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Speaker 1: Ye, Welcome to the Bloomberg Surveillance podcast. I'm Tom Keane.

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Speaker 1: Daily we bring you insight from the best in economics, finance, investment,

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Speaker 1: and international relations. Find Bloomberg Surveillance on Apple Podcasts, SoundCloud,

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Speaker 1: Bloomberg dot Com, and of course on the Bloomberg. Let's

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Speaker 1: begin with Paul Donovan. He is the chief economist for IT.

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Speaker 1: You bys joining us from London. Paul Donovan, thank you

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Speaker 1: very much for being with us. Um. Your most recent

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Speaker 1: note has to do with, as you describe it, the

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Speaker 1: Italian job, and you counsel that everyone needs to take

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Speaker 1: a deep breath and calm down. All right, So now

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Speaker 1: that we've calmed down, what should we know? Well, I

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Speaker 1: think what we should know first and foremost is that

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Speaker 1: no one is suggesting that this ely should leave the Euro.

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Speaker 1: Neither of the anti establishment parties are suggesting it, and

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Speaker 1: certainly none of the establishment parties are suggesting it. So

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Speaker 1: any thought that that there's going to be some kind

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Speaker 1: of existential crisis for the Euro, I think needs to

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Speaker 1: be dismissed. While we have got here is a good

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Speaker 1: old fashioned Italian political crisis. And you know what, they're

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Speaker 1: not that rare. We've had seventy years of this. What

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Speaker 1: we have is unstable government and lots of internal politics

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Speaker 1: going on in Rome. Well, what's so wrong about having

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Speaker 1: a country that's in the European Union that doesn't use

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Speaker 1: the euro. There's nothing wrong with having somebody in the

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Speaker 1: EU which doesn't use the Euro. The UK occupied that

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Speaker 1: position and will continue to occupy that position until next March.

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Speaker 1: But joining a monetary union and then leaving that's different.

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Speaker 1: Monitory unions are like hotel call or you you can

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Speaker 1: check out, but you can never leave. Um, because if

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Speaker 1: you break up a month for union, the prospects of

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Speaker 1: of what that does to the economy is extraordinarily destructive. Um,

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Speaker 1: you are defaulting on your debt, you are creating bank runs,

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Speaker 1: instability and the financial system. You're wiping out the value

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Speaker 1: of people's savings. And there's no coincidence that in almost

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Speaker 1: every single monetary union breakup of the twentieth century we

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Speaker 1: either ended up with extreme civil disturbance or civil war,

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Speaker 1: or we ended up with authoritarian governments in some parts

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Speaker 1: of the untary Union. So we're just not going to

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Speaker 1: see this happen. UM. You know, once you're in, you're in.

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Speaker 1: You can't mess around with the value of people's savings,

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Speaker 1: the value of your debt, the value of your obligations

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Speaker 1: and so forth. So there's no way that you could

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Speaker 1: maintain the current status quo of having your savings in

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Speaker 1: euros and debts denominated in euros. You couldn't have a

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Speaker 1: dual currency situation as they have in other economies of

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Speaker 1: the world, like Panama for example. No, absolutely not, because

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Speaker 1: you're starting from a position here where you know it.

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Speaker 1: It's all very well saying okay, well we'll keep Italy's

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Speaker 1: debt denominated in euros, but we'll tax in lira. Well,

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Speaker 1: where do you think the value with the new lira

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Speaker 1: is going to be against the euro if if you

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Speaker 1: Italy were to leave the the Eurozone. The other point

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Speaker 1: to bear in mind, if you don't just leave the euro.

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Speaker 1: If you leave the Euro you automatically leave the EU.

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Speaker 1: You're breaking the Treaty of Rome, which is the founding

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Speaker 1: institution and the constitution of the European Union. You know,

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Speaker 1: if you're out, you're out um and that then becomes

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Speaker 1: extraordinarily problematic. Pass So much of this comes back to

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Speaker 1: economic growth. I mentioned earlier, folks on television. The Guardian

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Speaker 1: Overnight has a wonderful article and the austerity of the

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Speaker 1: United Kingdom, and within that, Paul is maybe the austerity

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Speaker 1: of Europe, or certainly just the stri having for economic growth.

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Speaker 1: And yet things are better in Europe. That's been one

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Speaker 1: of our themes this morning. Is Europe free and clear

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Speaker 1: from the eurosclerosis of another time in place. I think

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Speaker 1: that by and large, yes, Europe has emerged from the

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Speaker 1: recession that came in really from two thousand and ten

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Speaker 1: onwards in the case of the Eurozone, UM, but there

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Speaker 1: are some problems with that. So we've got two essential problems.

