WEBVTT - Fed Could Lose a Tool With Balance Sheet Cut, Kocherlakota Says 0:00:05.800 --> 0:00:08.720 Welcome to the Bloomberg p m L Podcast. I'm pim Fox. 0:00:08.760 --> 0:00:11.520 Along with my co host Lisa Bramowitz. Each day we 0:00:11.640 --> 0:00:15.120 bring you the most important, noteworthy, and useful interviews for 0:00:15.200 --> 0:00:17.840 you and your money, whether you're at the grocery store 0:00:17.960 --> 0:00:20.720 or the trading floor. Find the Bloomberg p m L 0:00:20.840 --> 0:00:32.760 Podcast on Apple Podcasts, SoundCloud, and Bloomberg dot Com. This Wednesday, 0:00:32.800 --> 0:00:35.280 we are going to get the minutes from the latest 0:00:35.400 --> 0:00:38.519 Federal Reserve meeting where they talked about everything from the 0:00:38.600 --> 0:00:42.880 economy to potential risks to the downside uh for the US, 0:00:43.000 --> 0:00:46.040 but most important, what everyone is looking for is guidance 0:00:46.159 --> 0:00:49.000 on how the FED is going to unwind it's four 0:00:49.159 --> 0:00:53.400 point five trillion dollar balance sheet. And for somebody who 0:00:53.400 --> 0:00:56.400 knows quite a bit about this is former Minneapolis FED 0:00:56.440 --> 0:01:01.520 President uh Nriana coach Lakota, who joins us now by phone. 0:01:02.040 --> 0:01:04.160 He is also a Bloomberg View calumnists as well as 0:01:04.160 --> 0:01:07.959 a professor of economics at the University of Rochester. Uh Marianna, 0:01:08.040 --> 0:01:09.920 thank you so much for joining us. You wrote a 0:01:09.920 --> 0:01:12.840 recent column saying that the FED is making a two 0:01:13.040 --> 0:01:16.240 trillion dollar mistakes, saying that they really should not be 0:01:16.319 --> 0:01:18.920 considering whether to shrink their balance sheet at all, it 0:01:19.000 --> 0:01:21.280 is the wrong question. They should not go that route. 0:01:21.360 --> 0:01:25.839 Can you explain why? Yeah, thanks for having me on, Lisa, UM. 0:01:25.920 --> 0:01:29.360 So why thinking there is that? I remember when we 0:01:29.360 --> 0:01:32.480 were hit with shocks, when I was back on the committee, 0:01:32.480 --> 0:01:36.200 even the dark days of eleven UH, one of the 0:01:36.200 --> 0:01:37.720 things we wanted to be able to do was to 0:01:37.840 --> 0:01:41.040 lower interest rates UM, but we didn't have them. Couldn't 0:01:41.040 --> 0:01:42.760 do that because the interest rates were pretty much as 0:01:42.760 --> 0:01:45.160 low as they could go. If the FED were keep 0:01:45.560 --> 0:01:48.480 keep their balance sheet at the current size of four 0:01:48.520 --> 0:01:51.600 and a half trillion dollars or even potentially growing with 0:01:51.680 --> 0:01:55.600 the economy UM, they would over the longer run, also 0:01:55.640 --> 0:01:58.240 be keeping their short term interest rate tool higher because 0:01:58.240 --> 0:02:01.880 they're already providing a lot of accommodation through UM that 0:02:02.360 --> 0:02:04.480 balance sheet. The way you would offset that is by 0:02:04.560 --> 0:02:07.400 keeping your your interest rate tool higher. So that means 0:02:07.440 --> 0:02:10.239 when you go into a recession you're facing shocks, you've 0:02:10.280 --> 0:02:12.600 got your interest rate tool that you're familiar with, you 0:02:12.680 --> 0:02:15.000 know how it works. That's the one you're gonna belonging 0:02:15.040 --> 0:02:18.400 on to two offset shocks. So I think the FED 0:02:18.440 --> 0:02:21.280 would just be better off just as I say, keeping 0:02:21.280 --> 0:02:24.160 the balance sheet constant or even uh I suggest my 0:02:24.480 --> 0:02:28.280 post um keeping that um growing over time as the 0:02:28.280 --> 0:02:31.000 economy grows. So another words, just to make sure that 0:02:31.040 --> 0:02:32.959 I understand what you're saying. You're saying that if the 0:02:32.960 --> 0:02:35.680 FED keeps the big balance sheet, then they have more 0:02:35.800 --> 0:02:38.800 room to raise interest rates and then have that sort 0:02:38.800 --> 0:02:43.680 of the more well known tool to deal with upcoming crises, 0:02:43.760 --> 0:02:46.480 whereas if they shrink the balance sheet, they're going to 0:02:46.600 --> 0:02:49.880 have a harder