WEBVTT - Surveillance: Fed Eyes 'Hard Numbers,' Clarida Says 0:00:05.120 --> 0:00:09.200 Welcome to the Bloomberg Surveillance Podcast. I'm Tom Keane. Along 0:00:09.240 --> 0:00:13.200 with Jonathan Farrell and Lisa Brownwitz. Daily we bring you 0:00:13.280 --> 0:00:18.600 insight from the best and economics, finance, investment, and international relations. 0:00:18.960 --> 0:00:23.840 Find Bloomberg Surveillance on Apple Podcast, Suncloud, Bloomberg dot Com, 0:00:23.920 --> 0:00:29.880 and of course on the Bloomberg termainment. Let's get right 0:00:29.920 --> 0:00:31.840 to it right now. He is the Vice Chairman of 0:00:31.840 --> 0:00:34.960 the Federal Reserve System, Richard Clarida, of course of Columbia 0:00:35.080 --> 0:00:40.600 University and truly one of our noted academics on monetary policy, 0:00:40.840 --> 0:00:44.639 assisting Jerome Powell at every step of the way. Vice 0:00:44.720 --> 0:00:48.080 Chairman John Farrell and Tom can good morning to you. 0:00:48.800 --> 0:00:52.320 Good morning. I look, Richard Claida, where we are, and 0:00:52.360 --> 0:00:55.000 I want to go back to your important paper The 0:00:55.120 --> 0:01:00.680 Science of Monetary Policy with Galli and Galli and Girdler 0:01:00.720 --> 0:01:02.720 of years ago. And you lead with a quote from 0:01:02.760 --> 0:01:07.680 another Vice Chairman, Alan Blinder, who talks about the practicing 0:01:07.760 --> 0:01:10.760 of the dark art. Give us the state of the 0:01:10.800 --> 0:01:15.000 practicing of the dark art of the FED, given this 0:01:15.080 --> 0:01:19.839 original moment in American history. Well, thank you, Tom and 0:01:19.840 --> 0:01:22.600 and as Alan and we all and I certainly believe 0:01:22.640 --> 0:01:25.240 there's there's as much or probably much more art than 0:01:25.240 --> 0:01:27.720 science and monetary policy, but it's good to refer to 0:01:27.800 --> 0:01:30.640 some of that UH as well. I think I think 0:01:30.760 --> 0:01:34.880 that the Federal Reserve in August adopted a new framework. 0:01:34.920 --> 0:01:39.040 It's an evolution, but it's a robust evolution, and primarily 0:01:39.080 --> 0:01:42.839 it is outcome based UM our goals our maximum employment 0:01:42.880 --> 0:01:45.880 and price stability, and we want our policy to be robust. 0:01:46.040 --> 0:01:49.360 If our models break down UM and we can still 0:01:49.400 --> 0:01:52.320 do monetary policy, but we're gonna be more outcome based 0:01:52.800 --> 0:01:55.320 and less outlook based. And I think that served us 0:01:55.320 --> 0:01:58.120 well in the pandemic, and I think it will service 0:01:58.160 --> 0:02:00.520 well in the years ahead. Could you count arise that 0:02:00.880 --> 0:02:05.360 as a commitment to being late instead of being guly well. 0:02:05.400 --> 0:02:08.560 What we've said in September of last year, following our 0:02:08.600 --> 0:02:11.480 framework announcement in August is that we are we do 0:02:11.600 --> 0:02:15.680 not expect to lift off until a three conditions are met. First, 0:02:15.680 --> 0:02:17.920 that inflation actually gets to two percent. We want to 0:02:17.919 --> 0:02:20.600 see actual inflation for at least a year or two 0:02:20.960 --> 0:02:23.040 per cent, and we want that to be sustained, not 0:02:23.120 --> 0:02:26.360 just one and done. Secondly, we want to be UH 0:02:26.440 --> 0:02:30.239 looking at labor market indicators that are consistent with a 0:02:30.280 --> 0:02:33.880 fully employed um economy. And third, we want that to 0:02:33.919 --> 0:02:36.880 be sustained. We think that's appropriate since we've hit the 0:02:36.880 --> 0:02:39.920 effective lower bound, inflation has been below our target for 0:02:39.960 --> 0:02:43.760 most of the last ten years, and under those circumstances, 0:02:44.080 --> 0:02:46.799 that is a