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Speaker 1: Hello, and welcome to Stephonomics, the podcast that brings the

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Speaker 1: global economy to you. We have a special episode this

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Speaker 1: week devoted to a conversation I had recently as part

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Speaker 1: of the Catre Economic Forum. The topic was restructuring the

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Speaker 1: global economy, and the speakers were two men whose views

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Speaker 1: always attract a lot of attention. Ray Dalio is the

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Speaker 1: co chief investment officer of Bridgewater Associates, the world's biggest

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Speaker 1: hedge fund, which he founded in He's a multi billionaire

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Speaker 1: who also became a best selling author recently when he

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Speaker 1: put his philosophy for life and Work into a book.

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Speaker 1: Larry Summers is well known to listeners of Stephanomics. His

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Speaker 1: Harvard economics professor who has also been U S Treasury

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Speaker 1: Secretary under President Bill Clinton and head of President Obama's

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Speaker 1: National Economic Council. Larry has been allowed critic of President

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Speaker 1: biden stimulus programs. Overall, He says the US is now

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Speaker 1: following the most irresponsible fiscal policies in forty years. Both

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Speaker 1: he and Ray Daniel have been sending the alarm on

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Speaker 1: inflation too, So I started by asking about that, Larry.

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Speaker 1: I mean, we have a former FED chair sitting as

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Speaker 1: Treasury Sectory Janet Yellen, but that doesn't seem to have

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Speaker 1: made her more concerned about the inflation that we have

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Speaker 1: coming down the track, and indeed can already see in

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Speaker 1: the US and despite that massive fiscal stimulus that's also

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Speaker 1: here and going to continue. Is there something that policymakers

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Speaker 1: in Washington are missing that you're seeing when you say

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Speaker 1: we should be worried more about inflation? Arithmetic? I don't

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Speaker 1: think the arithmetic is terribly difficult. We're looking at an

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Speaker 1: average GDP GAPP relative to potential GDP of two percent

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Speaker 1: this year, and we're looking at a fourteen percent of

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Speaker 1: g d P fiscal stimulus along with massive growth in

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Speaker 1: the FEDS bound sheet and very low real interest rates. Arithmetic.

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Speaker 1: We're looking at UH labor shortages as measured by job

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Speaker 1: openings or is measured by workers comfort and quitting at

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Speaker 1: record UH levels. Arithmetic, We're looking at a current rate

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Speaker 1: of inflation that, if you look at the last two

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Speaker 1: or three months, is running close to eight percent. Now,

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Speaker 1: no one thinks that that's the new guilty and rate

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Speaker 1: of inflation, So of course there's transient inflation. The important

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Speaker 1: question is whether that is six percentage points of transcence

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Speaker 1: inflation or four percentage points of trans scient inflation, and

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Speaker 1: I don't see the basis for policy makers serenity that

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Speaker 1: it's a full six percent of transient inflation. I welcomed

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Speaker 1: the feds limited efforts to markets used towards UH reality

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Speaker 1: and growing awareness that this overheating is likely to necessitate

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Speaker 1: a monetary policy response. But I still think the reality

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Speaker 1: of overheating, just if you look at the most basic

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Speaker 1: UH numbers, is UH being overestimated. The prevailing forecasts that

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Speaker 1: the FED in the Lighthouse, indeed, in much of the

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Speaker 1: consensus of professional economic forecasters in February, was that we

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Speaker 1: would have inflation just above two percent this year. We've

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Speaker 1: already had more inflation than that in the first five

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Speaker 1: months of the year. That would suggest to me that

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Speaker 1: people should not just modify their forecasts, but should think

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Speaker 1: about what their errors are thinking were that led them

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Speaker 1: to be so far off in their forecasts. Ray we

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Speaker 1: had therefore from Larry the economists, indeed, that the mathematicians

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Speaker 1: response to the situation. I mean, as an investor, we've

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Speaker 1: seen that pivot of some of some kind by the

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Speaker 1: FED last week, quite calm market reaction but should market

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Speaker 1: should investors generally be taking this threat a lot more seriously?

