1 00:00:02,720 --> 00:00:16,640 Speaker 1: Bloomberg Audio Studios, Podcasts, Radio News. 2 00:00:18,600 --> 00:00:21,640 Speaker 2: Hello and welcome to another episode of the All Thoughts podcast. 3 00:00:21,680 --> 00:00:23,040 Speaker 2: I'm Tracy Alloway. 4 00:00:22,760 --> 00:00:25,720 Speaker 3: And I'm Joe Whysenthal. Joe, Yeah. Yes. 5 00:00:26,000 --> 00:00:30,080 Speaker 2: Recently, recently Stephen Myron, who is chair of the Council 6 00:00:30,080 --> 00:00:34,280 Speaker 2: of Economic Advisors and also the newly confirmed FED Board member, 7 00:00:34,800 --> 00:00:38,360 Speaker 2: he made his first public speech since joining the Central Bank. 8 00:00:38,520 --> 00:00:39,800 Speaker 2: And do you know what it was about? 9 00:00:40,200 --> 00:00:43,120 Speaker 3: I do but go on the neutral rate, the. 10 00:00:43,200 --> 00:00:47,320 Speaker 2: Natural rate of interest, our stares basically all about our star, 11 00:00:47,400 --> 00:00:50,479 Speaker 2: which is like pretty significant for his first speech. 12 00:00:50,560 --> 00:00:52,960 Speaker 4: I mean, to me, this has come up on a 13 00:00:52,960 --> 00:00:55,400 Speaker 4: bunch of episodes lately. To me, this is the multi 14 00:00:55,400 --> 00:00:58,840 Speaker 4: trillion dollar question, which is recording the September twenty fourth, 15 00:00:58,920 --> 00:01:02,040 Speaker 4: twenty twenty five. Why are long term rates so much higher? 16 00:01:02,080 --> 00:01:05,360 Speaker 4: Why does the market perceive that rates will have to 17 00:01:05,400 --> 00:01:07,600 Speaker 4: be so much higher in order for the FED to 18 00:01:07,680 --> 00:01:11,120 Speaker 4: hit its inflation goals than the market perceived in twenty nineteen. 19 00:01:11,280 --> 00:01:13,760 Speaker 4: What changed in the last six years or five years 20 00:01:13,840 --> 00:01:14,199 Speaker 4: or whatever. 21 00:01:14,360 --> 00:01:17,759 Speaker 2: Well, Also, I mean, our star has always been something 22 00:01:17,840 --> 00:01:20,839 Speaker 2: of a controversial idea, and people criticize it for being 23 00:01:20,880 --> 00:01:24,760 Speaker 2: this unobservable thing. And you know, it's a hypothetical estimate 24 00:01:24,800 --> 00:01:28,200 Speaker 2: that's extracted from all this different stuff like savings and 25 00:01:28,240 --> 00:01:32,600 Speaker 2: spending and productivity and demographics, investment. You can go on 26 00:01:32,640 --> 00:01:34,880 Speaker 2: and on and on immigration. 27 00:01:35,040 --> 00:01:35,760 Speaker 5: Yeah exactly. 28 00:01:35,880 --> 00:01:39,080 Speaker 2: Yeah, but I think you know, our star is probably 29 00:01:39,120 --> 00:01:43,360 Speaker 2: going to get even more controversial, or perhaps more under 30 00:01:43,440 --> 00:01:46,120 Speaker 2: the spotlight, is a way of putting it. Given that 31 00:01:46,440 --> 00:01:49,960 Speaker 2: people like Myron in his speech where he was arguing 32 00:01:50,000 --> 00:01:52,840 Speaker 2: that the natural rate of interest should be zero right now, 33 00:01:53,080 --> 00:01:56,760 Speaker 2: which is very, very different than other sort of normal 34 00:01:56,920 --> 00:01:59,720 Speaker 2: estimates out there, which has the natural rate of interest 35 00:01:59,720 --> 00:02:02,240 Speaker 2: at las three point three or three point nine percent 36 00:02:02,760 --> 00:02:05,520 Speaker 2: something like that. And so if you think the neutral 37 00:02:05,560 --> 00:02:08,560 Speaker 2: rate of interest is a lot lower, then you would 38 00:02:08,600 --> 00:02:13,079 Speaker 2: assume that the FED should be loosening more. And conversely, 39 00:02:13,240 --> 00:02:15,240 Speaker 2: if you think our star is high, which a lot 40 00:02:15,240 --> 00:02:18,200 Speaker 2: of people have argued in recent years, then you would 41 00:02:18,639 --> 00:02:21,920 Speaker 2: argue that interest rates don't look that restrictive at the 42 00:02:21,919 --> 00:02:24,640 Speaker 2: moment totally. So we should clearly talk more about this. 43 00:02:24,760 --> 00:02:27,760 Speaker 2: And we've actually never done a specific episode just on 44 00:02:27,840 --> 00:02:28,560 Speaker 2: the neutral rate. 45 00:02:28,720 --> 00:02:29,880 Speaker 3: So I'll just say two things. 46 00:02:29,919 --> 00:02:32,440 Speaker 4: I'm probably something of an r star truth or in 47 00:02:32,480 --> 00:02:35,919 Speaker 4: the specific sense that I doubt like, Okay, everyone agrees 48 00:02:35,919 --> 00:02:38,400 Speaker 4: it's like quote unobservable, et cetera. But I doubt that 49 00:02:38,440 --> 00:02:42,160 Speaker 4: there is actually some rate that will magically bring the 50 00:02:42,200 --> 00:02:45,120 Speaker 4: economy into balance if we knew what it was. That 51 00:02:45,160 --> 00:02:47,720 Speaker 4: doesn't mean I don't find this to be a conceptually 52 00:02:47,840 --> 00:02:49,440 Speaker 4: useful conversation. 53 00:02:49,760 --> 00:02:52,040 Speaker 2: And yet you don't believe in the term premium. 54 00:02:52,400 --> 00:02:54,760 Speaker 3: I don't really believe in any any of this stuff. No, 55 00:02:54,840 --> 00:02:55,720 Speaker 3: that's not true. 56 00:02:55,800 --> 00:03:00,320 Speaker 4: I am very interested in setting aside whether something could 57 00:03:00,360 --> 00:03:04,160 Speaker 4: theoretically be observed, whether one number could bring everything into balance, 58 00:03:04,240 --> 00:03:07,120 Speaker 4: all of these ex sitting aside that question, something has 59 00:03:07,240 --> 00:03:10,160 Speaker 4: changed in the underlying economy. If you want to call 60 00:03:10,240 --> 00:03:13,000 Speaker 4: that a neutral rate of interest, I guess I'm totally 61 00:03:13,160 --> 00:03:16,320 Speaker 4: fine with that. But something's changed, and I want to 62 00:03:16,360 --> 00:03:18,359 Speaker 4: know what it is. But more importantly, I want to 63 00:03:18,400 --> 00:03:18,760 Speaker 4: know why. 64 00:03:18,880 --> 00:03:21,240 Speaker 2: All right, Well, we have the perfect guests. We're going 65 00:03:21,280 --> 00:03:23,519 Speaker 2: to be speaking with Tom Orlick, who is of course 66 00:03:23,560 --> 00:03:26,320 Speaker 2: chief economist at Bloomberg Economics. He's been on a number 67 00:03:26,360 --> 00:03:30,440 Speaker 2: of times before, and Jamie Rush, director of Global Economics 68 00:03:30,480 --> 00:03:35,400 Speaker 2: at Bloomberg Economics, and together with Stephanie Flanders, who is 69 00:03:35,440 --> 00:03:38,120 Speaker 2: the head of Bloomberg Economics and also the host of 70 00:03:38,200 --> 00:03:42,920 Speaker 2: the Trumpenomics podcast, have written a book all about the. 71 00:03:43,000 --> 00:03:45,240 Speaker 3: Neutral rate of interest, A whole book about it. 72 00:03:45,360 --> 00:03:48,440 Speaker 2: Yeah, called The Price of Money, A Guide to the past, Present, 73 00:03:48,560 --> 00:03:51,040 Speaker 2: and Future of the Natural rate of Interest. 74 00:03:51,200 --> 00:03:52,800 Speaker 3: Amazing. I'm really excited, So. 75 00:03:52,880 --> 00:03:55,400 Speaker 2: Let's get started. Tom and Jamie, thank you so much 76 00:03:55,440 --> 00:03:56,640 Speaker 2: for coming on all thoughts. 77 00:03:56,640 --> 00:03:59,320 Speaker 5: Great to be here, Thanks Tracy, thanks Jay, thanks for 78 00:03:59,360 --> 00:03:59,800 Speaker 5: having us. 79 00:04:00,480 --> 00:04:03,240 Speaker 2: First of all, congratulations on the new book. And I 80 00:04:03,280 --> 00:04:06,200 Speaker 2: got to say, it's kind of ballsy to tackle this 81 00:04:06,360 --> 00:04:09,880 Speaker 2: concept that a lot of people don't believe in, excluding Joe, 82 00:04:10,520 --> 00:04:13,640 Speaker 2: and you know that tends to generate a lot of criticism. 83 00:04:13,680 --> 00:04:16,080 Speaker 2: And maybe it's even ballsier to publish your own model 84 00:04:16,200 --> 00:04:18,720 Speaker 2: so that everyone can see what the estimates actually are. 85 00:04:19,480 --> 00:04:22,800 Speaker 2: I mean that as a genuine compliment. But why a 86 00:04:22,800 --> 00:04:25,120 Speaker 2: book on the neutral rate? What prompted it? 87 00:04:25,839 --> 00:04:25,919 Speaker 6: So? 88 00:04:25,960 --> 00:04:28,720 Speaker 5: I actually recall the tweet from Joe a while ago 89 00:04:29,000 --> 00:04:32,159 Speaker 5: where he took aim at books as a concept. 90 00:04:32,480 --> 00:04:35,000 Speaker 4: Oh yeah, So not only do I not believe in 91 00:04:35,040 --> 00:04:37,040 Speaker 4: our star or anything, I don't even believe in the 92 00:04:37,040 --> 00:04:37,760 Speaker 4: premise of book. 93 00:04:37,839 --> 00:04:38,680 Speaker 3: No, I do believe in it. 94 00:04:38,839 --> 00:04:40,520 Speaker 2: Joe believe all books should be a tweet. 95 00:04:40,600 --> 00:04:41,839 Speaker 3: That's right, Keep going exactly. 