1 00:00:00,120 --> 00:00:03,320 Speaker 1: Hello, I'm Joe Wisenthal and I'm Tracy Alloway, and you 2 00:00:03,400 --> 00:00:06,640 Speaker 1: are listening to a special edition of the Audlots podcast 3 00:00:06,760 --> 00:00:09,160 Speaker 1: in your Bloomberg Surveillance podcast feed. 4 00:00:09,440 --> 00:00:12,400 Speaker 2: We are here in Jackson Hall, Wyoming, along with our 5 00:00:12,440 --> 00:00:16,479 Speaker 2: colleagues Tom Keene, Jonathan Farrell, and Lisa Bromovics, covering the 6 00:00:16,520 --> 00:00:19,000 Speaker 2: fed's Annual Monetary Policy Symposium. 7 00:00:19,200 --> 00:00:22,439 Speaker 1: So keep listening for our conversation on this special edition 8 00:00:22,520 --> 00:00:36,199 Speaker 1: of Odlots. Hello, and welcome to another episode of the 9 00:00:36,200 --> 00:00:37,239 Speaker 1: Audlots podcast. 10 00:00:37,320 --> 00:00:39,440 Speaker 2: I'm Tracy Alloway and I'm Joe Wisenthal. 11 00:00:39,760 --> 00:00:42,040 Speaker 1: Joe, we are here at Jackson Hole. And I know 12 00:00:42,120 --> 00:00:44,240 Speaker 1: that so much of the focus is on the short 13 00:00:44,360 --> 00:00:47,879 Speaker 1: term outlook for rates, but really this is a gathering 14 00:00:47,920 --> 00:00:52,240 Speaker 1: to talk about the longer term framework of monetary policy. Yeah. 15 00:00:52,280 --> 00:00:56,120 Speaker 2: It's so funny because it is an academic conference and 16 00:00:56,160 --> 00:00:58,280 Speaker 2: there are all these like sort of like big think 17 00:00:58,920 --> 00:01:01,800 Speaker 2: sort of conversations going on about, you know, the changing 18 00:01:01,920 --> 00:01:04,080 Speaker 2: nature of the global economy something like that. I think 19 00:01:04,080 --> 00:01:06,560 Speaker 2: it's actually the theme, like the structural changes in the 20 00:01:06,560 --> 00:01:09,919 Speaker 2: global economy, But like ninety nine percent of the media 21 00:01:10,000 --> 00:01:12,080 Speaker 2: interest in this whole event is like, are we going 22 00:01:12,120 --> 00:01:14,320 Speaker 2: to get a rate hike itea November December, you know, 23 00:01:14,360 --> 00:01:15,880 Speaker 2: but there is so much more right. 24 00:01:15,920 --> 00:01:18,920 Speaker 1: And one of the big themes that is emerging is 25 00:01:18,959 --> 00:01:22,280 Speaker 1: this idea of living in a world where there is 26 00:01:22,520 --> 00:01:26,240 Speaker 1: more debt outstanding. And we've seen that sort of pop 27 00:01:26,319 --> 00:01:29,240 Speaker 1: up a number of times in recent months. Of course, 28 00:01:29,280 --> 00:01:33,080 Speaker 1: you had Fitch downgrading the most credit rating because partly 29 00:01:33,440 --> 00:01:37,640 Speaker 1: of the public finance trajectory, You've had volatility in the 30 00:01:37,640 --> 00:01:41,520 Speaker 1: treasury market. You've had questions over whether or not investors 31 00:01:41,560 --> 00:01:44,039 Speaker 1: are still going to want to buy bonds at a 32 00:01:44,080 --> 00:01:48,120 Speaker 1: time when there's enormous supply, and also the Fed out 33 00:01:48,160 --> 00:01:50,880 Speaker 1: to raise rates and potentially bring down inflation. 34 00:01:51,240 --> 00:01:54,280 Speaker 2: Yeah, I would say there's sort of two dynamics that 35 00:01:54,360 --> 00:01:56,960 Speaker 2: I think is really interesting here with regards to sort 36 00:01:56,960 --> 00:01:59,200 Speaker 2: of like public spending and public debt. So I think 37 00:01:59,240 --> 00:02:02,040 Speaker 2: there's sort of like some of the technical factors that 38 00:02:02,400 --> 00:02:04,560 Speaker 2: you've described, and of course we talked about them with 39 00:02:04,880 --> 00:02:09,640 Speaker 2: Darryl Duffy as well, the capacity for debt absorption. And 40 00:02:09,720 --> 00:02:12,840 Speaker 2: then we're also living in an age that's very different 41 00:02:12,840 --> 00:02:15,320 Speaker 2: from the twenty tens, in which fiscal authorities are just 42 00:02:15,360 --> 00:02:18,400 Speaker 2: taking a much more active role in economic management. And 43 00:02:18,480 --> 00:02:21,200 Speaker 2: so the twenty tens we sort of, you know, fiscal 44 00:02:21,280 --> 00:02:24,200 Speaker 2: took a backseat. All the pressure was placed on the 45 00:02:24,240 --> 00:02:26,959 Speaker 2: monetary authorities to get us back to full employment so forth. 46 00:02:27,440 --> 00:02:29,840 Speaker 2: And the twenty twenties so far feel very different from 47 00:02:29,880 --> 00:02:33,280 Speaker 2: that because we've had these big spending bills, very active management, 48 00:02:33,320 --> 00:02:36,359 Speaker 2: and so how that interacts with policy, what that means 49 00:02:36,400 --> 00:02:38,920 Speaker 2: for inflation, what that means for central bankers, et cetera. 50 00:02:39,160 --> 00:02:41,040 Speaker 2: And I think all of these questions like what that 51 00:02:41,160 --> 00:02:43,720 Speaker 2: means for central bankers, what that means for the macro 52 00:02:43,960 --> 00:02:46,040 Speaker 2: trajectory going forward, is going to be debated, I mean 53 00:02:46,080 --> 00:02:46,880 Speaker 2: probably for years. 54 00:02:47,080 --> 00:02:50,720 Speaker 1: Exactly right, let's get a jumpstart on this topic of 55 00:02:51,080 --> 00:02:53,600 Speaker 1: high public debt. And I'm glad to say we really 56 00:02:53,600 --> 00:02:56,359 Speaker 1: do have the perfect guest. We're going to be speaking with, 57 00:02:56,680 --> 00:02:59,680 Speaker 1: Barry eichen Green. He is the professor of economics at 58 00:02:59,760 --> 00:03:03,400 Speaker 1: Universe of California at Berkeley and the man that central 59 00:03:03,400 --> 00:03:07,120 Speaker 1: bankers here at Jackson Hole have tapped to research and 60 00:03:07,160 --> 00:03:10,240 Speaker 1: discuss this exact topic. So, Barry, thank you so much 61 00:03:10,280 --> 00:03:11,720 Speaker 1: for coming on. All thoughts, good. 62 00:03:11,600 --> 00:03:14,120 Speaker 3: To be with you. Before we go on, tell me 63 00:03:14,160 --> 00:03:15,600 Speaker 3: where did the name odd Locks? 64 00:03:17,400 --> 00:03:21,720 Speaker 1: Well, it's actually an old bond term for bond trades 65 00:03:21,880 --> 00:03:23,639 Speaker 1: of non standardized sizes. 66 00:03:23,800 --> 00:03:26,280 Speaker 2: When we started the podcast years ago, we didn't really 67 00:03:26,320 --> 00:03:27,679 Speaker 2: know what it was going to be, but we sort 68 00:03:27,720 --> 00:03:29,280 Speaker 2: of had a sense that maybe, like you know, we 69 00:03:29,360 --> 00:03:32,440 Speaker 2: try to find some off the beaten path stories and 70 00:03:32,480 --> 00:03:34,880 Speaker 2: so what's something that sounded like that, like a odd 71 00:03:34,920 --> 00:03:37,400 Speaker 2: lots sounded good and it stucks. Yeah, it works. 72 00:03:38,040 --> 00:03:41,800 Speaker 1: So Barry, let me start with a really simple question here, 73 00:03:42,280 --> 00:03:46,120 Speaker 1: why do governments seem to borrow so much? Like what 74 00:03:46,240 --> 00:03:49,440 Speaker 1: is going on that in twenty twenty three, we do 75 00:03:49,520 --> 00:03:52,760 Speaker 1: have these massive physical deficits, and we have had them 76 00:03:52,960 --> 00:03:53,800 Speaker 1: for a long time. 77 00:03:54,040 --> 00:03:58,280 Speaker 3: Governments borrow for both reasons good and bad. So we've 78 00:03:58,320 --> 00:04:03,760 Speaker 3: seen that government borrowed to finance emergency responses to great recessions, 79 00:04:04,040 --> 00:04:09,680 Speaker 3: financial crises, pandemics, wars, and throughout history they have done 80 00:04:09,720 --> 00:04:13,880 Speaker 3: that when in exceptional circumstances, governments have to resort to 81 00:04:14,120 --> 00:04:18,839 Speaker 3: exceptional fiscal policies, and they do do so by borrowing, 82 00:04:19,000 --> 00:04:22,680 Speaker 3: sometimes big time. On the other hand, it would be 83 00:04:22,800 --> 00:04:27,960 Speaker 3: nice were governments to reduce those heavy debt burdens once 84 00:04:28,040 --> 00:04:31,960 Speaker 3: the emergency has passed and restore that capacity to borrow 85 00:04:32,400 --> 00:04:35,360 Speaker 3: and that's where the borrowing for bad reasons kicks in. 86 00:04:35,520 --> 00:04:39,400 Speaker 3: When you have divided government, where you have inability of 87 00:04:39,760 --> 00:04:44,640 Speaker 3: different political factions to agree on which form of public 88 00:04:44,680 --> 00:04:48,479 Speaker 3: spending to cut or whose taxes to increase in order 89 00:04:48,520 --> 00:04:53,120 Speaker 3: to restore fiscal balance, restore fiscal sustainability, you have the 90 00:04:53,320 --> 00:04:58,240 Speaker 3: persistence of those fiscal deficits in high debt ratios. So again, 91 00:04:58,560 --> 00:05:01,440 Speaker 3: there are good reasons and is why governments and current 92 00:05:01,440 --> 00:05:04,480 Speaker 3: public debts, and there are bad reasons why they persist. 