1 00:00:10,680 --> 00:00:14,000 Speaker 1: Hello, and welcome to another episode of the All Thoughts Podcast. 2 00:00:14,040 --> 00:00:16,160 Speaker 2: I'm Tracy Alloway and I'm Joe Wisenthal. 3 00:00:16,480 --> 00:00:18,759 Speaker 1: Joe, we are here at Jackson Hole, and I know 4 00:00:18,880 --> 00:00:21,000 Speaker 1: that so much of the focus is on the short 5 00:00:21,079 --> 00:00:24,599 Speaker 1: term outlook for rates, but really this is a gathering 6 00:00:24,640 --> 00:00:28,960 Speaker 1: to talk about the longer term framework of monetary policy. Yeah. 7 00:00:29,000 --> 00:00:32,879 Speaker 2: It's so funny because it is an academic conference and 8 00:00:32,920 --> 00:00:35,040 Speaker 2: there are all these like sort of like big think 9 00:00:35,680 --> 00:00:38,559 Speaker 2: sort of conversations going on about, you know, the changing 10 00:00:38,680 --> 00:00:40,839 Speaker 2: nature of the global economy something like that. I think 11 00:00:40,840 --> 00:00:43,280 Speaker 2: it's actually the theme, like the structural changes in the 12 00:00:43,320 --> 00:00:46,640 Speaker 2: global economy. But like ninety nine percent of the media 13 00:00:46,760 --> 00:00:48,800 Speaker 2: interest in this whole event is like, are we going 14 00:00:48,840 --> 00:00:51,040 Speaker 2: to get a rate hike it November December, you know, 15 00:00:51,080 --> 00:00:51,720 Speaker 2: But there is so. 16 00:00:51,760 --> 00:00:54,319 Speaker 1: Much more right And one of the big themes that 17 00:00:54,520 --> 00:00:58,160 Speaker 1: is emerging is this idea of living in a world 18 00:00:58,280 --> 00:01:02,000 Speaker 1: where there is more debt outstanding. And we've seen that 19 00:01:02,080 --> 00:01:05,640 Speaker 1: sort of pop up a number of times in recent months. 20 00:01:05,680 --> 00:01:08,479 Speaker 1: Of course, you had Fitch downgrading the most credit rating 21 00:01:08,600 --> 00:01:14,040 Speaker 1: because partly of the public finance trajectory. You've had volatility 22 00:01:14,160 --> 00:01:17,680 Speaker 1: in the treasury market, You've had questions over whether or 23 00:01:17,720 --> 00:01:20,320 Speaker 1: not investors are still going to want to buy bonds 24 00:01:20,520 --> 00:01:24,080 Speaker 1: at a time when there's enormous supply, and also the 25 00:01:24,160 --> 00:01:27,600 Speaker 1: FED out to raise rates and potentially bring down inflation. 26 00:01:27,959 --> 00:01:31,000 Speaker 2: Yeah, I would say there's sort of two dynamics that 27 00:01:31,120 --> 00:01:33,679 Speaker 2: I think is really interesting here with regards to sort 28 00:01:33,720 --> 00:01:35,959 Speaker 2: of like public spending and public debts. So I think 29 00:01:36,000 --> 00:01:38,760 Speaker 2: there's sort of like some of the technical factors that 30 00:01:39,120 --> 00:01:41,320 Speaker 2: you've described, and of course we talked about them with 31 00:01:41,600 --> 00:01:46,360 Speaker 2: Darryl Duffy as well, the capacity for debt absorption. And 32 00:01:46,440 --> 00:01:49,560 Speaker 2: then we're also living in an age it's very different 33 00:01:49,600 --> 00:01:52,280 Speaker 2: from the twenty tens in which fiscal authorities are taking 34 00:01:52,320 --> 00:01:55,280 Speaker 2: a much more active role in economic management. And so 35 00:01:55,400 --> 00:01:58,200 Speaker 2: the twenty tens we sort of, you know, fiscal took 36 00:01:58,200 --> 00:02:01,400 Speaker 2: a backseat, all the pressure was placed on the monetary 37 00:02:01,400 --> 00:02:03,680 Speaker 2: authorities to get us back to full employment so forth. 38 00:02:04,160 --> 00:02:06,680 Speaker 2: And the twenties so far feel very different from that 39 00:02:06,840 --> 00:02:10,000 Speaker 2: because we've had these big spending bills, very active management, 40 00:02:10,080 --> 00:02:13,079 Speaker 2: and so how that interacts with policy, what that means 41 00:02:13,120 --> 00:02:15,640 Speaker 2: for inflation, what that means for central bankers, et cetera. 42 00:02:15,880 --> 00:02:17,800 Speaker 2: And I think all of these questions like what that 43 00:02:17,919 --> 00:02:20,440 Speaker 2: means for central bankers, what that means for the macro 44 00:02:20,680 --> 00:02:22,799 Speaker 2: trajectory going forward is going to be debated, I mean 45 00:02:22,800 --> 00:02:23,600 Speaker 2: probably for years. 46 00:02:23,840 --> 00:02:27,440 Speaker 1: Exactly right, let's get a jumpstart on this topic of 47 00:02:27,840 --> 00:02:30,280 Speaker 1: high public debt. And I'm glad to say we really 48 00:02:30,360 --> 00:02:33,079 Speaker 1: do have the perfect guest. We're going to be speaking with, 49 00:02:33,400 --> 00:02:36,440 Speaker 1: Barry eichen Green. He is the professor of economics at 50 00:02:36,560 --> 00:02:40,120 Speaker 1: University of California at Berkeley and the man that central 51 00:02:40,160 --> 00:02:43,840 Speaker 1: bankers here at Jackson Hole have tapped to research and 52 00:02:43,919 --> 00:02:47,000 Speaker 1: discuss this exact topic. So, Barry, thank you so much 53 00:02:47,000 --> 00:02:48,520 Speaker 1: for coming on. All thoughts, good to. 54 00:02:48,440 --> 00:02:51,119 Speaker 3: Be with you. Before we go on, tell me where 55 00:02:51,120 --> 00:02:52,320 Speaker 3: did the name odd locks? 56 00:02:54,160 --> 00:02:58,480 Speaker 1: Well, it's actually an old bond term for bond trades 57 00:02:58,639 --> 00:02:59,880 Speaker 1: of non standardized. 58 00:03:00,520 --> 00:03:03,040 Speaker 2: When we started the podcast years ago, we didn't really 59 00:03:03,040 --> 00:03:04,440 Speaker 2: know what it was going to be, but we sort 60 00:03:04,440 --> 00:03:06,040 Speaker 2: of had a sense that maybe, like you know, we 61 00:03:06,080 --> 00:03:09,160 Speaker 2: try to find some off the beaten path stories and 62 00:03:09,240 --> 00:03:11,640 Speaker 2: so what's something that sounded like that, like a odd 63 00:03:11,639 --> 00:03:14,160 Speaker 2: lots sounded good and it stucks. Yeah, it works. 64 00:03:14,760 --> 00:03:18,520 Speaker 1: So Barry, let me start with a really simple question here. 65 00:03:19,000 --> 00:03:22,840 Speaker 1: Why do governments seem to borrow so much like what 66 00:03:23,000 --> 00:03:26,160 Speaker 1: is going on that in twenty twenty three. We do 67 00:03:26,280 --> 00:03:29,480 Speaker 1: have these massive fiscal deficits, and we have had them 68 00:03:29,720 --> 00:03:30,519 Speaker 1: for a long time. 69 00:03:30,760 --> 00:03:35,000 Speaker 3: Governments borrow for both reasons, good and bad. So we've 70 00:03:35,040 --> 00:03:40,400 Speaker 3: seen that governments borrow to finance emergency responses to great recessions, 71 00:03:40,760 --> 00:03:46,440 Speaker 3: financial crises, pandemics, wars, and throughout history they have done 72 00:03:46,440 --> 00:03:50,600 Speaker 3: that when in exceptional circumstances, governments have to resort to 73 00:03:50,840 --> 00:03:55,560 Speaker 3: exceptional fiscal policies, and they do do so by borrowing, 74 00:03:55,720 --> 00:03:59,400 Speaker 3: sometimes big time. On the other hand, it would be 75 00:03:59,560 --> 00:04:04,720 Speaker 3: nice were governments to reduce those heavy debt burdens once 76 00:04:04,760 --> 00:04:08,720 Speaker 3: the emergency has passed and restore that capacity to borrow. 77 00:04:09,160 --> 00:04:12,080 Speaker 3: And that's where the borrowing for bad reasons kicks in. 78 00:04:12,240 --> 00:04:16,280 Speaker 3: When you have divided government, where you have inability of 79 00:04:16,520 --> 00:04:21,320 Speaker 3: different political factions to agree on which form of public 80 00:04:21,400 --> 00:04:25,240 Speaker 3: spending to cut or whose taxes to increase in order 81 00:04:25,279 --> 00:04:29,880 Speaker 3: to restore fiscal balance restore fiscal sustainability, you have the 82 00:04:30,040 --> 00:04:35,000 Speaker 3: persistence of those fiscal deficits in high debt ratio. So again, 83 00:04:35,040 --> 00:04:38,880 Speaker 3: there are good reasons why governments and current public debts, 84 00:04:39,000 --> 00:04:41,640 Speaker 3: and there are bad reasons why they persist. 