WEBVTT - Interview With Ethan Harris: Masters in Business (Audio) 0:00:03.240 --> 0:00:07.560 This is Masters in Business with Barry Ridholts on Bloomberg Radio. 0:00:08.119 --> 0:00:11.040 This week on the podcast, I have a very special guest. 0:00:11.360 --> 0:00:14.200 His name is Ethan Harris, and he is Bank of 0:00:14.240 --> 0:00:19.799 America Merrill Lynches co head of Global Research. Really I 0:00:19.920 --> 0:00:23.080 call him the chief economist of Merry Lynch, but I know, uh, 0:00:23.120 --> 0:00:26.599 that's not his formal title. Uh. He is really an 0:00:26.680 --> 0:00:33.400 institutional guy whose clients are primarily big hedge funds, mutual funds, 0:00:33.440 --> 0:00:36.760 pension funds, institutions, as well as the high net worth 0:00:36.800 --> 0:00:40.600 group at Merrill Lynch, which remains one of the largest 0:00:40.680 --> 0:00:45.520 asset management firms UM in the world. And he's also 0:00:45.920 --> 0:00:49.519 a Federal Reserve expert and interest rate expert. And we 0:00:49.920 --> 0:00:53.920 the talk ranged far and wide, everything from what the 0:00:53.960 --> 0:00:58.840 FED did right and wrong, what various FED chiefs focused 0:00:58.880 --> 0:01:02.680 on and and were the right FED chiefs at the 0:01:02.760 --> 0:01:06.000 right moment uh, and some of the errors made by 0:01:06.200 --> 0:01:10.840 other Fed chiefs. And we also had a conversation about 0:01:10.880 --> 0:01:13.800 the state of the global economy, which I thought was 0:01:13.959 --> 0:01:18.560 very thoughtful and interesting UM and without going off into 0:01:18.640 --> 0:01:22.200 the weeds, without getting excessively wonky, it was very accessible 0:01:22.600 --> 0:01:28.160 if you're at all interested in interest rates, monetary policy, economics, 0:01:28.200 --> 0:01:30.760 and the state of the global economy. I think you're 0:01:30.760 --> 0:01:34.360 gonna find this a very interesting and informative um. Dare 0:01:34.400 --> 0:01:38.880 I say fascinating? Uh? Conversation. So, without any further ado 0:01:39.520 --> 0:01:46.480 my conversation with Ethan Harris. This is Masters in Business 0:01:46.600 --> 0:01:51.080 with Barry Ridholts on Bloomberg Radio. My special guest this 0:01:51.120 --> 0:01:54.720 week is Ethan Harris. He is the chief economist of 0:01:54.920 --> 0:01:59.920 Bank America Merrill Lynch, co head of the Global Economics Research. 0:02:00.040 --> 0:02:03.560 To a quick overview of his CV, I can't do 0:02:03.640 --> 0:02:06.960 the full one because it will take the whole show. UM. 0:02:07.320 --> 0:02:10.560 Ethan regularly ranks in the top of investor polls and 0:02:10.639 --> 0:02:15.560 forecasters surveys. He helps to coordinate the global economic forecast 0:02:15.639 --> 0:02:20.960 and manages the Developed Markets economics team. Before coming to 0:02:21.000 --> 0:02:24.560 Mary Lynch, Harris was the chief U S economist at 0:02:24.639 --> 0:02:27.720 Lehman Brothers. Previous to that, he worked as an economist 0:02:27.720 --> 0:02:32.240 at Barclays and JP Morrigan. He began his career spending 0:02:32.400 --> 0:02:35.880 nine years at the Federal Reserve Bank of New York. 0:02:36.400 --> 0:02:40.320 He has a PhD in economics from Columbia, where he 0:02:40.440 --> 0:02:44.399 is also a university fellow. Ethan Harris, Welcome to Bloomberk. 0:02:44.520 --> 0:02:47.840 Thank you. It's great to be here. So I also 0:02:47.919 --> 0:02:51.400 left out you're the author of Ben Bernanke's Fed the 0:02:51.440 --> 0:02:54.040 Federal Reserve after Great Span. We're gonna spend a lot 0:02:54.040 --> 0:02:58.440 of time talking about the FED later, but but let's 0:02:58.560 --> 0:03:03.760 just start basically. What what attracted you to economics? So 0:03:04.080 --> 0:03:06.120 I was a history buff as a kid with the 0:03:06.240 --> 0:03:10.960 name Ethan Harris growing up in in Massachusetts. Of course 0:03:11.000 --> 0:03:14.960 everyone talked about Ethan Allen in the Green Mountain were 0:03:15.080 --> 0:03:20.320 interviewing today, said aren't you Yeah, no, no, no, not now. 0:03:20.360 --> 0:03:22.760 So I was very interested in history. But what got 0:03:22.800 --> 0:03:25.839 me going into economics was that my older brother came 0:03:25.880 --> 0:03:28.960 back from the University of Chicago and economics major, and 0:03:29.000 --> 0:03:33.640 he said he started talking about economics with me. I 0:03:33.760 --> 0:03:36.360 then said, hey, you know, this sounds pretty interesting, you 0:03:36.400 --> 0:03:40.720 know because remember economics as a combination of history and 0:03:40.720 --> 0:03:43.520 and math, and so it really fit my skill set. 0:03:44.080 --> 0:03:46.600 And I was a pretty nerdy kid in high school. 