good UH policy. You are correct that 0:02:46.919 --> 0:02:49.560 in the past the FED was more preemptive, and indeed, 0:02:49.600 --> 0:02:52.840 my research suggested that if you've got good models, you 0:02:52.919 --> 0:02:55.160 want to be preemptive. But if the models are not 0:02:55.240 --> 0:02:58.040 serving you, well, you're more robust if you're looking at 0:02:58.080 --> 0:03:00.799 actual data. So that's that's the way I chacterize the job. 0:03:00.919 --> 0:03:03.560 The conversation, as you know, vice check clouded right now, 0:03:03.639 --> 0:03:07.680 is over what substantial progress actually is. You're familiar with 0:03:07.680 --> 0:03:09.840 the debate. We talk about it almost every single down 0:03:09.919 --> 0:03:12.280 programs like this. Do you think it's necessary to define 0:03:12.560 --> 0:03:16.640 what substantial progress actually is? Well, first of all, it's 0:03:16.680 --> 0:03:19.160 actual progress. I think that's an important point. It's not 0:03:19.280 --> 0:03:22.960 projective progress. It's it's hard numbers on the labor market 0:03:23.040 --> 0:03:27.280 and on prices. That's the first point. Secondly, Um, you 0:03:27.320 --> 0:03:29.600 know we're early on in this year. I know we've 0:03:29.639 --> 0:03:32.360 already sort of penciled in six or seven percent growth 0:03:32.360 --> 0:03:35.280 and a big ball and unemployment. But under outcome based policy, 0:03:35.640 --> 0:03:38.560 we really want to see that as as share power 0:03:38.640 --> 0:03:41.360 is indicated and I've under indicated, as we go through 0:03:41.400 --> 0:03:44.360 the year, as the data comes in, as we release 0:03:44.400 --> 0:03:48.760 our SEP projections based on that incoming data, we will 0:03:48.800 --> 0:03:51.240 have a sense on on where we are relative to 0:03:51.280 --> 0:03:54.840 that progress. And as share pal is also indicated. Um, 0:03:54.880 --> 0:03:57.240 as we think we are making that progress, we will 0:03:57.280 --> 0:04:01.680 communicate that to UH people who listen to our communication. 0:04:01.760 --> 0:04:03.840 And so I think that this is really where we 0:04:03.840 --> 0:04:06.720 want to be. It's actual progress, it's not projective progress. 0:04:07.080 --> 0:04:08.960 And as we go through the year, we will be 0:04:09.000 --> 0:04:12.200 informing the public about our views on that progress. So Rich, 0:04:12.360 --> 0:04:14.480 let's talk about it right now. You've talked about the 0:04:14.480 --> 0:04:17.279 conditions needed for lift off, but we haven't ready defined 0:04:17.320 --> 0:04:20.000 them conditions consistent with full employment. I don't know what 0:04:20.080 --> 0:04:21.760 that is. I have no idea. If you'll tell me, 0:04:22.040 --> 0:04:24.800 we're talking about substantial progress, but it needs to be actual, 0:04:24.920 --> 0:04:27.560 not forecast. But I still don't know what progress actually is. 0:04:28.000 --> 0:04:30.600 So you don't plan to define what substantial further progress is. 0:04:30.880 --> 0:04:34.600 You've promised to give markets warning before changing policy. How 0:04:34.640 --> 0:04:38.920 exactly do you plan to do that? Well, certainly we have. 0:04:39.400 --> 0:04:41.400 We have eight meetings a year. The Chair does a 0:04:41.440 --> 0:04:44.200 press conference at at each of those meetings. We release 0:04:44.240 --> 0:04:48.960 the summary of economic projections at four of those meetings, 0:04:49.000 --> 0:04:52.359 and so we will have apple opportunity. And again the 0:04:52.440 --> 0:04:55.080 Chair would not have been making those comments publicly if 0:04:55.200 --> 0:04:57.360 if he was not committed to it. So we'll have 0:04:57.440 --> 0:05:01.279 many opportunities as as the actual data ms en uh 0:05:01.320 --> 0:05:05.599 to to inform uh fat observers