WEBVTT - Bloomberg Wall Street Week - April 5th, 2024 0:00:00.240 --> 0:00:02.440 This is Bloomberg Wall Street Week. 0:00:02.480 --> 0:00:04.400 And we may not have an overall recession, we're having 0:00:04.400 --> 0:00:06.760 a rolling recession. To conge roll looks pretty strongly it 0:00:06.800 --> 0:00:07.680 is when it comes to jobs. 0:00:07.720 --> 0:00:09.840 The financial stories that shape our world. 0:00:09.960 --> 0:00:13.640 Three major regional bank failures send shockwaves through the banking system. 0:00:13.680 --> 0:00:15.480 We're all trying to figure out what to make of 0:00:15.600 --> 0:00:17.000 generative AI. 0:00:16.920 --> 0:00:19.320 Through the eyes of the most influential voices. 0:00:19.440 --> 0:00:22.400 Welcome down, Doctor Paul Krugman, Ryan moynihan, Bank of America, 0:00:22.560 --> 0:00:25.279 deebro Lair of the Paulson Institute, well then Hubbard of 0:00:25.280 --> 0:00:26.280 the Columbia Business School. 0:00:26.280 --> 0:00:30.120 Bloomberg Wall Street Week with David Weston from Bloomberg Radio. 0:00:30.160 --> 0:00:34.040 The Jobs engine continues, Tesla falters and Bob Eiger gets 0:00:34.080 --> 0:00:37.040 his way at Disney. This is Bloomberg Wall Street Week. 0:00:37.120 --> 0:00:53.720 I'm David Weston, but we start with investing legend Ray Daliu, 0:00:54.040 --> 0:00:56.279 who has been on Wall Street Week several times through 0:00:56.320 --> 0:00:59.240 the years, but perhaps never more memorably than back in 0:00:59.360 --> 0:01:02.600 nineteen eight in the wake of the Mexican sovereign debt default, 0:01:02.880 --> 0:01:05.800 when Ray both appear before Congress and on this program 0:01:05.880 --> 0:01:08.880 with Marty's Wag and Lewis Rukaser to take a pretty 0:01:08.920 --> 0:01:11.319 firm position on where things were headed. 0:01:13.080 --> 0:01:15.759 Chairman, mister Mitchell, it's a great pleasure and a great 0:01:15.760 --> 0:01:18.440 honor to be able to appear before you in examination 0:01:18.600 --> 0:01:20.640 with what is going wrong. 0:01:20.440 --> 0:01:21.840 With our economy. 0:01:21.959 --> 0:01:25.520 The economy is now flat teetering on the brink of failure. 0:01:26.120 --> 0:01:28.560 You were recently quoted in an article you said, I 0:01:28.560 --> 0:01:31.640 can say this with absolute certainty because I know how 0:01:31.680 --> 0:01:32.440 markets work. 0:01:32.720 --> 0:01:35.000 I can say with absolute certainty that if you look 0:01:35.040 --> 0:01:39.000 at the liquidity base in the cooperations and the world 0:01:39.080 --> 0:01:41.399 as a whole, that there's such a reduced level of 0:01:41.440 --> 0:01:44.920 liquidity that you can't return to an arab stagflation. 0:01:45.280 --> 0:01:48.440 And we welcome now Ray Dalio of Bridgewater back to Wallstreet. 0:01:48.440 --> 0:01:50.520 Big so, Ray, great to have you back on It's 0:01:50.520 --> 0:01:53.120 great to see you somewhat younger, back in nineteen eighty two. 0:01:54.200 --> 0:01:56.240 But take us back to nineteen eighty two, because you've 0:01:56.280 --> 0:01:59.400 talked about that since it's being a really transformative, a 0:01:59.440 --> 0:02:02.360 pivotal moment in your life. Tell us of what happened 0:02:02.400 --> 0:02:04.040 and what happened afterwards. 0:02:03.960 --> 0:02:06.000 Like watch me, was I arrogant? 0:02:06.760 --> 0:02:08.920 I look at myself, mout I couldn't have been more 0:02:09.080 --> 0:02:14.440 arrogant and I couldn't have been more wrong and painfully wrong. 0:02:15.120 --> 0:02:20.160 And so that's why it was a transitional moment for me, because. 0:02:22.040 --> 0:02:22.880 I got. 0:02:24.480 --> 0:02:27.880 So broke that my dad had to lend me four 0:02:27.919 --> 0:02:30.560 thousand dollars to pay for my family bills. 