93 00:05:04,920 --> 00:05:08,839 Speaker 2: Just a quick question, and you know, Tracy mentioned in 94 00:05:08,920 --> 00:05:12,320 Speaker 2: the intro that you've been invited to this event to 95 00:05:12,520 --> 00:05:14,760 Speaker 2: talk about your research in this area, and you've done 96 00:05:14,800 --> 00:05:17,479 Speaker 2: new research, and that this event is more than just 97 00:05:17,520 --> 00:05:19,760 Speaker 2: an opportunity for Wall Street to say it is I 98 00:05:19,839 --> 00:05:21,840 Speaker 2: going to be in November December. There's a lot more. 99 00:05:22,120 --> 00:05:23,800 Speaker 2: First of all, actually just a very like sort of 100 00:05:23,880 --> 00:05:26,560 Speaker 2: like nuts and meet. Yeah, how does this like how 101 00:05:26,560 --> 00:05:28,280 Speaker 2: does it work? I think people are sort of at 102 00:05:28,360 --> 00:05:30,160 Speaker 2: least I'm curious, maybe knowing not maybe it just me 103 00:05:30,200 --> 00:05:31,720 Speaker 2: and Tracy are curious. But how does it work? How 104 00:05:31,720 --> 00:05:34,560 Speaker 2: do you get like invited? What is the process to 105 00:05:34,680 --> 00:05:37,240 Speaker 2: like come like a give, give a talk and present 106 00:05:37,279 --> 00:05:38,400 Speaker 2: a paper here at Jackson Hall. 107 00:05:38,880 --> 00:05:40,800 Speaker 3: So I can tell you what I what I see 108 00:05:40,839 --> 00:05:43,800 Speaker 3: and know, sure, as one of the invited speakers, but 109 00:05:44,760 --> 00:05:47,599 Speaker 3: you should have the folks from the Kansas City fed 110 00:05:48,160 --> 00:05:51,960 Speaker 3: on as well. They're the conveners. But what I see 111 00:05:52,360 --> 00:05:55,200 Speaker 3: is they came to me, and I've done this once 112 00:05:55,320 --> 00:05:58,200 Speaker 3: or twice before, same story. Then they came to me 113 00:05:58,279 --> 00:06:01,919 Speaker 3: at the beginning of the year in Anuary or February 114 00:06:01,960 --> 00:06:06,720 Speaker 3: with an agenda for topics and they say, this is 115 00:06:06,760 --> 00:06:08,800 Speaker 3: the one topic number four we would like you to 116 00:06:08,800 --> 00:06:10,800 Speaker 3: write on. Are you willing to do so? And the 117 00:06:10,839 --> 00:06:13,640 Speaker 3: topic has a title, and it has a paragraph of 118 00:06:13,800 --> 00:06:16,359 Speaker 3: why the topic is important and what some of the 119 00:06:16,400 --> 00:06:19,640 Speaker 3: issues that you might discuss in your paper are and 120 00:06:19,680 --> 00:06:22,760 Speaker 3: then they let you go. So there was a check 121 00:06:22,800 --> 00:06:25,960 Speaker 3: in a couple of months ago where I had a 122 00:06:25,960 --> 00:06:29,040 Speaker 3: phone call with the research director and he said are 123 00:06:29,080 --> 00:06:30,960 Speaker 3: you on course? Is the paper going well? And I 124 00:06:31,000 --> 00:06:32,440 Speaker 3: said sure, and he said, all right, see you and 125 00:06:32,520 --> 00:06:39,039 Speaker 3: Jackson Oll. So they commission more experienced scholars. That's a 126 00:06:39,040 --> 00:06:41,480 Speaker 3: way of saying, this is not my first rodeo. If 127 00:06:41,520 --> 00:06:45,120 Speaker 3: you will Jackson Hole talk and then and then they 128 00:06:45,240 --> 00:06:49,120 Speaker 3: just let us go with it. They trust us to produce, 129 00:06:49,200 --> 00:06:52,680 Speaker 3: and this is the kind of high profile event where 130 00:06:52,760 --> 00:06:57,520 Speaker 3: the self imposed pressure to produce is great sufficient to 131 00:06:57,520 --> 00:06:59,200 Speaker 3: deliver the disorder result. 132 00:06:59,560 --> 00:07:01,200 Speaker 1: I was going to ask, does anyone ever say no 133 00:07:01,360 --> 00:07:02,240 Speaker 1: to the Kansas Fed? 134 00:07:02,600 --> 00:07:06,600 Speaker 3: So you know, we don't know that from as authors, 135 00:07:06,680 --> 00:07:09,039 Speaker 3: but if you look at the list of participants, it's 136 00:07:09,080 --> 00:07:14,480 Speaker 3: pretty evident that for reasons of both quality of intellectual 137 00:07:14,520 --> 00:07:16,960 Speaker 3: program and scenery, people rarely say no. 138 00:07:17,360 --> 00:07:21,000 Speaker 2: So let's get into I mean, it's a monetary policy symposium. 139 00:07:21,200 --> 00:07:24,880 Speaker 2: Your research is on sort of the fiscal side, public spending, 140 00:07:25,040 --> 00:07:27,400 Speaker 2: public debt. Talk to us just about how you sort 141 00:07:27,440 --> 00:07:30,160 Speaker 2: of like see this interaction. And I sort of mentioned 142 00:07:30,160 --> 00:07:32,560 Speaker 2: in the intro the twenty tens it felt like fiscal 143 00:07:32,560 --> 00:07:34,600 Speaker 2: authorities were kind of on the back seat, not a 144 00:07:34,680 --> 00:07:37,760 Speaker 2: lot of active management. How do you know, sort of 145 00:07:37,800 --> 00:07:40,000 Speaker 2: big picture that we could get more granular, like why 146 00:07:40,000 --> 00:07:43,640 Speaker 2: should central bankers be thinking more about the role of 147 00:07:43,720 --> 00:07:46,600 Speaker 2: high public debt and high public deficits as they think 148 00:07:46,640 --> 00:07:48,760 Speaker 2: of charting the course of monetary policy going forward? 149 00:07:49,120 --> 00:07:51,920 Speaker 3: Central bankers have to worry about two things. Number One, 150 00:07:52,000 --> 00:07:55,720 Speaker 3: that fiscal authorities in many countries and here the US 151 00:07:55,800 --> 00:08:00,400 Speaker 3: is special because of the dollars global role In mostes 152 00:08:00,440 --> 00:08:03,080 Speaker 3: other than the United States, there will be less room 153 00:08:03,160 --> 00:08:07,000 Speaker 3: for an active fiscal response going forward. So there was 154 00:08:07,120 --> 00:08:09,960 Speaker 3: one in response to the global financial crisis in many 155 00:08:10,000 --> 00:08:13,800 Speaker 3: countries again during COVID, and as a result of that, 156 00:08:14,000 --> 00:08:18,400 Speaker 3: debt to GDP ratios on average have doubled worldwide, which 157 00:08:18,440 --> 00:08:22,720 Speaker 3: means that scope for using fiscal policy in response to 158 00:08:22,760 --> 00:08:25,559 Speaker 3: the next crisis, whatever it might be, will be less. 159 00:08:25,600 --> 00:08:27,960 Speaker 3: So will we have to go back to the world 160 00:08:28,040 --> 00:08:31,440 Speaker 3: where monetary policy is the only game in town And 161 00:08:31,520 --> 00:08:35,080 Speaker 3: the answer is to an extent yes. Factor number two 162 00:08:35,360 --> 00:08:39,040 Speaker 3: is that central banks will come under pressure to be 163 00:08:39,280 --> 00:08:43,360 Speaker 3: more active debt managers. Some people will argue that if 164 00:08:43,400 --> 00:08:47,600 Speaker 3: they accept a higher inflation rate, that will make managing 165 00:08:48,000 --> 00:08:51,640 Speaker 3: the debt easier because we'll be inflating away the real 166 00:08:51,720 --> 00:08:54,600 Speaker 3: value of the debt. I disagree with that, because I 167 00:08:54,600 --> 00:08:59,240 Speaker 3: think yields will respond in Any benefit from an inflation 168 00:08:59,400 --> 00:09:03,600 Speaker 3: for debt management will be fleeting. But pressure to keep 169 00:09:03,679 --> 00:09:07,360 Speaker 3: interest rates low and tolerate more inflation will be more 170 00:09:07,400 --> 00:09:10,120 Speaker 3: intense than otherwise because of this heavy debt. 171 00:09:10,320 --> 00:09:13,160 Speaker 1: So you touched on it in that answer, but let 172 00:09:13,200 --> 00:09:15,839 Speaker 1: me press you on this particular point and ask the 173 00:09:15,880 --> 00:09:19,840 Speaker 1: devil's advocate question. I'm going to channel my inner modern 174 00:09:19,960 --> 00:09:24,480 Speaker 1: monetary theory. Dearest persona here, Joe. Our high levels of 175 00:09:24,480 --> 00:09:26,120 Speaker 1: debt always bad. 176 00:09:26,559 --> 00:09:29,560 Speaker 3: High levels of debt are always worse than low levels 177 00:09:29,559 --> 00:09:32,280 Speaker 3: of debt. So we would all like to see the 178 00:09:32,320 --> 00:09:35,760 Speaker 3: debt to GDP ratio in the United States and globally 179 00:09:35,800 --> 00:09:40,079 Speaker 3: be lower because governments will be able to use more 180 00:09:40,120 --> 00:09:43,640 Speaker 3: of their tax revenues for purposes other than debt service. 