96 00:04:41,880 --> 00:04:44,920 Speaker 5: So we've written about a concept Joe doesn't believe in 97 00:04:45,080 --> 00:04:47,400 Speaker 5: in a format that Joe doesn't support. So we feel 98 00:04:47,400 --> 00:04:50,320 Speaker 5: incredibly lucky to be on the on the podcast. So 99 00:04:50,440 --> 00:04:52,880 Speaker 5: why now? I think there's a couple of ways to 100 00:04:52,920 --> 00:04:55,240 Speaker 5: answer that question. The first is, I mean, this is 101 00:04:55,320 --> 00:04:59,719 Speaker 5: really important, right we talk about the neutral rate of interest, 102 00:04:59,839 --> 00:05:02,440 Speaker 5: but really a different way of saying it is it's 103 00:05:02,480 --> 00:05:05,440 Speaker 5: the cost of borrowing in the economy, right, and the 104 00:05:05,480 --> 00:05:10,320 Speaker 5: cost of borrowing is incredibly consequential for ministers of finance, 105 00:05:10,360 --> 00:05:15,400 Speaker 5: it's incredibly consequential for businesses, for households, for investors. So 106 00:05:15,880 --> 00:05:19,240 Speaker 5: it's always a good time to write about the neutral 107 00:05:19,320 --> 00:05:23,960 Speaker 5: rate interest rates, the cost of borrowing. Why specifically now, well, 108 00:05:24,200 --> 00:05:28,760 Speaker 5: is because something really important has changed. From the late 109 00:05:28,839 --> 00:05:32,760 Speaker 5: nineteen eighties to the mid twenty tens, the global economy 110 00:05:33,040 --> 00:05:37,480 Speaker 5: was characterized by too much saving and not enough investment, 111 00:05:38,120 --> 00:05:40,839 Speaker 5: and in that state of affairs, the neutral rate of interest, 112 00:05:41,080 --> 00:05:44,359 Speaker 5: the cost of borrowing, was continually falling. What's happened in 113 00:05:44,360 --> 00:05:48,040 Speaker 5: the last decade, Well, that dynamic has swung into reverse 114 00:05:48,480 --> 00:05:52,880 Speaker 5: and now we have less saving, more investment, and that 115 00:05:52,960 --> 00:05:55,600 Speaker 5: means the neutral rate of interest, the cost of borrowing 116 00:05:55,600 --> 00:05:58,800 Speaker 5: for the US Treasury and for everyone else is going up. 117 00:05:59,120 --> 00:05:59,880 Speaker 3: I like this frame. 118 00:06:00,200 --> 00:06:02,240 Speaker 4: So it's less about the idea that there is some 119 00:06:02,440 --> 00:06:06,320 Speaker 4: rate that will bring everything into balance magically, et cetera, 120 00:06:06,440 --> 00:06:10,239 Speaker 4: because I think a lot of people intuitively understand why 121 00:06:10,320 --> 00:06:12,960 Speaker 4: you know, that's not such a you know, I think 122 00:06:12,960 --> 00:06:15,440 Speaker 4: that probably makes a lot of people uncomfortable. But it 123 00:06:15,440 --> 00:06:19,799 Speaker 4: seems objectively true or real that the cost of money 124 00:06:19,880 --> 00:06:22,320 Speaker 4: or the cost of borrowing has gone up, and so 125 00:06:22,400 --> 00:06:25,120 Speaker 4: we can talk about that specifically. Let's talk about the 126 00:06:25,160 --> 00:06:28,400 Speaker 4: cost of borrowing today, like how much more expensive is 127 00:06:28,440 --> 00:06:31,880 Speaker 4: it to borrow money today by some measure than it was, 128 00:06:31,920 --> 00:06:32,840 Speaker 4: say pre COVID. 129 00:06:33,000 --> 00:06:35,320 Speaker 2: Wait, just before we do this, can we get like 130 00:06:35,520 --> 00:06:38,960 Speaker 2: a three sentenced definition of how you view our star? 131 00:06:39,120 --> 00:06:41,839 Speaker 2: I feel like we should define our terms before we start. 132 00:06:41,920 --> 00:06:45,240 Speaker 6: Excellent idea, So our star the natural rate of interest 133 00:06:45,480 --> 00:06:50,800 Speaker 6: is what balances demand for investment and saving in the economy, 134 00:06:50,839 --> 00:06:53,280 Speaker 6: and when those two things have imbalanced, the economy is 135 00:06:53,320 --> 00:06:56,240 Speaker 6: on trend and inflation is roughly at target. 136 00:06:56,440 --> 00:06:57,800 Speaker 2: All right, that's a simple definition. 137 00:06:57,920 --> 00:07:00,560 Speaker 3: Okay, I like that. All right, gone up. 138 00:07:01,480 --> 00:07:03,120 Speaker 4: I mean this is the big this is the big 139 00:07:03,200 --> 00:07:05,359 Speaker 4: question rate. But actually, before we say, why has it 140 00:07:05,360 --> 00:07:07,760 Speaker 4: gone up? How much has it gone up, or has 141 00:07:07,800 --> 00:07:11,440 Speaker 4: it in fact gone up versus the pre COVID environment. 142 00:07:11,520 --> 00:07:12,160 Speaker 3: Let's start with that. 143 00:07:12,760 --> 00:07:16,040 Speaker 6: Well, if we cast our mind back to that COVID experience, 144 00:07:16,720 --> 00:07:20,280 Speaker 6: there was a period where governments could basically be paid 145 00:07:20,320 --> 00:07:23,120 Speaker 6: to borrow in real terms, interest rates were so low 146 00:07:23,680 --> 00:07:26,400 Speaker 6: for so far across the Yelk curve that they could 147 00:07:26,440 --> 00:07:29,000 Speaker 6: borrow without having to worry about whether they'd pay it back. 148 00:07:29,160 --> 00:07:31,400 Speaker 6: So you can see that the real world implications of 149 00:07:31,440 --> 00:07:33,640 Speaker 6: that and the behavior that we saw during the pandemic, 150 00:07:33,720 --> 00:07:38,080 Speaker 6: the borrowing that happened, the interest rate was enormously consequential, 151 00:07:38,400 --> 00:07:40,560 Speaker 6: and a big part of that. We're not in that 152 00:07:40,600 --> 00:07:43,640 Speaker 6: world now. Interest rates, treasury yields in excess of four 153 00:07:43,680 --> 00:07:46,960 Speaker 6: percent are much higher, much more burdensome, And now we're 154 00:07:46,960 --> 00:07:50,560 Speaker 6: seeing that the costs of those policies manifest in budgets today. 155 00:07:51,280 --> 00:07:54,920 Speaker 2: So I remember, way back in twenty sixteen, Goldman Sachs 156 00:07:54,960 --> 00:07:57,680 Speaker 2: put out this note arguing that the Fed had a 157 00:07:57,680 --> 00:08:01,280 Speaker 2: big new idea to justify keep rates low basically, and 158 00:08:01,360 --> 00:08:05,120 Speaker 2: the argument was that our star was low, and so 159 00:08:05,400 --> 00:08:09,040 Speaker 2: you know, monetary policy wasn't actually that loose at the time, 160 00:08:09,200 --> 00:08:12,080 Speaker 2: even though benchmark rates were already pretty low. And the 161 00:08:12,080 --> 00:08:15,400 Speaker 2: Goldman analyst had this chart in their note where they 162 00:08:15,440 --> 00:08:19,960 Speaker 2: basically looked at mentions of thematic ideas in FED speeches 163 00:08:20,000 --> 00:08:23,760 Speaker 2: and press releases and things like that. And indeed you 164 00:08:23,800 --> 00:08:26,920 Speaker 2: could see that starting in twenty sixteen, mentions of our 165 00:08:27,000 --> 00:08:30,480 Speaker 2: Star start going up, and you know, they basically came 166 00:08:30,520 --> 00:08:33,679 Speaker 2: off of nothing. For like the previous decade, no one 167 00:08:33,800 --> 00:08:37,000 Speaker 2: was talking about the natural rate of interest. I know 168 00:08:37,160 --> 00:08:41,280 Speaker 2: our Star itself is an old idea because I read 169 00:08:41,320 --> 00:08:44,319 Speaker 2: the book and there's a chunky chapter on the history 170 00:08:44,400 --> 00:08:48,280 Speaker 2: and development of the entire concept. But am I right 171 00:08:48,320 --> 00:08:51,600 Speaker 2: in thinking that there has been a resurgence in interest 172 00:08:51,720 --> 00:08:54,080 Speaker 2: in our Star over the past decade or so? 173 00:08:55,400 --> 00:08:59,760 Speaker 5: Chunky seems like a neutral adjective, tracy, right, elanquent. 174 00:09:00,120 --> 00:09:02,760 Speaker 2: An informative chapter, I should say so. 175 00:09:03,080 --> 00:09:05,520 Speaker 5: I think that clearly has right. And I think one 176 00:09:05,520 --> 00:09:08,719 Speaker 5: of the reasons for that is because the state of 177 00:09:08,720 --> 00:09:11,080 Speaker 5: the world has changed. Right, in the run up to 178 00:09:11,120 --> 00:09:15,560 Speaker 5: the global financial crisis, didn't feel like there were sort 179 00:09:15,600 --> 00:09:19,840 Speaker 5: of fundamental issues with how monetary policy was operating. Right, 180 00:09:20,920 --> 00:09:24,400 Speaker 5: interest rates moved up, interest rates moved down, the economy 181 00:09:24,440 --> 00:09:27,680 Speaker 5: responded in the way which the textbooks would suggest. But 182 00:09:27,760 --> 00:09:30,480 Speaker 5: in the aftermath of the financial crisis, we're in this 183 00:09:30,640 --> 00:09:36,120 Speaker 5: extended period of economic malaise, right, and from a monetary 184 00:09:36,120 --> 00:09:39,600 Speaker 5: policy perspective, it was hard to explain. Interest rates are 185 00:09:39,600 --> 00:09:41,400 Speaker 5: on the floor. There have been a huge amount of 186 00:09:41,440 --> 00:09:47,600 Speaker 5: quantitative easing, and yet unemployment rates remained stubbornly high, growth 187 00:09:47,640 --> 00:09:51,120 Speaker 5: remained stubbornly low. Why was that? And that's one of 188 00:09:51,120 --> 00:09:55,000 Speaker 5: the reasons why this neutral rate of interest rose in 189 00:09:55,200 --> 00:09:59,120 Speaker 5: profile as an explanatory factor, because if the neutral rate 190 00:09:59,160 --> 00:10:03,000 Speaker 5: of interest has come down, if it's come down very far, well, 191 00:10:03,240 --> 00:10:05,400 Speaker 5: that means that central banks have to do a lot 192 00:10:05,480 --> 00:10:08,160 Speaker 5: to stimulate the economy. And if the neuturate of interest 193 00:10:08,200 --> 00:10:11,640 Speaker 5: is close to zero, well, that effectively means that central 194 00:10:11,679 --> 00:10:14,680 Speaker 5: banks are out of fire power. They can't take interest 195 00:10:14,760 --> 00:10:16,640 Speaker 5: rates low enough to stimulate growth. 196 00:10:17,200 --> 00:10:20,440 Speaker 4: This is a very important point actually, and again just 197 00:10:20,520 --> 00:10:24,000 Speaker 4: let's stay in the twenty tens here, when interest rates 198 00:10:24,040 --> 00:10:26,800 Speaker 4: were at zero or near zero for a long time, 199 00:10:27,360 --> 00:10:30,199 Speaker 4: You've probably hurt a lot of people in the financial press. 