WEBVTT - Ray Dalio and Lawrence Summers Keep Sounding the Inflation Alarm

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<v Speaker 1>Hello, and welcome to Stephonomics, the podcast that brings the

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<v Speaker 1>global economy to you. We have a special episode this

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<v Speaker 1>week devoted to a conversation I had recently as part

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<v Speaker 1>of the Catre Economic Forum. The topic was restructuring the

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<v Speaker 1>global economy, and the speakers were two men whose views

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<v Speaker 1>always attract a lot of attention. Ray Dalio is the

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<v Speaker 1>co chief investment officer of Bridgewater Associates, the world's biggest

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<v Speaker 1>hedge fund, which he founded in He's a multi billionaire

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<v Speaker 1>who also became a best selling author recently when he

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<v Speaker 1>put his philosophy for life and Work into a book.

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<v Speaker 1>Larry Summers is well known to listeners of Stephanomics. His

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<v Speaker 1>Harvard economics professor who has also been U S Treasury

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<v Speaker 1>Secretary under President Bill Clinton and head of President Obama's

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<v Speaker 1>National Economic Council. Larry has been allowed critic of President

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<v Speaker 1>biden stimulus programs. Overall, He says the US is now

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<v Speaker 1>following the most irresponsible fiscal policies in forty years. Both

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<v Speaker 1>he and Ray Daniel have been sending the alarm on

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<v Speaker 1>inflation too, So I started by asking about that, Larry.

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<v Speaker 1>I mean, we have a former FED chair sitting as

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<v Speaker 1>Treasury Sectory Janet Yellen, but that doesn't seem to have

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<v Speaker 1>made her more concerned about the inflation that we have

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<v Speaker 1>coming down the track, and indeed can already see in

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<v Speaker 1>the US and despite that massive fiscal stimulus that's also

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<v Speaker 1>here and going to continue. Is there something that policymakers

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<v Speaker 1>in Washington are missing that you're seeing when you say

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<v Speaker 1>we should be worried more about inflation? Arithmetic? I don't

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<v Speaker 1>think the arithmetic is terribly difficult. We're looking at an

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<v Speaker 1>average GDP GAPP relative to potential GDP of two percent

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<v Speaker 1>this year, and we're looking at a fourteen percent of

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<v Speaker 1>g d P fiscal stimulus along with massive growth in

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<v Speaker 1>the FEDS bound sheet and very low real interest rates. Arithmetic.

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<v Speaker 1>We're looking at UH labor shortages as measured by job

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<v Speaker 1>openings or is measured by workers comfort and quitting at

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

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<v Speaker 1>of inflation that, if you look at the last two

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<v Speaker 1>or three months, is running close to eight percent. Now,

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<v Speaker 1>no one thinks that that's the new guilty and rate

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<v Speaker 1>of inflation, So of course there's transient inflation. The important

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<v Speaker 1>question is whether that is six percentage points of transcence

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<v Speaker 1>inflation or four percentage points of trans scient inflation, and

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<v Speaker 1>I don't see the basis for policy makers serenity that

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<v Speaker 1>it's a full six percent of transient inflation. I welcomed

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<v Speaker 1>the feds limited efforts to markets used towards UH reality

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<v Speaker 1>and growing awareness that this overheating is likely to necessitate

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<v Speaker 1>a monetary policy response. But I still think the reality

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<v Speaker 1>of overheating, just if you look at the most basic

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<v Speaker 1>UH numbers, is UH being overestimated. The prevailing forecasts that

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<v Speaker 1>the FED in the Lighthouse, indeed, in much of the

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<v Speaker 1>consensus of professional economic forecasters in February, was that we

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<v Speaker 1>would have inflation just above two percent this year. We've

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<v Speaker 1>already had more inflation than that in the first five

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<v Speaker 1>months of the year. That would suggest to me that

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<v Speaker 1>people should not just modify their forecasts, but should think

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<v Speaker 1>about what their errors are thinking were that led them

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<v Speaker 1>to be so far off in their forecasts. Ray we

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<v Speaker 1>had therefore from Larry the economists, indeed, that the mathematicians

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

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<v Speaker 1>seen that pivot of some of some kind by the

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<v Speaker 1>FED last week, quite calm market reaction but should market

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<v Speaker 1>should investors generally be taking this threat a lot more seriously?

