Speaker 1: Ye, Welcome to the Bloomberg Surveillance podcast. I'm Tom Keane.
Speaker 1: Daily we bring you insight from the best in economics, finance, investment,
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Speaker 1: begin with Paul Donovan. He is the chief economist for IT.
Speaker 1: You bys joining us from London. Paul Donovan, thank you
Speaker 1: very much for being with us. Um. Your most recent
Speaker 1: note has to do with, as you describe it, the
Speaker 1: Italian job, and you counsel that everyone needs to take
Speaker 1: a deep breath and calm down. All right, So now
Speaker 1: that we've calmed down, what should we know? Well, I
Speaker 1: think what we should know first and foremost is that
Speaker 1: no one is suggesting that this ely should leave the Euro.
Speaker 1: Neither of the anti establishment parties are suggesting it, and
Speaker 1: certainly none of the establishment parties are suggesting it. So
Speaker 1: any thought that that there's going to be some kind
Speaker 1: of existential crisis for the Euro, I think needs to
Speaker 1: be dismissed. While we have got here is a good
Speaker 1: old fashioned Italian political crisis. And you know what, they're
Speaker 1: not that rare. We've had seventy years of this. What
Speaker 1: we have is unstable government and lots of internal politics
Speaker 1: going on in Rome. Well, what's so wrong about having
Speaker 1: a country that's in the European Union that doesn't use
Speaker 1: the euro. There's nothing wrong with having somebody in the
Speaker 1: EU which doesn't use the Euro. The UK occupied that
Speaker 1: position and will continue to occupy that position until next March.
Speaker 1: But joining a monetary union and then leaving that's different.
Speaker 1: Monitory unions are like hotel call or you you can
Speaker 1: check out, but you can never leave. Um, because if
Speaker 1: you break up a month for union, the prospects of
Speaker 1: of what that does to the economy is extraordinarily destructive. Um,
Speaker 1: you are defaulting on your debt, you are creating bank runs,
Speaker 1: instability and the financial system. You're wiping out the value
Speaker 1: of people's savings. And there's no coincidence that in almost
Speaker 1: every single monetary union breakup of the twentieth century we
Speaker 1: either ended up with extreme civil disturbance or civil war,
Speaker 1: or we ended up with authoritarian governments in some parts
Speaker 1: of the untary Union. So we're just not going to
Speaker 1: see this happen. UM. You know, once you're in, you're in.
Speaker 1: You can't mess around with the value of people's savings,
Speaker 1: the value of your debt, the value of your obligations
Speaker 1: and so forth. So there's no way that you could
Speaker 1: maintain the current status quo of having your savings in
Speaker 1: euros and debts denominated in euros. You couldn't have a
Speaker 1: dual currency situation as they have in other economies of
Speaker 1: the world, like Panama for example. No, absolutely not, because
Speaker 1: you're starting from a position here where you know it.
Speaker 1: It's all very well saying okay, well we'll keep Italy's
Speaker 1: debt denominated in euros, but we'll tax in lira. Well,
Speaker 1: where do you think the value with the new lira
Speaker 1: is going to be against the euro if if you
Speaker 1: Italy were to leave the the Eurozone. The other point
Speaker 1: to bear in mind, if you don't just leave the euro.
Speaker 1: If you leave the Euro you automatically leave the EU.
Speaker 1: You're breaking the Treaty of Rome, which is the founding
Speaker 1: institution and the constitution of the European Union. You know,
Speaker 1: if you're out, you're out um and that then becomes
Speaker 1: extraordinarily problematic. Pass So much of this comes back to
Speaker 1: economic growth. I mentioned earlier, folks on television. The Guardian
Speaker 1: Overnight has a wonderful article and the austerity of the
Speaker 1: United Kingdom, and within that, Paul is maybe the austerity
Speaker 1: of Europe, or certainly just the stri having for economic growth.
