Speaker 1: Hello, and welcome to another episode of the All Thoughts Podcast.
Speaker 2: I'm Tracy Alloway and I'm Joe Wisenthal.
Speaker 1: Joe, we are here at Jackson Hole, and I know
Speaker 1: that so much of the focus is on the short
Speaker 1: term outlook for rates, but really this is a gathering
Speaker 1: to talk about the longer term framework of monetary policy. Yeah.
Speaker 2: It's so funny because it is an academic conference and
Speaker 2: there are all these like sort of like big think
Speaker 2: sort of conversations going on about, you know, the changing
Speaker 2: nature of the global economy something like that. I think
Speaker 2: it's actually the theme, like the structural changes in the
Speaker 2: global economy. But like ninety nine percent of the media
Speaker 2: interest in this whole event is like, are we going
Speaker 2: to get a rate hike it November December, you know,
Speaker 2: But there is so.
Speaker 1: Much more right And one of the big themes that
Speaker 1: is emerging is this idea of living in a world
Speaker 1: where there is more debt outstanding. And we've seen that
Speaker 1: sort of pop up a number of times in recent months.
Speaker 1: Of course, you had Fitch downgrading the most credit rating
Speaker 1: because partly of the public finance trajectory. You've had volatility
Speaker 1: in the treasury market, You've had questions over whether or
Speaker 1: not investors are still going to want to buy bonds
Speaker 1: at a time when there's enormous supply, and also the
Speaker 1: FED out to raise rates and potentially bring down inflation.
Speaker 2: Yeah, I would say there's sort of two dynamics that
Speaker 2: I think is really interesting here with regards to sort
Speaker 2: of like public spending and public debts. So I think
Speaker 2: there's sort of like some of the technical factors that
Speaker 2: you've described, and of course we talked about them with
Speaker 2: Darryl Duffy as well, the capacity for debt absorption. And
Speaker 2: then we're also living in an age it's very different
Speaker 2: from the twenty tens in which fiscal authorities are taking
Speaker 2: a much more active role in economic management. And so
Speaker 2: the twenty tens we sort of, you know, fiscal took
Speaker 2: a backseat, all the pressure was placed on the monetary
Speaker 2: authorities to get us back to full employment so forth.
Speaker 2: And the twenties so far feel very different from that
Speaker 2: because we've had these big spending bills, very active management,
Speaker 2: and so how that interacts with policy, what that means
Speaker 2: for inflation, what that means for central bankers, et cetera.
Speaker 2: And I think all of these questions like what that
Speaker 2: means for central bankers, what that means for the macro
Speaker 2: trajectory going forward is going to be debated, I mean
Speaker 2: probably for years.
Speaker 1: Exactly right, let's get a jumpstart on this topic of
Speaker 1: high public debt. And I'm glad to say we really
Speaker 1: do have the perfect guest. We're going to be speaking with,
Speaker 1: Barry eichen Green. He is the professor of economics at
Speaker 1: University of California at Berkeley and the man that central
Speaker 1: bankers here at Jackson Hole have tapped to research and
Speaker 1: discuss this exact topic. So, Barry, thank you so much
Speaker 1: for coming on. All thoughts, good to.
Speaker 3: Be with you. Before we go on, tell me where
Speaker 3: did the name odd locks?
Speaker 1: Well, it's actually an old bond term for bond trades
Speaker 1: of non standardized.
Speaker 2: When we started the podcast years ago, we didn't really
Speaker 2: know what it was going to be, but we sort
Speaker 2: of had a sense that maybe, like you know, we
Speaker 2: try to find some off the beaten path stories and
Speaker 2: so what's something that sounded like that, like a odd
Speaker 2: lots sounded good and it stucks. Yeah, it works.
Speaker 1: So Barry, let me start with a really simple question here.
Speaker 1: Why do governments seem to borrow so much like what
Speaker 1: is going on that in twenty twenty three. We do
Speaker 1: have these massive fiscal deficits, and we have had them
Speaker 1: for a long time.
Speaker 3: Governments borrow for both reasons, good and bad. So we've
Speaker 3: seen that governments borrow to finance emergency responses to great recessions,
Speaker 3: financial crises, pandemics, wars, and throughout history they have done
Speaker 3: that when in exceptional circumstances, governments have to resort to
Speaker 3: exceptional fiscal policies, and they do do so by borrowing,
Speaker 3: sometimes big time. On the other hand, it would be
Speaker 3: nice were governments to reduce those heavy debt burdens once
Speaker 3: the emergency has passed and restore that capacity to borrow.
Speaker 3: And that's where the borrowing for bad reasons kicks in.
Speaker 3: When you have divided government, where you have inability of
Speaker 3: different political factions to agree on which form of public
Speaker 3: spending to cut or whose taxes to increase in order
Speaker 3: to restore fiscal balance restore fiscal sustainability, you have the
Speaker 3: persistence of those fiscal deficits in high debt ratio. So again,
Speaker 3: there are good reasons why governments and current public debts,
Speaker 3: and there are bad reasons why they persist.