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<v Speaker 1>There are different kinds of inflation. UM. I'm not particularly

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<v Speaker 1>worried about the classic supply uh, you know, demand pressing

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

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<v Speaker 1>something like ten pc of g d P s stored

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<v Speaker 1>in financial assets that's going to be coming out, and

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<v Speaker 1>so it's likely that there's going to be a big

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<v Speaker 1>pickup in demand and that will probably raise prices uh significantly.

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<v Speaker 1>And it also depends how you count for inflation, because

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<v Speaker 1>like housing prices, housing prices themselves are going up a lot,

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<v Speaker 1>that rental prices to going down a lot, And if

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<v Speaker 1>you went to a three percent inflation rate or some bounds,

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<v Speaker 1>you know that that's not one of those things that

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<v Speaker 1>gets me very nervous or very excited. The real issue

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<v Speaker 1>is that we have a supply demand issue of bonds,

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<v Speaker 1>because we're going to have to sell a lot of

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<v Speaker 1>bonds to those um in the world who own bond

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<v Speaker 1>inventories and they have very low interest rates, negative real

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<v Speaker 1>interest rates, and they're overweighted in US bonds and they're

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<v Speaker 1>gonna have to buy a lot more. And that is

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<v Speaker 1>also coming at a time when Chinese capital markets are

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<v Speaker 1>the capital markets of kindy more attractive. That creates a

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<v Speaker 1>supplied demand issue that can create a monetary inflation, because um,

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<v Speaker 1>there will not be enough demand to buy those bonds,

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<v Speaker 1>and that means that it's likely that the Federal Reserve

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<v Speaker 1>will not be able to taper or cut back and

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<v Speaker 1>might actually have to increase to prevent interest rates from

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<v Speaker 1>going up. And that's a classic monetary inflation. So that's

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<v Speaker 1>my bigger concern, um than just the spirit all right,

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<v Speaker 1>how much would you say this is a global issue,

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

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<v Speaker 1>I would say we're driving our car at a hundred

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<v Speaker 1>miles an hour on a road that is empty right

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<v Speaker 1>now but will always be empty. And I don't know

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<v Speaker 1>what form the accident will come, but when you're driving

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<v Speaker 1>a hundred miles an hour, it's probably not actually the

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<v Speaker 1>fastest way to get where you're going, because you're likely

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<v Speaker 1>to have some kind of dislocation, whether that comes in

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<v Speaker 1>product and labor markets, whether that comes in spiking of

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<v Speaker 1>interest rates, whether that comes first in a decline in uh,

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<v Speaker 1>the value of the dollar. I don't presume to be

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<v Speaker 1>able to predict, but that we're on a problematic course

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<v Speaker 1>where anything can happen and none of us can predict

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<v Speaker 1>markets precisely, but where the balance of risks is very

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<v Speaker 1>very much on the too much liquidity overheating side. Seems

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<v Speaker 1>to me to be relatively clear. I think these tendencies

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<v Speaker 1>are present in many places, but I think they're by

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<v Speaker 1>far more pronounced in the United States UH than they

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<v Speaker 1>are in UH the rest of the world. UM. It's

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<v Speaker 1>not that extraordinarily low interest rates are unique. It's not

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<v Speaker 1>that extraordinarily big budget deficits are unique. It's that having

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<v Speaker 1>them in tandem with an economy that's growing at what

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<v Speaker 1>people think I expect will be a double digit rate

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<v Speaker 1>this courter and UM, along with an epic degree of

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

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<v Speaker 1>me the extraordinary feature of UH, of this of this moment.

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<v Speaker 1>It would be a very different thing if we were

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<v Speaker 1>creating liquidity in an extraordinary way to respond to a

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<v Speaker 1>major output gap. But to be doing this kind end

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<v Speaker 1>of thing in a labor shortage economy seems to me

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<v Speaker 1>to be very intensely problem at you mentioned the dollar,

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<v Speaker 1>I mean I guess one could see there are different

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<v Speaker 1>scenarios that come out of this. I mean, the classic

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<v Speaker 1>scenario for the US growing faster than everybody else sucking

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<v Speaker 1>in a lot of imports would be that actually the

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<v Speaker 1>dollar could rise and export problems for the rest of

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<v Speaker 1>the world that way. But I know, but Ray, you

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<v Speaker 1>just mentioned that you potentially see the dollar heading down.

