Speaker 1: Hello, and welcome to another episode of the Odd Lots Podcast.
Speaker 1: I'm Joe Wisenthal and I'm Tracy Hallway. Tracy, I hate
Speaker 1: to do this, but I have to try. I knew it.
Speaker 1: I knew you were going to do this. I knew it.
Speaker 1: I'll spare you, I'll spare you the effort. But yes,
Speaker 1: there is a crisis that we haven't covered yet. I'm
Speaker 1: never gonna let you forget the time when you said
Speaker 1: that we had touched all the basis of this, when
Speaker 1: they were clearly several several more major areas that we
Speaker 1: had yet to discuss. Well, we're starting to get there
Speaker 1: in terms of hitting all the really big themes I think. Okay, Okay,
Speaker 1: I'm not going to result, but yes, go ahead. Of
Speaker 1: the many crises will we be covering today, Okay, the
Speaker 1: one that we definitely have not talked about yet is
Speaker 1: emerging markets. And you know, there are all kinds of
Speaker 1: aspects to a extraordinary economic disruption of this sort, the
Speaker 1: likes of which we've never seen in terms of essentially
Speaker 1: a mandated halt to so many businesses worldwide, But one
Speaker 1: acute vulnerability point is obviously emerging markets. Countries whose economies
Speaker 1: may rely on tourism or other exports to richer countries,
Speaker 1: countries that have a lot of dollar denominated debts but
Speaker 1: are suddenly finding it very difficult to acquire those dollars
Speaker 1: in their normal means of business. This is a huge
Speaker 1: shock domestically from many countries, but also a huge shock
Speaker 1: to world trade. And of course emerging markets are sort
Speaker 1: of necessarily the most the most at risk here, right,
Speaker 1: So you have this perfect storm really of pressures on
Speaker 1: emerging markets. You have up the big spike in the dollar, which,
Speaker 1: as you mentioned, causes pain for emerging markets in different ways,
Speaker 1: a bunch of different ways. You also have the contraction
Speaker 1: in global trade. You have the fall in the oil price,
Speaker 1: which is bad if you're an oil exporting developing nation.
Speaker 1: And then of course you have the coronavirus pandemic itself,
Speaker 1: which could disproportionately impact developing countries given that they have
Speaker 1: fewer health resources, fewer financial resources, and different not really
Speaker 1: ideal living conditions to actually battle the virus. So yeah,
Speaker 1: it's it's a pretty bad mix for em at the moment. Right.
Speaker 1: The way as you put it, there really is sort
Speaker 1: of like just being buffeted on every side. Right now.
Speaker 1: So our guests today, and I feel like our guest
Speaker 1: today is yet another one of our recent guests that
Speaker 1: deserves when we eventually get oddlock toade bags or something
Speaker 1: like this, because this might be his fourth or fifth time.
Speaker 1: We've talked to Dan Wing several times, We've talked to
Speaker 1: Chris White several times, and of course our guests today,
Speaker 1: Brad Setser, it's got to be at least this fifth
Speaker 1: time talking to us since we launched the podcast. But
Speaker 1: he has been tracking the e M angle very closely
Speaker 1: and really has been uh for years, but UH now
Speaker 1: sort of with this particular crisis, and so we'll sort
Speaker 1: of get a broad overview of um the crisis facing
Speaker 1: different e m s and what needs to be done
Speaker 1: going forward. So, without further ado, Brad Setser, thank you
Speaker 1: very much for joining us. That's a great pleasure. Brad.
Speaker 1: Just sort of big picture if you, how does this
Speaker 1: shock to the real economy for e MS as a whole?
Speaker 1: And I know people always say you can't look at
Speaker 1: ems as a whole, and every country has its unique situation,
Speaker 1: but as a whole, how does it compare to prior
Speaker 1: major downturns in global trade of the global economy, and
Speaker 1: this this shock is clearly going to be significantly worse
Speaker 1: than the two thousand and eight shock, the global financial crisis,
Speaker 1: It's clearly going to be significantly worse than the Asian
Speaker 1: financial crisis. I think this is across a range of measures.
Speaker 1: You know, it is the biggest shock the emerging world
Speaker 1: is faced in the last thirty years. Yeah, I think
Speaker 1: I saw someone on Twitter describing the current economic situation
Speaker 1: or the crisis is sort of like the Spanish flue
Speaker 1: meets Great depression meets two thousand and eight financial crisis
Speaker 1: meets Asia financial crisis, which is a pretty terrible mix
Speaker 1: when it comes to e MS. What would you say
Speaker 1: is the biggest pressure point at the moment, what's causing
Speaker 1: the most pain? Well, I think there are two distinct
Speaker 1: pressure points. One pressure point does the global financial crisis
Speaker 1: analog pressure point? Those countries that have borrowed in dollars
Speaker 1: or those countries that have a large dependence on foreign
Speaker 1: investors holding their local currency debt have had difficulty borrowing
Speaker 1: dollars and have had to manage a world where a
Speaker 1: lot of foreign investors are pulling money out. And then
Speaker 1: that's been combined with a shock to global trade, but
Speaker 1: a particularly sharp shock to global trade and tourism and
Speaker 1: global commodity prices, so symmetric fall and trade. Um it
Speaker 1: obviously hurts activity, but it doesn't create gaps between exports
Speaker 1: and imports. But if you're reliant on tourism and tourism
Speaker 1: goes to zero, all of a sudden, you can't pay
Speaker 1: your import bill. If you rely on oil exports, and
Speaker 1: your break even used to be fifty or sixty, and
Speaker 1: you can't get twenty dollars a barrel today for lower volumes,
Speaker 1: all of a sudden, again you can't cover your imports. Though.