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Speaker 1: Problem number one is Italy. Unfortunately, whilst Italy has done better,

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Speaker 1: it's still legged behind the rest of Europe, and its

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Speaker 1: banking system is a big part of that problem as well,

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Speaker 1: where bank lending has persisted UM as a negative force

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Speaker 1: in the in the Italian economy. And then the second

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Speaker 1: issue is that whilst cyclically I think Europe has recovered, structually,

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Speaker 1: there are still challenges. The Europe doesn't work properly. We

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Speaker 1: know that, but to be honest, I in the U S.

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Speaker 1: Dollars and work properly either, and the pound sterling has

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Speaker 1: one or two issues. But we're not making enough structural

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Speaker 1: effort to make the euro work better. There are other

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Speaker 1: impediments to growth across the Eurozone, which also needs structural adjustment.

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Speaker 1: So I think in a technical sense, absolutely Europe is

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Speaker 1: on a better track, and there are some structural improvements

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Speaker 1: as well, but it's not necessarily on a very very

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Speaker 1: strong projection for growth over the medium term. I mean

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Speaker 1: within this in you know, the projection and growth in

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Speaker 1: Italy is a distraction. Is how it redounds over to

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Speaker 1: the US markets. I mean, we're gonna open up today.

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Speaker 1: I think pim things are going to be better. I mean,

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Speaker 1: that's the basic idea in the market tone right now.

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Speaker 1: Part down, I'm and explain to our US audience why

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Speaker 1: they should care about Italy. Well, I think you should

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Speaker 1: care about Italy a bit. I don't think you need

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Speaker 1: to get over excited about it, although that may be

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Speaker 1: a little bit late to be saying now, but I

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Speaker 1: think you need to care about it a bit because

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Speaker 1: it is an important part of what is still the

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Speaker 1: world's largest economy. The world's argist economy is not, I'm

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Speaker 1: afraid to say, the United States. The world's largest economy

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Speaker 1: is the European Union. Um at least until the British

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Speaker 1: leave it. And so it's an important part of an

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Speaker 1: important market. Europe is very important to the US as

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Speaker 1: an export destination. And remember the the S and P

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Speaker 1: is not a US equity index, not at all. The

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Speaker 1: SMP is a global equity index where companies are earning

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Speaker 1: money through manufacturing, through providing services, and through trading globally.

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Speaker 1: So that's why Italy doesn't matter. But Paul, let me

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Speaker 1: just challenge you here when you talk about the European

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Speaker 1: Union is one economy. You don't have consistent banking laws,

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Speaker 1: you don't have consistent immigration laws, and you know as

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Speaker 1: well as anyone you talk to people from Italy, they're

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Speaker 1: not even interested in the Italian dead crisis, the amount

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Speaker 1: of money that their government owes. And most Italians that

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Speaker 1: you talk to will tell you that unless you have

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Speaker 1: either a family business or you have some sinecure, you're

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Speaker 1: living at home waiting for someone to hire you, or

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Speaker 1: you're going abroad because that's where the opportunity is. Well, yes,

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Speaker 1: I mean Europe has differences, um in between you know

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Speaker 1: the national states. Of course it does, although those differences

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Speaker 1: have lessons over time, um. But then Frankly, there are

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Speaker 1: a lot of differences between say, Texas and New York.

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Speaker 1: The polarization of the United States, and indeed the declining

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Speaker 1: led mobility in the United States is a different economic challenge.

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Speaker 1: So I don't think we should be too concerned about this. Um.

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Speaker 1: And Northern Italy, at least, cell has a very dynamic economy. Um.

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Speaker 1: You know, the southern Italy is a is a somewhat

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Speaker 1: different issue. But Northern Italy remains a very dynamic place

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Speaker 1: in which to do business. And and I think this

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Speaker 1: is an important point to remember. We should bear in

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Speaker 1: mind that Italy is one of the wealthiest countries on

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Speaker 1: the planet, far wealthier than Germany is, say, and this

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Speaker 1: is an important saving growth because Italians own a lot

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Speaker 1: of their own debt and that reduces the damage over time.

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Speaker 1: Paul One come in and this comes folks as Mr

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Speaker 1: Soros's team sends me the transcript of his important speech yesterday.

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Speaker 1: Very cautious and the European Experiment, Pod Donovan, some how

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Speaker 1: you would push against George Soros's gloom and your Europe.

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Speaker 1: I think that there is still a degree of optimism

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Speaker 1: about Europe. I think Europe has a number of advantages

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Speaker 1: which are likely to become more important as we go

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Speaker 1: through the changes of the Fourth Industrial Revolution and and

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Speaker 1: so on and so forth. An aging population, which Europe has,

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Speaker 1: becomes less of an economic problem as we get in

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Speaker 1: robotics and automation, because you know what, you can operate

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Speaker 1: a robot at the age of eighty just as well

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Speaker 1: as you can operate it at the age of eighteen.