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<v Speaker 1>So is this is there a fundamental threat to the

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<v Speaker 1>dollar that comes out of this? Yes, the way I mean,

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<v Speaker 1>I'm just dealing with the mechanics. You know. The way

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<v Speaker 1>it works is you sell a lot of bonds. So

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<v Speaker 1>now who do you sell the bonds to? And when

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<v Speaker 1>I look around and calculating warms the bonds and what

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<v Speaker 1>they have to buy, and what the incentives of buying, uh,

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<v Speaker 1>they're they're bad. And in fact, you can see dollar

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<v Speaker 1>selling of bonds. What that means is then the Federal

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<v Speaker 1>Reserve is in a position of either seeing rates rise

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<v Speaker 1>because there's not enough demand to meet that in fact,

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<v Speaker 1>that they start selling it would be a very bad situation,

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<v Speaker 1>and that they can't let that happen because that would

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<v Speaker 1>be very bad for the economy and markets and all

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<v Speaker 1>sorts of things. So we have to keep in mind.

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<v Speaker 1>Where we are, we're at the end of a long

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<v Speaker 1>term debt cycle, and that means that the Federal Reserve

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<v Speaker 1>will have to do what they did last time, which

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<v Speaker 1>is to buy a lot more to prevent the interest

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<v Speaker 1>rates from going up. That's very non cyclical. It's one

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<v Speaker 1>of those cases where you know, in reserve currencies it's

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<v Speaker 1>a it's a very dangerous thing. Now you compare that

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<v Speaker 1>with alternatives, um first best alternatives or other asset classes,

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

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<v Speaker 1>the situation that we're in is quite similar to the

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<v Speaker 1>going from the late seven late sixties into the early

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<v Speaker 1>seventies when there was a different core inflation rate in

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<v Speaker 1>the United States versus Germany and Japan. It's different balance

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<v Speaker 1>of payments situation. We're in a basically a balance of

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<v Speaker 1>payments deficit. They're in a balance of payments surf bus position.

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<v Speaker 1>That means that they chronologically worried about important inflation and

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<v Speaker 1>there's favorable capital flows. So I think that that's negative

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<v Speaker 1>for the dollar, particularly against Asian currencies. I have uh

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<v Speaker 1>raised instincts, but considerable agnosticism on timing. There are classic

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<v Speaker 1>periods in the early nineties is the one that comes

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<v Speaker 1>to mind where large budget deficits, it's spurred growth, sucked

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<v Speaker 1>in capital, and we're associated with an appreciation of UH

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

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<v Speaker 1>I think al and I'm not as confident as Ray

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<v Speaker 1>as UH in the long term attractiveness of Chinese UH

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<v Speaker 1>capital markets and indeed of foreign UH capital markets UH

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<v Speaker 1>to the dollar, but I think the risks are substantial.

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<v Speaker 1>And one of the things that I hear people say

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<v Speaker 1>it seems most bizarre to me is they say, now

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

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<v Speaker 1>and so the inflation process is much stickier, or we

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

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<v Speaker 1>Because of globalization, we are much more like a small

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<v Speaker 1>country than we used to be, and that means that

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<v Speaker 1>the dollar gets into trouble, which it easily could, that

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<v Speaker 1>the pass through the inflation is going to be more

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<v Speaker 1>rapid than it would have been UH decades decades ago.

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<v Speaker 1>So I basically share the kind of concern UH that

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<v Speaker 1>uh Ray is expressing, just with a bit more uncertainty

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

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<v Speaker 1>and I think it's kind of an important UH point,

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<v Speaker 1>and it's simplicit in something that Ray said. The really

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<v Speaker 1>hard monetary policy challenges are not actually moments like the

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<v Speaker 1>period after leaving or the period a year ago this spray,

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<v Speaker 1>when there's massive illiquidity and markets are breaking down and

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<v Speaker 1>it's entirely obvious the direction that policy should move. You

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<v Speaker 1>need to provide liquidity, and the questions have to do without.