200 00:10:30,200 --> 00:10:34,080 Speaker 4: Ao you know, the FED is super loose monetary policy, etc. 201 00:10:35,040 --> 00:10:37,959 Speaker 4: How long will the Fed continue to print money or whatever, 202 00:10:38,320 --> 00:10:42,040 Speaker 4: and yet looking at the actual results in the real economy, 203 00:10:42,080 --> 00:10:47,640 Speaker 4: as you've described, unemployment remaining stubbornly high, inflation consistently undershooting 204 00:10:48,120 --> 00:10:50,199 Speaker 4: in retrospect. Very nice problem to have. I think we 205 00:10:50,240 --> 00:10:53,240 Speaker 4: should have appreciated it more at the time. Really not 206 00:10:53,280 --> 00:10:56,679 Speaker 4: a problem at all in my opinion. The implication, though, 207 00:10:56,880 --> 00:10:58,960 Speaker 4: and we could have understood this from Milton Friedman and 208 00:10:59,000 --> 00:11:02,439 Speaker 4: some of his talk about you, was that actually, implicitly 209 00:11:02,520 --> 00:11:06,280 Speaker 4: we were still running tight monetary policy even with normal 210 00:11:06,520 --> 00:11:08,880 Speaker 4: rates basically at their physical floor. 211 00:11:09,480 --> 00:11:09,760 Speaker 3: Yeah. 212 00:11:09,880 --> 00:11:12,319 Speaker 6: So I guess during that period, interest rates were low, 213 00:11:12,360 --> 00:11:16,559 Speaker 6: the economy was failing to gain traction, and policymakers were 214 00:11:16,559 --> 00:11:20,400 Speaker 6: puzzling over it. And actually the puzzle continues, right, Policymakers 215 00:11:20,440 --> 00:11:24,280 Speaker 6: still don't know how restricted policy is. They infer what 216 00:11:24,360 --> 00:11:27,200 Speaker 6: they think the natural rates should be by looking around them, 217 00:11:27,200 --> 00:11:30,360 Speaker 6: seeing what's happening to unemployment, see what's happening to inflation, 218 00:11:30,800 --> 00:11:33,319 Speaker 6: But they don't know. And so one of the things 219 00:11:33,320 --> 00:11:34,840 Speaker 6: that we did, and we tried to achieve in our 220 00:11:34,840 --> 00:11:38,680 Speaker 6: book is to rather than inferring the natural rate of interest, 221 00:11:39,040 --> 00:11:41,400 Speaker 6: we looked over a broader sweep of history and try 222 00:11:41,480 --> 00:11:43,920 Speaker 6: to pin down the explanatory drivers of the rate of 223 00:11:43,920 --> 00:11:46,280 Speaker 6: interest to try to shed some light on why these 224 00:11:46,280 --> 00:11:49,120 Speaker 6: things are as they are, why interest rates fell so much, 225 00:11:49,520 --> 00:11:52,240 Speaker 6: why there was an inflection point around the pandemic, and 226 00:11:52,280 --> 00:11:54,400 Speaker 6: why we think interest rates may therefore go upwards in 227 00:11:54,440 --> 00:11:57,320 Speaker 6: the future. So it was for us the exercise the 228 00:11:57,320 --> 00:12:00,560 Speaker 6: book was really about trying to pin down the and 229 00:12:00,559 --> 00:12:02,199 Speaker 6: then tell a story about this drive is so you 230 00:12:02,240 --> 00:12:04,280 Speaker 6: can think about it in the future. 231 00:12:20,360 --> 00:12:24,080 Speaker 4: I feel tracy like this conversation is really about like 232 00:12:24,800 --> 00:12:27,840 Speaker 4: the magical object that you can't look at right because 233 00:12:27,880 --> 00:12:30,240 Speaker 4: I'll freeze you, or maybe it's the shining gold and 234 00:12:30,280 --> 00:12:31,520 Speaker 4: the briefcase of pulp fiction. 235 00:12:31,800 --> 00:12:32,520 Speaker 3: You can't see it. 236 00:12:32,720 --> 00:12:36,360 Speaker 4: So all we've done historically mostly is we've attempted to 237 00:12:36,600 --> 00:12:39,760 Speaker 4: figure out what it is by observing its reflection onto 238 00:12:39,800 --> 00:12:42,000 Speaker 4: the world which we observe that reflection. 239 00:12:41,720 --> 00:12:42,520 Speaker 3: And the unemployment. 240 00:12:42,800 --> 00:12:45,760 Speaker 4: And now this is an attempt to see the unseeable 241 00:12:46,040 --> 00:12:49,440 Speaker 4: and to actually stare into the abyss at this crucial 242 00:12:49,559 --> 00:12:51,720 Speaker 4: number and find out what it truly is. 243 00:12:51,880 --> 00:12:54,480 Speaker 2: Everyone's been wondering what's in the suitcase of cult fiction. 244 00:12:54,559 --> 00:12:55,199 Speaker 2: It was our star. 245 00:12:55,360 --> 00:12:56,560 Speaker 3: It was our star all along. 246 00:12:57,080 --> 00:12:59,760 Speaker 2: Okay, Well, on that note, I mean I take the 247 00:12:59,760 --> 00:13:02,280 Speaker 2: point that most of the book is about the specific 248 00:13:02,360 --> 00:13:04,480 Speaker 2: drivers of our star, but you do come up with 249 00:13:04,559 --> 00:13:07,280 Speaker 2: a model, and you do come up with an estimate 250 00:13:07,440 --> 00:13:10,240 Speaker 2: for the sort of long run trajectory of our star. 251 00:13:10,400 --> 00:13:13,480 Speaker 2: Can you walk us through how your model actually differs 252 00:13:13,600 --> 00:13:15,719 Speaker 2: from some of the other models out there, because I 253 00:13:15,720 --> 00:13:18,280 Speaker 2: think that might help us to understand, you know, when 254 00:13:18,280 --> 00:13:21,760 Speaker 2: people say this is unobservable, or we're sort of staring 255 00:13:21,800 --> 00:13:24,679 Speaker 2: at the reflection of the economy trying to come up 256 00:13:24,720 --> 00:13:29,720 Speaker 2: with this hypothetical number, what we're actually doing or what 257 00:13:29,760 --> 00:13:31,080 Speaker 2: economists are actually doing. 258 00:13:31,600 --> 00:13:35,080 Speaker 6: Yeah, of course, So the conventional way, at least the 259 00:13:35,080 --> 00:13:37,920 Speaker 6: way that's been gained a lot of popularity over the 260 00:13:37,960 --> 00:13:41,280 Speaker 6: past couple of decades, has been the Lowback and William's 261 00:13:41,360 --> 00:13:43,280 Speaker 6: model of the natural rate of interest or neutual rate 262 00:13:43,320 --> 00:13:46,520 Speaker 6: of interest. And what they do is they look at 263 00:13:46,679 --> 00:13:49,680 Speaker 6: what's going on with inflation, what's going on with unemployment, 264 00:13:50,320 --> 00:13:52,839 Speaker 6: and they try to judge from that how far current 265 00:13:52,840 --> 00:13:55,520 Speaker 6: interest rates must be away from the neutral rate. So 266 00:13:55,960 --> 00:13:59,079 Speaker 6: if interest rates are very restrictive, very far away from 267 00:13:59,120 --> 00:14:01,480 Speaker 6: the neutral rate, inflation is going to be very low 268 00:14:01,920 --> 00:14:04,920 Speaker 6: and unemployment is going to be very high, and vice aversa. 269 00:14:05,520 --> 00:14:08,199 Speaker 6: And this has the benefit of giving you a feel 270 00:14:08,240 --> 00:14:10,760 Speaker 6: for what's going on right now based on observable data, 271 00:14:11,200 --> 00:14:13,520 Speaker 6: but it doesn't tell you anything about why the interest 272 00:14:13,600 --> 00:14:16,800 Speaker 6: rate is what it is or therefore where it may go. 273 00:14:17,240 --> 00:14:20,360 Speaker 6: And so what we tried to do was pin the 274 00:14:20,560 --> 00:14:24,440 Speaker 6: natural rate down by using some actual data and some theory. 275 00:14:24,520 --> 00:14:26,320 Speaker 6: So if we think about what the natural rate is, 276 00:14:26,440 --> 00:14:28,880 Speaker 6: what it is that determines well, it's the price of money, 277 00:14:29,400 --> 00:14:31,360 Speaker 6: and that's determined by in the same way as anything 278 00:14:31,400 --> 00:14:34,680 Speaker 6: else is determined by the supply and the demand. So 279 00:14:34,840 --> 00:14:37,240 Speaker 6: on the one hand, you've got investment demand and then 280 00:14:37,240 --> 00:14:39,760 Speaker 6: you've got the supply of savings, and when these two 281 00:14:39,840 --> 00:14:42,160 Speaker 6: things move, it shifts to the rate of interest. And 282 00:14:42,200 --> 00:14:46,520 Speaker 6: because of that fundamental theoretical understanding, you're able to think about, well, 283 00:14:46,560 --> 00:14:49,400 Speaker 6: what is it that determines investment, Why do people want 284 00:14:49,440 --> 00:14:52,240 Speaker 6: to invest, why do people want to save? What is 285 00:14:52,280 --> 00:14:55,400 Speaker 6: it about them or different types of people or different 286 00:14:55,400 --> 00:14:58,480 Speaker 6: age people that affects their saving behavior. And so you 287 00:14:58,520 --> 00:15:01,920 Speaker 6: go from that theory to these drivers of these theoretical 288 00:15:02,040 --> 00:15:04,800 Speaker 6: drivers of behavior, and then you can try and pin 289 00:15:04,840 --> 00:15:07,360 Speaker 6: it down empirically, and that's exactly what we did. So 290 00:15:07,360 --> 00:15:10,960 Speaker 6: we fed into this model what economists generally think are 291 00:15:10,960 --> 00:15:14,680 Speaker 6: the main drivers of these investment and saving decisions. So 292 00:15:14,760 --> 00:15:16,760 Speaker 6: there are quite a few of them, and then we 293 00:15:16,920 --> 00:15:20,840 Speaker 6: estimate their relationship with the interest rates over the sweep 294 00:15:20,840 --> 00:15:23,440 Speaker 6: of say fifty years, and that really was what supported 295 00:15:23,680 --> 00:15:26,240 Speaker 6: our results, and it allows us, of course then to 296 00:15:26,240 --> 00:15:28,000 Speaker 6: think about how those drivers may change. 297 00:15:28,440 --> 00:15:31,280 Speaker 4: Just keeping in my own trases mentioned in the beginning 298 00:15:31,360 --> 00:15:35,880 Speaker 4: of defining terms investment just sort of clear this is 299 00:15:35,920 --> 00:15:39,520 Speaker 4: like real investment, right, so this is hiring in Paul's 300 00:15:39,720 --> 00:15:42,600 Speaker 4: capital expense, Like, what does investment mean in your terms? 