Speaker 1: So it's the combination of the financial shock and the
Speaker 1: real shock, the real shock to trade, the shock to
Speaker 1: health is almost certainly coming. But I think they're for
Speaker 1: most emerging economies. That's uh something that I'll play out
Speaker 1: over the next month before we go any further. A
Speaker 1: little bit of housekeeping. Two points is a of course,
Speaker 1: we've had bread on so many times. I didn't even
Speaker 1: really properly introduce him in the beginning, but he is
Speaker 1: a senior Fellow or the Council on Foreign Relations as
Speaker 1: well as a senior adviser of EXANTE Data I just
Speaker 1: feel like so hopefully most of our listeners have heard
Speaker 1: Bread or followed him for a long time, but forgot
Speaker 1: to do that. Also another crucial piece, we went the
Speaker 1: we want the no introduction necessary route, which is which
Speaker 1: is a form of praise really uh, and also another
Speaker 1: crucial form of consideration. We're recording this April nine, twenty,
Speaker 1: and we've been saying that a lot of we want
Speaker 1: people to know exactly which day it's been recording because
Speaker 1: things are moving so fast. But there's another special reason
Speaker 1: it's important to bear in mind the day that we're
Speaker 1: recording this, which is that next week, which is when
Speaker 1: people will likely be listening to this is the I
Speaker 1: m F Spring meetings, and those of course take on
Speaker 1: new urgency in light of the sort of twin shocks
Speaker 1: that Brad had this uh just described. So of course
Speaker 1: we're recording this before those happened, and we don't know
Speaker 1: what will have been announced by the time you're listening,
Speaker 1: but sort of bread, uh, that gives us a chance
Speaker 1: to pivot again sort of big picture, what is the
Speaker 1: role of the I m F in alleviating some of
Speaker 1: the acute crisis and what does it happen it's toolbox
Speaker 1: when so many countries are all suffering at the exact
Speaker 1: same time. The the i m S role broadly speaking,
Speaker 1: is to lend reserves for an exchange reserves two countries
Speaker 1: that don't have enough foreign exchange reserves, and that may
Speaker 1: be countries that don't have enough foreign exchange reserves relative
Speaker 1: to their short term debt that is coming due. Maybe
Speaker 1: that countries that don't have enough foreign exchange reserves relative
Speaker 1: to the number of foreign investors in their local markets
Speaker 1: who want to get out. Or it may be that
Speaker 1: countries that don't have enough foreign exchange reserves to cover
Speaker 1: the fall off in their exports without reducing their imports
Speaker 1: very dramatically. Now there's some details, you know, the i
Speaker 1: m F can, in the process of providing balance of
Speaker 1: payment support also provide budget financing, and that certainly will
Speaker 1: have a role. But in general, the i m F
Speaker 1: is a an institution that is designed to provide countries
Speaker 1: that need reserves with reserves and to give lend people
Speaker 1: reserves for longer periods of time and for a broader
Speaker 1: set of uses. Then, say the kind of foreign exchange
Speaker 1: which is provided through say the FED swap lines, which
Speaker 1: is really short term lending to support short term funding
Speaker 1: needs of banks. The I m F has a lot
Speaker 1: more flexibility. It lends for several years, varies a little bit,
Speaker 1: but it usually lends UH in conjunction with a program
Speaker 1: of some reform and policy change. Now, look, we're in
Speaker 1: a different world than the usual world the reforms or
Speaker 1: policy changes that may go with I MF lending, and
Speaker 1: in this context, maybe we the I m F asked
Speaker 1: you to spend more on your public health system, or
Speaker 1: the I m F ask you to increase the amount
Speaker 1: of public spending to poor families. I don't think the
Speaker 1: conditionality needs to be thought of as the traditional conditionality
Speaker 1: in all cases, and that will be interesting to see
Speaker 1: whether or not we get an element of that in
Speaker 1: UH next week's I m F meetings. UM, just when
Speaker 1: it comes to the state of effects reserves in emerging markets,
Speaker 1: can you give us a sort of high level overview
Speaker 1: of what those look like right now? Who is best
Speaker 1: positioned in this environment and who is maybe UH warsaw
Speaker 1: so sure. I mean, there are a set of emerging
Speaker 1: economies that basically interact with the global economy as creditors.
Speaker 1: They have more foreign assets than they have foreign liabilities,
Speaker 1: and in many cases they have more liquid foreign exchange
Speaker 1: reserves in their central bank, then they have external debt.
Speaker 1: That is broadly a description of Korea, it's broadly a
Speaker 1: description of China. It is certainly a description of Taiwan.
Speaker 1: It is a description of Thailand. On the other end
Speaker 1: of the spectrum are emerging markets that have almost no
Speaker 1: reserves or almost no reserves that they haven't borrowed from
Speaker 1: their own banks and have substantial external debts. The most
Speaker 1: extreme cases leban On Earth, but Turkey falls in that category.
Speaker 1: And then you have I think Argentina broadly speaking, as
Speaker 1: we all know, falls in that category. And then you
Speaker 1: have a set of countries in the middle countries that
Speaker 1: do have reserves, that do have already pre negotiated credit
Speaker 1: lines from the I m F, but have substantial external
Speaker 1: act and it is possible that the withdrawal of foreign credit,
Speaker 1: together with a loss of export receipts could leave them
Speaker 1: short reserves. So those are countries like Colombia or Indonesia,
Speaker 1: South Africa, uh and in bad states of the world,
Speaker 1: even a country like Mexico, which is a special case
Speaker 1: because of his relationship with the United States. And then
Speaker 1: that same split is present amongst the oil exporting economies.