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<v Speaker 1>The really hard monetary policy dilemmas are when it's not

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<v Speaker 1>clear which way to go, when on the one hand

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<v Speaker 1>you have a falling currency and an excess supply of bonds,

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<v Speaker 1>and on the other hand you have a weakening UH

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<v Speaker 1>economy and rising UH inequality and the fear of procession,

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<v Speaker 1>and you don't know whether you're um cutting rates to

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<v Speaker 1>respond to the latter problem we're doing tightening things to

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<v Speaker 1>respond to the former problem. Those are the really difficult

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<v Speaker 1>moments in monetary policy where even the direction is not

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<v Speaker 1>entirely clear, And my fear is that we're setting ourselves

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<v Speaker 1>up for such a moment. I think that the fact

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<v Speaker 1>that will you that they are actively looking to have

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<v Speaker 1>that overshoot an inflation the change of approach in terms

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<v Speaker 1>of the average inflation model in order to sort of

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<v Speaker 1>reset the system and indeed get that wage growth through

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<v Speaker 1>to parts of the economy that perhaps have not seen

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<v Speaker 1>it over the last few years, and that that could

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<v Speaker 1>be more politically sustainable long term. So so rad do

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<v Speaker 1>you see that that that is an argument that the

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<v Speaker 1>FED could make that it's worth some short term risk

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<v Speaker 1>to achieve that more sustainable outcome. As as I mentioned, UM,

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<v Speaker 1>I think if you see break even inflation rates goal

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<v Speaker 1>above three percent or something like that, and you see

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<v Speaker 1>that spurit, then you have the dilemma of the timing

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<v Speaker 1>of the monetary policy. As I said, I'm not particularly

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<v Speaker 1>worried about that particular inflation, but the other things that

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<v Speaker 1>worry about there um the whole shift um in terms

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<v Speaker 1>of the quantity of debt money that's being produced. It

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<v Speaker 1>goes into great bubbles, creates an enormous amount of liquidity

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<v Speaker 1>UM and that I think will be manifest by either

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<v Speaker 1>a rate rice tracing inflation or or dollar decline. And

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<v Speaker 1>I think then we also have to deal with the

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<v Speaker 1>changes in um uh, the political situation, the wealth gap situation.

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<v Speaker 1>The wealth with the wealth gap is the left right question. Um,

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<v Speaker 1>there's a lot of conflict in terms of left right politics.

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<v Speaker 1>There's there's a big move pretty much probably two more

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<v Speaker 1>left politics, believing that there's not enough fair share of

0:16:38.920 --> 0:16:43.040
<v Speaker 1>incomes and so on, and those great structural changes that

0:16:43.160 --> 0:16:48.400
<v Speaker 1>will have um um effects. The amount of money which

0:16:48.480 --> 0:16:52.800
<v Speaker 1>is has gone to profits has increased from about six

0:16:52.880 --> 0:16:57.720
<v Speaker 1>percent of revenue to about of revenue, and that's decreased

0:16:57.720 --> 0:17:00.360
<v Speaker 1>the share that's gone to incomes. Those things could be

0:17:00.440 --> 0:17:05.480
<v Speaker 1>structural changes that shift the wealth and income. I think

0:17:05.520 --> 0:17:08.679
<v Speaker 1>there we're here to those that are going to be

0:17:08.760 --> 0:17:13.640
<v Speaker 1>more beneficial let's say, two workers, than to um capitalists.

0:17:13.640 --> 0:17:16.840
<v Speaker 1>I think in general that's a particularly a US issue.

0:17:17.160 --> 0:17:20.000
<v Speaker 1>It is a European issue too, although it's a world issue,

0:17:20.200 --> 0:17:22.880
<v Speaker 1>but it differs around the world. So um, I think

0:17:22.920 --> 0:17:25.639
<v Speaker 1>those are the bigger issues. That and the rise of

0:17:25.720 --> 0:17:28.440
<v Speaker 1>China and what the rise of China means, those that

0:17:28.520 --> 0:17:32.240
<v Speaker 1>I think are the bigger issues. Larry, I mean the

0:17:32.240 --> 0:17:35.440
<v Speaker 1>global when you say the globalization as an interesting point

0:17:35.480 --> 0:17:38.399
<v Speaker 1>about with US becoming more like a single a single

0:17:38.400 --> 0:17:41.360
<v Speaker 1>country responding to things. But one could argue that the

