Speaker 1: Ye, Welcome to the Bloomberg Surveillance Podcast. I'm Tom Keane
Speaker 1: Jai Ley. We bring you insight from the best in economics, finance, investment,
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Speaker 1: now on this Economy canom picker and joins us with Barenberg,
Speaker 1: their senior economist. Calumn your observations of the duration that
Speaker 1: Christine Legard is looking out to into two thousand twenty
Speaker 1: two into two thousand twenty three. But I think what
Speaker 1: you hoppy is a commitment to ease monetary policy beyond
Speaker 1: the horizon at which you would expect the Eurozone economy
Speaker 1: to return to its pre pandemic level of GDP, which
Speaker 1: is probably going to happen exclude in Italy mid twenty two.
Speaker 1: So the ECB here, I think, is much more focused
Speaker 1: on inflation and inflation expectations than it is long term rates,
Speaker 1: which already at historic close. If the ECB can signal
Speaker 1: to markets that it will create some inflation once the
Speaker 1: economy is at full employment at least, then the ECB
Speaker 1: can get ahold of real interest rates, which is the
Speaker 1: thing that it has lost control of it. That's what
Speaker 1: matters for economic outcomes. So, Kia, this is all about
Speaker 1: generating higher inflationary expectations, which is why, as you mentioned,
Speaker 1: the euro becomes a big deal for the ECB in
Speaker 1: trying to achieve those higher inflation expectations. And just looking
Speaker 1: at the euro, it did shoot higher versus a dollar
Speaker 1: on the session, but has come off those just a
Speaker 1: touch right now, even on the day. Right now. There
Speaker 1: is a question to John's point earlier column. He was
Speaker 1: talking about building that bridge for fiscal policymakers to be
Speaker 1: able to borrow money and to spend to actually create
Speaker 1: that growth and inflation because monetary policymakers cannot do it alone.
Speaker 1: Do you have a sense of how closely they're working
Speaker 1: And is the extension in quantitative easing and bond purchase
Speaker 1: is by the ECB a sign that perhaps those fiscal
Speaker 1: talks aren't going on track or aren't going to get
Speaker 1: going quickly enough. I think the economic conditions, prevailing economic
Speaker 1: conditions justified the monstery policy actions. You have inflation expectations
Speaker 1: well below up the two pretent rate. You have huge
Speaker 1: output gaps across the Eurozone. You have a historic shock,
Speaker 1: which would have been a historic deflation, and the monstery
Speaker 1: policymakers simply care about that. When it comes to fiscal
Speaker 1: matters in Europe, what really matters is first the joint budget,
Speaker 1: which will be negotiated at the upcoming summit today and tomorrow.
Speaker 1: And then you have the the implicit decision by economies
Speaker 1: to say, okay, are we really going to stick to
Speaker 1: the mastric rules? Are we going to suspend these rules
Speaker 1: for a while. So on the fiscal side, governments have
Speaker 1: all the permission that they need to go and borrow it.
Speaker 1: Just it happens down that economic conditions are prevailing that
Speaker 1: allows the ECB to supplement that fiscal policy with aggressive
Speaker 1: monetary policy stimulus. Here's the line from the ECB will
Speaker 1: continue to monitor exchange rate developments. That doesn't even land,
Speaker 1: does it, Callum, It doesn't get it done. E're a
Speaker 1: dollar right now? Seven. I don't think this is a
Speaker 1: big deal right now is the higher the year? It's
Speaker 1: a movement about two tenths of one percent. This was
Speaker 1: the setup, Callum. At the last meeting, they precommitted to
Speaker 1: doing something. There's something everyone agreed on would be a
Speaker 1: five billion dollar euro rather increase to the pandemic emergent
Speaker 1: purchase program. They've done that. The consensus view was that
Speaker 1: extended by six to nine months. They've done that, throwing
Speaker 1: the tow trouble, all that good stuff. They've done everything
Speaker 1: everybody expected and basically nothing more. In thirty seven minutes,
Speaker 1: there's a news conference. What's the objective of that news conference? Again,
Speaker 1: it's to try somehow to raise in place an expectations
Speaker 1: so that the ECB can reclaim its hold on real
Speaker 1: interest rates. But to your point about the euro, let's
Speaker 1: let's let's just step back a second and say the
Speaker 1: riding euro reflects an improvement in economic fundamentals in Europe.
