Speaker 1: Hey, they're Odd Lots listeners. The following episode was recorded
Speaker 1: May second on the Princeton campus. Obviously, some things have
Speaker 1: changed since then, but I still think it's a very
Speaker 1: interesting and relevant conversation, So take a listen.
Speaker 2: Bloomberg Audio Studios, Podcasts, Radio News.
Speaker 1: Hello and welcome to another episode of the Odd Lots Podcast.
Speaker 1: I'm Tracy Alloway.
Speaker 3: And I'm Joe Wisenthal.
Speaker 1: Joe, do you feel like you are hearing the term
Speaker 1: exorbitant privilege a lot more than you used to?
Speaker 3: Yes?
Speaker 1: Is that a loaded question? Maybe it is.
Speaker 3: Yes, you heard it a lot.
Speaker 4: You know, large budget deficits, right, those were explainable or
Speaker 4: people claimed that they were explainable because of something called
Speaker 4: exorbitant privilege. I've never totally known what that term means,
Speaker 4: but obviously with some of the policy volatility in the
Speaker 4: United States, which is a very nice way of putting it,
Speaker 4: you hear it again and whether it can last or
Speaker 4: whether it could be exhausted.
Speaker 1: So I had the same reaction to you. I started
Speaker 1: thinking about it, like, why are we hearing this over
Speaker 1: and over again? And then I was curious when we
Speaker 1: first started using that term, and I think to your
Speaker 1: point about what exactly this means. We first started using
Speaker 1: it in the nineteen sixties and sort of going into
Speaker 1: the early nineteen seventies. Yes, And it was this idea
Speaker 1: that because we had built the financial system around the
Speaker 1: US dollar visa vi Bretton Woods, which we've talked about
Speaker 1: on the show, that the US was in this privileged
Speaker 1: position where it felt like people in other countries were
Speaker 1: basically subsidizing the US lifestyle.
Speaker 4: The constraints that typical countries might face in terms of
Speaker 4: spending don't to the same extent seem to apply to
Speaker 4: the United States in general. When it comes to talk
Speaker 4: about the dollar, I find that there's just a lot
Speaker 4: of slaty definitions thrown around. People will talk about dollar strength,
Speaker 4: but they're not always clear whether they're talking about dollar
Speaker 4: euro as an exchange rate, or dollars share of transactions,
Speaker 4: or dollar share of reserves or the global reserve current
Speaker 4: scare the global safe haven assets. Lots of fuzzy defined
Speaker 4: terms that I'm satisfied that's totally fair.
Speaker 1: I don't get as mad at fuzzy terms because we
Speaker 1: don't have all day like do we have to define
Speaker 1: everything into like obsolescence? No, But anyway, speaking of someone
Speaker 1: who probably also doesn't like fuzzy terms. To your point,
Speaker 1: we have the perfect guest, yes, to talk about all
Speaker 1: of this, and I guess a big moment that keeps
Speaker 1: coming up on our show quite a few times over
Speaker 1: recent episodes, and that is the Nixon Shock.
Speaker 4: The Nixon shock, right, because people look at the tariffs
Speaker 4: that Trump announced on April second, and you reach for
Speaker 4: historical analogies about the changing relationship between the US and
Speaker 4: the rest of the world, and part via trade and
Speaker 4: part via currency, and so much to mine from the past.
Speaker 1: So we have the perfect guest, and we're actually at
Speaker 1: the perfect event to do this as well. So we're
Speaker 1: at Princeton University.
Speaker 3: That's right. We came down here.
Speaker 4: We did a podcast which either if you're listening to this,
Speaker 4: either it's going to come out or you'll have already
Speaker 4: heard it, depending on the sequence. We're at a conference.
Speaker 4: Brendan Greeley invited us down a conference on currencies and
Speaker 4: what is a currency and.
Speaker 1: So forth, how to write a biography of a currency.
Speaker 4: That's the name of the conference. So anyway, yes, perfect guest,
Speaker 4: at the perfect context to talk about the dollar.