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Speaker 1: There are different kinds of inflation. UM. I'm not particularly

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Speaker 1: worried about the classic supply uh, you know, demand pressing

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Speaker 1: up against supply, although we'll find out soon because there's

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Speaker 1: something like ten pc of g d P s stored

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Speaker 1: in financial assets that's going to be coming out, and

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Speaker 1: so it's likely that there's going to be a big

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Speaker 1: pickup in demand and that will probably raise prices uh significantly.

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Speaker 1: And it also depends how you count for inflation, because

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Speaker 1: like housing prices, housing prices themselves are going up a lot,

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Speaker 1: that rental prices to going down a lot, And if

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Speaker 1: you went to a three percent inflation rate or some bounds,

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Speaker 1: you know that that's not one of those things that

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Speaker 1: gets me very nervous or very excited. The real issue

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Speaker 1: is that we have a supply demand issue of bonds,

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Speaker 1: because we're going to have to sell a lot of

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Speaker 1: bonds to those um in the world who own bond

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Speaker 1: inventories and they have very low interest rates, negative real

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Speaker 1: interest rates, and they're overweighted in US bonds and they're

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Speaker 1: gonna have to buy a lot more. And that is

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Speaker 1: also coming at a time when Chinese capital markets are

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Speaker 1: the capital markets of kindy more attractive. That creates a

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Speaker 1: supplied demand issue that can create a monetary inflation, because um,

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Speaker 1: there will not be enough demand to buy those bonds,

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Speaker 1: and that means that it's likely that the Federal Reserve

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Speaker 1: will not be able to taper or cut back and

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Speaker 1: might actually have to increase to prevent interest rates from

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Speaker 1: going up. And that's a classic monetary inflation. So that's

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Speaker 1: my bigger concern, um than just the spirit all right,

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Speaker 1: how much would you say this is a global issue,

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Speaker 1: not just something that's related to US fiscal policy. For example, Look,

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Speaker 1: I would say we're driving our car at a hundred

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Speaker 1: miles an hour on a road that is empty right

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Speaker 1: now but will always be empty. And I don't know

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Speaker 1: what form the accident will come, but when you're driving

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Speaker 1: a hundred miles an hour, it's probably not actually the

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Speaker 1: fastest way to get where you're going, because you're likely

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Speaker 1: to have some kind of dislocation, whether that comes in

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Speaker 1: product and labor markets, whether that comes in spiking of

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Speaker 1: interest rates, whether that comes first in a decline in uh,

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Speaker 1: the value of the dollar. I don't presume to be

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Speaker 1: able to predict, but that we're on a problematic course

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Speaker 1: where anything can happen and none of us can predict

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Speaker 1: markets precisely, but where the balance of risks is very

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Speaker 1: very much on the too much liquidity overheating side. Seems

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Speaker 1: to me to be relatively clear. I think these tendencies

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Speaker 1: are present in many places, but I think they're by

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Speaker 1: far more pronounced in the United States UH than they

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Speaker 1: are in UH the rest of the world. UM. It's

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Speaker 1: not that extraordinarily low interest rates are unique. It's not

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Speaker 1: that extraordinarily big budget deficits are unique. It's that having

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Speaker 1: them in tandem with an economy that's growing at what

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Speaker 1: people think I expect will be a double digit rate

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Speaker 1: this courter and UM, along with an epic degree of

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Speaker 1: labor shortage, that's what he is. UH. It seems to

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Speaker 1: me the extraordinary feature of UH, of this of this moment.

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Speaker 1: It would be a very different thing if we were

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Speaker 1: creating liquidity in an extraordinary way to respond to a

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Speaker 1: major output gap. But to be doing this kind end

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Speaker 1: of thing in a labor shortage economy seems to me

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Speaker 1: to be very intensely problem at you mentioned the dollar,

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Speaker 1: I mean I guess one could see there are different

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Speaker 1: scenarios that come out of this. I mean, the classic

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Speaker 1: scenario for the US growing faster than everybody else sucking

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Speaker 1: in a lot of imports would be that actually the

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Speaker 1: dollar could rise and export problems for the rest of

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Speaker 1: the world that way. But I know, but Ray, you

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Speaker 1: just mentioned that you potentially see the dollar heading down.

