WEBVTT - Surveillance: UK Credibility with Diamond 0:00:05.120 --> 0:00:09.200 Welcome to the Bloomberg Surveillance Podcast. I'm Tom Keane. Along 0:00:09.200 --> 0:00:13.200 with Jonathan Ferrell and Lisa Abramowitz. Daily we bring you 0:00:13.280 --> 0:00:18.600 insight from the best and economics, finance, investment, and international relations. 0:00:18.840 --> 0:00:23.840 To find Bloomberg Surveillance on Apple podcast, Suncloud, Bloomberg dot Com, 0:00:23.920 --> 0:00:29.920 and of course on the Bloomberg Terminal. Now for the 0:00:29.960 --> 0:00:32.960 City of London, Bob Diamond joins us to say he's 0:00:32.960 --> 0:00:36.480 founding partner and CEO of Atlas Merchant Bank. Barely describes 0:00:36.760 --> 0:00:38.720 when he did for Barclay's. I'll cut to the chase 0:00:38.760 --> 0:00:41.760 because of time, go back and look did Barkley's get 0:00:41.760 --> 0:00:44.479 a ball out during the crisis? Bob Diamond, thank you 0:00:44.520 --> 0:00:46.480 so much. Honored to have you here in our studios 0:00:46.920 --> 0:00:49.879 with Bloomberg Today. I'm gonna ask one question in the 0:00:49.880 --> 0:00:53.200 city because John really wants to focus on Sterling. There's 0:00:53.200 --> 0:00:57.920 the city, there's this comedy of Reaganomics, re Dux as well. 0:00:58.520 --> 0:01:02.000 How does the city is an international venue, how does 0:01:02.040 --> 0:01:05.920 it move forward? How does it survive? Is the global institution? 0:01:06.520 --> 0:01:09.480 So this is a really important question, Tom, and I 0:01:09.520 --> 0:01:12.759 think with all the debate around the announcements that were 0:01:12.760 --> 0:01:15.760 made in the last couple of days. Um, there is 0:01:16.200 --> 0:01:19.399 um much more support for the city. UH, something as 0:01:19.440 --> 0:01:24.360 simple as removing the bankers bonus caps, which as you know, 0:01:24.600 --> 0:01:27.400 was gamed by the banks and put the UK banks 0:01:27.400 --> 0:01:32.080 that a significant competitive disadvantage to the US banks. Any 0:01:32.080 --> 0:01:35.480 support for the city right now is UH, is important. 0:01:35.840 --> 0:01:37.640 But what else would you like to say from this 0:01:37.720 --> 0:01:40.520 government to bring that kind of enthusiasm back to the 0:01:40.560 --> 0:01:42.800 city that I think was lost for many people after 0:01:42.840 --> 0:01:46.120 the Brexit vote. You know, I think right now credibility 0:01:46.520 --> 0:01:49.480 is the key and in uh, you know, Simon French 0:01:49.520 --> 0:01:52.520 said this morning that the only currency that Simon French 0:01:52.560 --> 0:01:56.640 from Panmore Gordon, the only currency that really matters in 0:01:56.680 --> 0:02:00.160 the UK macro right now is credibility. UM. And I 0:02:00.200 --> 0:02:03.600 think the the announcement earlier today which I saw on 0:02:03.600 --> 0:02:06.800 the Blueberg headlines, which is that the Chancellor is going 0:02:06.840 --> 0:02:10.000 to spend time with the banks and and the traders 0:02:10.000 --> 0:02:12.880 and distributors of the of the guilt market, is important. 0:02:13.200 --> 0:02:17.160 So I think step one is is credibility. Jonathan. If 0:02:17.200 --> 0:02:19.680 you put this in context, we had a you know, 0:02:19.800 --> 0:02:25.160 a hundred and fifty billion debt financed energy policy UM 0:02:25.200 --> 0:02:28.639 without really preparing the guilt market um for what was 0:02:28.720 --> 0:02:31.440 coming in terms of issuance, and I think people talk 0:02:31.480 --> 0:02:34.799 about the currency crisis. I think this is more crisis 0:02:34.919 --> 0:02:37.120 in the guilt market than it was in the currency market. 0:02:37.280 --> 0:02:38.720 We can you talk a little bit more about what 0:02:38.760 --> 0:02:40.600 some of those moves in rates would mean for a 0:02:40.600 --> 0:02:43.600 big bank running a large mortgage book. We saw certain 0:02:43.639 --> 0:02:46.640 banks remove certain products in the last twenty four hours. 