time raising rates just because the level 0:02:49.880 --> 0:02:52.480 of accommodation is going to be less on the balance 0:02:52.480 --> 0:02:54.360 sheet side. Am I Am I getting that right? Said? 0:02:54.520 --> 0:02:57.480 Exactly right? Thank you for thank you? Okay, no, no, no, 0:02:57.520 --> 0:02:59.640 I just want to make sure. I mean, I guess 0:02:59.639 --> 0:03:01.320 that the ads an argument, and what a lot of 0:03:01.360 --> 0:03:03.880 people are saying in the market is well, the Fed's 0:03:03.880 --> 0:03:06.560 going to move at such a glacial pace, and because 0:03:06.600 --> 0:03:09.480 demographics are changing to such a degree where you have 0:03:09.680 --> 0:03:14.280 people aging and cycling their money into more reliable investments 0:03:14.360 --> 0:03:16.960 like bonds, you're not going to end up getting that 0:03:17.000 --> 0:03:18.600 big of a move, if anything at all. In fact, 0:03:18.680 --> 0:03:20.520 yields on the on the long end might even go 0:03:20.600 --> 0:03:23.240 down even as the Fed on wind's balance sheet and 0:03:23.240 --> 0:03:25.480 then they'll have this tool as well open to them 0:03:25.880 --> 0:03:28.960 in the next crisis. What do you say to that? Yeah, 0:03:29.040 --> 0:03:32.080 I actually I've heard actually some speakers in the fom 0:03:32.160 --> 0:03:35.520 C make this argument. I just don't understand it. Um. 0:03:35.600 --> 0:03:38.200 The estimates we've had from the effect of the balance 0:03:38.240 --> 0:03:42.240 sheet are pretty clear. It's it's basically substituteable with our 0:03:43.680 --> 0:03:45.440 Like I laps in the hour because I'm still thinking 0:03:45.480 --> 0:03:48.560 about myself being on the committee, but it's it's comperbebly 0:03:48.600 --> 0:03:52.720 substituteable with the FED typical tool of the Fed funds rate. 0:03:53.320 --> 0:03:56.560 UM So, as you reduce the size the balance sheet, 0:03:56.960 --> 0:04:00.600 you are substituting for interest rate increase is and in 0:04:00.680 --> 0:04:03.600 fact President Dudley and the New York Fed has made 0:04:03.600 --> 0:04:06.520 this point on a couple of occasions. UM So, I 0:04:07.080 --> 0:04:08.720 think that's the right way to be thinking about it. 0:04:08.800 --> 0:04:12.240 If you scale back the position you have in in 0:04:12.320 --> 0:04:16.680 long term assets, you're removing demand stimulus from the economy, 0:04:16.880 --> 0:04:18.960 and um you're gonna have to make that up in 0:04:19.000 --> 0:04:20.400 some way, and the way you'll be making it up 0:04:20.520 --> 0:04:22.680 is by keeping your short term interest rate, the FED 0:04:22.720 --> 0:04:25.360 funds rate, lower than you would otherwise be doing. So 0:04:25.400 --> 0:04:27.719 this brings us to another column that you recently wrote 0:04:27.800 --> 0:04:31.760 about forecasting growth, because when you talk about short term 0:04:31.760 --> 0:04:34.200 interest rates, let's leave aside the balance sheet, right, because 0:04:34.480 --> 0:04:36.920 let's say the FED decides to keep it at four 0:04:36.960 --> 0:04:40.000 and a half trillion dollars for the time being, puts 0:04:40.080 --> 0:04:43.359 off any discussion of ceasing to reinvest any proceeds that 0:04:43.360 --> 0:04:46.320 they get from that, and they just focus on raising 0:04:46.480 --> 0:04:50.560 interest rates. Um. There's a lot of questions about how 0:04:50.640 --> 0:04:53.440 much they could really do that based on growth and 0:04:53.480 --> 0:04:56.480 the potential for growth. And you know, when you look 0:04:56.560 --> 0:04:58.960 at what the Fed is talking about, do you think 0:04:59.000 --> 0:05:02.160 that they're measuring growth the right way? And given what 0:05:02.200 --> 0:05:05.800 they're looking at, what's the sort of end rate for 0:05:05.880 --> 0:05:09.360 overnight benchmark borrowing costs that you think is is feasible 0:05:09.400 --> 0:05:12.880 in the near future? Oh wow? Okay, so that last 0:05:12.960 --> 0:05:15.839 question is really hard, um, And it would depend on 0:05:15.880 --> 0:05:18.440 where you end up with a balance sheet. Um. You know, 0:05:18.480 --> 0:05:21.839 I think if you you were to to shrink the 0:05:21.839 --> 