Speaker 1: Okay, so we do have the perfect guest. We're going
Speaker 1: to be speaking with He's a long time out lots guest, Yes,
Speaker 1: although he hasn't been on for a while. Yeah, we're
Speaker 1: speaking with Perry Marling, a professor of international political economy
Speaker 1: at the Party School of Global Studies over at Boston University. Perry,
Speaker 1: thank you for coming back on the show.
Speaker 5: Happy to be here.
Speaker 3: Great to catch up with you in person.
Speaker 1: Okay, I'm just going to jump in with the exorbitant
Speaker 1: privilege question, because this keeps coming up. Is the US
Speaker 1: dollar's role in the global financial system a net positive
Speaker 1: or a net negative for the country?
Speaker 5: Well, I guess it depends on who you ask. This
Speaker 5: exorbitant privileged thing, Okay, was coming from Europe. Okay, so
Speaker 5: clearly Europe France in particular was viewing this as a
Speaker 5: net positive for the United States and negative for themselves.
Speaker 5: But in the United States there was coming to be
Speaker 5: a view that it was a net negative, that it
Speaker 5: was exorbitant burden, and that in fact, that something about
Speaker 5: being the international reserve currency was getting in the way
Speaker 5: of our manufacturing development and overvaluing our exchange rate. And
Speaker 5: that became a theory that was accepted by the political forces.
Speaker 1: Just to be clear, we're talking in the nineteen sixties.
Speaker 1: Was the French politician I think who first said that term.
Speaker 5: I think it was your scar tost name. But the
Speaker 5: important point is that the view from one side of
Speaker 5: the Atlantic and the view from the other side of
Speaker 5: the Atlantic were quite different. So yes, let me take
Speaker 5: you back to the sixties, okay. One way to understand
Speaker 5: Bretton Woods ninety forty four, okay, was that this was
Speaker 5: a pass off from Sterling pre World War One to
Speaker 5: the dollar to build the post World War two international
Speaker 5: monetary system. Okay, And so the bankers in New York thought, oh,
Speaker 5: that's just great. You know, New York will become like London.
Speaker 5: London had been the center of the world money market,
Speaker 5: the center of the world capital market with Stirling before
Speaker 5: World War One, and all the bankers knew that, and
Speaker 5: they had been chomping in the bit to do this
Speaker 5: for a long time. Okay. So that's what they thought
Speaker 5: they were doing in building up during the fifties. But
Speaker 5: in the sixties there started to be political resistance in
Speaker 5: the United States, and the United States government started to
Speaker 5: put taxes on people who came from abroad to float bonds.
Speaker 5: And they tried to prevent it from happening. They tried
Speaker 5: to prevent from happening. This is sort of American politics
Speaker 5: that Americans are very suspicious of finance probably you know that, Okay.
Speaker 1: Especially globalist finance here.
Speaker 5: Yes, right, yeah, And so there came to be some
Speaker 5: view that this was very bad for America, you know,
Speaker 5: to have and so they tried to kill the private
Speaker 5: capital markets throughout the sixties. Okay, there were various interventions,
Speaker 5: and I go through in my book on Kinderberger. But
Speaker 5: the danoument of all of this was nineteen seventy one. Okay,
Speaker 5: August fifteenth, actually nineteen seventy one, when Richard Nixon took
Speaker 5: the dollar off gold, which was the promise that had
Speaker 5: been made at Bretton Woods, and increased tariffs by ten percent.
Speaker 5: This was intended as leverage for forcing our allies to
Speaker 5: revalue their currencies. So if you have the view that
Speaker 5: the dollar is overvalued because it's a reserve currency, you
Speaker 5: can force your allies to revalue their currency. So that happened.
Speaker 5: Actually in December of that same year, nineteen seventy one,
Speaker 5: the en went up and there wasn't euro then you know,
Speaker 5: this was this. So this is August fifteenth, nineteen seventy one. Okay.
Speaker 5: The reason I go through this in some detail is
Speaker 5: that I think that the current events, the events of
Speaker 5: the last is it only two months.
Speaker 3: Okay, yeah, two months, yeah, are.
Speaker 5: Quite analogous to what is going on, okay. And in fact,
Speaker 5: some of the theories that were around back then have
Speaker 5: been re emerged, you know, And so it's as if
Speaker 5: no time has gone by. Okay, Trump is replaying the
Speaker 5: Nixon Handbook, but times ten, because he's doing much more tariffs.