0:02:30.960 --> 0:02:33.080 So that was my bottom, my big. 0:02:33.000 --> 0:02:37.680 Bottom, and that painful experience made me think, how do 0:02:37.760 --> 0:02:42.680 I get all the upside without the downside of risk? Okay, 0:02:42.680 --> 0:02:45.560 so it's the big question that all investors have to 0:02:45.560 --> 0:02:50.080 deal with being knocked out and the bet that you 0:02:50.080 --> 0:02:52.880 can lose that can take you out is your risk. 0:02:52.919 --> 0:02:55.160 But how do you get the great upside? And so 0:02:55.360 --> 0:03:01.240 then I had to engineer it and I learned about diversification. 0:03:01.360 --> 0:03:06.080 I learned that if I can have fifteen uncorrelated bets, 0:03:06.639 --> 0:03:10.240 I can eliminate eighty percent of my risk without producing 0:03:10.240 --> 0:03:10.919 my return. 0:03:11.560 --> 0:03:13.400 Looking at this says, look, but look at what Bridgewater 0:03:13.480 --> 0:03:16.040 ended up and the extraordinary success you just went through. 0:03:16.400 --> 0:03:19.760 So go back to nineteen eighty two. You said you 0:03:19.760 --> 0:03:22.560 should have been more diversified, and you should have had 0:03:22.600 --> 0:03:24.520 some other points of view. What is it you got 0:03:24.560 --> 0:03:27.280 wrong in nineteen eighty two? Exactly what was your mistake? 0:03:27.520 --> 0:03:29.280 And could there have been somebody come along to say, 0:03:29.400 --> 0:03:31.280 at that moment, we're a second rate. You should think 0:03:31.280 --> 0:03:33.880 about that. You haven't thought about that over there. 0:03:34.080 --> 0:03:35.320 Yes, So. 0:03:36.840 --> 0:03:41.920 I calculated that Mexico, that American banks had lent more 0:03:41.960 --> 0:03:43.880 money to foreign countries than they were going to be 0:03:43.880 --> 0:03:45.800 able to pay back, and that was going to be 0:03:45.840 --> 0:03:47.640 a debt default, which was true. 0:03:47.760 --> 0:03:48.440 Which was true. 0:03:48.480 --> 0:03:53.680 Mexico defaulted and all these countries afterwards defaulted. And I 0:03:53.760 --> 0:03:56.320 said that that debt crisis was going to cause a 0:03:56.440 --> 0:04:00.680 crisis all the way around the world because to banks 0:04:00.680 --> 0:04:04.760 and so on. And I didn't realize the mechanics of 0:04:05.400 --> 0:04:09.240 how the changing of a debt squeeze, having a debt 0:04:09.320 --> 0:04:12.560 squeeze in those countries so money would not go to 0:04:12.600 --> 0:04:15.520 those countries used to go to those countries and lending, 0:04:15.760 --> 0:04:18.800 and while they were having a squeeze, we could have 0:04:19.040 --> 0:04:22.800 a disinflationary boom, and it produced the eighties. 0:04:23.080 --> 0:04:25.480 My point is that these. 0:04:25.320 --> 0:04:28.800 Experiences in life, if you go back and you study 0:04:28.920 --> 0:04:32.680 history and you see how history repeats many things never 0:04:32.720 --> 0:04:34.840 happened in your lifetime before, and you. 0:04:34.880 --> 0:04:37.799 Built up Bridgewater at the same time. Having studied history. 0:04:37.880 --> 0:04:40.040 Now I'm surmising you knew you got to think about 0:04:40.040 --> 0:04:42.920 succession at some point. You can't stay forever. Now tell 0:04:42.960 --> 0:04:45.520 us how that's worked and has it succeeded. Are you 0:04:45.640 --> 0:04:47.719 satisfied with that succession of Bridgewater? 0:04:48.360 --> 0:04:49.360 It's been so great? 0:04:49.480 --> 0:04:53.159 So I am so I did that and I had 0:04:53.200 --> 0:04:56.240 that track record with them bringing them in as you described, 0:04:56.839 --> 0:05:02.440 and Bob Prince, Greg Jensen, near other people. All of 0:05:02.480 --> 0:05:05.120 those people are all part of that mission. And there 0:05:05.160 --> 0:05:07.800 was also part of a culture of can we be 0:05:07.920 --> 0:05:10.320 radical truth and radically transparent? 