dollars a battle would it be difficult for countries to

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Speaker 2: deal with. Was still fighting the last inflation fight, which

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Speaker 2: is to bring inflation back down to target.

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Speaker 1: One thing that the IMF has talked extensively about is

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Speaker 1: concerned about sovereign debt, in particular in the United States

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Speaker 1: and the overhang there. What's the outcome of that is

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Speaker 1: the fear of some sort of sort of flugflation or

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Speaker 1: just sort of a sluggish growth kind of picture because

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Speaker 1: of the overhang is at higher rates and potentially a

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Speaker 1: list trust moment, which I've been talking about and get

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Speaker 1: shot out all the time in the US, But is

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Speaker 1: there something like that that could potentially happen.

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Speaker 2: You know, the US is running very large deficits for

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Speaker 2: a country where demand is very strong and there is

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Speaker 2: still the last mile in terms of bringing inflation down.

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Speaker 2: So for all those reasons the deficit, we can't have

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Speaker 2: a deficit of seven percent of GDP. It needs to

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Speaker 2: be lower, and if you project out it's going to

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Speaker 2: stay at those high levels for a while. That has

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Speaker 2: consequences of course for debt servicing in the US. But

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Speaker 2: in a sense, the bring up problem is in terms

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Speaker 2: of spillow was to the rest of the world, Because

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Speaker 2: for the rest of the world, when you have so

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Speaker 2: much of death being issued by the US that can

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Speaker 2: crowd out the borrowing from other countries, their cost of

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Speaker 2: borrowing goes up and their death servicing costs go up

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Speaker 2: by much more. So you know, I wouldn't say the

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Speaker 2: US has a death sustainability problem now, but at the

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Speaker 2: same time, when the US is borrowing that heavily that

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Speaker 2: causes rates to be that much higher. It has implications

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Speaker 2: for the rest of the world. And for you know,

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Speaker 2: corporations and households in the US, how.

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Speaker 1: Much higher I mean, could you see rate staying here

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Speaker 1: between five twenty five and five fifty for the rest

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Speaker 1: of this year, for even in the next year.

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Speaker 2: That will not be our baseline. We would expect to

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Speaker 2: see rates coming down. So you know, right now there

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Speaker 2: is a it's for getting inflation back to target. So

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Speaker 2: we expect that to will come down. You know, it's

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Speaker 2: going to take a little longer, but we expect that

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Speaker 2: to come down. The questions whether it comes back down

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Speaker 2: towards we saw in the decade after the GFC, and

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Speaker 2: they're you know right now that doesn't seem to be case.

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Speaker 1: One thing that you talk about is this era of

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Speaker 1: fragmentation is going to lead to a higher inflationary regime.

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Speaker 1: Do you think it's appropriate for central banks to have

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Speaker 1: a higher inflation target long term as sort of their goal,

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Speaker 1: say not two percent but two and a half percent

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Speaker 1: or some of between two and three percent, just because

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Speaker 1: it is a different reality now.

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Speaker 2: So firstly, this is a conversation we should not be

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Speaker 2: having now. We need to ensure that information marked that

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Speaker 2: down to two percent. You know, monetary policy can pin

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Speaker 2: down a level of inflation. Yes, if you're going to

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Speaker 2: have a lot of volatility and that inflation statistic, that

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Speaker 2: will create problems because we are in a much more

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Speaker 2: shock par world. But again, you know that is a

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Speaker 2: conversation for Lata for.

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Speaker 1: Later, but it might be yes, okay, getting open app.

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Speaker 1: I know has to run otherwise you will walk off

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Speaker 1: the set because you have to get to a panel

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Speaker 1: that you guys are hosting. That was wonderful to speak

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Speaker 1: with you.

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Speaker 2: Thank you so much, Jja, Thank you so much.

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Speaker 1: John back to you, Lisa. Great work.

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Speaker 2: Thank you so much. Lisa, bravits there with the IMF

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Speaker 2: first Deputy Managed Director.

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Speaker 1: Get to go for not