181 00:09:43,760 --> 00:09:47,600 Speaker 3: We have the Green Transition, we have infrastructure needs, We 182 00:09:47,679 --> 00:09:50,800 Speaker 3: have all the obvious things that only government can do, 183 00:09:51,000 --> 00:09:54,600 Speaker 3: and we need government to do those things. If government 184 00:09:54,760 --> 00:09:59,280 Speaker 3: is using its limited tax revenues to pay interest on 185 00:09:59,360 --> 00:10:02,760 Speaker 3: the debt, as fewer resources left over for those other 186 00:10:03,000 --> 00:10:07,319 Speaker 3: good things. So from that point, a few heavy inherited 187 00:10:07,400 --> 00:10:11,280 Speaker 3: debts are a bit of a drag on economic growth. 188 00:10:11,320 --> 00:10:16,360 Speaker 3: If you believe, as I do, that publicly financed infrastructure 189 00:10:16,720 --> 00:10:22,520 Speaker 3: and publicly subsidized climate change related and investment will be 190 00:10:22,559 --> 00:10:25,640 Speaker 3: important for economic growth going forward. 191 00:10:25,520 --> 00:10:28,040 Speaker 1: It sounds like there could almost be a distinction between 192 00:10:28,280 --> 00:10:32,319 Speaker 1: bad debt overhangs and good debt if the good debt 193 00:10:32,520 --> 00:10:36,280 Speaker 1: is taken out in the name of higher economic growth. 194 00:10:36,600 --> 00:10:41,600 Speaker 3: If government is borrowing to finance investments that make people 195 00:10:41,720 --> 00:10:46,240 Speaker 3: and the economy more productive, so that grows the denominator 196 00:10:46,280 --> 00:10:48,760 Speaker 3: of the debt to GDP ratio, the debt is less 197 00:10:48,760 --> 00:10:50,640 Speaker 3: of a problem than it would be otherwise. 198 00:10:51,040 --> 00:10:57,160 Speaker 2: What are some historical analogies to right now? Because you know, 199 00:10:57,200 --> 00:10:59,040 Speaker 2: we've had so it feels like there's kind of two 200 00:10:59,160 --> 00:11:02,520 Speaker 2: things happening. Once there was the emergency spending in the 201 00:11:02,600 --> 00:11:06,800 Speaker 2: immediate wake or when COVID hit, obviously, and then there 202 00:11:06,920 --> 00:11:08,880 Speaker 2: is this sort of, at least in the United States, 203 00:11:08,920 --> 00:11:12,960 Speaker 2: and I think somewhat elsewhere, a certain more aggressive political 204 00:11:12,960 --> 00:11:15,920 Speaker 2: winds shifting about our willingness to spend. And again, you know, 205 00:11:16,360 --> 00:11:18,920 Speaker 2: infrastructure and climate and chips in a way that we 206 00:11:18,960 --> 00:11:21,560 Speaker 2: didn't really see for a long time. Are there any 207 00:11:21,840 --> 00:11:24,920 Speaker 2: previous historical analogies that you can think of? Is it 208 00:11:25,000 --> 00:11:28,000 Speaker 2: mostly wars in which you see this sort of like 209 00:11:28,080 --> 00:11:30,200 Speaker 2: regime shift to the level of public debt. 210 00:11:30,520 --> 00:11:34,280 Speaker 3: I think it is emergencies tantamount to war. I'm an 211 00:11:34,320 --> 00:11:36,920 Speaker 3: economic historian, but I'm also a firm believer that the 212 00:11:37,000 --> 00:11:41,000 Speaker 3: role of historical analysis is not simply to draw parallels 213 00:11:41,640 --> 00:11:44,600 Speaker 3: or analogies, but to look for differences between then and now. 214 00:11:44,679 --> 00:11:49,000 Speaker 3: What is distinctive about our current situation. I'm worried about 215 00:11:49,040 --> 00:11:52,320 Speaker 3: the trajectory of debt. I'm worried about the trajectory of 216 00:11:52,360 --> 00:11:55,040 Speaker 3: the economy more broadly in the United States, because of 217 00:11:55,120 --> 00:12:00,360 Speaker 3: the extent of political polarization and the need or a 218 00:12:00,400 --> 00:12:06,080 Speaker 3: degree of political consensus to bring financial problems generally under control. 219 00:12:06,520 --> 00:12:10,520 Speaker 3: I think political polarization and fractionalization in the United States 220 00:12:10,520 --> 00:12:14,520 Speaker 3: are greater than any time in my lifetime. So from 221 00:12:14,880 --> 00:12:17,600 Speaker 3: that point a few Debt to GDP was higher after 222 00:12:17,640 --> 00:12:20,480 Speaker 3: World War Two, but you know, we had the McCarthy 223 00:12:20,559 --> 00:12:25,640 Speaker 3: years and politics were not exactly placid in the United States. 224 00:12:25,720 --> 00:12:28,400 Speaker 3: But I do not see a scenario at the moment 225 00:12:28,440 --> 00:12:32,480 Speaker 3: where the two parties can reach an agreement on raising 226 00:12:32,559 --> 00:12:37,800 Speaker 3: more tax revenues and bringing entitlement spending under control, which 227 00:12:37,840 --> 00:12:40,320 Speaker 3: is what you would need in order to flatten the 228 00:12:40,720 --> 00:12:41,599 Speaker 3: debt projectory. 229 00:12:41,800 --> 00:12:44,720 Speaker 1: What is the political appetite to bring down debt because 230 00:12:44,760 --> 00:12:48,640 Speaker 1: it feels like you're always going to have politicians who 231 00:12:48,760 --> 00:12:53,000 Speaker 1: maybe are eyeing short term gains, you know, cut taxes, 232 00:12:53,160 --> 00:12:57,680 Speaker 1: boost public spending in order to win another vote, versus 233 00:12:57,760 --> 00:13:01,200 Speaker 1: maybe a longer term gain of actually bringing down the 234 00:13:01,200 --> 00:13:04,439 Speaker 1: public debt, and that tension seems really hard to surmount. 235 00:13:04,600 --> 00:13:08,360 Speaker 3: In my paper for Jackson Hole, we look at some 236 00:13:08,440 --> 00:13:14,120 Speaker 3: of these historical experiences and thereof two varieties. Number One, 237 00:13:14,520 --> 00:13:18,319 Speaker 3: if you have a crisis that's enough to galvanize thought 238 00:13:18,640 --> 00:13:22,520 Speaker 3: and action such that governments are able to bring down debts. 239 00:13:22,559 --> 00:13:27,400 Speaker 3: So the Greek government crisis in twenty ten, Iceland crisis 240 00:13:27,559 --> 00:13:30,720 Speaker 3: in two thousand and eight have been able to run 241 00:13:30,760 --> 00:13:37,840 Speaker 3: budget surplus's technical term primary budget surpluses excluding interest payments 242 00:13:37,880 --> 00:13:42,120 Speaker 3: for the last ten years. And think about the United States, 243 00:13:42,200 --> 00:13:46,400 Speaker 3: that's inconceivable here. But what impelled them into action was 244 00:13:46,600 --> 00:13:50,840 Speaker 3: serious economic and financial crises and the conclusion that there 245 00:13:50,920 --> 00:13:54,640 Speaker 3: was no alternative but get this problem under control. And 246 00:13:54,720 --> 00:13:59,280 Speaker 3: the other historically cases have been those in which there 247 00:13:59,320 --> 00:14:04,160 Speaker 3: has been a rod political consensus where one party or 248 00:14:04,280 --> 00:14:08,840 Speaker 3: typically coalition of parties in the European setting where you 249 00:14:08,840 --> 00:14:12,240 Speaker 3: have coalition governments have been able to agree on a 250 00:14:12,760 --> 00:14:16,640 Speaker 3: program of bringing fiscal policy in the debt under control. 251 00:14:16,760 --> 00:14:20,280 Speaker 3: So bring those two cases to the United States. You know, 252 00:14:20,520 --> 00:14:23,040 Speaker 3: the first one, the crisis scenario is not one we 253 00:14:23,080 --> 00:14:26,680 Speaker 3: want to contemplate. And the second one broad consensus on 254 00:14:26,760 --> 00:14:29,200 Speaker 3: what to do is hard to imagine. 