Speaker 1: Hello, and welcome to Stephonomics, the podcast that brings the
Speaker 1: global economy to you. We have a special episode this
Speaker 1: week devoted to a conversation I had recently as part
Speaker 1: of the Catre Economic Forum. The topic was restructuring the
Speaker 1: global economy, and the speakers were two men whose views
Speaker 1: always attract a lot of attention. Ray Dalio is the
Speaker 1: co chief investment officer of Bridgewater Associates, the world's biggest
Speaker 1: hedge fund, which he founded in He's a multi billionaire
Speaker 1: who also became a best selling author recently when he
Speaker 1: put his philosophy for life and Work into a book.
Speaker 1: Larry Summers is well known to listeners of Stephanomics. His
Speaker 1: Harvard economics professor who has also been U S Treasury
Speaker 1: Secretary under President Bill Clinton and head of President Obama's
Speaker 1: National Economic Council. Larry has been allowed critic of President
Speaker 1: biden stimulus programs. Overall, He says the US is now
Speaker 1: following the most irresponsible fiscal policies in forty years. Both
Speaker 1: he and Ray Daniel have been sending the alarm on
Speaker 1: inflation too, So I started by asking about that, Larry.
Speaker 1: I mean, we have a former FED chair sitting as
Speaker 1: Treasury Sectory Janet Yellen, but that doesn't seem to have
Speaker 1: made her more concerned about the inflation that we have
Speaker 1: coming down the track, and indeed can already see in
Speaker 1: the US and despite that massive fiscal stimulus that's also
Speaker 1: here and going to continue. Is there something that policymakers
Speaker 1: in Washington are missing that you're seeing when you say
Speaker 1: we should be worried more about inflation? Arithmetic? I don't
Speaker 1: think the arithmetic is terribly difficult. We're looking at an
Speaker 1: average GDP GAPP relative to potential GDP of two percent
Speaker 1: this year, and we're looking at a fourteen percent of
Speaker 1: g d P fiscal stimulus along with massive growth in
Speaker 1: the FEDS bound sheet and very low real interest rates. Arithmetic.
Speaker 1: We're looking at UH labor shortages as measured by job
Speaker 1: openings or is measured by workers comfort and quitting at
Speaker 1: record UH levels. Arithmetic, We're looking at a current rate
Speaker 1: of inflation that, if you look at the last two
Speaker 1: or three months, is running close to eight percent. Now,
Speaker 1: no one thinks that that's the new guilty and rate
Speaker 1: of inflation, So of course there's transient inflation. The important
Speaker 1: question is whether that is six percentage points of transcence
Speaker 1: inflation or four percentage points of trans scient inflation, and
Speaker 1: I don't see the basis for policy makers serenity that
Speaker 1: it's a full six percent of transient inflation. I welcomed
Speaker 1: the feds limited efforts to markets used towards UH reality
Speaker 1: and growing awareness that this overheating is likely to necessitate
Speaker 1: a monetary policy response. But I still think the reality
Speaker 1: of overheating, just if you look at the most basic
Speaker 1: UH numbers, is UH being overestimated. The prevailing forecasts that
Speaker 1: the FED in the Lighthouse, indeed, in much of the
Speaker 1: consensus of professional economic forecasters in February, was that we
Speaker 1: would have inflation just above two percent this year. We've
Speaker 1: already had more inflation than that in the first five
Speaker 1: months of the year. That would suggest to me that
Speaker 1: people should not just modify their forecasts, but should think
Speaker 1: about what their errors are thinking were that led them
Speaker 1: to be so far off in their forecasts. Ray we
Speaker 1: had therefore from Larry the economists, indeed, that the mathematicians
Speaker 1: response to the situation. I mean, as an investor, we've
Speaker 1: seen that pivot of some of some kind by the
Speaker 1: FED last week, quite calm market reaction but should market
Speaker 1: should investors generally be taking this threat a lot more seriously?