Speaker 1: Saudi Arabian Russia, the two biggest, both have about a
Speaker 1: half trillion in reserves. That's enough that they can broadly
Speaker 1: speaking cover their imports this year even if oil doesn't rebound,
Speaker 1: and still have enough reserves so there's no real threat
Speaker 1: to financial studaility. But then there are much weaker oil
Speaker 1: exporting economies Algeria, Oman and Goal and Nigeria, almost Ecuador obvious.
Speaker 1: The list goes on and on, and those countries broadly
Speaker 1: speaking lack enough for an exchange info to pay their
Speaker 1: foreign debts. Right now, I have a question that might
Speaker 1: be a little stupid and it's not facetious, but I
Speaker 1: think some people might interpret it as such. Does a
Speaker 1: country like Argentina, which has spent years of being sort
Speaker 1: of closet disconnected already from the global financial system due
Speaker 1: to all of its defaults, is this less of a
Speaker 1: shock in a weird way to them because this is
Speaker 1: sort of business as usual. Yes, I think that's right. Actually, um,
Speaker 1: it's less of a shock because even before the coronavirus,
Speaker 1: Argentina was seeking at debt restructuring for all of its
Speaker 1: external debt and that debt restructuring was going to involve
Speaker 1: almost no near term payments, so you know, essentially they
Speaker 1: they their creditors were already anticipating a deep loss and
Speaker 1: no near term cash flow. It's also a smaller shock
Speaker 1: just because of the structure of Argentina's exports. To be honest,
Speaker 1: Argentina exports soybeans, wheat, and beef. And if you think
Speaker 1: of the kind of trade that is likely to see
Speaker 1: the least disruption, that's trade in in basic foods. And
Speaker 1: while soy is an input into the production of chicken
Speaker 1: and pork, it's a pretty important input, and so therefore
Speaker 1: Argentina's trade is going to see somewhat less disruption. So
Speaker 1: I think both on the financial side, you know, Argentina
Speaker 1: was already essentially heading to default, already not going to
Speaker 1: be paying, already reliant on the I m F, and
Speaker 1: on the current account side, they happen to be in
Speaker 1: a position where there's a re reasonable basis for thinking
Speaker 1: that Belsia smaller loss and exports. Yeah, but you can
Speaker 1: look at other countries like Lebanon, which is very reliant
Speaker 1: on tourism and remittances and faces an even bigger problem
Speaker 1: even though they too essentially entered the coronavirus shock in
Speaker 1: default right, we actually have an All Lots episode with
Speaker 1: Paul McNamara talking specifically about the situation in Lebanon from
Speaker 1: a few months ago. And I don't think things have
Speaker 1: improved since then. Um I wanted to go back just
Speaker 1: to the idea of the external debt and emerging markets.
Speaker 1: It's not like this hasn't been on people's radars before.
Speaker 1: You know, we saw the Bank for International Settlements, for instance,
Speaker 1: writing over and over and over that dollar denominated borrowing
Speaker 1: was a potential vulnerability in emerging market and now it
Speaker 1: seems like it could really come back to haunt them.
Speaker 1: We did see some emerging market economies that did try
Speaker 1: to borrow more through domestic currency bonds. Has that helped
Speaker 1: them at all? Yes? Uh, you know, I think it
Speaker 1: obviously helps if your currency falls, if your debt is
Speaker 1: denominated in your own currency, If you're debt denominated and
Speaker 1: foreign currency, the real burden of that debt goes up.
Speaker 1: It hasn't been a panaceat the fact that a lot
Speaker 1: of foreign investors were holding local currency debt meant that
Speaker 1: they were more exposed to currency moves. And in their
Speaker 1: efforts to limit their exposure, two further falls in the
Speaker 1: currency they would sell, and that puts the pressure on
Speaker 1: the local bond market. It puts pressure obviously on the
Speaker 1: exchange rate. So in that sense, it became an amplifier
Speaker 1: of the a lot of the currency moves, but in
Speaker 1: a sort of strange way, it amplifies those moves, which
Speaker 1: is bad, but it makes a country itself less vulnerable
Speaker 1: to the impact of an undervalued currency. But it clearly
Speaker 1: has introduced a new new type of dynamic into the market. Uh,
Speaker 1: and that dynamic can in its own way be destabilized
Speaker 1: m so Bron. Obviously, one of the questions out there
Speaker 1: is we don't really know, and that everyone just started
Speaker 1: guessing what post crisis economic behavior will look like. Presumably
Speaker 1: some tourism will come back, but we don't know how
Speaker 1: many years it will take for tourism to return to, say,
Speaker 1: twenty nine levels, or people to be comfortable traveling at
Speaker 1: the same degree they did. We don't know the degree
Speaker 1: to which a rich country like the US may choose
Speaker 1: to prior ties importing fewer things, especially after what we've
Speaker 1: seen in terms of shortages of masks and ventilators and
Speaker 1: other sort of basic equipment. Will this, in your view,
Speaker 1: create a rethink about these sort of financial and growth
Speaker 1: models that EMS have currently undertaken in terms of the
Speaker 1: presumption that tourist revenue or export revenue UH just might
Speaker 1: not be there again. And how much could we plausibly
Speaker 1: expect to see that all change. You know, I think
Speaker 1: it's it's a good question, it's a hard question. I think.