255 00:14:29,240 --> 00:14:32,160 Speaker 2: We would probably really need just like one party to 256 00:14:32,600 --> 00:14:35,840 Speaker 2: sweep in massively with some sort of effort to either 257 00:14:35,920 --> 00:14:39,120 Speaker 2: cut spending or race axes. But it's interesting because, like 258 00:14:39,160 --> 00:14:41,920 Speaker 2: I've read a little bit in the eighties and the nineties, 259 00:14:42,160 --> 00:14:45,400 Speaker 2: even as recently as in the eighties and nineties, there 260 00:14:45,400 --> 00:14:51,760 Speaker 2: were occasionally multi party efforts to cut you know, I 261 00:14:51,800 --> 00:14:54,760 Speaker 2: mean George H. W. Bush like famously like promise not 262 00:14:54,880 --> 00:14:56,840 Speaker 2: to raise taxes that read my Libs, and then he 263 00:14:56,840 --> 00:14:59,200 Speaker 2: did raise taxes a little bit. So it's like, even 264 00:14:59,280 --> 00:15:04,000 Speaker 2: fairly recent there was some appetite in DC among both 265 00:15:04,040 --> 00:15:07,400 Speaker 2: Democrats and Republicans to address deficits from time to. 266 00:15:07,360 --> 00:15:11,320 Speaker 3: Time, and not only George HW. Bush but William Jefferson 267 00:15:11,360 --> 00:15:15,400 Speaker 3: Clinton as well. That the budget was broadly balanced through 268 00:15:15,400 --> 00:15:17,400 Speaker 3: the nineteen nineties. And I would remind you that at 269 00:15:17,480 --> 00:15:19,760 Speaker 3: the end of the nineties we were talking about the 270 00:15:19,760 --> 00:15:24,120 Speaker 3: disappearance of US treasury debt and how financial markets would 271 00:15:24,400 --> 00:15:28,240 Speaker 3: price assets in the absence of treasury bonds because the wow, 272 00:15:28,640 --> 00:15:34,480 Speaker 3: your time was running surpluses. So it has been possible 273 00:15:34,600 --> 00:15:38,320 Speaker 3: in the US context. But then we got the Tea 274 00:15:38,360 --> 00:15:42,320 Speaker 3: Party and we got social media. You know, everybody will 275 00:15:42,360 --> 00:15:45,360 Speaker 3: have their favorite culprit for why we've had this increase 276 00:15:45,480 --> 00:15:50,359 Speaker 3: in political polarization in the US. But it's a fact. 277 00:15:53,520 --> 00:15:59,640 Speaker 1: You mentioned the dollars reserve status earlier. Does the idiosyncratic 278 00:16:00,120 --> 00:16:04,000 Speaker 1: role of US assets in the global financial system, the 279 00:16:04,040 --> 00:16:07,840 Speaker 1: safe haven status of US treasuries, Does that insulate the 280 00:16:08,000 --> 00:16:12,520 Speaker 1: US somewhat from experiencing a crisis on the scale of 281 00:16:12,640 --> 00:16:14,000 Speaker 1: a Greece or in Iceland. 282 00:16:14,080 --> 00:16:17,760 Speaker 3: Well, it certainly gives the US Treasury more room to run. 283 00:16:17,920 --> 00:16:23,440 Speaker 3: In other words, there is this significant and expanding appetite 284 00:16:23,520 --> 00:16:26,440 Speaker 3: for US Treasury bonds on the part of central banks 285 00:16:26,440 --> 00:16:30,160 Speaker 3: around the world which hold them as foreign reserves. And 286 00:16:30,600 --> 00:16:34,000 Speaker 3: as we show in the paper, there is significant and 287 00:16:34,120 --> 00:16:36,640 Speaker 3: expanding appetite for US treasuries on the part of the 288 00:16:36,640 --> 00:16:42,000 Speaker 3: private sector, corporate treasurers, institutional investors of all kinds that 289 00:16:42,120 --> 00:16:44,960 Speaker 3: view them as kind of a safe asset that they 290 00:16:45,000 --> 00:16:48,400 Speaker 3: can hold as the bedrock of their portfolio. So we 291 00:16:48,520 --> 00:16:52,120 Speaker 3: can keep adding to the stock of treasuries in the 292 00:16:52,160 --> 00:16:55,160 Speaker 3: hands of the public for a longer time than can 293 00:16:55,320 --> 00:17:00,560 Speaker 3: other central banks that don't enjoy the same exorbitant privilege 294 00:17:00,600 --> 00:17:05,000 Speaker 3: that their currency is a global currency. Things can change, 295 00:17:05,840 --> 00:17:10,640 Speaker 3: So I think, to my mind, there are the big 296 00:17:10,720 --> 00:17:16,000 Speaker 3: risk would be a disorderly debt ceiling blowout, which the 297 00:17:16,040 --> 00:17:18,880 Speaker 3: debt ceiling will be back on the table, if you will, 298 00:17:18,960 --> 00:17:24,280 Speaker 3: after the presidential elections, so that problem and the danger 299 00:17:24,320 --> 00:17:28,400 Speaker 3: it poses to the dollars global role are not off 300 00:17:28,480 --> 00:17:28,919 Speaker 3: the table. 301 00:17:29,200 --> 00:17:31,120 Speaker 1: Is this going to turn into a coin episode? 302 00:17:31,160 --> 00:17:33,879 Speaker 2: No, No, it's always you who thinks it's going to 303 00:17:34,000 --> 00:17:34,800 Speaker 2: And I wasn't going next. 304 00:17:35,000 --> 00:17:38,320 Speaker 1: I live in perpetual fear, but so. 305 00:17:38,280 --> 00:17:39,640 Speaker 2: I was, you know, I was going to ask like okay, 306 00:17:39,680 --> 00:17:42,080 Speaker 2: and you sort of anticipated. But when you think about 307 00:17:42,080 --> 00:17:46,560 Speaker 2: like what are tipping points and for when the government's 308 00:17:46,600 --> 00:17:50,280 Speaker 2: public debt suddenly people go from thinking it's safe and 309 00:17:50,359 --> 00:17:52,320 Speaker 2: it's something they want to hold, it's something linked to 310 00:17:52,359 --> 00:17:55,879 Speaker 2: something they're anxious. Is the scenario that's more likely to 311 00:17:55,960 --> 00:17:58,960 Speaker 2: create a tipping point something where it's like a ratio, 312 00:17:59,480 --> 00:18:02,080 Speaker 2: where it's like, okay, there's some level and we're concerned 313 00:18:02,080 --> 00:18:05,480 Speaker 2: about debt service like sort of like a classic credit concerns. 314 00:18:05,800 --> 00:18:08,800 Speaker 2: Or is it more like something the public starts to 315 00:18:08,840 --> 00:18:12,440 Speaker 2: lose faith and not necessarily even do a ratio or 316 00:18:12,480 --> 00:18:15,439 Speaker 2: do to a stock of debt, but something about the 317 00:18:15,520 --> 00:18:19,160 Speaker 2: US political system in which people do not feel good 318 00:18:19,359 --> 00:18:24,200 Speaker 2: about what that government guarantee means. Whether it's something technical 319 00:18:24,280 --> 00:18:26,679 Speaker 2: like the existence of not raising the debt sealing, or 320 00:18:26,880 --> 00:18:29,879 Speaker 2: just a sort of like further degradation of the quality 321 00:18:30,000 --> 00:18:31,120 Speaker 2: of politics in DC. 322 00:18:31,760 --> 00:18:34,840 Speaker 3: I think it's the politics that are the real and 323 00:18:35,600 --> 00:18:42,160 Speaker 3: present danger. If financial conditions deteriorate very gradually, yields will 324 00:18:42,320 --> 00:18:46,560 Speaker 3: rise very gradually, and hopefully that will get the attention 325 00:18:46,680 --> 00:18:52,800 Speaker 3: of policymakers sufficiently to at some point aggress the problem. Similarly, 326 00:18:52,840 --> 00:18:57,680 Speaker 3: I do not think that aggressive US use of sanctions 327 00:18:57,720 --> 00:19:02,080 Speaker 3: will prompt like from the dollar. Think so called weaponization 328 00:19:02,240 --> 00:19:08,000 Speaker 3: of the dollar is the danger other either because there 329 00:19:08,000 --> 00:19:11,240 Speaker 3: are no alternatives, and the bricks can hold all the 330 00:19:11,240 --> 00:19:14,320 Speaker 3: summits they want, and they talk a good game about 331 00:19:14,400 --> 00:19:17,440 Speaker 3: creating an alternative to the dollar, but it's easier said 332 00:19:17,440 --> 00:19:20,679 Speaker 3: than done, as the Chinese among the others have learned. 333 00:19:21,000 --> 00:19:24,000 Speaker 1: Just on that note, how much is high public debt, 334 00:19:24,240 --> 00:19:27,359 Speaker 1: at least in the US. The sort of other side 335 00:19:27,440 --> 00:19:31,160 Speaker 1: of the coin of a lot of countries like China 336 00:19:31,640 --> 00:19:35,639 Speaker 1: having these big savings surpluses that they need to put 337 00:19:35,880 --> 00:19:39,560 Speaker 1: somewhere like to what extent is the deficit I guess 338 00:19:39,960 --> 00:19:42,040 Speaker 1: enabled by those savings. 