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Speaker 1: So is this is there a fundamental threat to the

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Speaker 1: dollar that comes out of this? Yes, the way I mean,

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Speaker 1: I'm just dealing with the mechanics. You know. The way

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Speaker 1: it works is you sell a lot of bonds. So

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Speaker 1: now who do you sell the bonds to? And when

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Speaker 1: I look around and calculating warms the bonds and what

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Speaker 1: they have to buy, and what the incentives of buying, uh,

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Speaker 1: they're they're bad. And in fact, you can see dollar

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Speaker 1: selling of bonds. What that means is then the Federal

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Speaker 1: Reserve is in a position of either seeing rates rise

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Speaker 1: because there's not enough demand to meet that in fact,

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Speaker 1: that they start selling it would be a very bad situation,

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Speaker 1: and that they can't let that happen because that would

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Speaker 1: be very bad for the economy and markets and all

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Speaker 1: sorts of things. So we have to keep in mind.

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Speaker 1: Where we are, we're at the end of a long

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Speaker 1: term debt cycle, and that means that the Federal Reserve

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Speaker 1: will have to do what they did last time, which

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Speaker 1: is to buy a lot more to prevent the interest

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Speaker 1: rates from going up. That's very non cyclical. It's one

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Speaker 1: of those cases where you know, in reserve currencies it's

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Speaker 1: a it's a very dangerous thing. Now you compare that

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Speaker 1: with alternatives, um first best alternatives or other asset classes,

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Speaker 1: but all so, let's say China, for example. I think

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Speaker 1: the situation that we're in is quite similar to the

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Speaker 1: going from the late seven late sixties into the early

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Speaker 1: seventies when there was a different core inflation rate in

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Speaker 1: the United States versus Germany and Japan. It's different balance

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Speaker 1: of payments situation. We're in a basically a balance of

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Speaker 1: payments deficit. They're in a balance of payments surf bus position.

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Speaker 1: That means that they chronologically worried about important inflation and

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Speaker 1: there's favorable capital flows. So I think that that's negative

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Speaker 1: for the dollar, particularly against Asian currencies. I have uh

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Speaker 1: raised instincts, but considerable agnosticism on timing. There are classic

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Speaker 1: periods in the early nineties is the one that comes

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Speaker 1: to mind where large budget deficits, it's spurred growth, sucked

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Speaker 1: in capital, and we're associated with an appreciation of UH

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Speaker 1: the dollar. So I'm not sure of timing here, but

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Speaker 1: I think al and I'm not as confident as Ray

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Speaker 1: as UH in the long term attractiveness of Chinese UH

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Speaker 1: capital markets and indeed of foreign UH capital markets UH

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Speaker 1: to the dollar, but I think the risks are substantial.

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Speaker 1: And one of the things that I hear people say

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Speaker 1: it seems most bizarre to me is they say, now

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Speaker 1: you don't understand UM now or in an era of globalization,

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Speaker 1: and so the inflation process is much stickier, or we

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Speaker 1: can't get rapid inflation because of globalization. I think the opposite.

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Speaker 1: Because of globalization, we are much more like a small

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Speaker 1: country than we used to be, and that means that

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Speaker 1: the dollar gets into trouble, which it easily could, that

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Speaker 1: the pass through the inflation is going to be more

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Speaker 1: rapid than it would have been UH decades decades ago.

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Speaker 1: So I basically share the kind of concern UH that

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Speaker 1: uh Ray is expressing, just with a bit more uncertainty

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Speaker 1: about timing. And I guess i'd add one more thing, Uh, Stephanie,

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Speaker 1: and I think it's kind of an important UH point,

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Speaker 1: and it's simplicit in something that Ray said. The really

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Speaker 1: hard monetary policy challenges are not actually moments like the

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Speaker 1: period after leaving or the period a year ago this spray,

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Speaker 1: when there's massive illiquidity and markets are breaking down and

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Speaker 1: it's entirely obvious the direction that policy should move. You

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Speaker 1: need to provide liquidity, and the questions have to do without.