Speaker 1: You have three risks which are fading over the next
Speaker 1: few months, Brexit, COVID, and now we have a more
Speaker 1: European friendly president in the US. On top of that,
Speaker 1: you have historic stimulus and likely a decent growth rate
Speaker 1: over the next couple of years as Europe recaptures the
Speaker 1: lost output from the pandemic. That's a fairly good situation.
Speaker 1: So money will flow into Europe over the next two
Speaker 1: few years. It already is and that's what's pushing the
Speaker 1: euro higher. So on its own the Euro tells you
Speaker 1: that the economy is improving. However, from an ECB point
Speaker 1: of view, a stronger Euro reduces in podcasts, reduces CPI,
Speaker 1: and hurts its medium term monetary policy objectives. So it's
Speaker 1: it's a very difficult situation to the ECB because you
Speaker 1: could argue that the most stimulus the ECB gives the economy,
Speaker 1: the more fiscal policymakers try to stimulate the economy. The
Speaker 1: more the ECB and fiscal policy because actually undermined their
Speaker 1: medium term inflation target. Rock and a hard place callum
Speaker 1: great to catch up the callum pickering of Barrenberg. Right now,
Speaker 1: we will digress to this horrific pandemic. Lawrence Gostin is
Speaker 1: one of the nation's true experts in public health law.
Speaker 1: He is a Georgetown He is definitive Professor Goston. I
Speaker 1: think I need to put scope and scale in here
Speaker 1: and ask if we've lost it. We all know an
Speaker 1: individual story, an individual recovery. Mayor Giuliani, I believe leaving
Speaker 1: the hospital yesterday a tragic single death, and then we
Speaker 1: try to encompass three thousand people in one day. How
Speaker 1: do you keep perspective in this pandemic. Wow, what a
Speaker 1: great question. You know, it's hard. I mean just you know,
Speaker 1: you just step back and you think that this little
Speaker 1: microscopic organism, uh, in a matter of weeks and months
Speaker 1: and now we're into it a year is just literally
Speaker 1: taken over our lives. So many celebrations without that special
Speaker 1: person in the chair next to you. Uh, I think
Speaker 1: you know right now we're just being glazed over by
Speaker 1: the numbers. But you're so right. Every single death is
Speaker 1: you know, somebody's dear loved one and it's just massively,
Speaker 1: um tragic to see it all. Um. But maybe we're
Speaker 1: gonna be the beginning of the end with the light
Speaker 1: at the end of the tunnel with these vaccines. One
Speaker 1: of your acclaim books Power Duty Restraint. Let's go through
Speaker 1: the list and start with power. What is the power
Speaker 1: you request from the Biden administration? Yeah, I mean, I
Speaker 1: think the Biden administration, first of all, is going to
Speaker 1: have to have the power of the purse. They're gonna
Speaker 1: need Congress um to get a lot of funding. They're
Speaker 1: gonna need funding not just to kind of recovery and
Speaker 1: just getting people back to work, business small businesses back
Speaker 1: up and running, but they'll also need state and local
Speaker 1: health departments, and they're also needed for you know, vaccine
Speaker 1: campaigns because a lot of Americans don't trust this vaccine
Speaker 1: and we've got to overcome that and get enough people.
Speaker 1: We've got to get the jabs in people's arms because
Speaker 1: having a good vaccine isn't enough. We've got to get
Speaker 1: about sevent of our population vaccinated. And that's going to
Speaker 1: be a hard task. All right, Well, power, duty and restraint.