0:02:47.000 --> 0:02:48.760 You of course, that's what ever see a large mortgage 0:02:48.800 --> 0:02:51.280 book over at Barclays in your time running that bank. Well, 0:02:51.320 --> 0:02:52.840 can you tell me what you'd have to do when 0:02:52.840 --> 0:02:55.679 you see rates move this quickly this fast, and expectations 0:02:55.680 --> 0:02:57.800 for the Bank of England climb as quickly as they 0:02:57.800 --> 0:03:00.000 have done. Well, if you put it in context, John, 0:03:00.160 --> 0:03:03.960 then the two year guilt um is recently as as 0:03:04.040 --> 0:03:06.720 recently as August was about one and a half percent, 0:03:07.400 --> 0:03:09.320 you know right now it's about four and a quarter. 0:03:09.400 --> 0:03:11.000 I think it touched four and a half in the 0:03:11.080 --> 0:03:14.320 last couple of days. So to your point, that's a sizeable, 0:03:14.440 --> 0:03:18.600 sizeable move um. That kind of volatility is not necessarily 0:03:18.680 --> 0:03:22.480 bad for banks, particularly banks with investment banking operations such 0:03:22.520 --> 0:03:25.239 as Barclay's. But what it will do is it will 0:03:25.280 --> 0:03:28.080 really slow down the issuance of any new mortgages, So 0:03:28.440 --> 0:03:31.760 the mortgage books in terms of new issuance. UM, you 0:03:31.800 --> 0:03:33.919 know it's going to be as you said, there was 0:03:33.960 --> 0:03:36.400 the announcement that a number of banks have really kind 0:03:36.400 --> 0:03:38.960 of closed their mortgage issuance. Well, it's also going to 0:03:39.000 --> 0:03:42.080 slow down the economy dramatically. What are you expecting in 0:03:42.160 --> 0:03:46.200 terms of a downturn of potential response? Uh from England? 0:03:46.320 --> 0:03:49.520 Given that the fiscal tool is kind of being blown 0:03:49.600 --> 0:03:51.480 up in the Bank of England kind of has to 0:03:51.520 --> 0:03:55.440 push back. So let's keep it in context. I talked about, 0:03:55.760 --> 0:03:58.880 you know, I think the communications and the credibility around 0:03:59.000 --> 0:04:03.920 announcing a dred and fifty billion debt financed energy policy. 0:04:04.040 --> 0:04:06.880 We talked about those issues. But the other things that 0:04:06.920 --> 0:04:09.280 were announced, there's some good things in there. I think. 0:04:09.440 --> 0:04:12.520 I think the announce spent around both corporate and personal 0:04:12.560 --> 0:04:18.279 taxes UM, keeping corporate taxes at or lowering them rather 0:04:18.360 --> 0:04:22.520 than raising them to puts the UK in a credible 0:04:22.560 --> 0:04:26.520 position amongst its peers. UM. I think announcing some easing 0:04:26.560 --> 0:04:31.400 of immigration to to ease the labor supply issues. I 0:04:31.400 --> 0:04:34.479 think some of the things that we're announced around kind 0:04:34.480 --> 0:04:37.719 of infrastructure or reducing the bureaucracy to be able to 0:04:37.720 --> 0:04:42.160 get to building around infrastructure and around housing. So keep it, 0:04:42.320 --> 0:04:45.000 keeping it in context. There were some positive things that 0:04:45.000 --> 0:04:47.880 were announced within this and I think because of the 0:04:47.960 --> 0:04:51.479 shock to the debt markets, to the guilt markets, we 0:04:51.560 --> 0:04:53.720 really have to find a way to hold the hands 0:04:53.800 --> 0:04:57.200 of the markets until late November when the budget is 0:04:57.240 --> 0:05:00.440 announced and we really get to look at what is 0:05:00.520 --> 0:05:04.719 meant here by the medium and long term fiscal program 0:05:04.760 --> 0:05:06.920 and somehow we have to we have to manage our 0:05:06.960 --> 0:05:09.839 way through these markets. And I think the Chancellor meeting 0:05:09.880 --> 0:05:11.880 with the banks today and over the next couple of 0:05:11.960 --> 0:05:15.320 days UM is a positive step in that direction. Do 0:05:15.320 --> 0:05:20.839 you see some opportunities then absolutely, UM within the guilt market, 0:05:20.920 --> 0:05:26.479 within within stelling denominated assets more broadly, take your pick. Well, look, Jonathan, 0:05:26.480 --> 0:05:28.400 I want to put that in context as well. People 0:05:28.400 --> 0:05:32.360 have talked about UM. The currency crisis, the move from 0:05:32.440 --> 0:05:35.560 one thirty down to where the currency is right now, 0:05:35.640 --> 0:05:38.400 has really been about the dollar, the dollar, the dollar. 