Speaker 1: I think you're right to say that those emerging markets
Speaker 1: that were most reliant on tourism face a particularly difficult challenge.
Speaker 1: You know, those emerging economies most reliant on oil also
Speaker 1: potentially face a long run challenge. Depends on them. It's
Speaker 1: tint to which oil demand rebounds and where the long
Speaker 1: run price settles. But you could imagine this not being
Speaker 1: a temporary shock, UH. And then manufacturing heavy East Asia
Speaker 1: does face a shock to their growth models. In China,
Speaker 1: in particular, if the world moves away from a model
Speaker 1: of what you might call full globalization, which would be
Speaker 1: if all of our phones come from China and all
Speaker 1: of our personal protective equipment comes from China. That's fine,
Speaker 1: that's more efficient to a world where there's more desire
Speaker 1: for at least regionalization of supply chains, if not nationalization,
Speaker 1: and a much higher point priority on resilience. Resilience can
Speaker 1: mean bigger stockpiles, but resilience can also mean local manufacturers
Speaker 1: who have the capacity to ramp up production in bad
Speaker 1: states of the world. So I do think that there
Speaker 1: will be some very significant challenges in some cases that
Speaker 1: may create new opportunities. You know, a world where there
Speaker 1: is more regionalization of supply chains, particularly in North America,
Speaker 1: would arguably be good good for Mexico at the expense
Speaker 1: of China, and it would help Mexico manage the loss
Speaker 1: of oil export revenue and the tax revenue that Mexico
Speaker 1: has historically gotten from its oil production. But it does
Speaker 1: imply some important long run adjustments on the part of
Speaker 1: many economies. Speaking of long run adjustments, we're talking a
Speaker 1: lot about the vulnerability of emerging markets that have borrowed
Speaker 1: in dollars, the attempts to shift away from that little
Speaker 1: bit and issue more local currency debt. Would you expect
Speaker 1: the current crisis to lead to a significant shift in
Speaker 1: the relationship between emerging markets and the US dollar. Would
Speaker 1: more em countries potentially try to move away from dollar dependence. Well,
Speaker 1: it's it's it's hard to move away from dollar dependence
Speaker 1: if creditors still want to lend to you in dollars.
Speaker 1: And given the volatility and emerging currencies, I can see
Speaker 1: in some sense more pressure for those economies who want
Speaker 1: to still borrow to borrow in hard currency just because
Speaker 1: the creditor side may be less willing to take local
Speaker 1: currency risk. We don't know, um, you know what. I
Speaker 1: think the general move is likely to be towards more
Speaker 1: resilient balance sheets across the board, to higher reserves, less
Speaker 1: external debt, and in a world of less external debt
Speaker 1: if you can manage it, less hard currency debt. The
Speaker 1: countervailing pressure and all of that is that there are
Speaker 1: a set of countries that really don't want to adjust
Speaker 1: in the near term, and they may go out and
Speaker 1: borrow an awful lot of dollars. I'm thinking of a
Speaker 1: country like Saudi Arabia, which has a choice threefold joys.
Speaker 1: It can either reduce its imports to reflect lower levels
Speaker 1: of oil exports lower revenues from oil oil exports, or
Speaker 1: it can maintain as imports relatively high levels and make
Speaker 1: up for the deficit and foreign exchange by borrowing, probably
Speaker 1: in dollars, or it can run down its reserves. So
Speaker 1: I would think that, you know, for Saudi Arabia, the
Speaker 1: easiest choice might well be more borrowing and a less
Speaker 1: resilient balance sheet. So I think the response will vary.
Speaker 1: But the basic lesson here is that only emerging economies
Speaker 1: with fortress like external balance sheets, uh, we'll be able
Speaker 1: to come off relatively well. So I think the pressure
Speaker 1: general direction of pressure will be towards more fortress like
Speaker 1: balance sheets. And one of the reasons why I think
Speaker 1: it's important that the i m F be very aggressive
Speaker 1: in some ways very generous in its response, because if
Speaker 1: every country wants to have a fortress balance sheet, that
Speaker 1: introduces inefficiencies of its own um and so you would
Speaker 1: want in some sense insurance mechanisms to help absorb true
Speaker 1: exogenous shocks so that every country in the world doesn't
Speaker 1: try to self insure. And in principle that's to the
Speaker 1: role that the I m F and the other multilaterals
Speaker 1: could play. Speaking of countries that have fortress balance sheets
Speaker 1: that we haven't really talked about much, obviously China, which
Speaker 1: still has an extraordinary mono foreign reserves and has shown
Speaker 1: the ability to sort of withstand the acute phase of
Speaker 1: this crisis and use domestic firepower to maintain its economy.
Speaker 1: It appears to be coming back online. Nonetheless, it's going
Speaker 1: to face pressure, particularly if there is any sort of
Speaker 1: you know, modest deglobalization, because again exports and so forth,
Speaker 1: what do you see as potential course shifts that we
Speaker 1: could be looking for it from the sort of Chinese
Speaker 1: economic model going forward. So I think, you know, there's
Speaker 1: a couple of powerful offsetting forces that are impacting uh,
Speaker 1: China and China's external position right now. One is the
Speaker 1: broad contraction and all trade, which hurts China because China
Speaker 1: trades a lot, probably hurts activity as much as it
Speaker 1: hurts the balance of payments. And then China, because it
Speaker 1: is the world's biggest commodity importer, stands to be the
Speaker 1: biggest winner from lower oil prices. And because China has
Speaker 1: been such a huge source of tourists. The lockdown and
Speaker 1: they fall in tourism has significantly reduced China's imports, and
Speaker 1: therefore it works to improve China's balance payments. So in
Speaker 1: the short run, I don't actually see any pressure on
Speaker 1: China's balance of payments. If anything, I think as China's exports,
Speaker 1: particularly of medical equipment, ramp up, and as the full
Speaker 1: impact of lower oil prices shows up in China's import data,
Speaker 1: China's surplus, in my view, is likely to rise, but
Speaker 1: that rise will um with less activity. It's going to
Speaker 1: be an increase in your surplus when you're exporting less
Speaker 1: and importing less. So there is still a shock two
Speaker 1: China's economy. And there's obviously been a shock to China's
Speaker 1: economy from the measures that China has taken to slow
Speaker 1: the spread of the virus internally. And I think now China,
Speaker 1: broadly speaking, confronts a choice between two different growth models.