Speaker 2: Just a quick question. And Tracy mentioned in the intro
Speaker 2: that you've been invited to this event to talk about
Speaker 2: your research in this area and you've done new research,
Speaker 2: and that this event is more than just an opportunity
Speaker 2: for Wall Street to say it is the high to
Speaker 2: be in November or December. There's a lot more. First
Speaker 2: of all, actually just a very like sort of like
Speaker 2: not to meet. Yeah, how does this like, how does
Speaker 2: it work? I think people are sort of at least
Speaker 2: I'm curious, maybe knowing not Maybe it just me and
Speaker 2: Tracey are curious. But how does it work? How do
Speaker 2: you get like invited? What is the process to like
Speaker 2: come like a give give a talk and present a
Speaker 2: paper here at Jackson Hall.
Speaker 3: So I can tell you what I what I see
Speaker 3: and know. Sure, as one of the invited speakers, but
Speaker 3: you should have the folks from the Kansas City fed
Speaker 3: on as well. They're the conveners. But what I see
Speaker 3: is they came to me, and I've done this once
Speaker 3: or twice before, same story. Then they came to me
Speaker 3: at the beginning of the year in January or February
Speaker 3: with an agenda of for topics, and they say this
Speaker 3: is the one topic number four we would like you
Speaker 3: to write on are you willing to do so? And
Speaker 3: the topic has a title, and it has a paragraph
Speaker 3: of why the topic is important and what some of
Speaker 3: the issues that you might discuss in your paper are
Speaker 3: and then they let you go. So there was a
Speaker 3: check in a couple of months ago where I had
Speaker 3: a phone call with the research director and he said,
Speaker 3: are you on course? Is the paper going well? And
Speaker 3: I said sure? And he said, all right, see you
Speaker 3: and jacksonvill So they commission more experienced scholars. That's a
Speaker 3: way of saying, this is not my first rodeo, if
Speaker 3: you will Jackson Hole talk and terminology. And then they
Speaker 3: just let us go with it. They trust us to produce.
Speaker 3: And this is the kind of high profile event where
Speaker 3: the self imposed pressure to produce is great sufficient to
Speaker 3: deliver the MisOr result.
Speaker 1: I was going to ask, does anyone ever say no
Speaker 1: to the Kansas Fed?
Speaker 3: So you know, we don't know that from as authors,
Speaker 3: but if you look at the list of participants, it's
Speaker 3: pretty evident that for reasons of both quality of intellectual
Speaker 3: program and scenery, people rarely say no.
Speaker 2: So let's get into I mean, it's a monetary Policy Symposium.
Speaker 2: Your research is on sort of the fiscal side, public spending,
Speaker 2: public debt. Talk to us just about how you sort
Speaker 2: of like see this interaction and I sort of mentioned
Speaker 2: in the intro the twenty tens it felt like fiscal
Speaker 2: authorities were kind of on the backseat, not a lot
Speaker 2: of active management. How do you you know, sort of
Speaker 2: big picture and that we could get more granular, like
Speaker 2: why should central bankers be thinking more about the role
Speaker 2: of high public debt and high public deficits as they
Speaker 2: think of charting the course of monetary policy going forward?
Speaker 3: Central bankers have to worry about two things. Number one,
Speaker 3: that fiscal authorities in many countries and here the US
Speaker 3: is special because of the dollars global role in most
Speaker 3: countries other than the United States, there will be less
Speaker 3: room for an active fiscal response going forward. So there
Speaker 3: was one in response to the global financial crisis in
Speaker 3: many countries again during COVID, and as a result of that,
Speaker 3: debt to GDP ratios on average have doubled worldwide, which
Speaker 3: means that scope for using fiscal policy in response to
Speaker 3: the next vis whatever it might be, will be less.
Speaker 3: So will we have to go back to the world
Speaker 3: where monetary policy is the only game in town, and
Speaker 3: the answer is to an extent yes. Factor number two
Speaker 3: is that central banks will come under pressure to be
Speaker 3: more active debt managers. Some people will argue that if
Speaker 3: they accept a higher inflation rate, that will make managing
Speaker 3: the debt easier because we'll be inflating away the real
Speaker 3: value of the debt. I disagree with that, because I
Speaker 3: think yields will respond in any benefit from an inflation
Speaker 3: for debt management will be fleeting. But pressure to keep
Speaker 3: interest rates slow and tolerate more inflation will be more
Speaker 3: intense than otherwise because of this heavy debt.
Speaker 1: So you touched on it in that answer, But let
Speaker 1: me press you on this particular point and ask the
Speaker 1: devil's advocate question. I'm going to channel my inner modern
Speaker 1: monetary theory. Dearest persona. Here are high levels of debt
Speaker 1: always bad.
Speaker 3: High levels of debt are always worse than low levels
Speaker 3: of debt. So we would all like to see the
Speaker 3: debt to GDP ratio in the United States and globally
Speaker 3: be lower because governments will be able to use more
Speaker 3: of their tax revenues for purposes other than debt service.