0:05:39.080 --> 0:05:42.880 So the the UK currency is down maybe twenty five 0:05:42.920 --> 0:05:46.200 or thirty percent, the dollars up against every currency in 0:05:46.240 --> 0:05:50.159 the world. So we need to keep that in context 0:05:49.600 --> 0:06:03.720 of APIs mentions capital. Right now, we are going to 0:06:03.920 --> 0:06:08.240 stop worldwide and have a conversation with a definitive expert 0:06:08.360 --> 0:06:12.200 on e M arguably with Stanley Fisher. He invented our 0:06:12.279 --> 0:06:15.599 concept of emerging markets. This is a guy where Damien 0:06:15.680 --> 0:06:19.760 Sassaure of Bloomberg hangs on every word. Mark Mobius was 0:06:19.800 --> 0:06:22.640 a communications major who got parchment from M I T 0:06:22.920 --> 0:06:27.560 years ago and basically invented for Sir John Templeton the 0:06:27.600 --> 0:06:30.919 emerging market business. We're honored that Mark Mobius joins us 0:06:31.279 --> 0:06:33.919 from Dubai this morning. Mark, just what a pleasure to 0:06:33.960 --> 0:06:35.600 have you with. Let me cut to the chase that 0:06:35.680 --> 0:06:38.000 every pro wants to know. How close are we to 0:06:38.080 --> 0:06:45.039 the instabilities of I think we're very close. Actually, we're 0:06:45.120 --> 0:06:48.719 in a really a strange situation because on the one hand, 0:06:48.760 --> 0:06:51.680 you've seen this incredible increase in money by it and 0:06:51.760 --> 0:06:55.760 my definition of inflation is the evaluation of currency, and 0:06:55.800 --> 0:06:59.320 if you increase fund sup life as we've seen in 0:06:59.320 --> 0:07:03.279 the US, then that's what the evaluation of the money 0:07:03.320 --> 0:07:05.679 is going to be, and it goes that's where prices 0:07:05.680 --> 0:07:08.039 are going to go. But we're in a very strange 0:07:08.040 --> 0:07:13.480 situation now because we've got these cryptocurrencies and here in Goodbye, 0:07:13.520 --> 0:07:18.160 I've noticed that there's so many people transferring money in cryptocurrencies. 0:07:18.160 --> 0:07:20.200 And if you look at the emerging markets in particular 0:07:20.520 --> 0:07:24.200 places like Nigeria, they do a tremendous amount of turnover 0:07:24.600 --> 0:07:29.480 in crypto counties. Uh, what is money supply? That's a 0:07:29.520 --> 0:07:32.080 big question about, right. I look, Mark, and you and 0:07:32.120 --> 0:07:33.760 I were on the stage at the World or for Story, 0:07:33.760 --> 0:07:35.880 I wanna say eight years ago, and you stuck your 0:07:35.920 --> 0:07:39.160 neck out and said Bologny that the rules have changed 0:07:39.200 --> 0:07:43.520 for e M. There's this uh, this conceit right now 0:07:43.840 --> 0:07:46.480 that e M is more financially solid. E M as 0:07:46.520 --> 0:07:53.040 air act together unlike do they It depends on the country, 0:07:53.440 --> 0:07:55.280 you know. That's a great thing about emerging markets. You 0:07:55.360 --> 0:07:58.560 see such variety. You see some countries that are doing 0:07:58.560 --> 0:08:01.320 a terrific job. By the way, Brazil, which used to 0:08:01.320 --> 0:08:03.400 be a basket case, has been doing a pretty good 0:08:03.480 --> 0:08:06.160 job and stabilizing the economy. And then you go to 0:08:06.160 --> 0:08:09.800 a place like Taiwan, even Indonesia, they were doing a 0:08:09.920 --> 0:08:14.520 very good job in uh managing their economies. So it 0:08:14.600 --> 0:08:16.280 really depends on where you're going. And then you go 0:08:16.320 --> 0:08:19.000 to Turkey and then you have a tremendous amount of 0:08:19.080 --> 0:08:22.480 evaluation of the Church Lera and really a lot of 0:08:22.520 --> 0:08:28.760 instability financially. But there are even opportunities in Turkey. So Mark, 0:08:28.880 --> 0:08:31.040 at this point you started by saying that there are 0:08:31.120 --> 0:08:35.520 some analogs that we're getting close to that. What's the 0:08:35.559 --> 0:08:38.720 dividing line between now and then the trigger point that 0:08:38.800 --> 0:08:41.360 