0:03:46.600 --> 0:03:50.600 So I decided to spend the summer reading Samuelson's Introductory 0:03:50.680 --> 0:03:55.560 Economics textbook, and that hooked me in an economics. So 0:03:55.600 --> 0:03:58.640 I was an economics major the day I arrived in college. 0:03:59.000 --> 0:04:02.720 So your brother um is out of Chicago, you're out 0:04:02.720 --> 0:04:05.880 of Colombia. I'm gonna ask a question. I'm gonna pull 0:04:05.920 --> 0:04:11.119 it forward from another segment. Several economists, most notably Paul Krugman, 0:04:11.240 --> 0:04:15.720 has divided the University of Economists into freshwater and saltwater 0:04:15.760 --> 0:04:20.520 economists or coastal economists. And do you think that economy 0:04:20.680 --> 0:04:27.359 holds any any accuracy? Is there something to the multiple schools? 0:04:27.400 --> 0:04:30.159 I think there is, But there's also, as in a 0:04:30.200 --> 0:04:33.080 lot of academia, there's a lot of debate about pretty 0:04:33.120 --> 0:04:35.880 fine points. I mean, I think there is a broad 0:04:35.960 --> 0:04:40.720 consensus among macroeconomists about some fairly general things, the idea 0:04:41.160 --> 0:04:44.000 of the importance of free markets, the idea that you 0:04:44.080 --> 0:04:47.120 do need a central bank that will manage the economy 0:04:47.120 --> 0:04:49.320 to some degree. There are people whould argue that we 0:04:49.360 --> 0:04:52.720 don't need to fed. Aren't those in in opposition? We 0:04:52.720 --> 0:04:55.440 we want free markets. But at the same time this 0:04:55.560 --> 0:04:59.520 was always the conundrum with Alan Greenspan, a true free 0:04:59.560 --> 0:05:04.839 market mine Rand's acolyte, who was constantly accused of manipulating 0:05:04.920 --> 0:05:07.279 mart How do you find a balance? Well, I think 0:05:07.360 --> 0:05:10.400 I think we that's where the compromise comes. And so 0:05:10.440 --> 0:05:13.000 that you've got the extreme view of no no intervention 0:05:13.040 --> 0:05:15.799 at all, and then you've got the very aggressive intervention. 0:05:15.880 --> 0:05:18.280 I think the reality is. And certainly what I learned 0:05:18.279 --> 0:05:21.960 at the FED, which is obviously an interventionist institution, was 0:05:22.520 --> 0:05:25.360 you know, you nudge the markets and the economy along, 0:05:25.360 --> 0:05:28.120 you don't try to to micromanage it. And so that's 0:05:28.160 --> 0:05:31.159 where the agreement I think is. Now. Of course there's 0:05:31.200 --> 0:05:34.120 going to be debates, but I think that macre economics 0:05:34.279 --> 0:05:37.240 is not nearly as fractured as it sometimes looks like 0:05:37.440 --> 0:05:40.280 from the outside. So so let's go back to the 0:05:40.279 --> 0:05:43.080 New York FED. Where was that your first job out 0:05:43.080 --> 0:05:46.000 of Columbia? So who was the president at the time? 0:05:46.200 --> 0:05:51.839 So so, so my career started basically Jerry Corrigan, of course, 0:05:51.880 --> 0:05:53.920 and I ended up working closely with him. At one 0:05:53.920 --> 0:05:57.680 point I was the assistant corporate secretary, which doesn't sound 0:05:57.800 --> 0:06:01.320 very prestigious, but it put me in the president and 0:06:01.520 --> 0:06:05.480 first Vice president's office, doing you know, work, system wide 0:06:05.480 --> 0:06:07.680 type work as opposed to just the local bank work. 0:06:07.760 --> 0:06:10.640 And so I I learned a lot in the experience 0:06:10.680 --> 0:06:13.240 game to the FED right out of grad school. The 0:06:13.560 --> 0:06:15.359 great thing about working at the FED coming out of 0:06:15.360 --> 0:06:17.800 grad school is in grad school you learn a lot 0:06:17.800 --> 0:06:21.240 of math and statistics. Uh, what you do learn at 0:06:21.240 --> 0:06:23.520 the FED is how to apply it in a practical 0:06:23.560 --> 0:06:26.520 way to real questions of the day. And so the 0:06:26.800 --> 0:06:30.120 New York FED, with a lot of other young economists, 0:06:30.120 --> 0:06:32.720 there was really a great place to kind of make 0:06:32.720 --> 0:06:37.680 a transition out of academia into more practical use of economics. 