WEBVTT - Surveillance: El-Erian Sees EM 'Perfect Storm' 0:00:05.120 --> 0:00:09.200 Welcome to the Bloomberg Surveillance Podcast. I'm Tom Keene. Along 0:00:09.240 --> 0:00:13.080 with Jonathan Ferrell and Lisa Brownwitz Jay Leye. We bring 0:00:13.119 --> 0:00:17.159 you insight from the best and economics, finance, investment, and 0:00:17.280 --> 0:00:23.280 international relations. Find Bloomberg Surveillance, an Apple podcast, SoundCloud, Bloomberg 0:00:23.360 --> 0:00:30.160 dot Com, and of course on the Bloomberg Terminent. Joining 0:00:30.240 --> 0:00:32.480 us now, a man who needs no introduction nobody please 0:00:32.479 --> 0:00:35.400 decide that with us is Mohammed al Arian. Mohammed, let's 0:00:35.440 --> 0:00:38.400 start that same transitory. How much of a challenge are 0:00:38.400 --> 0:00:43.239 they getting from the recent incoming data? Massive? Drawn and 0:00:43.280 --> 0:00:45.879 thank you for having me a massive challenge. I think 0:00:45.920 --> 0:00:49.360 anybody who looks at what's going on will tell you 0:00:49.440 --> 0:00:55.240 that unless you embrace the analytically meaningless phase of persistently transitory, 0:00:55.360 --> 0:01:00.120 which I've heard persistently transitory, this inflation around is not transitor. 0:01:00.560 --> 0:01:03.640 We should take it seriously and central banks should move 0:01:03.760 --> 0:01:09.040 quickly to contain what could be something that ends up 0:01:09.120 --> 0:01:12.280 being more than just an inflation problem, but a growth problem. Mom. 0:01:12.319 --> 0:01:14.880 It's how small is that window to wact to make 0:01:14.920 --> 0:01:18.600 that change? Is it there? John? But it's getting smaller. 0:01:18.640 --> 0:01:21.080 You've heard me say this for the last five months. Um. 0:01:21.160 --> 0:01:24.440 The longer you wait, the harder it is to deliver 0:01:25.080 --> 0:01:31.800 a orderly adjustment. I think this notion that Andy Heldane 0:01:31.880 --> 0:01:35.720 introduced last July of a handwake you turn what you 0:01:35.760 --> 0:01:38.480 want to avoid central banks doing this handwake you turn 0:01:39.200 --> 0:01:41.720 um is a risk that we should factor in, and 0:01:41.840 --> 0:01:45.120 indeed is being factored in away from the from the 0:01:45.160 --> 0:01:47.720 Fed right now. Mohamed. One of the more interesting aspects 0:01:47.720 --> 0:01:49.720 of the price action we talked about the lift in 0:01:49.800 --> 0:01:53.800 markets following people bringing forward their expectations for rate hikes 0:01:53.840 --> 0:01:56.600 for the end of asset purchases in the middle of 0:01:56.680 --> 0:01:58.960 next year. Now we are praising in potentially to rate 0:01:59.000 --> 0:02:01.880 hikes by the end of next year. Is this basically 0:02:01.920 --> 0:02:05.520 a market endorsement of a more hawkish FED that has 0:02:05.560 --> 0:02:09.480 previously been communicated. Yes. I mean the market is telling 0:02:09.480 --> 0:02:13.440 the feed two things. One is get going with tapering, 0:02:13.560 --> 0:02:16.160 we can take it. And two is you're not going 0:02:16.200 --> 0:02:21.000 to be able to separate cleanly tapering from waight hikes. 0:02:21.160 --> 0:02:24.400 And again, look at the numbers today, look at p 0:02:24.520 --> 0:02:28.440 PI in China. This is a very hot inflation environment. 0:02:28.880 --> 0:02:32.160 And the longer the central banks wait, the greater the 0:02:32.240 --> 0:02:35.160 risk and the market realizes this, and it's starting slowly 0:02:35.600 --> 0:02:38.440 in the fixed income space to price that in. Mohammed, 0:02:38.480 --> 0:02:40.040 what do we What would you say to people who 0:02:40.160 --> 0:02:42.960 argue that there is a self correcting mechanism here, that 0:02:43.080 --> 0:02:45.880 higher prices will slow growth, will slow demand, and that 0:02:45.919 --> 0:02:49.320 you'll actually right size without the FED interfering and curtailing 0:02:49.360 --> 0:02:52.440 growth that needs to hit some sort of acceleration pace 0:02:52.720 --> 0:02:55.520 so we can get out of the hole. I will 0:02:55.560 --> 0:02:59.200 tell them that in theory you're right. In practice, we 0:02:59.320 --> 0:03:02.000 haven't seen it work too well. Um, it's a very 