Speaker 1: There are different kinds of inflation. UM. I'm not particularly
Speaker 1: worried about the classic supply uh, you know, demand pressing
Speaker 1: up against supply, although we'll find out soon because there's
Speaker 1: something like ten pc of g d P s stored
Speaker 1: in financial assets that's going to be coming out, and
Speaker 1: so it's likely that there's going to be a big
Speaker 1: pickup in demand and that will probably raise prices uh significantly.
Speaker 1: And it also depends how you count for inflation, because
Speaker 1: like housing prices, housing prices themselves are going up a lot,
Speaker 1: that rental prices to going down a lot, And if
Speaker 1: you went to a three percent inflation rate or some bounds,
Speaker 1: you know that that's not one of those things that
Speaker 1: gets me very nervous or very excited. The real issue
Speaker 1: is that we have a supply demand issue of bonds,
Speaker 1: because we're going to have to sell a lot of
Speaker 1: bonds to those um in the world who own bond
Speaker 1: inventories and they have very low interest rates, negative real
Speaker 1: interest rates, and they're overweighted in US bonds and they're
Speaker 1: gonna have to buy a lot more. And that is
Speaker 1: also coming at a time when Chinese capital markets are
Speaker 1: the capital markets of kindy more attractive. That creates a
Speaker 1: supplied demand issue that can create a monetary inflation, because um,
Speaker 1: there will not be enough demand to buy those bonds,
Speaker 1: and that means that it's likely that the Federal Reserve
Speaker 1: will not be able to taper or cut back and
Speaker 1: might actually have to increase to prevent interest rates from
Speaker 1: going up. And that's a classic monetary inflation. So that's
Speaker 1: my bigger concern, um than just the spirit all right,
Speaker 1: how much would you say this is a global issue,
Speaker 1: not just something that's related to US fiscal policy. For example, Look,
Speaker 1: I would say we're driving our car at a hundred
Speaker 1: miles an hour on a road that is empty right
Speaker 1: now but will always be empty. And I don't know
Speaker 1: what form the accident will come, but when you're driving
Speaker 1: a hundred miles an hour, it's probably not actually the
Speaker 1: fastest way to get where you're going, because you're likely
Speaker 1: to have some kind of dislocation, whether that comes in
Speaker 1: product and labor markets, whether that comes in spiking of
Speaker 1: interest rates, whether that comes first in a decline in uh,
Speaker 1: the value of the dollar. I don't presume to be
Speaker 1: able to predict, but that we're on a problematic course
Speaker 1: where anything can happen and none of us can predict
Speaker 1: markets precisely, but where the balance of risks is very
Speaker 1: very much on the too much liquidity overheating side. Seems
Speaker 1: to me to be relatively clear. I think these tendencies
Speaker 1: are present in many places, but I think they're by
Speaker 1: far more pronounced in the United States UH than they
Speaker 1: are in UH the rest of the world. UM. It's
Speaker 1: not that extraordinarily low interest rates are unique. It's not
Speaker 1: that extraordinarily big budget deficits are unique. It's that having
Speaker 1: them in tandem with an economy that's growing at what
Speaker 1: people think I expect will be a double digit rate
Speaker 1: this courter and UM, along with an epic degree of
Speaker 1: labor shortage, that's what he is. UH. It seems to
Speaker 1: me the extraordinary feature of UH, of this of this moment.
Speaker 1: It would be a very different thing if we were
Speaker 1: creating liquidity in an extraordinary way to respond to a
Speaker 1: major output gap. But to be doing this kind end
Speaker 1: of thing in a labor shortage economy seems to me
Speaker 1: to be very intensely problem at you mentioned the dollar,
Speaker 1: I mean I guess one could see there are different
Speaker 1: scenarios that come out of this. I mean, the classic
Speaker 1: scenario for the US growing faster than everybody else sucking
Speaker 1: in a lot of imports would be that actually the
Speaker 1: dollar could rise and export problems for the rest of
Speaker 1: the world that way. But I know, but Ray, you
Speaker 1: just mentioned that you potentially see the dollar heading down.