0:17:41.359 --> 0:17:45.679
<v Speaker 1>things that globalization was associated structurally with falling inflation for

0:17:45.720 --> 0:17:48.560
<v Speaker 1>a long time at a period where you also have

0:17:48.720 --> 0:17:51.560
<v Speaker 1>central banks focusing more on inflation, and you have this

0:17:51.640 --> 0:17:55.159
<v Speaker 1>sort of shift em bargaining power away from workers. If

0:17:55.200 --> 0:17:58.800
<v Speaker 1>all of those things are going into reverse, Um, that

0:17:59.000 --> 0:18:03.760
<v Speaker 1>is potentially more inflationary, but also a better world for

0:18:03.760 --> 0:18:07.800
<v Speaker 1>for workers, or a more inclusive world, more sustainable politically.

0:18:09.960 --> 0:18:12.440
<v Speaker 1>Let me let me take your question a moment ago

0:18:12.520 --> 0:18:16.000
<v Speaker 1>and then and then come to that, stefanitiely Um. Look,

0:18:16.080 --> 0:18:20.560
<v Speaker 1>I think the arguments about average inflation targeting and so forth,

0:18:20.640 --> 0:18:24.719
<v Speaker 1>they kind of have their have their place. But I

0:18:24.760 --> 0:18:29.359
<v Speaker 1>think we need to recognize when you declare victor when

0:18:29.840 --> 0:18:34.480
<v Speaker 1>we've got a record labor shortage effect, probably shouldn't be

0:18:34.840 --> 0:18:42.000
<v Speaker 1>obsessing about making sure that their opportunities available. When we've

0:18:42.160 --> 0:18:45.920
<v Speaker 1>now got average inflation over the last two or three

0:18:45.960 --> 0:18:49.919
<v Speaker 1>years up to two, we don't have the problem of

0:18:50.000 --> 0:18:53.720
<v Speaker 1>meeting more inflation in order to get to some kind

0:18:53.840 --> 0:18:59.399
<v Speaker 1>of uh level of average. So I just think we

0:18:59.480 --> 0:19:03.880
<v Speaker 1>need to recognize the new reality is very different from

0:19:04.000 --> 0:19:08.239
<v Speaker 1>the secular stagnation reality of two years ago. Look, I

0:19:08.280 --> 0:19:13.160
<v Speaker 1>am all for a strengthening on a variety of dimensions

0:19:13.200 --> 0:19:16.440
<v Speaker 1>at the hand of workers. I think we need to

0:19:16.520 --> 0:19:20.120
<v Speaker 1>raise the wage. I think we need to re empower

0:19:20.240 --> 0:19:25.439
<v Speaker 1>the ability to organize unions. I think that you can't

0:19:25.480 --> 0:19:30.920
<v Speaker 1>read the stories about working conditions in Amazon and not

0:19:31.160 --> 0:19:37.439
<v Speaker 1>think that something should be happening to re balance things.

0:19:38.240 --> 0:19:40.879
<v Speaker 1>At the same time, I think you have to recognize

0:19:41.000 --> 0:19:46.280
<v Speaker 1>that doing all of those UH things, he is going

0:19:46.440 --> 0:19:50.960
<v Speaker 1>to bear on the inflation process. It's gonna bear on

0:19:51.440 --> 0:19:56.280
<v Speaker 1>what economists call the natural rate of unemployment, and you're

0:19:56.400 --> 0:20:00.119
<v Speaker 1>going to have it have a set of consequences, and

0:20:00.160 --> 0:20:04.760
<v Speaker 1>you need to factor those in UH in setting macro

0:20:04.920 --> 0:20:08.560
<v Speaker 1>economic policy. I mean, we had a moment very much

0:20:09.200 --> 0:20:14.440
<v Speaker 1>UH like the current moment, coming after a long period

0:20:14.480 --> 0:20:18.160
<v Speaker 1>of no inflation. We had a government that had very

0:20:18.200 --> 0:20:22.040
<v Speaker 1>expansive desires for what it was going to do. He

0:20:22.200 --> 0:20:28.760
<v Speaker 1>had a progressive tide sweeping through the country, changing attitudes

0:20:29.280 --> 0:20:35.119
<v Speaker 1>on very many fronts. We had that in the nineties sixties,