0:03:02.040 --> 0:03:05.400 finely balanced because this is about demand destruction. That argument 0:03:05.440 --> 0:03:08.359 is about demand destruction, and when you destroyed them on 0:03:08.919 --> 0:03:11.960 there's a lot of collateral damage at unintended consequences. So 0:03:12.000 --> 0:03:15.519 in theory, in a textbook, it works fine. In practice 0:03:15.560 --> 0:03:18.799 we often overshoot and end buck in a recession. So 0:03:19.000 --> 0:03:21.160 this is not something that I would like to try 0:03:21.240 --> 0:03:23.560 as someone who cares about the well being of Americans 0:03:23.560 --> 0:03:28.600 and especially those who are lower income, because they get 0:03:28.639 --> 0:03:32.600 hurt the most in that sort of world. Mohammed, you 0:03:32.800 --> 0:03:37.520 joined the International Monetary Fund in three This is back, folks, 0:03:37.520 --> 0:03:40.480 when the New York Jets are actually good and you 0:03:40.600 --> 0:03:44.120 spent a good fifteen years there, Dr l Arion, you 0:03:44.240 --> 0:03:47.960 saw all of the revolution and the different crises, but 0:03:48.200 --> 0:03:52.960 nonelikely oddity. Now, how important is it for the I 0:03:53.240 --> 0:03:57.840 MF to distance across the nineteenth Street northwest? Does the 0:03:57.960 --> 0:04:02.640 I m F need to dialogue breakaway from the World 0:04:02.680 --> 0:04:08.520 Bank in the coming weeks and years? No, On the contrary, um, 0:04:08.600 --> 0:04:12.000 you need really good I m F World Bank collaboration 0:04:12.600 --> 0:04:17.600 going forward. We have a structural issue. The development countries 0:04:17.640 --> 0:04:22.320 are particularly vulnerable and the two institutions working together can 0:04:22.360 --> 0:04:25.080 have a huge impact. What the IMF has to make 0:04:25.160 --> 0:04:28.039 clear and has been making clear, is that the data 0:04:28.080 --> 0:04:31.960 integrity issues aren't about the IMF. No one has raised 0:04:32.000 --> 0:04:34.800 questions about the I m S data integrity. This is 0:04:34.839 --> 0:04:39.880 an issue that relates to doing business report at the 0:04:39.880 --> 0:04:44.359 World Bank, and the IMF data integrity is as high 0:04:44.400 --> 0:04:48.120 as it can be. Right within this crisis, are we 0:04:48.200 --> 0:04:52.120 at the point where marginally we finally give way voting 0:04:52.160 --> 0:04:57.320 and governance power from the European nations of Breton Woods 0:04:57.360 --> 0:05:00.920 over to selected emerging markets per two, really an Asia. 0:05:03.160 --> 0:05:06.440 So we have had this governance issues repeatedly, Tom, You 0:05:06.480 --> 0:05:09.640 and I have been talking about it for decades um. 0:05:09.680 --> 0:05:13.720 The governance and representation of the IMF, while it has evolved, 0:05:14.080 --> 0:05:17.040 still represents the world of yesterday and not the world 0:05:17.040 --> 0:05:20.239 of today and tomorrow. And what we're seeing is little 0:05:20.360 --> 0:05:24.680 pipes being built around the I m F and the 0:05:24.720 --> 0:05:29.480 World Bank because other institutions are deemed to be more representative. 0:05:29.520 --> 0:05:32.760 So so that is an urgent issue and Europe has 0:05:32.880 --> 0:05:35.200 to take the lead on this issue. Mohammed. We talked 0:05:35.240 --> 0:05:37.200 about this great divergence this week because of the I 0:05:37.360 --> 0:05:39.280 m F. Let's talk about that a little bit more 0:05:39.320 --> 0:05:42.080 from a central bank perspective. We've had interest rate hikes 0:05:42.120 --> 0:05:44.440 from Chile, a big one in the last twenty four hours, 0:05:44.440 --> 0:05:47.880 I think a hundred and twenty five basis points, Colombia, Mexico, Brazil, 0:05:48.240 --> 0:05:51.240 South Korea. Mahamm. Do you think something biggest building care 0:05:51.440 --> 0:05:53.760 from emerging markets that could spread to d M from 0:05:53.960 --> 0:05:57.839 e M. So funny you say that because I'm drafting 0:05:57.920 --> 0:06:00.800 my next ft op ed and it will be on that. 0:06:01.240 --> 0:06:04.599 I think that there's a risk for developing countries that 0:06:04.680 --> 0:06:08.920 they have the perfect store and that means massive cost 0:06:09.000 --> 0:06:14.760 push inflation