Speaker 1: So is this is there a fundamental threat to the
Speaker 1: dollar that comes out of this? Yes, the way I mean,
Speaker 1: I'm just dealing with the mechanics. You know. The way
Speaker 1: it works is you sell a lot of bonds. So
Speaker 1: now who do you sell the bonds to? And when
Speaker 1: I look around and calculating warms the bonds and what
Speaker 1: they have to buy, and what the incentives of buying, uh,
Speaker 1: they're they're bad. And in fact, you can see dollar
Speaker 1: selling of bonds. What that means is then the Federal
Speaker 1: Reserve is in a position of either seeing rates rise
Speaker 1: because there's not enough demand to meet that in fact,
Speaker 1: that they start selling it would be a very bad situation,
Speaker 1: and that they can't let that happen because that would
Speaker 1: be very bad for the economy and markets and all
Speaker 1: sorts of things. So we have to keep in mind.
Speaker 1: Where we are, we're at the end of a long
Speaker 1: term debt cycle, and that means that the Federal Reserve
Speaker 1: will have to do what they did last time, which
Speaker 1: is to buy a lot more to prevent the interest
Speaker 1: rates from going up. That's very non cyclical. It's one
Speaker 1: of those cases where you know, in reserve currencies it's
Speaker 1: a it's a very dangerous thing. Now you compare that
Speaker 1: with alternatives, um first best alternatives or other asset classes,
Speaker 1: but all so, let's say China, for example. I think
Speaker 1: the situation that we're in is quite similar to the
Speaker 1: going from the late seven late sixties into the early
Speaker 1: seventies when there was a different core inflation rate in
Speaker 1: the United States versus Germany and Japan. It's different balance
Speaker 1: of payments situation. We're in a basically a balance of
Speaker 1: payments deficit. They're in a balance of payments surf bus position.
Speaker 1: That means that they chronologically worried about important inflation and
Speaker 1: there's favorable capital flows. So I think that that's negative
Speaker 1: for the dollar, particularly against Asian currencies. I have uh
Speaker 1: raised instincts, but considerable agnosticism on timing. There are classic
Speaker 1: periods in the early nineties is the one that comes
Speaker 1: to mind where large budget deficits, it's spurred growth, sucked
Speaker 1: in capital, and we're associated with an appreciation of UH
Speaker 1: the dollar. So I'm not sure of timing here, but
Speaker 1: I think al and I'm not as confident as Ray
Speaker 1: as UH in the long term attractiveness of Chinese UH
Speaker 1: capital markets and indeed of foreign UH capital markets UH
Speaker 1: to the dollar, but I think the risks are substantial.
Speaker 1: And one of the things that I hear people say
Speaker 1: it seems most bizarre to me is they say, now
Speaker 1: you don't understand UM now or in an era of globalization,
Speaker 1: and so the inflation process is much stickier, or we
Speaker 1: can't get rapid inflation because of globalization. I think the opposite.
Speaker 1: Because of globalization, we are much more like a small
Speaker 1: country than we used to be, and that means that
Speaker 1: the dollar gets into trouble, which it easily could, that
Speaker 1: the pass through the inflation is going to be more
Speaker 1: rapid than it would have been UH decades decades ago.
Speaker 1: So I basically share the kind of concern UH that
Speaker 1: uh Ray is expressing, just with a bit more uncertainty
Speaker 1: about timing. And I guess i'd add one more thing, Uh, Stephanie,
Speaker 1: and I think it's kind of an important UH point,
Speaker 1: and it's simplicit in something that Ray said. The really
Speaker 1: hard monetary policy challenges are not actually moments like the
Speaker 1: period after leaving or the period a year ago this spray,
Speaker 1: when there's massive illiquidity and markets are breaking down and
Speaker 1: it's entirely obvious the direction that policy should move. You
Speaker 1: need to provide liquidity, and the questions have to do without.
