Speaker 1: Bloomberg Audio Studios, Podcasts, Radio News.
Speaker 2: Hello and welcome to another episode of the Odd Lots Podcast.
Speaker 2: I'm Joe Wisenthal.
Speaker 3: And I'm Tracy Alloway.
Speaker 2: So, Tracy, I don't know if I would describe the
Speaker 2: mood here at Jackson Hole. So by the way, we
Speaker 2: are recording this August twenty third, the day of Powell's
Speaker 2: big speech. I don't know if I would describe the
Speaker 2: mood as like declaring victory per se. But I would
Speaker 2: say on the narrow question of like is the problem
Speaker 2: of inflation over the verdict seems to be yes, it is.
Speaker 4: I think the big difference for me is last year,
Speaker 4: in twenty twenty three, there was a lot of discussion
Speaker 4: about the idea of the traject victory of inflation was
Speaker 4: looking pretty good. Yeah, the direction of travel was where
Speaker 4: the Central Bank wanted it to go, but there was
Speaker 4: still a lot of caution about the risk of an
Speaker 4: upside surprise and inflation could come back. And we saw
Speaker 4: that to some extent in Q one of this year,
Speaker 4: but I don't think it was you know, the degree
Speaker 4: that necessarily people were worried about in August twenty twenty three.
Speaker 4: But anyway, the big difference this year is I don't
Speaker 4: really see a lot of talk about that tail risk
Speaker 4: of inflation coming back.
Speaker 2: That's right. Yeah. Last year, you know, we were all
Speaker 2: like here in Jackson Hole looking out at the Grand
Speaker 2: Titans and observing how the two mountains kind of resembled
Speaker 2: the two spikes, and the inflation.
Speaker 4: Burns was sort of looming in the background.
Speaker 2: Yeah, basically the mountains looked like a chart of nineteen
Speaker 2: seventies inflation. Is like, oh, is there another way anyway?
Speaker 2: Most people it was like, yeah, Okay, the risks are
Speaker 2: on the labor market side, and there's probably many good
Speaker 2: reasons to think that's where the risk lies. But I look,
Speaker 2: the FED is pretty clearly going to start its cutting
Speaker 2: cycle in September. Other than that fact, which is not
Speaker 2: technically a fact yet, but other than that fact, there's
Speaker 2: so a tremendous amount of uncertainty what the cutting cycle
Speaker 2: will look like, the speed, the intensity, how the data
Speaker 2: will cooperate or not, many open questions. Absolutely, All right, Well,
Speaker 2: I'm very pleased to say we do have the perfect
Speaker 2: guest to talk about some of these themes and risks.
Speaker 2: We talked to him last year and had a great conversation.
Speaker 2: So like, let's follow up, we're going to be speaking
Speaker 2: with Adam Posen. He is the president of the Peterson
Speaker 2: Institute for International Economics who's also at the BOE for
Speaker 2: a while, so perfect person to talk about some of
Speaker 2: these themes. So Adam, thank you so much for coming
Speaker 2: back on odd lots.
Speaker 5: Thank you for working me into your Jackson Home tour schedule.
Speaker 2: We got it, We got it. So you were there
Speaker 2: in the room in the speech, Tracy and I we
Speaker 2: were just read it on the website. Although I think
Speaker 2: actually that's a probably faster or more efficient way to
Speaker 2: consume his speech than have been listening to the whole thing.
Speaker 2: But what was your takeaway?
Speaker 5: The speech was fine as far as it went, but
Speaker 5: it didn't go very far and it should have gone farther.