imported, especially for commodity importers, lower global growth 0:06:14.880 --> 0:06:18.680 as China and as the US slow, and then on 0:06:18.800 --> 0:06:23.159 top of that the risk of reversal in financial flows, 0:06:23.160 --> 0:06:26.320 and that's why you're seeing the central banks tightened way 0:06:26.320 --> 0:06:29.760 before the FED Titan. So that risk is there, and 0:06:29.800 --> 0:06:33.880 it's meaningful because I go back not just your word dispersion, John, 0:06:34.040 --> 0:06:37.480 but to what Peter Governors, the head of research, called 0:06:37.600 --> 0:06:41.000 dangerous dispersion. You do not want to enter a world 0:06:41.080 --> 0:06:43.920 in which the low income countries risk being knocked off 0:06:44.120 --> 0:06:48.080 the convergence process. So yes, there is that risk, and 0:06:48.120 --> 0:06:50.240 it's something that we should be keeping an eye on, 0:06:50.880 --> 0:06:54.120 and it's one of the unfortunately underdeveloped themes so far 0:06:54.240 --> 0:06:56.680 at the FUND. I think that the IMF did a 0:06:56.720 --> 0:07:00.120 great service by introducing this notion of dangerous dispersion, and 0:07:00.160 --> 0:07:02.200 we should pursue it further. So have it. Let's pursue 0:07:02.240 --> 0:07:04.520 it further a little bit more. Right now, it's one 0:07:04.560 --> 0:07:06.440 thing to be focused on the spillover risk. You know 0:07:06.440 --> 0:07:09.200 how this works. Often DM doesn't care until it effects 0:07:09.520 --> 0:07:11.520 d M. What's the one big thing you focused on 0:07:11.640 --> 0:07:17.440 right now? So I'm focused on how capital is responding. 0:07:17.520 --> 0:07:20.480 Because the good thing for markets, and you're seeing it 0:07:20.520 --> 0:07:25.280 again today, is that the behavioral conditioning of the marketplace 0:07:25.840 --> 0:07:28.880 has been to buy the dip. It has been incredibly 0:07:28.920 --> 0:07:34.960 successful strategy, and we still see residual buying the deep inclination. 0:07:35.320 --> 0:07:37.360 And the one thing I'm really focusing on is can 0:07:37.400 --> 0:07:40.840 we understand the behavioral conditioning of the marketplace and how 0:07:40.880 --> 0:07:43.280 that's going to evolve. We know the economy. I don't 0:07:43.280 --> 0:07:45.800 think anybody can doubt that we have an inflation issue, 0:07:46.320 --> 0:07:50.280 that the Fed in particular is late to this issue, 0:07:50.680 --> 0:07:55.560 and that we risk a disorderly tightening of policy. I 0:07:55.560 --> 0:07:58.600 think most people see that as a risk. What we 0:07:58.680 --> 0:08:02.760 haven't yet understood fully is how the conditioning of markets, 0:08:02.800 --> 0:08:06.640 the behavior conditions of market can change Mohammed. If the 0:08:06.640 --> 0:08:10.240 Federal Reserve does, in fact hike twice come next year, 0:08:10.640 --> 0:08:13.240 what does that do to emerging markets? How much more 0:08:13.320 --> 0:08:16.120 pressure does this put on them, given how much they've 0:08:16.160 --> 0:08:20.440 already had the high rates to compete. It depends which one, Lisa, 0:08:20.480 --> 0:08:24.120 and that's why we're going to see massive differentiation. Some 0:08:24.200 --> 0:08:27.560 countries have the financial resilience to cope with it and 0:08:27.600 --> 0:08:31.520 have the policy flexibilities. Others don't. And that's that's a 0:08:31.640 --> 0:08:35.800 very important message for emerjoring market investors. So far, they 0:08:35.800 --> 0:08:40.280 have benefited enormously from simply writing the liquidity wave. We've 0:08:40.400 --> 0:08:42.439 entered a phase right now where you need a lot 0:08:42.520 --> 0:08:46.160 more granular analyzes and you need to be the old 0:08:46.200 --> 0:08:51.000 type emerging market investor, understanding that ultimately you do get contagion, 0:08:51.520 --> 0:08:54.080 and you've got to be able to differentiate between those 0:08:54.080 --> 0:08:59.160 who recover quickly and those who constitute nonrecoverable mistakes. Mohammed, 0:08:59.240 --> 0:09:01.320 we miss you, we miss you. We want you back 0:09:01.320 --> 0:09:03.880 in America. I understand there might be a free seat 0:09:03.880 --> 0:09:06.240 at the Federal Reserve soon, so maybe we