0:06:38.040 --> 0:06:41.920 And if I recall correctly, Jerry Corrigan was really a 0:06:41.960 --> 0:06:46.440 major player UM in in if you read the history 0:06:46.480 --> 0:06:50.000 of the seven Crash, and my favorite book on the 0:06:50.040 --> 0:06:54.000 subject is Black Monday by Tim Metz, Corrigan is really 0:06:54.279 --> 0:06:58.120 a major behind the scenes actor working to keep the 0:06:58.160 --> 0:07:00.960 whole system together when it looks like it's falling apot well. 0:07:01.000 --> 0:07:03.120 And that's that's the role of the New York FED. 0:07:03.160 --> 0:07:05.159 And so we have a history of that. Obviously with 0:07:05.279 --> 0:07:08.000 every time there's a big financial crisis, the president of 0:07:08.000 --> 0:07:11.680 the New York Fed is absolutely critical because that's the 0:07:11.760 --> 0:07:14.119 person who can talk to all the leaders of Wall 0:07:14.160 --> 0:07:18.200 Street UM and kind of get people's heads around the problem, 0:07:18.240 --> 0:07:21.440 get people working together. And so we've had multiple instances 0:07:21.560 --> 0:07:26.120 where UM in a crisis moment, the New York President 0:07:26.160 --> 0:07:28.480 has kind of really taken the lead and kind of 0:07:28.520 --> 0:07:32.600 saved the financial system. I'm thinking of longtime capital management. 0:07:32.600 --> 0:07:35.920 In the late nineties, there was a private sector rescue 0:07:35.920 --> 0:07:39.480 deal put together, but that was really shepherd along by 0:07:39.520 --> 0:07:42.600 the New York FED. And if memory serves, that deal 0:07:42.720 --> 0:07:45.720 might have even been done in the hallways from New 0:07:45.760 --> 0:07:50.520 York Fed. Absolutely, and and the you know, the idea 0:07:50.600 --> 0:07:52.760 there was. I mean, actually, if you go back in history, 0:07:52.760 --> 0:07:55.400 you go back all the way back to JP Morgan, 0:07:55.560 --> 0:07:58.520 back and before the FED existed, that's what he would do. 0:07:58.640 --> 0:08:02.880 He would gather together their bankers and in a financial crisis, 0:08:02.880 --> 0:08:06.480 which remember the original purpose of the FED was to 0:08:06.520 --> 0:08:10.120 prevent financial crisis, not to manage monetary policy, but prevent 0:08:10.160 --> 0:08:14.520 financial crisis. And so that role is now kind of 0:08:14.560 --> 0:08:17.960 moved into the New York FED, obviously working closely with 0:08:18.040 --> 0:08:21.000 the with the chairman. But that was one of the 0:08:21.000 --> 0:08:22.880 exciting things about working in the New York FED, right 0:08:22.920 --> 0:08:24.800 in the heart of Wall Street and then in the 0:08:24.800 --> 0:08:28.480 heart of the financial system. You're listening to Masters in 0:08:28.560 --> 0:08:32.240 Business on Bloomberg Radio. My special guest this week is 0:08:32.280 --> 0:08:36.120 Ethan Harris. He is the co head of Global Economics 0:08:36.160 --> 0:08:41.199 Research at Bank America, Merrill Lynch and I wanted to 0:08:41.240 --> 0:08:46.120 get into the specifics of interest rates and how they 0:08:46.280 --> 0:08:49.920 vary around the world. And I understand the academic answer 0:08:49.960 --> 0:08:54.400 to this, but it's never really been satisfactory. So ballpark, 0:08:54.880 --> 0:08:58.000 the ten year bond in the United States is about 0:08:59.240 --> 0:09:01.760 If you go to Germany, it's under half a percent, 0:09:01.800 --> 0:09:06.040 It's about point four four as of this recording, and 0:09:06.240 --> 0:09:10.480 Japan is about point to although given the most recent 0:09:10.559 --> 0:09:12.760 activity from the Bank of Japan, who knows where that 0:09:12.760 --> 