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Speaker 1: So an aging population becomes of an issue. The skills

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Speaker 1: and talents that Europe has, the education system which had

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Speaker 1: its laws, but you know it provides good caliber education.

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Speaker 1: That's the plus as well. So I think there are

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Speaker 1: reasons to be optimistic over the medium term, not to

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Speaker 1: downplay the challenges, but there you know, we don't need

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Speaker 1: to be in a doomed spiral. It's not that bad

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Speaker 1: to inspiral. Paul Dunavan, thank you so much with you

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Speaker 1: BS greatly appreciate the effort from their zeroch offices on

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Speaker 1: this morning. We're gonna do it now, folks with Italy

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Speaker 1: on the brain, and of course a huge market moves

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Speaker 1: yesterday to talk to a gentleman who can synthesize Italy

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Speaker 1: for what it means for Europe, what it means for

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Speaker 1: the United Kingdom and what it means for America. That's

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Speaker 1: sunny comp actually hugely qualified to synthesize international relations and

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Speaker 1: political economics. He's with redefined, but that barely disguise describes

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Speaker 1: his portfolio of knowledge on his Europe. Sonny, wonderful day

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Speaker 1: have you with this this morning? The Cynic, not that

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Speaker 1: that would be moi, but the Cynic would say, this

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Speaker 1: is just normal Italy. They've gone through like forty seven

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Speaker 1: million governments since World War Two. What's different now, Sonny?

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Speaker 1: What is different in Italy now versus all the other

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Speaker 1: previous collapses? Well, for one, we had got used to

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Speaker 1: an unusual period in Italy's recent history. And for all

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Speaker 1: that we criticized Silvio Belusconi, the one thing he gave

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Speaker 1: Italy was stable government. I think him alone brought down

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Speaker 1: the brought up the average tenure of Italian prime ministers significantly,

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Speaker 1: and him and Matteo Renzy and and the next prime minister.

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Speaker 1: And now it seems that the old days are back,

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Speaker 1: and I think that seems to be the single biggest problem.

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Speaker 1: Before Italy had sort of the pulling effect of the

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Speaker 1: membership of the Eurodic convergence, et cetera. And now that

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Speaker 1: positive influence has gone, the fear is that they may

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Speaker 1: continue to diverge from Germany and France. As a task

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Speaker 1: for the postible year, my colleagues, Sonny pim Fox observed

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Speaker 1: today that the Italian government of Rome is essentially removed

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Speaker 1: from the Italian people. Describe the linkage emotionally the Italian

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Speaker 1: people to their Italian federal system. Well, Italy is I mean,

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Speaker 1: before you go down to the to the region level,

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Speaker 1: I mean it is essentially two separate economic zones cobbled

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Speaker 1: into one, which explains the rise of the League which

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Speaker 1: used to be called the Northern League, and it's primarily

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Speaker 1: from the far more sort of Germanic northern part of Italy,

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Speaker 1: which has been growing where gdpeoper capita has actually been growing,

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Speaker 1: which has where unemployment is low and sort of work

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Speaker 1: culture institutions a sort of much better developed, it's quite

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Speaker 1: Germanic in nature, whereas the southern half of fy Uh

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Speaker 1: is lagging behind economically, and a lot of what you

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Speaker 1: see at the macro level outside and the political divisions, etcetera,

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Speaker 1: are the fact that there are these two economically fairly

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Speaker 1: distinct entities cobbled together into one country and they just

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Speaker 1: can't get their act together. There in lies the big contradiction,

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Speaker 1: and that is why the political instipidity we are seeing

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Speaker 1: now is not likely to go away any time soon.

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Speaker 1: This is going to be with us for for a

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Speaker 1: while to come a stain. It does. Does Italy embody

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Speaker 1: the contradictions that bedeviled the European Union as a whole.

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Speaker 1: At one level, Um, it's both sort of the best

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Speaker 1: and the worst of Europe. If you look at the

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Speaker 1: quality of life, if you look at the cultural richness,

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Speaker 1: life expectancy, most things actually worked pretty well, um. And

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Speaker 1: the quality of life for most people is still pretty

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Speaker 1: fantastic compared to most other places in the world. But

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Speaker 1: it is falling behind. And you know, from Roman times

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Speaker 1: it's been a story of study decline, which has accelerated

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Speaker 1: in the last century. And that is I think also

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Speaker 1: one of the reasons why it is highly unlikely that

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Speaker 1: Italians will ever choose to leave the euro or the

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Speaker 1: European Union. This is the sort of last vestige of greatness,

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Speaker 1: pretensions to greatness, of being part of this core European

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Speaker 1: Union as a founding member. Otherwise, if you look at

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Speaker 1: what happened, you know, in the World Wars. What happened

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Speaker 1: since then? France, Germany and the UK have defined the

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Speaker 1: destiny of where Europe has gone. Italy has only had

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Speaker 1: a marginal role, whereas historically it used to be the

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Speaker 1: exact opposite. And Italy sort of his desperately sticking to

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Speaker 1: be part of the Euro which is the core of

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Speaker 1: the European Union, because it still sees itself as a

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Speaker 1: great European power um and it's unlikely that that will change.