301 00:15:43,080 --> 00:15:46,960 Speaker 6: Yeah, so we're thinking specifically, actually the capital expenditure. OK, 302 00:15:47,240 --> 00:15:51,200 Speaker 6: so let's take an example like AI. So AI is great, 303 00:15:51,640 --> 00:15:53,880 Speaker 6: I can't do it on a Cassio calculator. I have 304 00:15:53,960 --> 00:15:56,960 Speaker 6: to buy something to make it work. I have to 305 00:15:57,000 --> 00:16:00,640 Speaker 6: spend money. I have to invest in chips in fabs 306 00:16:01,000 --> 00:16:04,440 Speaker 6: to reap the benefits of those frontier technologies. So as 307 00:16:04,560 --> 00:16:07,520 Speaker 6: AI lifts the growth rate of the economy, it also 308 00:16:07,640 --> 00:16:10,920 Speaker 6: raises the investment needs. And so this is one of 309 00:16:10,920 --> 00:16:13,000 Speaker 6: the linkages that we kind of explore, is like, what 310 00:16:13,080 --> 00:16:16,000 Speaker 6: is the relationship between overall growth in the economy and 311 00:16:16,040 --> 00:16:20,520 Speaker 6: productivity growth, the investment need that creates, and then therefore 312 00:16:20,560 --> 00:16:23,640 Speaker 6: the knock on consequence of interest rates. So whether it's 313 00:16:23,960 --> 00:16:29,520 Speaker 6: ICT revolution in the nineties, railroads, or anything else, these 314 00:16:29,560 --> 00:16:32,920 Speaker 6: things all have impacts on investment and therefore the natural 315 00:16:32,960 --> 00:16:33,640 Speaker 6: rates of interest. 316 00:16:33,840 --> 00:16:35,720 Speaker 4: And just to define the other term when you talk 317 00:16:35,720 --> 00:16:39,160 Speaker 4: about savings, because you know, in a sense of savings 318 00:16:39,480 --> 00:16:42,200 Speaker 4: long toil bank, et cetera. But this is the impulse 319 00:16:42,280 --> 00:16:46,320 Speaker 4: to have sort of liquidity right or at any given moment, 320 00:16:46,360 --> 00:16:49,920 Speaker 4: the various actors that desire to hold es centrally, dollar 321 00:16:50,080 --> 00:16:51,920 Speaker 4: or euro or whatever liquidity. 322 00:16:52,920 --> 00:16:54,800 Speaker 6: Yeah, that's right. I mean, I guess you can think 323 00:16:54,800 --> 00:16:59,480 Speaker 6: about it on the individual level. So I want to 324 00:16:59,480 --> 00:17:02,360 Speaker 6: save right now. As I get older, I'll want to 325 00:17:02,400 --> 00:17:04,800 Speaker 6: spend those savings in my retirement. So that's one of 326 00:17:04,840 --> 00:17:07,640 Speaker 6: the key drivers of saving behavior. China used to save 327 00:17:07,680 --> 00:17:10,800 Speaker 6: a lot, Now it saves a little. But state actors 328 00:17:11,000 --> 00:17:13,840 Speaker 6: also matter to the global supply of saving and investment. 329 00:17:13,960 --> 00:17:17,040 Speaker 6: So yes, it's everybody, and it touches on everything. Yeah. 330 00:17:17,119 --> 00:17:19,640 Speaker 2: One of the light bulb moments for me reading this 331 00:17:19,680 --> 00:17:23,600 Speaker 2: book was kind of touching the idea of generational warfare 332 00:17:24,000 --> 00:17:26,879 Speaker 2: and the idea that from the nineteen eighties onwards, baby 333 00:17:26,880 --> 00:17:30,040 Speaker 2: boomers started saving a lot, and so the supply of 334 00:17:30,080 --> 00:17:32,440 Speaker 2: savings went up and the neutral rate went down. And 335 00:17:32,480 --> 00:17:35,000 Speaker 2: that's the reason why I never earned interest on my 336 00:17:35,080 --> 00:17:40,560 Speaker 2: bank account until two years ago. Okay, serious question in 337 00:17:40,600 --> 00:17:44,040 Speaker 2: your model, what's the biggest driver of the neutral rate 338 00:17:44,080 --> 00:17:45,359 Speaker 2: actually going up in the future. 339 00:17:45,800 --> 00:17:49,760 Speaker 6: Well, and I'm model the main driver really is dissaving 340 00:17:49,800 --> 00:17:53,000 Speaker 6: by governments or spending by governments. So there are a 341 00:17:53,119 --> 00:17:54,920 Speaker 6: number of I mean, if you look at the recent past, 342 00:17:55,000 --> 00:17:57,680 Speaker 6: the experience of the pandemic, if you look at the 343 00:17:57,880 --> 00:17:59,920 Speaker 6: path of the deficit in the US and other countries, 344 00:18:00,320 --> 00:18:03,720 Speaker 6: then what we've learned is that government's like to spend 345 00:18:03,920 --> 00:18:06,560 Speaker 6: and they have continued to do so even though it's 346 00:18:06,600 --> 00:18:10,160 Speaker 6: become more costly. And a lot of that reflects politics. 347 00:18:10,200 --> 00:18:14,479 Speaker 6: Politics are fragmented. It's hard to get support around closing 348 00:18:14,480 --> 00:18:17,840 Speaker 6: budget deficits, and so governance has continue to spend, which 349 00:18:17,920 --> 00:18:21,160 Speaker 6: is tilting the balance between investment and saving the global economy. 350 00:18:21,440 --> 00:18:23,639 Speaker 6: And of course they have big outlays coming up. Defense 351 00:18:23,680 --> 00:18:26,639 Speaker 6: spending is going up in much of the advanced world. 352 00:18:26,920 --> 00:18:29,800 Speaker 6: The need to green the energy infrastructure again in some 353 00:18:29,840 --> 00:18:32,720 Speaker 6: parts of the world is also crimping saving and they're 354 00:18:32,800 --> 00:18:37,000 Speaker 6: just that fundamental point that you've got aging populations, increasing outlays, 355 00:18:37,040 --> 00:18:39,359 Speaker 6: for dealing with that, on health, for dealing with that, 356 00:18:39,480 --> 00:18:42,680 Speaker 6: on benefits and pensions, all of this is just making 357 00:18:42,720 --> 00:18:44,240 Speaker 6: it very difficult to keep spending down. 358 00:18:44,480 --> 00:18:47,560 Speaker 5: It also intersects with the argument which you kicked off 359 00:18:47,560 --> 00:18:51,080 Speaker 5: with Joe and Tracy from Stephen Myron. So Stephen Myron, 360 00:18:51,200 --> 00:18:54,199 Speaker 5: the new Fed Governor, has made the case that the 361 00:18:54,200 --> 00:18:56,800 Speaker 5: policies from the Trump administration are going to have a 362 00:18:56,800 --> 00:19:00,280 Speaker 5: big negative impact on the neutral rate of interest. That's 363 00:19:00,320 --> 00:19:04,800 Speaker 5: why he's advocating for very aggressive rate cuts to keep 364 00:19:04,840 --> 00:19:08,600 Speaker 5: policy accommodative. Now, the argument we make in our book 365 00:19:08,760 --> 00:19:12,200 Speaker 5: actually points in the opposite direction. Right, If you think 366 00:19:12,200 --> 00:19:16,080 Speaker 5: about the policies of the Trump administration, well, firstly, we've 367 00:19:16,080 --> 00:19:19,280 Speaker 5: got the One Big, Beautiful Bill which adds trillions and 368 00:19:19,320 --> 00:19:22,160 Speaker 5: trillions of dollars to government borrowing over the next decade. 369 00:19:22,480 --> 00:19:26,399 Speaker 5: That significantly pushes up the neutral rate of interest. And 370 00:19:26,440 --> 00:19:30,160 Speaker 5: if you think more broadly about Trump policies, well it's 371 00:19:30,280 --> 00:19:33,840 Speaker 5: kind of the end of the Grand Bargain which America 372 00:19:33,920 --> 00:19:36,640 Speaker 5: is struck with the world. Right, one way of thinking 373 00:19:36,720 --> 00:19:40,240 Speaker 5: about the last few decades is America said to the world, 374 00:19:40,960 --> 00:19:43,760 Speaker 5: we will buy your stuff and we will defend you, 375 00:19:44,560 --> 00:19:46,560 Speaker 5: but you have to finance us. You have to send 376 00:19:46,600 --> 00:19:50,080 Speaker 5: your saving to the United States by US treasuries. Well, 377 00:19:50,080 --> 00:19:52,800 Speaker 5: what the Trump administration now is saying is, well, we're 378 00:19:52,840 --> 00:19:54,680 Speaker 5: not going to buy your stuff and we're not going 379 00:19:54,720 --> 00:19:57,480 Speaker 5: to defend you. Right So it wouldn't be that surprising 380 00:19:57,520 --> 00:19:59,199 Speaker 5: if the rest of the world said, well, if you're 381 00:19:59,200 --> 00:20:00,639 Speaker 5: not going to buy our stuff, you're not going to 382 00:20:00,640 --> 00:20:03,919 Speaker 5: defend this, we're not going to finance you anymore. Right So, 383 00:20:04,400 --> 00:20:07,679 Speaker 5: Stephen Myron, who's a super smart, super articulate guy, and 384 00:20:07,680 --> 00:20:09,439 Speaker 5: if you've not had it on odd Lots already, you 385 00:20:09,440 --> 00:20:10,040 Speaker 5: should have. 386 00:20:10,080 --> 00:20:12,280 Speaker 3: The fan favorite episode. 387 00:20:12,040 --> 00:20:14,760 Speaker 5: Makes the case that the Trump administration has significantly lowered 388 00:20:14,920 --> 00:20:16,920 Speaker 5: the neutral rate of interest and that's why the Fed 389 00:20:17,000 --> 00:20:20,919 Speaker 5: needs to cut aggressively. The model which Jamie developed, the 390 00:20:21,080 --> 00:20:22,920 Speaker 5: argument we make in our book, actually points in the 391 00:20:22,920 --> 00:20:23,679 Speaker 5: opposite direction. 