0:09:16.800 will be by the time this broadcast. These are three 0:09:16.880 --> 0:09:21.360 of the most powerful economic um countries in the world, 0:09:21.760 --> 0:09:25.840 yet they seem to have wildly different rates. Why is 0:09:25.880 --> 0:09:30.040 it that the United States has to pay two Germany 0:09:30.080 --> 0:09:33.480 pays less than half a percent, and what maybe the 0:09:33.520 --> 0:09:38.320 most indebted developed nation, Japan at least major economic power, 0:09:38.760 --> 0:09:40.800 is paying less than a quarter percent? How do how 0:09:40.840 --> 0:09:43.760 do we reconcile? So I Bury, I think what's going 0:09:43.800 --> 0:09:46.640 on here is this is actually good news for the US. 0:09:46.760 --> 0:09:50.120 I mean, because what we're seeing in Europe and Japan 0:09:50.960 --> 0:09:53.920 is our markets that are pricing in a world of 0:09:54.000 --> 0:09:58.359 near zero interest rates for the indefinite future, no inflation 0:09:58.640 --> 0:10:02.600 for the indefinite future. That means that investors are very 0:10:02.640 --> 0:10:06.240 pessimistic about the prospects for growth in those countries. Neither 0:10:06.320 --> 0:10:10.439 country has managed to extract itself from this kind of low, 0:10:10.679 --> 0:10:15.040 near deflationary kind of environment. The the US, at least 0:10:15.040 --> 0:10:18.040 with two percent tenure yields, the markets are giving us 0:10:18.240 --> 0:10:22.560 some some hope that, yeah, the the US has heeled 0:10:22.559 --> 0:10:25.400 a good deal, that there is some prospect of an 0:10:25.320 --> 0:10:28.679 acceleration inflation. The Fed doesn't have to keep interest rates 0:10:29.440 --> 0:10:32.080 pegg to zero forever. So I think that the the 0:10:32.120 --> 0:10:36.320 interest rate differentials telling you something about the prospect of 0:10:36.360 --> 0:10:39.480 the US finally come out coming out of its malaise. 0:10:40.240 --> 0:10:43.120 But a lot of doubts in the markets about Japan, 0:10:43.440 --> 0:10:47.000 UM and UH in Europe. But but that spread has 0:10:47.080 --> 0:10:50.400 been Germany has been yielding less than the US and 0:10:50.480 --> 0:10:53.400 Japan less than Germany for the better part of a 0:10:53.440 --> 0:10:56.040 couple of decades. And so I know, if I go 0:10:56.120 --> 0:10:58.679 to a textbook, it's going to say, well, look at 0:10:58.720 --> 0:11:02.360 the yield versus the real GDP net of inflation. But 0:11:02.520 --> 0:11:06.120 that's not really satisfying. What I'm hearing from you is 0:11:06.200 --> 0:11:09.680 that people in Germany and to a greater degree in 0:11:09.720 --> 0:11:13.840 Japan are flocking to bonds because they don't have confidence 0:11:14.200 --> 0:11:16.840 in the economy. Is no, No, I think that yeah. 0:11:16.840 --> 0:11:21.000 I mean the bondmark of the tenure yield is amalgam 0:11:21.000 --> 0:11:23.760 of people's expectations were where interest rates are going over 0:11:23.800 --> 0:11:26.959 the next ten years. Um. You know, if you believe 0:11:27.200 --> 0:11:30.640 that the Fed has some chance of normalizing interest rates 0:11:30.720 --> 0:11:34.439 in the next few years, UM, you're going to demand 0:11:34.480 --> 0:11:37.080 a higher interest rate on your tenure yield because you 0:11:37.200 --> 0:11:39.520 need to cover the fact that you're you're going to 0:11:39.679 --> 0:11:43.240 miss out on those higher rates. So um. And I 0:11:43.280 --> 0:11:45.880 think that the I mean the longer history of of 0:11:46.120 --> 0:11:49.040 super low rates in Japan. I mean Japan has had 0:11:49.080 --> 0:11:51.439 not just a lost decade of growth. I mean people 0:11:51.440 --> 0:11:54.160 talk about the nineties being a lost decade, but in effect, 0:11:54.640 --> 0:11:58.800 Japan for twenty five years has been a low growth, 0:11:59.559 --> 0:12:04.400 zero or negative inflation country. Um. And so if you're 0:12:04.440 --> 0:12:06.840 buying bonds in Japan, you don't feel you need any 0:12:06.880 --> 0:12:11.360 compensation for inflation because there is no inflation. Well, you're 0:12:11.400 --> 0:12:15.200 really doing is parking money there. You're getting the tiniest 0:12:15.240 --> 0:12:19.359 of yield and it's a way to not be in equities, 0:12:19.440 --> 0:12:24.520 which twenty five years have not exactly been it's basically 0:12:24.840 --> 0:12:27.920 people saying, yeah, I'm not I don't have enough confidence 0:12:27.960 --> 0:12:31.160 in the economy to to put my money to work. 0:12:31.880 --> 0:12:34.480 I'm going to take the safest investment I can and 0:12:34.520 --> 0:12:37.080 just kind of sit on it um. Of course, what's 0:12:37.120 --> 0:12:40.120 also going on in both Europe and Japan is that 0:12:40.200 --> 0:12:43.760 the Central Bank is still buying debt and the FED 0:12:43.920 --> 0:12:47.640 is stopped their their quantitative easing debt buying program, and 0:12:47.679 --> 0:12:51.920 so there's an additional gap created by the fact that 0:12:51.960 --> 0:12:55.040 they're still in an aggressive bond buying program to try 0:12:55.040 --> 0:12:58.840 and artificially lower bond yields, as in hoping to stimulate 0:12:58.840 --> 0:13:01.120 their economy. Well, the FED this kind of specked away 0:13:01.160 --> 0:13:03.800 from that. So but I think that fundamentally that the 0:13:03.880 --> 0:13:06.840 story here is about, you know, faith in the long 0:13:06.960 --> 0:13:11.360 run growth and inflation prospects. It's not like people are 0:13:12.040 --> 0:13:14.680 bowled up about the US. It's just in you know, 0:13:14.800 --> 0:13:16.480 kind of the land of the blind. You know, the 0:13:16.480 --> 0:13:19.200 one eyed man is king, and that's that's that's where 0:13:19.200 --> 0:13:22.400 we are now. So so, although when we look at Germany, 0:13:22.559 --> 0:13:25.720 despite the issue with the refugees, despite all the other 0:13:25.760 --> 0:13:29.679 problems there, their economy seems to be running pretty strongly. 0:13:29.720 --> 0:13:32.600 I mean, that is the strong man of Europe, isn't it. 0:13:33.080 --> 0:13:37.240 I mean they're they're um. Obviously, they're the one part 0:13:37.280 --> 0:13:40.360 of Europe that really looks healthy. And uh, it's not 0:13:40.440 --> 0:13:43.040 that Europe is collapsing, it's just the region has had 0:13:43.080 --> 0:13:47.680 a big double recession never really recovered, and so Germany 0:13:47.760 --> 0:13:50.520 is is kind of the model of strength there. But 0:13:50.559 --> 0:13:53.160 their interest rates are very tied into what other countries 0:13:53.200 --> 0:13:56.800 are paying. Their interest rates are determined by the same 0:13:56.840 --> 0:14:00.600 central bank as every other country there, so everyone's kind 0:14:00.640 --> 0:14:03.960 of tied into this low rate environment on the assumption 0:14:04.000 --> 0:14:06.040 that the ECB is not going to be able to 0:14:06.160 --> 0:14:10.079 raise interest rates anytime soon. So so let's as long 0:14:10.080 --> 0:14:12.360 as we're talking about Europe in Germany, I would be 0:14:12.400 --> 0:14:15.840 remiss if I didn't bring up the Swiss, who have 0:14:16.000 --> 0:14:19.880 been at times running negative interest rates. They are not 0:14:20.080 --> 0:14:23.440 on the euro, so they're affected by the central bank, 0:14:23.840 --> 0:14:27.200 but it's not like they're tied to the local currency. 0:14:27.880 --> 0:14:33.560 Why is Switzerland's getting the benefit of borrowing money at 0:14:33.600 --> 0:14:36.840 a negative rate. Here here's my money, and here's a 0:14:36.840 --> 0:14:40.440 little ACTRA to keep it safe. Yeah, well, I think 0:14:40.440 --> 0:14:44.000 that they are um. The one way to think of 0:14:44.040 --> 0:14:47.440 it with Switzerland is they're kind of an island of 0:14:47.520 --> 0:14:52.200 stability in Europe and so and I've been for centuries, centuries, 0:14:52.240 --> 0:14:55.400 and and the crisis in Europe has caused a lot 0:14:55.440 --> 0:15:00.320 of money to flow into UH, into UH Switzerland. That's 0:15:00.360 --> 0:15:03.040 one reason they can borrow a cheap right. The other 0:15:03.080 --> 0:15:06.600 thing is that it's created it's created an extremely strong currency, 0:15:06.680 --> 0:15:10.360 which hurts their economy. They're kind of they're they're actually 0:15:10.680 --> 0:15:14.560 in a sense there they're suffering