Speaker 1: Let's go to duty. And the question is what is
Speaker 1: the duty to vaccinate individuals? After you get the first
Speaker 1: responders and residents at nursing homes, who next? How should
Speaker 1: this be best rolled out to get the virus under
Speaker 1: the control the quickest. Yeah, that seems to be the
Speaker 1: big question right now. Um. You know, in my view, um,
Speaker 1: the the what we need to do is prioritize the
Speaker 1: most disadvantaged and that also has a good public health
Speaker 1: impact because you know, there are communities in this country,
Speaker 1: Black Americans, Indian Americans, others that have had four times
Speaker 1: as many cases and deaths and hospitalizations as anyone else
Speaker 1: getting the vaccine to them, who, by the way, tend
Speaker 1: to distrust the vaccine a lot more than others. UM
Speaker 1: will be very very important, not not just for equity,
Speaker 1: but actually to kind of target the vaccine exactly UM,
Speaker 1: where the illnesses and deaths are occurring. That's going to
Speaker 1: be really really important. And we've got to ramp up
Speaker 1: production using the Defense Production Act. That's another duty to
Speaker 1: actually make sure that the supplies are not as scarce
Speaker 1: as they look like they're going to be. All Right,
Speaker 1: we're gonna keep going out with this let's code of restraint.
Speaker 1: And there is a question about employers and what they
Speaker 1: do in terms of mandating that their employees get vaccinated
Speaker 1: in order to come back to work. What's the law
Speaker 1: on that side? How do they deal with that aspect
Speaker 1: as they try to create a work yet effective UH workplace? Yeah,
Speaker 1: you know the E E o C hasn't weighed in
Speaker 1: on this yet, but from what we know, UM, they've
Speaker 1: said with the flu vaccine, UH, that employers can mandate it.
Speaker 1: Many hospitals, nursing homes, workplaces, universities do. UH. I don't
Speaker 1: see any reason why that they wouldn't be able to
Speaker 1: do it for the COVID nineteen vaccine. I think it's
Speaker 1: ethical because anyone is entitled to you know, take a
Speaker 1: risk with their own health. Um, but employers are there
Speaker 1: to make sure that their customers are safe, their employees
Speaker 1: are safe. And I think at least having a COVID
Speaker 1: nineteen vaccine program at the workplace offering it to every
Speaker 1: single employee at the minimum, is there is there ethical
Speaker 1: responsibility to keep everyone safe because that's their job, Professor.
Speaker 1: Just before we let you go, an important question that
Speaker 1: many people have been asking me over the last few weeks.
Speaker 1: If we can vaccinate the most at risk in society.
Speaker 1: Once we've achieved that, is there any reason to maintain
Speaker 1: the restrictions that have been introduced in countries like the
Speaker 1: United Kingdom, the United States, across Europe and our sweaar
Speaker 1: you mean, do you mean the restrictions in terms of
Speaker 1: who can get the vaccine or the restrictions and the
Speaker 1: restrictions around social distancing, Professor, those kinds of things. Yeah,
Speaker 1: well that's a that's a question I get asked all
Speaker 1: the time. You know, for now, I think even when
Speaker 1: the vaccine rolls out, we're going to continue to have
Speaker 1: to mask up and social distances, No, no question about it.
Speaker 1: There's still going to be a large reservoir of of
Speaker 1: infection in the United States, the UK and other places.
Speaker 1: What we need to do is wait until we're really
Speaker 1: sure that we virtually eliminated um uh stars Kovie two
Speaker 1: in the United States or Britain or wherever it is
Speaker 1: that is we need herd immunity. That's probably not going
Speaker 1: to happen until, you know, maybe that's a late summer
Speaker 1: or even into the fall. Wow, Professor Goustin, we appreciate
Speaker 1: your time, sir, Thank you for Georgetown University. Jane Fowyd
Speaker 1: passes us for Robot Bank. We're thrilled that she could
Speaker 1: join us UM this morning. Jane, let's just review here
Speaker 1: your euro call. I assume it's unchanged off of what
Speaker 1: we've heard in the last hour. If that is so,
Speaker 1: where will euro be a year from now, Well, you know,
Speaker 1: looking at these inflation forecasts, I start think that Europe
Speaker 1: could be really quite weak in any year to go.
Speaker 1: I mean, if we look at one of the reasons
Speaker 1: that really caused the eurodolla to papaya this spring, it
Speaker 1: was that change in real interest rates, and if we
Speaker 1: look at the inflation in the Eurozone, well, neither God
Speaker 1: has just already been saying that we could have negative
Speaker 1: inflation through you know, for a while, just yet, and
Speaker 1: she provides lower the inflation forecast for two and there
Speaker 1: really isn't an awful lot in there for, you know,
Speaker 1: to to change that expectation that real interest rates are
Speaker 1: going to be more attractive in Euros than for the dollar,
Speaker 1: you know, for the foreseeable next year and maybe beyond.