392 00:20:24,280 --> 00:20:26,639 Speaker 2: Yeah, on this note, do you get the sense that 393 00:20:26,880 --> 00:20:31,439 Speaker 2: central bankers, policymakers, economists sometimes use our star as a 394 00:20:31,480 --> 00:20:35,480 Speaker 2: crutch to justify whatever they're doing. Like, if you think 395 00:20:35,560 --> 00:20:37,560 Speaker 2: rates should be lower, then you can just argue that 396 00:20:37,640 --> 00:20:40,280 Speaker 2: our star is in fact low, and our star is 397 00:20:40,320 --> 00:20:43,719 Speaker 2: this unobservable thing that's based on your own estimates, So 398 00:20:43,920 --> 00:20:45,880 Speaker 2: you can argue about it, but no one's ever going 399 00:20:45,920 --> 00:20:49,040 Speaker 2: to prove what our star actually is. And if you 400 00:20:49,080 --> 00:20:51,520 Speaker 2: think that rates should be higher, then you just argue that, well, 401 00:20:51,560 --> 00:20:54,480 Speaker 2: actually something has structurally changed and the natural rate of 402 00:20:54,480 --> 00:20:57,439 Speaker 2: interest is in fact quite high. Do people use it 403 00:20:57,480 --> 00:20:58,880 Speaker 2: in that way? It feels like it. 404 00:21:00,320 --> 00:21:03,000 Speaker 6: One thing I suppose is with our star, you're never 405 00:21:03,000 --> 00:21:05,399 Speaker 6: beholden to a prediction, really, are you. So if you 406 00:21:05,480 --> 00:21:07,639 Speaker 6: say I think interest atech should be lower because the 407 00:21:07,680 --> 00:21:10,280 Speaker 6: economy is going to tank, and then the economy doesn't tank, 408 00:21:10,640 --> 00:21:12,199 Speaker 6: you just look like a bit of an idiot. But 409 00:21:12,240 --> 00:21:13,800 Speaker 6: if you say I think RAG should be lower because 410 00:21:13,800 --> 00:21:15,840 Speaker 6: our star is actually lower, then no one's ever going 411 00:21:15,880 --> 00:21:18,360 Speaker 6: to come along and say, oh, actually, you are completely wrong, 412 00:21:18,359 --> 00:21:20,360 Speaker 6: because I've got a refusable proof that our star will 413 00:21:20,400 --> 00:21:22,879 Speaker 6: actually in fact higher. So I think it's probably a 414 00:21:22,920 --> 00:21:25,280 Speaker 6: safe way to express your views if you just have 415 00:21:25,280 --> 00:21:27,159 Speaker 6: a belief, and in a belief that rates needs to 416 00:21:27,160 --> 00:21:29,840 Speaker 6: be lower, But it is perhaps one that's less easy 417 00:21:29,880 --> 00:21:30,280 Speaker 6: to help to. 418 00:21:30,240 --> 00:21:33,960 Speaker 4: Account when we talk about Trump policies and their effect 419 00:21:34,080 --> 00:21:37,560 Speaker 4: on our star. Another thing that I think about a 420 00:21:37,560 --> 00:21:41,440 Speaker 4: lot is you talk about this grand bargain following part 421 00:21:41,800 --> 00:21:46,080 Speaker 4: the trade and every country wanting to be increasingly more 422 00:21:46,200 --> 00:21:50,200 Speaker 4: self sufficient in various goods, which strikes me as something 423 00:21:50,200 --> 00:21:54,160 Speaker 4: that once again adds to the investment impulse. The US 424 00:21:54,320 --> 00:21:56,440 Speaker 4: is worried that maybe one day we won't be able 425 00:21:56,440 --> 00:22:00,520 Speaker 4: to rely on Taiwan friendships. Europe might be worry the 426 00:22:00,920 --> 00:22:03,240 Speaker 4: US may not be a great supplier for whatever the 427 00:22:03,320 --> 00:22:07,080 Speaker 4: US supplies to Europe, etc. Does this sort of fracturing 428 00:22:07,240 --> 00:22:10,000 Speaker 4: of global trade, which may or may not be happening, 429 00:22:10,400 --> 00:22:14,600 Speaker 4: contribute to a positive investment impulse in a sense and 430 00:22:14,720 --> 00:22:16,520 Speaker 4: therefore raise our star? 431 00:22:17,119 --> 00:22:17,320 Speaker 6: Yeah. 432 00:22:17,359 --> 00:22:19,680 Speaker 5: I think there's a couple of dynamics that work there, Joe. 433 00:22:19,760 --> 00:22:22,120 Speaker 5: So the first one is the one you mentioned. If 434 00:22:22,160 --> 00:22:25,240 Speaker 5: everyone wants to make their own stuff at home, then 435 00:22:25,280 --> 00:22:27,560 Speaker 5: clearly there has to be a massive amount of capital 436 00:22:27,600 --> 00:22:30,879 Speaker 5: spending so everyone can build their own everything. 437 00:22:31,160 --> 00:22:31,360 Speaker 3: Right. 438 00:22:31,760 --> 00:22:35,360 Speaker 5: We can't just have semiconductive fabs in Taiwan. We need 439 00:22:35,400 --> 00:22:39,800 Speaker 5: semiconductive fabs in Germany and Japan and the United States, 440 00:22:40,000 --> 00:22:43,000 Speaker 5: and that means there needs to be much more investment spending. 441 00:22:43,560 --> 00:22:46,800 Speaker 5: The second dynamic, and this is something which one of 442 00:22:46,840 --> 00:22:49,959 Speaker 5: our co authors, Dan Hanson, gets into in the book, 443 00:22:50,240 --> 00:22:54,600 Speaker 5: is around globalization and the cost of investment goods. Right, 444 00:22:55,080 --> 00:22:58,919 Speaker 5: think about how much more computing power you get for 445 00:22:58,960 --> 00:23:02,520 Speaker 5: your money today thing you did in nineteen eighty. Right, 446 00:23:02,560 --> 00:23:06,280 Speaker 5: There's just been a massive increase in productivity, a massive 447 00:23:06,359 --> 00:23:09,639 Speaker 5: increase in the amount of computing power you get for 448 00:23:10,040 --> 00:23:12,600 Speaker 5: a certain amount of money, and that means you don't 449 00:23:12,600 --> 00:23:16,480 Speaker 5: have to spend as much in order to buy investment goods. Well, 450 00:23:16,520 --> 00:23:19,879 Speaker 5: if globalization now breaks down and we come to the 451 00:23:20,040 --> 00:23:24,359 Speaker 5: end of that kind of productivity miracle in technology, well 452 00:23:24,800 --> 00:23:27,760 Speaker 5: that means that the cost of investment goods is going 453 00:23:27,800 --> 00:23:30,639 Speaker 5: to stop falling. You're going to need to pay more 454 00:23:31,000 --> 00:23:33,760 Speaker 5: to buy a certain amount of technology, a certain amount 455 00:23:33,800 --> 00:23:36,000 Speaker 5: of investment goods, and that is also going to be 456 00:23:36,040 --> 00:23:37,879 Speaker 5: a factor pushing up the natural ry. 457 00:23:38,760 --> 00:23:41,320 Speaker 2: So on a related note, we have had a number 458 00:23:41,400 --> 00:23:45,280 Speaker 2: of supply shocks in recent years, during the pandemic, during 459 00:23:45,480 --> 00:23:48,760 Speaker 2: the Russian invasion of Ukraine, all that stuff, which has 460 00:23:48,840 --> 00:23:51,160 Speaker 2: led a lot of governments to start thinking about how 461 00:23:51,200 --> 00:23:55,600 Speaker 2: to solve these sort of choke points or shortages in 462 00:23:55,640 --> 00:23:59,720 Speaker 2: the system. What does that actually mean for central bank policy? 463 00:24:00,119 --> 00:24:03,120 Speaker 2: If perhaps the neutral rate of interest is going up 464 00:24:03,359 --> 00:24:06,400 Speaker 2: because of these supply shocks because you need more investment. 465 00:24:06,880 --> 00:24:10,119 Speaker 2: But at the same time, the central bank raising rates 466 00:24:10,200 --> 00:24:14,359 Speaker 2: doesn't necessarily produce more wheat or more shipping capacity and 467 00:24:14,400 --> 00:24:17,040 Speaker 2: things like that. How should central banks respond? 468 00:24:17,440 --> 00:24:21,879 Speaker 6: There are obviously going to be periods where inflation just 469 00:24:21,920 --> 00:24:25,000 Speaker 6: moves higher because of the supply shocks you mentioned, I think, 470 00:24:25,320 --> 00:24:27,879 Speaker 6: and we should expect those to happen with increasing frequency. 471 00:24:28,040 --> 00:24:28,280 Speaker 1: Right. 472 00:24:28,400 --> 00:24:31,040 Speaker 6: So climate change is going to make it harder to 473 00:24:31,080 --> 00:24:34,280 Speaker 6: produce stuff, it's going to make food price shocks more common, 474 00:24:34,760 --> 00:24:38,920 Speaker 6: it's going to create other distortions which hit production. So 475 00:24:39,080 --> 00:24:42,160 Speaker 6: central banks in the future will perhaps have to keep 476 00:24:42,200 --> 00:24:46,600 Speaker 6: interest rates higher anyway, just to kind of prevent those 477 00:24:46,640 --> 00:24:50,720 Speaker 6: shocks from feeding through to inflation expectations and therefore keeping 478 00:24:50,720 --> 00:24:53,439 Speaker 6: inflation away from targets. Is because supply shocks really are 479 00:24:53,480 --> 00:24:56,760 Speaker 6: very different from demand shocks. As you guys know, I'm sure, 480 00:24:56,800 --> 00:25:00,119 Speaker 6: and you know, history was dominated at least in the 481 00:25:00,200 --> 00:25:02,840 Speaker 6: last couple of decades by demand shots, and now we're 482 00:25:02,840 --> 00:25:05,680 Speaker 6: seeing a world which is dominated increasingly by suppier shocks. 483 00:25:05,680 --> 00:25:07,679 Speaker 6: And actually it's just a different playbook for central banks. 484 00:25:08,119 --> 00:25:10,000 Speaker 5: I agree with all of that. I think there's also 485 00:25:10,040 --> 00:25:12,879 Speaker 5: another dynamic for central banks which is also going to 486 00:25:12,880 --> 00:25:16,680 Speaker 5: be a force for higher interest rates going forwards. And 487 00:25:16,720 --> 00:25:20,120 Speaker 5: that's the challenge to central bank independence. Right We've talked 488 00:25:20,160 --> 00:25:23,600 Speaker 5: about Stephen Myron coming onto the Board of Governors at 489 00:25:23,640 --> 00:25:26,800 Speaker 5: the FED. Well, guess what he's still holding onto his 490 00:25:27,160 --> 00:25:30,280 Speaker 5: position as the chair of the Council of Economic Advisors, 491 00:25:30,600 --> 00:25:35,200 Speaker 5: senior member of Donald Trump's economic policy team. Having someone 492 00:25:35,280 --> 00:25:39,840 Speaker 5: from the President's team serve on the FED concurrently, that's 493 00:25:39,960 --> 00:25:44,359 Speaker 5: unprecedented going back to nineteen thirty six and raises significant 494 00:25:44,400 --> 00:25:48,520 Speaker 5: questions about FED independence and so the Fed's credibility as 495 00:25:48,560 --> 00:25:52,080 Speaker 5: an inflation fighter. Right now, we've not really seen this 496 00:25:52,200 --> 00:25:55,600 Speaker 5: in markets so far. Markets have been paying surprisingly little 497 00:25:55,640 --> 00:25:59,080 Speaker 5: attention to this dynamic. But if the FED does lose 498 00:25:59,119 --> 00:26:01,639 Speaker 5: its independence, if the FED does lose its credibility as 499 00:26:01,640 --> 00:26:04,919 Speaker 5: an inflation fighter, then markets are going to start demanding 500 00:26:05,240 --> 00:26:10,119 Speaker 5: an additional premium to hold long term US treasury debt. Right, So, 501 00:26:10,160 --> 00:26:13,880 Speaker 5: you're going to have all of these structural forces, less saving, 502 00:26:14,400 --> 00:26:17,720 Speaker 5: more investment. You're going to have the greater preponderance of 503 00:26:17,800 --> 00:26:21,399 Speaker 5: supply shocks, which Jamie spoke about as an additional driver 504 00:26:21,480 --> 00:26:24,720 Speaker 5: of higher inflation, and