339 00:19:42,280 --> 00:19:45,560 Speaker 3: Michael Pettis has made that argument, and I think that 340 00:19:45,760 --> 00:19:51,320 Speaker 3: is part of the story. But the traditional story about 341 00:19:51,520 --> 00:19:55,400 Speaker 3: crade surpluses and deficits, that countries like China are running 342 00:19:55,440 --> 00:19:58,600 Speaker 3: trade and current account surpluses and therefore they are accumulating 343 00:19:58,640 --> 00:20:04,160 Speaker 3: dollars worked well in a world where capital wasn't mobile internationally. 344 00:20:04,600 --> 00:20:09,240 Speaker 3: So with Chinese investment abroad and foreign investment in China, 345 00:20:09,400 --> 00:20:12,639 Speaker 3: which has been important until very recently, I think the 346 00:20:12,720 --> 00:20:16,080 Speaker 3: story becomes more complex. So I don't think it's mainly 347 00:20:16,240 --> 00:20:21,679 Speaker 3: about high savings and current councilor pluses in countries like 348 00:20:22,040 --> 00:20:25,639 Speaker 3: China and Saudi Arabia. I think it's mainly about the 349 00:20:25,760 --> 00:20:30,600 Speaker 3: dollars liquidity, about US treasuries liquidity and their safe haven. 350 00:20:30,880 --> 00:20:33,720 Speaker 2: Since you mentioned the bricks and there was just the 351 00:20:33,800 --> 00:20:36,240 Speaker 2: sort of brick summit, and there's this, you know, perpetual 352 00:20:36,560 --> 00:20:39,920 Speaker 2: I don't know fantasy or people write science fiction about 353 00:20:39,920 --> 00:20:42,160 Speaker 2: one day. This sort of alternative. 354 00:20:41,680 --> 00:20:44,080 Speaker 1: Possibility is a nicer way of describing. 355 00:20:44,000 --> 00:20:47,560 Speaker 2: Instead of science fiction hypothetical. But you know, people do 356 00:20:47,640 --> 00:20:49,520 Speaker 2: talk about this a lot, and I'm curious, you know, 357 00:20:49,640 --> 00:20:53,119 Speaker 2: since you mentioned that you know the real risk to 358 00:20:53,960 --> 00:20:57,440 Speaker 2: US dollar standing or US Treasury standing might be political politics. 359 00:20:57,720 --> 00:21:00,879 Speaker 2: Would you say it's politics that's also the impediment to 360 00:21:00,960 --> 00:21:03,600 Speaker 2: sort of something else, Rais. I mean to your point, 361 00:21:03,800 --> 00:21:05,840 Speaker 2: you know, people talk about good maybe China needs to 362 00:21:05,920 --> 00:21:09,359 Speaker 2: run its own current account deficit for UN internationalization or 363 00:21:09,359 --> 00:21:12,720 Speaker 2: et cetera. Is the flip also essentially that we're not 364 00:21:12,880 --> 00:21:16,879 Speaker 2: going to see a credible alternative to the dollar until 365 00:21:16,880 --> 00:21:21,080 Speaker 2: there's just sort of much more global political confidence in 366 00:21:21,160 --> 00:21:25,840 Speaker 2: the leadership of whatever country would theoretically be behind that currency. 367 00:21:25,920 --> 00:21:30,879 Speaker 3: Absolutely so, it's not only an open financial markets open 368 00:21:30,920 --> 00:21:33,120 Speaker 3: to the rest of the world, which China doesn't have, 369 00:21:33,680 --> 00:21:37,480 Speaker 3: but confidence in the political system of the issuing country. 370 00:21:37,600 --> 00:21:40,159 Speaker 3: Presidency and the pollop euro can change the rules of 371 00:21:40,200 --> 00:21:43,840 Speaker 3: the financial game even more grammatically in response to events 372 00:21:43,920 --> 00:21:47,720 Speaker 3: than the US Treasury did when it led the drive 373 00:21:48,280 --> 00:21:52,040 Speaker 3: toward Russian sanctions in twenty twenty two. And I think 374 00:21:52,320 --> 00:21:56,040 Speaker 3: mister Putin's actions have reminded the world of the risks 375 00:21:56,080 --> 00:21:59,359 Speaker 3: of putting your financial legs in the basket of an 376 00:21:59,400 --> 00:22:03,879 Speaker 3: authority and lead, and China has been moving in that 377 00:22:03,960 --> 00:22:05,560 Speaker 3: direction rather than moving away. 378 00:22:05,760 --> 00:22:09,679 Speaker 1: We've been talking a lot about foreign demand for US 379 00:22:09,720 --> 00:22:12,920 Speaker 1: debt in the form of reserves from other central banks. 380 00:22:12,960 --> 00:22:15,600 Speaker 1: But you briefly mentioned that there are, of course private 381 00:22:15,640 --> 00:22:18,800 Speaker 1: investors who snap up treasuries too. One of the big 382 00:22:18,840 --> 00:22:22,480 Speaker 1: groups of private investors are the banks who are basically 383 00:22:22,600 --> 00:22:26,159 Speaker 1: mandated to buy bonds because we have all these capital 384 00:22:26,240 --> 00:22:29,520 Speaker 1: rules and things like the supplementary leverage ratio. To what 385 00:22:29,640 --> 00:22:33,720 Speaker 1: extent is that sort of bank bondage, for lack of 386 00:22:33,720 --> 00:22:37,960 Speaker 1: a better term, or financial repression a solution to this problem. 387 00:22:38,000 --> 00:22:40,960 Speaker 1: Can it help offset some of those exploding levels, or 388 00:22:41,000 --> 00:22:44,119 Speaker 1: at some point does it become an issue sort of 389 00:22:44,119 --> 00:22:46,200 Speaker 1: how we saw in March of this year. 390 00:22:46,560 --> 00:22:49,840 Speaker 3: We used to talk about the diabolic loop or the 391 00:22:49,920 --> 00:22:55,000 Speaker 3: doom between government budget deficits and banking problems, that if 392 00:22:55,040 --> 00:22:58,600 Speaker 3: you force feed government bonds to the banks, you end 393 00:22:58,680 --> 00:23:02,240 Speaker 3: up with silicon all bank, big time. So I think 394 00:23:02,320 --> 00:23:08,200 Speaker 3: there are obvious risks with what you described as financial repression. 395 00:23:08,400 --> 00:23:12,440 Speaker 3: Carmen Reinhardt, who was the commentator on my paper at 396 00:23:12,520 --> 00:23:16,960 Speaker 3: Jackson Hole, is the specialist in that she believes that 397 00:23:17,160 --> 00:23:22,200 Speaker 3: there's more scope for that financial repression approach to managing 398 00:23:22,200 --> 00:23:25,680 Speaker 3: our debt problems than I do. Financial markets are open 399 00:23:25,720 --> 00:23:29,520 Speaker 3: and global, and if we weaken US banks by force 400 00:23:29,600 --> 00:23:32,520 Speaker 3: feeding them bonds, they're going to lose business to foreign banks. 401 00:23:32,640 --> 00:23:36,720 Speaker 3: So my view is there are real limits to going 402 00:23:36,840 --> 00:23:37,400 Speaker 3: on that road. 403 00:23:40,320 --> 00:23:44,159 Speaker 1: You mentioned Reinhart was the assigned discusser of your paper. 404 00:23:44,359 --> 00:23:46,479 Speaker 1: What sort of questions do you get give us an 405 00:23:46,480 --> 00:23:49,399 Speaker 1: insight on what that discussion actually looks like when you 406 00:23:49,440 --> 00:23:50,200 Speaker 1: present your paper. 407 00:23:50,800 --> 00:23:56,240 Speaker 3: It's very much personality specific, so it helps if you're 408 00:23:56,400 --> 00:24:00,359 Speaker 3: discustant is a personal friend Carmen is in my case, 409 00:24:01,000 --> 00:24:03,320 Speaker 3: And on the other hand, you're a little bit on 410 00:24:03,320 --> 00:24:06,200 Speaker 3: on edge. If you know that your friend and discuss 411 00:24:06,240 --> 00:24:07,960 Speaker 3: and has very different views than your. 412 00:24:07,800 --> 00:24:11,919 Speaker 2: Own, sounds like a fun, fun, fun fun set up. 413 00:24:11,960 --> 00:24:15,560 Speaker 1: Maybe maybe one day in our dream world, they'll invite us, 414 00:24:15,760 --> 00:24:17,280 Speaker 1: one of us, the one of. 415 00:24:17,240 --> 00:24:21,040 Speaker 2: Us will send it, and one of us will critique 416 00:24:21,359 --> 00:24:23,520 Speaker 2: the other. Can we talk a little bit more? Okay? Like, 417 00:24:23,560 --> 00:24:26,959 Speaker 2: so imagine like it does not feel like there is 418 00:24:27,520 --> 00:24:31,440 Speaker 2: some imminent big fiscal consolidation coming. Maybe there'll be a 419 00:24:31,480 --> 00:24:34,399 Speaker 2: crisis or something, hope hopefully not. But you know, as 420 00:24:34,440 --> 00:24:36,760 Speaker 2: you say in your paper, it looks like we are 421 00:24:36,760 --> 00:24:40,440 Speaker 2: in an era of high public debts that will be 422 00:24:40,600 --> 00:24:43,080 Speaker 2: sustained for a while. Can you talk a little bit more. 423 00:24:43,119 --> 00:24:47,320 Speaker 2: I mean, you mentioned perhaps this constrains fiscal authorities in 424 00:24:47,400 --> 00:24:49,960 Speaker 2: terms of what they can prioritize and so forth. Can 425 00:24:50,000 --> 00:24:51,760 Speaker 2: you talk a little bit more about what you see 426 00:24:51,760 --> 00:24:54,920 Speaker 2: as some of the implications of this world, maybe both 427 00:24:54,920 --> 00:24:57,840 Speaker 2: for the US and countries that don't enjoy the same 428 00:24:57,880 --> 00:25:00,359 Speaker 2: status as the US, Like, how do you think that 429 00:25:00,359 --> 00:25:03,800 Speaker 2: that world looks versus say, the last decade in which 430 00:25:04,200 --> 00:25:06,760 Speaker 2: it seemed like, you know, ample demand for debt, no 431 00:25:06,800 --> 00:25:08,399 Speaker 2: real issue. Well, how does this world look different? 