Speaker 3: We have the green transition we have infrastructure needs, we
Speaker 3: have all the obvious things that only government can do,
Speaker 3: and we need government to do those things. If government
Speaker 3: is using its limited tax revenues to pay interest on
Speaker 3: the debt, it has fewer resources left over for those
Speaker 3: other good things. So from that point, a few heavy
Speaker 3: inherited debts are a bit of a drag on economic growth.
Speaker 3: If you believe, as I do, that publicly financed infrastructure
Speaker 3: and publicly subsidized climate change related and investment will be
Speaker 3: important for economic growth going.
Speaker 1: Forward, it sounds like there could almost be a distinction
Speaker 1: between bad debt overhangs and good debt. If the good
Speaker 1: debt is taken out in the name of higher economic growth.
Speaker 3: If government is borrowing to finance investments that make people
Speaker 3: and the economy more productive, so that grows the denominator
Speaker 3: of the debt to GDP ratio, the debt is less
Speaker 3: of a problem than it would be otherwise.
Speaker 2: What are some historical analogies to right now, because you know,
Speaker 2: there's we've had so it feels like there's kind of
Speaker 2: two things happening. Once there was the emergency spending in
Speaker 2: the immediate wake or when COVID hit obviously, and then
Speaker 2: there is this sort of at least in the United States,
Speaker 2: and I think somewhat elsewhere, a certain more aggressive political
Speaker 2: winds shifting about our willingness to spend and again, you know,
Speaker 2: infrastructure and climate and chips in a way that we
Speaker 2: didn't really see for a long time. There any previous
Speaker 2: historical analogies that you can think of. Is it mostly
Speaker 2: wars in which you see the sort of like regime
Speaker 2: shift to the level of public debt.
Speaker 3: I think it is emergencies tantamount to war. I'm an
Speaker 3: economic historian, but I'm also a firm believer that the
Speaker 3: role of historical analysis is not simply to draw parallels
Speaker 3: or analogies, but to look for differences between then and now.
Speaker 3: What is distinctive about our current situation. I'm worried about
Speaker 3: the trajectory of debt. I'm worried about the trajectory of
Speaker 3: the economy more broadly in the United States, because of
Speaker 3: the extent of political polarization and the need for a
Speaker 3: degree of political consensus to bring financial problems generally under control.
Speaker 3: I think political polarization and fractionalization in the United States
Speaker 3: are greater than any time in my lifetime. So from
Speaker 3: that point a few Debt to GDP was higher after
Speaker 3: World War Two, but you know, we had the McCarthy
Speaker 3: years and politics were not exactly placid in the United States.
Speaker 3: But I do not see a scenario at the moment
Speaker 3: where the two parties can reach an agreement on raising
Speaker 3: more tax revenues and bringing entitlement spending under control, which
Speaker 3: is what you would need in order to flatten the
Speaker 3: debt trajectory.
Speaker 1: What is the political appetite to bring down debt because
Speaker 1: it feels like you're always going to have politicians who
Speaker 1: maybe are eyeing short term gains, you know, cut taxes,
Speaker 1: boost public spending in order to win another vote, versus
Speaker 1: maybe a longer term gain of actually bringing down the
Speaker 1: public debt. And that tension seems really hard to surmount.
Speaker 3: In my paper four Jackson Hole, we look at some
Speaker 3: of these historical experiences and thereof two varieties. Number One,
Speaker 3: if you have a crisis that's enough to galvanize thought
Speaker 3: and action such that governments are able to bring down debts.
Speaker 3: The Greek government crisis in twenty ten, Iceland crisis in
Speaker 3: two thousand and eight have been able to run budget surplus'
Speaker 3: technical term primary budget surpluses excluding interest payments for the
Speaker 3: last ten years, and think about the United States, that's
Speaker 3: inconceivable here. But what impelled them into action was serious
Speaker 3: economic and financial crises and the conclusion that there was
Speaker 3: no alternative but get this problem under control. And the
Speaker 3: other historically cases have been those in which there has
Speaker 3: been a broad political consensus where one party or typically
Speaker 3: coalition of parties in the European setting where you have
Speaker 3: coalition governments have been able to agree on a program
Speaker 3: of bringing fiscal policy in the debt under control. So
Speaker 3: bring those two cases to the United States. The first one,
Speaker 3: the crisis scenario, is not one we want to contemplate.
Speaker 3: In the second one, broad consensus on what to do
Speaker 3: is hard to imagine.
Speaker 2: We would probably really need just like one party to
Speaker 2: sweep in massively with some sort of effort to either
Speaker 2: cut spending or race taxes. But it's interesting because, like
Speaker 2: I've read a little bit in the eighties and the nineties,
Speaker 2: even as recently as in the eighties and nineties, there
Speaker 2: were occasionally multi party efforts to cut you know, I mean,
Speaker 2: George H. W. Bush like famously like promise not to
Speaker 2: raise taxes. They read my libs and then he did
Speaker 2: raise taxes a little bit. So it's like, even fairly recently,
Speaker 2: there was some appetite in DC among both Democrats and
Speaker 2: Republicans to address deficits from time to.