you're going to have risks to 505 00:26:25,160 --> 00:26:29,000 Speaker 5: FED independence. And all of these are forces which are 506 00:26:29,000 --> 00:26:31,639 Speaker 5: going to be pushing up long term borrowing costs for 507 00:26:31,640 --> 00:26:34,159 Speaker 5: the US Treasury, and because the treasury rate is the 508 00:26:34,200 --> 00:26:38,119 Speaker 5: anchor for global markets, also pushing up borrowing costs for 509 00:26:38,119 --> 00:26:38,760 Speaker 5: everybody else. 510 00:26:54,960 --> 00:26:59,040 Speaker 4: Even setting aside the sort of formal risks to FED independent, 511 00:26:59,520 --> 00:27:02,160 Speaker 4: there are other ERUs who question the degree to which 512 00:27:02,240 --> 00:27:06,040 Speaker 4: the FED still takes its own two percent inflation targeting 513 00:27:06,520 --> 00:27:09,840 Speaker 4: targets seriously, including our own colleague here, Anna Wong, who 514 00:27:09,920 --> 00:27:11,800 Speaker 4: says implicitly, if you look at what's going on, it 515 00:27:11,800 --> 00:27:14,280 Speaker 4: looks like they're no longer targeting two percent. They're targeting 516 00:27:14,320 --> 00:27:17,480 Speaker 4: two point eight percent. Tim Dewey, an economist we've had, says, 517 00:27:17,600 --> 00:27:20,320 Speaker 4: you know what, as long as inflation is below three percent, 518 00:27:20,680 --> 00:27:23,679 Speaker 4: we think the FED is mostly concerned about the labor 519 00:27:23,760 --> 00:27:28,240 Speaker 4: side of the mandate. So, setting aside Myron's role or 520 00:27:28,320 --> 00:27:32,000 Speaker 4: Trump's truth social posts, when you look at markets, is 521 00:27:32,040 --> 00:27:34,240 Speaker 4: there this sort of growing belief that the FED just 522 00:27:34,280 --> 00:27:37,560 Speaker 4: does not take two percent as seriously as once it did. 523 00:27:38,320 --> 00:27:38,480 Speaker 6: Yees. 524 00:27:38,520 --> 00:27:42,080 Speaker 5: So it's a powerful argument which Anna, our chiefs economist, makes, 525 00:27:42,280 --> 00:27:47,200 Speaker 5: and part of that argument is that this divergence between 526 00:27:47,760 --> 00:27:49,960 Speaker 5: what the FED should be doing if they take two 527 00:27:49,960 --> 00:27:54,800 Speaker 5: percent inflation seriously, and what they're actually doing didn't start 528 00:27:54,840 --> 00:27:58,639 Speaker 5: under Trump. It started under Biden. And actually it was 529 00:27:58,680 --> 00:28:00,960 Speaker 5: those rate cuts in the run up to the twenty 530 00:28:01,040 --> 00:28:05,200 Speaker 5: twenty four election which were the beginning of the FED 531 00:28:05,600 --> 00:28:12,199 Speaker 5: diverging from a kind of pure apolitical tailor rule path. Right. So, 532 00:28:12,800 --> 00:28:15,399 Speaker 5: as I'm sure you've seen Joe and Tracy, there's not 533 00:28:15,600 --> 00:28:20,399 Speaker 5: much which Republicans and Democrats agree on in America right now. 534 00:28:20,880 --> 00:28:25,520 Speaker 5: One point of bipartisan consensus, unfortunately, is that there's too 535 00:28:25,600 --> 00:28:27,200 Speaker 5: much politics in the FED. 536 00:28:27,720 --> 00:28:30,600 Speaker 3: Tracy. Someone once told me that the two things. 537 00:28:30,320 --> 00:28:33,600 Speaker 4: That everyone agrees on, by the way, in America are 538 00:28:33,640 --> 00:28:36,760 Speaker 4: that Dolly Partner is good and that Epstein didn't kill himself. 539 00:28:36,920 --> 00:28:39,240 Speaker 4: We can add a third that there is too much 540 00:28:39,280 --> 00:28:42,800 Speaker 4: politics in monetary policy making. So the three points of 541 00:28:42,920 --> 00:28:44,040 Speaker 4: bipartisan agreement. 542 00:28:44,160 --> 00:28:47,000 Speaker 2: That's going to be my new conversation starter at dinners 543 00:28:47,120 --> 00:28:49,400 Speaker 2: for everyone. Just ask them if they think there's too 544 00:28:49,480 --> 00:28:53,960 Speaker 2: much politics in FED policy. Okay, Joe mentioned markets just then. So, 545 00:28:54,160 --> 00:28:56,480 Speaker 2: I think when people think of the era of low 546 00:28:56,600 --> 00:29:00,600 Speaker 2: interest rates and low natural rates, people think about high 547 00:29:00,680 --> 00:29:04,000 Speaker 2: asset prices. Right there tends to be a correlation there. 548 00:29:04,240 --> 00:29:07,520 Speaker 2: If the price of money is going up, what does 549 00:29:07,560 --> 00:29:09,560 Speaker 2: that actually mean for asset prices. 550 00:29:09,720 --> 00:29:12,400 Speaker 6: Well, it kind of depends on the reason. And as 551 00:29:12,560 --> 00:29:14,800 Speaker 6: we sort of talks about earlier about the kind of 552 00:29:14,880 --> 00:29:19,280 Speaker 6: role of AI, Well, AI can raise equity values because 553 00:29:19,840 --> 00:29:22,960 Speaker 6: it's a frontier technology that's going to potentially transform the 554 00:29:22,960 --> 00:29:25,240 Speaker 6: way the economy operates and create lots of profits along 555 00:29:25,240 --> 00:29:27,600 Speaker 6: the way. It's also going to suck in a load 556 00:29:27,600 --> 00:29:30,200 Speaker 6: of capital and make it less available for others, which 557 00:29:30,240 --> 00:29:32,720 Speaker 6: is going to drive up interest rates. So if that's 558 00:29:32,760 --> 00:29:35,440 Speaker 6: the source you can see this world continuing. You can 559 00:29:35,480 --> 00:29:38,320 Speaker 6: see that interest rates will continue to rise as investments 560 00:29:38,440 --> 00:29:43,200 Speaker 6: sucked into the AI nexus. But if someone's the actual 561 00:29:43,240 --> 00:29:45,800 Speaker 6: promise is realized, you see equity values going up as well, 562 00:29:45,800 --> 00:29:49,080 Speaker 6: which is kind of a slightly unusual arrangement. But then 563 00:29:49,080 --> 00:29:52,320 Speaker 6: we don't have technological revolutions every day. 564 00:29:52,480 --> 00:29:54,200 Speaker 4: I'm glad you brought up there, because I wanted to 565 00:29:54,200 --> 00:29:57,120 Speaker 4: go there. You know, I've seen Jason Furman, he has 566 00:29:57,240 --> 00:30:01,200 Speaker 4: characterized AI spending as being almost quae fiscal in nature 567 00:30:01,280 --> 00:30:04,680 Speaker 4: because it has this we haven't got the productivity payoff yet, 568 00:30:04,680 --> 00:30:07,280 Speaker 4: but there's this incredible flood of money coming in, so 569 00:30:07,360 --> 00:30:09,560 Speaker 4: it sort of has this perhaps crowding out effect. 570 00:30:09,920 --> 00:30:11,440 Speaker 3: Neil kash Kari gave an. 571 00:30:11,360 --> 00:30:15,560 Speaker 4: Interesting posted I guess there's a blog post called three Questions. 572 00:30:15,600 --> 00:30:17,640 Speaker 4: I think he posted it last week, but he talks 573 00:30:17,680 --> 00:30:21,240 Speaker 4: about our star about how this higher neutral rate of 574 00:30:21,280 --> 00:30:25,920 Speaker 4: interest may be appropriate given the intense pace of AI 575 00:30:26,040 --> 00:30:29,840 Speaker 4: investment that's going on, but also it may not be appropriate, 576 00:30:29,880 --> 00:30:32,320 Speaker 4: you know, for the housing sector. That's not what's bringing 577 00:30:32,360 --> 00:30:34,160 Speaker 4: to balance, and we see this decline. Could there be 578 00:30:34,200 --> 00:30:36,520 Speaker 4: two our stars? Could there be this our star that's 579 00:30:36,560 --> 00:30:39,840 Speaker 4: sort of the high tech economy booming, but it's not 580 00:30:40,000 --> 00:30:42,400 Speaker 4: the our star that brings the rest of the economy 581 00:30:42,440 --> 00:30:43,000 Speaker 4: into balance. 582 00:30:43,720 --> 00:30:45,840 Speaker 6: It's a good question, Jay, and I think people do 583 00:30:45,880 --> 00:30:49,240 Speaker 6: you think about this concept quite a lot, in the 584 00:30:49,280 --> 00:30:52,000 Speaker 6: sense that there's a maybe there's an our star which 585 00:30:52,080 --> 00:30:54,840 Speaker 6: keeps the economy balanced, and maybe there's an our star 586 00:30:54,960 --> 00:30:58,080 Speaker 6: which keeps the financial sector and financial markets balanced and 587 00:30:58,400 --> 00:31:01,240 Speaker 6: not getting carried away with themselves. And there's no guarantee 588 00:31:01,320 --> 00:31:03,080 Speaker 6: or in a particular reason to think that they should 589 00:31:03,080 --> 00:31:06,240 Speaker 6: be the same, which implies then that you've got this 590 00:31:06,320 --> 00:31:08,680 Speaker 6: policy trade off you've got what's good for the economy 591 00:31:08,720 --> 00:31:11,040 Speaker 6: may not be good for financial stability, and so that's 592 00:31:11,040 --> 00:31:13,240 Speaker 6: another thing for central banks to be grappling with in 593 00:31:13,240 --> 00:31:13,840 Speaker 6: the years to come. 594 00:31:14,560 --> 00:31:16,920 Speaker 5: So I was trying to remember, I was grasping for 595 00:31:16,960 --> 00:31:19,880 Speaker 5: that famous quote from I Think is it Benjamin Strong, 596 00:31:20,080 --> 00:31:23,120 Speaker 5: the head of the FED in the late late nineteen twenties, 597 00:31:23,680 --> 00:31:26,800 Speaker 5: and he said something like, must the FED be responsible 598 00:31:26,800 --> 00:31:29,880 Speaker 5: for all the problems in the economy? If I have 599 00:31:29,920 --> 00:31:32,440 Speaker 5: to set an interest rate for all the different sectors separately, 600 00:31:32,480 --> 00:31:35,320 Speaker 5: it's like spanking all of my children individually. 