Speaker 1: And yet things are better in Europe. That's been one
Speaker 1: of our themes this morning. Is Europe free and clear
Speaker 1: from the eurosclerosis of another time in place. I think
Speaker 1: that by and large, yes, Europe has emerged from the
Speaker 1: recession that came in really from two thousand and ten
Speaker 1: onwards in the case of the Eurozone, UM, but there
Speaker 1: are some problems with that. So we've got two essential problems.
Speaker 1: Problem number one is Italy. Unfortunately, whilst Italy has done better,
Speaker 1: it's still legged behind the rest of Europe, and its
Speaker 1: banking system is a big part of that problem as well,
Speaker 1: where bank lending has persisted UM as a negative force
Speaker 1: in the in the Italian economy. And then the second
Speaker 1: issue is that whilst cyclically I think Europe has recovered, structually,
Speaker 1: there are still challenges. The Europe doesn't work properly. We
Speaker 1: know that, but to be honest, I in the U S.
Speaker 1: Dollars and work properly either, and the pound sterling has
Speaker 1: one or two issues. But we're not making enough structural
Speaker 1: effort to make the euro work better. There are other
Speaker 1: impediments to growth across the Eurozone, which also needs structural adjustment.
Speaker 1: So I think in a technical sense, absolutely Europe is
Speaker 1: on a better track, and there are some structural improvements
Speaker 1: as well, but it's not necessarily on a very very
Speaker 1: strong projection for growth over the medium term. I mean
Speaker 1: within this in you know, the projection and growth in
Speaker 1: Italy is a distraction. Is how it redounds over to
Speaker 1: the US markets. I mean, we're gonna open up today.
Speaker 1: I think pim things are going to be better. I mean,
Speaker 1: that's the basic idea in the market tone right now.
Speaker 1: Part down, I'm and explain to our US audience why
Speaker 1: they should care about Italy. Well, I think you should
Speaker 1: care about Italy a bit. I don't think you need
Speaker 1: to get over excited about it, although that may be
Speaker 1: a little bit late to be saying now, but I
Speaker 1: think you need to care about it a bit because
Speaker 1: it is an important part of what is still the
Speaker 1: world's largest economy. The world's argist economy is not, I'm
Speaker 1: afraid to say, the United States. The world's largest economy
Speaker 1: is the European Union. Um at least until the British
Speaker 1: leave it. And so it's an important part of an
Speaker 1: important market. Europe is very important to the US as
Speaker 1: an export destination. And remember the the S and P
Speaker 1: is not a US equity index, not at all. The
Speaker 1: SMP is a global equity index where companies are earning
Speaker 1: money through manufacturing, through providing services, and through trading globally.
Speaker 1: So that's why Italy doesn't matter. But Paul, let me
Speaker 1: just challenge you here when you talk about the European
Speaker 1: Union is one economy. You don't have consistent banking laws,
Speaker 1: you don't have consistent immigration laws, and you know as
Speaker 1: well as anyone you talk to people from Italy, they're
Speaker 1: not even interested in the Italian dead crisis, the amount
Speaker 1: of money that their government owes. And most Italians that
Speaker 1: you talk to will tell you that unless you have
Speaker 1: either a family business or you have some sinecure, you're
Speaker 1: living at home waiting for someone to hire you, or
Speaker 1: you're going abroad because that's where the opportunity is. Well, yes,
Speaker 1: I mean Europe has differences, um in between you know
Speaker 1: the national states. Of course it does, although those differences
Speaker 1: have lessons over time, um. But then Frankly, there are
Speaker 1: a lot of differences between say, Texas and New York.
Speaker 1: The polarization of the United States, and indeed the declining
Speaker 1: led mobility in the United States is a different economic challenge.
Speaker 1: So I don't think we should be too concerned about this. Um.
Speaker 1: And Northern Italy, at least, cell has a very dynamic economy. Um.
Speaker 1: You know, the southern Italy is a is a somewhat
Speaker 1: different issue. But Northern Italy remains a very dynamic place
Speaker 1: in which to do business. And and I think this
Speaker 1: is an important point to remember. We should bear in
Speaker 1: mind that Italy is one of the wealthiest countries on
Speaker 1: the planet, far wealthier than Germany is, say, and this
Speaker 1: is an important saving growth because Italians own a lot
Speaker 1: of their own debt and that reduces the damage over time.