Speaker 5: Of course, the world is much bigger than this was
Speaker 5: really just a US versus Europe spat, okay, you know,
Speaker 5: even you know, getting Japan to revalue was not such
Speaker 5: a big Japan was not a big player yet in
Speaker 5: nineteen seventy one, you know, Europe was the main object
Speaker 5: of this, and the pound, sterling and the French franc
Speaker 5: and the Deutsch mark, you know, there were separate currencies
Speaker 5: at that time. They had the euro had not just happened.
Speaker 5: So the world is now much more global, and so
Speaker 5: it's quite a different kind of a shock. It's a
Speaker 5: much more comprehensive shock.
Speaker 4: I think Nixon Playbook times ten is a very promising headline.
Speaker 1: I literally just read it.
Speaker 3: I know it is a very.
Speaker 4: Promising headline for this episode. I'm just curious the premise
Speaker 4: that the dollar is this global reserve asset lead to
Speaker 4: an overvaluation. You know, a country cares about overvaluation because
Speaker 4: it wants to have competitive exports, or that seems to
Speaker 4: be won't there does that actually bear out in the fact,
Speaker 4: because when I you know, as I sort of said
Speaker 4: in the intro, you could talk about a dollar strength
Speaker 4: in terms of its reserve status or trade status or
Speaker 4: dollar yen, dollar euro, is there actually a stable relationship
Speaker 4: between the dollar share of X versus the exchange rate.
Speaker 5: Well, this is a debate among economists, and there's empirical
Speaker 5: studies on both sides. I incline to say no, okay,
Speaker 5: and in particular no now okay, because so much of
Speaker 5: the dollar system is offshore, so you can get dollar
Speaker 5: reserves if you want, you know, by having a euro
Speaker 5: dollar deposit in France. You know that is not touching
Speaker 5: the US shores at all. So some of this argument,
Speaker 5: you know, is outdated. You know that the the globalization
Speaker 5: of the dollar, the fact that the US refused to
Speaker 5: make New York into London has led the world to
Speaker 5: become a dollar system. And so I don't know that
Speaker 5: those arguments work quite so well. I'm not sure those
Speaker 5: people who are making them, you know, have paid attention
Speaker 5: to the way in which the world has changed since
Speaker 5: nineteen seventy one.
Speaker 1: Well, speaking of what changed after nineteen seventy one, there's
Speaker 1: one more historical question that I want to ask you,
Speaker 1: and please forgive me for not remembering this from your book,
Speaker 1: But Charles Kindelberger, what did he think was going to
Speaker 1: happen after Nixon unveiled all his policies.
Speaker 5: So he was very worried about this because he had
Speaker 5: just finished this book, The World in Depression. Okay. That
Speaker 5: made the argument that when Sterling was forced off gold, okay,
Speaker 5: in September of nineteen thirty one, Okay, that the failure
Speaker 5: to do the pass off to the dollar at that
Speaker 5: time meant that there was no world currency, and so
Speaker 5: there was a collapse of world trade and we had
Speaker 5: world depression. Okay. And the reason he calls it the
Speaker 5: crime of nineteen seventy one is that, in fact, the
Speaker 5: US was not forced off of gold. This was a
Speaker 5: decision by the president to just abrogate these agreements. So
Speaker 5: he felt this was a fail of responsibility that was
Speaker 5: just wrongheaded, and it came out of nowhere and there
Speaker 5: was no reason to do this. But Nixon was very
Speaker 5: clear about this that he saw the dollar system emerging
Speaker 5: and he just wanted to kill it. And it was
Speaker 5: America first, and he wanted to kill it. And as
Speaker 5: I said, the bankers wouldn't let him. But that's a
Speaker 5: little bit longer a story.
Speaker 1: But that's not what happened. We didn't have deflation. We
Speaker 1: had inflation in the mid nineteen seventies, and we saw
Speaker 1: the rest of the financial system sort of expand to
Speaker 1: absorb what had been lost through the Nixon crime. I'm
Speaker 1: doing air quotes here.