0:05:10.360 --> 0:05:12.640 Could we trust each other? Can we go through all 0:05:12.640 --> 0:05:12.839 of that? 0:05:13.520 --> 0:05:16.320 And so that was all they are And then of course, 0:05:16.520 --> 0:05:19.960 you know you want to pass it along and so 0:05:20.360 --> 0:05:24.440 then I, with a lot of planning and with the 0:05:24.480 --> 0:05:28.640 comfort that these great people I've worked with and I know, 0:05:29.040 --> 0:05:33.360 and those great people working together can continue to pick 0:05:33.480 --> 0:05:36.320 up where I left off or we left off together 0:05:36.680 --> 0:05:39.600 and then go bring it to a higher level beyond me. 0:05:40.080 --> 0:05:41.640 And so that's the success. 0:05:41.800 --> 0:05:46.520 And so in about eighteen months they I turned it 0:05:46.560 --> 0:05:47.160 over to them. 0:05:47.200 --> 0:05:49.640 They have their it's. 0:05:49.480 --> 0:05:52.800 Theirs and now I'm a mentor, and as a mentor, 0:05:53.160 --> 0:05:56.360 we have the enjoyment, the great pleasure of being able 0:05:56.400 --> 0:05:59.880 to brainstorm that way, But it's theirs and they owner, 0:06:00.120 --> 0:06:03.080 and so when they have I'm confident that they have 0:06:03.120 --> 0:06:06.200 the qualities and the terrific elements to be able to 0:06:06.240 --> 0:06:10.599 bring them up to have theirs that will be hopefully 0:06:10.640 --> 0:06:14.760 better than ours, Because Wow, I think we had an 0:06:14.760 --> 0:06:18.320 amazing success. And the success it's like raising your kids, 0:06:18.720 --> 0:06:22.239 you know, the joy that the ones who are older 0:06:22.760 --> 0:06:26.840 feel about the next generation and seeing them succeed. That'll 0:06:26.839 --> 0:06:30.719 be my mark of my success. If they succeed, it's 0:06:30.960 --> 0:06:34.800 my success. If they don't succeed, it's my failure. But 0:06:34.880 --> 0:06:40.080 I couldn't have a better group of people and a 0:06:40.120 --> 0:06:44.640 greater simpatico in terms of that element of where we're 0:06:44.680 --> 0:06:49.919 going on the same basic approaches and the same basic culture. 0:06:50.120 --> 0:06:53.440 You've written a recent post about a pivotal year on 0:06:53.520 --> 0:06:57.159 the brink twenty twenty four. Take us through your analysis there. 0:06:58.120 --> 0:07:03.400 There are many things that surprised me in my life 0:07:03.640 --> 0:07:07.640 that wouldn't have surprised me if I had studied the history, 0:07:07.720 --> 0:07:10.080 because they didn't happen in my lifetime, but they happened 0:07:10.080 --> 0:07:14.000 many times before. So I created a need really to 0:07:14.080 --> 0:07:17.000 when certain things are coming along that I'm not used 0:07:17.040 --> 0:07:20.200 to seeing to then go back and there are five 0:07:20.360 --> 0:07:23.320 things that are now the big forces that interact together. 0:07:23.560 --> 0:07:27.960 The way those five forces interact with each other through 0:07:28.120 --> 0:07:31.880 history has a pattern to it, and you know those interactions. 0:07:32.200 --> 0:07:33.400 So when we look at. 0:07:33.280 --> 0:07:36.240 That pattern of what's now happening, and we could look 0:07:36.280 --> 0:07:40.720 ahead with that in mind, we can see that twenty 0:07:40.800 --> 0:07:46.240 twenty four is we are on the brink of a 0:07:46.320 --> 0:07:50.240 number of things related to that. I can list those things, 0:07:50.560 --> 0:07:52.920 but we're on the brink. And it becomes also somewhat 0:07:52.920 --> 0:07:56.880 of a definitive year because of we're going to find 0:07:56.880 --> 0:08:00.520 out how we are with each other politically, and we're 0:08:00.520 --> 0:08:03.400 going to find out geopolitically a lot. 0:08:03.280 --> 0:08:06.680 A definitive year, but not the only one. Neil Ferguson 0:08:06.720 --> 0:08:09.520 of the Hoover Institution, for example, says that twenty twenty 0:08:09.560 --> 0:08:12.480 four stands out compared with the last thirty or forty years, 0:08:12.760 --> 0:08:15.280 but not compared to some of what came before. 0:08:15.840 --> 0:08:19.920 If you go back maybe to the nineteen nineties, Yeah, 0:08:20.200 --> 0:08:25.560 that period seemed pretty low risk. The Soviet Union had collapsed, 0:08:25.960 --> 0:08:30.840 and apart from trouble in the Balkans with the breakup 0:08:30.880 --> 0:08:36.840 of Yugoslavia and some other trouble spots like Somalia. The world, 0:08:36.960 --> 0:08:39.640 by the standards of the rest of the twentieth century 0:08:40.240 --> 0:08:41.120 was pretty peaceful. 