432 00:25:08,560 --> 00:25:11,560 Speaker 3: We learned it in the global financial crisis and again 433 00:25:11,680 --> 00:25:15,400 Speaker 3: during the pandemic, that being able to adjust fiscal policy, 434 00:25:15,800 --> 00:25:20,760 Speaker 3: being able to mount an assertive fiscal response to events 435 00:25:21,119 --> 00:25:25,480 Speaker 3: can be invaluable, can be critically important for stabilizing the economy, 436 00:25:25,520 --> 00:25:28,560 Speaker 3: and there will be much less scope for doing that 437 00:25:28,720 --> 00:25:31,520 Speaker 3: in a wide variety of economies around the world. So 438 00:25:32,080 --> 00:25:35,280 Speaker 3: I would caution us collectively that this is not only 439 00:25:35,320 --> 00:25:37,639 Speaker 3: a story about the United States, but it's a story 440 00:25:37,680 --> 00:25:40,560 Speaker 3: about one hundred and eighty economies around the world, many 441 00:25:40,600 --> 00:25:43,680 Speaker 3: of which most of which are more heavily indebted, significantly 442 00:25:43,720 --> 00:25:46,200 Speaker 3: more heavily indebted than they were before, and their governments 443 00:25:46,240 --> 00:25:48,560 Speaker 3: will not be able to use fiscal policy in the 444 00:25:48,600 --> 00:25:49,080 Speaker 3: same way. 445 00:25:49,320 --> 00:25:52,040 Speaker 2: We focus so much on the US context, and we've 446 00:25:52,080 --> 00:25:54,560 Speaker 2: talked about the sort of political degradation and the dead 447 00:25:54,600 --> 00:25:56,879 Speaker 2: ceiling and things like that, But I don't know if 448 00:25:57,040 --> 00:26:00,760 Speaker 2: is it a similar story elsewhere, Like why in the 449 00:26:00,800 --> 00:26:04,040 Speaker 2: other one hundred and seventy nine countries have we also 450 00:26:04,160 --> 00:26:07,440 Speaker 2: seen this sort of debt trajectory and perhaps a similar 451 00:26:07,560 --> 00:26:11,960 Speaker 2: unwillingness or similar difficulties to constrain the fiscal response. 452 00:26:12,119 --> 00:26:17,200 Speaker 3: The global pandemic was global by definition, so most governments 453 00:26:17,240 --> 00:26:21,159 Speaker 3: around the world faced the same imperatives. People were locked 454 00:26:21,160 --> 00:26:25,919 Speaker 3: down and government had to provide support for households that 455 00:26:25,960 --> 00:26:32,080 Speaker 3: couldn't otherwise feed themselves. And secondly, yes, there are political problems. 456 00:26:32,160 --> 00:26:36,320 Speaker 3: Some people who believe in small government at all costs 457 00:26:36,840 --> 00:26:40,560 Speaker 3: prefer starve the beast kind of policies where you cut 458 00:26:40,640 --> 00:26:44,560 Speaker 3: taxes now in order to force government to cut spending later. 459 00:26:44,640 --> 00:26:48,600 Speaker 3: And you don't always get the later part of the equation. 460 00:26:48,880 --> 00:26:55,520 Speaker 3: When governments are unstable or alternating in office, those in 461 00:26:55,600 --> 00:26:58,760 Speaker 3: office prefer to spend on their preferred programs now before 462 00:26:58,800 --> 00:27:02,280 Speaker 3: the other party comes into power, and both parties engaged 463 00:27:02,320 --> 00:27:07,320 Speaker 3: in that kind of behavior, So political dysfunction is part 464 00:27:07,359 --> 00:27:08,480 Speaker 3: of the story, to be sure. 465 00:27:08,640 --> 00:27:11,399 Speaker 1: In your conclusion in the paper, when you talk about 466 00:27:11,440 --> 00:27:14,240 Speaker 1: the implications of living with high debt, you sort of 467 00:27:14,280 --> 00:27:16,679 Speaker 1: sum it up and say, basically, it means we'll have 468 00:27:16,760 --> 00:27:20,280 Speaker 1: to try to avoid steps that make a bad situation worse. 469 00:27:20,560 --> 00:27:23,080 Speaker 1: And you list a bunch of those potential steps, so 470 00:27:23,240 --> 00:27:27,160 Speaker 1: things like raising taxes in the good times or lowering 471 00:27:27,320 --> 00:27:31,080 Speaker 1: unproductive spending. But you had one line in there. I'm 472 00:27:31,119 --> 00:27:34,400 Speaker 1: not entirely sure what it means. It's targeting social transfers 473 00:27:34,440 --> 00:27:37,479 Speaker 1: as a way of limiting pressures on the expenditure side. 474 00:27:37,560 --> 00:27:41,280 Speaker 1: What do you mean by that means testing? Oh? 475 00:27:41,560 --> 00:27:44,800 Speaker 3: That in the United States, certainly, entitlement spending is a 476 00:27:44,800 --> 00:27:49,160 Speaker 3: big part of the federal budget, the majority, and it's 477 00:27:49,600 --> 00:27:53,000 Speaker 3: not clear from an economist's point of view why the 478 00:27:53,040 --> 00:27:57,760 Speaker 3: one percent should be receiving Social Security payments every month. 479 00:27:58,200 --> 00:27:59,880 Speaker 1: Oh interesting, Okay, there's a question. 480 00:28:00,200 --> 00:28:04,040 Speaker 2: And maybe it's a little bit more short term focused. 481 00:28:04,080 --> 00:28:07,760 Speaker 2: But you know, throughout the twenty tens, I don't even 482 00:28:07,840 --> 00:28:10,200 Speaker 2: know why. In retrospect, it seems like a silly challenge, 483 00:28:10,200 --> 00:28:14,920 Speaker 2: but we kept missing inflation from the downside. It doesn't 484 00:28:14,920 --> 00:28:16,840 Speaker 2: seem like a terrible problem to have, but that's how 485 00:28:16,840 --> 00:28:20,320 Speaker 2: people characterize it. We couldn't hit the target from the downside. 486 00:28:20,400 --> 00:28:23,200 Speaker 2: And one of the arguments that you heard a lot 487 00:28:23,200 --> 00:28:25,560 Speaker 2: through the twenty tens is well, we should have we 488 00:28:25,560 --> 00:28:28,040 Speaker 2: should spend more, and we should boost demand, should boost 489 00:28:28,040 --> 00:28:31,560 Speaker 2: domestic demand, use the government's power to spend and what 490 00:28:31,720 --> 00:28:35,080 Speaker 2: never really happened again due to politics. When you look 491 00:28:35,160 --> 00:28:39,120 Speaker 2: at the challenge right now that the central bankers here 492 00:28:39,520 --> 00:28:45,280 Speaker 2: faced with high inflation and surprisingly resilient inflation, rapid rate 493 00:28:45,360 --> 00:28:48,000 Speaker 2: hikes have not had the effect yet at least of 494 00:28:48,600 --> 00:28:51,320 Speaker 2: cool getting inflation back to target as people might have guessed, 495 00:28:51,600 --> 00:28:54,479 Speaker 2: how much is that? Essentially the flip story of the 496 00:28:54,480 --> 00:29:00,000 Speaker 2: twenty tens that it's the aggressive fiscal policy is contribute 497 00:29:00,520 --> 00:29:03,480 Speaker 2: to the current inflation and makes the challenge of getting 498 00:29:03,480 --> 00:29:05,680 Speaker 2: back to target difficult for policymakers. 