can work 0:09:06.320 --> 0:09:11.160 something out. I'm joking, you don't work work. Tom said 0:09:11.160 --> 0:09:13.760 about mom Mike. I'm in the UK and I love 0:09:13.800 --> 0:09:18.360 my momake, do you I do? I love momake. It 0:09:19.840 --> 0:09:22.640 is an acquired taste you're not. Thank you very much 0:09:22.640 --> 0:09:31.680 for being with us. Muhammadalarian, Thank you very much. John. 0:09:31.760 --> 0:09:36.800 I understand you understand how sensitive and woke Adam posing is. 0:09:37.040 --> 0:09:39.200 Will find out how boke Adam posting is in just 0:09:39.280 --> 0:09:42.720 a moment. Larry Summers, the former Treasury Secretary Lawrence Summers 0:09:42.760 --> 0:09:45.000 saying in the last twenty four hours the following, Adam 0:09:45.040 --> 0:09:47.760 help us out with this one. I'd love you reaction. Quote, 0:09:47.960 --> 0:09:50.520 we have a generation of central bankers who are defining 0:09:50.559 --> 0:09:53.880 themselves by their wokeness. Goes on to say they're defining 0:09:53.880 --> 0:09:58.160 themselves by how socially concerned they are. Adam open one 0:09:58.200 --> 0:10:01.280 for you. What's your reaction to that. I don't think 0:10:01.320 --> 0:10:06.440 that's fair. Um, if you want to worry about wokeness, yeah, 0:10:06.559 --> 0:10:11.000 there's universities you can worry about. There's various individuals. But 0:10:11.600 --> 0:10:15.960 the central bank is not stomping on alternative voices. It 0:10:16.120 --> 0:10:19.120 is not saying you can't worry about inflation because we're 0:10:19.120 --> 0:10:23.080 too worried about unemployment. There's open debate. I just hosted 0:10:23.480 --> 0:10:27.679 Raphael Bostic, Federal Reserve Bank of Atlanta President, at Peterson 0:10:27.720 --> 0:10:30.800 Institute earlier this week. He gave a speech that sounded 0:10:30.840 --> 0:10:35.440 relatively hawkish. He talked about inflation expectations, and at the 0:10:35.559 --> 0:10:38.240 very end I asked him about inequality, and he gave 0:10:38.320 --> 0:10:40.280 the same answer than most members of the f O 0:10:40.440 --> 0:10:43.520 m C would. It's entirely right for the Federal Reserve 0:10:43.640 --> 0:10:46.040 to do research and draw attention to the inequities in 0:10:46.080 --> 0:10:50.079 the society. Monetary policy has to be focused on the 0:10:50.160 --> 0:10:54.800 aggregate output, aggregate inflation. The really important point that Adam. 0:10:54.800 --> 0:10:56.760 Whether they have the souls or not to address it 0:10:56.840 --> 0:10:59.400 or not, it sounds like President Bostick doesn't think they do. 0:10:59.280 --> 0:11:01.240 Do you think they're Are some on the FED the 0:11:01.280 --> 0:11:03.920 belief they do and ultimately want to do something about it. 0:11:05.040 --> 0:11:07.080 I think those on the FED who care about these 0:11:07.120 --> 0:11:09.720 things deeply, and that's most FED people. But if you 0:11:09.720 --> 0:11:12.320 think of the various FED presidents, there's a lot they 0:11:12.320 --> 0:11:14.960 can do in their districts. There's issues of bank supervision. 0:11:15.000 --> 0:11:17.679 There's issues of redlining and housing where the FED played 0:11:17.679 --> 0:11:20.319 a huge role first and ignoring it and then drawing 0:11:20.360 --> 0:11:24.120 attention to it. There's issues of education, there's issues of 0:11:24.280 --> 0:11:28.360 documenting and putting out there what are the disparities. But no, 0:11:28.679 --> 0:11:31.560 I don't see anybody on the FED Committee who thinks 0:11:31.600 --> 0:11:36.199 that you're going to use monetary policy to solve inequality problems. 