Speaker 5: So I think Joe he was very clear, The chair
Speaker 5: was very clear that we've reached the end of their
Speaker 5: hiking cycle, we're into the loosening cycle, and that their
Speaker 5: key concern is about a sharp fall off in employment
Speaker 5: in the US, and again that's perfectly reasonable. The issue is, though,
Speaker 5: how narrow the speech was. It was narrow in terms
Speaker 5: of time frame. It was really only relevant for the
Speaker 5: next couple months. It doesn't touch anything about looking out
Speaker 5: beyond that. It was very narrow in its discussion, not
Speaker 5: only of sort of the victory lap, although Powe will
Speaker 5: never call it that, reflecting on how we got here
Speaker 5: or going forward, in that it basically talked about labor markets,
Speaker 5: labor markets, and a tiny bit about supply shocks. And
Speaker 5: it was very narrow in that we're at a conference
Speaker 5: which topic is the important issue of monetary transmission mechanism,
Speaker 5: which in normal people speak is how effective and why
Speaker 5: our interest rates able to change the course of the economy,
Speaker 5: and he gave absolutely no hints about that issue. So
Speaker 5: it was a very limited speech. There are contexts where
Speaker 5: a very limited speech is good. Two years ago Powell
Speaker 5: gave what I consider a perfect speech. It was a
Speaker 5: rifle shot. It was only eight minutes long, and all
Speaker 5: he was saying was they're going to keep going until
Speaker 5: inflation beast is slain, and that at that time, with
Speaker 5: that facing them and then being so far away from
Speaker 5: where inflation wanted needed to be, was the right move.
Speaker 5: But in the context we are now where we're not
Speaker 5: facing a crisis where you're basically doing risk management over
Speaker 5: the next couple months, which means just trying to balance things.
Speaker 5: Having the rifle shot is to me misleading the public.
Speaker 5: Not a good speech.
Speaker 4: This is actually something that I've been thinking a lot about,
Speaker 4: and we should get into the transmission mechanism of monetary policy.
Speaker 4: But the point you just made about the narrow range
Speaker 4: in terms of time frame, it does feel to me
Speaker 4: like the emphasis is very much on the short term
Speaker 4: at the moment, and there's all the talk about data dependency,
Speaker 4: which obviously puts the emphasis on the next job's number,
Speaker 4: and there's not a lot of forward guidance over the
Speaker 4: longer term.
Speaker 3: To your point about doing whatever it takes.
Speaker 4: To crush inflation in twenty twenty two, is that what's
Speaker 4: happening here?
Speaker 5: I think it is tracy, but I extended our nuance
Speaker 5: it depending on your view in two ways. The first
Speaker 5: is there has been this general shortening of the Fed's
Speaker 5: time horizon, and it's not just the politics, but I
Speaker 5: think the fear of seeming partisan in the upcoming election
Speaker 5: is taking it further. But it's also it's a fundamental
Speaker 5: change in I think the fed's operating philosophy. So when
Speaker 5: Bernanki Laubach Michigan and I wrote the book on inflation targeting,
Speaker 5: or before that, when the Bank of England, the Reserve
Speaker 5: Bank of New Zealand, Bank of Canada did inflation targeting,
Speaker 5: the emphasis was on what do you think is going
Speaker 5: to happen to the economy roughly two years out? What
Speaker 5: is your forecast? And again, if you have some sort
Speaker 5: of crisis, a financial market crisis, of a pandemic, that's different.
Speaker 5: But the current FMC seems to have forsaken, somewhat deliberately,
Speaker 5: the idea that they should be making a forecast and
Speaker 5: the idea that they should be acting on that forecast.
Speaker 5: And there's a lot of bad forecasts out there. But
Speaker 5: I think Alan Blinder made this point when he was
Speaker 5: Vice chair of the FED some twenty five years ago.
Speaker 5: If you don't have a forecast, then it's even worse
Speaker 5: because then there's no discipline on what you're doing. It's
Speaker 5: just Okay, this is what we're seeing right now, let's
Speaker 5: react to that.
Speaker 2: I find like this idea of that, the two rifle
Speaker 2: shots speech is very interesting because you know, in twenty
Speaker 2: twenty two inflation was arguab like at crisis levels, yes,
Speaker 2: And in twenty twenty four there has been weakening of
Speaker 2: the unemployment rate, but you know, we're not at crisis
Speaker 2: levels of unemployment. So I think that's very interesting and perceptive,
Speaker 2: that sort of asymmetry of the two rifle speeches. You know,
Speaker 2: one of the stories for the last several years has
Speaker 2: been that the labor market has just got way overheated
Speaker 2: by various measures. There was a lot of focus on
Speaker 2: the number of job openings and we've seen quite a
Speaker 2: change in that, and so one of the things that
Speaker 2: Powell said specifically was that by some measures, the labor
Speaker 2: market is weaker now than pre COVID levels in their
Speaker 2: number of charts we can bring up that would show this.