Speaker 3: Time, and not only George HW. Bush, but William Jefferson
Speaker 3: Clinton right as well, that the budget was broadly balanced
Speaker 3: through the nineteen nineties. And I would remind you that
Speaker 3: at the end of the nineties we were talking about
Speaker 3: the disappearance of US Treasury that and how financial mar
Speaker 3: markets would price assets in the absence of treasury bonds
Speaker 3: because the wow, what are your time running surpluses? So
Speaker 3: it has been possible in the US context, But then
Speaker 3: we got the tea party and we got social media.
Speaker 3: You know, everybody will have their favorite culprit for why
Speaker 3: we've had this increase in political polarization in the US.
Speaker 3: But it's a fact.
Speaker 1: You mentioned the dollars reserve status earlier. Does the idiosyncratic
Speaker 1: role of US assets in the global financial system, the
Speaker 1: safe haven status of US treasuries, does that insulate the
Speaker 1: US somewhat from experiencing a crisis on the scale of
Speaker 1: a Greece or in Iceland.
Speaker 3: Well, it certainly gives the US Treasury more room to run.
Speaker 3: In other words, there is this significant and expanding appetite
Speaker 3: for US Treasury bonds on the part of central banks
Speaker 3: around the world which hold them as foreign reserves. And
Speaker 3: as we show in the paper, there is significant and
Speaker 3: expanding appetite for US treasuries on the part of the
Speaker 3: private sector, corporate treasurers, institutional investors of all kinds that
Speaker 3: view them as kind of a safe asset that they
Speaker 3: can hold as the bedrock of their portfolio. So we
Speaker 3: can keep adding to the stock of treasuries in the
Speaker 3: hands of the public for a longer time than can
Speaker 3: other central banks that don't enjoy the same exorbitant privilege
Speaker 3: that their currency is a global currency. Things can change,
Speaker 3: so I think, to my mind, there are The big
Speaker 3: risk would be a disorderly debt ceiling blowout, which the
Speaker 3: debt ceiling will be back on the table, if you will,
Speaker 3: after the presidential elections, so that problem and the danger
Speaker 3: it poses to the dollar's global role are not off
Speaker 3: the table.
Speaker 1: Is this going to turn into a coin episode?
Speaker 2: No, No, it's always you who thinks it's going to
Speaker 2: And I wasn't going next.
Speaker 1: I live in perpetual fear but.
Speaker 2: You know, I was going to ask, like, okay, and
Speaker 2: you sort of anticipated. But when you think about like
Speaker 2: what are tipping points and for when the government's public
Speaker 2: debt suddenly people go from thinking it's safe and it's
Speaker 2: something they want to hold, it's something lickdid to something
Speaker 2: they're anxious. Is the scenario that's more likely to create
Speaker 2: a tipping point something where it's like a ratio, where
Speaker 2: it's like, okay, there's some level and we're concerned about
Speaker 2: debt service, like sort of like a classic credit concerns.
Speaker 2: Or is it more like something the public starts to
Speaker 2: lose faith and not necessarily even do a ratio or
Speaker 2: do to a stock of debt, but something about the
Speaker 2: US political system in which people do not feel good
Speaker 2: about what that government guarantee means. Whether it's something technical
Speaker 2: like the existence of not raising the dead ceiling, or
Speaker 2: just a sort of like further degradation of the quality
Speaker 2: of politics in DC.
Speaker 3: I think it's the politics that are the real and
Speaker 3: present danger. If financial conditions deteriorate very gradually, yields will
Speaker 3: rise very gradually, and hopefully that will get the attention
Speaker 3: of policymakers sufficiently to at some point address the problem. Similarly,
Speaker 3: I do not think that aggressive US use of sanctions
Speaker 3: will prompt flight from the dollar. I don't think so
Speaker 3: called weaponization of the dollar is the other either, because
Speaker 3: there are no alternatives and the bricks can hold all
Speaker 3: the summits they want, and they talk a good game
Speaker 3: about creating an alternative to the dollar, but it's easier
Speaker 3: said than done, as the Chinese among the others, have learned.
Speaker 1: Just on that note, how much is high public debt,
Speaker 1: at least in the US. The sort of other side
Speaker 1: of the coin of a lot of countries like China
Speaker 1: having these big savings surpluses that they need to put
Speaker 1: somewhere to what extent is the deficit I guess enabled
Speaker 1: by those savings.
Speaker 3: Michael Pettis has made that argument, and I think that
Speaker 3: is part of the story. But the traditional story about
Speaker 3: trade surpluses and deficits that countries like China are running
Speaker 3: trade and current account surpluses and therefore they are accumulating dollars.