makes this evolve into something that needs to be immediately 0:08:41.360 --> 0:08:45.679 addressed rather than just a rapidly ball a rapidly evolving 0:08:45.679 --> 0:08:51.480 ball of pain for debt investors. Uh, the real situation 0:08:51.559 --> 0:08:54.240 now is that, unlike what we had in the past 0:08:54.480 --> 0:08:57.840 during the Asian financial crisis, is that the dollar debts 0:08:57.840 --> 0:09:00.400 are not as big as they were because all these 0:09:00.400 --> 0:09:03.000 countries learned their lesson. They was not a good idea 0:09:03.040 --> 0:09:05.880 for them to get into dollar debts, so they realized 0:09:05.920 --> 0:09:08.679 that and didn't do it, except for a number of 0:09:08.679 --> 0:09:11.960 countries that have been involved in the Belton Road projects 0:09:12.360 --> 0:09:15.120 that China's been doing, where they've lent an awful lot 0:09:15.160 --> 0:09:18.400 of money in women and b and dollars to these 0:09:18.440 --> 0:09:21.920 countries which they can't pay. So here again you have 0:09:22.040 --> 0:09:27.280 tremendous differences between countries and in some cases, as I say, 0:09:27.320 --> 0:09:33.280 we're closer to these Asian and financial crisis kinds of situations. Mark, 0:09:33.320 --> 0:09:35.160 I'm glad that you brought that up to Belton Road 0:09:35.360 --> 0:09:39.760 initiative of China, which by some accounts has significantly soured. 0:09:39.800 --> 0:09:42.120 There was one report recently, it was published in the 0:09:42.160 --> 0:09:45.960 Wallster Journal yesterday that nearly sixty of China's overseas loans 0:09:45.960 --> 0:09:48.360 are now held by countries considered to be in financial distress, 0:09:48.400 --> 0:09:51.079 up from five percent back in two thousand ten. This 0:09:51.200 --> 0:09:54.000 really raises a concern for China, which has acted more 0:09:54.040 --> 0:09:55.720 like a banker than say that I m F when 0:09:55.760 --> 0:09:59.040 it comes to these types of loans. How does this develop? Mark? 0:09:59.080 --> 0:10:01.880 How does this evolve into something that could potentially have 0:10:01.960 --> 0:10:05.600 contagion effects in markets? Are their countries that are going 0:10:05.640 --> 0:10:08.040 to just basically be flatten their backs unable to pay 0:10:08.080 --> 0:10:11.080 their bills that you're looking at. There are a number 0:10:11.120 --> 0:10:13.840 of countries in that situation. I was in Sri Lanka 0:10:14.040 --> 0:10:16.720 six months ago, and of course they're flat on their 0:10:16.760 --> 0:10:20.160 backs that can't pay, and they owe the Chinese so much, 0:10:20.200 --> 0:10:22.640 and of course they owe other donors. The problem is 0:10:22.640 --> 0:10:25.720 is that nobody knows what the numbers really are because 0:10:25.800 --> 0:10:28.920 the Chinese signed agreements with these countries that they should 0:10:28.960 --> 0:10:32.800 not disclose again not disclosed what they owe and what 0:10:32.960 --> 0:10:35.679 the Chinese lent to them. So we're really in a 0:10:35.800 --> 0:10:38.280 dark spot. And if you talk to i MT people, 0:10:38.400 --> 0:10:42.320 they are really very unhappy about the situation. Mark I've 0:10:42.360 --> 0:10:45.720 got a fancy chart, really fancy chart. It's a very 0:10:45.760 --> 0:10:49.440 weak extrapolation of how we get to another plaza accord. 0:10:50.040 --> 0:10:53.120 And the naive chart is two thousand thirty two. I 0:10:53.160 --> 0:10:55.040 don't buy it for a minute. With a race of 0:10:55.120 --> 0:10:58.800 change first and second derivative dynamics that we see right now, 0:10:59.160 --> 0:11:01.280 how close are you were I having a beverage of 0:11:01.320 --> 0:11:06.080 our choice at the plaza hotel? Yeah? Yeah, this is 0:11:06.080 --> 0:11:10.720 a really interesting question because here you have the dollars 0:11:10.720 --> 0:11:16.080 hold strong, okay, and uh, prices in America are not down. 0:11:16.320 --> 0:11:19.439 In fact, I just took a one month ship all 0:11:19.480 --> 0:11:22.719 over America and people are spending like crazy. Then you 0:11:22.760 --> 0:11:27.199 are to London. Now the London, the pounds devalued against 0:11:27.240 --> 0:11:31.319 the dollar by what and yet try to find a 0:11:31.520 --> 0:11:35.760 hotel at decent hotel in London of the low three 0:11:35.840 --> 0:11:39.920 hundred or four hundred euros or founder pounds. It's crazy, 0:11:40.240 --> 0:11:42.680 the whole situation. And that's why I say, I think 0:11:42.920 --> 0:11:46.240 we're in a situation where nobody really knows what the 0:11:46.280 --> 0:11:48.960 money supply is. And I believe a lot of this 0:11:49.040 --> 0:11:52.280 is because of the crypto world. Mont You've got standards. 