worse from Europe's problems 0:15:14.560 --> 0:15:17.200 and than Europe itself is suffering because they end up 0:15:17.200 --> 0:15:20.360 with a very strong exchange rate, so they push interest 0:15:20.480 --> 0:15:23.840 rates into negative territory to prevent their currency from being 0:15:23.840 --> 0:15:28.360 so strong. And um, it's really a desperate battle by 0:15:28.720 --> 0:15:33.960 Switzerland to avoid importing the problems of Europe. This is 0:15:34.080 --> 0:15:38.120 Masters in Business on Bloomberg Radio. I'm Barry Ridhalts. My 0:15:38.240 --> 0:15:42.240 special guest this week is Bank America, Mary Lynch's co 0:15:42.440 --> 0:15:47.000 head of Global Economic Research, Ethan Harris. He is a 0:15:47.040 --> 0:15:51.120 former FED researcher, former chief economist for Lehman Brothers, and 0:15:51.240 --> 0:15:55.680 author of Ben Bernanke's Fed the Federal Reserve After Greenspan 0:15:56.440 --> 0:16:00.520 And let's talk a little bit about inflation. You in 0:16:00.560 --> 0:16:04.400 some or we'll talk about flation. As as was famously said, 0:16:04.880 --> 0:16:07.440 it doesn't look like most of the world is suffering 0:16:07.520 --> 0:16:10.960 from inflation. We're starting to see signs in the United 0:16:11.000 --> 0:16:14.680 States perhaps wages will tick up. In parts of the 0:16:14.720 --> 0:16:18.800 world we see deflation, and in other parts of the 0:16:18.800 --> 0:16:22.160 world we're seeing disinflation. For the person who may not 0:16:22.280 --> 0:16:27.400 be familiar with all these inflations, what are the differences? Yeah, so, um, 0:16:27.480 --> 0:16:30.400 you know, inflation is just a general rise in wages 0:16:30.440 --> 0:16:33.440 and prices and income. So everything's going up in value 0:16:33.480 --> 0:16:36.920 over time, but it's not increasing your ability to buy things. 0:16:36.960 --> 0:16:39.760 It's just prices going going higher. So if your wages 0:16:39.800 --> 0:16:43.920 go up and prices go up proportionately, exactly what you know, 0:16:44.000 --> 0:16:46.120 you're just you're paying more and you're earning more, but 0:16:46.200 --> 0:16:49.320 you're kind of in place. Um, you know, deflation is 0:16:49.320 --> 0:16:53.640 when you actually have falling prices across the economy. This 0:16:53.720 --> 0:16:57.080 is very unusual. It really only happens in depression like 0:16:57.200 --> 0:17:00.280 conditions for a sustained period of time, you know, the 0:17:00.280 --> 0:17:04.600 Great Depression of the nineteen thirties and Japan's last decade. Um, 0:17:04.720 --> 0:17:07.960 disinflation is just a slowing of inflation, so you're going 0:17:08.000 --> 0:17:11.280 from five percent to three percent. So that's the Those 0:17:11.320 --> 0:17:14.480 are the kind of words we bandy about all the time, 0:17:14.560 --> 0:17:18.800 So now we hear frequently, I see frequently discussions of 0:17:18.920 --> 0:17:24.040 deflation in commodities, deflation in China, and deflation in Japan. 0:17:24.560 --> 0:17:26.720 Is that the right way to describe it? Are we 0:17:26.800 --> 0:17:31.440 actually seeing deflation? Well? I mean when economists think about deflation, 0:17:31.680 --> 0:17:34.360 usually they're thinking about something that's sustained over a long 0:17:34.440 --> 0:17:36.280 period of time. So I think what you're seeing in 0:17:36.359 --> 0:17:39.959 commodity markets is really a repricing where you've gone from 0:17:39.960 --> 0:17:45.040 an environment of consistently high prices to consistently low prices. 0:17:45.440 --> 0:17:48.600 And so during that interim you have very rapid deflation. 