0:08:41.240 --> 0:08:42.559 But if you go back. 0:08:42.840 --> 0:08:48.240 Fifty years, imagine we're back in nineteen seventy four. That 0:08:48.360 --> 0:08:50.680 was a much more dangerous time than we're living through now. 0:08:51.440 --> 0:08:54.560 And I speak with some insight as I'm in the 0:08:54.559 --> 0:08:57.280 midst of writing about that period, as I write the 0:08:57.280 --> 0:09:01.160 second volume of my biography of Henry Kissinger. We have 0:09:01.200 --> 0:09:04.600 a tendency to judge the present by comparison with the 0:09:04.600 --> 0:09:08.240 recent past. But the recent past was an inter war period, 0:09:08.360 --> 0:09:12.200 the period between two Cold Wars. Cold War one ended 0:09:12.200 --> 0:09:15.400 with the Soviet collapse, and we didn't really notice Cold 0:09:15.400 --> 0:09:17.839 War two beginning. But I think it really began when 0:09:17.840 --> 0:09:19.600 Exhijinpin came to power in China. 0:09:20.080 --> 0:09:22.920 Geopolitical risk is not the only factor that may make 0:09:23.000 --> 0:09:26.640 twenty twenty four pivotal. We also have elections around the world, 0:09:26.679 --> 0:09:29.880 and particularly in the United States, which raises uncertainty over 0:09:29.920 --> 0:09:33.479 economic policies, which Neil ferguson things markets are well equipped 0:09:33.600 --> 0:09:34.120 to handle. 0:09:34.559 --> 0:09:39.160 I think we know that markets try to adjust for 0:09:39.360 --> 0:09:43.200 domestic political risk. We know this because there's been some 0:09:43.240 --> 0:09:47.360 great work done in recent years on the way that 0:09:47.480 --> 0:09:53.240 in an election year, investors have a tendency to make 0:09:53.320 --> 0:09:58.120 some allowance for policy uncertainty, and the bigger the difference 0:09:58.200 --> 0:10:02.479 between the candidates in the United States, the more uncertainty. 0:10:02.520 --> 0:10:07.080 And we've certainly got a pretty big difference this year, 0:10:07.120 --> 0:10:08.920 but it's the same difference that we have back in 0:10:08.960 --> 0:10:12.280 twenty twenty between Donald Trump and Joe Biden. 0:10:12.679 --> 0:10:15.640 But Ray Dalio is concerned that the election this year 0:10:15.679 --> 0:10:18.439 may go past the policy uncertainty investors have dealt with 0:10:18.480 --> 0:10:22.440 in the past, that given the disagreements, even violent disagreements, 0:10:22.480 --> 0:10:25.959 over the last election, we may face more fundamental uncertainties 0:10:25.960 --> 0:10:29.760 about the underlying political system. And you, in your writing 0:10:29.920 --> 0:10:32.760 so specifically, a focus on that second force is maybe 0:10:32.880 --> 0:10:35.120 the most dominant right now going to twenty three fourth, 0:10:35.240 --> 0:10:38.280 the potential for internal conflict. I mean, you even write 0:10:38.280 --> 0:10:40.480 the possible this is I have a there's a fifty 0:10:40.520 --> 0:10:44.120 to fifty chance of civil war you talk about, Is 0:10:44.200 --> 0:10:45.720 that right? Fifty to fifty? 0:10:46.440 --> 0:10:50.200 Well, so let me define a civil war that you 0:10:50.320 --> 0:10:55.160 have a situation where you have irreconcilable differences so that 0:10:56.000 --> 0:11:01.160 there becomes a failure to follow the rules. In other words, 0:11:01.360 --> 0:11:05.440 let's take January sixth incident. Okay, you could see a 0:11:05.520 --> 0:11:10.280 situation in which you don't accept losing, don't accept the results. 