Speaker 1: The really hard monetary policy dilemmas are when it's not
Speaker 1: clear which way to go, when on the one hand
Speaker 1: you have a falling currency and an excess supply of bonds,
Speaker 1: and on the other hand you have a weakening UH
Speaker 1: economy and rising UH inequality and the fear of procession,
Speaker 1: and you don't know whether you're um cutting rates to
Speaker 1: respond to the latter problem we're doing tightening things to
Speaker 1: respond to the former problem. Those are the really difficult
Speaker 1: moments in monetary policy where even the direction is not
Speaker 1: entirely clear, And my fear is that we're setting ourselves
Speaker 1: up for such a moment. I think that the fact
Speaker 1: that will you that they are actively looking to have
Speaker 1: that overshoot an inflation the change of approach in terms
Speaker 1: of the average inflation model in order to sort of
Speaker 1: reset the system and indeed get that wage growth through
Speaker 1: to parts of the economy that perhaps have not seen
Speaker 1: it over the last few years, and that that could
Speaker 1: be more politically sustainable long term. So so rad do
Speaker 1: you see that that that is an argument that the
Speaker 1: FED could make that it's worth some short term risk
Speaker 1: to achieve that more sustainable outcome. As as I mentioned, UM,
Speaker 1: I think if you see break even inflation rates goal
Speaker 1: above three percent or something like that, and you see
Speaker 1: that spurit, then you have the dilemma of the timing
Speaker 1: of the monetary policy. As I said, I'm not particularly
Speaker 1: worried about that particular inflation, but the other things that
Speaker 1: worry about there um the whole shift um in terms
Speaker 1: of the quantity of debt money that's being produced. It
Speaker 1: goes into great bubbles, creates an enormous amount of liquidity
Speaker 1: UM and that I think will be manifest by either
Speaker 1: a rate rice tracing inflation or or dollar decline. And
Speaker 1: I think then we also have to deal with the
Speaker 1: changes in um uh, the political situation, the wealth gap situation.
Speaker 1: The wealth with the wealth gap is the left right question. Um,
Speaker 1: there's a lot of conflict in terms of left right politics.
Speaker 1: There's there's a big move pretty much probably two more
Speaker 1: left politics, believing that there's not enough fair share of
Speaker 1: incomes and so on, and those great structural changes that
Speaker 1: will have um um effects. The amount of money which
Speaker 1: is has gone to profits has increased from about six
Speaker 1: percent of revenue to about of revenue, and that's decreased
Speaker 1: the share that's gone to incomes. Those things could be
Speaker 1: structural changes that shift the wealth and income. I think
Speaker 1: there we're here to those that are going to be
Speaker 1: more beneficial let's say, two workers, than to um capitalists.
Speaker 1: I think in general that's a particularly a US issue.
Speaker 1: It is a European issue too, although it's a world issue,
Speaker 1: but it differs around the world. So um, I think
Speaker 1: those are the bigger issues. That and the rise of
Speaker 1: China and what the rise of China means, those that
Speaker 1: I think are the bigger issues. Larry, I mean the
Speaker 1: global when you say the globalization as an interesting point
Speaker 1: about with US becoming more like a single a single
Speaker 1: country responding to things. But one could argue that the
Speaker 1: things that globalization was associated structurally with falling inflation for
Speaker 1: a long time at a period where you also have
Speaker 1: central banks focusing more on inflation, and you have this
Speaker 1: sort of shift em bargaining power away from workers. If
Speaker 1: all of those things are going into reverse, Um, that
Speaker 1: is potentially more inflationary, but also a better world for
Speaker 1: for workers, or a more inclusive world, more sustainable politically.
Speaker 1: Let me let me take your question a moment ago
Speaker 1: and then and then come to that, stefanitiely Um. Look,
Speaker 1: I think the arguments about average inflation targeting and so forth,
Speaker 1: they kind of have their have their place. But I
Speaker 1: think we need to recognize when you declare victor when
Speaker 1: we've got a record labor shortage effect, probably shouldn't be
Speaker 1: obsessing about making sure that their opportunities available. When we've
Speaker 1: now got average inflation over the last two or three
Speaker 1: years up to two, we don't have the problem of
Speaker 1: meeting more inflation in order to get to some kind
Speaker 1: of uh level of average. So I just think we
Speaker 1: need to recognize the new reality is very different from
Speaker 1: the secular stagnation reality of two years ago. Look, I
Speaker 1: am all for a strengthening on a variety of dimensions
Speaker 1: at the hand of workers. I think we need to
Speaker 1: raise the wage. I think we need to re empower
Speaker 1: the ability to organize unions. I think that you can't
Speaker 1: read the stories about working conditions in Amazon and not
Speaker 1: think that something should be happening to re balance things.