85 00:04:41,640 --> 00:04:46,080 Speaker 2: Just a quick question. And Tracy mentioned in the intro 86 00:04:46,240 --> 00:04:49,799 Speaker 2: that you've been invited to this event to talk about 87 00:04:49,800 --> 00:04:52,120 Speaker 2: your research in this area and you've done new research, 88 00:04:52,400 --> 00:04:55,120 Speaker 2: and that this event is more than just an opportunity 89 00:04:55,160 --> 00:04:56,800 Speaker 2: for Wall Street to say it is the high to 90 00:04:56,880 --> 00:04:59,039 Speaker 2: be in November or December. There's a lot more. First 91 00:04:59,040 --> 00:05:00,720 Speaker 2: of all, actually just a very like sort of like 92 00:05:01,120 --> 00:05:03,480 Speaker 2: not to meet. Yeah, how does this like, how does 93 00:05:03,480 --> 00:05:05,240 Speaker 2: it work? I think people are sort of at least 94 00:05:05,279 --> 00:05:07,000 Speaker 2: I'm curious, maybe knowing not Maybe it just me and 95 00:05:07,040 --> 00:05:08,560 Speaker 2: Tracey are curious. But how does it work? How do 96 00:05:08,560 --> 00:05:11,479 Speaker 2: you get like invited? What is the process to like 97 00:05:11,560 --> 00:05:14,040 Speaker 2: come like a give give a talk and present a 98 00:05:14,080 --> 00:05:15,160 Speaker 2: paper here at Jackson Hall. 99 00:05:15,640 --> 00:05:17,560 Speaker 3: So I can tell you what I what I see 100 00:05:17,560 --> 00:05:20,560 Speaker 3: and know. Sure, as one of the invited speakers, but 101 00:05:21,520 --> 00:05:24,320 Speaker 3: you should have the folks from the Kansas City fed 102 00:05:24,880 --> 00:05:28,760 Speaker 3: on as well. They're the conveners. But what I see 103 00:05:29,080 --> 00:05:31,960 Speaker 3: is they came to me, and I've done this once 104 00:05:32,040 --> 00:05:34,919 Speaker 3: or twice before, same story. Then they came to me 105 00:05:35,000 --> 00:05:38,160 Speaker 3: at the beginning of the year in January or February 106 00:05:38,720 --> 00:05:43,280 Speaker 3: with an agenda of for topics, and they say this 107 00:05:43,360 --> 00:05:45,360 Speaker 3: is the one topic number four we would like you 108 00:05:45,440 --> 00:05:47,360 Speaker 3: to write on are you willing to do so? And 109 00:05:47,440 --> 00:05:49,720 Speaker 3: the topic has a title, and it has a paragraph 110 00:05:50,040 --> 00:05:52,960 Speaker 3: of why the topic is important and what some of 111 00:05:53,000 --> 00:05:55,840 Speaker 3: the issues that you might discuss in your paper are 112 00:05:56,200 --> 00:05:59,159 Speaker 3: and then they let you go. So there was a 113 00:05:59,279 --> 00:06:02,600 Speaker 3: check in a couple of months ago where I had 114 00:06:02,600 --> 00:06:05,159 Speaker 3: a phone call with the research director and he said, 115 00:06:05,600 --> 00:06:07,599 Speaker 3: are you on course? Is the paper going well? And 116 00:06:07,640 --> 00:06:09,080 Speaker 3: I said sure? And he said, all right, see you 117 00:06:09,120 --> 00:06:15,760 Speaker 3: and jacksonvill So they commission more experienced scholars. That's a 118 00:06:15,800 --> 00:06:18,240 Speaker 3: way of saying, this is not my first rodeo, if 119 00:06:18,240 --> 00:06:21,840 Speaker 3: you will Jackson Hole talk and terminology. And then they 120 00:06:21,960 --> 00:06:25,839 Speaker 3: just let us go with it. They trust us to produce. 121 00:06:25,920 --> 00:06:29,359 Speaker 3: And this is the kind of high profile event where 122 00:06:29,480 --> 00:06:34,239 Speaker 3: the self imposed pressure to produce is great sufficient to 123 00:06:34,279 --> 00:06:35,920 Speaker 3: deliver the MisOr result. 124 00:06:36,320 --> 00:06:37,960 Speaker 1: I was going to ask, does anyone ever say no 125 00:06:38,120 --> 00:06:38,960 Speaker 1: to the Kansas Fed? 126 00:06:39,360 --> 00:06:43,320 Speaker 3: So you know, we don't know that from as authors, 127 00:06:43,400 --> 00:06:45,760 Speaker 3: but if you look at the list of participants, it's 128 00:06:45,800 --> 00:06:51,200 Speaker 3: pretty evident that for reasons of both quality of intellectual 129 00:06:51,240 --> 00:06:53,720 Speaker 3: program and scenery, people rarely say no. 130 00:06:54,080 --> 00:06:57,720 Speaker 2: So let's get into I mean, it's a monetary Policy Symposium. 131 00:06:57,920 --> 00:07:01,640 Speaker 2: Your research is on sort of the fiscal side, public spending, 132 00:07:01,760 --> 00:07:04,120 Speaker 2: public debt. Talk to us just about how you sort 133 00:07:04,160 --> 00:07:06,920 Speaker 2: of like see this interaction and I sort of mentioned 134 00:07:06,920 --> 00:07:09,320 Speaker 2: in the intro the twenty tens it felt like fiscal 135 00:07:09,320 --> 00:07:11,560 Speaker 2: authorities were kind of on the backseat, not a lot 136 00:07:11,600 --> 00:07:14,520 Speaker 2: of active management. How do you you know, sort of 137 00:07:14,520 --> 00:07:16,400 Speaker 2: big picture and that we could get more granular, like 138 00:07:16,560 --> 00:07:20,280 Speaker 2: why should central bankers be thinking more about the role 139 00:07:20,320 --> 00:07:23,120 Speaker 2: of high public debt and high public deficits as they 140 00:07:23,160 --> 00:07:25,520 Speaker 2: think of charting the course of monetary policy going forward? 141 00:07:25,880 --> 00:07:28,640 Speaker 3: Central bankers have to worry about two things. Number one, 142 00:07:28,720 --> 00:07:32,440 Speaker 3: that fiscal authorities in many countries and here the US 143 00:07:32,520 --> 00:07:36,520 Speaker 3: is special because of the dollars global role in most 144 00:07:36,600 --> 00:07:39,480 Speaker 3: countries other than the United States, there will be less 145 00:07:39,560 --> 00:07:43,480 Speaker 3: room for an active fiscal response going forward. So there 146 00:07:43,640 --> 00:07:46,440 Speaker 3: was one in response to the global financial crisis in 147 00:07:46,520 --> 00:07:50,520 Speaker 3: many countries again during COVID, and as a result of that, 148 00:07:50,760 --> 00:07:55,119 Speaker 3: debt to GDP ratios on average have doubled worldwide, which 149 00:07:55,160 --> 00:07:59,440 Speaker 3: means that scope for using fiscal policy in response to 150 00:07:59,480 --> 00:08:02,280 Speaker 3: the next vis whatever it might be, will be less. 151 00:08:02,320 --> 00:08:04,680 Speaker 3: So will we have to go back to the world 152 00:08:04,760 --> 00:08:08,200 Speaker 3: where monetary policy is the only game in town, and 153 00:08:08,280 --> 00:08:11,840 Speaker 3: the answer is to an extent yes. Factor number two 154 00:08:12,080 --> 00:08:15,800 Speaker 3: is that central banks will come under pressure to be 155 00:08:16,000 --> 00:08:20,120 Speaker 3: more active debt managers. Some people will argue that if 156 00:08:20,160 --> 00:08:24,320 Speaker 3: they accept a higher inflation rate, that will make managing 157 00:08:24,760 --> 00:08:28,360 Speaker 3: the debt easier because we'll be inflating away the real 158 00:08:28,480 --> 00:08:31,360 Speaker 3: value of the debt. I disagree with that, because I 159 00:08:31,360 --> 00:08:35,960 Speaker 3: think yields will respond in any benefit from an inflation 160 00:08:36,160 --> 00:08:40,360 Speaker 3: for debt management will be fleeting. But pressure to keep 161 00:08:40,400 --> 00:08:44,120 Speaker 3: interest rates slow and tolerate more inflation will be more 162 00:08:44,120 --> 00:08:46,880 Speaker 3: intense than otherwise because of this heavy debt. 163 00:08:47,040 --> 00:08:49,920 Speaker 1: So you touched on it in that answer, But let 164 00:08:49,920 --> 00:08:52,559 Speaker 1: me press you on this particular point and ask the 165 00:08:52,600 --> 00:08:56,600 Speaker 1: devil's advocate question. I'm going to channel my inner modern 166 00:08:56,720 --> 00:09:01,480 Speaker 1: monetary theory. Dearest persona. Here are high levels of debt 167 00:09:01,679 --> 00:09:02,839 Speaker 1: always bad. 168 00:09:03,280 --> 00:09:06,280 Speaker 3: High levels of debt are always worse than low levels 169 00:09:06,320 --> 00:09:09,000 Speaker 3: of debt. So we would all like to see the 170 00:09:09,040 --> 00:09:12,480 Speaker 3: debt to GDP ratio in the United States and globally 171 00:09:12,520 --> 00:09:16,840 Speaker 3: be lower because governments will be able to use more 172 00:09:16,840 --> 00:09:20,400 Speaker 3: of their tax revenues for purposes other than debt service. 