0:11:10.400 --> 0:11:12.600 We are getting more and more, not only just in 0:11:12.640 --> 0:11:15.920 the election, but even in decision making as the state 0:11:15.960 --> 0:11:19.440 of Texas deals with the federal government on issues, or 0:11:19.480 --> 0:11:22.720 we had sanctuary city issues where there may not be 0:11:22.760 --> 0:11:29.720 the agreeing on that these irreconcilable differences. Irreconcilable differences for example, 0:11:30.040 --> 0:11:33.760 on children and sexuality and education, how should that be? 0:11:34.040 --> 0:11:39.480 These are not compromisable issues. That greater and greater extremism 0:11:39.760 --> 0:11:42.440 is an issue. And so when we come to let's 0:11:42.440 --> 0:11:46.200 say this election period, how will we get through that 0:11:46.480 --> 0:11:50.120 and how will we work together in an effective way? 0:11:50.559 --> 0:11:54.040 Or will it be even so chaotic and that we 0:11:54.160 --> 0:11:56.720 keep that we start fighting with each other. So when 0:11:56.760 --> 0:11:59.880 I say we're on the brink, I think that it's 0:12:00.280 --> 0:12:03.199 to say we're accurate to say that some of these 0:12:03.320 --> 0:12:07.760 questions exist and we will find out in a year, Okay, 0:12:08.040 --> 0:12:10.920 how well we can be together, and that well, how 0:12:10.960 --> 0:12:13.320 well we be together not only the conflict, but how 0:12:13.360 --> 0:12:15.959 effective can we be. We're going to find that out 0:12:16.040 --> 0:12:18.600 over the next year. What we need I think is 0:12:18.679 --> 0:12:21.960 a strong middle. We have to do this together with 0:12:22.080 --> 0:12:25.760 a strong middle and a bipartisan and my opinion almost 0:12:26.000 --> 0:12:29.760 the President of the United States should have a bipartisan cabinet, 0:12:30.080 --> 0:12:33.000 draw the best and bring it together so that there's 0:12:33.040 --> 0:12:35.400 a bipartisanship. 0:12:34.640 --> 0:12:36.400 Where it's been such a pleasure having here. Thank you 0:12:36.440 --> 0:12:38.400 so much for doing this. Oh, thank you for having me. 0:12:38.800 --> 0:12:39.439 Many thanks to. 0:12:39.440 --> 0:12:44.520 Ray Value of Bridgewater. Coming up, we go to Argentina 0:12:44.600 --> 0:12:48.800 and hear from President Milay about his economic plans. That's 0:12:48.840 --> 0:12:50.640 next on Wall Street Week on Bloomberg. 0:12:52.559 --> 0:12:56.720 This is Bloomberg Well Street Week with David Weston from 0:12:56.880 --> 0:12:59.559 Bloomberg Radio. 0:13:04.400 --> 0:13:05.360 This is Walter Weegan. 0:13:05.400 --> 0:13:09.480 I'm David Weston. After years of economic struggles, Argentina's new president, 0:13:09.559 --> 0:13:13.280 Javier Milay, is administering shock therapy that he promised when 0:13:13.320 --> 0:13:14.320 he campaigned. 0:13:13.920 --> 0:13:14.480 For his job. 0:13:14.760 --> 0:13:19.000 Bloomberg International Policy and Economics correspondent Michael McKee lays out the. 0:13:19.000 --> 0:13:19.800 Issues for US. 0:13:20.400 --> 0:13:24.280 Argentina has long been a symbol of economic mismanagement. A 0:13:24.360 --> 0:13:27.720 legacy of government overspending has led to recurring bouts of 0:13:27.800 --> 0:13:32.040 high inflation and debt defaults. Javier mile came to office 0:13:32.040 --> 0:13:36.640 in December promising a radical transformation. His plans include massively 0:13:36.760 --> 0:13:42.520 slashing government spending, privatizing state owned businesses, eliminating the central bank, 0:13:42.559 --> 0:13:47.040 and most controversially, replacing the Argentine peso with the US dollar. 0:13:47.320 --> 0:13:50.960 The dollar would, he said, solve the inflation problem because 0:13:51.000 --> 0:13:54.800 the government couldn't spend more dollars than it has, but 0:13:54.920 --> 0:13:58.640 Argentina doesn't have enough dollars in its foreign exchange holdings 0:13:58.679 --> 0:14:01.520 to make it work right now. Adopting it would lead 0:14:01.600 --> 0:14:05.440 to a deep recession and tie Argentina's economy to the 0:14:05.480 --> 0:14:09.680 federal Reserve. While a recession may indeed be in the cards, 0:14:09.960 --> 0:14:13.559 Mela's plans aren't working out as he'd hoped. The opposition 0:14:13.600 --> 0:14:17.720 controlled Argentine legislature has blocked many of the changes he 0:14:17.800 --> 0:14:21.280 wants to make. Inflation remains over twenty percent a month 0:14:21.360 --> 0:14:25.240 or almost three hundred percent a year, so while Melee 0:14:25.320 --> 0:14:28.760 cut the peso's value in half, dollarization. 