Speaker 1: Paul One come in and this comes folks as Mr
Speaker 1: Soros's team sends me the transcript of his important speech yesterday.
Speaker 1: Very cautious and the European Experiment, Pod Donovan, some how
Speaker 1: you would push against George Soros's gloom and your Europe.
Speaker 1: I think that there is still a degree of optimism
Speaker 1: about Europe. I think Europe has a number of advantages
Speaker 1: which are likely to become more important as we go
Speaker 1: through the changes of the Fourth Industrial Revolution and and
Speaker 1: so on and so forth. An aging population, which Europe has,
Speaker 1: becomes less of an economic problem as we get in
Speaker 1: robotics and automation, because you know what, you can operate
Speaker 1: a robot at the age of eighty just as well
Speaker 1: as you can operate it at the age of eighteen.
Speaker 1: So an aging population becomes of an issue. The skills
Speaker 1: and talents that Europe has, the education system which had
Speaker 1: its laws, but you know it provides good caliber education.
Speaker 1: That's the plus as well. So I think there are
Speaker 1: reasons to be optimistic over the medium term, not to
Speaker 1: downplay the challenges, but there you know, we don't need
Speaker 1: to be in a doomed spiral. It's not that bad
Speaker 1: to inspiral. Paul Dunavan, thank you so much with you
Speaker 1: BS greatly appreciate the effort from their zeroch offices on
Speaker 1: this morning. We're gonna do it now, folks with Italy
Speaker 1: on the brain, and of course a huge market moves
Speaker 1: yesterday to talk to a gentleman who can synthesize Italy
Speaker 1: for what it means for Europe, what it means for
Speaker 1: the United Kingdom and what it means for America. That's
Speaker 1: sunny comp actually hugely qualified to synthesize international relations and
Speaker 1: political economics. He's with redefined, but that barely disguise describes
Speaker 1: his portfolio of knowledge on his Europe. Sonny, wonderful day
Speaker 1: have you with this this morning? The Cynic, not that
Speaker 1: that would be moi, but the Cynic would say, this
Speaker 1: is just normal Italy. They've gone through like forty seven
Speaker 1: million governments since World War Two. What's different now, Sonny?
Speaker 1: What is different in Italy now versus all the other
Speaker 1: previous collapses? Well, for one, we had got used to
Speaker 1: an unusual period in Italy's recent history. And for all
Speaker 1: that we criticized Silvio Belusconi, the one thing he gave
Speaker 1: Italy was stable government. I think him alone brought down
Speaker 1: the brought up the average tenure of Italian prime ministers significantly,
Speaker 1: and him and Matteo Renzy and and the next prime minister.
Speaker 1: And now it seems that the old days are back,
Speaker 1: and I think that seems to be the single biggest problem.
Speaker 1: Before Italy had sort of the pulling effect of the
Speaker 1: membership of the Eurodic convergence, et cetera. And now that
Speaker 1: positive influence has gone, the fear is that they may
Speaker 1: continue to diverge from Germany and France. As a task
Speaker 1: for the postible year, my colleagues, Sonny pim Fox observed
Speaker 1: today that the Italian government of Rome is essentially removed
Speaker 1: from the Italian people. Describe the linkage emotionally the Italian
Speaker 1: people to their Italian federal system. Well, Italy is I mean,
Speaker 1: before you go down to the to the region level,
Speaker 1: I mean it is essentially two separate economic zones cobbled
Speaker 1: into one, which explains the rise of the League which
Speaker 1: used to be called the Northern League, and it's primarily
Speaker 1: from the far more sort of Germanic northern part of Italy,
Speaker 1: which has been growing where gdpeoper capita has actually been growing,
Speaker 1: which has where unemployment is low and sort of work
Speaker 1: culture institutions a sort of much better developed, it's quite
Speaker 1: Germanic in nature, whereas the southern half of fy Uh
Speaker 1: is lagging behind economically, and a lot of what you
Speaker 1: see at the macro level outside and the political divisions, etcetera,
Speaker 1: are the fact that there are these two economically fairly
Speaker 1: distinct entities cobbled together into one country and they just
Speaker 1: can't get their act together. There in lies the big contradiction,
Speaker 1: and that is why the political instipidity we are seeing
Speaker 1: now is not likely to go away any time soon.