about our assessment of 0:05:05.640 --> 0:05:09.120 are we making that progress? Vice Chairman. The critics, and 0:05:09.160 --> 0:05:10.919 as you know, there are many critics. They have a 0:05:10.960 --> 0:05:14.600 habit of coming out Friday for weekend consumption. Have a 0:05:14.600 --> 0:05:19.400 true fear of inflation? You're Andrea Aella running your research 0:05:19.440 --> 0:05:22.960 for monetary affairs. Is a fabulous phrase of the core 0:05:23.160 --> 0:05:26.320 and the crust. Looking at core inflation, looking at the 0:05:26.400 --> 0:05:30.039 dynamics of energy, It gets to the visceral fear that 0:05:30.080 --> 0:05:34.880 our radio and TV listeners have. Are you afraid of inflation? 0:05:35.080 --> 0:05:41.000 Should we fear inflation? Well, the reality is we have 0:05:41.040 --> 0:05:44.120 a dual mandate and and half of that is price 0:05:44.160 --> 0:05:47.599 stability um and so the federal reserve, every federal reserve 0:05:47.720 --> 0:05:50.479 since Paul Wolker's leadership has been committed to that the 0:05:50.520 --> 0:05:54.960 pal fit is too But but tom um two percent 0:05:55.120 --> 0:05:57.600 as a ceiling, which is in effect the way many 0:05:57.640 --> 0:06:00.159 thought of our prior policy, also does not serve the 0:06:00.200 --> 0:06:04.400 economy well. It has in fact serious implications for the 0:06:04.480 --> 0:06:07.359 labor market and prosperity. And so essentially what we've said 0:06:07.440 --> 0:06:11.359 is that we want inflation outcomes that keep inflation expectations 0:06:11.400 --> 0:06:14.040 anchored at two percent, and that's gonna mean sometimes will 0:06:14.080 --> 0:06:17.920 be above two and sometimes will be UM below uh. 0:06:18.200 --> 0:06:22.000 We focus on inflation expectations UH intensely. We have a 0:06:22.040 --> 0:06:25.800 new index of common inflation expectations, I would say, and 0:06:25.839 --> 0:06:29.520 we've indicated tom uh that because of the nature of 0:06:29.560 --> 0:06:32.920 the pandemic shock a year ago, as we moved through 0:06:33.800 --> 0:06:36.960 one on a year over a year basis, headline inflation 0:06:37.040 --> 0:06:39.800 is gonna likely move above two percent because we're gonna 0:06:39.800 --> 0:06:43.760 be comparing this year's prices with last year's collapsing prices. 0:06:43.800 --> 0:06:46.279 But we expect in our baseline most of that to 0:06:46.320 --> 0:06:49.880 be transitory and for inflation to return later this year 0:06:49.920 --> 0:06:53.680 to around uh two. That's our that's our baseline. Let 0:06:53.680 --> 0:06:56.240 me also say that around the baseline, there are risks 0:06:56.360 --> 0:06:59.800 on both sides, uh, and in the risk case and 0:07:00.160 --> 0:07:03.000 inflation were to begin to move above a level consistent 0:07:03.040 --> 0:07:06.200 with price stability, we would have the tools to address that, 0:07:06.240 --> 0:07:08.680 and I'm confident that we would under that under that 0:07:08.680 --> 0:07:11.600 wrist scenario fold in the balance sheet and that can 0:07:11.640 --> 0:07:14.840 be the twin deficits, a comparison of the fiscal situation 0:07:14.920 --> 0:07:18.120 to g d P and of course trade dynamics as well. 0:07:18.640 --> 0:07:22.160 What do we do with the sixth standard deviation move 0:07:22.280 --> 0:07:25.600 and the twin deficit oout say two years. Are you 0:07:25.680 --> 0:07:30.600 optimistic we can stabilize that terrible trend? Are you optimistic 0:07:30.640 --> 0:07:34.960 that we can somehow revert to a better outcome? Well, 0:07:35.240 --> 0:07:37.680 you are correct, Tom, and I think this was pointed 0:07:37.680 --> 0:07:40.920 out in the I m F World Bank meetings this week. 0:07:41.200 --> 0:07:44.480 UM that because the US, for a variety of reasons, 0:07:44.760 --> 0:07:49.400 including better