Speaker 1: And if we look at the amount of people buying
Speaker 1: say tips or so in the US, is belief that
Speaker 1: the feder their balance, she can do more to bolster inflation.
Speaker 1: Just isn't that belief in Europe? Right now, let's back
Speaker 1: up to first principles for our global Wall Street audience.
Speaker 1: But for those that are less sophisticated at this, what
Speaker 1: is reflation and is there any evidence a government or
Speaker 1: society can reflate? Is a policy prescription? Well, this is
Speaker 1: what they would like to do. But of course we're
Speaker 1: all very familiar with Japan, and we've seen you for
Speaker 1: a long time and really ability to create an awful
Speaker 1: lot of inflation. And to be honest, if you look
Speaker 1: through the whole of the details, for quite a long
Speaker 1: time now, for a few decades in some cases, it's
Speaker 1: been very difficult to create wage inflation, And it's certainly
Speaker 1: my view that if you can't create wage inflation, it's
Speaker 1: very difficult to create CPI inflation as well. Now that
Speaker 1: there are, of course that going to be exceptions to that.
Speaker 1: There's going to be supply side issues for one reason
Speaker 1: or another. There's going to be certain sectors that might
Speaker 1: see inflation. But generally speaking, I think it's going to
Speaker 1: be difficult to create a north side inflation if you
Speaker 1: can't get the wages up. But the market is of
Speaker 1: the view that the FED will be more successful at
Speaker 1: that than certainly in Europe right now. Are the partial
Speaker 1: differentials of price change between goods versus services? Are they
Speaker 1: very different or are they much the same the way
Speaker 1: they bounce around creating inflation or disinflation? Is there in
Speaker 1: a pandemic the service sector at differently maybe than before.
Speaker 1: I think that's probably right. I mean, I think the
Speaker 1: UK is probably a good example of this. In the
Speaker 1: UK services sector has been really hit. So if we
Speaker 1: think about what services are um you know, are we
Speaker 1: thinking about things that education, Are we thinking about things
Speaker 1: like the hospitality for instance, sectors which in some countries
Speaker 1: have been hit quite hard. And I think from that
Speaker 1: point incause you can expect that some of the prices
Speaker 1: for some of these services will be quite weak. Whereas
Speaker 1: if we look at the sectors of the economies that
Speaker 1: generally have we bounded quite well, well, it tends to
Speaker 1: be manufacturing, produce, and and that perhaps you know, we
Speaker 1: can begin to see a little bit more inflation. We
Speaker 1: could talk also about the theme of a reversal of globalization.
Speaker 1: This relates back, of course to the theme of China tensions.
Speaker 1: That could um, you know, see more wage inflation, more inflation,
Speaker 1: perhaps in in some manufactured goods as well. So there
Speaker 1: are different things and different forces going on, but generally speaking,
Speaker 1: certainly in Europe, that's not going to be you know,
Speaker 1: fast enough to to really create an awful lot of
Speaker 1: inflation in the next couple of years. What's the origin?
Speaker 1: I love that phrase, except you say it's so elegantly
Speaker 1: compared to my ugly American English. Fast enough? What is
Speaker 1: Madame Leguard's fast enough? Right now? What is the desperation
Speaker 1: to get to in two thousand twenty one? Well, I mean,
Speaker 1: there's a headline on the Blieber terminal right now. Ecbcs
Speaker 1: inflation well below two percent target through to three three.
Speaker 1: I think that's in three. So you know this is
Speaker 1: this is a position that we were in. What can
Speaker 1: they do to create inflation and the market. Okay, but
Speaker 1: come on, like, I don't mean to to ruppert chain
Speaker 1: in the time we've got left. The answer is simple
Speaker 1: to classic economics, which is clear the market. We gotta
Speaker 1: go chump at her and we've got to clear out
Speaker 1: a lot of this great grant and a pandemic. I
Speaker 1: get that, But separate from the pandemic, we have to
Speaker 1: clear the market of zombie companies, don't we. But that's
Speaker 1: that's where you get very very to come. I mean,
Speaker 1: there's been zombie companies around in a site global financial crisis,
Speaker 1: supported a course by this stript feat of cheap money,
Speaker 1: but thank you, supported by fiscal policies as well. So
Speaker 1: there's there's a there's a two problemed approach supporting them.
