1 00:00:10,039 --> 00:00:13,720 Speaker 1: Welcome to the Bloomberg Surveillance Podcast. I'm Tom Keane. Always 2 00:00:14,000 --> 00:00:17,560 Speaker 1: with Michael McKee. Daily we bring you insight from the 3 00:00:17,560 --> 00:00:22,760 Speaker 1: best in economics, finance, investment, and international relations. Find Bloomberg 4 00:00:22,840 --> 00:00:27,240 Speaker 1: Surveillance on iTunes, SoundCloud, Bloomberg dot Com, and of course, 5 00:00:27,760 --> 00:00:33,440 Speaker 1: on the Bloomberg Sir Revin King was Governor of the 6 00:00:33,440 --> 00:00:36,240 Speaker 1: Bank of England for ten years until retiring in two 7 00:00:36,280 --> 00:00:39,839 Speaker 1: thousand and thirteen, writing one of the best received books 8 00:00:40,200 --> 00:00:43,000 Speaker 1: about the financial crisis and where we go from here, 9 00:00:43,080 --> 00:00:45,680 Speaker 1: The End of Alchemy. We're honored to have him joined 10 00:00:45,720 --> 00:00:49,159 Speaker 1: us this morning, Sir Revin. The consensus seems to be 11 00:00:49,880 --> 00:00:52,560 Speaker 1: this is not a Lehman moment. But can we say 12 00:00:52,600 --> 00:00:56,640 Speaker 1: with any certainty what the economic and financial consequences over 13 00:00:56,680 --> 00:00:59,960 Speaker 1: the longer run will be? No, we certainly can't say 14 00:01:00,040 --> 00:01:03,800 Speaker 1: with certainty anything really about the longer run. And one 15 00:01:03,800 --> 00:01:06,280 Speaker 1: of the problems in the whole campaign that took place 16 00:01:06,319 --> 00:01:10,280 Speaker 1: here was that people wanted to demonstrate greater certainty about 17 00:01:10,280 --> 00:01:12,880 Speaker 1: the long run consequences than they had any right to do. 18 00:01:13,400 --> 00:01:15,080 Speaker 1: So we'll have to wait and see. It's not a 19 00:01:15,160 --> 00:01:18,840 Speaker 1: Lehman's moment. It's a very different kind of moment. This 20 00:01:18,920 --> 00:01:22,520 Speaker 1: is one which has caused immense political instability here, But 21 00:01:22,680 --> 00:01:24,880 Speaker 1: the way in which the UK will trade for the 22 00:01:24,920 --> 00:01:27,720 Speaker 1: rest of the world is totally unchanged and will be 23 00:01:27,760 --> 00:01:31,320 Speaker 1: so for at least two years, so the underlying economics 24 00:01:32,120 --> 00:01:35,280 Speaker 1: doesn't change immediately. There is uncertainty about what the future 25 00:01:35,319 --> 00:01:38,839 Speaker 1: will be. But I rather suspect that, given that businesses 26 00:01:39,280 --> 00:01:41,479 Speaker 1: that want to trade with each other today we'll want 27 00:01:41,520 --> 00:01:44,039 Speaker 1: to trade with each other tomorrow, that we shall end 28 00:01:44,360 --> 00:01:47,120 Speaker 1: up in a position that does not look drastically different 29 00:01:47,520 --> 00:01:50,960 Speaker 1: from where we were before the referendum. Obviously, people trade 30 00:01:51,000 --> 00:01:53,280 Speaker 1: in it out, but if you're a longer term investor 31 00:01:53,400 --> 00:01:57,920 Speaker 1: looking at the UK, you've got debilitating political instability, a 32 00:01:58,000 --> 00:02:02,920 Speaker 1: large current account deficit, ateriorating credit worthiness, and a loss 33 00:02:02,960 --> 00:02:05,920 Speaker 1: of some policy credibility, which one analyst this morning says 34 00:02:06,720 --> 00:02:10,560 Speaker 1: suggests that the UK is exhibiting many of the characteristics 35 00:02:10,680 --> 00:02:13,639 Speaker 1: of an emerging market. Well, I think that's a rather 36 00:02:13,680 --> 00:02:16,920 Speaker 1: foolish remark. With great respect, there is a large current 37 00:02:16,919 --> 00:02:19,720 Speaker 1: account deficit and it's something I've drawn attention to for 38 00:02:19,760 --> 00:02:22,639 Speaker 1: some while, and that was bound to mean that sterling 39 00:02:22,639 --> 00:02:25,480 Speaker 1: would have to return at least to the level which 40 00:02:25,520 --> 00:02:28,800 Speaker 1: it was three years ago in effective terms against its 41 00:02:28,800 --> 00:02:31,680 Speaker 1: trading partners, a level which at the time both the 42 00:02:31,680 --> 00:02:34,520 Speaker 1: Bank of England and the Treasury thought was necessary to 43 00:02:34,680 --> 00:02:37,680 Speaker 1: give the UK a chance of rebalancing its economy. And 44 00:02:37,720 --> 00:02:40,520 Speaker 1: what's happened since last Thursday is that sterling has returned 45 00:02:40,760 --> 00:02:44,040 Speaker 1: exactly almost to the same level of the effective exchange 46 00:02:44,080 --> 00:02:46,840 Speaker 1: races three years ago. So that that's something which you 47 00:02:46,880 --> 00:02:50,480 Speaker 1: can discuss in completely normal economic terms, and it's not 48 00:02:50,520 --> 00:02:55,360 Speaker 1: really very surprising that that has happened. The down trading 49 00:02:55,440 --> 00:02:59,760 Speaker 1: of government credit, you would normally be worried about that 50 00:03:00,080 --> 00:03:01,840 Speaker 1: it led to a rise in the interest rate of 51 00:03:01,919 --> 00:03:04,519 Speaker 1: which governments could borrow. In fact, the opposites happened. The 52 00:03:04,560 --> 00:03:06,680 Speaker 1: interest rate of which the government can borrow has gone down. 53 00:03:07,080 --> 00:03:10,880 Speaker 1: So I don't think this is remotely like a situation 54 00:03:10,919 --> 00:03:14,040 Speaker 1: of either the Lehman brothers or an emerging market crisis. 55 00:03:14,120 --> 00:03:17,160 Speaker 1: This is so I generies. This is a decision by 56 00:03:17,200 --> 00:03:20,640 Speaker 1: the United Kingdom to alter its political arrangements with the 57 00:03:20,680 --> 00:03:23,440 Speaker 1: rest of the European Union that will require it to 58 00:03:23,440 --> 00:03:26,720 Speaker 1: put in place new trade agreements and so on. But 59 00:03:26,840 --> 00:03:29,720 Speaker 1: that can be delivered and there will be uncertainty while 60 00:03:29,760 --> 00:03:31,600 Speaker 1: this goes on, and it will have an effect in 61 00:03:31,600 --> 00:03:34,200 Speaker 1: the short run on the level of demanding the UK 62 00:03:34,320 --> 00:03:38,160 Speaker 1: economy as investment is probably put on hold for a period. 63 00:03:38,480 --> 00:03:40,520 Speaker 1: But none of this tells us very much about what 64 00:03:40,600 --> 00:03:43,520 Speaker 1: the long run consequences will be. My guest for what 65 00:03:43,600 --> 00:03:46,160 Speaker 1: it's worth, and it probably isn't worth very much, is 66 00:03:46,200 --> 00:03:47,920 Speaker 1: that there's no reason to think this will have any 67 00:03:48,000 --> 00:03:50,960 Speaker 1: dramatic effect on either the level or the growth rate 68 00:03:51,000 --> 00:03:54,000 Speaker 1: of the United Kingdom GDP. But we don't know. There 69 00:03:54,120 --> 00:03:57,960 Speaker 1: is uncertainty and that will gradually get resolved as the 70 00:03:58,000 --> 00:04:01,520 Speaker 1: position about trade gets resolved. That will take time, but 71 00:04:01,600 --> 00:04:04,320 Speaker 1: it will take time because actually nothing will happen in 72 00:04:04,360 --> 00:04:06,680 Speaker 1: the short run. We will carry on trading as we 73 00:04:06,680 --> 00:04:10,440 Speaker 1: were doing well. It uh, this is my chance to 74 00:04:10,440 --> 00:04:12,520 Speaker 1: get in trouble here because I know you don't want 75 00:04:12,520 --> 00:04:17,120 Speaker 1: to comment on or