Speaker 3: That logic worked well in a world where capital wasn't
Speaker 3: mobile internationally. So with Chinese investment abroad and foreign investment
Speaker 3: in China, which has been important until very recently, I
Speaker 3: think the story becomes more complex. So I don't think
Speaker 3: it's mainly about high savings and current account surpluses in
Speaker 3: countries like China and Saudi Arabia. I think it's mainly
Speaker 3: about the dollars, liquidity, about US treasuries liquidity in their
Speaker 3: safe haven.
Speaker 2: Since you mentioned the bricks and there was just this
Speaker 2: sort of brick summit, and there's this you know, perpetual
Speaker 2: I don't know, fantasy or people science fiction about one day.
Speaker 2: This sort of alternative.
Speaker 1: Possibility is a nicer way of discising.
Speaker 2: Instead of science fiction hypothetical. But you know, people do
Speaker 2: talk about this a lot, and I'm curious, you know,
Speaker 2: since you mentioned that, you know, the real risk to
Speaker 2: US dollar standing or US treasury standing might be political politics.
Speaker 2: Would you say it's politics that's also the impediment to
Speaker 2: sort of something else raising. I mean, to your point,
Speaker 2: you know, people talk about maybe China needs to run
Speaker 2: its own current account deficit for UN internationalization or et cetera.
Speaker 2: Is the flip also essentially that we're not going to
Speaker 2: see a credible alternative to the dollar until there's just
Speaker 2: sort of much more global political confidence in the leadership
Speaker 2: of whatever country. Would theoretically be behind that currency.
Speaker 3: Absolutely, so it's not only an open financial markets open
Speaker 3: to the rest of the world, which China doesn't have,
Speaker 3: but confidence in the political system of the issuing country,
Speaker 3: presidency and the pollop euro can change the rules of
Speaker 3: the financial game even more grammatically in response to events
Speaker 3: than the US Treasury did when it led the drive
Speaker 3: toward Russian sanctions in twenty twenty two. And I think
Speaker 3: mister Putin's actions have reminded the world of the risks
Speaker 3: of putting your financial legs in the basket of an
Speaker 3: authoritarian leader, and China has been moving in that direction
Speaker 3: rather than moving away.
Speaker 1: We've been talking a lot about foreign demand for US
Speaker 1: debt in the form of reserves from other central banks,
Speaker 1: but you briefly mentioned that there are, of course private
Speaker 1: investors who snap up treasuries too. One of the big
Speaker 1: groups of private investors are the banks who are basically
Speaker 1: mandated to buy bonds because we have all these capital
Speaker 1: rules and things like the supplementary leverage ratio. To what
Speaker 1: extent is that sort of bank bondage. For lack of
Speaker 1: a better term, or financial repression a solution to this problem.
Speaker 1: Can it help offset some of those exploding levels or
Speaker 1: at some point does it become an issue sort of
Speaker 1: how we saw in March of this year.
Speaker 3: We used to talk about the diabolic loop or the
Speaker 3: doom between government budget deficits and banking problems, that if
Speaker 3: you force feed government bonds to the banks, you end
Speaker 3: up with Silicon Valley Bank big time. So I think
Speaker 3: there are obvious risks with what you described as financial repression.
Speaker 3: Carmen Reinhardt, who was the commentator on my paper at
Speaker 3: Jackson Hole, is the specialist in that she believes that
Speaker 3: there's more scope for that financial repression approach to managing
Speaker 3: our debt problems than I do. Financial markets are open
Speaker 3: and global, and if we weaken US banks by force
Speaker 3: feeding them bonds, they're going to lose business to foreign banks.
Speaker 3: So my views there there are real limits to going
Speaker 3: on that road you mentioned.
Speaker 1: Reinhart was the assigned discusser of your paper. What sort
Speaker 1: of questions do you get give us an insight on
Speaker 1: what that discussion actually looks like when you present your paper.
Speaker 3: It's very much personality specific, so it helps if you're discustant.
Speaker 3: Is a personal friend is commonness in my case? And
Speaker 3: on the other hand, you're a little bit on edge
Speaker 3: if you know that your friend and discust and has
Speaker 3: very different views than your own.
Speaker 2: Sounds like a fun, fun funne like me and Tracy
Speaker 2: set up.
Speaker 1: Maybe maybe one day in our dream world, they'll invite
Speaker 1: us to discuss one of the page.
Speaker 2: One of us will send it a live episode, and
Speaker 2: one of us will critique the other. Can we talk
Speaker 2: a little bit more? Hey, Like, so we imagine like
Speaker 2: it does not feel like there is some imminent big
Speaker 2: fiscal consolidation coming. Maybe there'll be a crisis or something.
Speaker 2: Hope hopefully not. But you know, as you say in
Speaker 2: your paper, it looks like we are in an era
Speaker 2: of high public debts that will be sustained for a while.