0:11:36.240 --> 0:11:39.280 And the point is you can worry about inflation and 0:11:39.440 --> 0:11:41.840 argue about whether or not inflation is getting out of 0:11:41.880 --> 0:11:45.800 hand without talking about people's motivations and assuming some kind 0:11:45.840 --> 0:11:48.400 of soft headed dr pos and you have the enjoy 0:11:48.520 --> 0:11:51.200 every day of working with Olivia Blanchardi wrote about the 0:11:51.320 --> 0:11:54.880 unlikely but not impossible the modern inflation dynamics were in 0:11:55.720 --> 0:11:59.520 He made worldwide headlines eleven years ago talking of a 0:11:59.559 --> 0:12:04.600 four scent inflation. We're there, but this is very different, 0:12:04.679 --> 0:12:08.320 isn't it? Yes? And no, Tom, I mean Olivier and 0:12:08.400 --> 0:12:12.040 his co authors made headlines a gad ago calling for 0:12:12.080 --> 0:12:15.400 a four percent inflation target because the two percent inflation 0:12:15.480 --> 0:12:18.480 target for Nankee, Michigan lau Bak and I and others 0:12:18.480 --> 0:12:22.280 had pushed didn't take into account enough the zero lower 0:12:22.360 --> 0:12:25.080 bound and us not having effective monage. So have we 0:12:25.200 --> 0:12:29.920 committed the experiment? Professor Bluntchard talked about, no, because the 0:12:29.920 --> 0:12:34.360 Federal Reserve and the Congress have not said, hey, inflations up, 0:12:34.480 --> 0:12:38.760 let's rat let's grab that and say, now that we're here, 0:12:38.920 --> 0:12:42.960 let's raise the target. Myself, Joe Gagnon at Peterson Institute, 0:12:43.000 --> 0:12:46.120 we've been out there saying three plus now is the time. 0:12:46.200 --> 0:12:48.520 Just like you said, So, do we need to resume shame? 0:12:48.600 --> 0:12:51.120 Do we need a bullet regime change right now to 0:12:51.280 --> 0:12:56.800 rephrase our generational belief and two percent inflation and say hey, 0:12:56.840 --> 0:13:01.360 this is the new normal? I perly think yes, because 0:13:01.440 --> 0:13:04.000 it's not a regime change, it's a resetting of the target. 0:13:04.040 --> 0:13:06.600 One of the problems that we didn't foresee when we 0:13:06.640 --> 0:13:10.360 put in place inflation targets was we assumed It's in 0:13:10.360 --> 0:13:13.200 the books that we wrote. We assumed that you would 0:13:13.240 --> 0:13:15.960 be able to reset the target as economic knowledge and 0:13:16.040 --> 0:13:20.640 circumstances change. We've never seen targets get raised for inflation targets. 0:13:20.679 --> 0:13:23.040 It's like an exchange rate. Once you said it, you're 0:13:23.120 --> 0:13:25.560 scared to move it. And so, as I've said to you, 0:13:25.600 --> 0:13:27.760 I think before Tom, but I'm glad we're talking about 0:13:27.760 --> 0:13:31.720 this right now. We should be opportunistically reflating. We should 0:13:31.720 --> 0:13:34.840 be saying, okay, inflation is now above three percent, let's 0:13:34.960 --> 0:13:37.480 re anchor it there. So what do you say to 0:13:37.520 --> 0:13:42.400 people who argue, maybe not stagflation, maybe slugflation, that basically 0:13:42.679 --> 0:13:45.160 this will slow growth and that prices will come back 0:13:45.160 --> 0:13:48.040 down naturally. Why do you say that that is not 0:13:48.160 --> 0:13:50.760 the case, that we're in a regime change, and what 0:13:50.880 --> 0:13:53.800 data are you pointing to? Well, just to be clear, 0:13:53.920 --> 0:13:55.880 I'm saying we're not yet in a regime change. A 0:13:55.960 --> 0:13:59.480 regime change would be either a fundamental structure shift or 0:13:59.559 --> 0:14:03.120 the Federal Reserve upping the target. What I do think 0:14:03.240 --> 0:14:06.920 is happening is we've got so much accumulated weight from 0:14:06.960 --> 0:14:10.120 these generations of central bankers who were hardly woke and 0:14:10.160 --> 0:14:13.840 paid too little intention to unemployment that you see the 0:14:13.920 --> 0:14:16.880 ten year bond. No matter what fiscal and inflation happens, 0:14:17.120 --> 0:14:20.360 inflation expectations don't go up. And we saw this in 0:14:20.440 --> 0:14:22.840 Japan and we've seen this in the Euro Area. It 0:14:22.920 --> 0:14:25.800 should be a two way bet that there's some variability 0:14:25.840 --> 0:14:28.720 and inflation expectations, and that gives you the flexibility to 0:14:28.720 --> 0:14:30.640 cope with the kind of destruction. I'm got to jump in. 0:14:30.680 --> 0:14:33.480 What you're saying is so so important. You think that 0:14:33.560 --> 0:14:35.560 the way they should communicate this is not by making 0:14:35.640 --> 0:14:38.120 up excuses for it, just by saying this is what 0:14:38.160 --> 0:14:41.360 we want to see. Is that right? Yeah, we're fortunate 0:14:41.480 --> 0:14:43.680 enough to now have a bit more headroom from the 0:14:43.800 --> 0:14:47.200 