progress on vaccination and very robust policy support, 0:07:49.920 --> 0:07:52.440 is going to be growing rapidly this year compared to 0:07:52.520 --> 0:07:55.440 other countries. And what we tend to see historically is 0:07:55.480 --> 0:07:57.440 that when the US grows faster than most of the 0:07:57.480 --> 0:07:59.880 rest of the world, some of that spills into our 0:08:00.000 --> 0:08:02.400 imports and we have a bigger trade deficit. From the 0:08:02.400 --> 0:08:04.120 point of view of the rest of the world, that's 0:08:04.120 --> 0:08:08.240 a good thing that we're more of a locomotive than caboose, 0:08:08.320 --> 0:08:11.360 and so I would expect the current account deficit to 0:08:11.440 --> 0:08:15.880 widen this year and next under the baseline scenario. It's 0:08:15.920 --> 0:08:20.040 not something now that that is a concern because capital 0:08:20.080 --> 0:08:23.440 flows into the US in part because of our our 0:08:23.560 --> 0:08:25.320 rage relative to the rest of the world. So no, 0:08:25.560 --> 0:08:28.920 it's not a concern. Obviously, any circumstance with a big 0:08:28.920 --> 0:08:31.520 imbalance can become a concern, but it's not a concern 0:08:31.560 --> 0:08:34.120 now to me. Colleague and good friend Michael McKee reached 0:08:34.160 --> 0:08:37.240 down early this morning Rich and indicated that Lorie Logan, 0:08:37.360 --> 0:08:39.079 who I'm sure you're familiar with, of course over the 0:08:39.120 --> 0:08:41.960 New York Fed, suggested last night that they'll be changing 0:08:42.000 --> 0:08:45.120 the composition of his QUEI purchases to match the outstanding 0:08:45.200 --> 0:08:48.040 US debt profile. Can you elaborate a little bit on 0:08:48.120 --> 0:08:52.679 the objectives behind that, Ridge, Sure, And look, Laurie is 0:08:52.720 --> 0:08:55.520 a fine colleague and and has done a fabulous job 0:08:55.559 --> 0:08:58.160 in my three years at the at the board, so 0:08:58.200 --> 0:08:59.839 I'm lucky to be able to work with her. Well, 0:09:00.000 --> 0:09:02.920 we're said in those remarks is essentially restarting what has 0:09:02.960 --> 0:09:07.800 been our policy for some time now, which is that 0:09:07.920 --> 0:09:11.720 as we're purchasing treasury securities, we're doing so in the 0:09:11.760 --> 0:09:15.080 secondary market, and we'd like those purchases to roughly match 0:09:15.800 --> 0:09:19.920 the outstanding, the supply of treasuries in the market according 0:09:19.920 --> 0:09:23.280 to different maturities, and so, you know, as the Treasury 0:09:23.360 --> 0:09:27.760 changes its issuance patterns, then we would of course adapt 0:09:27.800 --> 0:09:30.640 our program to match those those outstanding. So I don't 0:09:30.679 --> 0:09:32.439 think she was really trying to make news there. It's 0:09:32.480 --> 0:09:36.000 really just articulating what our policy has been for for 0:09:36.040 --> 0:09:38.839 some time. You wouldn't characterize this is operation twist, then 0:09:39.880 --> 0:09:43.160 I would not characterize the as operation twists. Michael mckill 0:09:43.200 --> 0:09:45.800 be happy that we address that particular question, said, I 0:09:46.120 --> 0:09:47.839 think John that was on the edge of the route, 0:09:47.960 --> 0:09:49.960 just so you know, have to bring it up. At 0:09:50.040 --> 0:09:52.320 one of the conversation, Rich you mentioned transit tree, and 0:09:52.360 --> 0:09:54.920 we've been playing the drinking game transit tree every time 0:09:55.360 --> 0:09:57.800 the vice chairman is South speaks. Every time the chairman 0:09:57.840 --> 0:10:01.120 speaks transitory, transity transitory. Say, here's my question. Riches the 0:10:01.120 --> 0:10:04.400 Epograms says, how would you know if you're wronk that 0:10:04.520 --> 0:10:06.160 it's not just transit treat How would you know if 0:10:06.160 --> 0:10:11.920 you're wronk. Well, the simplest answer is that of inflation 0:10:12.520 --> 0:10:15.760 at the end of the year, is has not declined 0:10:15.800 --> 0:10:17.160 from where it is in the middle of the year, 0:10:17.240 --> 0:10:21.480 that will be some good evidence. Um. I also think 0:10:21.559 --> 0:10:24.920 that you know, we look at both headline and core measures. 