0:17:48.600 --> 0:17:52.960 I mean, coal prices have dropped U seventy percent from 0:17:53.000 --> 0:17:56.640 their peak, so um, but that's really over a year 0:17:56.720 --> 0:17:58.679 year and it's a year and a half. Yeah, that's 0:17:58.680 --> 0:18:01.800 an amazing drop. Mean, and by the way, this isn't new. 0:18:01.880 --> 0:18:06.120 I mean, we've seen oil markets just flip and suddenly 0:18:06.119 --> 0:18:09.840 a market that had been sustaining at very high prices 0:18:09.840 --> 0:18:12.600 suddenly you have an oversupply problem. It just takes years 0:18:12.640 --> 0:18:14.720 to get rid of it, and you end up in 0:18:14.760 --> 0:18:18.159 this sustained low prices. But that's not deflation in the 0:18:18.240 --> 0:18:20.439 sense that from We're not gonna have oil. Oil prices 0:18:20.480 --> 0:18:23.719 can't drop ten dollars forever every month because they'll go 0:18:23.800 --> 0:18:27.000 into negative territory. That's more of a one time kind 0:18:27.040 --> 0:18:30.480 of big adjustment in the market. Real deflation is when 0:18:31.200 --> 0:18:35.520 um year after year prices keep keep dropping and and 0:18:35.560 --> 0:18:38.720 really the kinds of deflation that economists worry about and 0:18:38.840 --> 0:18:42.760 not so much. You know, a few items like oil falling, 0:18:42.800 --> 0:18:47.080 but it's really broad based price declines and broad based 0:18:47.200 --> 0:18:51.439 wage decreases. That's those are signs of a sick economy. 0:18:51.680 --> 0:18:56.280 So arguably the issue with oil this cycle has been 0:18:56.280 --> 0:19:00.240 a supply issue. We brought I Ran online, we would 0:19:00.240 --> 0:19:04.000 Iraq online, and the US has gone from a marginal 0:19:04.080 --> 0:19:07.600 producer to a significant producer. And at the same time, 0:19:07.600 --> 0:19:11.280 the Saudis, who normally would pull back are are continuing 0:19:11.320 --> 0:19:15.040 to pump NonStop. UH plus Russia could use the money, 0:19:15.040 --> 0:19:18.960 so they key, So the usual suppliers who would typically 0:19:19.000 --> 0:19:23.919 pull back aren't. So arguably this is a supply issue. 0:19:24.480 --> 0:19:29.480 What sort of deflationary environment is a demand issue? Well, 0:19:29.600 --> 0:19:33.080 demand issue would be UH in fact, a Japanese experience 0:19:33.080 --> 0:19:36.720 of the and two thousands a classic example that where 0:19:36.800 --> 0:19:40.720 you have an economy that never really gets growing and 0:19:40.760 --> 0:19:45.440 so over time UM prices and wage growth fade into 0:19:45.520 --> 0:19:50.000 negative territory because there's not enough spending going on the economy. 0:19:50.200 --> 0:19:52.480 And in Japan's case, I think it was a lot 0:19:52.520 --> 0:19:58.040 of it was a severely damaged banking industry, severely damage 0:19:58.080 --> 0:20:01.080 stock market and real estate market that just kind of 0:20:01.160 --> 0:20:04.680 hung over the economy for long periods of time, combined 0:20:04.720 --> 0:20:08.280 with a complete lack of confidence. I mean a lot 0:20:08.280 --> 0:20:10.800 of what the story of Japan was confidence. So those 0:20:10.920 --> 0:20:15.040 kind of when you have a big overhang of of 0:20:16.080 --> 0:20:21.040 broken markets and lack of confidence that those that's really 0:20:21.080 --> 0:20:24.280 what happens when you have these big deflation episodes. How 0:20:24.359 --> 0:20:27.560 much of the Japan story is is one of demographics. 0:20:27.560 --> 0:20:30.919 I keep reading that there's almost no immigration. It's an 0:20:30.960 --> 0:20:35.600 aging society, and we all know your prime spending years 0:20:35.680 --> 0:20:38.399 or your forties and fifties. If you have an aging society, 0:20:38.880 --> 0:20:42.360 what does that do to uh deflation and spending? Well, 0:20:42.400 --> 0:20:44.240 I think that if you look at the origins of 0:20:44.280 --> 0:20:47.800 their crisis, it was a mass of real estate and 0:20:47.960 --> 0:20:52.120 equity bubble that burst and left them with a crippled 0:20:52.160 --> 0:20:55.160 banking system and a failure to kind of fix all 0:20:55.160 --> 0:20:59.560 those problems quickly, and that created this ongoing overhanging the 0:20:59.600 --> 0:21:03.120 econom mean, but I think over time the challenges for 0:21:03.119 --> 0:21:06.080 for Japan have shifted, and what you're talking about with 0:21:06.080 --> 0:21:09.280 the demographics is really the challenge going forward. It's the 0:21:09.440 --> 0:21:14.240 fact that you know, when Japan got into trouble, at first, 0:21:14.359 --> 0:21:17.159 demographic was not an important issue. But now we're in 0:21:17.200 --> 0:21:21.680 a shrink a country that's a shrinking population, very low 0:21:21.760 --> 0:21:26.880 birth rates and very little immigration, and so the new 0:21:26.920 --> 0:21:31.560 generation of workers is much smaller than the old generation retirees. 