zero lower bound. We're fortunate enough to have enough inflation 0:14:47.360 --> 0:14:51.880 space that the economic adjustments to the labor market need 0:14:51.960 --> 0:14:53.760 to be done. There was a great paper at Jackson 0:14:53.800 --> 0:14:56.560 Hole this summer talking about how you get better labor 0:14:56.560 --> 0:14:59.160 market adjustment when you have loose policy, which is what 0:14:59.280 --> 0:15:02.200 I said back in ninety eight on Japan. You should 0:15:02.280 --> 0:15:07.280 be opportunistically reflating and raising the inflation target and consolidating 0:15:07.280 --> 0:15:09.640 what we got, and then if that means the ten 0:15:09.720 --> 0:15:13.000 years up a little bit, the yield curve steepens a 0:15:13.000 --> 0:15:16.440 little bit, and there's two way risk on inflation expectations. 0:15:16.480 --> 0:15:18.760 That is a win for the economy. That is a 0:15:18.800 --> 0:15:20.920 win for the Fed, except that the bills are getting 0:15:20.920 --> 0:15:23.720 bigger and we have to refinance debt. How much is 0:15:23.760 --> 0:15:26.440 this a concern? What is the threshold for the ten 0:15:26.520 --> 0:15:29.920 year treasure yield that the US economy can tolerate given 0:15:29.960 --> 0:15:33.760 the deficit? It's the ten year yield doesn't have a 0:15:33.800 --> 0:15:36.600 single threshold. I'm sorry to be pedantic about this, but 0:15:36.680 --> 0:15:39.480 this goes back to blanch Yard, right and others. It 0:15:39.600 --> 0:15:42.440 what's counts as our minus g the differential between what 0:15:42.520 --> 0:15:45.040 interest rate you're paying and how much the economy is growing. 0:15:45.480 --> 0:15:47.560 And if the economy is growing at the rate it's 0:15:47.640 --> 0:15:50.640 now growing, the interest rate is going to be lower 0:15:50.680 --> 0:15:53.640 than that. I'm not gonna worry about it. And if 0:15:53.680 --> 0:15:56.040 the interest rate starts moving up a lot and looks 0:15:56.040 --> 0:15:58.920 like it's going to stay up, then I worry about it. 0:15:59.160 --> 0:16:02.560 I do not ink a lasting multi year shift the 0:16:02.640 --> 0:16:05.320 three percent is going to ruin the Yelker, so let's 0:16:05.400 --> 0:16:08.720 let's conflate this. Blanchard and other sticklets has mentioned it 0:16:08.760 --> 0:16:12.240 often our minus gs k that interest rate as it's 0:16:12.280 --> 0:16:16.400 related to growth. If the growth there, everything's okay. Do 0:16:16.480 --> 0:16:21.680 you believe that what we're misjudging is a technological overlay 0:16:21.720 --> 0:16:24.800 which is going to give us better productivity, better growth, 0:16:24.840 --> 0:16:27.800 so we don't have to sweat our minus g No. 0:16:28.040 --> 0:16:30.920 I think we're misjudging the extent of the R risk, 0:16:31.280 --> 0:16:33.960 the extent to which our can jump. I'd love to 0:16:34.000 --> 0:16:36.440 have G jumping. I'd love to see a product. Do 0:16:36.480 --> 0:16:38.400 you model and with all your work at Peterson, do 0:16:38.400 --> 0:16:41.520 you model G jumping or do the inflation nest is 0:16:41.600 --> 0:16:46.760 completely underestimate the our dynamics. I'm not quite following Tom. 0:16:46.800 --> 0:16:49.880 What we what I think what we've seen is that 0:16:50.120 --> 0:16:52.680 over you look back at the data, if you've got 0:16:52.680 --> 0:16:56.240 a large economy with a stable government and issuing that 0:16:56.400 --> 0:16:59.560 in its own currency, are states below gene most of 0:16:59.600 --> 0:17:01.840 the time if you look at US or Western European 0:17:01.920 --> 0:17:05.760 or Japanese history, you get are jumping usually when there's 0:17:05.800 --> 0:17:09.080 a political problem, and that's where I worry about the US. 0:17:09.200 --> 0:17:12.520 Not some thresholders was being mentioned you worry about it 0:17:12.560 --> 0:17:16.000 because when it stops being critical credible you're here in Washington, 0:17:16.400 --> 0:17:19.520 stops being credible that we can pass debt, that we 0:17:19.560 --> 0:17:21.640 can pass, excuse me, a budget that we can raise 0:17:21.680 --> 0:17:24.280 taxes if necessary, that we can get out of from 0:17:24.280 --> 0:17:27.640 the stupid debt limit. When that stops being