0:20:35.600 --> 0:20:42.200
<v Speaker 1>and what we saw was that inflation um rose more

0:20:42.320 --> 0:20:47.639
<v Speaker 1>rapidly than anybody anticipated. That a right wing tide in

0:20:47.800 --> 0:20:54.160
<v Speaker 1>politics was ushers in with the success of elections lags

0:20:54.200 --> 0:21:00.760
<v Speaker 1>of Richard Nixon and UH Ronald Raven and that what

0:21:01.040 --> 0:21:06.640
<v Speaker 1>happened in the ultimately did not serve the interests of

0:21:07.160 --> 0:21:11.840
<v Speaker 1>the progressives who supported it, and you saw a big

0:21:11.920 --> 0:21:15.080
<v Speaker 1>upsurge with the way in which the United States went

0:21:15.119 --> 0:21:21.639
<v Speaker 1>off gold and imposed tariffs universally fifty years ago UH

0:21:21.880 --> 0:21:28.399
<v Speaker 1>this summer, so a return to UH that does not

0:21:28.720 --> 0:21:31.080
<v Speaker 1>seem to me to be what we should be targeted.

0:21:34.640 --> 0:21:37.520
<v Speaker 1>I think Larry and I agree that this is looking

0:21:37.520 --> 0:21:41.440
<v Speaker 1>more like the late sixties UM transitioning to the early

0:21:41.520 --> 0:21:45.159
<v Speaker 1>seventies UM, and that has implications for the balance payments

0:21:45.160 --> 0:21:48.480
<v Speaker 1>and the dollars, so we've covered that UM. I'm more

0:21:48.600 --> 0:21:54.480
<v Speaker 1>worried about the inflation in UH financial assets and what

0:21:54.520 --> 0:21:58.600
<v Speaker 1>that means for returns and bubbles that are developing, because

0:21:58.600 --> 0:22:01.800
<v Speaker 1>there's a massive amount of liquidity around and it's being

0:22:01.840 --> 0:22:06.840
<v Speaker 1>thrown around so that it's a difficult environment for those

0:22:06.920 --> 0:22:10.879
<v Speaker 1>returns to be justified. I think we're building kind of

0:22:10.880 --> 0:22:16.719
<v Speaker 1>a bubble. So I think inflation in financial assets and

0:22:16.760 --> 0:22:20.320
<v Speaker 1>so on is UM is an issue related to liquidity

0:22:20.359 --> 0:22:23.800
<v Speaker 1>anyway you think about it. What's happened is the net

0:22:23.840 --> 0:22:29.639
<v Speaker 1>worth of UM of of Americans and most people and

0:22:30.080 --> 0:22:33.600
<v Speaker 1>developed countries is higher than it's ever been. I mean,

0:22:33.600 --> 0:22:35.840
<v Speaker 1>all of a sudden, it was a big boost the

0:22:35.880 --> 0:22:41.639
<v Speaker 1>net income, yet production isn't. So what you've seen is

0:22:41.720 --> 0:22:44.680
<v Speaker 1>a lot of people got a lot of money which

0:22:44.720 --> 0:22:48.560
<v Speaker 1>they're still holding, and they put it into the stock

0:22:48.600 --> 0:22:52.120
<v Speaker 1>market everything and interest rates go down and they borrow,

0:22:52.720 --> 0:22:57.160
<v Speaker 1>and that is a dynamic that creates a bubble. And

0:22:57.240 --> 0:23:00.639
<v Speaker 1>that's what I would say is the main the main issue.

0:23:01.280 --> 0:23:03.639
<v Speaker 1>Let me just say that there's some division of labor

0:23:03.760 --> 0:23:08.400
<v Speaker 1>on this panel, and Ray has talked more about financial assets,

0:23:08.440 --> 0:23:15.240
<v Speaker 1>but I share his UH concern about asset price inflation,

0:23:15.840 --> 0:23:19.600
<v Speaker 1>and I would say the idea that lower returns have

0:23:19.800 --> 0:23:23.080
<v Speaker 1>led to higher asset prices, and of course, while that

0:23:23.160 --> 0:23:29.159
<v Speaker 1>transition is taking place, everybody's enjoying wonderful capital gains. There's