0:11:52.280 --> 0:11:54.240 I'm guessing you're looking for a different kind of quality 0:11:54.280 --> 0:11:57.280 hotel compared to many of us. I mean, you can't 0:11:57.280 --> 0:12:02.000 do five start more. Mom times have changed. It's not 0:12:02.040 --> 0:12:06.760 just inflation at the chain hotels. And by the way, 0:12:06.800 --> 0:12:09.560 in the US, I checked into a marrier and they 0:12:10.480 --> 0:12:14.320 asked me do you want made service? I said, what 0:12:14.320 --> 0:12:16.480 do you mean? So we don't give maid service unless 0:12:16.480 --> 0:12:18.480 you ask for it, and it's only every seven days. 0:12:18.880 --> 0:12:23.160 Only every seven days's house. Yeah, I'm not sure that 0:12:23.160 --> 0:12:25.000 would work for me. Mark Mike, I wanted to bring 0:12:25.040 --> 0:12:27.680 up Raphael Bostick of the Atlanta Fed on the UK 0:12:28.000 --> 0:12:29.760 at least I want your view on this. He was 0:12:29.800 --> 0:12:32.160 basically asked about what was happening in the UK at 0:12:32.160 --> 0:12:34.600 the moment and whether it adds to the odds of 0:12:34.640 --> 0:12:37.400 a global recession, and he turned around and said it 0:12:37.440 --> 0:12:40.360 doesn't help. And I just wondered what the rest of 0:12:40.360 --> 0:12:42.000 the world would like to say back to the Federal 0:12:42.040 --> 0:12:43.920 reserve Lee. So if if people are worried about the 0:12:44.000 --> 0:12:46.480 UK not helping, I mean, surely the Federal Reserve and 0:12:46.520 --> 0:12:48.720 aggressive rate hikes and a strong dollar is a bigger 0:12:48.720 --> 0:12:50.840 threat to the global economy than what is going on 0:12:50.880 --> 0:12:54.440 in the UK. Well, and that's actually perfect segue mark 0:12:54.600 --> 0:12:56.839 into what you're looking for in terms of some of 0:12:56.920 --> 0:12:59.839 the distress that you're focused on, for some sort of 0:13:00.040 --> 0:13:03.000 sponse for the French Reserve, some sort of concerted effort 0:13:03.040 --> 0:13:06.400 like Tom was talking about. Basically, is there a cap 0:13:06.440 --> 0:13:09.000 on how much pain there can possibly be? Is there 0:13:09.040 --> 0:13:12.760 a trade that you're looking at. I don't think the 0:13:12.760 --> 0:13:15.559 FED is gonna care about the markets. They're gonna care 0:13:15.559 --> 0:13:19.559 about the inflation. That's their person priority, and their playbook 0:13:19.800 --> 0:13:23.079 is to keep on raising rates until the rate is 0:13:23.160 --> 0:13:27.160 above inflection, which mean you're talking about nine percent inflation 0:13:27.240 --> 0:13:30.640 now apencent um. Now, if you look at the UK, 0:13:31.000 --> 0:13:34.920 to be fair, they have been reducing money supply um. 0:13:35.200 --> 0:13:37.600 Of course they've raised it as much as the US, 0:13:37.920 --> 0:13:39.679 but the U s money supply is still up there, 0:13:39.720 --> 0:13:42.520 it's not really going down that much. So I think 0:13:42.720 --> 0:13:46.920 we're in a situation where the playbook for the FED 0:13:47.520 --> 0:13:51.079 is going to continue. Uh means they're going to continue 0:13:51.160 --> 0:13:54.520 raising rates and the markets that are just gonna have 0:13:54.600 --> 0:13:57.640 to live through it. And by the way, let's be reminded, 0:13:58.280 --> 0:14:01.040 high rates don't mean a bare mom. I mean there 0:14:01.080 --> 0:14:03.320 may have been many cases in history where the rates 0:14:03.320 --> 0:14:06.040 were high, but we had a good you know of 0:14:06.120 --> 0:14:08.400 a good bull market. So we have