Speaker 1: I don't think going back to the two thousand seven,
Speaker 1: two thousand and eight export driven growth model is a
Speaker 1: viable option in today's world. That would be a world
Speaker 1: where China's current account surplus goes to like ten percent
Speaker 1: of Chinese GDP or a jillion dollars and the world
Speaker 1: becomes more dependent on Chinese manufacturing. I think there's fairly
Speaker 1: obvious as reasons why that's not a politically or our
Speaker 1: economically acceptable outcome right now. So then China either has
Speaker 1: to maintain domestic dynamism through a very high level of investment,
Speaker 1: and that has been done through a mix of loose
Speaker 1: credit for state sponsored firms, a lot of government sponsored
Speaker 1: industrial policy projects UH, and then a lot of quasi
Speaker 1: public investment often done by local governments, all the things
Speaker 1: we used to spend all sorts of time talking about.
Speaker 1: There's no reason why I, given China's high savings rate,
Speaker 1: it couldn't try to do that yet again and generate
Speaker 1: a bit of a recovery using the tried and true
Speaker 1: Chinese investment from above growth model. The alternative and when
Speaker 1: I'm personally drawn to is a world where China radically
Speaker 1: reforms it's UH system of tax and the system of spending.
Speaker 1: China actually has an incredibly regressive tax system. China collects
Speaker 1: one point three percentage points of its GDP and income tax,
Speaker 1: which is a extremely low number in the US. And
Speaker 1: you know we aren't we aren't considered a high tax country.
Speaker 1: We get ten percent of GDP from personal income tax,
Speaker 1: so China is a k one eighth of our level.
Speaker 1: The system of social contributions has a very high minimum
Speaker 1: contribution for urban workers, which means that in a lot
Speaker 1: of cases the poorer, you are, the bigger your tax burden.
Speaker 1: And then world workers with those who lack the right
Speaker 1: huko household residency don't pay into the system of social contributions.
Speaker 1: They're lower cost to the employer, but they also don't
Speaker 1: get urban social benefits. So a system we're trying to
Speaker 1: reformed as taxation and really quite radically much bigger collections
Speaker 1: from income tax, completely rethought, distribution of the burden of
Speaker 1: social contributions, subsidy income subsidies for low wage work like
Speaker 1: we have in the US through the earned income tax credit,
Speaker 1: combined with much more spending on public health, much less
Speaker 1: of out of pocket expense for Chinese workers who seek
Speaker 1: routine medical care, and an expansion of social benefits so
Speaker 1: that migrant workers can send their children to school where
Speaker 1: they work, rather than having to have them educated where
Speaker 1: they're from and live with their grandparents. That kind of
Speaker 1: deep transformation, UH faces enormous resistance, but I think that's
Speaker 1: by far the best pass forward China, and I think
Speaker 1: it's got some really positive externalities for the world. A
Speaker 1: lot more investment in public health in China sounds like
Speaker 1: something that would have been great to have done five
Speaker 1: years ago. Brad. Just going back to the world of
Speaker 1: emerging markets as a whole, and I know we're not
Speaker 1: supposed to treat it as one big, homogeneous block, but
Speaker 1: I'm wondering if there's an indicator or one lynchpin that
Speaker 1: you are currently watching to gauge just how bad the
Speaker 1: difficulties or the crisis in them could actually get. I'm
Speaker 1: not really watching one, I think you know. I'm watching
Speaker 1: the oil price knowing that it splits emerging economies into
Speaker 1: winners and losers. But the more extreme the move and
Speaker 1: the longer the move, the deeper the loss and the losers. UH.
Speaker 1: And then you know, any any index of the dollar
Speaker 1: against a basket of emerging arc of currencies that excludes China,
Speaker 1: I think is a good proxy for stress. The i
Speaker 1: f S capital flow data, high frequency capital flow data,
Speaker 1: is now widely followed and they've done a really good job.