incredible, that's 0:17:27.640 --> 0:17:30.200 when our jumps. So won't you speak to Secretary Yella 0:17:30.240 --> 0:17:32.560 now and everybody else managing this in real time? To 0:17:32.680 --> 0:17:36.520 Lesa's important question before, you don't have a concern about 0:17:36.520 --> 0:17:39.720 the combined the some of our debts right now and 0:17:40.119 --> 0:17:44.320 the trajectory of them. In response to Lisa and that question, 0:17:44.400 --> 0:17:46.560 what I always say is it matters a hell of 0:17:46.560 --> 0:17:49.120 a lot more what you spend it on and how 0:17:49.200 --> 0:17:52.199 fast you spend it over time than the level of 0:17:52.280 --> 0:17:54.480 how are you doing at that what? How are we 0:17:54.520 --> 0:17:58.840 doing it constructively? The January package was was overshooting. That's 0:17:58.840 --> 0:18:01.080 a place where I agree with Umbers and Blanchard. The 0:18:01.160 --> 0:18:04.800 January package was too much handouts. But what's in the 0:18:04.880 --> 0:18:08.040 investment packages that are now under consideration of Congress would 0:18:08.040 --> 0:18:11.040 be well smith. That was the argument that Larry was making, 0:18:11.040 --> 0:18:13.480 though that pushing that forward would take all the oxygen 0:18:13.480 --> 0:18:15.119 out of the room to enable us to push this 0:18:15.160 --> 0:18:18.040 one forward. And ultimately that's what we're bumping up against 0:18:18.200 --> 0:18:20.439 right now. And I'm what's amazing about this moment for 0:18:20.520 --> 0:18:23.000 me and for people that love this material and love 0:18:23.080 --> 0:18:25.960 this content they're students of it is to hair from 0:18:26.000 --> 0:18:29.320 someone equally as talented. Muhammada Ain earlier in the morning, 0:18:29.720 --> 0:18:32.399 taking the other view on all of this. On inflation, Adam, 0:18:32.400 --> 0:18:35.160 the question I often ask people, it's what's the towel? 0:18:35.640 --> 0:18:37.520 What they need to see to say, you know what, 0:18:37.760 --> 0:18:39.639 maybe I'm wrong about this. What would the towel be 0:18:40.040 --> 0:18:44.640 for you, Adam? For me, the tell would be one 0:18:44.680 --> 0:18:48.800 of two things. Either that we get no real wage 0:18:48.840 --> 0:18:53.200 growth over the cycle, meaning that we keep having inflation 0:18:53.280 --> 0:18:56.480 outplace wage growth. That would say, okay, this is all 0:18:56.560 --> 0:18:59.000 for not and so you might as well just go 0:18:59.080 --> 0:19:01.879 with this harder money as possible. The other tell would 0:19:01.880 --> 0:19:06.800 be a large jump in real rates excuse me, a 0:19:06.880 --> 0:19:10.000 large jump in long rates. Now, I think, what's going 0:19:10.040 --> 0:19:12.680 on with my friend Mohammed and others sister already missing 0:19:12.720 --> 0:19:15.360 the tell that should have told them to reconsider look 0:19:15.359 --> 0:19:19.000 at Japan, look at us. Their views do not explain 0:19:19.080 --> 0:19:22.080 and cannot comprehend why rates stayed so low for the 0:19:22.160 --> 0:19:24.879 last fifteen years. Next time we need to get you 0:19:24.880 --> 0:19:28.080 one together. Anamuscrites to catch ups as always Adam Poston 0:19:28.320 --> 0:19:38.080 of the Peterson Institute. A bit off our radar in 0:19:38.119 --> 0:19:41.160 this week of international economics, but now we dive full 0:19:41.600 --> 0:19:43.800 into it, and it is good that we can do it. 0:19:44.040 --> 0:19:47.919 VIDR Gaspar he has Fiscal Affairs Department Director at the 0:19:47.960 --> 0:19:51.399 i m F, but that fancy title barely describes the 0:19:51.520 --> 0:19:55.760 respect for the balance sheet worldwide that world leaders have. 0:19:56.000 --> 0:19:58.600 For the gentleman from Portugal. We're thrilled you could join 0:19:58.680 --> 0:20:02.600 us in our studios. Welcome a Bloomberg reader for having me. 0:20:03.000 --> 0:20:04.600 I want to go to the issue at hand, and 0:20:04.640 --> 0:20:07.040 I know you do not speak for the managing director 0:20:07.440 --> 0:20:10.800 that would be inappropriate. But to your fiscal model. You 0:20:10.840 --> 0:20:16.040 talk about strengthening the uncertainties that are out there within 0:20:16.760 --> 0:20:20.760 our fiscal process. How does your I m F prove 0:20:21.359 --> 0:20:26.280 through your department, your pH d s it's data integrity 0:20:26.400 --> 0:20:28.879 in the coming weeks and months. How do you show, 0:20:29.320 --> 0:20:35.920 not tell data integrity and analysis integrity is absolutely core 0:20:36.280 --> 0:20:40.399 for us. I'm very proud of my colleagues in the 0:20:40.440 --> 0:20:45.080 Fiscal Affair Department, and we have a very robust process 0:20:45.160 --> 0:20:49.400 to ensure data integrity and the soundness of our analysis. 