0:23:29.200 --> 0:23:33.359
<v Speaker 1>been a tendency for people like me and Ray to

0:23:33.960 --> 0:23:39.120
<v Speaker 1>warn for some years now that long term returns are

0:23:39.160 --> 0:23:43.200
<v Speaker 1>going to be lower on assets. And we've been saying

0:23:43.240 --> 0:23:45.880
<v Speaker 1>that for some years, and people who've been in asset

0:23:45.960 --> 0:23:51.800
<v Speaker 1>markets have done very very well because even lower UH,

0:23:52.400 --> 0:23:57.280
<v Speaker 1>even higher capitalization ratios, price earnings ratios, asset price to

0:23:57.720 --> 0:24:02.879
<v Speaker 1>rent ratios have been taken. And I suppose some people

0:24:02.880 --> 0:24:06.679
<v Speaker 1>are probably concluding that the warnings are unwarranted as a

0:24:06.720 --> 0:24:11.520
<v Speaker 1>consequence of that nobody knows for sure, but my feeling

0:24:11.600 --> 0:24:15.359
<v Speaker 1>would be that the warnings are now even more valid

0:24:16.040 --> 0:24:19.560
<v Speaker 1>because the conditions precedent there are the basis for the

0:24:19.680 --> 0:24:23.879
<v Speaker 1>warnings have become even more true with the passage of time.

0:24:24.640 --> 0:24:27.480
<v Speaker 1>Both of you have you come in it from different perspectives.

0:24:27.480 --> 0:24:29.560
<v Speaker 1>You may put different shades on it, but you clearly

0:24:29.600 --> 0:24:32.040
<v Speaker 1>think that there's some potential bumps coming down the road,

0:24:32.400 --> 0:24:35.879
<v Speaker 1>or risks that we need to be much more concerned about. Larry,

0:24:35.880 --> 0:24:37.920
<v Speaker 1>I know you wish that that stimulus in the US

0:24:37.960 --> 0:24:39.879
<v Speaker 1>have been spent on different things at the beginning of

0:24:39.880 --> 0:24:42.399
<v Speaker 1>the year that might actually support the supply side of

0:24:42.400 --> 0:24:46.040
<v Speaker 1>the US economy, UM and other things. You know, with

0:24:46.160 --> 0:24:48.040
<v Speaker 1>the mistakes, if you like, have already been made in

0:24:48.080 --> 0:24:52.919
<v Speaker 1>your view, But what's the best response, assuming that the

0:24:53.000 --> 0:24:57.560
<v Speaker 1>FED and indeed other policymakers accept your analysis, what's the

0:24:57.600 --> 0:25:00.879
<v Speaker 1>most constructive response? Now that wouldn't it self caused a

0:25:00.880 --> 0:25:06.040
<v Speaker 1>lot of volacility and upset. The necessary responses probably will

0:25:06.080 --> 0:25:10.320
<v Speaker 1>in the short run cause some volatility and upset. But

0:25:10.440 --> 0:25:17.160
<v Speaker 1>I'd like to see signals that overheating, liquidity, and bubbles

0:25:17.720 --> 0:25:22.399
<v Speaker 1>are now seen as major risks facing the American economy,

0:25:22.960 --> 0:25:26.720
<v Speaker 1>and I'd like to see a program of structural improvement

0:25:27.280 --> 0:25:30.880
<v Speaker 1>for the supply side that is fully paid for by

0:25:31.880 --> 0:25:37.840
<v Speaker 1>tax increases as the response, and a reduction in the

0:25:37.960 --> 0:25:46.760
<v Speaker 1>amount of populist transferring of UH cash to large routs

0:25:47.280 --> 0:25:53.520
<v Speaker 1>UM in the economy. I think we know that I

0:25:53.600 --> 0:25:57.560
<v Speaker 1>probably Larry and I agree on just saying it very simply, UM,

0:25:57.600 --> 0:26:00.240
<v Speaker 1>there's a ton of money around UH, and about your

0:26:00.240 --> 0:26:03.240
<v Speaker 1>money goes down and how much it goes down relative

0:26:03.280 --> 0:26:05.200
<v Speaker 1>to goods and services and how much it goes down

0:26:05.200 --> 0:26:07.840
<v Speaker 1>to financial assets. It's going to go down to both,

0:26:08.320 --> 0:26:12.360
<v Speaker 1>and that really raises financial assets and it changes capital

0:26:12.400 --> 0:26:17.159
<v Speaker 1>flows in important ways. I think that it's easy to

0:26:17.240 --> 0:26:20.040
<v Speaker 1>say that the fit should tighten, and I think that

0:26:21.000 --> 0:26:23.160
<v Speaker 1>they should. They put on the brakes in a little bit.