173 00:09:20,480 --> 00:09:24,360 Speaker 3: We have the green transition we have infrastructure needs, we 174 00:09:24,400 --> 00:09:27,520 Speaker 3: have all the obvious things that only government can do, 175 00:09:27,760 --> 00:09:31,360 Speaker 3: and we need government to do those things. If government 176 00:09:31,480 --> 00:09:36,000 Speaker 3: is using its limited tax revenues to pay interest on 177 00:09:36,080 --> 00:09:39,240 Speaker 3: the debt, it has fewer resources left over for those 178 00:09:39,280 --> 00:09:43,360 Speaker 3: other good things. So from that point, a few heavy 179 00:09:43,480 --> 00:09:48,000 Speaker 3: inherited debts are a bit of a drag on economic growth. 180 00:09:48,040 --> 00:09:53,079 Speaker 3: If you believe, as I do, that publicly financed infrastructure 181 00:09:53,440 --> 00:09:59,240 Speaker 3: and publicly subsidized climate change related and investment will be 182 00:09:59,280 --> 00:10:01,840 Speaker 3: important for economic growth going. 183 00:10:01,640 --> 00:10:04,240 Speaker 1: Forward, it sounds like there could almost be a distinction 184 00:10:04,360 --> 00:10:08,760 Speaker 1: between bad debt overhangs and good debt. If the good 185 00:10:08,800 --> 00:10:13,000 Speaker 1: debt is taken out in the name of higher economic growth. 186 00:10:13,320 --> 00:10:18,360 Speaker 3: If government is borrowing to finance investments that make people 187 00:10:18,440 --> 00:10:22,960 Speaker 3: and the economy more productive, so that grows the denominator 188 00:10:23,040 --> 00:10:25,439 Speaker 3: of the debt to GDP ratio, the debt is less 189 00:10:25,480 --> 00:10:27,400 Speaker 3: of a problem than it would be otherwise. 190 00:10:27,760 --> 00:10:32,760 Speaker 2: What are some historical analogies to right now, because you know, 191 00:10:33,040 --> 00:10:35,559 Speaker 2: there's we've had so it feels like there's kind of 192 00:10:35,640 --> 00:10:39,160 Speaker 2: two things happening. Once there was the emergency spending in 193 00:10:39,200 --> 00:10:43,280 Speaker 2: the immediate wake or when COVID hit obviously, and then 194 00:10:43,320 --> 00:10:45,600 Speaker 2: there is this sort of at least in the United States, 195 00:10:45,640 --> 00:10:49,679 Speaker 2: and I think somewhat elsewhere, a certain more aggressive political 196 00:10:49,720 --> 00:10:52,640 Speaker 2: winds shifting about our willingness to spend and again, you know, 197 00:10:53,120 --> 00:10:55,680 Speaker 2: infrastructure and climate and chips in a way that we 198 00:10:55,679 --> 00:10:59,040 Speaker 2: didn't really see for a long time. There any previous 199 00:10:59,200 --> 00:11:02,080 Speaker 2: historical analogies that you can think of. Is it mostly 200 00:11:02,160 --> 00:11:05,240 Speaker 2: wars in which you see the sort of like regime 201 00:11:05,240 --> 00:11:06,920 Speaker 2: shift to the level of public debt. 202 00:11:07,280 --> 00:11:11,040 Speaker 3: I think it is emergencies tantamount to war. I'm an 203 00:11:11,040 --> 00:11:13,640 Speaker 3: economic historian, but I'm also a firm believer that the 204 00:11:13,760 --> 00:11:17,719 Speaker 3: role of historical analysis is not simply to draw parallels 205 00:11:18,360 --> 00:11:21,360 Speaker 3: or analogies, but to look for differences between then and now. 206 00:11:21,440 --> 00:11:25,720 Speaker 3: What is distinctive about our current situation. I'm worried about 207 00:11:25,800 --> 00:11:29,080 Speaker 3: the trajectory of debt. I'm worried about the trajectory of 208 00:11:29,080 --> 00:11:31,800 Speaker 3: the economy more broadly in the United States, because of 209 00:11:31,840 --> 00:11:37,040 Speaker 3: the extent of political polarization and the need for a 210 00:11:37,120 --> 00:11:42,840 Speaker 3: degree of political consensus to bring financial problems generally under control. 211 00:11:43,240 --> 00:11:47,199 Speaker 3: I think political polarization and fractionalization in the United States 212 00:11:47,240 --> 00:11:51,400 Speaker 3: are greater than any time in my lifetime. So from 213 00:11:51,640 --> 00:11:54,320 Speaker 3: that point a few Debt to GDP was higher after 214 00:11:54,360 --> 00:11:57,240 Speaker 3: World War Two, but you know, we had the McCarthy 215 00:11:57,320 --> 00:12:02,400 Speaker 3: years and politics were not exactly placid in the United States. 216 00:12:02,480 --> 00:12:05,120 Speaker 3: But I do not see a scenario at the moment 217 00:12:05,200 --> 00:12:09,200 Speaker 3: where the two parties can reach an agreement on raising 218 00:12:09,320 --> 00:12:14,560 Speaker 3: more tax revenues and bringing entitlement spending under control, which 219 00:12:14,600 --> 00:12:17,080 Speaker 3: is what you would need in order to flatten the 220 00:12:17,440 --> 00:12:18,400 Speaker 3: debt trajectory. 221 00:12:18,559 --> 00:12:21,480 Speaker 1: What is the political appetite to bring down debt because 222 00:12:21,480 --> 00:12:25,360 Speaker 1: it feels like you're always going to have politicians who 223 00:12:25,480 --> 00:12:29,720 Speaker 1: maybe are eyeing short term gains, you know, cut taxes, 224 00:12:29,880 --> 00:12:34,400 Speaker 1: boost public spending in order to win another vote, versus 225 00:12:34,520 --> 00:12:37,920 Speaker 1: maybe a longer term gain of actually bringing down the 226 00:12:37,920 --> 00:12:41,160 Speaker 1: public debt. And that tension seems really hard to surmount. 227 00:12:41,360 --> 00:12:45,120 Speaker 3: In my paper four Jackson Hole, we look at some 228 00:12:45,200 --> 00:12:50,840 Speaker 3: of these historical experiences and thereof two varieties. Number One, 229 00:12:51,240 --> 00:12:55,040 Speaker 3: if you have a crisis that's enough to galvanize thought 230 00:12:55,400 --> 00:12:59,280 Speaker 3: and action such that governments are able to bring down debts. 231 00:13:00,040 --> 00:13:04,760 Speaker 3: The Greek government crisis in twenty ten, Iceland crisis in 232 00:13:04,880 --> 00:13:08,959 Speaker 3: two thousand and eight have been able to run budget surplus' 233 00:13:09,400 --> 00:13:15,480 Speaker 3: technical term primary budget surpluses excluding interest payments for the 234 00:13:15,559 --> 00:13:19,160 Speaker 3: last ten years, and think about the United States, that's 235 00:13:19,280 --> 00:13:23,800 Speaker 3: inconceivable here. But what impelled them into action was serious 236 00:13:24,040 --> 00:13:27,800 Speaker 3: economic and financial crises and the conclusion that there was 237 00:13:27,800 --> 00:13:31,560 Speaker 3: no alternative but get this problem under control. And the 238 00:13:31,600 --> 00:13:36,199 Speaker 3: other historically cases have been those in which there has 239 00:13:36,280 --> 00:13:41,520 Speaker 3: been a broad political consensus where one party or typically 240 00:13:41,600 --> 00:13:45,679 Speaker 3: coalition of parties in the European setting where you have 241 00:13:45,720 --> 00:13:50,080 Speaker 3: coalition governments have been able to agree on a program 242 00:13:50,240 --> 00:13:53,600 Speaker 3: of bringing fiscal policy in the debt under control. So 243 00:13:53,960 --> 00:13:57,920 Speaker 3: bring those two cases to the United States. The first one, 244 00:13:58,000 --> 00:14:00,760 Speaker 3: the crisis scenario, is not one we want to contemplate. 245 00:14:00,800 --> 00:14:04,000 Speaker 3: In the second one, broad consensus on what to do 246 00:14:04,600 --> 00:14:05,920 Speaker 3: is hard to imagine. 