to watch that 0:14:08.559 --> 0:14:12.040 place space carefully. Mombias grant to catch up. I gotta 0:14:12.040 --> 0:14:13.880 catch up and give a short notice to Mom. Mabbias, 0:14:13.920 --> 0:14:21.280 Thank you, sir of Mabias Capital Partners. William Dudley joins 0:14:21.360 --> 0:14:24.080 us now, the former FIT president. He's been of uncommon 0:14:24.200 --> 0:14:29.320 value before, during and after Jackson Hole Bill Dudley. Markets 0:14:29.320 --> 0:14:32.600 are moving the litmus paper of the system. The tenure 0:14:32.680 --> 0:14:37.840 real yield has gone from the bottom up to the 0:14:38.120 --> 0:14:41.960 pre Great Financial Crisis level of about a two point 0:14:42.080 --> 0:14:47.320 zero five. How to fancy people like you interpret where 0:14:47.360 --> 0:14:50.440 the real yield is, how far the real yield has come, 0:14:50.880 --> 0:14:53.560 and how it nears what seems to be some form 0:14:53.640 --> 0:14:57.760 of historic normal. I think it tells you that the 0:14:57.800 --> 0:15:00.200 FED is finally getting his arms around making mo terry 0:15:00.240 --> 0:15:03.200 policy type chair. I'll talk about how you need to 0:15:03.240 --> 0:15:06.600 see real yields positive throughout the yield curve, and there 0:15:06.680 --> 0:15:09.560 the feed is moving pretty quickly in that direction. And 0:15:09.640 --> 0:15:12.320 seenti five basis points last week, and they're promising another 0:15:12.520 --> 0:15:15.680 maybe basis points before the end of the year, taking 0:15:15.920 --> 0:15:18.560 the federal fund right well above four percent. So the 0:15:18.560 --> 0:15:21.040 feed is catching up, and I think the question at 0:15:21.040 --> 0:15:23.680 this point is will they stay in the course until 0:15:23.720 --> 0:15:25.880 they've actually finished the job to get inflation back down 0:15:25.920 --> 0:15:29.040 to two percent. Paul says, you'll do that, but whether 0:15:29.120 --> 0:15:31.040 the rest of themc will come along with them, I 0:15:31.080 --> 0:15:32.920 think it's an open question at this point. You like 0:15:33.120 --> 0:15:35.920 Richard Clarata, who joined us on FED Day, no, the 0:15:36.000 --> 0:15:39.360 mathematics the physics of modern economics, and then you discard 0:15:39.400 --> 0:15:42.280 it the real world application. You did that at Goldman 0:15:42.320 --> 0:15:45.080 Sachs for decades and then at the FED. I want 0:15:45.120 --> 0:15:49.280 to talk about the inertial force in this odd word overshoot. 0:15:49.880 --> 0:15:53.320 Is it a requirement or is it efficacious that a 0:15:53.440 --> 0:15:59.040 central bank overshoot a given target. Ideally, you don't overshood, 0:15:59.080 --> 0:16:01.920 you do just enough to achieve your objectives. But as 0:16:01.920 --> 0:16:04.560 you know, monetary policy has a lot of long lags 0:16:04.600 --> 0:16:06.880 in terms of its effects on the economy, and it's 0:16:06.920 --> 0:16:09.360 hard to judge those effects in real time. I think 0:16:09.360 --> 0:16:12.040 the FED is probably gonna be is probably gonna ultimately 0:16:12.080 --> 0:16:15.200 overshoot a bit, because they've said that they're the risks 0:16:15.200 --> 0:16:17.920 are skewed. The risk of doing too little is much 0:16:17.920 --> 0:16:20.000 greater than the risk of doing too much, because if 0:16:20.000 --> 0:16:22.080 you do too little, you end up in the nineties 0:16:22.160 --> 0:16:25.840 seventies with a more entrenched inflation problem, and then you 0:16:25.840 --> 0:16:27.840 have to do even more later. So I think you know, 0:16:27.880 --> 0:16:29.680 this is the consequence of the FED being late. If 0:16:29.720 --> 0:16:31.800 you're late, you have to catch up. You catch up, 0:16:31.840 --> 0:16:34.280 you probably are going to overshoot. You overshoot, you're gonna 0:16:34.320 --> 0:16:36.280 have a recession. I think where I would fault the 0:16:36.280 --> 0:16:38.320 FED right now is I don't think they've been realistic 0:16:38.360 --> 0:16:40.640 about the pain that they're actually gonna cause. If you 0:16:40.680 --> 0:16:43.200 look at their forecasts last week, that employing a rate 0:16:43.240 --> 0:16:45.240 climbs a little bit, it climbs up to four point 0:16:45.280 --> 0:16:49.520 four percent, and then inflation melts away. I don't think 0:16:49.520 --> 0:16:51.760 it's gonna be quite so simple as that. There's never 0:16:51.840 --> 0:16:55.000 been an example of the unemployer rate rising from three 0:16:55.040 --> 0:16:57.320 and a half percent to four point four percent point 0:16:57.400 --> 0:17:00.160 nine percent point rise if it rises more and a 0:17:00.160 --> 0:17:03.400 half a percentage point. Every every time that's happened in 0:17:03.440 --> 0:17:05.679 the post World War two period, US has end up 0:17:05.680 --> 0:17:08.280 in a full blown recession and the smallest rise and 0:17:08.320 --> 0:17:10.280 then a point of rate in those situations is two 0:17:10.280 --> 0:17:13.159 percentage points. So I think the FED is understanding the 0:17:13.200 --> 0:17:16.199 pain involved. What what worries me about that then, is 0:17:16.200 --> 0:17:19.639 that people when the pain actually rise, people will start 0:17:19.680 --> 0:17:21.920 will start to pressure the FED not to follow through. 0:17:22.760 --> 0:17:24.480 And this is the point of the column that you 0:17:24.520 --> 0:17:27.600 wrote today that there seemed to be some doubts in 0:17:27.680 --> 0:17:30.639 your mind and in markets minds right now. If the 0:17:30.680 --> 0:17:33.000 market had a mind that the FED is going to 0:17:33.040 --> 0:17:35.399 stay the course, what do you think they have to 0:17:35.440 --> 0:17:37.320 do to come out and say they're going to stay 0:17:37.320 --> 0:17:39.520 the course or do you think they're not going to 0:17:39.680 --> 0:17:41.399 that they're going to pull back on some of the 0:17:41.480 --> 0:17:44.600 rate hikes, say if unemployment rises above four and a 0:17:44.640 --> 0:17:47.760 half percent, Well, I think er Polo is committed to 0:17:47.800 --> 0:17:50.200 staying the course. I think he's you know, studied history 0:17:50.200 --> 0:17:53.520 and knows the consequences of not doing enough. But whether 0:17:53.520 --> 0:17:55.560 it can bring the rest of the fiddle Open Market 0:17:55.600 --> 0:17:57.879 Committee along with them later. I mean right now, it's 0:17:57.920 --> 0:18:00.480 easy to be tough right because everybody wants to get 0:18:00.520 --> 0:18:03.639 inflation down. The labor market is still very strong, and 0:18:03.680 --> 0:18:07.120 so the pain hasn't really materialized yet. A year from now, 0:18:07.119 --> 0:18:09.840 when the unemployer rates quit considerably higher, the e communist 0:18:09.880 --> 0:18:12.040 slowed inflation has come down a bit, there's gonna be 0:18:12.040 --> 0:18:13.480 people that are going to start to argue, do we 0:18:13.520 --> 0:18:15.240 really need to push inflation all the way back to 0:18:15.240 --> 0:18:17.960 two percent or can we take a break now? And 0:18:18.000 --> 0:18:20.000 how much is this going to be a political pressure 0:18:20.320 --> 0:18:23.960 on the FED? Well, I think the Biden administration will 0:18:24.000 --> 0:18:28.399 be pretty good about guarding the Fed's independence. Typically, if 0:18:28.440 --> 0:18:30.480 an administration starts to pick on the FED, that just 0:18:30.600 --> 0:18:33.760 unnerves financial markets and that makes the central banks job 0:18:33.760 --> 0:18:37.560 even harder. So I would be surprised if the Biden 0:18:37.560 --> 0:18:40.960 administration started to attack the FED. But you already are hearing, 0:18:41.000 --> 0:18:43.320 you know, cries from the left wing of the Democratic 0:18:43.320 --> 0:18:46.560 Party about how unfair this is that low income workers 0:18:46.560 --> 0:18:48.880 are gonna be put out of work. Um, you know, 0:18:49.040 --> 0:18:51.959 as if there's some alternative. The problem here is that 0:18:52.000 --> 0:18:55.120 once you're late, you have to catch up. Once you're late, 0:18:55.160 --> 0:18:57.280 the unemploying rate has to go up. There are no 0:18:57.400 --> 0:19:00.520 other alternatives, and so it's not not as if the 0:19:00.560 --> 0:19:04.600 FED has a better path to achieve better outcomes. They