0:10:24.920 --> 0:10:27.720 And let me also say, John, because not surprisingly it's 0:10:27.720 --> 0:10:31.280 a good question that the show tends to ask good questions. Um, 0:10:31.320 --> 0:10:35.800 the reality the real sometimes not not always, But I 0:10:35.800 --> 0:10:38.439 would say that that an important point to note, and 0:10:38.480 --> 0:10:40.800 I've made this point several times, so let me repeat it. 0:10:40.880 --> 0:10:42.880 Show there is a there is a lot of pent 0:10:42.960 --> 0:10:44.800 up demand in the economy. We have a lot of 0:10:44.840 --> 0:10:48.440 fiscal support, monetary policy has been all in for thirteen months. 0:10:48.720 --> 0:10:50.960 But there's a lot of pent up supply in the economy. 0:10:51.000 --> 0:10:53.079 Eight and a half million jobs short of where we 0:10:53.160 --> 0:10:57.760 were thirteen months ago. A lot of small businesses shut down, 0:10:57.840 --> 0:11:00.600 and so we do think the economy is going to reopen. 0:11:01.240 --> 0:11:03.840 So both supply and demand will be in play, and 0:11:03.880 --> 0:11:06.920 there could be some temporary and balances in certain sectors 0:11:07.400 --> 0:11:10.400 um so called bottle nuck bottleneck effects. But again we 0:11:10.440 --> 0:11:13.360 would expect those to be transitory, and there's the year progressive, 0:11:13.440 --> 0:11:16.120 and there's we go into next year. If they're not, 0:11:16.280 --> 0:11:20.200 then we'll have to take that into account, certainly, John, 0:11:20.520 --> 0:11:24.240 I should also say that. I should also say that 0:11:24.280 --> 0:11:28.280 I consult my Bloomberg regularly, UH and my favorite, one 0:11:28.320 --> 0:11:31.439 of my favorite screens is e CFC, where you accumulate 0:11:31.520 --> 0:11:35.160 all the individual forecast for the economy UH, and your 0:11:35.320 --> 0:11:39.320 entire Bloomberg panel shows a similar projection. Now, again, forecasting 0:11:39.400 --> 0:11:41.840 is hard, That's why we do it a lot. But 0:11:41.960 --> 0:11:45.640 the baseline view, even given the fiscal package, is that 0:11:45.760 --> 0:11:48.720 most of the move above two percent inflation we see 0:11:48.720 --> 0:11:51.800 the spring should revert back later this year. I'm looking 0:11:51.800 --> 0:11:54.160 at a CFC right now at two point one, twenty one, 0:11:54.240 --> 0:11:58.800 twenty two point twenty three. You mentioned something important, Nut Rich, 0:11:58.800 --> 0:12:00.720 and it wasn't lost on me until about that turn 0:12:00.800 --> 0:12:03.600 from twenty one into twenty two. Is that the ultimate 0:12:03.600 --> 0:12:06.080 test for you? But you won't really know until we 0:12:06.120 --> 0:12:08.840 get a little bit deeper into early twenty two. To 0:12:08.920 --> 0:12:12.079 draw that distinction between whether something is transitory or perhaps 0:12:12.080 --> 0:12:15.199 a little bit more persistent, Well, sure, I think I 0:12:15.880 --> 0:12:18.520 just think as as time, you know, as time goes on, 0:12:18.679 --> 0:12:21.079 you you learn more about about how the economy is 0:12:21.120 --> 0:12:23.000 going to a depth. I think I saw heard some 0:12:23.080 --> 0:12:25.280 sound you must have had my good friend Ken Rugoff 0:12:25.320 --> 0:12:28.080 on at one point, and I think Kenna's usual brings 0:12:28.120 --> 0:12:31.200 up an excellent observation, which is that this is a 0:12:31.280 --> 