Speaker 3: He certainly didn't kill the dollar system.
Speaker 5: He did not kill the dollar system. It took a
Speaker 5: while to put it back together again. I grew up
Speaker 5: in the seventies. I think I'm a little older than you.
Speaker 5: I was in high school in the seventies, and it
Speaker 5: was not a pleasant time to be alive. Stagflation You've
Speaker 5: heard the words stagflation, so where you have unemployment and
Speaker 5: inflation at the same time, and it was about there
Speaker 5: was a breakdown of the international monitor system. The story.
Speaker 5: The important date for that is maybe in nineteen seventy three,
Speaker 5: because I haven't filled in the rest of it that
Speaker 5: after the stabilization of exchange rates in December of nineteen
Speaker 5: seventy one, the revaluation of the end, as I say,
Speaker 5: Nixon took advantage of that new fixed exchange rate to
Speaker 5: try to get himself re elected by leaning on the
Speaker 5: FED to lower interest rates. And the Fed did lower
Speaker 5: interest rates, but the rest of the world did not.
Speaker 5: And so now you have a real problem because with
Speaker 5: the fixed exchange rate, you have free money by borrowing
Speaker 5: in dollars at a low rate and lending in deutsch
Speaker 5: marks in Germany, and the Central Bank of Germany has
Speaker 5: to defend the exchange rate, and so they have to
Speaker 5: absorb all of this, and they did until they couldn't
Speaker 5: or decided not to, And so after seventy three there
Speaker 5: was dis floating exchange rates. And so I think that
Speaker 5: is a kind of incipient breakdown of the international monetary
Speaker 5: system where you don't have stable exchange rates. And Kimderberger
Speaker 5: thought that that could be a replay of the hot
Speaker 5: money periods of the nineteen thirties, where speculators would say
Speaker 5: I need to be safe, Oh, I should be in
Speaker 5: the pound sterling, and then they would say, no, I
Speaker 5: think maybe the pounds sterling is going to devalue to
Speaker 5: be in the French franc No. And in as consequence,
Speaker 5: they're destabilizing all the exchange rates. And with the exchange
Speaker 5: rates fluctuating like that, how can you plan. So it
Speaker 5: basically broke down capitol flows, short term capital flows, long
Speaker 5: term capital flows trade. So the whole thing broke down,
Speaker 5: and so he was afraid that that would happen. But
Speaker 5: it didn't happen because the bankers wouldn't let it. And
Speaker 5: in particular, the BIS played an important role in providing
Speaker 5: currency swaps for countries that were under attack. They were
Speaker 5: taking the opposite side of some of these trades, and
Speaker 5: gradually we built what we now experience as the offshore
Speaker 5: dollar system, where there's dollars borrowing and lending offshore doesn't
Speaker 5: touch New York at all. That happened during the nineteen
Speaker 5: seventies as a consequence of these policy actions in seventy
Speaker 5: one and seventy three, and by nineteen seventy nine when
Speaker 5: Vulcar comes. This is the time when the United States
Speaker 5: is now taking responsibility again, okay, and you now have
Speaker 5: the infrastructure, you know where it is offshore. Okay, so
Speaker 5: maybe it's more politically acceptable than it was in the sixties.
Speaker 5: And then we go to the races. You know, it
Speaker 5: takes a little while for the you know, go to
Speaker 5: the races. Do double digit interest rates at twenty percent
Speaker 5: interest rates? I remember that too, you know, I was
Speaker 5: in college then and taking out student loans, and so
Speaker 5: it wasn't until nineteen eighty five at Plaza where the
Speaker 5: rest of the world sort of they actually agreed to
Speaker 5: some parodies and so forth. But the system got put
Speaker 5: back together again. That's the story, and I think maybe
Speaker 5: that's a hopeful story for this moment, the Nixon playbook.
Speaker 4: Before we get to the current moment. This is just
Speaker 4: a theoretical question. When you look at the world economy,
Speaker 4: either in the past or specifically now, does it inevitably
Speaker 4: tend towards sort of like one dominant currency. I mean,
Speaker 4: you know, and there's obviously countries hold other currencies too.