Speaker 2: Why the concern then, from your perspective, even looking at
Speaker 2: the medium term, for example, why shouldn't we just put
Speaker 2: the inflation anxiety in the rearview mirror.
Speaker 5: I think there's several big reasons not to, and just
Speaker 5: I'm saying this as someone who throughout most of my career,
Speaker 5: including my time serving at the Bank of England, was
Speaker 5: considered a dove. The first and biggest reason is because
Speaker 5: this is where the narrowness comes in the labor markets
Speaker 5: is first among equals in terms of determinants of inflation
Speaker 5: in the business cycle, but there are equals, there are
Speaker 5: other things. So productivity growth matters, Fiscal policy matters, supply shocks,
Speaker 5: as the chair mentions, matters, currency matters, trade policy matters.
Speaker 5: I don't mean you need to do the whole laundry list.
Speaker 5: But if you're sitting here and we're in a period
Speaker 5: where productivity growth has been up for most of the
Speaker 5: last two and a half years, is that going to continue,
Speaker 5: Is that going to fall back? That will have an
Speaker 5: effect on inflation. If Trump is elected. I don't know
Speaker 5: whether he is going to be or not, and obviously
Speaker 5: the FMC cannot talk about that, But if Trump's going
Speaker 5: to be elected, There's going to be massive tariffs, and
Speaker 5: even more importantly, there's going to be massive deportations of workers.
Speaker 5: Those are inflationary full stop. So acting as though these
Speaker 5: other factors don't matter, that all the matters is the
Speaker 5: labor mark, I think is misleading. The second reason is
Speaker 5: because and this is something where there is a lot
Speaker 5: of useful discussion, although within the FED could be more,
Speaker 5: is interpreting the labor market data. So yes, unquestionably we're
Speaker 5: not at the very hot labor market we were a
Speaker 5: year and a half two years ago. But equally, if
Speaker 5: you go in levels terms, we're at a multi year
Speaker 5: high and labor force participation and the unemployment level is
Speaker 5: still well blow what we used to think of as
Speaker 5: full employment. And so to me, that says we may
Speaker 5: get a recession, but it sure looks and feels like
Speaker 5: there may not be one, or at least that we're
Speaker 5: not in it yet. And if you look at the
Speaker 5: latest GDP data, we're not in it yet, and so
Speaker 5: it's different. It is different, And this again is why
Speaker 5: I would like a little bit more complex, nuanced, broader
Speaker 5: discussion by the chair rather than right now, last few
Speaker 5: months of data show labor market's softening. Right now, last
Speaker 5: several months of data show inflation coming down, we'll.
Speaker 4: Cut Yeah, I did think it was interesting. He kind
Speaker 4: of alluded to the beverage curve but didn't mention it
Speaker 4: by name, and then just said, well, openings are falling
Speaker 4: without mass layoffs and it's normalizing from that perspective, but
Speaker 4: then didn't actually go into any detail about why that
Speaker 4: might be.
Speaker 5: Yeah, And to be fair, Tracy, I mean I don't
Speaker 5: necessarily need the chair going into that, even though you
Speaker 5: and I are geeky enough to care about that. But
Speaker 5: you know, as I think we talked about a bit
Speaker 5: last year. But anyway, Governor Waller, Governor Chris Waller, you know,
Speaker 5: made some very important contributions a year or two ago
Speaker 5: talking about vacancies and that. So it again, it does
Speaker 5: matter to have a little bit richer discussion.
Speaker 4: How are you thinking about the labor market dynamics and
Speaker 4: how they might unfold at this point, because there's obviously
Speaker 4: a conversation at the moment about how quickly things could
Speaker 4: deteriorate in the labor market. People talk about, you know,
Speaker 4: unemployment being exponential. Once it starts, it can get worse,
Speaker 4: very very quickly.
Speaker 5: I think that's a valid concern. But I think the
Speaker 5: more you look at it, the less worried you get.
Speaker 5: Oftentimes I'll say something and I'm saying, I hope I'm wrong.