0:12:34.720 very unusual shock, a global shutdown, shutdown of the global 0:12:34.720 --> 0:12:38.040 economy through a true, truly exhaugenous event. I think it's 0:12:38.080 --> 0:12:41.440 never happened to my professional career because it impacted both 0:12:41.440 --> 0:12:44.320 supply and demand. So we're gonna be learning as sectors 0:12:44.360 --> 0:12:48.240 come back online, and I'm sure there'll be surprises along 0:12:48.280 --> 0:12:50.840 the way, and we need to be attuned and attentive 0:12:51.320 --> 0:12:53.560 to the data flow. But yes, of course, and also 0:12:53.960 --> 0:12:57.160 John Um, you know, yes, we we welcome the nine 0:12:57.559 --> 0:13:00.240 thousand plus jobs that are gained, but there's a a 0:13:00.280 --> 0:13:02.440 hole in the in the labor market, and will begin 0:13:02.480 --> 0:13:04.319 to get a better sense as we go through this 0:13:04.400 --> 0:13:08.120 calendar year about how how rapid that progress is and 0:13:08.160 --> 0:13:12.400 how that is showing up another indicators of the labor market. 0:13:12.440 --> 0:13:16.080 So of course, I think, yeah, Vice Chairman, a final question, 0:13:16.120 --> 0:13:18.280 if we could, we did speak with Kenneth Rogoff of 0:13:18.320 --> 0:13:21.640 Harvard today, and he traced a path in our academics 0:13:21.679 --> 0:13:26.880 back to UH Dr Mundell Robert Mandel passing at this week, 0:13:27.040 --> 0:13:30.160 Richard Clarida, you had the privilege of not only reading 0:13:30.280 --> 0:13:35.920 Mundel and doing Mundel, but working with Mundel at Columbia University. 0:13:36.240 --> 0:13:39.280 Your thoughts on what he gave to Kenneth Rogoff, Richard 0:13:39.320 --> 0:13:43.040 Clarida and the rest of us, well, it's uh. I 0:13:43.160 --> 0:13:45.880 was very saddened when I heard the news this week. 0:13:45.960 --> 0:13:50.320 Bob was a mentor and a friend for thirty years. 0:13:50.440 --> 0:13:52.400 It was one of the thrills of my career too, 0:13:52.480 --> 0:13:55.000 to be a colleague of his. Because as a global Mackerel, 0:13:55.320 --> 0:13:58.800 all global and Mackerel columns today are either students of 0:13:58.880 --> 0:14:01.719 Mundeal or the students of Mundal in one way or 0:14:01.760 --> 0:14:03.920 the other. And that was certainly true with me. He's 0:14:03.960 --> 0:14:08.960 truly the father of the euro expansive, creative, a wonderful gentleman, 0:14:09.240 --> 0:14:11.600 UH and really one of the great great economists of 0:14:11.679 --> 0:14:15.120 the second half of the twentieth century. Will be sorely missed, 0:14:15.120 --> 0:14:17.560 both as a human being UH and as a scholar. 0:14:17.720 --> 0:14:19.760 And I think everyone here at Blomberg's of violence and 0:14:19.840 --> 0:14:23.320 a tame across the Blimberg universe at those comments, Rachel 0:14:23.320 --> 0:14:24.880 always trying to catch out these. I think we're all 0:14:24.880 --> 0:14:26.640 looking forward to just getting into the same room again 0:14:26.640 --> 0:14:29.480 and look forward to doing that soon. Maybe, Like Danny D. C. 0:14:29.920 --> 0:14:38.040 Richard kod Of, Vice Chair of the Federals, Eve Kenneth 0:14:38.120 --> 0:14:42.360 Rogoff of Hervard University on the dollar in the place 0:14:42.520 --> 0:14:46.480 within our global system, Professor Rogoff I mentioned to Catherine 0:14:46.480 --> 0:14:50.280 Mann this line that goes from modern economics of you 0:14:50.440 --> 0:14:53.800 and Obsfeld, back through Jacob Frankel to the founding of 0:14:53.960 --> 0:14:57.720 Robert Mundel. In all of that is the politician velleries 0:14:57.760 --> 0:15:00.560 you started to staying of France who aked about the 0:15:00.680 --> 0:15:06.160 US dollar exorbitant privilege. Mundell talked about this for years 0:15:06.240 --> 0:15:09.760 and years. Are we finally here where we could lose 0:15:09.880 --> 0:15:14.400 our exorbitant privilege? Well, first, let me say it's a 0:15:14.440 --> 0:15:17.520 great tragedy that we've lost Robert Mandel. I regard him 0:15:17.560 --> 0:15:21.880 as my intellectual grandfather. He was my thesis advisor, Rudy 0:15:21.920 --> 0:15:27.840 Dornbush's thesis advisor, and certainly an incredibly original scholar. Uh No, 0:15:28.000 --> 0:15:31.280 I don't think we're about to lose our exorbitant privilege tomorrow. 