Speaker 1: This is going to be with us for for a
Speaker 1: while to come a stain. It does. Does Italy embody
Speaker 1: the contradictions that bedeviled the European Union as a whole.
Speaker 1: At one level, Um, it's both sort of the best
Speaker 1: and the worst of Europe. If you look at the
Speaker 1: quality of life, if you look at the cultural richness,
Speaker 1: life expectancy, most things actually worked pretty well, um. And
Speaker 1: the quality of life for most people is still pretty
Speaker 1: fantastic compared to most other places in the world. But
Speaker 1: it is falling behind. And you know, from Roman times
Speaker 1: it's been a story of study decline, which has accelerated
Speaker 1: in the last century. And that is I think also
Speaker 1: one of the reasons why it is highly unlikely that
Speaker 1: Italians will ever choose to leave the euro or the
Speaker 1: European Union. This is the sort of last vestige of greatness,
Speaker 1: pretensions to greatness, of being part of this core European
Speaker 1: Union as a founding member. Otherwise, if you look at
Speaker 1: what happened, you know, in the World Wars. What happened
Speaker 1: since then? France, Germany and the UK have defined the
Speaker 1: destiny of where Europe has gone. Italy has only had
Speaker 1: a marginal role, whereas historically it used to be the
Speaker 1: exact opposite. And Italy sort of his desperately sticking to
Speaker 1: be part of the Euro which is the core of
Speaker 1: the European Union, because it still sees itself as a
Speaker 1: great European power um and it's unlikely that that will change.
Speaker 1: Italy being thrown out or choosing to leave the EU
Speaker 1: would be the end of that pretension. And I don't
Speaker 1: think it's Ouian. The ready for that is the is
Speaker 1: the Euro or proxy for the former deutsch Mark. Sadly yes,
Speaker 1: uh be. Given the weight of the German economy. And
Speaker 1: there's old thing you've heard before. Germany is too small
Speaker 1: for the world and too large for Europe. Are too
Speaker 1: many of Euro related policies are driven by Germany's economic weight,
Speaker 1: And the problem is that the older, larger economies, and
Speaker 1: that includes Germany and Transtant to some extent Italy, what
Speaker 1: they need in monetary policy is very different from what
Speaker 1: some younger, more dynamic economies need which need to catch up,
Speaker 1: and the Euro will always never be able to provide
Speaker 1: the right monetary policy for any of the country. Sonny,
Speaker 1: let me ask you an unfair question for your remit
Speaker 1: of international relations. But let's pretend you're a market effect
Speaker 1: strategist right now to Pims, good question. If we're at
Speaker 1: one sixteen, which is right where we were well at
Speaker 1: the advent of the euro. If Italy was to leave,
Speaker 1: where would the euros for Germany like a one forty
Speaker 1: one thirty one? Probably not all that hype, but it
Speaker 1: would definitely the direction of the move will be very
Speaker 1: care it will be significantly higher than where it is now.