criticize your successor as governor. But 76 00:04:17,200 --> 00:04:19,760 Speaker 1: the Bank of England's forecast is that there would be 77 00:04:19,800 --> 00:04:22,279 Speaker 1: a hit to GDP, So I'm wondering on what you 78 00:04:22,320 --> 00:04:25,960 Speaker 1: base your optimism. Well, the Bank of England did not 79 00:04:26,080 --> 00:04:29,200 Speaker 1: make a judgment or an analysis of the long run 80 00:04:29,240 --> 00:04:33,440 Speaker 1: consequences of the UK's exit from the European Union, and 81 00:04:33,480 --> 00:04:35,240 Speaker 1: the Bank was very careful not to do that. What 82 00:04:35,360 --> 00:04:37,440 Speaker 1: it did do is it had to do. It was 83 00:04:37,520 --> 00:04:39,200 Speaker 1: to make a guess as to what would happen in 84 00:04:39,240 --> 00:04:41,680 Speaker 1: the short run. And it may well be the case 85 00:04:41,760 --> 00:04:43,320 Speaker 1: that the and it did. I think it would be 86 00:04:43,360 --> 00:04:45,480 Speaker 1: the case that the level of demand and output in 87 00:04:45,520 --> 00:04:48,480 Speaker 1: the UK economy will slow. Now whether that will actually 88 00:04:48,480 --> 00:04:51,599 Speaker 1: turn into a technical recession, in the words of Mark Kenny, 89 00:04:51,680 --> 00:04:54,200 Speaker 1: we simply don't know, and Mark was very careful to 90 00:04:54,240 --> 00:04:56,839 Speaker 1: say that he didn't know either. There's a range of 91 00:04:56,880 --> 00:04:59,440 Speaker 1: uncertainty around the outcomes, and the Bank has always been 92 00:04:59,520 --> 00:05:03,120 Speaker 1: very coarse, just and careful to stress the uncertainty involved 93 00:05:03,520 --> 00:05:06,520 Speaker 1: and not to pretend that any point forecast is a 94 00:05:06,560 --> 00:05:10,680 Speaker 1: statement of what will happen. Leaving Brexit side, there has 95 00:05:10,720 --> 00:05:13,400 Speaker 1: been a growing consensus that central banks around the world 96 00:05:13,400 --> 00:05:19,480 Speaker 1: have come to a tipping point, perhaps end of usefulness 97 00:05:19,480 --> 00:05:25,240 Speaker 1: of additional monetary policy, given the uncertainty about who will 98 00:05:25,560 --> 00:05:28,599 Speaker 1: govern Britain and therefore what the fiscal response might be. 99 00:05:29,080 --> 00:05:31,000 Speaker 1: Can you say that the Bank of England is well 100 00:05:31,000 --> 00:05:36,200 Speaker 1: positioned to address any problems in the UK economy over 101 00:05:36,200 --> 00:05:38,760 Speaker 1: the short run. Well, I think it's well positioned to 102 00:05:38,800 --> 00:05:41,400 Speaker 1: do what it can do, which is to provide liquidity 103 00:05:41,440 --> 00:05:44,440 Speaker 1: to the banking system and set monetary policy. What it 104 00:05:44,520 --> 00:05:48,159 Speaker 1: can't do is to change the structure of the economy 105 00:05:48,200 --> 00:05:50,680 Speaker 1: in a way that's consistent with a need to rebalance, 106 00:05:51,080 --> 00:05:53,680 Speaker 1: and this is a problem facing all central banks around 107 00:05:53,680 --> 00:05:57,240 Speaker 1: the world, namely that monetary policy has hit diminishing returns. 108 00:05:57,760 --> 00:06:00,359 Speaker 1: Central banks can buy time for governments to put in 109 00:06:00,400 --> 00:06:02,800 Speaker 1: place the measures that are needed, but it can't be 110 00:06:02,839 --> 00:06:05,440 Speaker 1: a substitute for those measures. This is a point that 111 00:06:05,520 --> 00:06:08,200 Speaker 1: Mario drag has been making at the European Central Bank, 112 00:06:08,680 --> 00:06:10,880 Speaker 1: and his solution in the case of the euro Area 113 00:06:11,440 --> 00:06:14,400 Speaker 1: is that the finance ministers in the Euro Area all 114 00:06:14,480 --> 00:06:18,960 Speaker 1: should essentially be replaced by a Euro Area Treasury and 115 00:06:19,040 --> 00:06:22,720 Speaker 1: a euro Area finance minister. Now, it's concerns about that 116 00:06:22,839 --> 00:06:25,680 Speaker 1: kind of development in the Euro Area which the e 117 00:06:25,720 --> 00:06:28,239 Speaker 1: c B says we must go forward towards a fiscal 118 00:06:28,720 --> 00:06:31,880 Speaker 1: union of some kind, and the politicians in the Euro 119 00:06:32,000 --> 00:06:35,480 Speaker 1: Area who see quite rightly that there is no legitimate 120 00:06:35,520 --> 00:06:38,719 Speaker 1: democratic support for such a move. Those are the tensions 121 00:06:38,760 --> 00:06:41,360 Speaker 1: in the euro Area that are making life so difficult 122 00:06:41,360 --> 00:06:43,120 Speaker 1: and why the United Kingdom is not going to be 123 00:06:43,160 --> 00:06:46,240 Speaker 1: part of that. The Governor, King Tom Keene here again, 124 00:06:46,279 --> 00:06:49,360 Speaker 1: and good morning to your lord King. I'm sure you're 125 00:06:49,360 --> 00:06:51,560 Speaker 1: not aware of this, but Michael McKee has led the 126 00:06:51,560 --> 00:06:56,400 Speaker 1: analysis of James Bullard's important paper put out the other 127 00:06:56,520 --> 00:07:01,120 Speaker 1: day on a new way of doing monetary all'll see. Michael, 128 00:07:01,120 --> 00:07:04,040 Speaker 1: why don't you jump in here with Mervin King and 129 00:07:04,120 --> 00:07:08,600 Speaker 1: ask him about regime changes? Well as you're I'm sure 130 00:07:08,680 --> 00:07:12,480 Speaker 1: aware Lurking that President of the St. Louis Federal Reserve 131 00:07:12,520 --> 00:07:15,360 Speaker 1: suggests we don't use a converging forecast to make my 132 00:07:15,560 --> 00:07:17,720 Speaker 1: terry policy anymore. But you look, you think in terms 133 00:07:17,720 --> 00:07:20,679 Speaker 1: of regimes, and until a regime changes, there's no reason 134 00:07:20,720 --> 00:07:23,600 Speaker 1: to make a forecast on what might happen next. And 135 00:07:24,080 --> 00:07:26,520 Speaker 1: I don't know what you might think of that, but 136 00:07:26,640 --> 00:07:29,800 Speaker 1: I'm very sympathetic to the idea that the rather simple 137 00:07:29,880 --> 00:07:32,880 Speaker 1: model that is used by most central banks to make 138 00:07:32,920 --> 00:07:36,160 Speaker 1: their forecasts, namely that the economy tends to grow and 139 00:07:36,200 --> 00:07:39,920 Speaker 1: on a steady path with temporary deviations from it, is 140 00:07:40,240 --> 00:07:43,000 Speaker 1: an unrealistic one and has led central banks into a 141 00:07:43,040 --> 00:07:46,680 Speaker 1: mistaken view that they are capable of resolving all problems 142 00:07:46,680 --> 00:07:49,840 Speaker 1: that hit the economy so I'm sympathetic to the the 143 00:07:49,920 --> 00:07:54,720 Speaker 1: intention I think of this paper to suggest a different approach, 144 00:07:55,280 --> 00:07:57,320 Speaker 1: But I do think it's quite difficult to divide the 145 00:07:57,360 --> 00:08:00,320 Speaker 1: world into a fixed number of regimes, and I do 146 00:08:00,400 --> 00:08:03,560 Speaker 1: think you have to take into account beliefs about what 147 00:08:03,640 --> 00:08:06,360 Speaker 1: could happen in the future. What is true, and I 148 00:08:06,360 --> 00:08:09,760 Speaker 1: think this is very very consistent with the spirit of 149 00:08:09,800 --> 00:08:12,840 Speaker 1: the Bullard paper, is that in a world in which 150 00:08:12,880 --> 00:08:16,160 Speaker 1: we simply do not know what the future holds, that 151 00:08:16,320 --> 00:08:19,520 Speaker 1: is a world in which individuals or groups of people 152 00:08:19,600 --> 00:08:23,240 Speaker 1: can make very sudden and very large revisions to their 153 00:08:23,280 --> 00:08:27,480 Speaker 1: beliefs about the future and hence to asset prices and spending. 