0:21:32.480 --> 0:21:36.719 That's a really serious challenge down the road for Japan. 0:21:37.000 --> 0:21:39.760 I'm Barry rid Holts. You're listening to Master's in Business 0:21:39.760 --> 0:21:42.879 on Bloomberg Radio. My special guest this week is b 0:21:43.000 --> 0:21:45.960 of A. Merrill. Lynch is Ethan Harris. He is the 0:21:46.040 --> 0:21:49.520 co head of Global Economic Research. He began his career 0:21:49.800 --> 0:21:52.600 at the New York Fed as a researcher. And let's 0:21:52.640 --> 0:21:56.520 talk a little bit about FED policy, because you mentioned 0:21:56.600 --> 0:22:00.119 in the prior segment Japan was slow to response on 0:22:00.280 --> 0:22:05.200 to their crisis, their markets and economy peaked in ninety. 0:22:05.760 --> 0:22:08.920 Here it is twenty five years later. They're still mired 0:22:09.200 --> 0:22:14.320 in soft uh economic I don't even want to call 0:22:14.359 --> 0:22:18.240 it an expansion. It's been a temporary blip up. What 0:22:18.320 --> 0:22:22.199 did the United States Feller Reserve do right that the 0:22:22.320 --> 0:22:25.840 Japanese Central Bank failed to do well? First of all, 0:22:25.920 --> 0:22:29.119 we should say that the FED had the benefit of 0:22:29.240 --> 0:22:33.520 Japan's experience, and you know, we know that for example, uh, 0:22:33.560 --> 0:22:36.240 Ben Bernanke spent a lot of time looking at Japan 0:22:36.359 --> 0:22:39.879 and the mistakes that they made the big difference. Didn't 0:22:39.880 --> 0:22:42.080 he do a big piece I want to say, oh 0:22:42.080 --> 0:22:45.560 three or something along those lines about here's what Japan 0:22:45.680 --> 0:22:47.879 should have done. I mean, been a student of the 0:22:48.280 --> 0:22:52.080 Great Depression, he said, here's the lesson Japan did not learn. Yeah. So, 0:22:52.240 --> 0:22:54.879 you know, Ben Bernanke is a very gentlemanly person, and 0:22:54.920 --> 0:22:58.360 he actually went over to Tokyo and gave some very 0:22:58.440 --> 0:23:02.280 pointed advice to the government about being more aggressive policy, 0:23:02.320 --> 0:23:04.720 and they did not like it, and so he was 0:23:05.080 --> 0:23:07.280 he uh, you know, this was something that he took 0:23:07.400 --> 0:23:10.080 very much to heart. The the the importance of a 0:23:10.160 --> 0:23:13.840 strong reaction. What the FED basically did is that they 0:23:14.200 --> 0:23:18.320 took a do whatever it takes attitude, and that was 0:23:18.440 --> 0:23:21.160 you know, if we cut interest rates and the economy 0:23:21.200 --> 0:23:24.480 doesn't respond, you cut them again. If cutting doesn't work, 0:23:25.000 --> 0:23:27.280 you promised to keep them low for a long time. 0:23:27.359 --> 0:23:30.480 If that doesn't work, you'd start buying lots of assets. 0:23:30.800 --> 0:23:33.359 And I think that the key to this was it 0:23:33.400 --> 0:23:36.200 gave a sense to people in the markets in a 0:23:36.280 --> 0:23:40.080 very panic condition that the FED was there, that that 0:23:40.080 --> 0:23:42.320 that the FED was never going to be out of ammunition. 0:23:42.359 --> 0:23:45.120 They were always going to have another weapon to put 0:23:45.160 --> 0:23:48.760 to work. And so it was the the aggressiveness, and 0:23:48.800 --> 0:23:51.719 it was the body language around their actions that we 0:23:51.800 --> 0:23:55.400 will keep trying until it works that made FED policy 0:23:55.440 --> 0:23:59.280 so effective. If you look recently at the European Central 0:23:59.280 --> 0:24:03.560 Bank success US under Druggy, it's he's taken a page 0:24:03.560 --> 0:24:06.679 out of the Bernanke playbook. His idea of do whatever 0:24:06.720 --> 0:24:10.160 it takes. He understands. I think that you know, when 0:24:10.160 --> 0:24:12.359 you're in a world of panic and people don't know 0:24:12.400 --> 0:24:15.479 how to value anything and um and the economy and 0:24:15.480 --> 0:24:20.359 the markets are are collapsing, uh, people want a sense 0:24:20.440 --> 0:24:24.200