Speaker 1: Let's leave it there, Sonny, thank you so much. Great brief,
Speaker 1: Sonny Kopor with this is redefined and filtering in international
Speaker 1: relations in a lot of the market. You know, I
Speaker 1: just want to underscore what you just described, what would
Speaker 1: happen in the value of the EU, because I don't
Speaker 1: think most people recognize the value of the Euro would
Speaker 1: actually increase. We are speaking with Megan Green, managing director,
Speaker 1: chief economist MANU Life Investments, and Megan, I'm wondering whether
Speaker 1: officials in Berlin and in Brussels, they've been rather silent
Speaker 1: about what's going on in Italy. Do you think that
Speaker 1: there are somehow rushed meetings behind closed doors asking themselves
Speaker 1: what do we do with Greece? Part two? Yeah, so
Speaker 1: I think they're definitely talking about it, but what can
Speaker 1: they do? Right? So, back in two eleven, if you recall,
Speaker 1: the e c B sent a letter to Rome saying
Speaker 1: get your fiscal house in order, um. Berlsconi had to
Speaker 1: leave a few days later, and off the back of that,
Speaker 1: actually Berlin gave the e c B permission essentially to
Speaker 1: to give the whatever it takes speech and eventually unleash
Speaker 1: QUI only because Italy had proven it was going to
Speaker 1: be fiscally responsible this time around. You know, Frankfurt and
Speaker 1: Berlin and Brussels can't really pull that because if they do,
Speaker 1: if they end up pushing out any government that is
Speaker 1: eventually formed, um, that will just symbol in the Populace,
Speaker 1: that will play out in the populace hands, and so
Speaker 1: in the next election then you can only expect more
Speaker 1: support for Populace. So they're kind of hamstrung in that sense.
Speaker 1: The ECB has come out and said, you know, Italy
Speaker 1: would be wise to remember the rules and to reread
Speaker 1: them um, which is a bit of a kind of warning.
Speaker 1: But that's all they've said. I think that suggests the
Speaker 1: ECP is just going to sit by and watch what happens.
Speaker 1: As long as there isn't significant contagion outside of Italy,
Speaker 1: they're going to try to let the market impost some
Speaker 1: discipline on Italian politicians. Let us turn to America and
Speaker 1: within all the data, Megan, I saw four point two
Speaker 1: percent nominal GDP. I guess that's a little dampened inflation
Speaker 1: combined with okay, real g d P. Is that politically
Speaker 1: acceptable in America to have a run rate of four
Speaker 1: point whatever nominal um? So fundamentally, when you're looking at
Speaker 1: GDP and recoveries, especially in the US, you have to
Speaker 1: ask whose recovery it really is and whose growth is this?
Speaker 1: And there's you know, huge and increasing inequality. So is
Speaker 1: that an acceptable run rate? It is for some, it's
Speaker 1: certainly not for all, And I think it's the lower
Speaker 1: classes that won't be lifted by that kind of growth.
Speaker 1: Does have fed adapt to that to your good observation
Speaker 1: of two America's or three America's. So no, not really,
Speaker 1: I don't think. Um. The FED sort of fed that
Speaker 1: in part with quantitative easing, so lifting up asset prices
Speaker 1: so that only those who actually hold those assets really
Speaker 1: benefit from it. Um. You know they're keen to They've
Speaker 1: they've stopped buying up assets. They're reinvesting them still, but
Speaker 1: they're shrinking their balance sheet. UM. They're not really keen
Speaker 1: to fire up KUWI in the next down turn if
Speaker 1: they can avoid it. For this exact reason, the FED
Speaker 1: doesn't want to be in the headlines being told that
Speaker 1: they're responsible for rising inequality in the US. So I
Speaker 1: think that they would like to shrink away from that.
Speaker 1: I've got a headline here, Pim and Megan would be
Speaker 1: perfect to talk to. Maybe you already did this, uh,
Speaker 1: Wilburt Ross says, US trade process already bearing good results.
Speaker 1: Mr Ross, our Secretary of Commerce, says, quote U US
Speaker 1: in a situation of asymmetrical tariffs, Megan, what are asymmetrical terroriffts?
Speaker 1: That's a great question. UM. I think it just suggests
Speaker 1: that we're imposing more tariffs than UM other countries and
Speaker 1: they're imposing on us. Of course that that doesn't actually
Speaker 1: mean anything. UM. In a global economy of countries that
Speaker 1: are really good at making some things and not good
Speaker 1: at making other things, so they specialize. UM, And so
Speaker 1: everybody's not making the same goods and services, So you
Speaker 1: shouldn't have symmetric tariffs. Anyhow, that doesn't make any sense. UM.
Speaker 1: This argument that we're you know, our trade policy is
Speaker 1: already paying off. I think UM is probably economically illiterate. UM.