154 00:08:28,000 --> 00:08:30,080 Speaker 1: And that is why there can be volatility in the 155 00:08:30,080 --> 00:08:34,640 Speaker 1: economy that is not well explained by many conventional economic models. 156 00:08:35,120 --> 00:08:38,559 Speaker 1: Lord King, thank you very much for joining us. Mervyn King, 157 00:08:38,880 --> 00:08:42,080 Speaker 1: the former Governor of the Bank of England, the offer 158 00:08:42,400 --> 00:08:45,000 Speaker 1: of a terrific book, The End of Alchemy, Money Banking 159 00:08:45,080 --> 00:08:57,520 Speaker 1: and the Future of the Global Economy. Joining us now 160 00:08:57,640 --> 00:09:01,800 Speaker 1: Marvin Goodfred for Carnegie mel And Professor of Economics, their 161 00:09:01,960 --> 00:09:07,959 Speaker 1: longtime research director at the Richmond fed and UH the 162 00:09:08,400 --> 00:09:13,280 Speaker 1: whole UH Brexit issue. Marvin seems to raise a question 163 00:09:13,320 --> 00:09:17,959 Speaker 1: of whether or not the financial world, the financial regulatory world, 164 00:09:18,080 --> 00:09:21,160 Speaker 1: the central banks of the world, what role they may 165 00:09:21,200 --> 00:09:26,079 Speaker 1: have played, whether they're the whole queue process that everybody's 166 00:09:26,160 --> 00:09:30,559 Speaker 1: undertaken that has raised asset values but not incomes, whether 167 00:09:30,640 --> 00:09:34,160 Speaker 1: that is, whether they have some complicity in all of this. 168 00:09:34,320 --> 00:09:37,280 Speaker 1: I guess, well, I Mike, it's it's nice to be here. 169 00:09:38,360 --> 00:09:40,520 Speaker 1: I think in general, I think what you're getting a 170 00:09:40,720 --> 00:09:44,560 Speaker 1: is true. In general, the you know, the regulatory state 171 00:09:45,040 --> 00:09:48,079 Speaker 1: that's been put together on the continent UM has been 172 00:09:48,120 --> 00:09:53,280 Speaker 1: an irritant in Britain. And actually the regulatory state that 173 00:09:53,280 --> 00:09:57,640 Speaker 1: that operates in international banking through the Basil Committee and 174 00:09:57,720 --> 00:10:00,800 Speaker 1: through other committees in Europe is export. It's their regulations 175 00:10:00,800 --> 00:10:03,280 Speaker 1: to the United States as well. There's an inclination on 176 00:10:03,320 --> 00:10:05,200 Speaker 1: the part of the Settled Reserve and US regulators to 177 00:10:05,240 --> 00:10:08,200 Speaker 1: follow as best they can to harmonize the quote harmonize 178 00:10:08,600 --> 00:10:12,600 Speaker 1: the financial regulations around the world. UM. There's no question 179 00:10:12,640 --> 00:10:17,400 Speaker 1: that that, in my view, that regulatory state has overreached 180 00:10:17,800 --> 00:10:20,679 Speaker 1: its benefits by far, and there's no question in the 181 00:10:20,800 --> 00:10:24,160 Speaker 1: US as a result of of that overreach, there's there's 182 00:10:24,160 --> 00:10:27,800 Speaker 1: a sentiment that resembles the bricks it in a way. 183 00:10:28,160 --> 00:10:31,080 Speaker 1: Last week the Republicans in the House of Representatives put 184 00:10:31,080 --> 00:10:33,520 Speaker 1: to put put out for or actually yesterday put out 185 00:10:33,559 --> 00:10:37,680 Speaker 1: for comment or legislation to roll back financial regulations. So 186 00:10:37,720 --> 00:10:40,760 Speaker 1: I think you're onto something there. And yet we have 187 00:10:40,920 --> 00:10:45,920 Speaker 1: seen this upset in the markets and questions about its 188 00:10:45,960 --> 00:10:48,920 Speaker 1: impact on the financial system, but we haven't seen any 189 00:10:48,960 --> 00:10:53,360 Speaker 1: banks in trouble as we did after Lehman Brothers. Is 190 00:10:54,600 --> 00:10:59,240 Speaker 1: has financial regulation actually served us well? Oh? I see well, 191 00:10:59,720 --> 00:11:03,560 Speaker 1: to some degree, regulation is necessary, but the way I 192 00:11:03,600 --> 00:11:05,960 Speaker 1: like to think about a regulation is mainly valuable as 193 00:11:05,960 --> 00:11:10,599 Speaker 1: a standardization to enable markets to behave more efficiently, to 194 00:11:10,679 --> 00:11:14,520 Speaker 1: enable customers to understand products being purchased, to have more 195 00:11:14,520 --> 00:11:17,240 Speaker 1: transparency so investors can get an idea of what's going 196 00:11:17,280 --> 00:11:21,160 Speaker 1: on in the companies that they're investing in. UM I 197 00:11:21,200 --> 00:11:23,599 Speaker 1: think the reason why markets haven't tanked so much is 198 00:11:24,360 --> 00:11:27,600 Speaker 1: not so much that regulation is helping stabilize things, but 199 00:11:27,679 --> 00:11:30,079 Speaker 1: in two reasons. One is not much as nobody is 200 00:11:30,120 --> 00:11:32,560 Speaker 1: quite sure what's going to happen yet. I mean, there's 201 00:11:32,559 --> 00:11:36,200 Speaker 1: a there's there's great uncertainty out there, There's no doesn't 202 00:11:36,200 --> 00:11:38,959 Speaker 1: seem to be any rush on anybody's part to take 203 00:11:38,960 --> 00:11:41,200 Speaker 1: any actions at the moment. So there's a kind of 204 00:11:41,200 --> 00:11:44,000 Speaker 1: a wait and see attitude about this. Well, are we 205 00:11:44,080 --> 00:11:46,920 Speaker 1: better off? Is the is what I want to get at. 206 00:11:47,160 --> 00:11:50,040 Speaker 1: I'm asking all these questions badly. Is the banking system 207 00:11:50,080 --> 00:11:54,080 Speaker 1: better off? For God Frank, for bossle three? Well, my 208 00:11:54,120 --> 00:11:56,520 Speaker 1: own feeling is not much, not at all, Actually, I 209 00:11:56,520 --> 00:12:02,120 Speaker 1: think an additional capital, Well, the additional capital is great, 210 00:12:02,200 --> 00:12:05,400 Speaker 1: but the additional capital is relative to a very relatively 211 00:12:05,480 --> 00:12:08,560 Speaker 1: punique amount of capital that the banking system throughout the 212 00:12:08,559 --> 00:12:11,000 Speaker 1: world was holding before the crisis, on the basis of 213 00:12:11,440 --> 00:12:14,040 Speaker 1: what they call risk based capital standards, which dilutes the 214 00:12:14,080 --> 00:12:16,360 Speaker 1: effective capital the banking system had to hold in the 215 00:12:16,400 --> 00:12:19,640 Speaker 1: first place. So you know, relative to that. Yeah, look, 216 00:12:19,760 --> 00:12:22,520 Speaker 1: you can make statements that capital requirements have doubled, but 217 00:12:22,600 --> 00:12:25,680 Speaker 1: they've doubled only to a relatively modest amount, and not 218 00:12:26,120 --> 00:12:28,360 Speaker 1: nearly enough in my view and a view of many people. 