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Speaker 1: Italy being thrown out or choosing to leave the EU

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Speaker 1: would be the end of that pretension. And I don't

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Speaker 1: think it's Ouian. The ready for that is the is

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Speaker 1: the Euro or proxy for the former deutsch Mark. Sadly yes,

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Speaker 1: uh be. Given the weight of the German economy. And

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Speaker 1: there's old thing you've heard before. Germany is too small

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Speaker 1: for the world and too large for Europe. Are too

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Speaker 1: many of Euro related policies are driven by Germany's economic weight,

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Speaker 1: And the problem is that the older, larger economies, and

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Speaker 1: that includes Germany and Transtant to some extent Italy, what

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Speaker 1: they need in monetary policy is very different from what

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Speaker 1: some younger, more dynamic economies need which need to catch up,

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Speaker 1: and the Euro will always never be able to provide

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Speaker 1: the right monetary policy for any of the country. Sonny,

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Speaker 1: let me ask you an unfair question for your remit

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Speaker 1: of international relations. But let's pretend you're a market effect

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Speaker 1: strategist right now to Pims, good question. If we're at

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Speaker 1: one sixteen, which is right where we were well at

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Speaker 1: the advent of the euro. If Italy was to leave,

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Speaker 1: where would the euros for Germany like a one forty

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Speaker 1: one thirty one? Probably not all that hype, but it

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Speaker 1: would definitely the direction of the move will be very

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Speaker 1: care it will be significantly higher than where it is now.

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Speaker 1: Let's leave it there, Sonny, thank you so much. Great brief,

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Speaker 1: Sonny Kopor with this is redefined and filtering in international

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Speaker 1: relations in a lot of the market. You know, I

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Speaker 1: just want to underscore what you just described, what would

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Speaker 1: happen in the value of the EU, because I don't

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Speaker 1: think most people recognize the value of the Euro would

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Speaker 1: actually increase. We are speaking with Megan Green, managing director,

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Speaker 1: chief economist MANU Life Investments, and Megan, I'm wondering whether

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Speaker 1: officials in Berlin and in Brussels, they've been rather silent

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Speaker 1: about what's going on in Italy. Do you think that

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Speaker 1: there are somehow rushed meetings behind closed doors asking themselves

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Speaker 1: what do we do with Greece? Part two? Yeah, so

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Speaker 1: I think they're definitely talking about it, but what can

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Speaker 1: they do? Right? So, back in two eleven, if you recall,

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Speaker 1: the e c B sent a letter to Rome saying

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Speaker 1: get your fiscal house in order, um. Berlsconi had to

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Speaker 1: leave a few days later, and off the back of that,

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Speaker 1: actually Berlin gave the e c B permission essentially to

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Speaker 1: to give the whatever it takes speech and eventually unleash

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Speaker 1: QUI only because Italy had proven it was going to

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Speaker 1: be fiscally responsible this time around. You know, Frankfurt and

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Speaker 1: Berlin and Brussels can't really pull that because if they do,

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Speaker 1: if they end up pushing out any government that is

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Speaker 1: eventually formed, um, that will just symbol in the Populace,

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Speaker 1: that will play out in the populace hands, and so

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Speaker 1: in the next election then you can only expect more

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Speaker 1: support for Populace. So they're kind of hamstrung in that sense.

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Speaker 1: The ECB has come out and said, you know, Italy

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Speaker 1: would be wise to remember the rules and to reread

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Speaker 1: them um, which is a bit of a kind of warning.

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Speaker 1: But that's all they've said. I think that suggests the

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Speaker 1: ECP is just going to sit by and watch what happens.

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Speaker 1: As long as there isn't significant contagion outside of Italy,

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Speaker 1: they're going to try to let the market impost some

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Speaker 1: discipline on Italian politicians. Let us turn to America and

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Speaker 1: within all the data, Megan, I saw four point two

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Speaker 1: percent nominal GDP. I guess that's a little dampened inflation

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Speaker 1: combined with okay, real g d P. Is that politically

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Speaker 1: acceptable in America to have a run rate of four

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Speaker 1: point whatever nominal um? So fundamentally, when you're looking at

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Speaker 1: GDP and recoveries, especially in the US, you have to

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Speaker 1: ask whose recovery it really is and whose growth is this?

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Speaker 1: And there's you know, huge and increasing inequality. So is

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Speaker 1: that an acceptable run rate? It is for some, it's

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Speaker 1: certainly not for all, And I think it's the lower

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Speaker 1: classes that won't be lifted by that kind of growth.