499 00:29:05,760 --> 00:29:09,040 Speaker 3: Boy, you're bringing me back to the much discussed issue 500 00:29:09,440 --> 00:29:14,000 Speaker 3: of what caused our current Yeah, well, I and we 501 00:29:14,040 --> 00:29:17,200 Speaker 3: know the answer is one of three things. Supply shocks 502 00:29:18,280 --> 00:29:23,320 Speaker 3: starting with COVID, excessive fiscal stimulus, notably the early twenty 503 00:29:23,400 --> 00:29:26,880 Speaker 3: twenty one Biden stimulus, I think was a bit more 504 00:29:26,920 --> 00:29:29,240 Speaker 3: than we needed, and number three, the FED was about 505 00:29:29,240 --> 00:29:31,520 Speaker 3: a year behind the curve, a year like the rest 506 00:29:31,520 --> 00:29:34,240 Speaker 3: of us, I include everyone in this room, everyone in 507 00:29:34,240 --> 00:29:36,160 Speaker 3: this podcast, about a year late. 508 00:29:36,320 --> 00:29:38,320 Speaker 2: We're all implicated, all us. 509 00:29:38,520 --> 00:29:42,320 Speaker 3: You're realizing that the inflation environment had changed and a 510 00:29:42,400 --> 00:29:45,160 Speaker 3: very different central bank policy was needed. So I think 511 00:29:45,200 --> 00:29:48,880 Speaker 3: all three factors played a role. And if we're really 512 00:29:49,520 --> 00:29:54,320 Speaker 3: now experiencing soft landing, something between a soft landing and 513 00:29:54,880 --> 00:29:58,400 Speaker 3: no landing, where inflation comes down with only a very 514 00:29:58,480 --> 00:30:03,040 Speaker 3: modest increase and the unemployment rate, if any, we should 515 00:30:03,480 --> 00:30:06,560 Speaker 3: have that discussion about how to narrow the budget deficits. 516 00:30:06,600 --> 00:30:08,560 Speaker 2: Can I just ask though, just to follow up? I mean, 517 00:30:08,680 --> 00:30:10,320 Speaker 2: there's a lot of talk about, like, well, what were 518 00:30:10,320 --> 00:30:13,280 Speaker 2: the policy errors, and you sort of identified two very 519 00:30:13,280 --> 00:30:17,000 Speaker 2: popular ones, which is excessive fiscal and central bankers coming slow. 520 00:30:17,040 --> 00:30:18,440 Speaker 2: But on the other hand, we have three and a 521 00:30:18,480 --> 00:30:22,800 Speaker 2: half percent unemployment multi decade lows. Other measures of labor 522 00:30:22,840 --> 00:30:27,280 Speaker 2: market utilization are very impressive, prime age employment to population ratio. 523 00:30:27,720 --> 00:30:31,760 Speaker 2: How should we think about like weighing the costs and benefits. 524 00:30:31,800 --> 00:30:33,760 Speaker 2: And I'm not talking about like, oh, we should like 525 00:30:33,960 --> 00:30:37,160 Speaker 2: formally accept three percent inflation or something like that, but 526 00:30:37,240 --> 00:30:39,720 Speaker 2: there are good things that seem to have come out 527 00:30:39,720 --> 00:30:43,120 Speaker 2: of the government's aggressive response to the pandemic, And how 528 00:30:43,120 --> 00:30:46,600 Speaker 2: should we think about, like weighing those benefits against the 529 00:30:46,640 --> 00:30:49,760 Speaker 2: cost of the higher inflation that we're talking all everyone's 530 00:30:49,760 --> 00:30:50,280 Speaker 2: talking about here. 531 00:30:50,360 --> 00:30:53,360 Speaker 3: Yeah, I think the benefits were considerable. So you Joe 532 00:30:53,360 --> 00:30:56,800 Speaker 3: asked me about the sources something of inflation, and I 533 00:30:56,880 --> 00:31:00,840 Speaker 3: pointed to a couple of macro policy mistakes, if you will, 534 00:31:00,840 --> 00:31:03,560 Speaker 3: that contributed to the inflation. But overall, I agree with 535 00:31:03,640 --> 00:31:08,000 Speaker 3: the implication of your question that we responded quite well 536 00:31:08,160 --> 00:31:11,840 Speaker 3: compared to the response to earlier crises. To the most 537 00:31:11,880 --> 00:31:17,120 Speaker 3: recent pandemic and energy crisis related shocks, that's quite remarkable 538 00:31:17,200 --> 00:31:20,280 Speaker 3: that two years on we're back to three percent inflation 539 00:31:20,520 --> 00:31:22,920 Speaker 3: and three and a half percent unemployment. 540 00:31:23,040 --> 00:31:27,000 Speaker 1: How do you view the impact of monetary policy in 541 00:31:27,040 --> 00:31:30,040 Speaker 1: a time of higher debt, because there is I mean, 542 00:31:30,040 --> 00:31:33,000 Speaker 1: there are multiple arguments on this topic, but one argument, 543 00:31:33,040 --> 00:31:36,480 Speaker 1: for instance, is that it's harder for interest rates to 544 00:31:36,680 --> 00:31:39,960 Speaker 1: stay high in an environment where you have lots of 545 00:31:40,000 --> 00:31:43,640 Speaker 1: public debt because the impact of those higher interest rates 546 00:31:43,720 --> 00:31:46,920 Speaker 1: is going to be more painful and also cause higher 547 00:31:46,960 --> 00:31:49,080 Speaker 1: debt servicing costs for the government. So how are you 548 00:31:49,160 --> 00:31:50,840 Speaker 1: thinking about those two issues. 549 00:31:51,080 --> 00:31:53,520 Speaker 3: We talked about that a little bit earlier. I think 550 00:31:53,720 --> 00:31:56,320 Speaker 3: my view is that the Fed really is committed to 551 00:31:56,360 --> 00:32:00,719 Speaker 3: its two percent inflation target, despite the pressures you allude 552 00:32:00,760 --> 00:32:04,760 Speaker 3: to that keeping interest rates higher than otherwise in order 553 00:32:04,800 --> 00:32:07,479 Speaker 3: to bring inflation all the way down to two percent 554 00:32:07,600 --> 00:32:10,280 Speaker 3: will make debt service a bit higher in the short 555 00:32:10,360 --> 00:32:12,959 Speaker 3: run than it would be otherwise and add to the 556 00:32:13,000 --> 00:32:18,200 Speaker 3: fiscal problem. And Chairman Powell was clear at Jackson Hole 557 00:32:18,400 --> 00:32:21,640 Speaker 3: that is not his immediate concern. His immediate concern is 558 00:32:22,240 --> 00:32:25,080 Speaker 3: convincing the public and the markets that we are on 559 00:32:25,200 --> 00:32:27,880 Speaker 3: track to two percent. And I take them at his word. 560 00:32:28,320 --> 00:32:31,120 Speaker 1: Let me ask this question in a slightly different, perhaps 561 00:32:31,240 --> 00:32:36,200 Speaker 1: more provocative way. In that case, what should central bankers 562 00:32:36,320 --> 00:32:40,880 Speaker 1: do in response to higher public debt levels. 563 00:32:41,280 --> 00:32:44,200 Speaker 3: Well, they have to be aware that the economy will 564 00:32:44,200 --> 00:32:47,640 Speaker 3: not receive support from fiscal policy in the next downturn 565 00:32:47,920 --> 00:32:51,120 Speaker 3: in the same way that it did in twenty twenty 566 00:32:51,200 --> 00:32:54,160 Speaker 3: twenty twenty one, in the same way even that it 567 00:32:54,240 --> 00:32:58,920 Speaker 3: did in many countries in and eight two thousand and nine. 568 00:32:59,000 --> 00:33:02,800 Speaker 3: So they have to be prepared to respond. I think 569 00:33:02,880 --> 00:33:06,920 Speaker 3: they have to make clear that they will not fall 570 00:33:07,040 --> 00:33:11,320 Speaker 3: prey to what economists call fiscal dominance, that monetary policy 571 00:33:11,360 --> 00:33:15,840 Speaker 3: will not become a slave to fiscal and debt problems, 572 00:33:16,480 --> 00:33:21,520 Speaker 3: and they will have to look even harder than otherwise 573 00:33:21,760 --> 00:33:26,640 Speaker 3: at financial stability risks. Who is holding this public debt? 574 00:33:26,800 --> 00:33:31,880 Speaker 3: Are their concentrations of public debt? Are their unhedged interest 575 00:33:31,960 --> 00:33:36,640 Speaker 3: rate exposures related to those holdings. Because central banks are 576 00:33:36,720 --> 00:33:39,200 Speaker 3: monetary policy makers, they're also regulators. 577 00:33:39,360 --> 00:33:41,840 Speaker 2: One last question, and it's sort of an x US question. 578 00:33:41,960 --> 00:33:45,760 Speaker 2: So obviously, the FED has a incredible balance sheet capacity, 579 00:33:45,840 --> 00:33:48,120 Speaker 2: and we saw it step in big time in March 580 00:33:48,160 --> 00:33:50,800 Speaker 2: twenty twenty to buy all the treasuries and stabilize the market. 581 00:33:51,560 --> 00:33:54,400 Speaker 2: We've also seen the beginnings, though, I think of other 582 00:33:55,160 --> 00:33:59,200 Speaker 2: smaller central banks do something similar. I think Brazil, for example, 583 00:33:59,560 --> 00:34:02,760 Speaker 2: bought some of its own government debt. And going forward, 584 00:34:03,280 --> 00:34:06,960 Speaker 2: do more central banks around the world have that capacity 585 00:34:07,040 --> 00:34:09,920 Speaker 2: or the credibility to use their own balance sheet to 586 00:34:10,040 --> 00:34:14,080 Speaker 2: smooth government debt markets than perhaps there was in the past. 587 00:34:14,239 --> 00:34:18,520 Speaker 3: Yes, I think that's the case more generally, monetary policy. 