Speaker 1: And I also watched that rathlessly. So following on Tracy's
Speaker 1: question about UH E M as a whole, and as
Speaker 1: we're talking about in the beginning, people will be listening
Speaker 1: to this at the UH sort of during the period
Speaker 1: of the I m F Spring meeting, and you've talked
Speaker 1: sort of generally about the need for the I m
Speaker 1: F to be generous here and what it can do
Speaker 1: and sort of providing reserves. What has it already done,
Speaker 1: and what specifically insert it's toolbox should it do that
Speaker 1: it's never done before, if it's a crisis that it's
Speaker 1: never experienced on this scale, And how is the I
Speaker 1: m F itself liquidity or capital constraint because I don't
Speaker 1: think I have a great feel for the IMF's own
Speaker 1: constraints where they come from, and how how aggressive the
Speaker 1: sort of the natural limitations on its own ability to
Speaker 1: be aggressive. Sure, So I mean I think what the
Speaker 1: I m F is now doing is is it has
Speaker 1: a set of rapid financing instruments that are generally give
Speaker 1: countries low levels of access, but they get the access
Speaker 1: very quickly and an enormous number of countries. I think
Speaker 1: it's apposed to the idea of applied for access to
Speaker 1: these rapid financing vehicles, which will get somewhere between fifty
Speaker 1: and hundred billion dollars out the door. And then the
Speaker 1: I m F has pre existing credit lines with Mexico
Speaker 1: and Colombia. Those lines haven't been drawn, but they are available,
Speaker 1: so that would sort of define I think the I
Speaker 1: MS existing response to think about what the more the
Speaker 1: I m F could do. I guess it probably helps
Speaker 1: to start by talking about the I m F liquidity position.
Speaker 1: The I m S capital position isn't a real constraint.
Speaker 1: The World Bank runs on a capital model. The I
Speaker 1: m F runs on a quota model, and it sets
Speaker 1: aside loan loss reserves and the like. But essentially the
Speaker 1: I m F takes contributions, it doesn't lever them up
Speaker 1: in the outside market, and then it lends them out.
Speaker 1: Because it is the preferred creditor, it historically has always
Speaker 1: been paid. So it doesn't operate on a capital model
Speaker 1: where it has to use in a small amount of
Speaker 1: equity capital support a broad amount of lending. It operates
Speaker 1: more on a pooling model, whereby contributions from its members
Speaker 1: are pooled and lent out, and the fact that it
Speaker 1: defaulting on the I m F is defaulting on the
Speaker 1: world effectively assures payment. The IMF now has about six
Speaker 1: billion and quota resources permanent contributions. It's lent out about
Speaker 1: two d and not all of the quota contributions are
Speaker 1: what the I m F calls usable. Some countries contributing
Speaker 1: their own currency and it's not very practical to lend
Speaker 1: that out. In addition, the i m F now has
Speaker 1: two billion supplemental credit line from many of its members,
Speaker 1: called the New Arrangement to Borrow, which allows the guy
Speaker 1: m have to borrow from a subset of its membership
Speaker 1: to increase its lending capacity that is already expected to
Speaker 1: go to around fifty billion at the end of this year.
Speaker 1: A lot of people ted Truman leading the way of
Speaker 1: said that this should be accelerated, and I hope that
Speaker 1: has agreed at the meetings next week. The US already
Speaker 1: has approval from Congress to bring forward the US contribution
Speaker 1: to the New Arrangements to Borrow, so it's just a
Speaker 1: matter of getting all the needed improvements. And then there's
Speaker 1: a final backup credit line, a set of bilateral loans
Speaker 1: from members of the i m F that is now
Speaker 1: four billion, but it is set to fall the two
Speaker 1: billions when the New Arrangement to Borrow expands, and a
Speaker 1: lot of people have suggested, hey, in the face of
Speaker 1: a global crisis, why bring this backup line of credit
Speaker 1: down keep it at its current level of four hundred.
Speaker 1: So if the I m F were to agree at
Speaker 1: the meetings, or as members were to agree two bring
Speaker 1: forward the expansion of the new arrangement to borrow and
Speaker 1: keep the current bilateral lines available, then the I m
Speaker 1: F would really have close to a trillion dollars in
Speaker 1: new lending capacity on top of the two billion or
Speaker 1: so that has already comitted. The precise amount that's already
Speaker 1: committed that's going to change more of these rapid instruments
Speaker 1: are approved, so that gives you a ballpark estimate of
Speaker 1: the size. Now, there's one other thing the IMF can do,
Speaker 1: which is a little complex and generates a lot of controversy,
Speaker 1: and it's called an SDR allocation. The SDR is the
Speaker 1: I m S unit of account. It's basically a basket
Speaker 1: of the world's biggest currencies, mostly dollars in euros, and
Speaker 1: the i m F, thanks to John Maynard Keynes, has
Speaker 1: the authority to give all of its members SDRs, which
Speaker 1: act as reserves. It's called an SDR allocation. And right
Speaker 1: now the IMF could provide a five dred billion SDR
Speaker 1: allocation with the support of the U S administration, but
Speaker 1: without a congressional vote anything more, much more than that
Speaker 1: would require a congressional vote. Now, the I m F
Speaker 1: has kind of indicated that they're not going to push
Speaker 1: this right now, which I think is a mistake. I
Speaker 1: presume that's because the US has indicated it doesn't support
Speaker 1: it right now, which I also think is a mistake.
Speaker 1: This is a time when I think almost all countries
Speaker 1: around the world do need more reserves, and this is
Speaker 1: a way of getting those reserves out into the system
Speaker 1: very quickly. So the special drawing rights issue has sort
Speaker 1: of been on the radar for years and years. Now,
Speaker 1: why do you see Why do you think there's so
Speaker 1: much resistance to it? I mean, it is kind of
Speaker 1: global money creation, and a lot of people don't like
Speaker 1: the idea of an international institution create global money or
Speaker 1: reserves for an exchange reserves. Uh. And then it's not targeted,
Speaker 1: so it goes to all members. That includes some members
Speaker 1: of the United States doesn't like. But you know, hey,
Speaker 1: I've noted the biggest beneficiary is actually the United States.