0:05:24.680 balance sheet, you're it's really going to put much more 0:05:24.680 --> 0:05:26.160 of a cap on where you can end up with 0:05:26.839 --> 0:05:29.040 in the longer run with your your interest rate tool, 0:05:29.279 --> 0:05:31.320 I would I wouldn't be surprised you would end up 0:05:31.320 --> 0:05:32.920 with a number that starts with a two. You know, 0:05:33.000 --> 0:05:35.040 in the in the longer run, FETs if if you 0:05:35.080 --> 0:05:36.920 do end up shrinking the balance sheet to keep the 0:05:36.960 --> 0:05:39.960 balance sheet where it is, then I think you're you'd 0:05:39.960 --> 0:05:42.360 be able more feel more comfortable with the probably the 0:05:42.400 --> 0:05:45.479 longer run, with the number that would start with a three. UM. 0:05:46.279 --> 0:05:50.720 But let me talk. I think I think you've hit 0:05:50.800 --> 0:05:53.120 upon a really important point, which is how hard it 0:05:53.200 --> 0:05:55.520 is to gauge the growth opportunities that are out there 0:05:55.560 --> 0:05:58.480 in the US. UM. There's a lot of pessimism out there, 0:05:58.760 --> 0:06:01.839 UM that maybe the US two percent is all we 0:06:01.839 --> 0:06:04.920 can hope for, UM, something in the two to three percent. 0:06:05.040 --> 0:06:08.760 Rangel here some optimism as well from from certainly from 0:06:08.760 --> 0:06:12.240 the administration is more optimistic about growth opportunities. But it's 0:06:12.360 --> 0:06:15.159 really hard for us to as economist, to get that right. 0:06:15.240 --> 0:06:19.720 And I think the Fed would be safer UM to 0:06:20.480 --> 0:06:22.640 calibrating their interest rate increases to what's going on in 0:06:22.680 --> 0:06:25.800 the inflation to mention they're better forecasting inflation. They'd be 0:06:25.839 --> 0:06:30.320 understand inflationary pressure is better UM. And the whole question 0:06:30.360 --> 0:06:33.320 of capacity, how much growth opportunity there are there are 0:06:33.360 --> 0:06:35.520 in the US is about how much can we grow 0:06:35.560 --> 0:06:40.040 the economy without running into generating too much inflation. So 0:06:40.080 --> 0:06:42.960 I think the FED will be better off holding back, 0:06:43.680 --> 0:06:47.839 being cautious about raising rates until we actually saw, um, 0:06:48.080 --> 0:06:50.080 real clear signs that we're going to get back. We're 0:06:50.120 --> 0:06:53.560 at two percent their target and staying there. So I know, 0:06:53.920 --> 0:06:56.480 I'm sure that you're still friendly with people who are 0:06:56.600 --> 0:07:00.000 on the INFMC right now, and do any of them 0:07:00.240 --> 0:07:02.360 kind of feel the way that you do and just 0:07:02.560 --> 0:07:05.559 feel like they the tides moving toward reducing the balance sheet. 0:07:05.640 --> 0:07:08.440 But uh so we'll go along with that, but we're 0:07:08.520 --> 0:07:11.160 kind of a little worried about that. Yeah, I know 0:07:11.280 --> 0:07:16.600 nothing beyond page I'm just another outsider, like like everyone 0:07:16.600 --> 0:07:19.360 else listening to this. I so, but I but when 0:07:19.360 --> 0:07:22.680 I track um, you know, I you know, I think 0:07:22.880 --> 0:07:26.800 the person who has probably been most cautious about the 0:07:26.800 --> 0:07:31.840 interest rate increases, there's obviously, uh President cash Cary in Minneapolis, 0:07:32.120 --> 0:07:34.280 and so you know, if you're asking me that question, 0:07:34.320 --> 0:07:35.720 I guess I would point to him as being the 0:07:36.240 --> 0:07:39.960 most obvious person on those lines. Marianna Coucha Lokotta, thank 0:07:40.000 --> 0:07:42.080 you so much for joining us. Marianna Coutcha Lokotta is 0:07:42.080 --> 0:07:45.200 a Bloomberg View columnist and of course the former Minneapolis 0:07:45.240 --> 0:07:49.560 Fed president, currently professor of economics at the University of Rochester. 