Speaker 2: Can you talk a little bit more? I mean, you
Speaker 2: mentioned perhaps this constrains fiscal authorities in terms of what
Speaker 2: they can prioritize and so forth. Can you talk a
Speaker 2: little bit more about what you see as some of
Speaker 2: the implications of this world, maybe both for the US
Speaker 2: and countries that don't enjoy the same status as the US, Like,
Speaker 2: how do you think that that world looks versus say,
Speaker 2: the last decade in which it seemed like, you know,
Speaker 2: ample demand for debt no real issue. Well, how does
Speaker 2: this world look different?
Speaker 3: We learned it in the global financial crisis and again
Speaker 3: during the pandemic, that being able to adjust fiscal policy,
Speaker 3: being able to mount an assertive fiscal response to events
Speaker 3: can be invaluable, can be critically important for stabilizing the economy,
Speaker 3: and there will be much less scope for doing that
Speaker 3: in a wide variety of economies around the world. So
Speaker 3: I would caution us collectively that this is not only
Speaker 3: a story about the United States, but it's a story
Speaker 3: about one hundred and eighty economies around the world, many
Speaker 3: of which, most of which are more heavily indebted, significantly
Speaker 3: more heavily indebted than they were before, and their governments
Speaker 3: will not be able to use fiscal policy in the
Speaker 3: same way.
Speaker 2: We focus so much on the US context, and we've
Speaker 2: talked about the sort of political degradation and the dead
Speaker 2: ceiling and things like that, But I don't know if
Speaker 2: is it a similar story elsewhere, Like why in the
Speaker 2: other one hundred and seventy nine countries have we also
Speaker 2: seen this sort of dead trajectory and perhaps a similar
Speaker 2: unwillingness or similar difficulties to constrain the fiscal response.
Speaker 3: The global pandemic was global by definition, so most governments
Speaker 3: around the world face the same imperatives. People were locked
Speaker 3: down and government had to provide i'd support for households
Speaker 3: that couldn't otherwise feed themselves. And secondly, yes, there are
Speaker 3: political problems. Some people who believe in small government at
Speaker 3: all costs prefer starve the beast kind of policies where
Speaker 3: you cut taxes now in order to force government to
Speaker 3: cut spending later, And you don't always get the later
Speaker 3: part of the equation. When governments are unstable or alternating
Speaker 3: in office, those in office prefer to spend on their
Speaker 3: preferred programs now before the other party comes into power,
Speaker 3: and both parties engage in that kind of behavior. So
Speaker 3: political dysfunction is part of the story, to be sure.
Speaker 1: In your conclusion in the paper, when you talk about
Speaker 1: the implications of living with high debt, you sort of
Speaker 1: sum it up and say, basically, it means we'll have
Speaker 1: to try to avoid steps that make a bad situation worse,
Speaker 1: and you list a bunch of those potential steps, things
Speaker 1: like raising taxes in the good times or lowering unproductive spending.
Speaker 1: But you had one line in there, I'm not entirely
Speaker 1: sure what it means. It's targeting social transfers as a
Speaker 1: way of limiting pressures on the expenditure side.
Speaker 3: What do you mean by that means testing? Oh that
Speaker 3: in the United States, certainly, entitlement spending is a big
Speaker 3: part of the federal budget, the majority. And it's not
Speaker 3: clear from an economist's point of view why the one
Speaker 3: percent should be receiving social security payments every month.
Speaker 1: Oh interesting, Okay, ask a question.
Speaker 2: And maybe it's a little bit more short term focused.
Speaker 2: But you know, throughout the twenty tens, I don't even
Speaker 2: know why, and retrospect it seems like a silly chance.
Speaker 2: But we kept missing inflation from the downside. It doesn't
Speaker 2: seem like a terrible problem to have, but that's how
Speaker 2: people characterize it. We couldn't hit the target from the downside.
Speaker 2: And one of the arguments that you heard a lot
Speaker 2: the twenty tens, well, we should have we should spend more,
Speaker 2: and we should boost demand, should boost domestic demand, use
Speaker 2: the government's power to spend. And what never really happened
Speaker 2: again due to politics. When you look at the challenge
Speaker 2: right now that the central bankers here face with high inflation,
Speaker 2: and surprisingly resilient inflation. Rapid rate hikes have not had
Speaker 2: the effect yet at least of getting inflation back to
Speaker 2: target as people might have guessed, how much is that?
Speaker 2: Essentially the flip story of the twenty tens that it's
Speaker 2: the aggressive fiscal policy is contributed to the current inflation
Speaker 2: and makes the challenge of getting back to target difficult
Speaker 2: for policymakers.
Speaker 3: Boy, you're bringing me back to the much discussed issue
Speaker 3: of what caused.
Speaker 2: Our current Yeah, well, I loved what's an answer?
Speaker 3: And we know the answer is one of three things.
Speaker 3: Supply shocks, starting with COVID, excessive fiscal stimulus, notably the
Speaker 3: early twenty twenty one Biden stimulus I think was a
Speaker 3: bit more than we needed. And number three, the FED
Speaker 3: was about a year behind the curve, a year like
Speaker 3: the rest of us. I include everyone in this room,
Speaker 3: everyone in this podcast, about a year late. We're all
Speaker 3: implicated in all of us realizing that the inflation environment
Speaker 3: had changed and a very different central bank policy was needed.