0:14:28.400 --> 0:14:29.520 Has been put on hold. 0:14:30.000 --> 0:14:33.320 The Mela plan did convince the International Monetary Fund to 0:14:33.400 --> 0:14:36.800 offer four point seven billion dollars in loans to pay 0:14:36.800 --> 0:14:40.120 its foreign exchange debts, and the stock market is up 0:14:40.120 --> 0:14:43.480 twenty percent since he took office. Whether Melea's plans can 0:14:43.640 --> 0:14:47.280 succeed will depend on keeping that optimism going, getting the 0:14:47.320 --> 0:14:51.560 economy going, and bringing down inflation enough to build up 0:14:51.600 --> 0:14:55.080 dollar reserves. He says he's not giving up on dollarization, 0:14:55.200 --> 0:14:59.440 but insists his program needs time until the money stops 0:14:59.560 --> 0:15:02.520 rolling out in all directions David. 0:15:03.080 --> 0:15:05.680 This week, our editor in chief, John Micklethway traveled to 0:15:05.720 --> 0:15:08.400 Buenos Aires for an in depth interview with President Lay 0:15:08.480 --> 0:15:11.280 about what he hopes to accomplish. 0:15:11.480 --> 0:15:15.000 So, first, you need to reform the financial system, which 0:15:15.040 --> 0:15:17.880 is what we are working on. And in that context, 0:15:18.400 --> 0:15:20.800 it's not just that the exchange rate is flexible, but 0:15:20.920 --> 0:15:25.760 also the money amount never varies, and as the economy 0:15:25.880 --> 0:15:31.480 recovers and grows and the money demand increases as the 0:15:31.560 --> 0:15:35.040 amount of business will order be a given endogenously will 0:15:35.120 --> 0:15:40.440 have a dollarization process relating to the monetization performed by 0:15:40.440 --> 0:15:41.400 individuals in the economy. 0:15:42.880 --> 0:15:44.960 I know that you are doing this thing with the 0:15:45.080 --> 0:15:49.160 floating exchange rate, where you've been deprecating or depreciating the 0:15:49.160 --> 0:15:53.560 official rate by two percent each month, and the IMF 0:15:53.560 --> 0:15:56.040 and various people have said, you know you must speed up, 0:15:56.160 --> 0:15:59.640 you must go quicker. Will you proceed? I know you 0:15:59.640 --> 0:16:01.840 are doing these other things, but when you speed up, 0:16:03.360 --> 0:16:05.080 that's rate of appreciation. 0:16:06.280 --> 0:16:09.880 No, because it makes no sense. It makes no sense 0:16:09.880 --> 0:16:11.120 to do that. 0:16:11.120 --> 0:16:14.160 That was Argentine President Milay speaking with Bloomberg Editor in 0:16:14.240 --> 0:16:18.960 chief John Nikelthwaite. We're joined once again by our very 0:16:18.960 --> 0:16:22.480 special contributor here on Walsteretreek. He is Larry Summers of Harvard. So, Larry, 0:16:22.640 --> 0:16:25.320 welcome back. Great to have you here, particularly this week 0:16:25.360 --> 0:16:28.120 when we got those jobs numbers which surprised the ouside. 0:16:28.280 --> 0:16:29.920 What did you make of them? 0:16:30.160 --> 0:16:36.960 This was a hot report jobs above three hundred thousand upwards, revision, strong, 0:16:37.000 --> 0:16:44.200 household survey hours up, payrolls up at nearly a ten 0:16:44.240 --> 0:16:47.200 percent to annualize rate. 0:16:47.760 --> 0:16:50.320 This was a hot report that. 0:16:50.400 --> 0:16:56.880 Suggested that, if anything, the economy is reaccelerating. This is 0:16:57.080 --> 0:17:01.080 very different from what lots of people, most people I think, 0:17:01.200 --> 0:17:08.440 were expecting, and fits the thesis that the neutral rate 0:17:08.720 --> 0:17:13.760 is much higher than people supposed and take money is 0:17:13.880 --> 0:17:17.399 much less potent than people supposed. 