247 00:14:05,960 --> 00:14:08,880 Speaker 2: We would probably really need just like one party to 248 00:14:09,320 --> 00:14:12,560 Speaker 2: sweep in massively with some sort of effort to either 249 00:14:12,640 --> 00:14:15,880 Speaker 2: cut spending or race taxes. But it's interesting because, like 250 00:14:15,880 --> 00:14:18,679 Speaker 2: I've read a little bit in the eighties and the nineties, 251 00:14:18,880 --> 00:14:22,120 Speaker 2: even as recently as in the eighties and nineties, there 252 00:14:22,160 --> 00:14:28,680 Speaker 2: were occasionally multi party efforts to cut you know, I mean, 253 00:14:28,720 --> 00:14:31,680 Speaker 2: George H. W. Bush like famously like promise not to 254 00:14:31,800 --> 00:14:33,720 Speaker 2: raise taxes. They read my libs and then he did 255 00:14:33,800 --> 00:14:36,960 Speaker 2: raise taxes a little bit. So it's like, even fairly recently, 256 00:14:37,000 --> 00:14:41,400 Speaker 2: there was some appetite in DC among both Democrats and 257 00:14:41,440 --> 00:14:44,200 Speaker 2: Republicans to address deficits from time to. 258 00:14:44,120 --> 00:14:48,080 Speaker 3: Time, and not only George HW. Bush, but William Jefferson 259 00:14:48,080 --> 00:14:51,920 Speaker 3: Clinton right as well, that the budget was broadly balanced 260 00:14:51,960 --> 00:14:54,000 Speaker 3: through the nineteen nineties. And I would remind you that 261 00:14:54,040 --> 00:14:56,360 Speaker 3: at the end of the nineties we were talking about 262 00:14:56,400 --> 00:14:59,920 Speaker 3: the disappearance of US Treasury that and how financial mar 263 00:15:00,000 --> 00:15:03,800 Speaker 3: markets would price assets in the absence of treasury bonds 264 00:15:03,840 --> 00:15:08,680 Speaker 3: because the wow, what are your time running surpluses? So 265 00:15:09,280 --> 00:15:13,640 Speaker 3: it has been possible in the US context, But then 266 00:15:13,760 --> 00:15:17,440 Speaker 3: we got the tea party and we got social media. 267 00:15:17,560 --> 00:15:20,800 Speaker 3: You know, everybody will have their favorite culprit for why 268 00:15:20,880 --> 00:15:25,239 Speaker 3: we've had this increase in political polarization in the US. 269 00:15:25,320 --> 00:15:27,080 Speaker 3: But it's a fact. 270 00:15:30,240 --> 00:15:36,400 Speaker 1: You mentioned the dollars reserve status earlier. Does the idiosyncratic 271 00:15:36,760 --> 00:15:40,720 Speaker 1: role of US assets in the global financial system, the 272 00:15:40,760 --> 00:15:44,600 Speaker 1: safe haven status of US treasuries, does that insulate the 273 00:15:44,720 --> 00:15:49,240 Speaker 1: US somewhat from experiencing a crisis on the scale of 274 00:15:49,360 --> 00:15:50,720 Speaker 1: a Greece or in Iceland. 275 00:15:50,840 --> 00:15:54,480 Speaker 3: Well, it certainly gives the US Treasury more room to run. 276 00:15:54,640 --> 00:16:00,200 Speaker 3: In other words, there is this significant and expanding appetite 277 00:16:00,240 --> 00:16:03,160 Speaker 3: for US Treasury bonds on the part of central banks 278 00:16:03,200 --> 00:16:06,920 Speaker 3: around the world which hold them as foreign reserves. And 279 00:16:07,320 --> 00:16:10,760 Speaker 3: as we show in the paper, there is significant and 280 00:16:10,840 --> 00:16:13,360 Speaker 3: expanding appetite for US treasuries on the part of the 281 00:16:13,400 --> 00:16:18,720 Speaker 3: private sector, corporate treasurers, institutional investors of all kinds that 282 00:16:18,840 --> 00:16:21,680 Speaker 3: view them as kind of a safe asset that they 283 00:16:21,720 --> 00:16:25,160 Speaker 3: can hold as the bedrock of their portfolio. So we 284 00:16:25,240 --> 00:16:28,880 Speaker 3: can keep adding to the stock of treasuries in the 285 00:16:28,880 --> 00:16:31,920 Speaker 3: hands of the public for a longer time than can 286 00:16:32,080 --> 00:16:37,280 Speaker 3: other central banks that don't enjoy the same exorbitant privilege 287 00:16:37,320 --> 00:16:41,680 Speaker 3: that their currency is a global currency. Things can change, 288 00:16:42,600 --> 00:16:47,360 Speaker 3: so I think, to my mind, there are The big 289 00:16:47,480 --> 00:16:52,720 Speaker 3: risk would be a disorderly debt ceiling blowout, which the 290 00:16:52,760 --> 00:16:55,640 Speaker 3: debt ceiling will be back on the table, if you will, 291 00:16:55,720 --> 00:17:01,000 Speaker 3: after the presidential elections, so that problem and the danger 292 00:17:01,080 --> 00:17:05,160 Speaker 3: it poses to the dollar's global role are not off 293 00:17:05,240 --> 00:17:05,639 Speaker 3: the table. 294 00:17:05,920 --> 00:17:07,840 Speaker 1: Is this going to turn into a coin episode? 295 00:17:07,920 --> 00:17:10,639 Speaker 2: No, No, it's always you who thinks it's going to 296 00:17:10,720 --> 00:17:11,600 Speaker 2: And I wasn't going next. 297 00:17:11,720 --> 00:17:14,400 Speaker 1: I live in perpetual fear but. 298 00:17:15,240 --> 00:17:16,520 Speaker 2: You know, I was going to ask, like, okay, and 299 00:17:16,560 --> 00:17:18,919 Speaker 2: you sort of anticipated. But when you think about like 300 00:17:19,000 --> 00:17:23,639 Speaker 2: what are tipping points and for when the government's public 301 00:17:23,680 --> 00:17:27,280 Speaker 2: debt suddenly people go from thinking it's safe and it's 302 00:17:27,280 --> 00:17:29,320 Speaker 2: something they want to hold, it's something lickdid to something 303 00:17:29,359 --> 00:17:32,920 Speaker 2: they're anxious. Is the scenario that's more likely to create 304 00:17:32,960 --> 00:17:36,480 Speaker 2: a tipping point something where it's like a ratio, where 305 00:17:36,480 --> 00:17:39,040 Speaker 2: it's like, okay, there's some level and we're concerned about 306 00:17:39,119 --> 00:17:42,200 Speaker 2: debt service, like sort of like a classic credit concerns. 307 00:17:42,520 --> 00:17:45,520 Speaker 2: Or is it more like something the public starts to 308 00:17:45,600 --> 00:17:49,199 Speaker 2: lose faith and not necessarily even do a ratio or 309 00:17:49,240 --> 00:17:52,159 Speaker 2: do to a stock of debt, but something about the 310 00:17:52,240 --> 00:17:55,879 Speaker 2: US political system in which people do not feel good 311 00:17:56,119 --> 00:18:00,920 Speaker 2: about what that government guarantee means. Whether it's something technical 312 00:18:01,040 --> 00:18:03,520 Speaker 2: like the existence of not raising the dead ceiling, or 313 00:18:03,600 --> 00:18:06,600 Speaker 2: just a sort of like further degradation of the quality 314 00:18:06,720 --> 00:18:07,880 Speaker 2: of politics in DC. 315 00:18:08,480 --> 00:18:11,600 Speaker 3: I think it's the politics that are the real and 316 00:18:12,359 --> 00:18:18,880 Speaker 3: present danger. If financial conditions deteriorate very gradually, yields will 317 00:18:19,080 --> 00:18:23,320 Speaker 3: rise very gradually, and hopefully that will get the attention 318 00:18:23,440 --> 00:18:29,520 Speaker 3: of policymakers sufficiently to at some point address the problem. Similarly, 319 00:18:29,600 --> 00:18:34,400 Speaker 3: I do not think that aggressive US use of sanctions 320 00:18:34,440 --> 00:18:37,720 Speaker 3: will prompt flight from the dollar. I don't think so 321 00:18:37,800 --> 00:18:43,360 Speaker 3: called weaponization of the dollar is the other either, because 322 00:18:44,560 --> 00:18:47,880 Speaker 3: there are no alternatives and the bricks can hold all 323 00:18:47,880 --> 00:18:50,640 Speaker 3: the summits they want, and they talk a good game 324 00:18:50,720 --> 00:18:53,919 Speaker 3: about creating an alternative to the dollar, but it's easier 325 00:18:53,960 --> 00:18:57,399 Speaker 3: said than done, as the Chinese among the others, have learned. 326 00:18:57,720 --> 00:19:00,760 Speaker 1: Just on that note, how much is high public debt, 327 00:19:00,960 --> 00:19:04,080 Speaker 1: at least in the US. The sort of other side 328 00:19:04,160 --> 00:19:07,880 Speaker 1: of the coin of a lot of countries like China 329 00:19:08,359 --> 00:19:12,359 Speaker 1: having these big savings surpluses that they need to put 330 00:19:12,600 --> 00:19:17,280 Speaker 1: somewhere to what extent is the deficit I guess enabled 331 00:19:17,600 --> 00:19:18,800 Speaker 1: by those savings. 332 00:19:19,040 --> 00:19:22,320 Speaker 3: Michael Pettis has made that argument, and I think that 333 00:19:22,480 --> 00:19:28,040 Speaker 3: is part of the story. But the traditional story about 334 00:19:28,240 --> 00:19:32,160 Speaker 3: trade surpluses and deficits that countries like China are running 335 00:19:32,200 --> 00:19:35,760 Speaker 3: trade and current account surpluses and therefore they are accumulating dollars. 