601 00:31:34,920 --> 00:31:38,880 Speaker 2: Or something like that, Oh dear. When it comes to 602 00:31:38,920 --> 00:31:42,520 Speaker 2: the composition of investment, one topic that gets a lot 603 00:31:42,520 --> 00:31:46,800 Speaker 2: of attention nowadays is the idea of dedollarization and perhaps 604 00:31:46,840 --> 00:31:50,960 Speaker 2: people buying fewer US assets, perhaps people choosing to hedge 605 00:31:51,400 --> 00:31:54,440 Speaker 2: those US assets, And we have seen some very big 606 00:31:54,480 --> 00:31:59,040 Speaker 2: buyers of securities, like foreign central banks actually slow down 607 00:31:59,080 --> 00:32:03,320 Speaker 2: their purchases of US treasuries or US mortgage bonds and 608 00:32:03,400 --> 00:32:07,320 Speaker 2: things like that. How would that affect the neutral rate 609 00:32:07,440 --> 00:32:11,040 Speaker 2: of interest if you know, there's less money flowing into 610 00:32:11,440 --> 00:32:13,720 Speaker 2: dollars specifically, or dollar assets. 611 00:32:14,160 --> 00:32:16,080 Speaker 5: So I think there's a number of reasons why we 612 00:32:16,160 --> 00:32:19,600 Speaker 5: would expect less money flowing into dollars, right. So one 613 00:32:19,640 --> 00:32:23,160 Speaker 5: really big reason is that China has changed its FX policy. 614 00:32:23,640 --> 00:32:27,040 Speaker 5: For more than a decade, China was pegging the yuan 615 00:32:27,120 --> 00:32:30,560 Speaker 5: to the dollar, and that meant the PBAC needed to 616 00:32:31,160 --> 00:32:35,600 Speaker 5: hoover up the whole trade surplus and park that in 617 00:32:35,640 --> 00:32:41,080 Speaker 5: treasuries to stop the yuan appreciating. Second big important reason 618 00:32:41,560 --> 00:32:45,560 Speaker 5: is that shift in the Grand Bargain between the US 619 00:32:45,880 --> 00:32:48,719 Speaker 5: and the rest of the world. Think about how the 620 00:32:48,840 --> 00:32:54,440 Speaker 5: US and Europe acted to freeze rushes FX reserves following 621 00:32:54,640 --> 00:32:58,440 Speaker 5: Putin's full scale invasion of Ukraine. That's a kind of 622 00:32:58,680 --> 00:33:01,760 Speaker 5: shift in the Grand bargain in and it tells Russia 623 00:33:02,000 --> 00:33:07,120 Speaker 5: but also everybody else. Guess what, There's geopolitics in the dollar, right, 624 00:33:07,360 --> 00:33:09,960 Speaker 5: and if you put your assets in the United States, 625 00:33:10,200 --> 00:33:13,120 Speaker 5: there's a risk you might lose them. And of course 626 00:33:13,160 --> 00:33:17,520 Speaker 5: the tariffs themselves are a factor. That huge hiking tariffs 627 00:33:17,520 --> 00:33:20,840 Speaker 5: that we saw on Liberation Day, well that's the US 628 00:33:20,960 --> 00:33:23,680 Speaker 5: saying we're going to play a smaller part in the 629 00:33:23,720 --> 00:33:27,200 Speaker 5: global trade system in the future. And if the US 630 00:33:27,280 --> 00:33:28,959 Speaker 5: is going to play a smaller part in the global 631 00:33:28,960 --> 00:33:33,080 Speaker 5: trade system, well, the utility of holding dollars as a 632 00:33:33,120 --> 00:33:37,080 Speaker 5: way of settling important export transactions goes down. So there's 633 00:33:37,120 --> 00:33:41,560 Speaker 5: a lot of reasons to be concerned about this dedollarization trend. 634 00:33:41,680 --> 00:33:44,160 Speaker 5: And Jamie may have a more sophisticated way of thinking 635 00:33:44,160 --> 00:33:47,920 Speaker 5: about this than me, But basically, I think about buying 636 00:33:47,960 --> 00:33:52,640 Speaker 5: dollars and buying treasuries has pretty strongly correlated in this context. 637 00:33:52,920 --> 00:33:55,640 Speaker 5: So if the rest of the world is dedollarizing, that 638 00:33:55,760 --> 00:33:59,000 Speaker 5: also means they're buying less US treasuries. That means less 639 00:33:59,000 --> 00:34:02,480 Speaker 5: demand for US treasure, and so it's another force pushing 640 00:34:02,840 --> 00:34:04,800 Speaker 5: US borrowing costs higher. 641 00:34:05,560 --> 00:34:08,279 Speaker 6: I think all that is all entirely true. And I 642 00:34:08,280 --> 00:34:10,319 Speaker 6: guess one thing when you're trying to think next to 643 00:34:10,400 --> 00:34:14,560 Speaker 6: the linkage with global borrowing costs is what happens to 644 00:34:14,640 --> 00:34:18,080 Speaker 6: those savings instead. Now, if you can't find anywhere else 645 00:34:18,200 --> 00:34:21,279 Speaker 6: any other assets to buy in place of US treasuries, 646 00:34:21,640 --> 00:34:23,400 Speaker 6: what are you going to do? Well, quite possibly you 647 00:34:23,440 --> 00:34:25,560 Speaker 6: will end up spending them. And particularly if you think 648 00:34:25,600 --> 00:34:28,080 Speaker 6: about the giopilisical context, you think about the impact of 649 00:34:28,120 --> 00:34:30,799 Speaker 6: tariff's on China, for example, well, now there's actually an 650 00:34:30,840 --> 00:34:33,920 Speaker 6: extra incentive to spend more. And if you think about it, 651 00:34:34,000 --> 00:34:37,200 Speaker 6: in those terms. Then actually that policy itself is going 652 00:34:37,280 --> 00:34:40,520 Speaker 6: to shift the international balance of investment in saving again 653 00:34:40,560 --> 00:34:43,120 Speaker 6: away from savings, partly because it's just too hard to 654 00:34:43,120 --> 00:34:43,440 Speaker 6: save them. 655 00:34:43,440 --> 00:34:47,400 Speaker 4: An US save my computer just for a force reboot. 656 00:34:47,400 --> 00:34:49,040 Speaker 4: I had a great charte on most streams, but now 657 00:34:49,080 --> 00:34:53,879 Speaker 4: I can't look at it. But December twenty seventh or whatever, 658 00:34:53,920 --> 00:34:56,759 Speaker 4: the last day of trading was. In twenty nineteen, the 659 00:34:56,880 --> 00:34:59,600 Speaker 4: US tenure was about one point eight and today it's 660 00:34:59,640 --> 00:35:02,880 Speaker 4: probably four point one two percent. Maybe both of you 661 00:35:03,840 --> 00:35:06,560 Speaker 4: list your five reasons in order. I know this, the 662 00:35:06,640 --> 00:35:09,120 Speaker 4: tenure is not the our star, but you know, for 663 00:35:09,200 --> 00:35:12,760 Speaker 4: our purposes for podcast talk, we could just sort. 664 00:35:12,560 --> 00:35:14,279 Speaker 2: Of our star is everywhere. 665 00:35:14,400 --> 00:35:17,560 Speaker 4: Yeah, like R five for both of you, in order 666 00:35:17,640 --> 00:35:20,680 Speaker 4: ranked the five major things or however men you want 667 00:35:20,760 --> 00:35:25,560 Speaker 4: to that have contributed most significantly to this regime change 668 00:35:25,760 --> 00:35:26,480 Speaker 4: or price change. 669 00:35:27,080 --> 00:35:30,280 Speaker 5: Maybe I'll take the easy ones and force hard ones. 670 00:35:30,360 --> 00:35:35,680 Speaker 5: So here's my three. So firstly, it's demographics. For decades, 671 00:35:35,719 --> 00:35:39,520 Speaker 5: we had the baby boomers in prime working age saving 672 00:35:39,560 --> 00:35:43,680 Speaker 5: money for retirement. That pushed the neutral rate down. Now 673 00:35:43,719 --> 00:35:47,520 Speaker 5: they're retiring, spending down their savings. That's a powerful force 674 00:35:47,600 --> 00:35:51,840 Speaker 5: pushing the neutral rate up. Second is debt for decades 675 00:35:52,080 --> 00:35:56,080 Speaker 5: from the nineteen eighties to the global financial crisis, borrowing 676 00:35:56,160 --> 00:35:59,600 Speaker 5: from the US and from other major advanced economies. Leaving 677 00:35:59,600 --> 00:36:03,840 Speaker 5: a side, Japan was low and stable. Since the global 678 00:36:03,840 --> 00:36:07,319 Speaker 5: financial crisis, and again since the COVID pandemic, there's been 679 00:36:07,320 --> 00:36:10,560 Speaker 5: a massive increase in government borrowing. And when there's more 680 00:36:10,560 --> 00:36:13,800 Speaker 5: government borrowing, that pushes the natural rate of interest higher. 681 00:36:14,000 --> 00:36:18,640 Speaker 5: And then the third deglobalization. So one of the factors 682 00:36:18,719 --> 00:36:23,520 Speaker 5: driving neutral rates lower was that ben Bernanke savings glut hypothesis, 683 00:36:24,000 --> 00:36:28,440 Speaker 5: Chinese saving, Petro States saving from Saudi and others heading 684 00:36:28,480 --> 00:36:32,759 Speaker 5: into the United States. The forces of deglobalization have now 685 00:36:32,840 --> 00:36:38,080 Speaker 5: brought that to an end, so conveniently three d's demographics, debt, 686 00:36:38,440 --> 00:36:41,320 Speaker 5: deglobalization all pushing neutral rates higher. 687 00:36:41,680 --> 00:36:43,759 Speaker 2: Very good, Jamie, you have to beat that now. 688 00:36:44,239 --> 00:36:46,400 Speaker 6: I think I'd only had one extra to be honest, 689 00:36:46,480 --> 00:36:48,680 Speaker 6: and that's Ai. So we when we were putting Pen's 690 00:36:48,719 --> 00:36:52,080 Speaker 6: paper for the book, chat GPT wasn't really a thing. 691 00:36:52,360 --> 00:36:54,640 Speaker 6: That's when we started out. By the time we published 692 00:36:54,680 --> 00:36:57,120 Speaker 6: the book, it's very much a thing. And I think 693 00:36:57,239 --> 00:36:59,960 Speaker 6: we can already see that the transformational impact that's having 694 00:37:00,280 --> 00:37:03,680 Speaker 6: on the investment landscape. Whether that has a transformational impact 695 00:37:03,719 --> 00:37:07,120 Speaker 6: on the economic landscape remains to be seen, but I 696 00:37:07,120 --> 00:37:09,320 Speaker 6: think that is now playing out faster than we thought. 697 00:37:09,400 --> 00:37:12,520 Speaker 6: We had a scenario in our book about what that 698 00:37:12,560 --> 00:37:15,680 Speaker 6: could do to the natural rate. No surprise pushes it up, 699 00:37:16,120 --> 00:37:17,600 Speaker 6: and I think we're actually in a world now with 700 00:37:17,680 --> 00:37:19,320 Speaker 6: that scenario is basically coming to pass. 701 00:37:19,600 --> 00:37:21,799 Speaker 4: I'm going to help everyone out here with a little 702 00:37:21,800 --> 00:37:30,120 Speaker 4: bit of marketing. So, Tom, you mentioned the three d's debt, demographics, deglobalization, AI, 703 00:37:30,239 --> 00:37:32,840 Speaker 4: we can rebrand as data centers, so that's a fourth D. 704 00:37:33,200 --> 00:37:35,120 Speaker 4: And then the fifth one which you guys talked about 705 00:37:35,120 --> 00:37:37,560 Speaker 4: but you didn't hit your list, and that is defense spending. 