219 00:12:28,679 --> 00:12:32,320 Speaker 1: If what's necessary and in fact, what what's what? The 220 00:12:32,320 --> 00:12:34,200 Speaker 1: game seems to be that, you know, you pile on 221 00:12:34,240 --> 00:12:36,720 Speaker 1: a bunch of extra regulations in order to satisfy the 222 00:12:36,760 --> 00:12:40,520 Speaker 1: banks desire to hold less capital than the otherwise would 223 00:12:40,559 --> 00:12:43,520 Speaker 1: so they can make more profit take more risks, and 224 00:12:43,559 --> 00:12:45,080 Speaker 1: I don't think that's the way to go. That's not 225 00:12:45,120 --> 00:12:48,040 Speaker 1: the solution to make the banking system safe. We're still, 226 00:12:48,080 --> 00:12:50,319 Speaker 1: I think, playing a game where we can elude ourselves 227 00:12:50,360 --> 00:12:52,400 Speaker 1: as as people that think about money and banking to 228 00:12:52,520 --> 00:12:54,120 Speaker 1: teach it, that are in the industry, that are in 229 00:12:54,360 --> 00:12:58,440 Speaker 1: the public sector. We still diluting our diluting ourselves to 230 00:12:58,480 --> 00:13:01,560 Speaker 1: think that we can operate um with with what we 231 00:13:01,600 --> 00:13:05,480 Speaker 1: call leverage ratios as low as six percent for our 232 00:13:05,520 --> 00:13:10,280 Speaker 1: globally active banks. Um When when when those ratios were 233 00:13:10,280 --> 00:13:13,200 Speaker 1: as high as ten to fift in the early part 234 00:13:13,240 --> 00:13:16,240 Speaker 1: of the twentieth century, before our safety net was in place, 235 00:13:16,240 --> 00:13:19,120 Speaker 1: when banks were on their own. Uh. We were talking 236 00:13:19,120 --> 00:13:23,000 Speaker 1: about regulation and regulatory overreach in the European Union, and 237 00:13:23,040 --> 00:13:26,600 Speaker 1: I wanted to ask you what that means, you think, 238 00:13:27,240 --> 00:13:31,720 Speaker 1: because everybody's asking these philosophical questions now for the Eurozone, 239 00:13:32,120 --> 00:13:36,360 Speaker 1: for the use of the single currency, it seems at 240 00:13:36,360 --> 00:13:39,079 Speaker 1: this point that the only hope is that they come 241 00:13:39,120 --> 00:13:41,000 Speaker 1: up with some sort of fiscal agency, which means that 242 00:13:41,520 --> 00:13:44,560 Speaker 1: they have to be more closely knitted together. At a 243 00:13:44,640 --> 00:13:51,000 Speaker 1: time when there's a populist uprising against additional union in Europe. 244 00:13:51,440 --> 00:13:54,920 Speaker 1: I think you're absolutely right this project UM to knit 245 00:13:55,000 --> 00:13:58,120 Speaker 1: the European countries together in the kind of a United 246 00:13:58,160 --> 00:14:02,400 Speaker 1: States of Europe, uh up against it because in my view, 247 00:14:02,400 --> 00:14:05,840 Speaker 1: it's not going to work. It does need tighter UM 248 00:14:06,080 --> 00:14:08,960 Speaker 1: fiscal policy at this point, and it's very hard to 249 00:14:08,960 --> 00:14:11,760 Speaker 1: achieve for exactly the reasons you said, Mike, the countries 250 00:14:11,800 --> 00:14:14,679 Speaker 1: are pulling away from each other in that way. UM. 251 00:14:14,840 --> 00:14:17,200 Speaker 1: I think you you basically put your finger on it 252 00:14:17,240 --> 00:14:20,680 Speaker 1: that this project uh, you know, might have a kind 253 00:14:20,680 --> 00:14:23,360 Speaker 1: of a goal that looks like it would be great 254 00:14:23,400 --> 00:14:25,360 Speaker 1: to achieve in the Europe that's been in war with 255 00:14:25,400 --> 00:14:28,320 Speaker 1: itself for hundreds of years. But given the concentration of 256 00:14:28,440 --> 00:14:31,800 Speaker 1: cultures and languages that exists in Europe as opposed to 257 00:14:31,840 --> 00:14:33,880 Speaker 1: the United States, where things are homogenized in a way 258 00:14:33,920 --> 00:14:37,360 Speaker 1: that we don't really see each other's cultures, so starkly, 259 00:14:37,800 --> 00:14:40,480 Speaker 1: I don't think the United States model works for Europe. 260 00:14:40,760 --> 00:14:42,960 Speaker 1: I think they have to pull back, and in a way, 261 00:14:43,000 --> 00:14:45,360 Speaker 1: that's what I think the bricks that vote is all about. 262 00:14:45,840 --> 00:14:48,080 Speaker 1: It's a wake up call saying, you know, we'd rather 263 00:14:48,120 --> 00:14:50,520 Speaker 1: wake you up now than wait another five ten years 264 00:14:50,520 --> 00:14:54,600 Speaker 1: and see a much much more chaotic collapse. Well, then 265 00:14:54,840 --> 00:14:59,240 Speaker 1: what happens if that is the case, what is the 266 00:15:00,080 --> 00:15:03,240 Speaker 1: the game plan? Does the yuro goo out of existence? Uh? 267 00:15:03,360 --> 00:15:06,880 Speaker 1: Do we muddle along in crisis after crisis? So what 268 00:15:06,960 --> 00:15:09,200 Speaker 1: do you think happens? Well, I mean it's hard to 269 00:15:09,240 --> 00:15:12,760 Speaker 1: it's hard to say, except that the Euro, the single currency, 270 00:15:12,840 --> 00:15:15,640 Speaker 1: is kind of the epitome of the regulatory state in Europe, 271 00:15:15,960 --> 00:15:21,560 Speaker 1: overlaid over everything and making and tightening the the flexibility 272 00:15:21,560 --> 00:15:25,360 Speaker 1: they would otherwise exist. If europad at least two currencies, 273 00:15:25,400 --> 00:15:27,400 Speaker 1: maybe a strong euro and a and a weak Euro 274 00:15:27,520 --> 00:15:30,040 Speaker 1: if you will, I don't see any way in ten 275 00:15:30,120 --> 00:15:32,080 Speaker 1: years there's not going to have to be at least 276 00:15:32,080 --> 00:15:35,240 Speaker 1: two currencies, Professor good friend, Um, we were talking what 277 00:15:35,320 --> 00:15:37,800 Speaker 1: an honor to talk to Adam Posing about William Klein 278 00:15:38,480 --> 00:15:42,840 Speaker 1: Peterson Institute and the idea of currency dynamics and politics 279 00:15:42,920 --> 00:15:46,560 Speaker 1: wrapped their own currency word A world is Ken Rogoff 280 00:15:46,680 --> 00:15:49,200 Speaker 1: was way out front on a zillion years ago of 281 00:15:49,320 --> 00:15:54,080 Speaker 1: moving from very fixed regames to floating, floating floating currencies. 282 00:15:54,520 --> 00:16:00,640 Speaker 1: Can we do international economics and affect policy when you've 283 00:16:00,680 --> 00:16:05,720 Speaker 1: got floating currencies that instantly adjust? I think floating currencies 284 00:16:05,760 --> 00:16:09,640 Speaker 1: among the important countries the world time are critical in 285 00:16:09,720 --> 00:16:12,840 Speaker 1: order to do policy in a way that's effective and 286 00:16:13,040 --> 00:16:19,440 Speaker 1: most most effective for promoting markets and prosperity and flexible businesses, 287 00:16:19,800 --> 00:16:22,400 Speaker 1: flexible decision making. I mean, that's the lesson of the 288 00:16:22,480 --> 00:16:26,440 Speaker 1: last fifty years that the major currencies, major countries have 289 00:16:26,520 --> 00:16:29,320 Speaker 1: flexible currencies with respect to each other. And the reason 290 00:16:29,360 --> 00:16:31,800 Speaker 1: that's so important is if you have fixed currencies and 291 00:16:31,840 --> 00:16:34,960 Speaker 1: you really try to maintain them between current countries that 292 00:16:35,040 --> 00:16:37,640 Speaker 1: have moving terms of trade. There is something I talk 293 00:16:37,720 --> 00:16:40,400 Speaker 1: about in my class. You know, the real prices of 294 00:16:40,480 --> 00:16:43,680 Speaker 1: goods change in relation to each other around the world 295 00:16:43,680 --> 00:16:46,280 Speaker 1: all the time. If you have fixed currencies, you don't 296 00:16:46,320 --> 00:16:50,520 Speaker 1: let those real price changes um flexibly impact to the 297 00:16:50,560 --> 00:16:53,720 Speaker 1: country's trading relations. And what happens is you're forced into 298 00:16:53,800 --> 00:16:56,760 Speaker 1: ever more government regulations to try to sustain the fixed 299 00:16:56,760 --> 00:17:00,280 Speaker 1: currencies in a in a cycle that eventually breaks down. 300 00:17:00,680 --> 00:17:03,320 Speaker 1: That's the history of fixed exchange rates, and that's why 301 00:17:03,880 --> 00:17:05,639 Speaker 1: you know, since nineteen seventy three we've moved in the 302 00:17:05,640 --> 00:17:08,520 Speaker 1: opposite direction. And that's why I think Europe we'll have 303 00:17:08,600 --> 00:17:12,600 Speaker 1: to back off on the European currency. What does Jenny 304 00:17:12,640 --> 00:17:15,960 Speaker 1: Yellen doing. I mean, I've been laughing that she's central banker. 