336 00:19:36,320 --> 00:19:39,760 Speaker 3: That logic worked well in a world where capital wasn't 337 00:19:39,800 --> 00:19:45,400 Speaker 3: mobile internationally. So with Chinese investment abroad and foreign investment 338 00:19:45,480 --> 00:19:49,040 Speaker 3: in China, which has been important until very recently, I 339 00:19:49,040 --> 00:19:51,920 Speaker 3: think the story becomes more complex. So I don't think 340 00:19:51,960 --> 00:19:57,119 Speaker 3: it's mainly about high savings and current account surpluses in 341 00:19:57,440 --> 00:20:01,919 Speaker 3: countries like China and Saudi Arabia. I think it's mainly 342 00:20:02,000 --> 00:20:06,240 Speaker 3: about the dollars, liquidity, about US treasuries liquidity in their 343 00:20:06,760 --> 00:20:07,320 Speaker 3: safe haven. 344 00:20:07,600 --> 00:20:10,440 Speaker 2: Since you mentioned the bricks and there was just this 345 00:20:10,520 --> 00:20:13,040 Speaker 2: sort of brick summit, and there's this you know, perpetual 346 00:20:13,320 --> 00:20:17,080 Speaker 2: I don't know, fantasy or people science fiction about one day. 347 00:20:17,119 --> 00:20:18,879 Speaker 2: This sort of alternative. 348 00:20:18,400 --> 00:20:20,880 Speaker 1: Possibility is a nicer way of discising. 349 00:20:20,720 --> 00:20:24,280 Speaker 2: Instead of science fiction hypothetical. But you know, people do 350 00:20:24,400 --> 00:20:26,240 Speaker 2: talk about this a lot, and I'm curious, you know, 351 00:20:26,400 --> 00:20:29,879 Speaker 2: since you mentioned that, you know, the real risk to 352 00:20:30,680 --> 00:20:34,160 Speaker 2: US dollar standing or US treasury standing might be political politics. 353 00:20:34,480 --> 00:20:37,600 Speaker 2: Would you say it's politics that's also the impediment to 354 00:20:37,680 --> 00:20:40,240 Speaker 2: sort of something else raising. I mean, to your point, 355 00:20:40,520 --> 00:20:42,840 Speaker 2: you know, people talk about maybe China needs to run 356 00:20:42,880 --> 00:20:46,520 Speaker 2: its own current account deficit for UN internationalization or et cetera. 357 00:20:47,160 --> 00:20:49,879 Speaker 2: Is the flip also essentially that we're not going to 358 00:20:49,960 --> 00:20:54,000 Speaker 2: see a credible alternative to the dollar until there's just 359 00:20:54,040 --> 00:20:58,520 Speaker 2: sort of much more global political confidence in the leadership 360 00:20:58,640 --> 00:21:02,560 Speaker 2: of whatever country. Would theoretically be behind that currency. 361 00:21:02,640 --> 00:21:07,600 Speaker 3: Absolutely, so it's not only an open financial markets open 362 00:21:07,640 --> 00:21:09,840 Speaker 3: to the rest of the world, which China doesn't have, 363 00:21:10,400 --> 00:21:14,240 Speaker 3: but confidence in the political system of the issuing country, 364 00:21:14,320 --> 00:21:16,879 Speaker 3: presidency and the pollop euro can change the rules of 365 00:21:16,920 --> 00:21:20,560 Speaker 3: the financial game even more grammatically in response to events 366 00:21:20,640 --> 00:21:24,440 Speaker 3: than the US Treasury did when it led the drive 367 00:21:25,000 --> 00:21:28,760 Speaker 3: toward Russian sanctions in twenty twenty two. And I think 368 00:21:29,080 --> 00:21:32,760 Speaker 3: mister Putin's actions have reminded the world of the risks 369 00:21:32,800 --> 00:21:36,119 Speaker 3: of putting your financial legs in the basket of an 370 00:21:36,160 --> 00:21:41,080 Speaker 3: authoritarian leader, and China has been moving in that direction 371 00:21:41,240 --> 00:21:42,280 Speaker 3: rather than moving away. 372 00:21:42,480 --> 00:21:46,320 Speaker 1: We've been talking a lot about foreign demand for US 373 00:21:46,440 --> 00:21:49,679 Speaker 1: debt in the form of reserves from other central banks, 374 00:21:49,680 --> 00:21:52,359 Speaker 1: but you briefly mentioned that there are, of course private 375 00:21:52,400 --> 00:21:55,520 Speaker 1: investors who snap up treasuries too. One of the big 376 00:21:55,560 --> 00:21:59,200 Speaker 1: groups of private investors are the banks who are basically 377 00:21:59,320 --> 00:22:02,920 Speaker 1: mandated to buy bonds because we have all these capital 378 00:22:03,000 --> 00:22:06,240 Speaker 1: rules and things like the supplementary leverage ratio. To what 379 00:22:06,400 --> 00:22:10,440 Speaker 1: extent is that sort of bank bondage. For lack of 380 00:22:10,480 --> 00:22:14,720 Speaker 1: a better term, or financial repression a solution to this problem. 381 00:22:14,720 --> 00:22:17,680 Speaker 1: Can it help offset some of those exploding levels or 382 00:22:17,720 --> 00:22:20,840 Speaker 1: at some point does it become an issue sort of 383 00:22:20,880 --> 00:22:22,920 Speaker 1: how we saw in March of this year. 384 00:22:23,280 --> 00:22:26,600 Speaker 3: We used to talk about the diabolic loop or the 385 00:22:26,680 --> 00:22:31,760 Speaker 3: doom between government budget deficits and banking problems, that if 386 00:22:31,800 --> 00:22:35,320 Speaker 3: you force feed government bonds to the banks, you end 387 00:22:35,440 --> 00:22:38,960 Speaker 3: up with Silicon Valley Bank big time. So I think 388 00:22:39,080 --> 00:22:44,919 Speaker 3: there are obvious risks with what you described as financial repression. 389 00:22:45,119 --> 00:22:49,160 Speaker 3: Carmen Reinhardt, who was the commentator on my paper at 390 00:22:49,280 --> 00:22:53,720 Speaker 3: Jackson Hole, is the specialist in that she believes that 391 00:22:53,880 --> 00:22:58,920 Speaker 3: there's more scope for that financial repression approach to managing 392 00:22:58,920 --> 00:23:02,440 Speaker 3: our debt problems than I do. Financial markets are open 393 00:23:02,440 --> 00:23:06,280 Speaker 3: and global, and if we weaken US banks by force 394 00:23:06,320 --> 00:23:09,240 Speaker 3: feeding them bonds, they're going to lose business to foreign banks. 395 00:23:09,359 --> 00:23:13,440 Speaker 3: So my views there there are real limits to going 396 00:23:13,560 --> 00:23:17,520 Speaker 3: on that road you mentioned. 397 00:23:17,520 --> 00:23:21,480 Speaker 1: Reinhart was the assigned discusser of your paper. What sort 398 00:23:21,480 --> 00:23:23,840 Speaker 1: of questions do you get give us an insight on 399 00:23:23,920 --> 00:23:26,920 Speaker 1: what that discussion actually looks like when you present your paper. 400 00:23:27,520 --> 00:23:33,720 Speaker 3: It's very much personality specific, so it helps if you're discustant. 401 00:23:33,960 --> 00:23:37,960 Speaker 3: Is a personal friend is commonness in my case? And 402 00:23:38,040 --> 00:23:40,639 Speaker 3: on the other hand, you're a little bit on edge 403 00:23:41,040 --> 00:23:43,280 Speaker 3: if you know that your friend and discust and has 404 00:23:43,400 --> 00:23:44,720 Speaker 3: very different views than your own. 405 00:23:44,880 --> 00:23:48,280 Speaker 2: Sounds like a fun, fun funne like me and Tracy 406 00:23:48,320 --> 00:23:48,679 Speaker 2: set up. 407 00:23:48,680 --> 00:23:52,159 Speaker 1: Maybe maybe one day in our dream world, they'll invite 408 00:23:52,200 --> 00:23:53,680 Speaker 1: us to discuss one of the page. 409 00:23:53,720 --> 00:23:56,280 Speaker 2: One of us will send it a live episode, and 410 00:23:56,359 --> 00:23:59,240 Speaker 2: one of us will critique the other. Can we talk 411 00:23:59,280 --> 00:24:01,240 Speaker 2: a little bit more? Hey, Like, so we imagine like 412 00:24:01,520 --> 00:24:05,800 Speaker 2: it does not feel like there is some imminent big 413 00:24:05,840 --> 00:24:09,000 Speaker 2: fiscal consolidation coming. Maybe there'll be a crisis or something. 414 00:24:09,040 --> 00:24:11,639 Speaker 2: Hope hopefully not. But you know, as you say in 415 00:24:11,680 --> 00:24:14,440 Speaker 2: your paper, it looks like we are in an era 416 00:24:14,600 --> 00:24:18,480 Speaker 2: of high public debts that will be sustained for a while. 