Speaker 1: But to get rid of them becomes extremely political, and
Speaker 1: again it's perhaps more difficult to do that in Europe,
Speaker 1: where governments send to be a little bit more left
Speaker 1: wing than in the US. Okay, well said, but just
Speaker 1: one final question here, and it's just so important. Okay,
Speaker 1: this morning we're talking two thousand twenty three, which means
Speaker 1: in eighteen months we're gonna be talking two thousand. I
Speaker 1: mean I talked to Secretary Geitner about this a million
Speaker 1: years ago. It's just moving the can in all of
Speaker 1: its descriptions down the road. There's a point where you've
Speaker 1: got a de zombie, right, well you would have thought so.
Speaker 1: But which government is going to be brave enough to
Speaker 1: do that? You know? That's the thing. Governments ultimately want
Speaker 1: to get voted in again, and that's you know that
Speaker 1: that's where they become very unbrave when it comes to
Speaker 1: these sorts of issues. And again we come back to
Speaker 1: this issue you know in Japan and how long has
Speaker 1: this been going on? How long can it sustained? And really,
Speaker 1: as always there's a global savings cut. As long as
Speaker 1: people want to buy this debt, it will today very valuable.
Speaker 1: Jane Folly, thank you so much coming off of Christine
Speaker 1: land Guard because that's pretty good. We speak to Christine
Speaker 1: land Garden. Then Jane Folly of Rubble Bank joins us
Speaker 1: double salts he can joins us. He is truly one
Speaker 1: of our most acute minds on fiscal politics, and not
Speaker 1: only our debt and deficit in his wonderful work at
Speaker 1: the Congressional Budget Office over the years, but also as
Speaker 1: acuity of Capitol Hill in our fiscal dynamics, Doctor Holtz,
Speaker 1: he can joins us from the American Action for him dog.
Speaker 1: Wonderful to talk to you, just well well timed Jason
Speaker 1: Furman writing up a Better Economy and the New Foreign
Speaker 1: Affairs magazine. How do we get to a better economy
Speaker 1: with this debt and this deficit? Well, the first step
Speaker 1: is obviously to take on the public health crisis and
Speaker 1: eliminate the coronavirus as a threat to the population. That
Speaker 1: lifts a lot of this supply constraints that we've been
Speaker 1: facing for the past year. And and then you can
Speaker 1: get down to focusing on the core things that matter.
Speaker 1: Can we generate better productivity growth which will raise real
Speaker 1: wags in the standard of living? That should be the
Speaker 1: focus more than anything else. This is great, but you know,
Speaker 1: I looked at the combined twin deficits fiscal and trade,
Speaker 1: and we're at four standard deviations off like Reagan years,
Speaker 1: I mean, going back a million years or well, do
Speaker 1: you assume all the stiglets in the small g that
Speaker 1: we just grow our way out of this, that there's
Speaker 1: a ten twenty thirty year constructive path to grow our
Speaker 1: way out of these excess debts and deficits. No, I
Speaker 1: don't think there's any reasonable aspectation you can do this
Speaker 1: with growth alone. We came into the pandemic recession with
Speaker 1: a sustainable outlook. We're gonna exit with an unsustainable out
Speaker 1: outlook and jumping off the highest record level of debt
Speaker 1: relative to GDP. So that's a that's a tremendous challenge.
Speaker 1: And on the political economy front, Tom, here's the key fact.
Speaker 1: The minimum condition for a sovereign nation is that you
Speaker 1: be able to stabilize your debt relative to GDP, and
Speaker 1: the US has not done that in the twenty one century.
Speaker 1: And so to do that, the minimum condition is going
Speaker 1: to require good growth, more revenue, and control on spending.