0:20:49.560 --> 0:20:54.520 It involves both our department but also other departments that 0:20:54.640 --> 0:20:59.800 in the review process vet our data, vet our forecasts, 0:21:00.119 --> 0:21:04.600 vet our analysis. I think that we have one of 0:21:04.840 --> 0:21:09.800 the most robust processes of vetting in the world, and 0:21:09.840 --> 0:21:15.800 we're always striving to improve. For example, the Independent Evaluation 0:21:15.880 --> 0:21:22.119 Office reviews how we conduct our business, makes recommendations those 0:21:22.200 --> 0:21:25.720 are addressed to management, their analyzing the board, and we 0:21:25.800 --> 0:21:29.359 make constant progress in the way that we produce data 0:21:29.440 --> 0:21:31.520 and analysis. The joy of what we do here is 0:21:31.560 --> 0:21:33.800 we just said, Adam, pose it on from the Peterson 0:21:33.880 --> 0:21:38.480 Institute with the spirited conversation of our fears of inflation, 0:21:38.880 --> 0:21:41.760 and that devolves right over to fiscal affairs. In the 0:21:41.800 --> 0:21:46.359 balance sheet, Can we have a normal discussion of inflation 0:21:47.080 --> 0:21:51.679 given the excess balance sheets we have from this terrible pandemic. 0:21:53.000 --> 0:21:56.320 The uncertainty that we're facing has exactly to do with 0:21:56.400 --> 0:22:00.080 the pandemic. As you put it. The fact that we 0:22:00.200 --> 0:22:04.120 have these locations in the balance between supply and demand 0:22:04.520 --> 0:22:10.600 is creating bottlenecks in specific sectors and price spikes that 0:22:10.720 --> 0:22:16.040 may last for a while while the economy rebalances and 0:22:16.160 --> 0:22:19.800 makes its transition to a new growth path. In a 0:22:19.960 --> 0:22:25.879 situation like that, central banks, if inflation and inflation expectations 0:22:25.880 --> 0:22:29.520 are well anchored for the medium to long term, should 0:22:29.520 --> 0:22:36.399 look through these transitory price spike and conduct monetary policy 0:22:36.400 --> 0:22:40.159 with a steady hand with fiscal affairs. The leaders of 0:22:40.240 --> 0:22:43.680 these institutions, and frankly, world leaders are going to turn 0:22:43.720 --> 0:22:49.560 to you with the overarching question, can emerging markets do 0:22:49.680 --> 0:22:54.080 better in crisis now because they have better fiscal affairs? 0:22:54.200 --> 0:22:57.000 And it does fall back into the governance of the 0:22:57.040 --> 0:22:59.360 I m F and the World Bank and other institutions. 0:22:59.440 --> 0:23:03.840 G Seven twenty is well, can you report through your 0:23:03.880 --> 0:23:08.880 research that emerging markets are more fiscally sound now than 0:23:08.920 --> 0:23:14.240 they've ever been. Emerging markets, like all country groups, are 0:23:14.400 --> 0:23:19.879 very etro genious. Inside We point out two risks of 0:23:19.960 --> 0:23:25.159 divergencies into recovery and inside the country groups. Probably the 0:23:25.200 --> 0:23:29.240 most ectro genious of all country groups is the emerging markets. 0:23:29.359 --> 0:23:32.159 We emphasize very much in the fiscal money sor that 0:23:32.200 --> 0:23:36.359 you just quoted the importance of strengthening the credibility of 0:23:36.400 --> 0:23:40.439 public finances. We recommend to all countries that they should 0:23:40.640 --> 0:23:45.479 maintain or build the credibility of their physical frameworks because 0:23:45.560 --> 0:23:49.080 it pays off. How does it pay off. It pays 0:23:49.119 --> 0:23:54.200 off in terms of better financing conditions for the treasury. 0:23:54.240 --> 0:23:58.120 It pays off in more flexibility to get financing when 0:23:58.160 --> 0:24:02.679