417 00:24:18,600 --> 00:24:20,239 Speaker 2: Can you talk a little bit more? I mean, you 418 00:24:20,320 --> 00:24:24,600 Speaker 2: mentioned perhaps this constrains fiscal authorities in terms of what 419 00:24:24,640 --> 00:24:27,040 Speaker 2: they can prioritize and so forth. Can you talk a 420 00:24:27,040 --> 00:24:28,919 Speaker 2: little bit more about what you see as some of 421 00:24:28,960 --> 00:24:32,240 Speaker 2: the implications of this world, maybe both for the US 422 00:24:32,320 --> 00:24:35,639 Speaker 2: and countries that don't enjoy the same status as the US, Like, 423 00:24:36,080 --> 00:24:38,880 Speaker 2: how do you think that that world looks versus say, 424 00:24:39,080 --> 00:24:41,879 Speaker 2: the last decade in which it seemed like, you know, 425 00:24:42,080 --> 00:24:44,320 Speaker 2: ample demand for debt no real issue. Well, how does 426 00:24:44,320 --> 00:24:45,119 Speaker 2: this world look different? 427 00:24:45,280 --> 00:24:48,320 Speaker 3: We learned it in the global financial crisis and again 428 00:24:48,400 --> 00:24:52,120 Speaker 3: during the pandemic, that being able to adjust fiscal policy, 429 00:24:52,520 --> 00:24:57,520 Speaker 3: being able to mount an assertive fiscal response to events 430 00:24:57,840 --> 00:25:02,200 Speaker 3: can be invaluable, can be critically important for stabilizing the economy, 431 00:25:02,240 --> 00:25:05,280 Speaker 3: and there will be much less scope for doing that 432 00:25:05,440 --> 00:25:08,280 Speaker 3: in a wide variety of economies around the world. So 433 00:25:08,840 --> 00:25:12,040 Speaker 3: I would caution us collectively that this is not only 434 00:25:12,040 --> 00:25:14,359 Speaker 3: a story about the United States, but it's a story 435 00:25:14,400 --> 00:25:17,320 Speaker 3: about one hundred and eighty economies around the world, many 436 00:25:17,359 --> 00:25:20,400 Speaker 3: of which, most of which are more heavily indebted, significantly 437 00:25:20,440 --> 00:25:22,920 Speaker 3: more heavily indebted than they were before, and their governments 438 00:25:23,000 --> 00:25:25,280 Speaker 3: will not be able to use fiscal policy in the 439 00:25:25,320 --> 00:25:25,800 Speaker 3: same way. 440 00:25:26,040 --> 00:25:28,760 Speaker 2: We focus so much on the US context, and we've 441 00:25:28,800 --> 00:25:31,320 Speaker 2: talked about the sort of political degradation and the dead 442 00:25:31,320 --> 00:25:33,640 Speaker 2: ceiling and things like that, But I don't know if 443 00:25:33,760 --> 00:25:37,520 Speaker 2: is it a similar story elsewhere, Like why in the 444 00:25:37,520 --> 00:25:40,760 Speaker 2: other one hundred and seventy nine countries have we also 445 00:25:40,920 --> 00:25:44,200 Speaker 2: seen this sort of dead trajectory and perhaps a similar 446 00:25:44,280 --> 00:25:48,680 Speaker 2: unwillingness or similar difficulties to constrain the fiscal response. 447 00:25:48,840 --> 00:25:53,920 Speaker 3: The global pandemic was global by definition, so most governments 448 00:25:53,960 --> 00:25:57,879 Speaker 3: around the world face the same imperatives. People were locked 449 00:25:57,880 --> 00:26:02,480 Speaker 3: down and government had to provide i'd support for households 450 00:26:02,520 --> 00:26:07,080 Speaker 3: that couldn't otherwise feed themselves. And secondly, yes, there are 451 00:26:07,280 --> 00:26:12,200 Speaker 3: political problems. Some people who believe in small government at 452 00:26:12,240 --> 00:26:16,320 Speaker 3: all costs prefer starve the beast kind of policies where 453 00:26:16,359 --> 00:26:20,080 Speaker 3: you cut taxes now in order to force government to 454 00:26:20,119 --> 00:26:23,359 Speaker 3: cut spending later, And you don't always get the later 455 00:26:23,800 --> 00:26:30,000 Speaker 3: part of the equation. When governments are unstable or alternating 456 00:26:30,119 --> 00:26:33,920 Speaker 3: in office, those in office prefer to spend on their 457 00:26:33,960 --> 00:26:37,520 Speaker 3: preferred programs now before the other party comes into power, 458 00:26:37,640 --> 00:26:40,760 Speaker 3: and both parties engage in that kind of behavior. So 459 00:26:41,640 --> 00:26:45,200 Speaker 3: political dysfunction is part of the story, to be sure. 460 00:26:45,359 --> 00:26:48,160 Speaker 1: In your conclusion in the paper, when you talk about 461 00:26:48,160 --> 00:26:51,000 Speaker 1: the implications of living with high debt, you sort of 462 00:26:51,000 --> 00:26:53,399 Speaker 1: sum it up and say, basically, it means we'll have 463 00:26:53,480 --> 00:26:57,040 Speaker 1: to try to avoid steps that make a bad situation worse, 464 00:26:57,320 --> 00:27:00,320 Speaker 1: and you list a bunch of those potential steps, things 465 00:27:00,400 --> 00:27:05,200 Speaker 1: like raising taxes in the good times or lowering unproductive spending. 466 00:27:05,440 --> 00:27:08,439 Speaker 1: But you had one line in there, I'm not entirely 467 00:27:08,440 --> 00:27:11,439 Speaker 1: sure what it means. It's targeting social transfers as a 468 00:27:11,440 --> 00:27:14,240 Speaker 1: way of limiting pressures on the expenditure side. 469 00:27:14,280 --> 00:27:18,399 Speaker 3: What do you mean by that means testing? Oh that 470 00:27:19,080 --> 00:27:21,800 Speaker 3: in the United States, certainly, entitlement spending is a big 471 00:27:21,840 --> 00:27:26,439 Speaker 3: part of the federal budget, the majority. And it's not 472 00:27:26,680 --> 00:27:29,920 Speaker 3: clear from an economist's point of view why the one 473 00:27:30,040 --> 00:27:34,440 Speaker 3: percent should be receiving social security payments every month. 474 00:27:34,920 --> 00:27:36,800 Speaker 1: Oh interesting, Okay, ask a question. 475 00:27:36,920 --> 00:27:40,800 Speaker 2: And maybe it's a little bit more short term focused. 476 00:27:40,800 --> 00:27:44,560 Speaker 2: But you know, throughout the twenty tens, I don't even 477 00:27:44,560 --> 00:27:46,880 Speaker 2: know why, and retrospect it seems like a silly chance. 478 00:27:46,920 --> 00:27:51,639 Speaker 2: But we kept missing inflation from the downside. It doesn't 479 00:27:51,640 --> 00:27:53,560 Speaker 2: seem like a terrible problem to have, but that's how 480 00:27:53,600 --> 00:27:57,080 Speaker 2: people characterize it. We couldn't hit the target from the downside. 481 00:27:57,119 --> 00:27:59,920 Speaker 2: And one of the arguments that you heard a lot 482 00:28:00,160 --> 00:28:02,960 Speaker 2: the twenty tens, well, we should have we should spend more, 483 00:28:02,960 --> 00:28:05,760 Speaker 2: and we should boost demand, should boost domestic demand, use 484 00:28:05,800 --> 00:28:09,199 Speaker 2: the government's power to spend. And what never really happened 485 00:28:09,200 --> 00:28:13,240 Speaker 2: again due to politics. When you look at the challenge 486 00:28:13,320 --> 00:28:18,119 Speaker 2: right now that the central bankers here face with high inflation, 487 00:28:18,440 --> 00:28:23,200 Speaker 2: and surprisingly resilient inflation. Rapid rate hikes have not had 488 00:28:23,240 --> 00:28:26,639 Speaker 2: the effect yet at least of getting inflation back to 489 00:28:26,680 --> 00:28:29,200 Speaker 2: target as people might have guessed, how much is that? 490 00:28:29,640 --> 00:28:32,720 Speaker 2: Essentially the flip story of the twenty tens that it's 491 00:28:33,200 --> 00:28:38,320 Speaker 2: the aggressive fiscal policy is contributed to the current inflation 492 00:28:38,760 --> 00:28:41,520 Speaker 2: and makes the challenge of getting back to target difficult 493 00:28:41,560 --> 00:28:42,400 Speaker 2: for policymakers. 494 00:28:42,480 --> 00:28:45,800 Speaker 3: Boy, you're bringing me back to the much discussed issue 495 00:28:46,200 --> 00:28:47,440 Speaker 3: of what caused. 496 00:28:47,040 --> 00:28:50,480 Speaker 2: Our current Yeah, well, I loved what's an answer? 497 00:28:50,480 --> 00:28:52,840 Speaker 3: And we know the answer is one of three things. 