Speaker 5: In this case, I hope I'm right. So there is
Speaker 5: as I know, you've discussed this so called psalm rule,
Speaker 5: and to doctor Sam's credit, she has said very clearly
Speaker 5: it's not a mechanistic role. It may not apply right now.
Speaker 5: So I give her credit for being honest about that.
Speaker 5: When a recession hits. Generally, unemployment spikes quickly, not like
Speaker 5: it did in twenty twenty with COVID, but that is
Speaker 5: usually the pattern. It goes from very low to very high,
Speaker 5: accelerates a lot. But that's kind of like saying you
Speaker 5: know you're in a recession. When you're in a recession,
Speaker 5: it's not a causal argument, and so you need something,
Speaker 5: some kind of story that tells you what triggers it
Speaker 5: to behave that way, the labor market to behave that way,
Speaker 5: and a lot of the things we're seeing and hearing
Speaker 5: in the US data aren't consistent with that kind of story.
Speaker 5: So investment outside of the big tech giants has not
Speaker 5: been high. Well, it wasn't high since two thousand and eight,
Speaker 5: and we've had large expansion since then. We're not seeing layoffs,
Speaker 5: and as the chair acknowledge, I mean that is almost
Speaker 5: always what you see before a recession. We in fact
Speaker 5: see more people entering the labor force, and as you've noted,
Speaker 5: we have a revision downward in total number of jobs
Speaker 5: created from early twenty twenty three to early twenty twenty four.
Speaker 5: But that's another way of saying, well, g productivity growth
Speaker 5: was higher because we didn't revise down GDP, but we
Speaker 5: revised down the number of work hours. So again, you
Speaker 5: don't usually it's not impossible. We don't usually see a
Speaker 5: jump in productivity growth right before you have a recession.
Speaker 5: So again I want to distinguish between my assessant of
Speaker 5: the economy and going forward, looking out beyond this month
Speaker 5: versus fine for the FED to cut preemptively given their
Speaker 5: low inflation risk right now.
Speaker 2: You know, since you mentioned it, I kind of just
Speaker 2: want to jump to this this time next year, it's
Speaker 2: very possible that we will have a president who does
Speaker 2: not believe that the current institutional arrangement of FED independence
Speaker 2: is a good thing. Does this come up in conversations
Speaker 2: around here? And is there anxiety about it? I'm certain
Speaker 2: that that would is a concept or a thing that
Speaker 2: would make you in particular anxious. But how much your
Speaker 2: people talk about it's the.
Speaker 5: This is something you don't talk about, okay, or rather
Speaker 5: you don't talk about currently sitting officials. That makes sense,
Speaker 5: But I mean all of us in the game, at
Speaker 5: whatever degree of remove who are not currently sitting officials
Speaker 5: talk about it a lot. So two of my colleagues
Speaker 5: at Peterson, David Wilcox, who used to be the head
Speaker 5: of the Division of Research Statistics mean the chief honestly
Speaker 5: the FED, has written about very real dangers to FED
Speaker 5: independence and how scary it is. And more Sobsfeld, who
Speaker 5: used to be chief econos of the IMF and was
Speaker 5: on Obama CEA, has also written about how scared he
Speaker 5: is for central bank independence in the FED if Trump wins. So,
Speaker 5: I mean, it's a very live issue. But of all
Speaker 5: the things I would expect, current Federal Reserve efficient not
Speaker 5: going to say any They're not going to apply on it,
Speaker 5: even in private, because it's just there's no upside to
Speaker 5: them talking about it.
Speaker 4: Just going back to the short termism versus making a
Speaker 4: longer term forecast and the importance there. I do have
Speaker 4: some sympathy with the difficulty of doing that right before
Speaker 4: US election, where you have two potential administrations that seem
Speaker 4: to have very different ideas of what they want to
Speaker 4: do and how the economy works. How do policy makers
Speaker 4: take into account or how should they take into account
Speaker 4: those sort of binary outcomes when making longer term decisions.