0:15:32.240 --> 0:15:35.800 But there's no question that part of what strengthened it 0:15:36.000 --> 0:15:39.800 over the last ten twenty years is that China has 0:15:39.800 --> 0:15:44.360 had a very dollar centric policy. They stabilized against the dollar. 0:15:44.560 --> 0:15:46.640 Now it's a mix of the dollar in the year 0:15:46.760 --> 0:15:48.720 with the dollar in the year aren't moving that much. 0:15:49.400 --> 0:15:52.040 And as long as that holds up, I think the 0:15:52.160 --> 0:15:56.840 US exorbitan privilege is solid, but it might not hold 0:15:56.920 --> 0:15:59.880 up forever. It's really not an optimal policy for China. 0:16:00.400 --> 0:16:02.440 And I might add that if you look at the 0:16:02.600 --> 0:16:08.040 longer end of five year ten year debt UH and 0:16:08.160 --> 0:16:12.480 look at say the covered comparisons, the US no longer 0:16:12.600 --> 0:16:16.040 gets any exorbitant privilege. It's really only on short debt. 0:16:16.840 --> 0:16:18.920 Can we will go if the basic theme of the 0:16:19.000 --> 0:16:23.000 less sophisticated is it China not as it war with US, 0:16:23.040 --> 0:16:25.920 but certainly has a different political system and as a 0:16:25.960 --> 0:16:30.880 new robust offense. Can they use remimbi as a weapon? 0:16:31.680 --> 0:16:37.040 Can you weaponize a currency? Look, they view themselves as 0:16:37.120 --> 0:16:41.040 doing very well and they're not looking to rock the boat. 0:16:41.360 --> 0:16:46.040 Their technocrats have been telling them for two decades almost 0:16:46.080 --> 0:16:50.240 now you really should have an inflation targeting regime like 0:16:50.440 --> 0:16:53.880 everybody else. Let us be a little bit more independent 0:16:53.960 --> 0:16:57.560 central bank. We can keep thinks stable. We shouldn't be 0:16:57.800 --> 0:17:01.320 following around the dollar for lots of reasons. Uh, the 0:17:01.520 --> 0:17:04.640 politicians have said, you know, things are going great, let's 0:17:04.680 --> 0:17:07.840 not do that. Uh. They are looking at the longer run, 0:17:08.160 --> 0:17:12.400 and they thoroughly intend for the NIMBI first to be 0:17:12.560 --> 0:17:16.040 coequal with the dollar, at least with the Euro, and 0:17:16.080 --> 0:17:19.359 maybe eventually take over. Uh. If we look at a 0:17:19.400 --> 0:17:22.480 long enough horizon, trying to continues to rise, that would 0:17:22.480 --> 0:17:25.080 be hard to stop. But I don't think they're looking 0:17:25.119 --> 0:17:28.159 to do anything quickly. That said, they put out this 0:17:28.280 --> 0:17:31.320 new starting to put out a new digital central bank 0:17:31.359 --> 0:17:35.320 currency which certainly has the seeds of being able to 0:17:35.359 --> 0:17:37.879 replace the dollar. Can as you see things right now, 0:17:37.880 --> 0:17:39.800 what do you think is the biggest threat to dollar hegemony? 0:17:40.000 --> 0:17:42.200 Is it a decision that America could make, or decision 0:17:42.200 --> 0:17:45.119 that could be made out of sweat. I think it 0:17:45.160 --> 0:17:48.840 would come from, you know, a shock to the system. 