0:07:49.720 --> 0:08:03.880 Really glad you could join us. President Trump did land 0:08:04.000 --> 0:08:07.840 in Israel earlier today and we are already heard comments 0:08:07.880 --> 0:08:10.360 from both President Trump as well as Israeli Prime Minister 0:08:10.640 --> 0:08:13.760 Benjamin Natanya. Who to give us a better sense of 0:08:13.800 --> 0:08:16.840 what we can expect to learn from this trip, I 0:08:16.840 --> 0:08:18.640 want to bring in Michael Arnold, who is the bureau 0:08:18.680 --> 0:08:23.640 chief for Israel and Palestinian Territories for Bloomberg. Michael, thank 0:08:23.680 --> 0:08:25.720 you so much for joining us. I would just like 0:08:25.840 --> 0:08:29.040 to first get a sense of what President Trump plans 0:08:29.080 --> 0:08:32.679 to do while he is in Israel and Palestinian territories 0:08:33.080 --> 0:08:36.040 and what the goal is here. Well, he's got quite 0:08:36.040 --> 0:08:38.760 a full itemperary already. As soon as he landed, he 0:08:38.800 --> 0:08:41.040 was whisked by helicopter to Jerusalem where he met with 0:08:41.080 --> 0:08:44.559 the President. Then he took a tour of holy sites 0:08:44.600 --> 0:08:47.600 in the Old City, both Christian and Jewish. Uh. Now 0:08:47.640 --> 0:08:49.400 he's meeting with the Prime Minister and later he's going 0:08:49.480 --> 0:08:51.720 to have dinner with the Prime Minister. Tomorrow is going 0:08:51.760 --> 0:08:53.959 to head of the Palestinian Authority, areas to meet with 0:08:54.280 --> 0:08:58.240 Mahmud Bas and then back to Israel for a major speech. Um. 0:08:58.320 --> 0:08:59.960 In terms of what he's trying to accomplish, I think 0:09:00.000 --> 0:09:02.080 if there's a few things, um, you know, he may 0:09:02.160 --> 0:09:04.440 make some kind of of a statement on the peace 0:09:04.480 --> 0:09:07.439 process that would give some clarity as to what the 0:09:07.480 --> 0:09:10.959 Trump team's vision is for that, because until now he's 0:09:10.960 --> 0:09:15.120 given really conflicting signals. Um. And I think also Israel 0:09:15.160 --> 0:09:17.240 is going to be looking very closely to see if 0:09:17.240 --> 0:09:20.760 there's really any substance to these these hints about closer 0:09:20.800 --> 0:09:23.559 cooperation for Israel with the wider Arab world, including a 0:09:23.640 --> 0:09:27.760 Saudi Arabia. You know, I'm struck by the tone. I've 0:09:27.800 --> 0:09:30.160 been watching some of the a lot of the coverage, 0:09:30.320 --> 0:09:34.240 particularly President Trump being in realit and being just with 0:09:34.280 --> 0:09:38.080 all the Saudi Arabian princes and the incredible ceremonies, and 0:09:38.200 --> 0:09:41.200 they were tracking his visit otto the minute of when 0:09:41.200 --> 0:09:45.680 he would arrive. What kind of reception has President Trump 0:09:45.679 --> 0:09:50.400 gotten in Israel? Uh, It's it's funny. Israel certainly can't 0:09:50.400 --> 0:09:54.320 compete with the Saudi Arabia in terms of extravagance or 0:09:54.360 --> 0:09:58.120 in or in hospitality. This is a place which has 0:09:58.240 --> 0:10:01.480 has many good things, but customer service is not really 0:10:01.640 --> 0:10:03.920 one of its strong points. So there was a very 0:10:03.920 --> 0:10:07.280 simple welcoming ceremony at the at the airport, which um 0:10:07.880 --> 0:10:10.040 uh Prime Minister Natanya who had to you know, had 0:10:10.040 --> 0:10:12.360 to twist his his cabinet minister's arms just to get 0:10:12.360 --> 0:10:15.240 them to go uh. And then there were some some 0:10:15.320 --> 0:10:17.800 snaffoos with one of the connected members trying to take 0:10:17.840 --> 0:10:21.520 a selfie with Trump to nothing. Who's chagrin um. But 0:10:21.640 --> 0:10:23.600 you know, I think that this kind of, you know, 0:10:23.640 --> 0:10:26.800 this is kind of the homely atmosphere of Israel. I'm 0:10:26.800 --> 0:10:29.920 not sure if that's um quite up Trump's alley. You know, 0:10:29.960 --> 0:10:32.480 you get the sense from his own um real estate 0:10:32.480 --> 0:10:34.680 career that he might feel more at home in the 0:10:34.720 --> 0:10:37.600 type of guilded palaces that he saw in in Saudi Arabia. 0:10:37.800 --> 0:10:40.360 But this is what Israel has to offer, I'm wondering. 