Speaker 3: So I think all three factors played a role. And
Speaker 3: if we're really now experiencing soft landing, something between a
Speaker 3: soft landing and no landing, where inflation comes down with
Speaker 3: only a very modest increase in the unemployment rate, if any,
Speaker 3: we should have that discussion about how to narrow the
Speaker 3: budget deficit.
Speaker 2: Can I just ask though it just to follow up?
Speaker 2: I mean, there's a lot of talk about, like, well,
Speaker 2: what were the policy errors, and you sort of identified
Speaker 2: two very popular ones, which is excessive fiscal and central
Speaker 2: bankers coming slow. But on the other hand, we have
Speaker 2: three and a half percent unemployment multi decade lows. Other
Speaker 2: measures of labor market realization are very impressive prime age
Speaker 2: employment to population ratio. How should we think about like
Speaker 2: weighing the costs and benefits? And I'm not talking about like, oh,
Speaker 2: we should like formally accept three percent inflation or something
Speaker 2: like that, but there are good things that seem to
Speaker 2: have come out of the government's aggressive response to the pandemic.
Speaker 2: And how should we think about, like weighing those benefits
Speaker 2: against the cost of the higher inflation that we're talking
Speaker 2: all everyone's talk about here.
Speaker 3: Yeah, I think the benefits were considerable. So you Joe
Speaker 3: asked me about the sources of inflation, and I pointed
Speaker 3: to a couple of macro policy mistakes, if you will,
Speaker 3: that contributed to the inflation. But overall, I agree with
Speaker 3: the implication of your question that we responded quite well
Speaker 3: compared to the response to earlier crises to the most
Speaker 3: recent pandemic and energy crisis related shocks. That's quite remarkable
Speaker 3: that two years on we're back to three percent inflation
Speaker 3: and three and a half percent unemployment.
Speaker 1: How do you view the impact of monetary policy in
Speaker 1: a time of higher debt, because there is I mean,
Speaker 1: there are multiple arguments on this topic, but one argument,
Speaker 1: for instance, is that it's harder for interest rates to
Speaker 1: stay high in an environment where you have lots of
Speaker 1: public debt because the impact of those higher interest rates
Speaker 1: is going to be more painful and also cause higher
Speaker 1: debt servicing costs for the government. So how are you
Speaker 1: thinking about those two issues.
Speaker 3: We talked about that a little bit earlier. I think
Speaker 3: my view is that the Fed really is committed to
Speaker 3: its two percent inflation target, despite the pressures you allude
Speaker 3: to that keeping interest rates higher than otherwise in order
Speaker 3: to bring inflation all the way down to two percent
Speaker 3: will make debt service a bit higher in the short
Speaker 3: run than it would be otherwise and add to the
Speaker 3: fiscal problem. And Chairman Powell was clear at Jackson hole,
Speaker 3: that is not his immediate concern. His immediate concern is
Speaker 3: convincing the public in the markets that we are on
Speaker 3: track to two percent, And I take them at his word.
Speaker 1: Let me ask this question in a slightly different, perhaps
Speaker 1: more provocative way. In that case, what should central bankers
Speaker 1: do in response to higher public debt levels?
Speaker 3: Well, they have to be aware that the economy will
Speaker 3: not receive support from fiscal policy in the next downturn
Speaker 3: in the same way that it did in twenty twenty,
Speaker 3: twenty twenty one, in the same way even that it
Speaker 3: did in many countries ind and eight two thousand and nine.
Speaker 3: So they have to be prepared to respond. I think
Speaker 3: they have to make clear that they will not fall
Speaker 3: prey to what economists call fiscal dominance, that monetary policy
Speaker 3: will not become a slave to fiscal and debt problems,
Speaker 3: and they will have to look even harder than otherwise
Speaker 3: at financial stability risk. Who is holding this public debt?
Speaker 3: Are there concentrations of public debt? Are their unhedged interest
Speaker 3: rate exposures related to those holdings. Because central banks are
Speaker 3: monetary policy makers, they're also regulators.
Speaker 2: One last question, and it's sort of an x us question.
Speaker 2: So obviously, the FED has a credible balance sheet capacity,
Speaker 2: and we saw it step in big time in March
Speaker 2: twenty twenty to buy all the treasuries and stabilize the market.
Speaker 2: We've also seen the beginnings, though, I think of other
Speaker 2: smaller central banks do something similar. I think Brazil, for example,
Speaker 2: bought some of its own government debt and going forward,
Speaker 2: do more central banks around the world have that capacity
Speaker 2: or the credibility to use their own balance sheet to
Speaker 2: smooth government debt markets than perhaps there was in the past.