Speaker 4: They hold euros, and theyailed some Swiss frank probably and
Speaker 4: maybe a little gold, et cetera. But is there a
Speaker 4: tendency towards like a power law distribution where one typically
Speaker 4: becomes the currency, kind of like in social networking, it's
Speaker 4: like there's Facebook.
Speaker 5: I don't think that's the right analogy power law distribution.
Speaker 5: I know what you're talking about. There. There is a tendency,
Speaker 5: but it comes from sort of efficiency in exchange.
Speaker 3: Okay.
Speaker 5: Kinderberger always made the analogy that before we had the FED,
Speaker 5: there was not park clearing between California and New York, right,
Speaker 5: So that was itself a sort of tax on trade
Speaker 5: inside the United States, and you weren't really sure how
Speaker 5: it was going to work, and there wasn't par check
Speaker 5: clearing and so forth. With the creation of the FED
Speaker 5: and with war finance, that all went away and we
Speaker 5: got park clearing. So he was always impressed by the analogy.
Speaker 5: If this was a good idea for the United States,
Speaker 5: maybe we should do this for the world as well.
Speaker 5: And he saw, as I said, this hot money. When
Speaker 5: you have multiple key currencies, you are inviting speculation, so
Speaker 5: your de stateabilizing the exchange rates, and therefore that's the
Speaker 5: tax on trade and on capitol flows. You don't want
Speaker 5: to do that, Okay. Now, the analogy with the United States,
Speaker 5: you know, in retrospect went too far because he was
Speaker 5: a big advocate of fixed exchange rates, and it seems
Speaker 5: like that's a bridge too far, that's too that's too demanding.
Speaker 5: So we do not have fixed exchange rates. We have
Speaker 5: managed floating exchange rates that are that are managed through
Speaker 5: joint intervention of of sort of the Club of six,
Speaker 5: the major central banks. This is another Kinderberger point that
Speaker 5: if you stabilize the core of the system, then you
Speaker 5: stabilize the system as a whole. That there will always
Speaker 5: be countries that are facing crises and so forth, but
Speaker 5: as long as you stabilize the core, you'll be all right.
Speaker 5: The system is as a whole will be all right.
Speaker 5: That's why the global financial crisis was such a problem,
Speaker 5: because that came from the core. It threatened the core.
Speaker 5: You may remember where I don't know if you were
Speaker 5: doing odd lots yet then quite but I was. You're
Speaker 5: a financial journalist, and you know that they thought the
Speaker 5: world was going to come to an end and that
Speaker 5: was the end of the dollar and all of that.
Speaker 5: But in fact, that's what happened, was the expansion of
Speaker 5: the dollar system to the global South. Because of zero
Speaker 5: interest rates in the North. And so this offshore dollar
Speaker 5: system that, as I was saying, it was given a
Speaker 5: big boost by the Nixon Shock of nineteen seventy one.
Speaker 5: In retrospect, as I say, it was not pleasant to
Speaker 5: live through, Okay, was given a big boost by the
Speaker 5: global financial crisis. Okay, and now we have the Trump shock. Okay,
Speaker 5: that's happening. And so I think that the lesson of
Speaker 5: history may be that the bankers won't let them, you
Speaker 5: know that. But it's going to be painful, it's not
Speaker 5: going to be pleasant. But I do not think that
Speaker 5: the dollar system is going away.
Speaker 1: I guess the obvious question to ask after that is, Okay,
Speaker 1: we have these other moments in time where there was
Speaker 1: a crisis in the dollar system, and yet it came
Speaker 1: back stronger. And I guess the question is is Trump
Speaker 1: different to the policymakers that were in charge at that
Speaker 1: particular time. He seems much more interested and willing in
Speaker 1: try buying very very new things and potentially destroying some
Speaker 1: really really big things. Is he going to want to
Speaker 1: maintain that system? I'm thinking, you know, something specific like
Speaker 1: the dollar swap lines. You can imagine the headlines if
Speaker 1: the FED is extending billions of dollars to Europe or something.
Speaker 1: Imagine how Trump would feel about headlines about Americans bailing
Speaker 1: out Europe or something like that.