Speaker 5: Let me try give you based on my reading of
Speaker 5: the history and the current situation, I think there are
Speaker 5: three levels of response. The first level of response is
Speaker 5: simply getting underneath the seemingly binary and trying to understand
Speaker 5: and what the actual policies would be. And this is
Speaker 5: why my forecast for twenty twenty five is roughly if
Speaker 5: Harris gets in, there will be slightly more inflation, slightly
Speaker 5: more growth, nothing crazy, and therefore a lot of the
Speaker 5: cuts that are priced in for twenty twenty five. Rate
Speaker 5: cuts for twenty twenty five are not going to happen,
Speaker 5: but the Fed's not likely not going to have to
Speaker 5: raise rates. If Trump gets in and he does what
Speaker 5: he says he's going to do, which we have very
Speaker 5: good reasona believe he will, then you've got tariffs, deportations,
Speaker 5: explicit threats to FED independence, attempts to talk down the dollar,
Speaker 5: a boombus cycle in fossil fuels through deregulation. Then you've
Speaker 5: got very significant inflation potentially. So if you say, I
Speaker 5: have no idea who's going to win the election. So
Speaker 5: if you say fifty percent Harris basically slight increase in
Speaker 5: inflation because of fiscal laxity, which I think is going
Speaker 5: to come because she's still adhering to the asinine no
Speaker 5: taxes on anybody making under four hundred thousand a year,
Speaker 5: you know, and then fifty percent, the Trump's going to
Speaker 5: jump inflation by two to three percentage points, and you
Speaker 5: average those, you end up with a mean scenario in
Speaker 5: my view, or excuse me, a modal scenario in my view,
Speaker 5: that inflation will be up one to one point five
Speaker 5: percent by this time next year in a very visible way,
Speaker 5: and no recession. So if I'm forecasting, that's where I'm going.
Speaker 5: So then, second, boice, how does the FED deal with that?
Speaker 5: There are two things you can do. The first is
Speaker 5: you can, like the FED does on all kinds of things,
Speaker 5: make vague warnings that appeal directly to fundamental economic principles.
Speaker 5: So Chair Powell, to his credit, at some point in
Speaker 5: the last couple of months, said, you know, having positive
Speaker 5: migration was part of why we got the soft landing.
Speaker 5: It was good supply shock for the US. So there
Speaker 5: you go one step further and say, you know, if
Speaker 5: we reverse migration, it would be in economic terms and
Speaker 5: negative supply shock to the US or caraffs. You know,
Speaker 5: all kinds of reasons trade policy gets set, But in
Speaker 5: terms of inflation, it's very clear what happens when you
Speaker 5: do terrorsts and you say that, and then the third thing,
Speaker 5: which goes back to the forecast idea. So if as
Speaker 5: the Bank of England and a number of other central
Speaker 5: banks do, you are doing a quarterly or a semi
Speaker 5: annual or whatever it is, regular release and update of
Speaker 5: your forecast, your committee's forecast, you can build in some
Speaker 5: fudge factors into the forecast where you don't say what
Speaker 5: they are, so nobody can take a paragraph and snapshot
Speaker 5: it and say you're being anti Trump or anti Harris,
Speaker 5: but just build it into the forecast. And since we're
Speaker 5: not the FED is not doing that, they can't do that.
Speaker 2: I'm going to ask a random question. Maybe you won't
Speaker 2: even want to answer what I'm trying to. I'm gonna
Speaker 2: try to think about how to ask this plately from
Speaker 2: an American perspective. When I when we look at what's
Speaker 2: going on in the UK, it always just seems like
Speaker 2: one mess after another, and they hate to go through
Speaker 2: all these different leaders and all these like weird scandals
Speaker 2: about who is at a random party or whatever, etcetera.
Speaker 2: That I don't understand. What should Americans know about how
Speaker 2: the UK works? That we don't having served on the
Speaker 2: Monetary Policy Committee. Well, I read these headlines and the Telegraph.
Speaker 2: I don't get it. What do as an American? What
Speaker 2: should I know about?