need. 0:19:04.640 --> 0:19:05.879 They need to do what they need to do to 0:19:05.880 --> 0:19:08.400 get inflation back down. It's just gonna be difficult if 0:19:08.400 --> 0:19:11.720 we see services stabilize and maybe reduce, if we see 0:19:11.720 --> 0:19:14.800 goods come down to the goods disinflation or deflation that 0:19:14.880 --> 0:19:18.640 we saw pre pandemic. I guess that means we come 0:19:18.640 --> 0:19:22.480 back towards John Taylor's two percent. Are you wedded to 0:19:22.560 --> 0:19:27.400 two point zero percent? Or can Build Dudley construct a 0:19:27.440 --> 0:19:30.760 new normal at two point eight two point nine two 0:19:30.800 --> 0:19:35.240 point adam posing where do you stand on that? Bill? Well, 0:19:35.720 --> 0:19:38.639 I'm not If you're talking about the real real interest 0:19:38.720 --> 0:19:41.840 rate or inflation, I'll go either way. I'll let you 0:19:41.880 --> 0:19:43.760 make it up. But to me, it's it's just it's 0:19:43.800 --> 0:19:46.560 a level that we're aspiring to get to out there. 0:19:46.640 --> 0:19:48.920 I think there's some people that's say the FET should 0:19:48.960 --> 0:19:51.520 raise their inflation target, but I think that's a bad 0:19:51.840 --> 0:19:54.200 approach right now, because that's like moving the goalposts because 0:19:54.200 --> 0:19:56.320 you can't achieve your objectives done that. I think that 0:19:56.720 --> 0:19:58.880 I think that would undercut the fence credibility a lot, 0:19:58.920 --> 0:20:01.359 and I think Paul has been very clear that, uh, 0:20:01.400 --> 0:20:04.280 you know, his pursuit of to percent inflation from his 0:20:04.359 --> 0:20:07.280 perspective is unconditional. Whether he can bring the rest of 0:20:07.280 --> 0:20:09.800 the FLOMC along with him when the job starts to 0:20:09.840 --> 0:20:13.640 become more difficult really a fundamental question right now. Markets 0:20:13.640 --> 0:20:18.000 are you know, basically believe Powell inflation expectations stay well anchored. 0:20:18.359 --> 0:20:21.960 But the pain process that's about to unfold is just begun. 0:20:22.600 --> 0:20:26.200 That's the domestic pain, the international pain we're witnessing right now. Bill, 0:20:26.280 --> 0:20:29.240 Well that that that's happened already, Yes, absolutely, How do 0:20:29.240 --> 0:20:32.560 you think they should respond to that? So well, you 0:20:32.560 --> 0:20:34.040 know the reality that they are not going to respond 0:20:34.080 --> 0:20:36.000 to that because at the end of the day, Montre Paulison, 0:20:36.040 --> 0:20:38.000 the US is about what's best for the United States 0:20:38.040 --> 0:20:41.480 in terms of the fit achieving its US inflation and 0:20:41.560 --> 0:20:46.040 output employment objectives. Obviously, this creates a lot of pressure 0:20:46.080 --> 0:20:48.360 on the rest of the world. You know, the stronger 0:20:48.400 --> 0:20:53.680 dollar holds down US inflation, a weaker foreign currency increases inflation. 0:20:54.080 --> 0:20:56.399 So it's so the flip side for other countries is 0:20:56.520 --> 0:20:59.920 much much tougher. Bill fantastic to catch up great pace 0:21:00.000 --> 0:21:03.160 as a WISA that the former New York Fed president 0:21:03.160 --> 0:21:17.400 and booked like opinion columnist. I remember you telling me 0:21:18.160 --> 0:21:22.720 Ryanair it's three whatever on the Irish r y A. 0:21:22.880 --> 0:21:25.920 I d you said by it to three and it 0:21:26.040 --> 0:21:30.240 went three to eighteen. I mean that's what Ryanair did. 0:21:30.600 --> 0:21:33.720 Did you buy it? No? I didn't. I mean, and 0:21:34.119 --> 0:21:36.479 it's been down in pandemic and all that, and somehow 0:21:36.560 --> 0:21:39.240 survives to move forward and does so with one of 0:21:39.240 --> 0:21:44.000 the most extraordinary chief executive officers, Mr Michael O'Leary, who 0:21:44.040 --> 0:21:46.800 has been medicated over the last three days and joins 0:21:46.920 --> 0:21:51.320 us this morning. Michael, John and Lisa have some very 0:21:51.359 --> 0:21:54.800 important British questions. I want to ask you what matters 0:21:54.840 --> 0:21:57.679