Speaker 1: Tariffs only introduced rigidities into an economy and create dead
Speaker 1: weight losses, and so nobody really wins in the end
Speaker 1: from that kind of trade war. UM imposing tariffs someone another.
Speaker 1: Can I just say I thought you were going to
Speaker 1: and I appreciate the answer, but I thought that where
Speaker 1: you were going with, as you said, a headline was
Speaker 1: a tweet from the President of the United States. No, well,
Speaker 1: he's just about five minutes ago. UM, he's speaking on
Speaker 1: Twitter and writing, UM, sort of channeling Representative Trey Goudy
Speaker 1: talking about Senator Sessions. Uh. Well yes, but in the
Speaker 1: tweet is referred to as Senator Sessions, UM, and the
Speaker 1: quote is, oh, by the way, I'm not going to
Speaker 1: be able to participate in the most important case in
Speaker 1: the office, meaning Attorney General Sessions. I would be frustrated too,
Speaker 1: And that's how I read that, Senator Sessions, why didn't
Speaker 1: you tell me before I picked you? And that is
Speaker 1: followed by a tweet that says, there are lots of
Speaker 1: really good lawyers in the country. He could have picked
Speaker 1: somebody else end quote, and then Donald Trump, President Trump writes,
Speaker 1: and I wish I did exclamation point. So I just
Speaker 1: thought I would you know. I'm glad you shared that
Speaker 1: because that's important within the moment by moment tick of Washington.
Speaker 1: Kevin Curlier thought was really quite good today on the
Speaker 1: broad set of issues. Has the president's attention? I don't
Speaker 1: I don't want to derailed up. Well, we're talking economics here,
Speaker 1: and Megan, you've been so good at explaining basic stuff.
Speaker 1: Paul Krugman has written whatever anybody thinks of the laureates politics,
Speaker 1: brilliant macroeconomics of trade and this dreaded phrase deadweight loss.
Speaker 1: What is a deadweight loss to America when we when
Speaker 1: we impose tariffs? Yeah, So the ideas every time you
Speaker 1: introduce a rigidity like a tariff or a subsidy in
Speaker 1: an economy, um, some parts of your economy benefits. UM.
Speaker 1: So the government, for example, will be able to collect
Speaker 1: more taxes um. If tariffs are imposed um and you know,
Speaker 1: the other producers of that good will benefit because they
Speaker 1: have less competition, But then a whole bunch of actors
Speaker 1: will lose out. So consumers are the obvious case here
Speaker 1: because they'll end up having to pay more for these
Speaker 1: goods um. And so it did we loss is kind
Speaker 1: of the balance of that there are more losers than
Speaker 1: there are winners. And within that, in within the modern economy,
Speaker 1: if we do tariffs on a certain products, say it's automobiles,
Speaker 1: and China adjust, they adjust for all the other countries
Speaker 1: as well when they adjust their terrorists. It's not just
Speaker 1: about American auto manufacturers, is it. No, that's right, Um,
Speaker 1: that's absolutely right. And in the same way, when you
Speaker 1: know China agrees to buy more of our goods, it's
Speaker 1: not like we're going to produce more as a result.
Speaker 1: We're just going to sell more to them and sell
Speaker 1: less to others as well, So it all ends up
Speaker 1: being kind of a a zero weight. These are the
Speaker 1: complexities of certitude of simplicity. Certitude of simplicity. Wow, people
Speaker 1: that don't know what they're talking about, who we won't mention,
Speaker 1: but maybe that would include me say stupid simple things,
Speaker 1: where Megan is working in a more complex and dynamic range.
Speaker 1: I just want to bring up one topic that is
Speaker 1: perhaps more prosaic, and this has to do with the
Speaker 1: cost of energy, specifically the cost of gasoline, because if
Speaker 1: you've been driving around the United States, you know that
Speaker 1: the cost of gasoline has increased now, albeit it is
Speaker 1: very inexpensive compared to what most of the world ends
Speaker 1: up paying. Having said that, do you believe that the
Speaker 1: increase in the cost of gasoline is going to create
Speaker 1: any kind of economic dread. Yeah, so that's a great question.