305 00:17:16,040 --> 00:17:20,800 Speaker 1: To Brexit, she has an outsized influence. How does that 306 00:17:20,920 --> 00:17:25,159 Speaker 1: change dialogue at the ECHOS building. Well, I don't know 307 00:17:25,200 --> 00:17:28,359 Speaker 1: how to answer that, because I don't think the FED 308 00:17:28,480 --> 00:17:33,240 Speaker 1: really cares that much about the currents. The the US 309 00:17:33,760 --> 00:17:37,760 Speaker 1: dollar um in the scheme of things. You know, when 310 00:17:37,800 --> 00:17:39,480 Speaker 1: when in the years that I was going to the 311 00:17:39,520 --> 00:17:43,240 Speaker 1: Federal Open Market Committee thirteen years, hardly at all was 312 00:17:43,240 --> 00:17:45,560 Speaker 1: was the currency mentioned. That the US is a huge 313 00:17:45,600 --> 00:17:49,119 Speaker 1: trading region and and mainly the FIT is focused internally. 314 00:17:49,880 --> 00:17:52,399 Speaker 1: There's a famous phrase, I said, you know our dollar 315 00:17:52,480 --> 00:17:54,760 Speaker 1: your problem, which I'm sure you know that the FED 316 00:17:54,840 --> 00:18:00,480 Speaker 1: has long said quietly the FED is. The FED is 317 00:18:00,600 --> 00:18:04,080 Speaker 1: sideline for now, it appears, But does that in the 318 00:18:04,119 --> 00:18:07,080 Speaker 1: long run make a difference at this point to the U. 319 00:18:07,119 --> 00:18:11,360 Speaker 1: S economy going for well, I mean it's sideline. Well, 320 00:18:11,400 --> 00:18:13,760 Speaker 1: I'm not sure that the FED is sideline. I will 321 00:18:13,760 --> 00:18:16,480 Speaker 1: say this, it seems the fitest sideline based on the 322 00:18:16,800 --> 00:18:19,600 Speaker 1: events of the last week. But the U. S. Economy 323 00:18:19,760 --> 00:18:22,160 Speaker 1: is potentially poised to do very well over the next 324 00:18:22,160 --> 00:18:24,240 Speaker 1: few months, and so I would warn people that think 325 00:18:24,240 --> 00:18:27,280 Speaker 1: the FED is absolutely sideline. Sideline to say, well, let's 326 00:18:27,320 --> 00:18:30,000 Speaker 1: wait a minute. If developments in Europe slow down a lot, 327 00:18:30,040 --> 00:18:33,080 Speaker 1: because you know, both sides are kind of waiting to 328 00:18:33,080 --> 00:18:36,280 Speaker 1: see what the other does, British and the EU, then 329 00:18:36,320 --> 00:18:38,919 Speaker 1: things could drag on for quite a while and the US, 330 00:18:38,920 --> 00:18:42,000 Speaker 1: you know, consumer is largely oblivious to maybe oblivious to 331 00:18:42,000 --> 00:18:44,800 Speaker 1: those things. The US is close to full employment or 332 00:18:44,800 --> 00:18:47,240 Speaker 1: if not, and maybe be ond full employment in a 333 00:18:47,240 --> 00:18:49,439 Speaker 1: few months, and the said could be back on track, 334 00:18:49,480 --> 00:18:52,359 Speaker 1: and you know, with a couple of good labor reports. 335 00:18:52,400 --> 00:18:55,399 Speaker 1: So I would warn people that think that sideline that 336 00:18:55,520 --> 00:18:59,080 Speaker 1: just doesn't seem in the cards necessarily to me. Professor 337 00:18:59,119 --> 00:19:02,080 Speaker 1: good for In Greenspan said yesterday he had to worry 338 00:19:02,080 --> 00:19:06,600 Speaker 1: about inflation. I thought that Sherman Greenspan was quite articulate 339 00:19:07,240 --> 00:19:10,879 Speaker 1: about not the win of inflation, but the makeup that 340 00:19:10,920 --> 00:19:14,680 Speaker 1: we're at now as causing inflation. And we jested, are 341 00:19:14,680 --> 00:19:18,960 Speaker 1: you an inflation issta help us here with the comedy 342 00:19:18,960 --> 00:19:22,320 Speaker 1: of inflation? East is Who've been wrong? And yet someone 343 00:19:22,359 --> 00:19:26,960 Speaker 1: like Sherman Greenspan saying, yeah, they've been wrong, but what's 344 00:19:27,000 --> 00:19:29,840 Speaker 1: the butt that gets us to higher inflation? The thing 345 00:19:29,880 --> 00:19:32,480 Speaker 1: about inflation, if you followed it as Greenspan did for 346 00:19:32,560 --> 00:19:35,119 Speaker 1: decades and decades. Is it's it's it's it's like a 347 00:19:35,240 --> 00:19:38,840 Speaker 1: vampire movie. When when you think the vampires asleep and 348 00:19:38,880 --> 00:19:41,120 Speaker 1: you're pretty confident he's not going to, you know, get 349 00:19:41,240 --> 00:19:45,240 Speaker 1: up again, that's when it becomes a problem, because there's 350 00:19:45,240 --> 00:19:47,439 Speaker 1: a tendency for the fellowserve to think, well, it's not 351 00:19:47,480 --> 00:19:49,280 Speaker 1: a problem, let's not worry about it. We can push 352 00:19:49,400 --> 00:19:53,760 Speaker 1: off the interest rate increases indefinitely. At some point, company 353 00:19:53,800 --> 00:19:57,359 Speaker 1: by company people they realized that their profit margins are 354 00:19:57,359 --> 00:20:00,639 Speaker 1: getting getting shrunk, and they make moves, and before you 355 00:20:00,640 --> 00:20:03,400 Speaker 1: know it, you've got a waking up of the vampire 356 00:20:03,440 --> 00:20:05,640 Speaker 1: waking up with the inflation. And we're at a point 357 00:20:05,680 --> 00:20:07,679 Speaker 1: now where we're close enough to full employment that that 358 00:20:07,720 --> 00:20:10,840 Speaker 1: could happen, especially if people assume, as I think the 359 00:20:10,880 --> 00:20:12,920 Speaker 1: conversation has been over the last few days, that oh, 360 00:20:12,960 --> 00:20:15,520 Speaker 1: the Feds asleep for for at least the next year. 361 00:20:15,920 --> 00:20:18,359 Speaker 1: I mean, that's a mistake. If that happens, then the 362 00:20:18,400 --> 00:20:20,679 Speaker 1: companies think we're on our own. We've got to protect 363 00:20:20,720 --> 00:20:23,320 Speaker 1: our margins. The set is not likely to raise rates 364 00:20:23,400 --> 00:20:26,520 Speaker 1: soon and stabilize the system from the top down, so 365 00:20:26,560 --> 00:20:29,000 Speaker 1: we've got to stabilize from the bottom up, and when 366 00:20:29,000 --> 00:20:32,480 Speaker 1: you get that kind of disconnect, that's the problem. That's 367 00:20:32,600 --> 00:20:34,960 Speaker 1: my way of saying what I think somebody like Alan 368 00:20:35,000 --> 00:20:37,560 Speaker 1: Greenspan would be saying. But how do you respond to 369 00:20:37,560 --> 00:20:40,119 Speaker 1: those who say on the FED, who say we know 370 00:20:40,200 --> 00:20:43,320 Speaker 1: how to fight inflation, we don't have a good handle 371 00:20:43,359 --> 00:20:46,120 Speaker 1: on how to keep us from getting out of deflation, 372 00:20:46,520 --> 00:20:48,760 Speaker 1: so better to err on the side of letting the 373 00:20:48,760 --> 00:20:51,159 Speaker 1: economy run hot. Well, at this point, I would say, 374 00:20:51,200 --> 00:20:53,280 Speaker 1: when you're closer that that was an argument that I 375 00:20:53,320 --> 00:20:56,520 Speaker 1: did support for for a few years ago. I thought 376 00:20:56,560 --> 00:20:59,199 Speaker 1: that argument was compelling. At this point, the problem is, 377 00:20:59,480 --> 00:21:03,040 Speaker 1: in my view, the following. The worst thing would happen 378 00:21:03,119 --> 00:21:06,199 Speaker 1: is if you know, inflation starts to move up and 379 00:21:06,280 --> 00:21:08,879 Speaker 1: the FED gets behind the curve, has to raise rates. 