Speaker 5: How an American or even an American investor or well
Speaker 5: informed person needs to know that much about Okay, I
Speaker 5: mean I think that's cutting. Yeah, no, but I mean
Speaker 5: I think you know, and it's very hurtful to friends
Speaker 5: of mine in the UK. But it has interesting lessons,
Speaker 5: like a lot of countries do. For economic policy generally,
Speaker 5: there are a huge number of cultural and other exports
Speaker 5: we get from the UK then that you want to
Speaker 5: think about and be interested in. There is a genuine
Speaker 5: special relationship, as it's called, on national security issues in
Speaker 5: terms of sharing not just intelligence at a very detailed level,
Speaker 5: but there are boots on the ground, usually from British
Speaker 5: troops like they were in Afghanistan and Rock when we
Speaker 5: went in. But in terms of economics, basically terms of
Speaker 5: institutional structure and everything, well, I mean the deal is
Speaker 5: they changed the rules on elections a while back, which
Speaker 5: meant that they are now a hybrid between a presidential
Speaker 5: system and a parliamentary system. So in a parliamentary system,
Speaker 5: if people who's faith in the government. You have a
Speaker 5: cabinet reshuffle and you normally have a question called and
Speaker 5: the government turns over and you get a new government.
Speaker 5: In a presidential system, at a certain fixed interval, you
Speaker 5: get a new government they push through under David Cameron
Speaker 5: a change so that now if you lose the faith
Speaker 5: of the rest of parliam n or the faith of
Speaker 5: the people, you don't automatically have an election. You have
Speaker 5: a fixed term until the next election. But yet it's
Speaker 5: a parliamentary system, so it does have turnover and who's
Speaker 5: on top anyway. The upshot of all this is this
Speaker 5: is why you like having independent institutions like the Bank
Speaker 5: of England to try to keep things under control even
Speaker 5: if the government keeps cycling.
Speaker 4: Since Joe asked a random question, do I also get
Speaker 4: to ask a random question about the BOE? What happened
Speaker 4: to the.
Speaker 3: Fan charts, the inflation fan charts? Do you remember those?
Speaker 5: Oh? Indeed, the rivers of blood. I remember discussing with
Speaker 5: the people who created the fan charts. The fan charts,
Speaker 5: for those who don't know, is they were an attempt
Speaker 5: to show graphically not just the central point of the
Speaker 5: macroeconomic forecast but a probability distribution. So the idea there
Speaker 5: were these colored bands and whatever color they were, red, blue, green,
Speaker 5: towards the center of the most likely part of the forecast,
Speaker 5: they would be a darker color, and then they would
Speaker 5: go out from their lighter and lighter colors. And they
Speaker 5: were never perfect, but they were an attempt to say,
Speaker 5: there isn't just a point estimate forecast range of probabilities.
Speaker 3: You were capturing that uncertainty to your point.
Speaker 5: Right exactly, and you were able to make the fan
Speaker 5: charts say asymmetric, so the balance of risks is much
Speaker 5: more towards the inflationary towards the disinflationary side. What ended
Speaker 5: up happening was they did it a long time and
Speaker 5: the general publics never seemed to latch onto it, and
Speaker 5: then financial markets would, as they are want to do,
Speaker 5: keep trying to deduce very specific things from within the
Speaker 5: fan charts by like measuring the bands and trying to
Speaker 5: calculate backwards what caused the van charts to be the
Speaker 5: way they were so and I think the Bernanki review
Speaker 5: of the Bank of England took some issues with this
Speaker 5: and had some recommendations on how to change it. The
Speaker 5: bottom line, though, I think, is of why the fan
Speaker 5: charts were there is right, which is, even if you
Speaker 5: agree with me and you want the bank center bank
Speaker 5: to have a clear forks, you don't want the forecast
Speaker 5: to be next month or next year or next decade
Speaker 5: inflation will be two point seven percent. You want it
Speaker 5: to be a little more scenario ish, if that's a word,
Speaker 5: than just that.
Speaker 2: So I think I have just one last question. But
Speaker 2: you know, Tracy mentioned a certain binariness of this electoral outcome.
Speaker 2: There is a sense a part in which there's alignment,
Speaker 2: which is on the question of trade with China specifically,
Speaker 2: which has been one of these topics in which a
Speaker 2: rare sense of bipartisan agreement that a hard line on
Speaker 2: things like imports or tariffs or technology exports, so things
Speaker 2: like that is good. And I when we talked to
Speaker 2: you last year, you're quite concerned about some of these
Speaker 2: policies and how they could get worse, so with very
Speaker 2: serious consequences in your view. Here in August twenty twenty four,
Speaker 2: and that's more or less continued, and every once in
Speaker 2: a while, every few weeks there's another headline about export technology,
Speaker 2: export controls or whatever, what's concerning to you? Where are
Speaker 2: we on this path? And how dangerous is it right now?