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Speaker 1: Does have fed adapt to that to your good observation

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Speaker 1: of two America's or three America's. So no, not really,

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Speaker 1: I don't think. Um. The FED sort of fed that

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Speaker 1: in part with quantitative easing, so lifting up asset prices

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Speaker 1: so that only those who actually hold those assets really

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Speaker 1: benefit from it. Um. You know they're keen to They've

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Speaker 1: they've stopped buying up assets. They're reinvesting them still, but

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Speaker 1: they're shrinking their balance sheet. UM. They're not really keen

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Speaker 1: to fire up KUWI in the next down turn if

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Speaker 1: they can avoid it. For this exact reason, the FED

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Speaker 1: doesn't want to be in the headlines being told that

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Speaker 1: they're responsible for rising inequality in the US. So I

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Speaker 1: think that they would like to shrink away from that.

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Speaker 1: I've got a headline here, Pim and Megan would be

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Speaker 1: perfect to talk to. Maybe you already did this, uh,

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Speaker 1: Wilburt Ross says, US trade process already bearing good results.

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Speaker 1: Mr Ross, our Secretary of Commerce, says, quote U US

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Speaker 1: in a situation of asymmetrical tariffs, Megan, what are asymmetrical terroriffts?

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Speaker 1: That's a great question. UM. I think it just suggests

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Speaker 1: that we're imposing more tariffs than UM other countries and

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Speaker 1: they're imposing on us. Of course that that doesn't actually

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Speaker 1: mean anything. UM. In a global economy of countries that

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Speaker 1: are really good at making some things and not good

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Speaker 1: at making other things, so they specialize. UM, And so

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Speaker 1: everybody's not making the same goods and services, So you

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Speaker 1: shouldn't have symmetric tariffs. Anyhow, that doesn't make any sense. UM.

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Speaker 1: This argument that we're you know, our trade policy is

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Speaker 1: already paying off. I think UM is probably economically illiterate. UM.

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Speaker 1: Tariffs only introduced rigidities into an economy and create dead

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Speaker 1: weight losses, and so nobody really wins in the end

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Speaker 1: from that kind of trade war. UM imposing tariffs someone another.

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Speaker 1: Can I just say I thought you were going to

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Speaker 1: and I appreciate the answer, but I thought that where

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Speaker 1: you were going with, as you said, a headline was

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Speaker 1: a tweet from the President of the United States. No, well,

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Speaker 1: he's just about five minutes ago. UM, he's speaking on

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Speaker 1: Twitter and writing, UM, sort of channeling Representative Trey Goudy

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Speaker 1: talking about Senator Sessions. Uh. Well yes, but in the

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Speaker 1: tweet is referred to as Senator Sessions, UM, and the

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Speaker 1: quote is, oh, by the way, I'm not going to

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Speaker 1: be able to participate in the most important case in

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Speaker 1: the office, meaning Attorney General Sessions. I would be frustrated too,

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Speaker 1: And that's how I read that, Senator Sessions, why didn't

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Speaker 1: you tell me before I picked you? And that is

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Speaker 1: followed by a tweet that says, there are lots of

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Speaker 1: really good lawyers in the country. He could have picked

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Speaker 1: somebody else end quote, and then Donald Trump, President Trump writes,

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Speaker 1: and I wish I did exclamation point. So I just

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Speaker 1: thought I would you know. I'm glad you shared that

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Speaker 1: because that's important within the moment by moment tick of Washington.

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Speaker 1: Kevin Curlier thought was really quite good today on the

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Speaker 1: broad set of issues. Has the president's attention? I don't

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Speaker 1: I don't want to derailed up. Well, we're talking economics here,

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Speaker 1: and Megan, you've been so good at explaining basic stuff.

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Speaker 1: Paul Krugman has written whatever anybody thinks of the laureates politics,

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Speaker 1: brilliant macroeconomics of trade and this dreaded phrase deadweight loss.

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Speaker 1: What is a deadweight loss to America when we when

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Speaker 1: we impose tariffs? Yeah, So the ideas every time you

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Speaker 1: introduce a rigidity like a tariff or a subsidy in

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Speaker 1: an economy, um, some parts of your economy benefits. UM.

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Speaker 1: So the government, for example, will be able to collect

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Speaker 1: more taxes um. If tariffs are imposed um and you know,

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Speaker 1: the other producers of that good will benefit because they

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Speaker 1: have less competition, But then a whole bunch of actors

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Speaker 1: will lose out. So consumers are the obvious case here

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Speaker 1: because they'll end up having to pay more for these

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Speaker 1: goods um. And so it did we loss is kind

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Speaker 1: of the balance of that there are more losers than

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Speaker 1: there are winners. And within that, in within the modern economy,

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Speaker 1: if we do tariffs on a certain products, say it's automobiles,

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Speaker 1: and China adjust, they adjust for all the other countries

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Speaker 1: as well when they adjust their terrorists. It's not just

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Speaker 1: about American auto manufacturers, is it. No, that's right, Um,

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Speaker 1: that's absolutely right. And in the same way, when you

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Speaker 1: know China agrees to buy more of our goods, it's

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Speaker 1: not like we're going to produce more as a result.