Speaker 3: Yes, I think that's the case. More generally, monetary policy,
Speaker 3: central bank policy has gained credibility over time in emerging
Speaker 3: markets in particular. So we saw that in the fact
Speaker 3: that many emerging markets moved more rapidly than the FED
Speaker 3: did in twenty twenty one twenty twenty two to begin
Speaker 3: to hike rates and bring inflation down, and that monetary
Speaker 3: policy credibility, that anti inflation commitment gives them more room
Speaker 3: for maneuver, including when circumstances dictate expanding their balance sheets.
Speaker 1: All right, Barry, it was fantastic having you on all thoughts.
Speaker 1: Thank you for giving us I guess our own personal
Speaker 1: presentation of your paper. We really appreciate it.
Speaker 3: Thank you both.
Speaker 2: Thank you so much. Those great.
Speaker 1: So Joe, obviously, that was really interesting. I did think
Speaker 1: that his warning about maybe next time the fiscal response
Speaker 1: won't be as big, you know, it will be restrained
Speaker 1: in some capacity. That was interesting.
Speaker 2: There are two things I mean, yeah, like in a
Speaker 2: period of high inflation, right, like already you would expect
Speaker 2: that that is going to constrain the appetite of policymakers
Speaker 2: to spend further, et cetera. But I was really struck,
Speaker 2: and I think that very telling, like the discussion of politics,
Speaker 2: and then ultimately like that manifests itself into different ways
Speaker 2: manifest itself. The lack of appetite for fiscal consolidation, it
Speaker 2: could manifest itself or people just freak out as like
Speaker 2: I don't trust the United States anymore. Right, it could
Speaker 2: be a debt sealing trip. Like it feels like that's
Speaker 2: really like where like things did go from stress to crisis.
Speaker 1: Yeah, and that was that tension. That's the reason I
Speaker 1: asked that question about, well, how do you ever get
Speaker 1: politicians to sort of sacrifice the next four years in
Speaker 1: exchange for longer term gains about bringing down the deficit.
Speaker 1: It seems really hard. But his answer about you kind
Speaker 1: of need a crisis to crystallize it, I mean, it
Speaker 1: makes sense. It's also a bit worrying.
Speaker 2: Well, and again, you know, like history unfortunately seems like
Speaker 2: kind of cruel on this point. And you know, you
Speaker 2: could even go back like, well, what did it take
Speaker 2: for us to get to full employment and above trend
Speaker 2: inflation from the twenty ten Well it took COVID, right,
Speaker 2: And history seems to be like you have some stable
Speaker 2: macro regime and then a crisis comes and then you
Speaker 2: have a new macro regime. I just thought it was
Speaker 2: interesting that, like his sort of skepticism that an alternative
Speaker 2: to the dollar would come about by like sort of
Speaker 2: like the mechanics of who's running a trade deficit or
Speaker 2: trade surplus or something like that, and that the flip
Speaker 2: side of our political dysfunction is the lack of political
Speaker 2: confidence in any other issuing authority of another currency.
Speaker 1: Yeah, that's a good way of putting it. The other
Speaker 1: thing I thought was interesting was, well, I think one
Speaker 1: thing that I'm hearing both from this conversation and from
Speaker 1: the one we recorded with Daryl Duffy is because so
Speaker 1: much of the financial system is built on bonds. It
Speaker 1: feels like the risks are higher as we enter this
Speaker 1: period of higher inflation. Right, there's a tension between bringing
Speaker 1: down inflation and also having bonds as the sort of stable,
Speaker 1: boring bedrock of the financial system. And he mentioned the
Speaker 1: sovereign bank loop. No one believes me I invented that term.
Speaker 2: I don't believe you.
Speaker 1: Listeners should see Joe's face right now. He definitely doesn't
Speaker 1: believe me.
Speaker 2: I believe you.
Speaker 1: I think it was twenty eleven. I was the first
Speaker 1: one to use it in an alphaville post during the
Speaker 1: Green Care You get to google it, all right, see it?
Speaker 3: Do it? Shall we leave it that?
Speaker 2: Let's leave it there.
Speaker 1: Okay. This has been another episode of the Audlots podcast.
Speaker 1: I'm Tracy Alloway. You can follow me at Tracy Alloway.
Speaker 2: I'm Joe Wisenthal. You can follow me at the Stalwart.
Speaker 2: Follow our guest Barry Eichen Green He's at b Underscore
Speaker 2: Aike and Green. Follow our producers Carmen Rodriguez at Carmen Arman,
Speaker 2: dash Ol Bennett at Dashbot, and our special Jackson Hull
Speaker 2: producer Sebastian Escobar at under de si bas. For more
Speaker 2: odd LODs content, go to Bloomberg dot com slash odd Lots,
Speaker 2: where we have a blog, transcription, a newsletter, and if
Speaker 2: you want to hang out with other odd Lots listeners
Speaker 2: it's really fun. Go to discord dot gg slash odd
Speaker 2: loads people talk all these topics twenty four sevenup.
Speaker 1: And if you enjoy odd Thoughts, if you like our
Speaker 1: discussions from Jackson how Wyoming, then please leave us a
Speaker 1: positive review on your favorite podcast platform. Thanks for listening.