380 00:21:08,920 --> 00:21:11,720 Speaker 1: What happens in that case is that raising rates is 381 00:21:12,080 --> 00:21:15,119 Speaker 1: more likely than otherwise in and of itself to precipitate 382 00:21:15,119 --> 00:21:17,720 Speaker 1: a recession, and then within the two years the set 383 00:21:17,760 --> 00:21:20,800 Speaker 1: has to cut rates below where it is today. That's 384 00:21:20,840 --> 00:21:24,280 Speaker 1: a real problem. So it's a delicate balance at this point. 385 00:21:24,320 --> 00:21:26,560 Speaker 1: Since we're so close to full employment, you don't want 386 00:21:26,560 --> 00:21:28,560 Speaker 1: to fall too far behind the curve, and I think 387 00:21:28,600 --> 00:21:30,480 Speaker 1: the force of the argument you just made, Mike is 388 00:21:30,560 --> 00:21:32,320 Speaker 1: much weaker in my mind than it was three or 389 00:21:32,359 --> 00:21:35,200 Speaker 1: four years ago. Marvin goodfriend, Thank you so much. He's 390 00:21:35,240 --> 00:21:38,399 Speaker 1: with Cornie gie Mellon University and of course associated for years, 391 00:21:39,240 --> 00:21:56,480 Speaker 1: among others, with the Richmond Fed. Michael, I want to 392 00:21:56,480 --> 00:22:01,679 Speaker 1: go back for five years to an essay from Morgan 393 00:22:01,840 --> 00:22:06,679 Speaker 1: Stanley that stopped economics. It was done by Yakum Fells. 394 00:22:06,760 --> 00:22:10,560 Speaker 1: He is now with Pimco and joins us UH. This morning, 395 00:22:11,000 --> 00:22:13,719 Speaker 1: Dr fels wonderful to speak to you. You wrote an 396 00:22:13,800 --> 00:22:17,560 Speaker 1: essay for Morgan Stanley suggesting it wasn't about Greece or 397 00:22:17,560 --> 00:22:22,000 Speaker 1: peripherals leaving Europe, it would be about Germany and a 398 00:22:22,160 --> 00:22:28,240 Speaker 1: core Europe leaving everybody else. Are we closer to Germany, Netherlands, 399 00:22:28,320 --> 00:22:34,840 Speaker 1: etcetera setting up their own institutional block versus everyone else. Well, 400 00:22:34,880 --> 00:22:38,280 Speaker 1: I think we may be an inch or two inches closer. 401 00:22:38,760 --> 00:22:40,960 Speaker 1: We haven't made a big step in that direction, but 402 00:22:41,080 --> 00:22:44,439 Speaker 1: I I think the main fallout for Europe from the 403 00:22:44,480 --> 00:22:47,159 Speaker 1: Brexit decision will be that it gives support, it lends 404 00:22:47,160 --> 00:22:52,280 Speaker 1: support to populist movements in other parts of Europe. Um 405 00:22:52,359 --> 00:22:57,520 Speaker 1: and almost everywhere in Europe you see those movements on 406 00:22:57,560 --> 00:23:00,560 Speaker 1: the rise. So you mentioned the Netherlands, there is a 407 00:23:00,600 --> 00:23:05,000 Speaker 1: strong anti immigration party and anti euro party, and as 408 00:23:05,000 --> 00:23:08,160 Speaker 1: you know, the leader of that party, get Wilders, has 409 00:23:08,200 --> 00:23:11,080 Speaker 1: already called for a referendum. Now, it's not so easy 410 00:23:11,119 --> 00:23:13,520 Speaker 1: to get in a to get a referendum in the Netherlands, 411 00:23:13,560 --> 00:23:17,480 Speaker 1: but I think that this really lends support to those forces, 412 00:23:17,560 --> 00:23:19,520 Speaker 1: and that's why we should be a little bit more 413 00:23:19,560 --> 00:23:24,720 Speaker 1: worried than we were before June. What is the what 414 00:23:24,920 --> 00:23:28,639 Speaker 1: is the game plan? A gameless out for us? What 415 00:23:28,760 --> 00:23:33,000 Speaker 1: you think the European unions response to all this will 416 00:23:33,080 --> 00:23:37,040 Speaker 1: be how much lee way will they give the UK? 417 00:23:37,240 --> 00:23:42,760 Speaker 1: How much power does the EU have in this negotiation? Well, 418 00:23:42,800 --> 00:23:46,639 Speaker 1: I think the main focus by the European institutions, by 419 00:23:46,640 --> 00:23:51,560 Speaker 1: other governments in the negotiations will be too um demonstrate 420 00:23:52,119 --> 00:23:56,760 Speaker 1: that leaving the EU is not an easy, easy thing, right, 421 00:23:56,800 --> 00:23:59,880 Speaker 1: So I think they will take a relatively tough stance 422 00:24:00,040 --> 00:24:04,480 Speaker 1: in the negotiations um and so they will not make 423 00:24:04,640 --> 00:24:08,000 Speaker 1: this exit easy for the UK by making a lot 424 00:24:08,040 --> 00:24:10,840 Speaker 1: of concessions. I think the main focus now is to 425 00:24:11,000 --> 00:24:17,240 Speaker 1: prevent that this move in Britain encourages populist movements in 426 00:24:17,280 --> 00:24:22,080 Speaker 1: other countries. I'm actually slightly encouraged by the results of 427 00:24:22,119 --> 00:24:26,160 Speaker 1: the Spanish election on the weekend. You saw that the 428 00:24:26,200 --> 00:24:30,000 Speaker 1: Po Demos, a euroskeptical party that had been on the 429 00:24:30,119 --> 00:24:34,320 Speaker 1: rise in the polls before the Brexit vote, actually did 430 00:24:34,600 --> 00:24:38,199 Speaker 1: a lot less well than the polls had suggested. So 431 00:24:38,240 --> 00:24:40,600 Speaker 1: there seems to have been a swinging sentiment in Spain 432 00:24:40,760 --> 00:24:43,640 Speaker 1: in the last one or two days before the election 433 00:24:43,680 --> 00:24:46,400 Speaker 1: when they saw the reaction of markets and the public 434 00:24:47,119 --> 00:24:51,160 Speaker 1: to the British vote. What is you say that they 435 00:24:51,160 --> 00:24:53,600 Speaker 1: will try to make it as difficult as possible. The 436 00:24:53,680 --> 00:24:56,320 Speaker 1: key question seems to be passporting whether or not the 437 00:24:56,359 --> 00:25:00,600 Speaker 1: financial firms in the UK can continue to business as 438 00:25:00,680 --> 00:25:05,560 Speaker 1: usual in the European Union. One analyst this morning was 439 00:25:05,600 --> 00:25:09,760 Speaker 1: suggesting it would be really stupid of the Europeans to 440 00:25:09,840 --> 00:25:13,960 Speaker 1: cut the banks off, because the big banks in Europe 441 00:25:14,119 --> 00:25:17,440 Speaker 1: are the best run, best the best one of the 442 00:25:17,480 --> 00:25:19,680 Speaker 1: ones in London are best run, best capitalized, and best 443 00:25:19,720 --> 00:25:24,119 Speaker 1: regulated banks, and given the trouble with European banks these days, uh, 444 00:25:24,160 --> 00:25:26,399 Speaker 1: it would be cutting off their nose despite their face. 445 00:25:26,520 --> 00:25:28,760 Speaker 1: Do you do you think they will see it that way? 446 00:25:29,280 --> 00:25:33,200 Speaker 1: I rather think that the Europeans will take a relatively 447 00:25:33,240 --> 00:25:36,639 Speaker 1: tough stance. I think there are you know that there's 448 00:25:36,680 --> 00:25:40,440 Speaker 1: the hope in Germany, in France and some other countries 449 00:25:40,480 --> 00:25:43,439 Speaker 1: that actually their financial centers, which are of course much 450 00:25:43,520 --> 00:25:47,040 Speaker 1: much smaller and much more fragmented than than London, that 451 00:25:47,080 --> 00:25:50,480 Speaker 