498 00:28:52,920 --> 00:28:59,280 Speaker 3: Supply shocks, starting with COVID, excessive fiscal stimulus, notably the 499 00:28:59,440 --> 00:29:03,160 Speaker 3: early twenty twenty one Biden stimulus I think was a 500 00:29:03,200 --> 00:29:05,560 Speaker 3: bit more than we needed. And number three, the FED 501 00:29:05,680 --> 00:29:07,840 Speaker 3: was about a year behind the curve, a year like 502 00:29:07,880 --> 00:29:10,360 Speaker 3: the rest of us. I include everyone in this room, 503 00:29:10,480 --> 00:29:13,400 Speaker 3: everyone in this podcast, about a year late. We're all 504 00:29:13,400 --> 00:29:18,040 Speaker 3: implicated in all of us realizing that the inflation environment 505 00:29:18,080 --> 00:29:21,320 Speaker 3: had changed and a very different central bank policy was needed. 506 00:29:21,440 --> 00:29:24,360 Speaker 3: So I think all three factors played a role. And 507 00:29:24,440 --> 00:29:30,200 Speaker 3: if we're really now experiencing soft landing, something between a 508 00:29:30,320 --> 00:29:34,280 Speaker 3: soft landing and no landing, where inflation comes down with 509 00:29:34,480 --> 00:29:39,040 Speaker 3: only a very modest increase in the unemployment rate, if any, 510 00:29:39,280 --> 00:29:42,520 Speaker 3: we should have that discussion about how to narrow the 511 00:29:42,560 --> 00:29:43,240 Speaker 3: budget deficit. 512 00:29:43,360 --> 00:29:45,000 Speaker 2: Can I just ask though it just to follow up? 513 00:29:45,040 --> 00:29:46,719 Speaker 2: I mean, there's a lot of talk about, like, well, 514 00:29:46,760 --> 00:29:49,600 Speaker 2: what were the policy errors, and you sort of identified 515 00:29:49,600 --> 00:29:52,880 Speaker 2: two very popular ones, which is excessive fiscal and central 516 00:29:52,880 --> 00:29:54,840 Speaker 2: bankers coming slow. But on the other hand, we have 517 00:29:54,840 --> 00:29:58,560 Speaker 2: three and a half percent unemployment multi decade lows. Other 518 00:29:58,680 --> 00:30:02,320 Speaker 2: measures of labor market realization are very impressive prime age 519 00:30:02,360 --> 00:30:05,800 Speaker 2: employment to population ratio. How should we think about like 520 00:30:06,200 --> 00:30:09,960 Speaker 2: weighing the costs and benefits? And I'm not talking about like, oh, 521 00:30:10,000 --> 00:30:13,160 Speaker 2: we should like formally accept three percent inflation or something 522 00:30:13,240 --> 00:30:15,840 Speaker 2: like that, but there are good things that seem to 523 00:30:15,880 --> 00:30:19,400 Speaker 2: have come out of the government's aggressive response to the pandemic. 524 00:30:19,600 --> 00:30:22,360 Speaker 2: And how should we think about, like weighing those benefits 525 00:30:22,400 --> 00:30:25,760 Speaker 2: against the cost of the higher inflation that we're talking 526 00:30:25,760 --> 00:30:27,000 Speaker 2: all everyone's talk about here. 527 00:30:27,080 --> 00:30:30,080 Speaker 3: Yeah, I think the benefits were considerable. So you Joe 528 00:30:30,120 --> 00:30:34,000 Speaker 3: asked me about the sources of inflation, and I pointed 529 00:30:34,040 --> 00:30:37,560 Speaker 3: to a couple of macro policy mistakes, if you will, 530 00:30:37,600 --> 00:30:40,280 Speaker 3: that contributed to the inflation. But overall, I agree with 531 00:30:40,360 --> 00:30:44,760 Speaker 3: the implication of your question that we responded quite well 532 00:30:44,880 --> 00:30:48,600 Speaker 3: compared to the response to earlier crises to the most 533 00:30:48,600 --> 00:30:53,880 Speaker 3: recent pandemic and energy crisis related shocks. That's quite remarkable 534 00:30:53,960 --> 00:30:57,000 Speaker 3: that two years on we're back to three percent inflation 535 00:30:57,280 --> 00:30:59,680 Speaker 3: and three and a half percent unemployment. 536 00:30:59,720 --> 00:31:03,760 Speaker 1: How do you view the impact of monetary policy in 537 00:31:03,800 --> 00:31:06,720 Speaker 1: a time of higher debt, because there is I mean, 538 00:31:06,760 --> 00:31:09,719 Speaker 1: there are multiple arguments on this topic, but one argument, 539 00:31:09,760 --> 00:31:13,240 Speaker 1: for instance, is that it's harder for interest rates to 540 00:31:13,400 --> 00:31:16,680 Speaker 1: stay high in an environment where you have lots of 541 00:31:16,720 --> 00:31:20,360 Speaker 1: public debt because the impact of those higher interest rates 542 00:31:20,440 --> 00:31:23,640 Speaker 1: is going to be more painful and also cause higher 543 00:31:23,680 --> 00:31:25,840 Speaker 1: debt servicing costs for the government. So how are you 544 00:31:25,880 --> 00:31:27,560 Speaker 1: thinking about those two issues. 545 00:31:27,840 --> 00:31:30,240 Speaker 3: We talked about that a little bit earlier. I think 546 00:31:30,480 --> 00:31:33,040 Speaker 3: my view is that the Fed really is committed to 547 00:31:33,080 --> 00:31:37,479 Speaker 3: its two percent inflation target, despite the pressures you allude 548 00:31:37,520 --> 00:31:41,480 Speaker 3: to that keeping interest rates higher than otherwise in order 549 00:31:41,520 --> 00:31:44,200 Speaker 3: to bring inflation all the way down to two percent 550 00:31:44,320 --> 00:31:47,000 Speaker 3: will make debt service a bit higher in the short 551 00:31:47,080 --> 00:31:49,680 Speaker 3: run than it would be otherwise and add to the 552 00:31:49,720 --> 00:31:54,920 Speaker 3: fiscal problem. And Chairman Powell was clear at Jackson hole, 553 00:31:55,120 --> 00:31:58,360 Speaker 3: that is not his immediate concern. His immediate concern is 554 00:31:58,960 --> 00:32:01,840 Speaker 3: convincing the public in the markets that we are on 555 00:32:01,920 --> 00:32:04,600 Speaker 3: track to two percent, And I take them at his word. 556 00:32:05,040 --> 00:32:07,800 Speaker 1: Let me ask this question in a slightly different, perhaps 557 00:32:08,000 --> 00:32:12,920 Speaker 1: more provocative way. In that case, what should central bankers 558 00:32:13,040 --> 00:32:17,600 Speaker 1: do in response to higher public debt levels? 559 00:32:18,000 --> 00:32:20,920 Speaker 3: Well, they have to be aware that the economy will 560 00:32:20,960 --> 00:32:24,440 Speaker 3: not receive support from fiscal policy in the next downturn 561 00:32:24,640 --> 00:32:27,840 Speaker 3: in the same way that it did in twenty twenty, 562 00:32:27,920 --> 00:32:30,880 Speaker 3: twenty twenty one, in the same way even that it 563 00:32:30,960 --> 00:32:35,600 Speaker 3: did in many countries ind and eight two thousand and nine. 564 00:32:35,720 --> 00:32:39,520 Speaker 3: So they have to be prepared to respond. I think 565 00:32:39,600 --> 00:32:43,600 Speaker 3: they have to make clear that they will not fall 566 00:32:43,800 --> 00:32:48,040 Speaker 3: prey to what economists call fiscal dominance, that monetary policy 567 00:32:48,080 --> 00:32:52,560 Speaker 3: will not become a slave to fiscal and debt problems, 568 00:32:53,240 --> 00:32:58,240 Speaker 3: and they will have to look even harder than otherwise 569 00:32:58,480 --> 00:33:03,400 Speaker 3: at financial stability risk. Who is holding this public debt? 570 00:33:03,520 --> 00:33:08,600 Speaker 3: Are there concentrations of public debt? Are their unhedged interest 571 00:33:08,680 --> 00:33:13,360 Speaker 3: rate exposures related to those holdings. Because central banks are 572 00:33:13,480 --> 00:33:15,920 Speaker 3: monetary policy makers, they're also regulators. 573 00:33:16,080 --> 00:33:18,600 Speaker 2: One last question, and it's sort of an x us question. 574 00:33:18,680 --> 00:33:22,520 Speaker 2: So obviously, the FED has a credible balance sheet capacity, 575 00:33:22,560 --> 00:33:24,840 Speaker 2: and we saw it step in big time in March 576 00:33:24,880 --> 00:33:27,560 Speaker 2: twenty twenty to buy all the treasuries and stabilize the market. 