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Speaker 1: We're just going to sell more to them and sell

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Speaker 1: less to others as well, So it all ends up

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Speaker 1: being kind of a a zero weight. These are the

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Speaker 1: complexities of certitude of simplicity. Certitude of simplicity. Wow, people

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Speaker 1: that don't know what they're talking about, who we won't mention,

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Speaker 1: but maybe that would include me say stupid simple things,

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Speaker 1: where Megan is working in a more complex and dynamic range.

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Speaker 1: I just want to bring up one topic that is

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Speaker 1: perhaps more prosaic, and this has to do with the

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Speaker 1: cost of energy, specifically the cost of gasoline, because if

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Speaker 1: you've been driving around the United States, you know that

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Speaker 1: the cost of gasoline has increased now, albeit it is

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Speaker 1: very inexpensive compared to what most of the world ends

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Speaker 1: up paying. Having said that, do you believe that the

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Speaker 1: increase in the cost of gasoline is going to create

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Speaker 1: any kind of economic dread. Yeah, so that's a great question.

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Speaker 1: I think to answer it, we should look at what

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Speaker 1: happened when oil prices fell significantly UM a couple of

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Speaker 1: years ago, and we thought that would be a huge

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Speaker 1: stimulus for the economy, and in the end, people just

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Speaker 1: drove a bit more and households repaired their balance sheets

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Speaker 1: so it went into savings and they pay down some

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Speaker 1: of their debt, which was a good medium to long

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Speaker 1: term dynamic, but didn't boost growth. UM. I think now

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Speaker 1: that oil prices are going up, we're probably seeing the

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Speaker 1: inverse of that, So I think households are having to

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Speaker 1: leverage up a bit and they're just driving less. I

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Speaker 1: don't think it's a huge headwind. Part of it depends

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Speaker 1: on how along this last, and I think it could

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Speaker 1: last for quite a while. UM, so far, I don't

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Speaker 1: think it's a huge head win on headwin on growth.

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Speaker 1: I think it does mean that consumers are maybe just

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Speaker 1: leveraging up more and so might be tapped out sooner. Megan,

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Speaker 1: Thank you so much. Megan Green with Manuel Life in

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Speaker 1: which John Hancock greatly appreciate your attendance today. Megan Green

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Speaker 1: writing worldwide. You can see her work writing world bode

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Speaker 1: as well. Right now, Michael Faroli, we continue with Dr

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Speaker 1: Feroli of JP Morgan here on the American economy. Michael,

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Speaker 1: I was looking at Atlanta Federaliser Bank of Atlanta wage growth,

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Speaker 1: their wage tracker, and I took out inflation and I'm sorry,

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Speaker 1: real wages, inflation adjusted wages have a tinge of the

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Speaker 1: United Kingdom to us, are we gonna get real wage growth?

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Speaker 1: It's there, but come on, it's fractional. Well, this kind

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Speaker 1: of brings us back to our other conversations productivity growth,

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Speaker 1: which is in principle, Uh, if you know of corporate

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Speaker 1: the labor share is going to be roughly constant, which

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Speaker 1: it hasn't been. But if it is just for are

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Speaker 1: you misake, then real wages should grow at the pace

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Speaker 1: of productivity growth. And productivity growth, you know, it's been averaging,

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Speaker 1: you know, recently maybe a little closer to one percent,

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Speaker 1: but on a longer term people below one percent, then

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Speaker 1: it's going to be hard to sustainably get real wages

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Speaker 1: up to two or three percent. Okay, but what's great here, folks,

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Speaker 1: And this is out of the boost school of Chicago.

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Speaker 1: We're feroughly dark in the door. Your idea of political

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Speaker 1: economics of Chicago is to take more micro economics. We

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Speaker 1: get that, but but within the politics, what politician of

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Speaker 1: whatever flavor and ever party can do politics in America

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Speaker 1: with subpar real wage growth? The answers, that's a crisis

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Speaker 1: every day for a politician, isn't it. Yeah, us, I think, uh,

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00:27:01,520 --> 00:27:04,000
Speaker 1: this is you know, it's no. I don't think it's

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00:27:04,000 --> 00:27:07,399
Speaker 1: any coincidence that we've had rise of populous parties all

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Speaker 1: over the place in the wake of the Great Recession,