Speaker 5: Yes, so this is another thing that is different today
Speaker 5: than it was back then. As I say, Arthur Burns
Speaker 5: caved in to mister Nixon, helped him try to get reelected.
Speaker 5: Economists know this, and it was a shameful episode at
Speaker 5: the FED. You know that that should never be so,
Speaker 5: that should never be. So. So what we're seeing play
Speaker 5: out right now is quite a different drama. Okay, Mister
Speaker 5: Powell is not caving in. Mister Powell is very publicly
Speaker 5: going and saying that equidity swap lines are in place,
Speaker 5: and I am not lowering interest rates, okay until I
Speaker 5: see that the inflationary effects of these tariffs are not
Speaker 5: going to undermine our economy. And so there is a conflict, okay,
Speaker 5: that is developing. There an immovable object facing an irresistible force. Okay.
Speaker 5: And so it's just started. It's just started. But that's
Speaker 5: very different from ninety seventy one, okay. And the other
Speaker 5: thing that's different from ninety seventy one is that the
Speaker 5: apparatus of the offshore dollar system is up and running, right.
Speaker 5: It does. You don't have to create it. It exists.
Speaker 5: It exists already, and I'm sure it's being put into
Speaker 5: force already that you can move a lot of this
Speaker 5: stuff offshore, Okay, and you will. It is a little
Speaker 5: peculiar that we're talking about. It's a globalized financial world,
Speaker 5: the extent to which is a global world is much
Speaker 5: more true in finance than it is in trade, notwithstanding
Speaker 5: global supply chains and everything like that. But you know,
Speaker 5: it takes a long time to get a car from
Speaker 5: China to New York, you know, through the Panama Canal
Speaker 5: or whatever. It doesn't take any time for money to
Speaker 5: flow this way and that way. So and they're not
Speaker 5: putting any tariffs on capital flows. They're not putting it.
Speaker 5: So the financial system is not being threatened, this financial
Speaker 5: system that grew up over this period. Maybe I shouldn't
Speaker 5: give them any ideas well.
Speaker 1: I mean there's some discussion. Is that the possibility?
Speaker 2: Yeah?
Speaker 1: And I think, well, for instance, maybe, I mean they've
Speaker 1: they've done some stuff around Chinese companies listing in the US,
Speaker 1: and there's talk about maybe you stopped US investors from
Speaker 1: investing in China.
Speaker 5: So that's the same thing as the Nixon playbook. That's
Speaker 5: in the sixties. You're trying to push that offshore somewhere,
Speaker 5: and so there will develop other financial centers and that
Speaker 5: will take a while. It takes a while to develop,
Speaker 5: but there are a number of competing financial centers. You know,
Speaker 5: London was happy to take the euro dollar business. They
Speaker 5: were like champion in the bed. We know how to
Speaker 5: do this. We did this for Sterling. We just need
Speaker 5: to change the little symbol in front and we can go.
Speaker 5: You know, it took a while to make it all go.
Speaker 5: It was the old guys who remembered, you know, and
Speaker 5: they had to teach the young things. But the structure
Speaker 5: was there, and so it could have and again, but
Speaker 5: I'm just saying it's there now. You don't need to
Speaker 5: build it. You don't need to build it. And so
Speaker 5: I think that the chance that it's going to all
Speaker 5: fall apart, okay, it's much bigger now, so that makes
Speaker 5: it harder to manage, okay, But it also means that
Speaker 5: it's evolved through crisis before from you know, every time
Speaker 5: it's counted out, it's come back stronger, and not just stronger,
Speaker 5: but expanding over the face of the globe that there
Speaker 5: are these phases. You know, in ninety seventy one, it
Speaker 5: was the US versus Europe. Okay. Then there's the Asian
Speaker 5: financial crisis, which which I understand as the way we
Speaker 5: were integrating Europe into the global dollar system that it
Speaker 5: expanded and then you had to consolidate. Now it's gone
Speaker 5: to the global South. We expanded and now we're in
Speaker 5: consolidation phase. So I think we could come out of
Speaker 5: this with a more robust system that's actually energetic and
Speaker 5: has growth. But politics are the problem. You know, Are
Speaker 5: the Americans going to be okay with this? You know?