0:10:40.679 --> 0:10:43.280 You know, we've heard a lot right before President Trump left, 0:10:43.360 --> 0:10:45.400 there have been a lot of right articles written about 0:10:45.400 --> 0:10:49.400 how he's escaping the turmoil of Washington. He's leaving the 0:10:49.400 --> 0:10:52.000 the difficulties at home to go abroad. And one of 0:10:52.000 --> 0:10:56.520 those difficulties came when President Trump perhaps inadvertently gave more 0:10:56.559 --> 0:11:01.160 information or than than perhaps some in eligence officers wanted 0:11:01.240 --> 0:11:05.960 him to to the Russian Foreign Minister, and included information 0:11:06.280 --> 0:11:12.679 that allegedly was given to the US by an Israeli informant. Um. 0:11:12.840 --> 0:11:15.360 Has there been any discussion about that, if not out 0:11:15.360 --> 0:11:18.720 loud in back office discussions, have you gotten a sense 0:11:18.760 --> 0:11:22.480 of what the reaction is like? Uh? In Israel? Yeah, 0:11:22.520 --> 0:11:24.400 you know, certainly, you know, there was a lot of 0:11:24.440 --> 0:11:27.000 consternation here. UM. I would note that it hasn't been 0:11:27.000 --> 0:11:29.600 confirmed that the information came from Israel. There were also 0:11:29.640 --> 0:11:31.600 some reports that it came from Jordan's, but you know, 0:11:31.640 --> 0:11:34.520 the working assumption is that it did come from Israel. Um. 0:11:34.720 --> 0:11:36.960 You know, people here are upset, but in the other hand, 0:11:37.080 --> 0:11:39.199 you know, they don't really have much option other than 0:11:39.240 --> 0:11:43.400 to continue sharing intelligence. Um, you know with the US. UM. 0:11:43.440 --> 0:11:45.280 And in terms of you know how people here are 0:11:45.280 --> 0:11:48.400 reacting to Trump's domestic problems. Uh, you know, the Prime 0:11:48.400 --> 0:11:51.920 minister here is also under police investigation. So um. You 0:11:51.960 --> 0:11:54.160 know this is something which Israeli's are are kind of 0:11:54.240 --> 0:11:58.600 used to. It's it's the kind of background noise against 0:11:58.679 --> 0:12:01.760 which you know, government is is conducted here. It's interesting 0:12:01.800 --> 0:12:03.760 to note, you know, with with both of these leaders, 0:12:03.760 --> 0:12:06.680 you know, kind of facing such such problems and both 0:12:06.720 --> 0:12:10.400 feeling that they're hounded by opponents and are and are mistreated. 0:12:10.640 --> 0:12:12.360 You know, perhaps this could push them to make some 0:12:12.400 --> 0:12:14.080 kind of a breakthrough. And you know, we've we've certainly 0:12:14.080 --> 0:12:16.440 seen leaders in the past, like you know, Nixon going 0:12:16.480 --> 0:12:19.160 to China, you know, being able to make important breakthroughs 0:12:19.200 --> 0:12:21.120 when they do feel that their their backs are against 0:12:21.120 --> 0:12:24.520 the wall. You know. One other big issue here, possibly 0:12:24.559 --> 0:12:26.520 the biggest is I ran, right. I mean, we just 0:12:26.640 --> 0:12:30.120 had the election in Iran. The more moderate uh person 0:12:30.240 --> 0:12:34.080 want candidate one? And uh yeah, President Trump has continued 0:12:34.120 --> 0:12:37.880 with his more hardlined rhetoric, which frankly, my understanding is 0:12:37.920 --> 0:12:39.680 that Israel would like to see more of. Can you 0:12:39.720 --> 0:12:42.000 give us a sense of what might come of these 0:12:42.040 --> 0:12:45.120 meetings that President Trump is having with Prime Minister Nathan 0:12:45.160 --> 0:12:49.439 yah who and what the implications for Iran could be. Sure, 0:12:50.200 --> 0:12:52.439 it's interesting because here, you know, even though so much 0:12:52.480 --> 0:12:54.760 of the headlines, uh, you know deal with the peace process, 0:12:54.760 --> 0:12:58.320 really Iran is the number one issue, uh and you know, uh, 0:12:58.360 --> 0:13:00.600 I think it's really officials have have been really gratifying 0:13:00.640 --> 0:13:02.959 to see the very strong statements that that the president 0:13:02.960 --> 0:13:05.680 has made on this trip. Um the the speech that 0:13:05.679 --> 0:13:08.360 he gave in Saudi Arabia which was presenting the the 0:13:08.640 --> 0:13:11.600 war and terror as uh you know, as as you know, 0:13:11.679 --> 0:13:14.760 not a not a clash of civilizations or class of religions, 0:13:14.800 --> 0:13:18.160 but rather uh, you know, people of goodwill versus you know, 