577 00:33:28,280 --> 00:33:31,160 Speaker 2: We've also seen the beginnings, though, I think of other 578 00:33:31,920 --> 00:33:35,960 Speaker 2: smaller central banks do something similar. I think Brazil, for example, 579 00:33:36,320 --> 00:33:39,520 Speaker 2: bought some of its own government debt and going forward, 580 00:33:40,000 --> 00:33:43,680 Speaker 2: do more central banks around the world have that capacity 581 00:33:43,800 --> 00:33:46,640 Speaker 2: or the credibility to use their own balance sheet to 582 00:33:46,760 --> 00:33:50,800 Speaker 2: smooth government debt markets than perhaps there was in the past. 583 00:33:50,960 --> 00:33:55,240 Speaker 3: Yes, I think that's the case. More generally, monetary policy, 584 00:33:55,320 --> 00:33:58,920 Speaker 3: central bank policy has gained credibility over time in emerging 585 00:33:58,960 --> 00:34:02,720 Speaker 3: markets in particular. So we saw that in the fact 586 00:34:02,720 --> 00:34:06,400 Speaker 3: that many emerging markets moved more rapidly than the FED 587 00:34:06,480 --> 00:34:10,280 Speaker 3: did in twenty twenty one twenty twenty two to begin 588 00:34:10,360 --> 00:34:14,680 Speaker 3: to hike rates and bring inflation down, and that monetary 589 00:34:14,680 --> 00:34:19,200 Speaker 3: policy credibility, that anti inflation commitment gives them more room 590 00:34:19,239 --> 00:34:25,520 Speaker 3: for maneuver, including when circumstances dictate expanding their balance sheets. 591 00:34:25,680 --> 00:34:28,640 Speaker 1: All right, Barry, it was fantastic having you on all thoughts. 592 00:34:28,680 --> 00:34:32,000 Speaker 1: Thank you for giving us I guess our own personal 593 00:34:32,040 --> 00:34:34,799 Speaker 1: presentation of your paper. We really appreciate it. 594 00:34:34,800 --> 00:34:35,359 Speaker 3: Thank you both. 595 00:34:35,520 --> 00:34:36,760 Speaker 2: Thank you so much. Those great. 596 00:34:45,239 --> 00:34:49,120 Speaker 1: So Joe, obviously, that was really interesting. I did think 597 00:34:49,239 --> 00:34:53,759 Speaker 1: that his warning about maybe next time the fiscal response 598 00:34:54,040 --> 00:34:57,520 Speaker 1: won't be as big, you know, it will be restrained 599 00:34:57,600 --> 00:35:00,000 Speaker 1: in some capacity. That was interesting. 600 00:35:00,560 --> 00:35:02,160 Speaker 2: There are two things I mean, yeah, like in a 601 00:35:02,200 --> 00:35:05,440 Speaker 2: period of high inflation, right, like already you would expect 602 00:35:05,520 --> 00:35:09,040 Speaker 2: that that is going to constrain the appetite of policymakers 603 00:35:09,080 --> 00:35:12,880 Speaker 2: to spend further, et cetera. But I was really struck, 604 00:35:12,920 --> 00:35:15,920 Speaker 2: and I think that very telling, like the discussion of politics, 605 00:35:16,000 --> 00:35:19,200 Speaker 2: and then ultimately like that manifests itself into different ways 606 00:35:19,400 --> 00:35:23,200 Speaker 2: manifest itself. The lack of appetite for fiscal consolidation, it 607 00:35:23,239 --> 00:35:25,560 Speaker 2: could manifest itself or people just freak out as like 608 00:35:25,560 --> 00:35:27,839 Speaker 2: I don't trust the United States anymore. Right, it could 609 00:35:27,840 --> 00:35:30,520 Speaker 2: be a debt sealing trip. Like it feels like that's 610 00:35:30,600 --> 00:35:34,560 Speaker 2: really like where like things did go from stress to crisis. 611 00:35:34,680 --> 00:35:37,200 Speaker 1: Yeah, and that was that tension. That's the reason I 612 00:35:37,239 --> 00:35:39,239 Speaker 1: asked that question about, well, how do you ever get 613 00:35:39,239 --> 00:35:42,840 Speaker 1: politicians to sort of sacrifice the next four years in 614 00:35:42,960 --> 00:35:46,520 Speaker 1: exchange for longer term gains about bringing down the deficit. 615 00:35:46,600 --> 00:35:49,520 Speaker 1: It seems really hard. But his answer about you kind 616 00:35:49,560 --> 00:35:52,440 Speaker 1: of need a crisis to crystallize it, I mean, it 617 00:35:52,480 --> 00:35:54,240 Speaker 1: makes sense. It's also a bit worrying. 618 00:35:54,480 --> 00:35:57,960 Speaker 2: Well, and again, you know, like history unfortunately seems like 619 00:35:58,040 --> 00:35:59,880 Speaker 2: kind of cruel on this point. And you know, you 620 00:36:00,000 --> 00:36:01,839 Speaker 2: could even go back like, well, what did it take 621 00:36:01,920 --> 00:36:04,960 Speaker 2: for us to get to full employment and above trend 622 00:36:05,000 --> 00:36:07,560 Speaker 2: inflation from the twenty ten Well it took COVID, right, 623 00:36:08,160 --> 00:36:11,000 Speaker 2: And history seems to be like you have some stable 624 00:36:11,040 --> 00:36:13,200 Speaker 2: macro regime and then a crisis comes and then you 625 00:36:13,239 --> 00:36:15,200 Speaker 2: have a new macro regime. I just thought it was 626 00:36:15,239 --> 00:36:18,920 Speaker 2: interesting that, like his sort of skepticism that an alternative 627 00:36:19,000 --> 00:36:20,759 Speaker 2: to the dollar would come about by like sort of 628 00:36:20,800 --> 00:36:23,440 Speaker 2: like the mechanics of who's running a trade deficit or 629 00:36:23,600 --> 00:36:26,000 Speaker 2: trade surplus or something like that, and that the flip 630 00:36:26,040 --> 00:36:28,640 Speaker 2: side of our political dysfunction is the lack of political 631 00:36:28,680 --> 00:36:31,800 Speaker 2: confidence in any other issuing authority of another currency. 632 00:36:32,160 --> 00:36:34,160 Speaker 1: Yeah, that's a good way of putting it. The other 633 00:36:34,200 --> 00:36:37,399 Speaker 1: thing I thought was interesting was, well, I think one 634 00:36:37,400 --> 00:36:39,680 Speaker 1: thing that I'm hearing both from this conversation and from 635 00:36:39,719 --> 00:36:42,960 Speaker 1: the one we recorded with Daryl Duffy is because so 636 00:36:43,200 --> 00:36:46,279 Speaker 1: much of the financial system is built on bonds. It 637 00:36:46,320 --> 00:36:49,759 Speaker 1: feels like the risks are higher as we enter this 638 00:36:49,840 --> 00:36:53,280 Speaker 1: period of higher inflation. Right, there's a tension between bringing 639 00:36:53,320 --> 00:36:57,400 Speaker 1: down inflation and also having bonds as the sort of stable, 640 00:36:57,560 --> 00:37:01,120 Speaker 1: boring bedrock of the financial system. And he mentioned the 641 00:37:01,160 --> 00:37:05,760 Speaker 1: sovereign bank loop. No one believes me I invented that term. 642 00:37:06,440 --> 00:37:07,080 Speaker 2: I don't believe you. 643 00:37:07,280 --> 00:37:10,240 Speaker 1: Listeners should see Joe's face right now. He definitely doesn't 644 00:37:10,239 --> 00:37:10,680 Speaker 1: believe me. 645 00:37:10,880 --> 00:37:11,440 Speaker 2: I believe you. 646 00:37:11,560 --> 00:37:13,839 Speaker 1: I think it was twenty eleven. I was the first 647 00:37:13,880 --> 00:37:16,279 Speaker 1: one to use it in an alphaville post during the 648 00:37:16,280 --> 00:37:18,239 Speaker 1: Green Care You get to google it, all right, see it? 649 00:37:18,640 --> 00:37:21,040 Speaker 3: Do it? Shall we leave it that? 650 00:37:21,160 --> 00:37:21,759 Speaker 2: Let's leave it there. 651 00:37:21,840 --> 00:37:25,080 Speaker 1: Okay. This has been another episode of the Audlots podcast. 652 00:37:25,160 --> 00:37:28,200 Speaker 1: I'm Tracy Alloway. You can follow me at Tracy Alloway. 653 00:37:28,640 --> 00:37:31,080 Speaker 2: I'm Joe Wisenthal. You can follow me at the Stalwart. 654 00:37:31,360 --> 00:37:34,920 Speaker 2: Follow our guest Barry Eichen Green He's at b Underscore 655 00:37:34,960 --> 00:37:39,440 Speaker 2: Aike and Green. Follow our producers Carmen Rodriguez at Carmen Arman, 656 00:37:39,920 --> 00:37:42,759 Speaker 2: dash Ol Bennett at Dashbot, and our special Jackson Hull 657 00:37:42,960 --> 00:37:47,239 Speaker 2: producer Sebastian Escobar at under de si bas. For more 658 00:37:47,280 --> 00:37:50,280 Speaker 2: odd LODs content, go to Bloomberg dot com slash odd Lots, 659 00:37:50,280 --> 00:37:54,080 Speaker 2: where we have a blog, transcription, a newsletter, and if 660 00:37:54,120 --> 00:37:55,800 Speaker 2: you want to hang out with other odd Lots listeners 661 00:37:55,840 --> 00:37:58,959 Speaker 2: it's really fun. Go to discord dot gg slash odd 662 00:37:59,000 --> 00:38:02,239 Speaker 2: loads people talk all these topics twenty four sevenup. 663 00:38:01,960 --> 00:38:04,759 Speaker 1: And if you enjoy odd Thoughts, if you like our 664 00:38:04,800 --> 00:38:07,920 Speaker 1: discussions from Jackson how Wyoming, then please leave us a 665 00:38:08,000 --> 00:38:11,560 Speaker 1: positive review on your favorite podcast platform. Thanks for listening.