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00:27:10,680 --> 00:27:13,080
Speaker 1: and that wage growth for ten years has been pretty

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00:27:13,359 --> 00:27:16,359
Speaker 1: close to stagnant, and that you see that kind of

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00:27:16,400 --> 00:27:19,800
Speaker 1: frustrations start to boil up and the choice of people

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00:27:19,840 --> 00:27:22,960
Speaker 1: make in the balance box. Um. You know, perhaps at

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00:27:23,040 --> 00:27:28,520
Speaker 1: some point expectations, uh, you know, reset themselves to what

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00:27:28,800 --> 00:27:32,639
Speaker 1: is actually deliverable from the economy. But I think, you know,

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00:27:32,760 --> 00:27:35,680
Speaker 1: we're living in the shadow of the post war period

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00:27:35,720 --> 00:27:39,160
Speaker 1: when we had much stronger real wage growth and productivity growth.

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00:27:39,480 --> 00:27:42,440
Speaker 1: How long it takes to reset expectations, I think it's

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00:27:42,520 --> 00:27:45,399
Speaker 1: really hard to say, but it certainly seems to be

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00:27:45,440 --> 00:27:49,520
Speaker 1: one of the facts contributing to um the darker mood,

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00:27:49,600 --> 00:27:53,040
Speaker 1: and I think that's that affected some, uh, some of

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00:27:53,080 --> 00:27:56,560
Speaker 1: the politics around the world. Michael Faroli. We also live

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00:27:56,600 --> 00:27:59,399
Speaker 1: in the shadow of huge treasury supply, and I'm wondering

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00:27:59,400 --> 00:28:03,720
Speaker 1: if you can explain what that increase in supply means

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00:28:03,840 --> 00:28:07,040
Speaker 1: when everyone is looking at a yield curve and wondering

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00:28:07,119 --> 00:28:11,639
Speaker 1: whether it will or won't be inverted. Yeah. So I

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00:28:11,720 --> 00:28:14,360
Speaker 1: think that's a really tough question. You know. We there's

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00:28:14,400 --> 00:28:15,760
Speaker 1: been a lot a lot of work done on the

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00:28:16,600 --> 00:28:18,680
Speaker 1: how much crowding out there is, which is to say,

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Speaker 1: when we increase more treasuries to get people to buy

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00:28:22,080 --> 00:28:25,399
Speaker 1: that you need some kind of price concession and higher yields. Um,

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00:28:26,080 --> 00:28:30,720
Speaker 1: we'd probably guess based on variety of econometric studies that

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00:28:30,880 --> 00:28:34,480
Speaker 1: the kind of increase in deficit projections based on the

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00:28:34,920 --> 00:28:38,280
Speaker 1: due to the fiscal actions over the past year may

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00:28:38,360 --> 00:28:42,920
Speaker 1: add about twenty or thirty basis points to treasury yields. Now,

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00:28:43,400 --> 00:28:45,280
Speaker 1: it's not clear that that should all show up in

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00:28:45,320 --> 00:28:47,520
Speaker 1: the long end of the curve, or which part of

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00:28:47,560 --> 00:28:49,600
Speaker 1: the curves that should necessarily show up in at all. So,

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00:28:49,760 --> 00:28:51,440
Speaker 1: for instance, you know, a lot of people have been

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00:28:51,480 --> 00:28:54,000
Speaker 1: talking about the fact that earlier this year we had

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00:28:54,040 --> 00:28:56,120
Speaker 1: this big increase in bill supply, and that may be

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Speaker 1: one of treasury buill spin and that may be one

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00:28:58,040 --> 00:29:03,440
Speaker 1: of the factors that has in fluenced libror uh library

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00:29:03,440 --> 00:29:06,320
Speaker 1: ois spreads the spread between effect if that fund and I.

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00:29:06,480 --> 00:29:08,560
Speaker 1: We are in all these rates in the short end

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00:29:08,600 --> 00:29:11,160
Speaker 1: of the complex. So is that crowding out well, perhaps,

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00:29:11,240 --> 00:29:14,360
Speaker 1: but that's also possible that it's happening in the front

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00:29:14,440 --> 00:29:17,760
Speaker 1: end the curse. I'm not sure that necessarily crowding out

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00:29:19,040 --> 00:29:22,680
Speaker 1: due to treasury supply and inversion have to be linked

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00:29:22,880 --> 00:29:26,440
Speaker 1: or should be linked in the same conversation. I think inversion,

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00:29:26,760 --> 00:29:29,480
Speaker 1: in my simple way of looking at it, is more

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00:29:30,200 --> 00:29:32,760
Speaker 1: related to where we are in the business cycle rather

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00:29:32,880 --> 00:29:35,440
Speaker 1: than the structural deficits. And I think the fact that

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00:29:35,560 --> 00:29:38,600
Speaker 1: we're you know, one, no one knows where we are