Speaker 5: To you? I think, Joe, it's a pretty dangerous path, because,
Speaker 5: as you said, there has been an extreme convergence between
Speaker 5: both the Trump camp and the Hairs camp, between different
Speaker 5: party members in Congress on very great deal of wariness,
Speaker 5: if not anger, against China, and a desire to keep
Speaker 5: ramping up technology, export controls, economic challenges, and so on.
Speaker 5: Why is this dangerous? It's dangerous to me for two reasons.
Speaker 5: The first, actually the more important one, is it reinforces
Speaker 5: this so called security dilemma narrative that if I'm convinced
Speaker 5: China is trying to do the US in I'm going
Speaker 5: to take actions either preemptive or defensive and want to
Speaker 5: deprive them of various things in hopes of weakening their
Speaker 5: ability to harm me. And then when I start doing that,
Speaker 5: the Chinese say, well, the US is out to get me,
Speaker 5: so I have to take measures and pre empt and
Speaker 5: defend and this and that's mostly usually talked about in
Speaker 5: a more strictly military security context, but I think here
Speaker 5: and now the economics is reinforcing that, and so I
Speaker 5: worry it pushes US towards a conflict that may maybe avoidable. Again.
Speaker 5: None of this, for me is because I think the
Speaker 5: communist part of China, our president, she is doing good
Speaker 5: in the world, or that I'm deluded into thinking they
Speaker 5: only have good thoughts towards the US economy. But it
Speaker 5: is this realm now of escalation and group think in
Speaker 5: both capitals Washington and Beijing, that they're out to get me.
Speaker 5: That is reminiscent of times in the Cold War. That's
Speaker 5: reminiscent of other times in US foreign policy history when
Speaker 5: we've done things that probably were self harming and dangerous.
Speaker 5: The other side is the pure economic that there are
Speaker 5: a lot of issues to have tension with China about.
Speaker 5: The one that currently gets the most attention is the
Speaker 5: so called issue of overcapacity. That they are able to
Speaker 5: produce vast amounts of steel, electric vehicles, solar panels. There's
Speaker 5: a list, it's a very long list, and that they
Speaker 5: do this having cheated by putting in huge industrial subsidies
Speaker 5: and not letting other people, including US exports into their country,
Speaker 5: and they've forcibly extracted or stolen intellectual property. Anyway, I
Speaker 5: think there's a measure of truth in all of those accusations,
Speaker 5: but I also think they're not the whole story. China's
Speaker 5: ability to produce a very relationable, functional electric vehicle that
Speaker 5: they can sell at five thousand dollars a year isn't
Speaker 5: just due to subsidies. It isn't just due to cheating.
Speaker 5: And as a number of China experts have pointed out, yeah,
Speaker 5: they're pretty aggressive towards foreign producers, but they've got a
Speaker 5: huge competition within China. There are many, many producers. It's
Speaker 5: not just BYD and Tesla, yeah exactly. So you know,
Speaker 5: the story isn't quite as all one sided as the
Speaker 5: Americans make it out to be. But there is an
Speaker 5: issue that China's growth is slowing down for the reasons
Speaker 5: I wrote about a year ago in Foreign Affairs, and
Speaker 5: we talked about and they are looking for other places
Speaker 5: to do growth, and so they want to export lots
Speaker 5: of this stuff. And usually the economist's response to that
Speaker 5: is great, you want to give us basically free solar panels,
Speaker 5: and don't we just we get faster adoption of green tech?
Speaker 5: Why not? And so where the rubber hits the road
Speaker 5: is the discussion of what is the damage of in
Speaker 5: each industry adding a dominant position for some amount of time,
Speaker 5: and on evs, there's a huge amount of emotional political
Speaker 5: national security for all kinds of reasons why Americans and
Speaker 5: even Europeans don't want to have large numbers of Chinese evs.
Speaker 5: But we have to at least recognize that that's setting
Speaker 5: back the pace of our green technology revolution quite a bit.