0:17:17.560 --> 0:17:19.640 So let's talk about the neutral rate. You've said before 0:17:19.760 --> 0:17:21.720 that the FED should have at least some idea of 0:17:21.720 --> 0:17:23.719 the nutral right to know whether it's restrict or not. 0:17:23.800 --> 0:17:26.760 We heard from share Powell this week is making out 0:17:26.760 --> 0:17:29.159 of Stanford, where he said, yes, we are restricting of 0:17:29.200 --> 0:17:32.679 our policy, and yet he quite explicitly said he doesn't 0:17:32.720 --> 0:17:34.840 need to worry about where the neutral rate is for 0:17:35.000 --> 0:17:36.200 policy going forward. 0:17:36.560 --> 0:17:39.159 So all those are very important things, but they're not 0:17:39.280 --> 0:17:41.760 things that affect the longer run potential output of the 0:17:41.880 --> 0:17:46.000 United States. So honestly, though, so the question of what 0:17:46.080 --> 0:17:50.480 will be the equilibrium interest rate, that the neutral interest 0:17:50.560 --> 0:17:53.320 rate going forward doesn't really matter for policy today. 0:17:53.720 --> 0:17:56.080 Saying we don't need to know what the neutral rate 0:17:56.320 --> 0:17:59.639 is is like saying you should drive your car on 0:17:59.760 --> 0:18:02.920 fees without looking at the speedometer. 0:18:03.840 --> 0:18:07.480 It is just a mistake. You cannot know. 0:18:08.080 --> 0:18:11.320 And look, I don't know what the Chairman said in 0:18:11.400 --> 0:18:15.879 full context, and I want to be fair, but there's 0:18:16.000 --> 0:18:22.879 no way to judge what policy is without knowing what 0:18:23.000 --> 0:18:28.240 would be a neutral policy. My view is that the 0:18:28.320 --> 0:18:33.960 evidence is overwhelming that the neutral rate is far higher 0:18:34.520 --> 0:18:36.880 than the two and a half percent two point six 0:18:36.920 --> 0:18:41.360 percent that the FED talks about. That evidence comes from 0:18:41.520 --> 0:18:46.600 four places. First, we have high interest rates, and we 0:18:46.680 --> 0:18:51.200 have an economy that is, if anything, growing faster than 0:18:51.480 --> 0:18:57.560 its long run potential, creating jobs as fast or faster 0:18:58.160 --> 0:19:01.120 than natural growth in the labor. 0:19:00.880 --> 0:19:02.960 Force, even allowing for immigration. 0:19:04.000 --> 0:19:09.440 Second, we have an economy with financial conditions that are 0:19:09.600 --> 0:19:14.440 extremely loose, that are actually looser than they were before 0:19:14.560 --> 0:19:15.240 the FED. 0:19:15.160 --> 0:19:17.119 Started the whole tightening process. 0:19:17.480 --> 0:19:20.560 If you look at credit spreads, you look at the 0:19:20.600 --> 0:19:24.280 stock market, suggesting that in the fullness of it, all 0:19:24.560 --> 0:19:29.160 financial conditions actually haven't been tightened in an appreciable way. 0:19:29.960 --> 0:19:32.440 Third, if you look at the markets. 0:19:32.160 --> 0:19:37.520 Estimate of the long run neutral rate as formed by 0:19:37.840 --> 0:19:43.320 looking at longer term of forward interest rates, that neutral 0:19:43.400 --> 0:19:50.080 rate is comfortably above four percent. Fourth, if you look 0:19:50.119 --> 0:19:54.960 at the fundamental determinants of the neutral rate, we have 0:19:55.200 --> 0:19:59.720 big surges in budget deficits that, if anything, look to 0:20:00.320 --> 0:20:03.480 get worse given the political process. 0:20:03.880 --> 0:20:06.440 We have big changes in. 0:20:06.840 --> 0:20:14.480 Resilience, investment in green investment in new investment in data centers, 0:20:14.880 --> 0:20:22.040 along with deglobalization which may limit capital inflows into our country. So, 0:20:22.080 --> 0:20:25.760 whether you look at the fundamentals, you look at market estimates, 0:20:26.080 --> 0:20:29.000 you look at financial conditions, or you look at the 0:20:29.040 --> 0:20:32.919 current strength of the economy, seems to me the evidence 0:20:33.080 --> 0:20:38.160 is overwhelming that the neutral rate is far higher than 0:20:38.200 --> 0:20:44.639 the FED supposes, and so cutting rates and hitting the 0:20:44.800 --> 0:20:49.919 accelerator in an economy creating jobs at more at a 0:20:49.960 --> 0:20:55.919 pace of more than three million jobs a year, with 0:20:56.560 --> 0:21:04.480 payrolls growing at rates consisting with inflation far above two percent, 0:21:05.160 --> 0:21:08.520 with a need to hoard ammunition, because we're not one 0:21:08.600 --> 0:21:16.280 hundred percent certain we're past every financial problem in the 0:21:16.320 --> 0:21:24.200 banking system, and with potential supply shocks coming down the road. 0:21:24.359 --> 0:21:25.359 Things could change. 