0:13:18.280 --> 0:13:20.880 versus villains. Um you know. So I think that you 0:13:20.880 --> 0:13:24.120 know that they've been quite hardened here. Um we you know, 0:13:24.160 --> 0:13:26.720 we we were told, you know, by by a source 0:13:26.880 --> 0:13:28.760 close to Natanya who the other day that he he 0:13:28.880 --> 0:13:32.160 is going to really push hard for for new sanctions 0:13:32.160 --> 0:13:34.720 on Iran that uh, you know, he wants to create 0:13:34.760 --> 0:13:39.120 what but this advisor termed a dirty Harry moment, referring 0:13:39.200 --> 0:13:41.439 to um, you know, to the clinice Wood films where 0:13:41.440 --> 0:13:43.000 he would dare the bad guys to shoot him so 0:13:43.040 --> 0:13:45.200 that he could blow them away. Uh. So that you know, 0:13:45.280 --> 0:13:47.400 Israel's really hoping that the you know, that the that 0:13:47.440 --> 0:13:51.400 the president can can really insist on Iran changing its 0:13:51.400 --> 0:13:53.560 behavior and if it doesn't, you know, perhaps set up 0:13:53.559 --> 0:13:58.840 a confrontation that that would improve the situation to Israel's advantage. Mclarnald, 0:13:58.920 --> 0:14:00.959 thank you so much for keeping tabs on this and 0:14:01.000 --> 0:14:03.560 I'm sure we will hear more about the trip. Michael 0:14:03.600 --> 0:14:07.439 Arnold is a bureau chief for Israel and Palestinian Territories 0:14:07.480 --> 0:14:11.160 for Bloomberg News, speaking with us about President Trump's trip 0:14:11.320 --> 0:14:22.000 to the Middle East. We want to take a moment 0:14:22.040 --> 0:14:25.080 to let you know about something new from Bloomberg. Starting 0:14:25.160 --> 0:14:28.000 right now, you can use our io s app or 0:14:28.120 --> 0:14:31.760 our new Google Chrome extension to scan any news story 0:14:31.840 --> 0:14:35.840 on any website, instantly revealing relevant news and market data 0:14:35.880 --> 0:14:39.640 from Bloomberg and other sources related to companies and people 0:14:39.680 --> 0:14:42.880 you're reading about. So no matter where you're reading the news, 0:14:42.920 --> 0:14:45.200 you can bring the power of Bloomberg's news and data 0:14:45.280 --> 0:14:48.680 with you. It's pretty amazing. Download our Io s app 0:14:48.800 --> 0:14:51.240 or search for the Bloomberg extension on the Chrome Store 0:14:51.280 --> 0:14:54.400 to try it out. Learn more at Bloomberg dot com 0:14:54.400 --> 0:15:03.960 slash lens. We've heard a lot about stagflation, but what 0:15:04.040 --> 0:15:09.240 about stagulation? That term was coined by David Service, chief 0:15:09.240 --> 0:15:13.040 market strategist at Jeffreys ll l C, and he joins 0:15:13.160 --> 0:15:16.000 us now on some of his latest comments. David Um, 0:15:16.080 --> 0:15:18.680 thank you so much for joining US. I was really 0:15:18.720 --> 0:15:22.200 struck by your latest miss if you're talking about how 0:15:22.240 --> 0:15:27.640 regulation is really, uh stymying growth in our economy and 0:15:27.720 --> 0:15:29.680 in a way that people don't really recognize, and you 0:15:29.760 --> 0:15:32.560 had a statistic that was pretty mind boggling to me. 0:15:32.600 --> 0:15:36.680 You said that data suggests that nearly ten of US 0:15:36.760 --> 0:15:39.400 g d P is associated with the cost of federal 0:15:39.480 --> 0:15:44.520 regulation intervention. Really well, that's according to the Competitive Enterprise 0:15:44.560 --> 0:15:47.440 Institute Lisa and UM. There's a lot of different studies 0:15:47.480 --> 0:15:52.160 that The problem I've had in digging into the costs 0:15:52.200 --> 0:15:57.640 of regulation is that, unfortunately, it becomes quite political quite quickly, 0:15:57.800 --> 0:16:00.760 and so the think tanks that are associated with the 0:16:00.840 --> 0:16:02.960 right come up with some numbers, that think tanks on 0:16:03.000 --> 0:16:06.360 the left come up with other numbers. The economics profession 0:16:06.360 --> 0:16:09.160 in and of itself is not particularly good at measuring 0:16:09.200 --> 0:16:12.120 these things, and so you're really kind of, you know, 0:16:12.360 --> 0:16:14.160 sort of throwing throwing your hands up in the air 0:16:14.240 --> 0:16:16.720 a