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Speaker 1: The really hard monetary policy dilemmas are when it's not

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Speaker 1: clear which way to go, when on the one hand

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Speaker 1: you have a falling currency and an excess supply of bonds,

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Speaker 1: and on the other hand you have a weakening UH

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Speaker 1: economy and rising UH inequality and the fear of procession,

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Speaker 1: and you don't know whether you're um cutting rates to

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Speaker 1: respond to the latter problem we're doing tightening things to

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Speaker 1: respond to the former problem. Those are the really difficult

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Speaker 1: moments in monetary policy where even the direction is not

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Speaker 1: entirely clear, And my fear is that we're setting ourselves

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Speaker 1: up for such a moment. I think that the fact

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Speaker 1: that will you that they are actively looking to have

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Speaker 1: that overshoot an inflation the change of approach in terms

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Speaker 1: of the average inflation model in order to sort of

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Speaker 1: reset the system and indeed get that wage growth through

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Speaker 1: to parts of the economy that perhaps have not seen

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Speaker 1: it over the last few years, and that that could

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Speaker 1: be more politically sustainable long term. So so rad do

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Speaker 1: you see that that that is an argument that the

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Speaker 1: FED could make that it's worth some short term risk

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Speaker 1: to achieve that more sustainable outcome. As as I mentioned, UM,

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Speaker 1: I think if you see break even inflation rates goal

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Speaker 1: above three percent or something like that, and you see

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Speaker 1: that spurit, then you have the dilemma of the timing

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Speaker 1: of the monetary policy. As I said, I'm not particularly

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Speaker 1: worried about that particular inflation, but the other things that

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Speaker 1: worry about there um the whole shift um in terms

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Speaker 1: of the quantity of debt money that's being produced. It

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Speaker 1: goes into great bubbles, creates an enormous amount of liquidity

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Speaker 1: UM and that I think will be manifest by either

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Speaker 1: a rate rice tracing inflation or or dollar decline. And

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Speaker 1: I think then we also have to deal with the

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Speaker 1: changes in um uh, the political situation, the wealth gap situation.

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Speaker 1: The wealth with the wealth gap is the left right question. Um,

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Speaker 1: there's a lot of conflict in terms of left right politics.

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Speaker 1: There's there's a big move pretty much probably two more

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Speaker 1: left politics, believing that there's not enough fair share of

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Speaker 1: incomes and so on, and those great structural changes that

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Speaker 1: will have um um effects. The amount of money which

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Speaker 1: is has gone to profits has increased from about six

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Speaker 1: percent of revenue to about of revenue, and that's decreased

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Speaker 1: the share that's gone to incomes. Those things could be

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Speaker 1: structural changes that shift the wealth and income. I think

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Speaker 1: there we're here to those that are going to be

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Speaker 1: more beneficial let's say, two workers, than to um capitalists.

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Speaker 1: I think in general that's a particularly a US issue.

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Speaker 1: It is a European issue too, although it's a world issue,

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Speaker 1: but it differs around the world. So um, I think

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Speaker 1: those are the bigger issues. That and the rise of

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Speaker 1: China and what the rise of China means, those that

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Speaker 1: I think are the bigger issues. Larry, I mean the

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Speaker 1: global when you say the globalization as an interesting point

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Speaker 1: about with US becoming more like a single a single

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Speaker 1: country responding to things. But one could argue that the

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Speaker 1: things that globalization was associated structurally with falling inflation for

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Speaker 1: a long time at a period where you also have

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Speaker 1: central banks focusing more on inflation, and you have this

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Speaker 1: sort of shift em bargaining power away from workers. If

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Speaker 1: all of those things are going into reverse, Um, that

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Speaker 1: is potentially more inflationary, but also a better world for

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Speaker 1: for workers, or a more inclusive world, more sustainable politically.

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Speaker 1: Let me let me take your question a moment ago

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Speaker 1: and then and then come to that, stefanitiely Um. Look,

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Speaker 1: I think the arguments about average inflation targeting and so forth,

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Speaker 1: they kind of have their have their place. But I

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Speaker 1: think we need to recognize when you declare victor when

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Speaker 1: we've got a record labor shortage effect, probably shouldn't be

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Speaker 1: obsessing about making sure that their opportunities available. When we've

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Speaker 1: now got average inflation over the last two or three

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Speaker 1: years up to two, we don't have the problem of

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Speaker 1: meeting more inflation in order to get to some kind

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Speaker 1: of uh level of average. So I just think we

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Speaker 1: need to recognize the new reality is very different from

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Speaker 1: the secular stagnation reality of two years ago. Look, I

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Speaker 1: am all for a strengthening on a variety of dimensions

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Speaker 1: at the hand of workers. I think we need to

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Speaker 1: raise the wage. I think we need to re empower

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Speaker 1: the ability to organize unions. I think that you can't

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Speaker 1: read the stories about working conditions in Amazon and not

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Speaker 1: think that something should be happening to re balance things.