Speaker 1: And given how creative the Treasury has been recently in
Speaker 1: using the Exchange Stabilization Fund, which is the United States
Speaker 1: owned reserves to backstop FED lending, it's kind of pennywise,
Speaker 1: but pound foolish to get obsessed about Iran's small str
Speaker 1: allocation and deny yourself a much bigger str allocation, which
Speaker 1: you've already shown in the US IS case. You know
Speaker 1: how to use um and use effectively, uh and creatively.
Speaker 1: But those are the kinds of arguments. It is an
Speaker 1: increase in everyone's reserves in proportion to their quote our
Speaker 1: contribution to the if. Before we go, I want to
Speaker 1: go back real quickly to what we were talking about
Speaker 1: before with regards to the potential path of Chinese reforms
Speaker 1: that they could take. You sort of stressed that this
Speaker 1: would be a good opportunity to re rethink there's domestic redistribution.
Speaker 1: That's something we've talked about with Michael Pettis in the
Speaker 1: past as well. If we were to see a more
Speaker 1: robust sort of Chinese household sector, basically more buying power
Speaker 1: among the lower and middle classes, presumably more external demand
Speaker 1: for goods, could this, in theory be the beginning of
Speaker 1: a further internationalization of the Chinese u N in terms
Speaker 1: of the sort of need to If there were domestic
Speaker 1: buyers of all kinds of goods, not just commodities and
Speaker 1: not just tourists. Could this begin to accelerate that process,
Speaker 1: and it could be part of that. There's I don't
Speaker 1: think there's a direct line between the reforms to China's
Speaker 1: taxation and public spending that I've called for and a
Speaker 1: broader global role for China's currency. The broader global role
Speaker 1: depends to some degree on the willingness of the world
Speaker 1: to hold you on denominated assets. See and why denominated assets.
Speaker 1: That's partially a function of China's exchange rate choices, partially
Speaker 1: a function of the people's confidence that if you put
Speaker 1: money into China you can get it out in times
Speaker 1: of stress, and partially a function of, you know, kind
Speaker 1: of the broader utility of the Chinese yuan and settling
Speaker 1: global transactions. And right now, you know trade between Africa
Speaker 1: and Europe is not denominated in Chinese yuan. It's denominated
Speaker 1: in dollars. And I still think it's more likely if
Speaker 1: there's a change, the change will be two towards more
Speaker 1: trade denominated in euros than two a ard more trade
Speaker 1: donominate and you want outside of trade with China's immediate neighbors. Now,
Speaker 1: one thing that I would note here is a China
Speaker 1: that has a more consumer oriented economy is in some
Speaker 1: ways a China that needs to trade less. China is
Speaker 1: perfectly capable of making its own consumer goods. It tends
Speaker 1: to import investment goods and tends to import commodities. So
Speaker 1: I don't necessarily think this is a China that is
Speaker 1: out in the global market sucking in consumer goods from
Speaker 1: the rest of the world. I think it's more likely
Speaker 1: that is it is a China that imports less and
Speaker 1: the China that also exports less, and that would be
Speaker 1: kind of consistent with She's vision and china national self reliance.
Speaker 1: But it's also consistent with a desire on the part
Speaker 1: of many of China's current big trading partners or more
Speaker 1: resilience and more diversity in their supply chains. Um. So
Speaker 1: I can imagine it being part of somewhat less globalized world,
Speaker 1: and in that world there may be less pressure to
Speaker 1: move away from the vale uh brand. Finally, then to
Speaker 1: that point, I mean, again, we don't know what the
Speaker 1: future policy have looked like. Uh would you would you
Speaker 1: say the US is in that situation where if political
Speaker 1: leaders chose to, it could more or less close itself
Speaker 1: off to the world from a trade standpoint in terms
Speaker 1: of adequate domestic demand and capability of building the things
Speaker 1: that needs well, I mean right now, the US is well.
Speaker 1: I shouldn't say right now, I say, you know, over
Speaker 1: the past twenty years, the US has generated surplus domestic
Speaker 1: demand which it has shared with the world. That's what
Speaker 1: ongoing trade deficits mean. Uh. And as a result, the
Speaker 1: US has less robust and well developed supply chains and
Speaker 1: a lot of industries uh, some of our big trade competitors.
Speaker 1: And one thing which probably should get more attention going
Speaker 1: forward is that our biggest export industry by far, particularly
Speaker 1: when you look at exports outside of the immediate neighborhood
Speaker 1: of Canada and Mexico, is aircraft UH. And one sector
Speaker 1: that is likely to have a persistent to climb his aircraft.
Speaker 1: Less tourism equals less travel equals less demand for planes,
Speaker 1: and then going has some self created problems as well.
Speaker 1: So in that sense, the US does space a challenge
Speaker 1: of offsetting the loss of a big export sector, not
Speaker 1: the loss, but reduction in size of this very large
Speaker 1: exports sector, and making that up with new domestic sectors
Speaker 1: or new exports sectors. But the bigger point is that
Speaker 1: the bigger your home market. In general, the less absolute
Speaker 1: need you have to trade is I think true, but
Speaker 1: that doesn't mean that shutting yourself off from trade doesn't
Speaker 1: still have cost. And I think the challenge is kind
Speaker 1: of finding the right balance going forward between resilience UH
Speaker 1: and the advantages and efficiencies created by integration. I think
Speaker 1: that there will be a shift towards greater priority on resilience,
Speaker 1: and there should be. I certainly think the U S
Speaker 1: should get rid of the tax incentives that now encourage
Speaker 1: the offshoring of pharmaceutical production. That's a separate issue. And
Speaker 1: you know, as the world moves towards the higher priority
Speaker 1: on resilience, there will be a little bit less emphasis
Speaker 1: on efficiency. But in my view it's not you don't
Speaker 1: go to absolute resilience and give up all efficiency from trade,
Speaker 1: nor do you remain in the world or any efficiency,
Speaker 1: including the less savory tax efficiencies that many companies now
Speaker 1: exploit through their global supply chain, are tolerated and encouraged.