Speaker 1: At the same time, I think you have to recognize
Speaker 1: that doing all of those UH things, he is going
Speaker 1: to bear on the inflation process. It's gonna bear on
Speaker 1: what economists call the natural rate of unemployment, and you're
Speaker 1: going to have it have a set of consequences, and
Speaker 1: you need to factor those in UH in setting macro
Speaker 1: economic policy. I mean, we had a moment very much
Speaker 1: UH like the current moment, coming after a long period
Speaker 1: of no inflation. We had a government that had very
Speaker 1: expansive desires for what it was going to do. He
Speaker 1: had a progressive tide sweeping through the country, changing attitudes
Speaker 1: on very many fronts. We had that in the nineties sixties,
Speaker 1: and what we saw was that inflation um rose more
Speaker 1: rapidly than anybody anticipated. That a right wing tide in
Speaker 1: politics was ushers in with the success of elections lags
Speaker 1: of Richard Nixon and UH Ronald Raven and that what
Speaker 1: happened in the ultimately did not serve the interests of
Speaker 1: the progressives who supported it, and you saw a big
Speaker 1: upsurge with the way in which the United States went
Speaker 1: off gold and imposed tariffs universally fifty years ago UH
Speaker 1: this summer, so a return to UH that does not
Speaker 1: seem to me to be what we should be targeted.
Speaker 1: I think Larry and I agree that this is looking
Speaker 1: more like the late sixties UM transitioning to the early
Speaker 1: seventies UM, and that has implications for the balance payments
Speaker 1: and the dollars, so we've covered that UM. I'm more
Speaker 1: worried about the inflation in UH financial assets and what
Speaker 1: that means for returns and bubbles that are developing, because
Speaker 1: there's a massive amount of liquidity around and it's being
Speaker 1: thrown around so that it's a difficult environment for those
Speaker 1: returns to be justified. I think we're building kind of
Speaker 1: a bubble. So I think inflation in financial assets and
Speaker 1: so on is UM is an issue related to liquidity
Speaker 1: anyway you think about it. What's happened is the net
Speaker 1: worth of UM of of Americans and most people and
Speaker 1: developed countries is higher than it's ever been. I mean,
Speaker 1: all of a sudden, it was a big boost the
Speaker 1: net income, yet production isn't. So what you've seen is
Speaker 1: a lot of people got a lot of money which
Speaker 1: they're still holding, and they put it into the stock
Speaker 1: market everything and interest rates go down and they borrow,
Speaker 1: and that is a dynamic that creates a bubble. And
Speaker 1: that's what I would say is the main the main issue.
Speaker 1: Let me just say that there's some division of labor
Speaker 1: on this panel, and Ray has talked more about financial assets,
Speaker 1: but I share his UH concern about asset price inflation,
Speaker 1: and I would say the idea that lower returns have
Speaker 1: led to higher asset prices, and of course, while that
Speaker 1: transition is taking place, everybody's enjoying wonderful capital gains. There's
Speaker 1: been a tendency for people like me and Ray to
Speaker 1: warn for some years now that long term returns are
Speaker 1: going to be lower on assets. And we've been saying
Speaker 1: that for some years, and people who've been in asset
Speaker 1: markets have done very very well because even lower UH,
Speaker 1: even higher capitalization ratios, price earnings ratios, asset price to
Speaker 1: rent ratios have been taken. And I suppose some people
Speaker 1: are probably concluding that the warnings are unwarranted as a
Speaker 1: consequence of that nobody knows for sure, but my feeling
Speaker 1: would be that the warnings are now even more valid
Speaker 1: because the conditions precedent there are the basis for the
Speaker 1: warnings have become even more true with the passage of time.