0:21:25.440 --> 0:21:30.359 Things are always subject to rapid change. So I don't 0:21:30.359 --> 0:21:35.560 want to make a prescription for monetary policy in June, 0:21:36.119 --> 0:21:41.399 but on current facts and current trends, I think it 0:21:41.440 --> 0:21:48.359 would be a inappropriate act to cut rates in June. 0:21:48.880 --> 0:21:52.119 And it is deeply troubling to me that the Fed 0:21:52.800 --> 0:21:59.040 somehow thinks that fidelity to its previous forward guidance and 0:21:59.680 --> 0:22:04.720 doc it believes some time ago is a more important 0:22:04.760 --> 0:22:09.800 thing than trying to gauge the neutral rate on an 0:22:09.880 --> 0:22:12.359 ongoing basis. 0:22:12.840 --> 0:22:14.560 There's a lot of talk right now about what we're 0:22:14.560 --> 0:22:16.960 seeing in the labor market. Here actually is an increase 0:22:16.960 --> 0:22:19.359 in immigration, and I'm not necessarily even talking about the 0:22:19.400 --> 0:22:22.800 people coming across the southern border illegally. I'm talking about 0:22:22.880 --> 0:22:26.399 legal immigration, which has increased rather significantly under the Biden administration, 0:22:26.600 --> 0:22:29.520 How is that affecting your model for economic growth in 0:22:29.520 --> 0:22:30.199 the United States. 0:22:30.640 --> 0:22:38.680 Look, that has meant more labor force growth, which has 0:22:38.960 --> 0:22:44.320 meant more supply to the extent that those immigrants are 0:22:45.040 --> 0:22:50.359 earning and increasing the capacity of the economy and remitting 0:22:50.400 --> 0:22:54.880 the money back to their families where they came from. 0:22:55.520 --> 0:23:00.159 It's a supply increase without a concombatant demand increase, and 0:23:00.200 --> 0:23:05.280 therefore it's deflationary. But that's what's been baked in and 0:23:05.440 --> 0:23:08.560 is going to happen and has been happening. And so 0:23:08.600 --> 0:23:12.840 the question for movements and inflation is is that trend 0:23:12.960 --> 0:23:17.320 going to accelerate or is it going to decelerate over time? 0:23:18.119 --> 0:23:22.800 As I look at the attitude, which I find ugly 0:23:22.840 --> 0:23:29.560 and unattractive of a potential Trump administration towards immigration, if 0:23:29.600 --> 0:23:34.080 I look at the political pressures on the Biden administration, 0:23:34.680 --> 0:23:40.160 seems to me much more likely that immigration flows are 0:23:40.200 --> 0:23:44.320 going to decrease going forward then that they're going to 0:23:44.400 --> 0:23:48.240 increase going forward. And that's just one of the ways 0:23:48.280 --> 0:23:53.360 in which deglobalization may contribute to higher inflation. 0:23:53.920 --> 0:23:55.760 What other things are worrying you that are out there 0:23:55.800 --> 0:23:56.280 right now? 0:23:56.800 --> 0:24:02.800 David I'm nervous about oil prices is given what's happening 0:24:02.840 --> 0:24:07.520 in the Middle East, and given the increased possibility that 0:24:07.680 --> 0:24:15.040 Iran is going to be drawn into this conflict. Given 0:24:15.119 --> 0:24:21.240 that we've got the coming of summer combined with higher 0:24:21.600 --> 0:24:26.560 wholesale prices projected, I think there's a real shot that 0:24:26.640 --> 0:24:31.880 we will have gasoline prices back to having a forehandle. 0:24:32.119 --> 0:24:33.320 And I think the last. 0:24:33.080 --> 0:24:38.040 Thing is that if I'm right, I'm not convinced that 0:24:38.320 --> 0:24:42.080