706 00:37:38,000 --> 00:37:40,480 Speaker 4: So really we can talk about the five to five 707 00:37:40,560 --> 00:37:46,399 Speaker 4: d's debt, demographics, deglobalization, data centers, and defense. This week 708 00:37:46,440 --> 00:37:48,400 Speaker 4: we've come to something we could really market this. I 709 00:37:48,440 --> 00:37:50,840 Speaker 4: think the four of us together, the five d's that 710 00:37:50,920 --> 00:37:53,480 Speaker 4: have caused the price of money to get so much 711 00:37:53,560 --> 00:37:55,080 Speaker 4: higher in the last six. 712 00:37:55,000 --> 00:37:58,080 Speaker 2: Years, Well, that can be the next book, yeah, although 713 00:37:58,080 --> 00:37:59,799 Speaker 2: the current one talks a lot about all of these. 714 00:38:00,560 --> 00:38:02,799 Speaker 3: I think that could be the title. 715 00:38:02,520 --> 00:38:03,320 Speaker 2: Of this episode. 716 00:38:03,680 --> 00:38:06,439 Speaker 3: The five d's, the five d's causing up the price 717 00:38:06,440 --> 00:38:08,399 Speaker 3: for money. Yeah, yeah, that would work. 718 00:38:08,800 --> 00:38:09,160 Speaker 6: Okay. 719 00:38:09,239 --> 00:38:11,799 Speaker 2: Well, on that note, Tom and Jamie, thank you so 720 00:38:11,880 --> 00:38:14,040 Speaker 2: much for joining Odd Thoughts. Really appreciate it. 721 00:38:14,280 --> 00:38:15,560 Speaker 3: Thank you so much. That was great. 722 00:38:15,840 --> 00:38:18,960 Speaker 5: Thanks so much for having us Jakes, Boys of Bust Pleasure. 723 00:38:19,000 --> 00:38:32,839 Speaker 6: Thanks coming Joe. 724 00:38:32,840 --> 00:38:35,520 Speaker 2: That was very fun. Always a fun time having our 725 00:38:35,560 --> 00:38:38,000 Speaker 2: Bloomberg Economics colleagues on the podcast. 726 00:38:38,400 --> 00:38:40,600 Speaker 3: I think I'm mar star pilled. I believe in it now. 727 00:38:40,760 --> 00:38:42,719 Speaker 4: I believe that there is some number that if only 728 00:38:42,760 --> 00:38:46,040 Speaker 4: we could stare at it directly, we could kind of 729 00:38:46,120 --> 00:38:47,200 Speaker 4: bring things into balance. 730 00:38:47,280 --> 00:38:49,680 Speaker 2: I think it's a useful concept, yeah, for sure. And 731 00:38:49,719 --> 00:38:51,560 Speaker 2: it's something to aim for. And it's kind of a 732 00:38:51,600 --> 00:38:54,680 Speaker 2: framework under which, like an umbrella under which you can 733 00:38:54,719 --> 00:38:59,000 Speaker 2: put all your thoughts about the economy. Basically that said, 734 00:38:59,719 --> 00:39:02,920 Speaker 2: I mean, Tom and Jamie and Stephanie lay out a 735 00:39:03,000 --> 00:39:05,400 Speaker 2: very convincing argument from why they think our Star is 736 00:39:05,400 --> 00:39:07,799 Speaker 2: going to be higher in the future. Meanwhile, you have 737 00:39:07,840 --> 00:39:11,960 Speaker 2: people like Myrone arguing the exact opposite. We can debate 738 00:39:12,080 --> 00:39:15,400 Speaker 2: whether it's convincing or not, but it does feel like 739 00:39:16,320 --> 00:39:19,080 Speaker 2: our Star is not a method of achieving consensus. Let's 740 00:39:19,120 --> 00:39:19,879 Speaker 2: just put it that way. 741 00:39:20,120 --> 00:39:20,640 Speaker 3: No, it's not. 742 00:39:20,800 --> 00:39:25,279 Speaker 4: But and to your point, if you can't make an 743 00:39:25,400 --> 00:39:29,080 Speaker 4: argument for either our star going higher or lower in 744 00:39:29,160 --> 00:39:32,720 Speaker 4: the future, it's like an intelligence test. Any intelligent person 745 00:39:32,760 --> 00:39:34,239 Speaker 4: should be able to argue both sides. 746 00:39:34,280 --> 00:39:35,520 Speaker 2: Yeah, exactly, exactly. 747 00:39:35,719 --> 00:39:38,840 Speaker 4: You could always come up with an eloquent, nice sounding 748 00:39:38,960 --> 00:39:39,920 Speaker 4: argument for any direction. 749 00:39:40,000 --> 00:39:40,560 Speaker 3: This is true. 750 00:39:40,680 --> 00:39:42,520 Speaker 4: The one thing I'll say is that while our star 751 00:39:42,640 --> 00:39:46,040 Speaker 4: may not truly be observable, et cetera, and maybe there 752 00:39:46,080 --> 00:39:48,920 Speaker 4: isn't one number that satisfies the whole economy. 753 00:39:49,040 --> 00:39:49,680 Speaker 3: What's that line? 754 00:39:49,760 --> 00:39:51,759 Speaker 4: It's like all models are fake, but some are at 755 00:39:51,840 --> 00:39:55,000 Speaker 4: least useful. It strikes me that it may be a 756 00:39:55,040 --> 00:39:58,440 Speaker 4: fake concept, but a useful concept, and that plugging some 757 00:39:58,520 --> 00:40:02,200 Speaker 4: of these factors in, can we anticipate about where defense 758 00:40:02,239 --> 00:40:05,080 Speaker 4: spending is going to go? What can we anticipate about 759 00:40:05,280 --> 00:40:09,440 Speaker 4: the nature of savings or spending decisions among an aging population? 760 00:40:09,840 --> 00:40:11,680 Speaker 4: These are useful things to try to wrap our head 761 00:40:11,680 --> 00:40:14,640 Speaker 4: around it. And maybe this could be a useful exercise, 762 00:40:14,960 --> 00:40:17,360 Speaker 4: even if the underlying concept is still like a little 763 00:40:17,800 --> 00:40:18,000 Speaker 4: you know. 764 00:40:18,120 --> 00:40:20,160 Speaker 2: Yeah, except that a lot of people argue that the 765 00:40:20,200 --> 00:40:22,799 Speaker 2: models are garbage too. No, of course, except for this 766 00:40:22,840 --> 00:40:25,360 Speaker 2: one obviously is for everything. 767 00:40:25,400 --> 00:40:27,239 Speaker 4: But I'm just saying, like, I mean, you just go 768 00:40:27,360 --> 00:40:31,400 Speaker 4: total nihilists and think that the profession of economics is nonsense. 769 00:40:31,440 --> 00:40:34,399 Speaker 4: But it does strike me as useful to say there 770 00:40:34,480 --> 00:40:36,680 Speaker 4: is going to be a lot more spending here because 771 00:40:36,719 --> 00:40:39,319 Speaker 4: real reasons that are happening. What is that going to 772 00:40:39,400 --> 00:40:41,880 Speaker 4: do to the availability of money or capital or whatever. 773 00:40:42,080 --> 00:40:44,760 Speaker 2: I think that makes sense. Although one thing I would 774 00:40:44,800 --> 00:40:47,799 Speaker 2: like to see more study of is like maybe not 775 00:40:47,840 --> 00:40:50,680 Speaker 2: necessarily our star and whether it's too high or too low, 776 00:40:50,760 --> 00:40:54,040 Speaker 2: but like the actual impact of interest rates on economic growth, 777 00:40:54,040 --> 00:40:56,960 Speaker 2: like the sensitivity of growth to rate. 778 00:40:57,200 --> 00:40:59,400 Speaker 4: It's a great question, and that's I think one of 779 00:40:59,440 --> 00:41:02,719 Speaker 4: the other big sort of mysteries of the last several years, Yeah, 780 00:41:02,719 --> 00:41:05,279 Speaker 4: which is, how do you get the biggest interest rake 781 00:41:05,520 --> 00:41:09,759 Speaker 4: hike in decades and the growth trajectory barely budges and 782 00:41:09,800 --> 00:41:13,799 Speaker 4: the employment trajectory barely budges. These are like things, you know, 783 00:41:13,920 --> 00:41:17,000 Speaker 4: I think a lot of people would have thought in retrospect, oh, 784 00:41:17,040 --> 00:41:19,480 Speaker 4: we're definitely going to go to recession with this rapid 785 00:41:19,520 --> 00:41:22,880 Speaker 4: base of rad hikes. The degree to which policy actually 786 00:41:22,880 --> 00:41:26,960 Speaker 4: affects the real economy in predictable ways highly contested. 787 00:41:27,120 --> 00:41:30,040 Speaker 2: Yeah, well maybe that can be Tom and Jamie's next book. Yeah, 788 00:41:30,120 --> 00:41:31,200 Speaker 2: all right, shall we leave it there? 789 00:41:31,280 --> 00:41:31,960 Speaker 3: Let's leave it there. 790 00:41:32,120 --> 00:41:34,799 Speaker 2: This has been another episode of the Oudlots podcast. I'm 791 00:41:34,800 --> 00:41:37,960 Speaker 2: Tracy Alloway. You can follow me at Tracy Alloway. 792 00:41:37,640 --> 00:41:40,400 Speaker 4: And I'm Joe Wisenthal. You can follow me at the Stalwart. 793 00:41:40,600 --> 00:41:42,680 Speaker 4: Check out the book The Price of Money from our 794 00:41:42,719 --> 00:41:46,719 Speaker 4: colleagues Jamie Rush, Tom Orlick, and Stephanie Flanders. Follow our 795 00:41:46,760 --> 00:41:50,440 Speaker 4: producers Carmen Rodriguez at Carman armand Dashel Bennett at dashbod 796 00:41:50,520 --> 00:41:53,280 Speaker 4: and Cail Brooks at Cail Brooks. For more Oddloss content, 797 00:41:53,320 --> 00:41:55,480 Speaker 4: go to Bloomberg dot com slash odd Lots, where the 798 00:41:55,560 --> 00:41:58,279 Speaker 4: daily newsletter and all of our episodes, and you can 799 00:41:58,360 --> 00:42:00,400 Speaker 4: chat about all of these topics twenty four seven in 800 00:42:00,440 --> 00:42:03,360 Speaker 4: our discord Discord do gg slash offline. 801 00:42:03,480 --> 00:42:05,759 Speaker 2: And if you enjoy odd Lots, if you like it 802 00:42:05,800 --> 00:42:08,560 Speaker 2: when we talk about what our star actually is, then 803 00:42:08,600 --> 00:42:11,719 Speaker 2: please leave us a positive review on your favorite podcast platform. 804 00:42:12,000 --> 00:42:14,759 Speaker 2: And remember, if you are a Bloomberg subscriber, you can 805 00:42:14,800 --> 00:42:18,000 Speaker 2: listen to all of our episodes absolutely ad free. All 806 00:42:18,040 --> 00:42:20,239 Speaker 2: you need to do is find the Bloomberg channel on 807 00:42:20,320 --> 00:42:24,120 Speaker 2: Apple Podcasts and follow the instructions there. Thanks for listening.