Speaker 1: So getting that new balance right to me as a
Speaker 1: h policy imperative for the next three years. Brad, thank
Speaker 1: you so much for joining us Thursday. Fantastic conversation and
Speaker 1: I'm sure we'll have you back on again before too long.
Speaker 1: Very good, we'll get that too, right, you know, Tracy. Obviously,
Speaker 1: when we book Brad, I think, uh, the focus was
Speaker 1: to some extent, Okay, what's the e m angle on
Speaker 1: this crisis, and we certainly hit that. But I don't
Speaker 1: think there's anyone we talked to regularly the that's capable
Speaker 1: of pulling in so many different threads and connecting it
Speaker 1: all together, including at the end, how US tax policy
Speaker 1: encourage the offshoring of pharmaceutical manufacturer and how that's coming
Speaker 1: to haunt the US in the past. There's no one
Speaker 1: who can pull it together like Brad. Yeah, Brad has
Speaker 1: an uncanny ability to really get to the biggest themes
Speaker 1: possible in a given subject. So he's basically talking about
Speaker 1: rebalancing the entire US economy and also the Chinese economy,
Speaker 1: and obviously that's a big deal. I think a lot
Speaker 1: about how we're probably going to see pressure to do
Speaker 1: this at the same time that the government is dealing
Speaker 1: with the coronavirus. So the US government and also potentially
Speaker 1: emerging market economies are basically going to be under pressure
Speaker 1: to reform their economies or change them in some really
Speaker 1: really big ways at the same time that all the
Speaker 1: virus drama is happening, and I sometimes wonder what that
Speaker 1: mix is going to look like and whether or not
Speaker 1: they're going to be able to get the balance right,
Speaker 1: as Brad put it, when they're under that kind of pressure. Yeah, No, absolutely,
Speaker 1: all kinds of interesting things here. I think, like you know,
Speaker 1: when I think about crises more broadly, and you and
Speaker 1: I have talked about this, having followed the last crisis,
Speaker 1: is crises create moments where people sort of rethink everything,
Speaker 1: business models and growth models and so forth. And just
Speaker 1: the speeded severity of this one and the fact that
Speaker 1: literally virtually nobody is unaffected by it, I think lends
Speaker 1: itself to that. So all these questions about how much
Speaker 1: should we trade, how much should we depend on external financing,
Speaker 1: everything is now sort of up for debate in a
Speaker 1: way that it hasn't really been in quite a while. Yeah,
Speaker 1: with big crises come big questions, I guess, and one
Speaker 1: of those has got to be about the role of
Speaker 1: a staller and whether or not plays too central a
Speaker 1: role in the global financial system. And I suspect we're
Speaker 1: going to end up talking about that again very very soon. Yeah,
Speaker 1: and it's important because people, you know, people are always
Speaker 1: coloring for the demise of like that the dollar is
Speaker 1: going to go down. And I think, you know, the
Speaker 1: point that I've tried to make and others is not
Speaker 1: that like the will may contribute to the demise of
Speaker 1: the dollar. It's not what people think, like they look
Speaker 1: at we're spending all this money, or the fan is
Speaker 1: expanding the balance sheet by trillions of dollars. I think
Speaker 1: it really is going to come down much more to
Speaker 1: these questions about how much do countries want to be
Speaker 1: interdependent on the on each other? From the US from
Speaker 1: a real good perspective, from other countries, from a financing perspective,
Speaker 1: do we want to become a little less interdependent on
Speaker 1: each other? That question maybe what sort of determined whether
Speaker 1: the dollar takes on some sort of diminished role in
Speaker 1: the future than it has today. Yeah. Absolutely, And I
Speaker 1: guess also whether or not the Federal Reserve is happy
Speaker 1: to be playing the role of the world's central banker,
Speaker 1: although I got to say recently it seems like it
Speaker 1: is so Yes, that's sort of a step change in
Speaker 1: the central banks behavior. So lots to talk about there
Speaker 1: an endless stream of major market crises for us to
Speaker 1: delve into. Joe, you know, I was thinking though, like
Speaker 1: at the end with Brad, because it was so comprehensive.
Speaker 1: It's like, maybe we're getting to the point of where
Speaker 1: relation the big ones. I'm sure there's like ten more
Speaker 1: really big ones we haven't here yet, but maybe we're
Speaker 1: sort of rounding the corner a little bit in terms
Speaker 1: of the extremely big themes. You will never let me
Speaker 1: forget this, will you? No? Okay, this has been another
Speaker 1: episode of the Odd Thoughts Podcast. I'm Tracy Alloway. You
Speaker 1: can follow me on Twitter at Tracy Alloway and I'm
Speaker 1: Joe Wisn't thought. You should follow me on Twitter, or
Speaker 1: you can follow me on Twitter at the Stalwart. And
Speaker 1: you should follow our guest on Twitter, Brad said sir.
Speaker 1: He's Brad Underscore, said ser and be sure to follow
Speaker 1: our producer on Twitter, Laura Carlson. She's at Laura M.
Speaker 1: Carlson followed the Bloomberg head of podcast Francesco Levi at
Speaker 1: Francesca Today, as well as all of the Bloomberg podcasts
Speaker 1: under the handle at podcasts. Thanks for listening.