little bit and trying to trying to play some 0:16:16.760 --> 0:16:19.840 guessing games, which by the way, is pretty true about 0:16:20.040 --> 0:16:23.080 everything in the economics profession, frankly. But but it's just 0:16:23.400 --> 0:16:26.440 says the chief market strategist at Jeffreys love it, but 0:16:26.480 --> 0:16:31.080 it's particularly acute in this study of regulation. And I 0:16:31.080 --> 0:16:34.280 think also it kind of um, you know, it gets 0:16:34.320 --> 0:16:36.440 to the heart of a debate between you know, traditionally 0:16:36.480 --> 0:16:40.800 interventionist economists and those who favor, you know, much less 0:16:40.800 --> 0:16:43.080 government interventions. So it really gets to the heart of 0:16:43.120 --> 0:16:46.960 the kind of Chicago School freshwater saltwater debates that have 0:16:47.040 --> 0:16:49.440 gone on from all. Right, so let's put aside the 0:16:49.480 --> 0:16:53.560 exact rigor with which some of these estimates are established. 0:16:53.600 --> 0:16:56.880 A lot of people would agree that regulatory burdens have increased, 0:16:57.040 --> 0:17:00.920 particularly since the two thousand and eight financial crisis. And 0:17:01.480 --> 0:17:05.520 you make an argument that this has materially limited growth, 0:17:05.720 --> 0:17:09.320 regardless of whether it's ten percent or not. Uh, And 0:17:09.359 --> 0:17:14.439 that these regulations are largely nonproductive. In other words, they 0:17:14.440 --> 0:17:17.679 don't really add anything to the economy, and that it 0:17:17.720 --> 0:17:21.919 has these have reduced competition. Um. Do you think that 0:17:22.000 --> 0:17:27.960 all regulations are nonproductive and that all regulations reduce competition? No? No, 0:17:28.160 --> 0:17:30.200 And I think, look, there's other forces that can reduce 0:17:30.240 --> 0:17:33.800 competition besides regulation. What I guess I'm poining. By the way, 0:17:33.840 --> 0:17:35.920 that was a great question that we could probably talk 0:17:35.920 --> 0:17:39.639 about for the next five days or more. But let 0:17:39.720 --> 0:17:41.320 me let me just let me just try to get 0:17:41.320 --> 0:17:44.000 to kind of the heart of the regulatory burden story. 0:17:45.080 --> 0:17:47.920 One of the things that we've seen added significantly in 0:17:48.040 --> 0:17:51.040 a lot of businesses are hours worked associated with things 0:17:51.080 --> 0:17:54.320 like compliance and regulation. In the financial industry, for example, 0:17:54.359 --> 0:17:57.880 I think the latest count has city banks compliance departments 0:17:57.880 --> 0:18:01.359 somewhere in the neighborhood of which is the same size 0:18:01.359 --> 0:18:06.080 as Golden Sas. That is a marked increase, significant increase 0:18:06.200 --> 0:18:09.280 over what that department looked like prior to the crisis. 0:18:09.680 --> 0:18:13.560 Those hours worked are are serving a purpose. We're we're 0:18:13.640 --> 0:18:17.960 overseeing a systemically important institution and theory uh in a 0:18:18.000 --> 0:18:20.800 better way to stave off financial crisis in the future. 0:18:21.119 --> 0:18:24.440 But those hours work don't actually produce returns. They don't 0:18:24.480 --> 0:18:27.640 produce GDP, they don't nobody's making a widget in that 0:18:28.000 --> 0:18:30.520 in that compliance department. And so I think what you 0:18:30.560 --> 0:18:31.920 have to come to grips with. And this is true 0:18:31.920 --> 0:18:36.120 of environmental regulation, that's true of health care regulation. We've 0:18:36.160 --> 0:18:40.520 added an enormous amount of hours worked to the menu 0:18:40.880 --> 0:18:44.760 of of of job creation in the United States post crisis, 0:18:45.040 --> 0:18:47.880 where a lot of those hours worked aren't actually contributing 0:18:47.920 --> 0:18:50.800 to final demand in a traditional way, so we don't 0:18:50.840 --> 0:18:53.280 get a lot of GDP per hour work, which is 0:18:54.040 --> 0:18:56.679 my opinion one of the reasons why productivity, which is 0:18:56.960 --> 0:19:00.560 output per hour work, has actually been slowing quite substantially, 0:19:00.600 --> 0:19:03.680 and why returns on capital have been lower