0:26:23.600 --> 0:26:27.199
<v Speaker 1>But I think you'll see a very sensitive market and

0:26:27.240 --> 0:26:31.240
<v Speaker 1>a very sensitive economy because the duration of assets has

0:26:31.280 --> 0:26:36.760
<v Speaker 1>gone very, very long, and just the slightest touching on

0:26:36.840 --> 0:26:42.359
<v Speaker 1>those brakes has the effect of m hurrying markets because

0:26:42.400 --> 0:26:45.800
<v Speaker 1>of where they're priced and also UM passing through to

0:26:45.920 --> 0:26:48.320
<v Speaker 1>the economy. We have to keep in mind since the

0:26:48.359 --> 0:26:53.760
<v Speaker 1>cyclical peak in every cyclical peak in interest rates and

0:26:53.760 --> 0:26:59.800
<v Speaker 1>every cyclical drought has gone steadily below the one, but

0:27:00.080 --> 0:27:04.760
<v Speaker 1>for it until we've had zero, and then every quantitative

0:27:04.800 --> 0:27:09.439
<v Speaker 1>easy in other words, purchasing of money, buying of money,

0:27:09.480 --> 0:27:12.840
<v Speaker 1>and purchasing the bonds has been greater than the one

0:27:12.880 --> 0:27:16.080
<v Speaker 1>before it. That is a debasement of the value of

0:27:16.119 --> 0:27:19.840
<v Speaker 1>the currency in one way or another. So I think

0:27:20.000 --> 0:27:22.720
<v Speaker 1>that I think the challenge of the FED is going

0:27:22.760 --> 0:27:26.679
<v Speaker 1>to be able to balance those in a highly political

0:27:26.840 --> 0:27:31.440
<v Speaker 1>sensitive environment because of this wealth class class. So it's

0:27:31.440 --> 0:27:35.399
<v Speaker 1>a difficult position for the FED. I think, well, that's um,

0:27:35.440 --> 0:27:37.800
<v Speaker 1>that's that's two perspectives we've had on the what what

0:27:37.920 --> 0:27:40.479
<v Speaker 1>leadership in a post pandemic world looks like? And I

0:27:40.480 --> 0:27:42.479
<v Speaker 1>know we've we've we've we've focused a lot on this

0:27:42.880 --> 0:27:47.640
<v Speaker 1>financial piece, but it clearly has huge global implications as

0:27:47.680 --> 0:27:49.960
<v Speaker 1>well as implications for the path for the US economy

0:27:50.080 --> 0:27:51.800
<v Speaker 1>is on for the next few years. So thank you

0:27:51.920 --> 0:27:55.200
<v Speaker 1>very much to both of you. Rate Value and Laurence

0:27:55.200 --> 0:28:04.720
<v Speaker 1>Summers will appreciate you you're joining us. That's it for

0:28:04.720 --> 0:28:07.959
<v Speaker 1>this episode of Stephonomics. We'll be back with more reporting

0:28:08.040 --> 0:28:11.960
<v Speaker 1>on as well as analyzing of the global economy next week,

0:28:12.320 --> 0:28:14.040
<v Speaker 1>but you can get more in the meantime from the

0:28:14.040 --> 0:28:18.000
<v Speaker 1>Bloomberg Terminal or website, and by following our Economics on Twitter.

0:28:18.960 --> 0:28:22.040
<v Speaker 1>This episode was produced by Magnus Hendrickson, with thanks to

0:28:22.119 --> 0:28:26.880
<v Speaker 1>Ray Dalio, Larry Summerson, and Lisa R. Shamble. Mike Sasso

0:28:27.040 --> 0:28:29.720
<v Speaker 1>is executive producer of Stephonomics and the head of Bloomberg

0:28:29.720 --> 0:28:30.960
<v Speaker 1>Podcast is Francesco