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00:29:38,640 --> 00:29:40,120
Speaker 1: in the business cycle, but I think it's safe, safe,

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00:29:40,240 --> 00:29:43,320
Speaker 1: not early right, so as it slightly gets more mature,

481
00:29:43,920 --> 00:29:46,440
Speaker 1: natural expects some flattening of the curve. Now we haven't

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00:29:46,480 --> 00:29:48,440
Speaker 1: had an inversion yet, We've just had flattening. And I

483
00:29:48,480 --> 00:29:53,320
Speaker 1: think flattening to me, doesn't look you know, uh weird,

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00:29:53,440 --> 00:29:56,320
Speaker 1: given that the fact that we're varied, you know, apparently

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00:29:56,440 --> 00:29:58,920
Speaker 1: late in the business cycle, all right, if relating the

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00:29:58,960 --> 00:30:02,880
Speaker 1: business cycle, where are we in the credit cycle? Uh,

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00:30:03,160 --> 00:30:07,640
Speaker 1: you know, I think, well, to me, it doesn't look

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00:30:07,760 --> 00:30:13,480
Speaker 1: like uh, the credit cycle is showing that we're you know,

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00:30:13,560 --> 00:30:16,040
Speaker 1: getting overly froth the year exuber and at least in

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00:30:16,080 --> 00:30:19,920
Speaker 1: the quantity uh variable. So you know, we often hear

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00:30:20,560 --> 00:30:24,320
Speaker 1: concerns about the reappearance of household over leverage. I think

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00:30:24,360 --> 00:30:27,040
Speaker 1: if you look at the aggregate data, it's really hard

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00:30:27,080 --> 00:30:30,520
Speaker 1: to make that case. Debt to income ratios have been stable,

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00:30:31,400 --> 00:30:35,720
Speaker 1: very stable actually for about uh five years now, Um,

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00:30:36,840 --> 00:30:40,280
Speaker 1: so I don't really see it their business sector. Maybe

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00:30:40,320 --> 00:30:42,000
Speaker 1: there's a little bit more of a case to be made,

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00:30:42,040 --> 00:30:46,800
Speaker 1: particularly in non corporate businesses, but the data there, I

498
00:30:46,880 --> 00:30:49,040
Speaker 1: think it's it's a little tougher to say, but you know,

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00:30:50,120 --> 00:30:53,160
Speaker 1: I think perhaps we're we may be fighting the last

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00:30:53,200 --> 00:30:55,560
Speaker 1: war here, which is the last several wards, which is

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00:30:56,040 --> 00:30:58,840
Speaker 1: in the last three decades we've been accustomed to the

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00:30:58,920 --> 00:31:01,320
Speaker 1: credit cycle in the business study kind of moving together

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00:31:01,480 --> 00:31:06,400
Speaker 1: and those being um CO conspirators and how the recession

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00:31:06,480 --> 00:31:09,600
Speaker 1: that ends the mansions arise. But if you go back,

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00:31:09,840 --> 00:31:12,960
Speaker 1: you know, further several decades, you don't necessarily need a

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00:31:13,040 --> 00:31:15,760
Speaker 1: credit cycle to have a business cycle. So you know,

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00:31:15,840 --> 00:31:19,440
Speaker 1: it could just be a um A cycle in which

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00:31:19,640 --> 00:31:22,680
Speaker 1: cost pressures are low and then over time, due to

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00:31:23,680 --> 00:31:26,240
Speaker 1: demand a head of supply, like we talked about earlier,

510
00:31:26,400 --> 00:31:30,040
Speaker 1: that that just generates the cost pressures that eventually get

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Speaker 1: the FED to uh really put on the brakes. I

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00:31:32,880 --> 00:31:34,720
Speaker 1: don't think there's any sign of that, you know, happening

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00:31:34,720 --> 00:31:37,360
Speaker 1: anytime soon, but it's not hard to tell a story

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00:31:37,440 --> 00:31:39,440
Speaker 1: of one wanted about that happening a few years out.

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Speaker 1: Michael Farley, thank you so much, particularly that update on

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00:31:42,120 --> 00:31:45,520
Speaker 1: potential GDP is shocking number below two for so many

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Speaker 1: of our listeners. Dr Fraley, it's with JP Morgan. Thanks

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00:31:56,920 --> 00:32:01,160
Speaker 1: for listening to the Bloomberg Surveillance podcast. Subscribe and listen

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00:32:01,400 --> 00:32:06,720
Speaker 1: to interviews on Apple Podcasts, SoundCloud, or whichever podcast platform

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00:32:06,840 --> 00:32:11,120
Speaker 1: you prefer. I'm on Twitter at Tom Keene before the podcast.

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Speaker 1: You can always catch us worldwide. I'm Bloomberg Radio