Speaker 1: Both of you have you come in it from different perspectives.
Speaker 1: You may put different shades on it, but you clearly
Speaker 1: think that there's some potential bumps coming down the road,
Speaker 1: or risks that we need to be much more concerned about. Larry,
Speaker 1: I know you wish that that stimulus in the US
Speaker 1: have been spent on different things at the beginning of
Speaker 1: the year that might actually support the supply side of
Speaker 1: the US economy, UM and other things. You know, with
Speaker 1: the mistakes, if you like, have already been made in
Speaker 1: your view, But what's the best response, assuming that the
Speaker 1: FED and indeed other policymakers accept your analysis, what's the
Speaker 1: most constructive response? Now that wouldn't it self caused a
Speaker 1: lot of volacility and upset. The necessary responses probably will
Speaker 1: in the short run cause some volatility and upset. But
Speaker 1: I'd like to see signals that overheating, liquidity, and bubbles
Speaker 1: are now seen as major risks facing the American economy,
Speaker 1: and I'd like to see a program of structural improvement
Speaker 1: for the supply side that is fully paid for by
Speaker 1: tax increases as the response, and a reduction in the
Speaker 1: amount of populist transferring of UH cash to large routs
Speaker 1: UM in the economy. I think we know that I
Speaker 1: probably Larry and I agree on just saying it very simply, UM,
Speaker 1: there's a ton of money around UH, and about your
Speaker 1: money goes down and how much it goes down relative
Speaker 1: to goods and services and how much it goes down
Speaker 1: to financial assets. It's going to go down to both,
Speaker 1: and that really raises financial assets and it changes capital
Speaker 1: flows in important ways. I think that it's easy to
Speaker 1: say that the fit should tighten, and I think that
Speaker 1: they should. They put on the brakes in a little bit.
Speaker 1: But I think you'll see a very sensitive market and
Speaker 1: a very sensitive economy because the duration of assets has
Speaker 1: gone very, very long, and just the slightest touching on
Speaker 1: those brakes has the effect of m hurrying markets because
Speaker 1: of where they're priced and also UM passing through to
Speaker 1: the economy. We have to keep in mind since the
Speaker 1: cyclical peak in every cyclical peak in interest rates and
Speaker 1: every cyclical drought has gone steadily below the one, but
Speaker 1: for it until we've had zero, and then every quantitative
Speaker 1: easy in other words, purchasing of money, buying of money,
Speaker 1: and purchasing the bonds has been greater than the one
Speaker 1: before it. That is a debasement of the value of
Speaker 1: the currency in one way or another. So I think
Speaker 1: that I think the challenge of the FED is going
Speaker 1: to be able to balance those in a highly political
Speaker 1: sensitive environment because of this wealth class class. So it's
Speaker 1: a difficult position for the FED. I think, well, that's um,
Speaker 1: that's that's two perspectives we've had on the what what
Speaker 1: leadership in a post pandemic world looks like? And I
Speaker 1: know we've we've we've we've focused a lot on this
Speaker 1: financial piece, but it clearly has huge global implications as
Speaker 1: well as implications for the path for the US economy
Speaker 1: is on for the next few years. So thank you
Speaker 1: very much to both of you. Rate Value and Laurence
Speaker 1: Summers will appreciate you you're joining us. That's it for
Speaker 1: this episode of Stephonomics. We'll be back with more reporting
Speaker 1: on as well as analyzing of the global economy next week,
Speaker 1: but you can get more in the meantime from the
Speaker 1: Bloomberg Terminal or website, and by following our Economics on Twitter.
Speaker 1: This episode was produced by Magnus Hendrickson, with thanks to
Speaker 1: Ray Dalio, Larry Summerson, and Lisa R. Shamble. Mike Sasso
Speaker 1: is executive producer of Stephonomics and the head of Bloomberg
Speaker 1: Podcast is Francesco