Speaker 1: I think to answer it, we should look at what
Speaker 1: happened when oil prices fell significantly UM a couple of
Speaker 1: years ago, and we thought that would be a huge
Speaker 1: stimulus for the economy, and in the end, people just
Speaker 1: drove a bit more and households repaired their balance sheets
Speaker 1: so it went into savings and they pay down some
Speaker 1: of their debt, which was a good medium to long
Speaker 1: term dynamic, but didn't boost growth. UM. I think now
Speaker 1: that oil prices are going up, we're probably seeing the
Speaker 1: inverse of that, So I think households are having to
Speaker 1: leverage up a bit and they're just driving less. I
Speaker 1: don't think it's a huge headwind. Part of it depends
Speaker 1: on how along this last, and I think it could
Speaker 1: last for quite a while. UM, so far, I don't
Speaker 1: think it's a huge head win on headwin on growth.
Speaker 1: I think it does mean that consumers are maybe just
Speaker 1: leveraging up more and so might be tapped out sooner. Megan,
Speaker 1: Thank you so much. Megan Green with Manuel Life in
Speaker 1: which John Hancock greatly appreciate your attendance today. Megan Green
Speaker 1: writing worldwide. You can see her work writing world bode
Speaker 1: as well. Right now, Michael Faroli, we continue with Dr
Speaker 1: Feroli of JP Morgan here on the American economy. Michael,
Speaker 1: I was looking at Atlanta Federaliser Bank of Atlanta wage growth,
Speaker 1: their wage tracker, and I took out inflation and I'm sorry,
Speaker 1: real wages, inflation adjusted wages have a tinge of the
Speaker 1: United Kingdom to us, are we gonna get real wage growth?
Speaker 1: It's there, but come on, it's fractional. Well, this kind
Speaker 1: of brings us back to our other conversations productivity growth,
Speaker 1: which is in principle, Uh, if you know of corporate
Speaker 1: the labor share is going to be roughly constant, which
Speaker 1: it hasn't been. But if it is just for are
Speaker 1: you misake, then real wages should grow at the pace
Speaker 1: of productivity growth. And productivity growth, you know, it's been averaging,
Speaker 1: you know, recently maybe a little closer to one percent,
Speaker 1: but on a longer term people below one percent, then
Speaker 1: it's going to be hard to sustainably get real wages
Speaker 1: up to two or three percent. Okay, but what's great here, folks,
Speaker 1: And this is out of the boost school of Chicago.
Speaker 1: We're feroughly dark in the door. Your idea of political
Speaker 1: economics of Chicago is to take more micro economics. We
Speaker 1: get that, but but within the politics, what politician of
Speaker 1: whatever flavor and ever party can do politics in America
Speaker 1: with subpar real wage growth? The answers, that's a crisis
Speaker 1: every day for a politician, isn't it. Yeah, us, I think, uh,
Speaker 1: this is you know, it's no. I don't think it's
Speaker 1: any coincidence that we've had rise of populous parties all
Speaker 1: over the place in the wake of the Great Recession,
Speaker 1: and that wage growth for ten years has been pretty
Speaker 1: close to stagnant, and that you see that kind of
Speaker 1: frustrations start to boil up and the choice of people
Speaker 1: make in the balance box. Um. You know, perhaps at
Speaker 1: some point expectations, uh, you know, reset themselves to what
Speaker 1: is actually deliverable from the economy. But I think, you know,
Speaker 1: we're living in the shadow of the post war period
Speaker 1: when we had much stronger real wage growth and productivity growth.