Speaker 2: Adam Posen, thank you so much. So glad we were
Speaker 2: able to make this happen, and I'm able to do
Speaker 2: it again next year.
Speaker 6: Here it'll be an annual event at least at a minimum.
Speaker 2: Tracy, I really like catching up with Adam, just going backwards.
Speaker 2: You know, I've always been a little bit unsatisfied by
Speaker 2: the China overcapacity argument, because a country can't just become
Speaker 2: really great at producing large scales of competitive products by
Speaker 2: subsidies alone. It's impossible. Otherwise every country would do it,
Speaker 2: and many have tried and most have failed. So like
Speaker 2: this simple story that people tell us, like, oh, they
Speaker 2: cheated and they gave all this money to their local companies,
Speaker 2: and that's why it's okay to have retaliatory tariffs. Like
Speaker 2: I've never really been satisfied with that argument.
Speaker 4: I mean, I think there's an additional layer to it,
Speaker 4: which is the complaint is that they've cheated in terms
Speaker 4: of like patents and key and that too. Sure, but
Speaker 4: without getting too into the weeds, I do think Adam's
Speaker 4: point about like the one upmanship is real between China
Speaker 4: and the US, and now also within the US with
Speaker 4: two political candidates that both seem to be vying on
Speaker 4: the same issue.
Speaker 2: Totally so on the speech itself, on Powell's speech, I
Speaker 2: found Adam's critique to actually be very interesting and I
Speaker 2: hadn't thought about this sort of in the last three years.
Speaker 2: Accellent hole. He's given two is he characterized at rifle
Speaker 2: shot speeches, So twenty twenty two basically a kind of
Speaker 2: whatever it takes ish speech that we're going to get
Speaker 2: inflation down, and then another short speech this year we're
Speaker 2: not going to let the labor market deteriorate.
Speaker 5: You know.
Speaker 2: It's funny because this thing that we've talked about is
Speaker 2: what would the markets be anxious if the FED went
Speaker 2: fifty braces points or whatever. And if you take Adam's
Speaker 2: perspective to its conclusion, it's like if somehow FED seriousness
Speaker 2: about tackling unemployment is a reason for you to get spooked,
Speaker 2: then why not get spooked by the speech today? Why
Speaker 2: even talk about the fifty basis point risk? Why not
Speaker 2: get spooked by the fact that they're talking about fighting
Speaker 2: unemployment with the same sort of focus and approach as
Speaker 2: they're fighting inflation.
Speaker 4: Yeah, I think that's a really good take. This has
Speaker 4: come up a number of times. But like also that
Speaker 4: short termism, yeah, point, I do really wonder about that.
Speaker 4: Part of me thinks the A is trying to maintain
Speaker 4: some optionality, obviously at a very uncertain time. But on
Speaker 4: the other hand, I do wonder between now and September seventeenth, eighteenth,
Speaker 4: if you were to get a really good jobs report,
Speaker 4: or I'm not even a really good jobs report, a
Speaker 4: slightly better than expected jobs report, what would the market
Speaker 4: do and what would the Fed do? Yeah?
Speaker 2: I mean maybe, I mean a good jobs report probably
Speaker 2: just means, you know, it's a very a comfortable pace
Speaker 2: of twenty five's right, or something like that. But yeah,
Speaker 2: I mean, and you know, since we got that week
Speaker 2: July jobs report, we've had pretty benign initial jobless claims readings.
Speaker 2: We've also had some survey data that's not been that bad.
Speaker 2: Some of the private sector data. So indeed dot com
Speaker 2: puts out their own measures of labor market health actually
Speaker 2: not that bad. So there's some interesting stuff coming up
Speaker 2: between now, for sure, Between now and that September meeting.
Speaker 3: Plenty more to talk about, for sure.
Speaker 2: Shall we leave it there for now, Let's leave it there.
Speaker 4: This has been another episode of the Odd Lots podcast.
Speaker 4: I'm Tracy Alloway. You can follow me at Tracy Alloway.
Speaker 2: And I'm Joe Wisenthal. You can follow me at the Stalwart.
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Speaker 2: Bennett at Dashbot and Kilbrooks and Kilbrooks. And thank you
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