1: there's financial centers will benefit. So I do not think 452 00:25:50,520 --> 00:25:54,280 Speaker 1: that europe will take a liberal attitude towards the banking 453 00:25:54,320 --> 00:25:58,200 Speaker 1: sector and towards passporting. I rather think that British banks 454 00:25:58,240 --> 00:26:02,200 Speaker 1: are to be more precise. Banks who do European business 455 00:26:02,240 --> 00:26:06,280 Speaker 1: out of London will have to relocate people to other 456 00:26:06,320 --> 00:26:08,800 Speaker 1: places in the EU in order to be able to 457 00:26:08,840 --> 00:26:12,240 Speaker 1: continue to do business. Now, that doesn't mean London cannot 458 00:26:12,320 --> 00:26:15,080 Speaker 1: remain a hub, but it will be a smaller hub, 459 00:26:15,320 --> 00:26:17,639 Speaker 1: and there will have to be more spokes in the 460 00:26:17,720 --> 00:26:22,200 Speaker 1: system in the sense that trading activities, sales activities will 461 00:26:22,240 --> 00:26:25,040 Speaker 1: have to relocate to some other places. The spokes remind 462 00:26:25,080 --> 00:26:30,240 Speaker 1: me of free Zakaria in a new American foreign policy. Well, London, 463 00:26:30,280 --> 00:26:34,280 Speaker 1: they have a new financial foreign policy because of Yakam 464 00:26:34,320 --> 00:26:40,040 Speaker 1: fills many spokes. Well, I think the issue and the 465 00:26:40,119 --> 00:26:43,199 Speaker 1: problem that the UK is now facing is you know 466 00:26:43,240 --> 00:26:46,800 Speaker 1: how to how how to position yourself in this new 467 00:26:46,840 --> 00:26:50,200 Speaker 1: geography of Europe. And you could say there may be 468 00:26:50,359 --> 00:26:53,480 Speaker 1: some advantages to the London to London as a financial 469 00:26:53,520 --> 00:26:56,119 Speaker 1: center when it is outside of the EU so they 470 00:26:56,880 --> 00:27:01,040 Speaker 1: can do their own regulation. Um, it may become more 471 00:27:01,040 --> 00:27:03,919 Speaker 1: of an offshore market. But again when it comes to 472 00:27:03,960 --> 00:27:07,200 Speaker 1: doing business within Europe, that will be much more difficult. 473 00:27:07,640 --> 00:27:11,719 Speaker 1: Do you share Lord King's optimism? Irvin King joined us 474 00:27:11,720 --> 00:27:15,320 Speaker 1: this morning and make clear that he has an optimism 475 00:27:15,320 --> 00:27:18,800 Speaker 1: about a resilient the United Kingdom. Do you share that? 476 00:27:18,880 --> 00:27:23,159 Speaker 1: Doctor fills Well, yes, I think Britain is quite resilient. 477 00:27:23,200 --> 00:27:25,399 Speaker 1: I mean this is a shock and we will have 478 00:27:25,480 --> 00:27:29,000 Speaker 1: to see the shock working its way through the economy, 479 00:27:29,320 --> 00:27:33,200 Speaker 1: through the financial markets. But eventually Britain, and I've lived 480 00:27:33,240 --> 00:27:38,720 Speaker 1: in Britain for twenty years, Britain is a relatively flexible economy. Um, 481 00:27:38,720 --> 00:27:41,440 Speaker 1: it is open to the rest of the world. So 482 00:27:42,040 --> 00:27:45,719 Speaker 1: I think eventually, yes, I think Britain will overcome this. 483 00:27:46,680 --> 00:27:49,600 Speaker 1: But I still think that there is a considerable loss. 484 00:27:49,760 --> 00:27:52,560 Speaker 1: There will be consider a loss of activity due to 485 00:27:52,640 --> 00:27:57,040 Speaker 1: the exit in in which sectors do you think is 486 00:27:57,080 --> 00:28:01,120 Speaker 1: it largely financial? It's not only financial Mike. I mean, 487 00:28:01,160 --> 00:28:05,040 Speaker 1: that's of course the main sector that you know suffers 488 00:28:05,119 --> 00:28:08,080 Speaker 1: from from Brexit. But think of manufacturing. There are a 489 00:28:08,080 --> 00:28:13,000 Speaker 1: lot of foreign global car manufacturers, the Japanese for example, 490 00:28:13,560 --> 00:28:18,600 Speaker 1: who are producing in the UK export to Europe. Now, 491 00:28:18,600 --> 00:28:22,240 Speaker 1: many of these producers have plants within other parts of 492 00:28:22,240 --> 00:28:25,520 Speaker 1: the European Union as well, and so they will not 493 00:28:25,840 --> 00:28:28,600 Speaker 1: invest further in in the UK, at least not at 494 00:28:28,600 --> 00:28:31,000 Speaker 1: the moment when it's not clear what the future trade 495 00:28:31,040 --> 00:28:34,119 Speaker 1: regime will be, what kind of tariffs will apply to 496 00:28:34,200 --> 00:28:37,040 Speaker 1: them when they export into the EU in in the future. 497 00:28:37,119 --> 00:28:42,520 Speaker 1: So the immediate impact of this decision is that investment 498 00:28:42,720 --> 00:28:46,880 Speaker 1: decisions will just be frozen and if in doubt, the 499 00:28:46,960 --> 00:28:51,160 Speaker 1: next investment will by these multinational companies will not happen 500 00:28:51,240 --> 00:28:53,400 Speaker 1: in the UK, but it will happen in other parts 501 00:28:53,400 --> 00:28:55,400 Speaker 1: of the European Union. So this is not only about 502 00:28:55,400 --> 00:28:57,480 Speaker 1: the financial sector. This is also about other parts of 503 00:28:57,480 --> 00:29:01,959 Speaker 1: the economy. How do your portfolio manager's digest fills strategy? 504 00:29:02,720 --> 00:29:04,760 Speaker 1: What are they getting out from under their desk when 505 00:29:04,760 --> 00:29:08,400 Speaker 1: you walk down the aisle. Nobody's sitting under the desk. 506 00:29:08,440 --> 00:29:11,280 Speaker 1: It's not that bad we were I'm trying to start 507 00:29:11,280 --> 00:29:14,720 Speaker 1: some rumors here we were. We were well prepared, as 508 00:29:14,720 --> 00:29:17,480 Speaker 1: you know, we had been focusing on this and we 509 00:29:17,520 --> 00:29:21,840 Speaker 1: actually had put a relatively high probability on an exit. 510 00:29:22,000 --> 00:29:25,560 Speaker 1: We were at probability for an exit even in the 511 00:29:25,640 --> 00:29:29,280 Speaker 1: days before the decision, when markets and and the book 512 00:29:29,400 --> 00:29:32,920 Speaker 1: the bookies attached to much lower probability. So look, we 513 00:29:32,960 --> 00:29:35,920 Speaker 1: had our secular forum recently where we discussed the longer 514 00:29:36,000 --> 00:29:38,840 Speaker 1: term outlook once a year and one big focus. One 515 00:29:38,880 --> 00:29:41,160 Speaker 1: big topic at that forum, which we held in May, 516 00:29:41,280 --> 00:29:44,320 Speaker 1: and by the way, Mervin King was one of the speakers, 517 00:29:44,800 --> 00:29:48,520 Speaker 1: one big topic was populism, the rise of populism and 518 00:29:48,560 --> 00:29:53,040 Speaker 1: the politicization of the political process. And one of the conclusions, 519 00:29:53,160 --> 00:29:57,280 Speaker 1: one of our conclusions was that we as portfolio managers, 520 00:29:57,480 --> 00:30:01,880 Speaker 1: as investment managers, we want to be aware of those risks. 