Speaker 5: Are the American political forces going to be okay with this?
Speaker 5: Can a new political agreement between countries you know, be
Speaker 5: made about this? And so that's where I'm out of
Speaker 5: my depth. I don't really know. I don't really know.
Speaker 5: What I have observed in life, okay, is that the
Speaker 5: financial system sort of grows, grows, grows, grows, and then
Speaker 5: the political system decides shall we bless this or shall
Speaker 5: we kill it? You know, So there's a political settlement, okay,
Speaker 5: and then you grow, grow, grow, grow, grow, and then
Speaker 5: it happens again, you know. So that's how I see
Speaker 5: what's happening now for me as a library rat as
Speaker 5: I am, you know, there's just too much noise. I
Speaker 5: don't know what's noise and what's signal at the moment.
Speaker 5: So and I do think that this, you know, attempt
Speaker 5: to play games with market valuations by announcing tariffs and
Speaker 5: then taking them off but telling your friends beforehand, you know,
Speaker 5: is very bad for market liquidity. You know, why would
Speaker 5: you be a dealer to take the other side of
Speaker 5: these trades, okay, if they're just going to take this
Speaker 5: money away from you, you know. So I think that's
Speaker 5: another place where there's stress in the system and pushback.
Speaker 5: You noticed in the last week, you know, the lack
Speaker 5: of liquidity and treasuries and things like that. I think
Speaker 5: that's a lot of what that's about. Out It's that
Speaker 5: the system seems to be rigged.
Speaker 4: Let's just talk about the events since April second for
Speaker 4: a second, because the really and you alluded to it already,
Speaker 4: But there's at least two dimensions. One is the sort
Speaker 4: of pure economics of tariffs. It's a taxike. One useful
Speaker 4: way to think about tariffs. Efforts to reassure manufacturing, perhaps
Speaker 4: efforts to kneecap China specifically, and we don't know where
Speaker 4: the tariffs are going to settle, and there's the final
Speaker 4: relationship as the time we're recording this, and we may
Speaker 4: never really know for the next four years. It seems plausible.
Speaker 4: And then there's the politics, which you mentioned, which is
Speaker 4: here you have a president who made a trade agreement
Speaker 4: with Mexico and Canada, and suddenly it's like, maybe he
Speaker 4: doesn't like it anymore, or he's willing to declare an
Speaker 4: emergency to change the trading relationship with the rest of
Speaker 4: the world.
Speaker 3: What's happening?
Speaker 4: And when I say what's happening, I mean is when
Speaker 4: this all gets announced to your mind, what are the
Speaker 4: first order effects of this sort of flurry of we're.
Speaker 3: Changing the rules right now?
Speaker 5: Well, I think the first art effects will be surprising, Okay.
Speaker 5: I doubt that there's going to be much change in
Speaker 5: net trade flows. That may be surprising to you, okay.
Speaker 5: But what there's going to be is a change in
Speaker 5: gross trade flows. Right This is a tax on trade
Speaker 5: is essentially what it is, okay, So that there will
Speaker 5: be less exports and less imports. The net is the
Speaker 5: difference between those. So the net could stay the same
Speaker 5: even as both exports and imports fall, and that will
Speaker 5: be increasing inefficiency in global you know, division of labor.
Speaker 5: So we're moving in the direction of autarchy. I don't
Speaker 5: think we're going to get there completely because there's a
Speaker 5: I mean, it's more possible for the United States because
Speaker 5: it's a very big country. You know, there's almost everything
Speaker 5: we need we have. It's cheaper from other places, you know,
Speaker 5: but almost everything we need we have. It would take
Speaker 5: a while to build up the capacity. And so this
Speaker 5: is a very big country. But I think that this
Speaker 5: is in fact killing global trade. That is very bad.
Speaker 5: That's very bad for growth, that's very bad for people. Okay.
Speaker 5: So I don't know what's going to happen to global
Speaker 5: capital flows, okay, because, as I say, Kinderberger in the
Speaker 5: seventies was surprised that capital flows actually continued even though
Speaker 5: you were in a flexible exchange rate, because businesses were
Speaker 5: looking through and saying, you know, this is a long
Speaker 5: term investment. Exchange rates are moving this way that way.