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Speaker 1: At the same time, I think you have to recognize

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Speaker 1: that doing all of those UH things, he is going

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Speaker 1: to bear on the inflation process. It's gonna bear on

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Speaker 1: what economists call the natural rate of unemployment, and you're

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Speaker 1: going to have it have a set of consequences, and

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Speaker 1: you need to factor those in UH in setting macro

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Speaker 1: economic policy. I mean, we had a moment very much

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Speaker 1: UH like the current moment, coming after a long period

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Speaker 1: of no inflation. We had a government that had very

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Speaker 1: expansive desires for what it was going to do. He

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Speaker 1: had a progressive tide sweeping through the country, changing attitudes

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Speaker 1: on very many fronts. We had that in the nineties sixties,

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Speaker 1: and what we saw was that inflation um rose more

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Speaker 1: rapidly than anybody anticipated. That a right wing tide in

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Speaker 1: politics was ushers in with the success of elections lags

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Speaker 1: of Richard Nixon and UH Ronald Raven and that what

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Speaker 1: happened in the ultimately did not serve the interests of

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Speaker 1: the progressives who supported it, and you saw a big

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Speaker 1: upsurge with the way in which the United States went

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Speaker 1: off gold and imposed tariffs universally fifty years ago UH

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Speaker 1: this summer, so a return to UH that does not

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Speaker 1: seem to me to be what we should be targeted.

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Speaker 1: I think Larry and I agree that this is looking

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Speaker 1: more like the late sixties UM transitioning to the early

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Speaker 1: seventies UM, and that has implications for the balance payments

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Speaker 1: and the dollars, so we've covered that UM. I'm more

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Speaker 1: worried about the inflation in UH financial assets and what

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Speaker 1: that means for returns and bubbles that are developing, because

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Speaker 1: there's a massive amount of liquidity around and it's being

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Speaker 1: thrown around so that it's a difficult environment for those

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Speaker 1: returns to be justified. I think we're building kind of

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Speaker 1: a bubble. So I think inflation in financial assets and

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Speaker 1: so on is UM is an issue related to liquidity

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Speaker 1: anyway you think about it. What's happened is the net

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Speaker 1: worth of UM of of Americans and most people and

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Speaker 1: developed countries is higher than it's ever been. I mean,

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Speaker 1: all of a sudden, it was a big boost the

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Speaker 1: net income, yet production isn't. So what you've seen is

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Speaker 1: a lot of people got a lot of money which

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Speaker 1: they're still holding, and they put it into the stock

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Speaker 1: market everything and interest rates go down and they borrow,

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Speaker 1: and that is a dynamic that creates a bubble. And

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Speaker 1: that's what I would say is the main the main issue.

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Speaker 1: Let me just say that there's some division of labor

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Speaker 1: on this panel, and Ray has talked more about financial assets,

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Speaker 1: but I share his UH concern about asset price inflation,

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Speaker 1: and I would say the idea that lower returns have

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Speaker 1: led to higher asset prices, and of course, while that

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Speaker 1: transition is taking place, everybody's enjoying wonderful capital gains. There's

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Speaker 1: been a tendency for people like me and Ray to

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Speaker 1: warn for some years now that long term returns are

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Speaker 1: going to be lower on assets. And we've been saying

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Speaker 1: that for some years, and people who've been in asset

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Speaker 1: markets have done very very well because even lower UH,

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Speaker 1: even higher capitalization ratios, price earnings ratios, asset price to

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Speaker 1: rent ratios have been taken. And I suppose some people

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Speaker 1: are probably concluding that the warnings are unwarranted as a

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Speaker 1: consequence of that nobody knows for sure, but my feeling

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Speaker 1: would be that the warnings are now even more valid

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Speaker 1: because the conditions precedent there are the basis for the

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Speaker 1: warnings have become even more true with the passage of time.