or our 0:19:03.760 --> 0:19:06.240 star has been lower in the BEDS model, and why 0:19:06.400 --> 0:19:09.320 potential growth appears to be closer to one and a 0:19:09.359 --> 0:19:11.399 half two rather than two and a half three. So 0:19:11.440 --> 0:19:14.200 I think a lot of that adds up. Now. I mean, 0:19:14.560 --> 0:19:17.240 I'm not making a statement about is it good or bad. 0:19:17.280 --> 0:19:19.119 I'm making a statement about what it means for interest 0:19:19.200 --> 0:19:21.480 rates and what it means for economic growth. We don't 0:19:21.520 --> 0:19:25.200 measure environmental quality in economic growth. We don't measure the 0:19:25.280 --> 0:19:28.920 quality of our groundwater, or the likelihood or unlilihood of 0:19:28.920 --> 0:19:32.480 a financial of financial instability event Those don't get put 0:19:32.520 --> 0:19:36.159 into GDP, and so you have to make some u 0:19:36.320 --> 0:19:39.840 you have to make some assumptions about well about whether 0:19:39.880 --> 0:19:41.520 those things are good or bad. And I think a 0:19:41.520 --> 0:19:43.720 lot of people would agree they're pretty good. Right well, 0:19:43.720 --> 0:19:45.800 But but look, so let's bring it down to the market, 0:19:45.880 --> 0:19:48.520 right because that's that's why this matters, is because if 0:19:48.520 --> 0:19:50.560 you think that this is going to be uh, a 0:19:50.560 --> 0:19:53.560 story of aging demographics and just sort of the change 0:19:53.680 --> 0:19:58.399 in the overall economic global climate, then it's going to 0:19:58.440 --> 0:20:01.560 be hard to change that, right, and therefore interest rates 0:20:01.600 --> 0:20:05.040 would remain low no matter what any government almost does. Right. 0:20:05.119 --> 0:20:07.320 But if you believe that there is a step like 0:20:07.359 --> 0:20:10.560 cutting regulation that could materially boost growth, then we would 0:20:10.600 --> 0:20:13.680 move away from this dag inflation uh kind of picture 0:20:13.840 --> 0:20:16.240 and towards one where you could see interest rates rise 0:20:16.320 --> 0:20:20.399 more substantially and stocks get a boost more substantially. Correct. 0:20:20.400 --> 0:20:22.760 I mean, that's the reason why this matters for markets. Well, 0:20:22.920 --> 0:20:24.880 I think you're exactly I think I think you're exactly 0:20:24.960 --> 0:20:28.440 right on the first. And that's why we're talking about it. Um. 0:20:28.480 --> 0:20:32.119 We're talking about it because, um, is it a demand 0:20:32.119 --> 0:20:34.000 side problem or is it a supply side problem. Is 0:20:34.000 --> 0:20:37.200 it a lack of aggregate demand, as my friend Larry 0:20:37.200 --> 0:20:40.920 Summers would argue, because of aging demographics, because of income inequality, 0:20:41.160 --> 0:20:43.359 because of a number of other issues that have created 0:20:43.400 --> 0:20:47.040 this savings glut globally, or is this just that people 0:20:47.119 --> 0:20:51.320 have underinvested, not because there's you know, there's some sort 0:20:51.320 --> 0:20:54.680 of you know, you know, demand side problem. But they're 0:20:54.720 --> 0:20:59.240 actually under investing because the supply side restrictions, the regulatory 0:20:59.320 --> 0:21:02.280 environment made it very complicated to invest heavily in the 0:21:02.359 --> 0:21:05.639 United States and in many other countries post crisis. And 0:21:05.680 --> 0:21:07.800 I think, look, I think you can make an argument 0:21:07.800 --> 0:21:10.080 for a demand shock pretty early in the crisis. There's 0:21:10.119 --> 0:21:12.720 no question there was one in A eight nine. I 0:21:12.720 --> 0:21:14.840 think what happened is starting in ten we started to 0:21:14.840 --> 0:21:18.800 see this demand shock dissipate, but a regulatory environment emerged 0:21:18.800 --> 0:21:23.960 that created a much more stagulatory outcome. If that's a word, 0:21:24.359 --> 0:21:27.359 um that I'm going to create, uh, stagulatory outcome then 0:21:27.400 --> 0:21:30.960 otherwise would have happened. And I think the exciting thing, um, 0:21:31.000 --> 0:21:33.560 you know, there's a lot of exciting things about watching 0:21:33.560 --> 0:21:37.520