Speaker 1: How long it takes to reset expectations, I think it's
Speaker 1: really hard to say, but it certainly seems to be
Speaker 1: one of the facts contributing to um the darker mood,
Speaker 1: and I think that's that affected some, uh, some of
Speaker 1: the politics around the world. Michael Faroli. We also live
Speaker 1: in the shadow of huge treasury supply, and I'm wondering
Speaker 1: if you can explain what that increase in supply means
Speaker 1: when everyone is looking at a yield curve and wondering
Speaker 1: whether it will or won't be inverted. Yeah. So I
Speaker 1: think that's a really tough question. You know. We there's
Speaker 1: been a lot a lot of work done on the
Speaker 1: how much crowding out there is, which is to say,
Speaker 1: when we increase more treasuries to get people to buy
Speaker 1: that you need some kind of price concession and higher yields. Um,
Speaker 1: we'd probably guess based on variety of econometric studies that
Speaker 1: the kind of increase in deficit projections based on the
Speaker 1: due to the fiscal actions over the past year may
Speaker 1: add about twenty or thirty basis points to treasury yields. Now,
Speaker 1: it's not clear that that should all show up in
Speaker 1: the long end of the curve, or which part of
Speaker 1: the curves that should necessarily show up in at all. So,
Speaker 1: for instance, you know, a lot of people have been
Speaker 1: talking about the fact that earlier this year we had
Speaker 1: this big increase in bill supply, and that may be
Speaker 1: one of treasury buill spin and that may be one
Speaker 1: of the factors that has in fluenced libror uh library
Speaker 1: ois spreads the spread between effect if that fund and I.
Speaker 1: We are in all these rates in the short end
Speaker 1: of the complex. So is that crowding out well, perhaps,
Speaker 1: but that's also possible that it's happening in the front
Speaker 1: end the curse. I'm not sure that necessarily crowding out
Speaker 1: due to treasury supply and inversion have to be linked
Speaker 1: or should be linked in the same conversation. I think inversion,
Speaker 1: in my simple way of looking at it, is more
Speaker 1: related to where we are in the business cycle rather
Speaker 1: than the structural deficits. And I think the fact that
Speaker 1: we're you know, one, no one knows where we are
Speaker 1: in the business cycle, but I think it's safe, safe,
Speaker 1: not early right, so as it slightly gets more mature,
Speaker 1: natural expects some flattening of the curve. Now we haven't
Speaker 1: had an inversion yet, We've just had flattening. And I
Speaker 1: think flattening to me, doesn't look you know, uh weird,
Speaker 1: given that the fact that we're varied, you know, apparently
Speaker 1: late in the business cycle, all right, if relating the
Speaker 1: business cycle, where are we in the credit cycle? Uh,
Speaker 1: you know, I think, well, to me, it doesn't look
Speaker 1: like uh, the credit cycle is showing that we're you know,
Speaker 1: getting overly froth the year exuber and at least in
Speaker 1: the quantity uh variable. So you know, we often hear
Speaker 1: concerns about the reappearance of household over leverage. I think
Speaker 1: if you look at the aggregate data, it's really hard
Speaker 1: to make that case. Debt to income ratios have been stable,
Speaker 1: very stable actually for about uh five years now, Um,
Speaker 1: so I don't really see it their business sector. Maybe
Speaker 1: there's a little bit more of a case to be made,
Speaker 1: particularly in non corporate businesses, but the data there, I
Speaker 1: think it's it's a little tougher to say, but you know,
Speaker 1: I think perhaps we're we may be fighting the last
Speaker 1: war here, which is the last several wards, which is
Speaker 1: in the last three decades we've been accustomed to the
Speaker 1: credit cycle in the business study kind of moving together
Speaker 1: and those being um CO conspirators and how the recession
Speaker 1: that ends the mansions arise. But if you go back,
Speaker 1: you know, further several decades, you don't necessarily need a
Speaker 1: credit cycle to have a business cycle. So you know,
Speaker 1: it could just be a um A cycle in which
Speaker 1: cost pressures are low and then over time, due to
Speaker 1: demand a head of supply, like we talked about earlier,
Speaker 1: that that just generates the cost pressures that eventually get
Speaker 1: the FED to uh really put on the brakes. I
Speaker 1: don't think there's any sign of that, you know, happening
Speaker 1: anytime soon, but it's not hard to tell a story
Speaker 1: of one wanted about that happening a few years out.
Speaker 1: Michael Farley, thank you so much, particularly that update on
Speaker 1: potential GDP is shocking number below two for so many
Speaker 1: of our listeners. Dr Fraley, it's with JP Morgan. Thanks
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