Speaker 1: And those are three things that we have not put
Speaker 1: together in play some time. Based on the plans currently
Speaker 1: in Washington, d C, Doug, do you think that they
Speaker 1: will help growth accelerate? That basically, it's spending worth spending
Speaker 1: right now right now. I don't think we should be
Speaker 1: concerned about the level of sending or the level of
Speaker 1: the death sit. I mean, we have a trendish challenge
Speaker 1: and just keeping American families afloat. And I don't think
Speaker 1: the bills that they're talking about should be thought of
Speaker 1: as stimulus bills. They are targeted primarily to giving h
Speaker 1: those who have been unemployed for a long time. At
Speaker 1: eleven million Americans our work since March some financial stability
Speaker 1: over the next couple of months. That should get us
Speaker 1: past the public health crisis, and then we have a
Speaker 1: chance to get back to doing economics well. And this
Speaker 1: sort of goes to the heart of trying to avoid
Speaker 1: another great depression, right that basically, if you prevent the
Speaker 1: depths of the pain, that there won't be as much
Speaker 1: scarring longer term, and that we can recover faster. What
Speaker 1: kind of stimulus, true stimulus, not just plugging the output gap,
Speaker 1: do you think would be appropriate next year? And coming
Speaker 1: from a position of having been the director of the
Speaker 1: Congressional Budget Office having to try to balance the budget,
Speaker 1: how much do you think we ought to be spending
Speaker 1: right now? Well, I don't think we should worry about
Speaker 1: the amount of spending as much as what we're spending
Speaker 1: it on. So you know, if you spend a trillion
Speaker 1: dollars and you targeted it at a high income individuals.
Speaker 1: You're not going to get them go out and replace
Speaker 1: the service spending that they stopped doing because of the
Speaker 1: health prom So it's where you target the money and
Speaker 1: more than how much it is and next year and
Speaker 1: the year after. I think the key is to combine
Speaker 1: uh genuine investments in infrastructure, where people talk a lot
Speaker 1: about done with an eye to the long term, not
Speaker 1: from from the point of view of stimulus, if that's
Speaker 1: waiting out there, and combine that with upfront um uh
Speaker 1: you know, tax relief and UM targeted UH income to
Speaker 1: to the low end. I think that's all we need
Speaker 1: hold on one second income to the low end. Is
Speaker 1: this basically what we've been hearing about in terms of
Speaker 1: giving supplemental income universal income, not a universal basic income.
Speaker 1: But I'm I'm talking about you know, stimulus style temporary policies,
Speaker 1: and and they can be extended U I. Under some circumstances,
Speaker 1: they can be checked UM. But but I think that's
Speaker 1: really the only thing to worry about coming out of
Speaker 1: this particular recession. This recession is unlike any other recession.
Speaker 1: It's important to remember that we've seen income growth throughout
Speaker 1: the recession. We've seen the stock market arise. We've seen
Speaker 1: housing market arise that's never happened before. We had a
Speaker 1: consumption driven decline focused on services that involve personal contact.
Speaker 1: Until you get that back, you don't get the e
Speaker 1: comedy operating yet. The Douglas sulking where the Douglas You've
Speaker 1: just got one more minute, and this is so important,
Speaker 1: I've got to get to it. Our Jenner Rana Randell
Speaker 1: in Europe already has put out an inside view of
Speaker 1: the ECB meeting before Madame Legarde has finished her press conference,
Speaker 1: and there's a raging debate about the duration of monetary experiments.
Speaker 1: In this case, it's the p E p P program
Speaker 1: is well. Our center bankers running out of ideas is
Speaker 1: the tool kit finally where they really don't know what
Speaker 1: to do in terms of policy or duration. I think
Speaker 1: in both the United States and in Europe, the baton
Speaker 1: happy path to the fiscal authorities, the monster authorities have
Speaker 1: done their job. We have seen financial markets stabilized in
Speaker 1: a dramatic fashion. Trading has been uh, you know, quite
Speaker 1: good over the course of the year. Now you need
Speaker 1: some real economic growth cone from the fiscal side. We
Speaker 1: gotta leave it there us. We'll seeking way too short.
Speaker 1: We got to get you back for a much longer conversation.
Speaker 1: The former head of the cbe OH. Thanks for listening
Speaker 1: to the Bloomberg Surveillance podcast. Subscribe and listen to interviews
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