588 00:34:18,600 --> 00:34:22,200 Speaker 3: Central bank policy has gained credibility over time in emerging 589 00:34:22,239 --> 00:34:25,960 Speaker 3: markets in particular, So we saw that in the fact 590 00:34:26,000 --> 00:34:29,680 Speaker 3: that many emerging markets moved more rapidly than the Fed 591 00:34:29,760 --> 00:34:33,520 Speaker 3: did in twenty twenty one twenty twenty two to begin 592 00:34:33,640 --> 00:34:37,920 Speaker 3: to hike rates and bring inflation down, and that monetary 593 00:34:37,960 --> 00:34:43,000 Speaker 3: policy credibility, that anti inflation commitment, gives them more room forneuver, 594 00:34:44,000 --> 00:34:48,800 Speaker 3: including when circumstances dictate expanding their balance sheets. 595 00:34:48,960 --> 00:34:51,920 Speaker 1: All right, Barry, it was fantastic having you on all thoughts. 596 00:34:51,920 --> 00:34:55,200 Speaker 1: Thank you for giving us, I guess our own personal 597 00:34:55,320 --> 00:34:58,040 Speaker 1: presentation of your paper. We really appreciate it. 598 00:34:58,080 --> 00:34:58,600 Speaker 3: Thank you both. 599 00:34:58,800 --> 00:35:05,359 Speaker 2: Thank you so much. Those Gay. 600 00:35:08,520 --> 00:35:12,400 Speaker 1: So Joe. Obviously, that was really interesting. I did think 601 00:35:12,520 --> 00:35:17,000 Speaker 1: that his warning about maybe next time the fiscal response 602 00:35:17,280 --> 00:35:20,799 Speaker 1: won't be as big, you know, it will be restrained 603 00:35:20,880 --> 00:35:23,440 Speaker 1: in some capacity. That was interesting. 604 00:35:23,840 --> 00:35:25,440 Speaker 2: There are two things I mean, yeah, like in a 605 00:35:25,480 --> 00:35:28,760 Speaker 2: period of high inflation, right like already you would expect 606 00:35:28,760 --> 00:35:32,279 Speaker 2: that that is going to constrain the appetite of policymakers 607 00:35:32,360 --> 00:35:36,279 Speaker 2: to spend further, etcetera. But I was really struck, and 608 00:35:36,320 --> 00:35:39,200 Speaker 2: I think that's very telling, like the discussion of politics, 609 00:35:39,239 --> 00:35:42,480 Speaker 2: and then ultimately like that manifest itself in different ways, 610 00:35:42,640 --> 00:35:46,440 Speaker 2: manifest itself, the lack of appetite for fiscal consolidation. It 611 00:35:46,480 --> 00:35:48,840 Speaker 2: could manifest itself or people just freak out as like 612 00:35:48,840 --> 00:35:51,200 Speaker 2: I don't trust the United States anymore. It could be 613 00:35:51,200 --> 00:35:54,240 Speaker 2: a debt sealing trip. Like it feels like that's really 614 00:35:54,360 --> 00:35:57,840 Speaker 2: like where like things did go from stress to crisis. 615 00:35:57,960 --> 00:36:00,399 Speaker 1: Yeah, and that was that tension. That that's the reason 616 00:36:00,440 --> 00:36:02,239 Speaker 1: I asked that question about, well, how do you ever 617 00:36:02,280 --> 00:36:06,000 Speaker 1: get politicians to sort of sacrifice the next four years 618 00:36:06,040 --> 00:36:09,800 Speaker 1: in exchange for longer term gains about bringing down the deficit? 619 00:36:09,880 --> 00:36:12,799 Speaker 1: It seems really hard. But his answer about you kind 620 00:36:12,800 --> 00:36:15,719 Speaker 1: of need a crisis to crystallize it. I mean it 621 00:36:15,760 --> 00:36:17,520 Speaker 1: makes sense. It's also a bit worrying. 622 00:36:17,760 --> 00:36:21,200 Speaker 2: Well, and again, you know, like history unfortunately seems like 623 00:36:21,320 --> 00:36:23,160 Speaker 2: kind of cruel on this point. And you know, you 624 00:36:23,160 --> 00:36:25,120 Speaker 2: could even go back like, well, what did it take 625 00:36:25,200 --> 00:36:28,160 Speaker 2: for us to get to full employment and above trend 626 00:36:28,239 --> 00:36:31,040 Speaker 2: inflation from the twenty ten Well it took COVID, right, Yeah, 627 00:36:31,400 --> 00:36:34,240 Speaker 2: And history seems to be like you have some stable 628 00:36:34,320 --> 00:36:36,480 Speaker 2: macro regime and then a crisis comes and then you 629 00:36:36,480 --> 00:36:38,480 Speaker 2: have a new macro regime. I just thought it was 630 00:36:38,520 --> 00:36:42,160 Speaker 2: interesting that like his sort of skepticism that an alternative 631 00:36:42,280 --> 00:36:44,040 Speaker 2: to the dollar would come about by like sort of 632 00:36:44,080 --> 00:36:46,719 Speaker 2: like the mechanics of who's running a trade deficit or 633 00:36:46,880 --> 00:36:49,240 Speaker 2: trade surplus or something like that, and that the flip 634 00:36:49,280 --> 00:36:51,920 Speaker 2: side of our political dysfunction is the lack of political 635 00:36:51,960 --> 00:36:55,040 Speaker 2: confidence in any other issuing authority of another currency. 636 00:36:55,440 --> 00:36:57,439 Speaker 1: Yeah, that's a good way of putting it. The other 637 00:36:57,440 --> 00:37:00,680 Speaker 1: thing I thought was interesting was, well, I think one 638 00:37:00,680 --> 00:37:02,960 Speaker 1: thing that I'm hearing, both from this conversation and from 639 00:37:02,960 --> 00:37:06,239 Speaker 1: the one we recorded with Daryl Duffy is because so 640 00:37:06,480 --> 00:37:09,520 Speaker 1: much of the financial system is built on bonds, it 641 00:37:09,600 --> 00:37:13,000 Speaker 1: feels like the risks are higher as we enter this 642 00:37:13,080 --> 00:37:16,560 Speaker 1: period of higher inflation. Right, there's a tension between bringing 643 00:37:16,600 --> 00:37:20,680 Speaker 1: down inflation and also having bonds as the sort of stable, 644 00:37:20,840 --> 00:37:24,360 Speaker 1: boring bedrock of the financial system. And he mentioned the 645 00:37:24,440 --> 00:37:29,040 Speaker 1: sovereign bank loop. No one believes me I invented that term. 646 00:37:29,719 --> 00:37:30,360 Speaker 2: I don't believe you. 647 00:37:30,560 --> 00:37:33,520 Speaker 1: Listeners should see Joe's face right now. He definitely doesn't 648 00:37:33,520 --> 00:37:33,960 Speaker 1: believe me. 649 00:37:34,160 --> 00:37:34,680 Speaker 2: I believe you. 650 00:37:34,800 --> 00:37:37,080 Speaker 1: I think it was twenty eleven. I was the first 651 00:37:37,120 --> 00:37:39,560 Speaker 1: one to use it in an alphaville post during the 652 00:37:39,560 --> 00:37:44,000 Speaker 1: Greek core Google. All right it do it? Shall we 653 00:37:44,040 --> 00:37:44,320 Speaker 1: leave it that? 654 00:37:44,400 --> 00:37:45,040 Speaker 2: Let's leave it there? 655 00:37:45,080 --> 00:37:48,360 Speaker 1: Okay, this has been another episode of the All Thoughts Podcast. 656 00:37:48,440 --> 00:37:51,480 Speaker 1: I'm Tracy Alloway. You can follow me at Tracy Alloway. 657 00:37:51,920 --> 00:37:54,360 Speaker 2: I'm Joe Wisenthal. You can follow me at The Stalwart. 658 00:37:54,640 --> 00:37:58,160 Speaker 2: Follow our guest Barry Eichen Green He's at b Underscore 659 00:37:58,239 --> 00:38:01,799 Speaker 2: Aike and Green. Follow our producer users Carmen Rodriguez at 660 00:38:01,880 --> 00:38:05,280 Speaker 2: Carman Arman dash El Bennett at Dashbot, and our special 661 00:38:05,360 --> 00:38:10,520 Speaker 2: Jackson Hole producer Sebastian Escobar at under Decibas. For more 662 00:38:10,520 --> 00:38:13,520 Speaker 2: odd LODs content, go to bloomberg dot com slash odd Lots, 663 00:38:13,520 --> 00:38:17,359 Speaker 2: where we have a blog, transcription, a newsletter and if 664 00:38:17,360 --> 00:38:19,080 Speaker 2: you want to hang out with other odd Lots listeners, 665 00:38:19,120 --> 00:38:22,240 Speaker 2: it's really fun. Go to discord dot gg slash odd 666 00:38:22,280 --> 00:38:25,040 Speaker 2: LODs people talk about all these topics twenty four seven 667 00:38:25,239 --> 00:38:25,759 Speaker 2: and if. 668 00:38:25,680 --> 00:38:28,719 Speaker 1: You enjoy odd Lots, if you like our discussions from 669 00:38:28,800 --> 00:38:32,080 Speaker 1: Jackson Hole Wyoming, then please leave us a positive review 670 00:38:32,120 --> 00:38:34,800 Speaker 1: on your favorite podcast platform. Thanks for listening.