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Speaker 1: Both of you have you come in it from different perspectives.

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Speaker 1: You may put different shades on it, but you clearly

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Speaker 1: think that there's some potential bumps coming down the road,

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Speaker 1: or risks that we need to be much more concerned about. Larry,

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Speaker 1: I know you wish that that stimulus in the US

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Speaker 1: have been spent on different things at the beginning of

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Speaker 1: the year that might actually support the supply side of

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Speaker 1: the US economy, UM and other things. You know, with

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Speaker 1: the mistakes, if you like, have already been made in

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Speaker 1: your view, But what's the best response, assuming that the

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Speaker 1: FED and indeed other policymakers accept your analysis, what's the

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Speaker 1: most constructive response? Now that wouldn't it self caused a

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Speaker 1: lot of volacility and upset. The necessary responses probably will

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Speaker 1: in the short run cause some volatility and upset. But

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Speaker 1: I'd like to see signals that overheating, liquidity, and bubbles

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Speaker 1: are now seen as major risks facing the American economy,

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Speaker 1: and I'd like to see a program of structural improvement

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Speaker 1: for the supply side that is fully paid for by

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Speaker 1: tax increases as the response, and a reduction in the

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Speaker 1: amount of populist transferring of UH cash to large routs

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Speaker 1: UM in the economy. I think we know that I

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Speaker 1: probably Larry and I agree on just saying it very simply, UM,

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Speaker 1: there's a ton of money around UH, and about your

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Speaker 1: money goes down and how much it goes down relative

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Speaker 1: to goods and services and how much it goes down

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Speaker 1: to financial assets. It's going to go down to both,

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Speaker 1: and that really raises financial assets and it changes capital

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Speaker 1: flows in important ways. I think that it's easy to

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Speaker 1: say that the fit should tighten, and I think that

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Speaker 1: they should. They put on the brakes in a little bit.

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Speaker 1: But I think you'll see a very sensitive market and

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Speaker 1: a very sensitive economy because the duration of assets has

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Speaker 1: gone very, very long, and just the slightest touching on

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Speaker 1: those brakes has the effect of m hurrying markets because

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Speaker 1: of where they're priced and also UM passing through to

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Speaker 1: the economy. We have to keep in mind since the

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Speaker 1: cyclical peak in every cyclical peak in interest rates and

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Speaker 1: every cyclical drought has gone steadily below the one, but

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Speaker 1: for it until we've had zero, and then every quantitative

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Speaker 1: easy in other words, purchasing of money, buying of money,

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Speaker 1: and purchasing the bonds has been greater than the one

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Speaker 1: before it. That is a debasement of the value of

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Speaker 1: the currency in one way or another. So I think

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Speaker 1: that I think the challenge of the FED is going

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Speaker 1: to be able to balance those in a highly political

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Speaker 1: sensitive environment because of this wealth class class. So it's

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Speaker 1: a difficult position for the FED. I think, well, that's um,

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Speaker 1: that's that's two perspectives we've had on the what what

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Speaker 1: leadership in a post pandemic world looks like? And I

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Speaker 1: know we've we've we've we've focused a lot on this

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Speaker 1: financial piece, but it clearly has huge global implications as

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Speaker 1: well as implications for the path for the US economy

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Speaker 1: is on for the next few years. So thank you

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Speaker 1: very much to both of you. Rate Value and Laurence

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Speaker 1: Summers will appreciate you you're joining us. That's it for

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Speaker 1: this episode of Stephonomics. We'll be back with more reporting

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Speaker 1: on as well as analyzing of the global economy next week,

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Speaker 1: but you can get more in the meantime from the

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Speaker 1: Bloomberg Terminal or website, and by following our Economics on Twitter.

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Speaker 1: This episode was produced by Magnus Hendrickson, with thanks to

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Speaker 1: Ray Dalio, Larry Summerson, and Lisa R. Shamble. Mike Sasso

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Speaker 1: is executive producer of Stephonomics and the head of Bloomberg

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Speaker 1: Podcast is Francesco