Speaker 5: I'm not thinking about that, okay. And there was some
Speaker 5: backstop for short term bounds of payments, deficits and so
Speaker 5: forth behind the scenes. So they sort of kept the
Speaker 5: wheels from falling completely off the wagon in the seventies,
Speaker 5: and as I say, I think there's even more capacity
Speaker 5: to do that now. So I think the bottom line,
Speaker 5: the most likely thing that's going to happen is that
Speaker 5: just trade stops. I mean, I think people say, I
Speaker 5: just listened to the news like you do, that essentially
Speaker 5: there's a trade embargo in China right now, like there's
Speaker 5: nothing is happening at all, and that's a pretty big
Speaker 5: trading partner. So I mean, I don't know that that
Speaker 5: will be the end result of this, you know, but
Speaker 5: that's the immediate shock result of this. And I think
Speaker 5: that if these tariffs were to persist, there would be much,
Speaker 5: much less trade in the world economy, and that's not
Speaker 5: good for ordinary people.
Speaker 1: Perry, Marilyn, thank you so much for coming back on again.
Speaker 1: That was great.
Speaker 3: It's good to see you, Joe.
Speaker 1: It was great to catch up with Perry. Truly the
Speaker 1: perfect guest.
Speaker 3: I love, I do love catching up with Perry.
Speaker 1: Yeah, And I mean, the analogy to the Nixon shock
Speaker 1: seems to be one that people are reaching for over
Speaker 1: and over again. And I guess I can see Perry's
Speaker 1: point that there have been multiple instances where the dollar
Speaker 1: system has been tested. Yeah, and it's sort of like
Speaker 1: I don't know, a rubber ball that you like, stretch
Speaker 1: and you test it and then it just like snaps
Speaker 1: back to where it was, or it gets even bigger.
Speaker 1: Right the dollars says done. And I guess the obvious
Speaker 1: question is is it different this time?
Speaker 2: Right?
Speaker 4: I mean to me, like, you know, there's a few
Speaker 4: different ideas here. So one is, you know, I think
Speaker 4: it is useful to conceptualize the quote dollar system unquote
Speaker 4: as this thing that exists independently of the United States government,
Speaker 4: obviously through banks wanting to have you know, one medium
Speaker 4: of exchange more or less, and global financial flows that
Speaker 4: are everywhere. Then there is also this element and this
Speaker 4: idea that you know, you could like tax trade and
Speaker 4: you can have a shrinkage of trade, but that's not
Speaker 4: necessarily going to make it so that there's a different
Speaker 4: calculation about the global currency to use, et cetera. And
Speaker 4: there's no obvious replacement just yet. All that being said,
Speaker 4: like part of the reason this moment, and honestly before April,
Speaker 4: second part of the reason this moment seems so fraught,
Speaker 4: Perhaps to people is precisely because of the politics. Specifically
Speaker 4: exactly which paracide you can't really talk to. But if
Speaker 4: there's going to be some sort of real disruption, I
Speaker 4: suspect it would from a political change rather than just
Speaker 4: a change in fiscal policy.
Speaker 1: Right, And this is sort of the policy point. This
Speaker 1: is exactly it. Whereas before I think everyone had like
Speaker 1: a relatively decent or reasonable grasp of what policy makers
Speaker 1: were trying to do. That seems very unclear, and we've
Speaker 1: written about this in the newsletter. But if you think
Speaker 1: about the dollar and dollar based assets as a sort
Speaker 1: of symbol or token of America's rule of constitutional strength,
Speaker 1: then it does seem different this time.
Speaker 3: Yeah, kind of does.
Speaker 1: Okay, So shall we leave it on that happy note.
Speaker 3: Let's leave it there.
Speaker 1: This has been another episode of the Odd Thoughts podcast.
Speaker 1: I'm Tracy Alloway. You can follow me at Tracy Alloway.
Speaker 4: And I'm Jill Wisenthal. You can follow me at the Stalwart.
Speaker 4: Check out our guest Perry Marling. He's at p Maryling.
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