521 00:30:01,920 --> 00:30:06,840 Speaker 1: We want to become increasingly and gradually more cautious to 522 00:30:06,880 --> 00:30:10,440 Speaker 1: take account of those risks. We think that longer term 523 00:30:10,680 --> 00:30:14,680 Speaker 1: there is a risk of higher inflation resulting from the 524 00:30:14,680 --> 00:30:18,000 Speaker 1: wave of populism, or let me be more precise, the 525 00:30:18,080 --> 00:30:22,720 Speaker 1: risk is higher inflation and lower growth, so stagflation, a 526 00:30:22,800 --> 00:30:26,240 Speaker 1: combination of weak growth and higher inflation, which is what 527 00:30:26,320 --> 00:30:30,720 Speaker 1: would result from protectionism and redistributive policies, and that is 528 00:30:30,760 --> 00:30:35,040 Speaker 1: why we are building some insurance against those events into 529 00:30:35,040 --> 00:30:39,800 Speaker 1: our portfolios. We were talking about the idea that the 530 00:30:39,840 --> 00:30:44,040 Speaker 1: world is likely to see higher inflation and lower growth, 531 00:30:44,120 --> 00:30:47,120 Speaker 1: which raises the question of what then do you do 532 00:30:47,200 --> 00:30:49,400 Speaker 1: about it. The argument, and we were talking about this 533 00:30:49,440 --> 00:30:51,320 Speaker 1: with Marvin good Friend a few minutes ago. The argument 534 00:30:51,360 --> 00:30:53,840 Speaker 1: from the Fed has been we know how to deal 535 00:30:54,640 --> 00:30:59,040 Speaker 1: with high inflation, we don't know how to deal with deflation, 536 00:30:59,160 --> 00:31:03,520 Speaker 1: so let it run. We that the cost benefit analysis 537 00:31:03,600 --> 00:31:06,840 Speaker 1: is we're going to get more out of monetary policy 538 00:31:06,920 --> 00:31:10,719 Speaker 1: trying to stimulate growth and stimulate a little inflation and 539 00:31:10,840 --> 00:31:17,520 Speaker 1: raise the employment rate than we would by clamping down. Well, Mike, 540 00:31:17,560 --> 00:31:20,240 Speaker 1: as as you said, in the past, when when inflation 541 00:31:20,280 --> 00:31:23,120 Speaker 1: showed up, when it's reared its ugly head, yes, the 542 00:31:23,120 --> 00:31:25,680 Speaker 1: FED knew what to do, raising interest rates aggressively. I 543 00:31:25,720 --> 00:31:27,840 Speaker 1: think I think it's different this time around. I think 544 00:31:27,840 --> 00:31:30,800 Speaker 1: the Fed wants somewhat higher inflation. Of course, they don't 545 00:31:30,800 --> 00:31:33,840 Speaker 1: want runaway inflation, but I think they would be quite 546 00:31:33,880 --> 00:31:37,520 Speaker 1: happy to overshoot for a while and still sit on 547 00:31:37,560 --> 00:31:40,320 Speaker 1: their hands and and let the economy run a little 548 00:31:40,320 --> 00:31:42,680 Speaker 1: bit hot. Why is that, Well, there's a lot of 549 00:31:42,720 --> 00:31:48,160 Speaker 1: debt out there UM that will be easier to carry 550 00:31:48,240 --> 00:31:52,880 Speaker 1: if inflation is somewhat higher. The second reason is that well, 551 00:31:52,960 --> 00:31:56,760 Speaker 1: overall growth is very low UM, as we discussed earlier, 552 00:31:56,960 --> 00:32:02,640 Speaker 1: and so raising interest rates in this environment risks another recession. 553 00:32:03,480 --> 00:32:08,320 Speaker 1: And then finally they are worried that inflation expectations are 554 00:32:08,520 --> 00:32:13,600 Speaker 1: dropping and dropping. This is certainly true for inflation compensation 555 00:32:13,800 --> 00:32:16,400 Speaker 1: as as we measure it in the bond market, but 556 00:32:16,480 --> 00:32:19,360 Speaker 1: there are also some signs in some of the surveys, 557 00:32:19,440 --> 00:32:24,440 Speaker 1: the consumer surveys, that inflation expectations are at least at 558 00:32:24,560 --> 00:32:28,200 Speaker 1: risk of un anchoring on the downside. And so I 559 00:32:28,240 --> 00:32:32,120 Speaker 1: think the best way to bring back, to bring inflation 560 00:32:32,160 --> 00:32:34,960 Speaker 1: expectations back up to the fat subjective is to let 561 00:32:35,000 --> 00:32:37,520 Speaker 1: inflation overshoot for a while. That's why I think you 562 00:32:37,560 --> 00:32:41,000 Speaker 1: will probably not see the typical reaction of the past 563 00:32:41,320 --> 00:32:43,720 Speaker 1: to run away or two rising inflation, but the fat 564 00:32:43,760 --> 00:32:47,520 Speaker 1: will will rather let it let it roll. I just 565 00:32:47,600 --> 00:32:50,920 Speaker 1: heard the Chance of the Exchequer speak and yakum fels 566 00:32:50,960 --> 00:32:54,160 Speaker 1: he spent most of his time talking about fancy business 567 00:32:54,160 --> 00:32:57,720 Speaker 1: stuff and things that leads talk about. There's two America's 568 00:32:58,480 --> 00:33:01,320 Speaker 1: I would suggest there's two United Kingdoms in the backdrop 569 00:33:01,360 --> 00:33:07,200 Speaker 1: of horrific productivity. It's just not there. Government policy affect 570 00:33:07,560 --> 00:33:13,080 Speaker 1: goodwill confidence in productivity, as what Germany did with employment 571 00:33:13,160 --> 00:33:17,880 Speaker 1: out of the immediate oh A crisis. I think it's 572 00:33:18,000 --> 00:33:24,200 Speaker 1: becoming very, very difficult for governments to raise confidence to 573 00:33:24,440 --> 00:33:29,520 Speaker 1: raise productivity. And the reason is that for the past 574 00:33:29,560 --> 00:33:34,160 Speaker 1: twenty years, we've basically exported the high productivity jobs somewhere else. 575 00:33:34,480 --> 00:33:38,040 Speaker 1: So as a consequence of globalization and a consequence of 576 00:33:38,480 --> 00:33:42,120 Speaker 1: new technologies, we have seen a hollowing out of the 577 00:33:42,160 --> 00:33:45,960 Speaker 1: middle classes in our societies. I'm talking the developed world. 578 00:33:46,000 --> 00:33:47,960 Speaker 1: This is not only the US, this is not only 579 00:33:48,000 --> 00:33:50,520 Speaker 1: the UK. I think this applies almost everywhere in the 580 00:33:50,560 --> 00:33:54,720 Speaker 1: developed world. Um So, the middle classes have not seen 581 00:33:55,160 --> 00:33:59,560 Speaker 1: their real incomes rising over the past twenty years. The 582 00:33:59,640 --> 00:34:03,560 Speaker 1: media on household income in the US, the real media 583 00:34:03,560 --> 00:34:07,760 Speaker 1: and household income peaked in and since then it has 584 00:34:07,760 --> 00:34:10,120 Speaker 1: been on a downward trend. And this has been at 585 00:34:10,160 --> 00:34:14,560 Speaker 1: the expense of growing middle classes in the emerging world. 586 00:34:14,760 --> 00:34:17,800 Speaker 1: So what we're now facing, and what governments are now facing, 587 00:34:18,000 --> 00:34:21,080 Speaker 1: is the backlash to that policy, and I think that 588 00:34:21,120 --> 00:34:25,080 Speaker 1: will be very very difficult to reverse. UM. I think 589 00:34:25,080 --> 00:34:28,520 Speaker 1: what you'll get is policies that will focus more on 590 00:34:28,680 --> 00:34:32,719 Speaker 1: reducing inequality. And one major consequence of this is that 591 00:34:32,760 --> 00:34:37,400 Speaker 1: the pendulum will over time swing back from policies favoring 592 00:34:37,520 --> 00:34:42,560 Speaker 1: capital two policies favoring labor. And that's yet another reason 593 00:34:42,600 --> 00:34:45,520 Speaker 1: why I think the risk of inflation over the next 594 00:34:45,560 --> 00:34:47,800 Speaker 1: few years is much higher than the risk of interesting 595 00:34:48,880 --> 00:34:53,799 Speaker 1: Thank you so much with PIMCO. Thanks for listening to 596 00:34:53,840 --> 00:34:59,960 Speaker 1: the Bloomberg Surveillance podcast. Subscribe and listen to interviews on iTunes, SoundCloud, 597 00:35:00,320 --> 00:35:04,319 Speaker 1: or whichever podcast platform you prefer. I'm on Twitter at 598 00:35:04,360 --> 00:35:09,120 Speaker 1: Tom Keane, Michael McKee is at Economy Before the podcast. 599 00:35:09,200 --> 00:35:12,720 Speaker 1: You can always catch us worldwide. I'm Bloomberg Radio.