0:17:49.280 --> 0:17:53.600 Dollar hegemony is not something that's going to go away overnight. Typically, 0:17:53.720 --> 0:17:55.679 when you get on top, you keep it for a 0:17:55.720 --> 0:17:58.520 century or more. We've had it for a century. Uh, 0:17:58.680 --> 0:18:02.480 certainly since we'll under World War One. So it's But 0:18:02.680 --> 0:18:05.720 on the other hand, if you're let's say, piling up 0:18:06.119 --> 0:18:11.560 sixty percent of the global public and corporate debt UH 0:18:11.880 --> 0:18:14.719 in the world, as the US is sort of doing, 0:18:14.800 --> 0:18:18.400 it just dominates UH debt issuance markets, and you're counting 0:18:18.440 --> 0:18:21.560 on that, and that can't go away quickly. It's a fragility. 0:18:21.640 --> 0:18:26.000 And the late Emanuel far He, together with Matteo Monjori 0:18:26.080 --> 0:18:28.959 at Stanford far He was my colleague, I wrote this 0:18:29.040 --> 0:18:32.800 wonderful paper about you know that hedgemon is tempted to 0:18:32.880 --> 0:18:37.080 push things, to take advantage of this exorbitant privilege and 0:18:37.200 --> 0:18:41.199 create fragility. That might be a reasonable calculus for the 0:18:41.280 --> 0:18:43.760 United States, but not for the world as a whole. 0:18:43.880 --> 0:18:45.960 So let me talk about that fragility right now. Ken, 0:18:46.080 --> 0:18:47.720 what's the biggest source of it do you think Do 0:18:47.720 --> 0:18:52.680 you think it is in the debt market? Boy? Um, well, 0:18:52.840 --> 0:18:56.280 certainly if interest rates went up, I just would turn 0:18:56.359 --> 0:18:59.239 the world upside down. I think we'll find out a 0:18:59.280 --> 0:19:03.359 lot when Europe gets out of this. When the vaccines come. 0:19:03.440 --> 0:19:07.080 That's really the biggest difference between the US and Europe. 0:19:07.119 --> 0:19:09.959 The vaccines come as long as Europe, which is roughly 0:19:10.000 --> 0:19:12.600 as big as the United States is sort of stuck 0:19:12.600 --> 0:19:15.320 in the mud. It's very hard to tell what's going 0:19:15.359 --> 0:19:18.400 on with global interest rates, what's going on with inflation. 0:19:18.800 --> 0:19:20.480 So I think I think the US has a while 0:19:20.520 --> 0:19:23.520 to run before that happens, But when it does, I 0:19:23.800 --> 0:19:26.840 don't know what's next. Obviously, this has been a very 0:19:26.880 --> 0:19:32.640 hard pandemic to call, particularly because uh waves of it 0:19:32.760 --> 0:19:35.800 and the vaccines have been vastly more successful. And I 0:19:35.840 --> 0:19:40.719 think almost anyone expected can rogoff. This time is different 0:19:40.960 --> 0:19:43.359 a book from another time in place, and I'll have 0:19:43.400 --> 0:19:46.399 the clearest recommended recollection. I think I was at your 0:19:46.440 --> 0:19:49.399 book party and remember opening and there was that single 0:19:49.440 --> 0:19:52.639 page you put together with Carmen on the finances of 0:19:52.680 --> 0:19:55.760 the Spanish Armada, and it was, you know, the Spanish 0:19:55.840 --> 0:20:00.080 government falling apart. Is our debt structure now span this 0:20:00.280 --> 0:20:03.840 government equivalent when they launched the Armada. I mean, are 0:20:03.920 --> 0:20:07.399 we in that bad a condition? Well, listen, they are. 0:20:07.520 --> 0:20:11.440 If the Armada hadn't crashed because of the weather, we'd 0:20:11.440 --> 0:20:13.920 be living in a different world history now. I think. 0:20:14.040 --> 0:20:16.359 I think it takes a shock to the system, just 0:20:16.440 --> 0:20:19.960 a massive shock of which I can't even imagine. Uh, 0:20:20.000 --> 0:20:22.760 But you know, we've had shocks to the system which 0:20:22.800 --> 0:20:27.200 we can't even imagine, roughly twice at the last twelve years, 0:20:27.720 --> 0:20:30.720 so we're more vulnerable than we were. On the other hand, 0:20:30.760 --> 0:20:32.840 By the way, I just want to be clear, I mean, 0:20:32.880 --> 0:20:36.000 I think it makes perfect sense what President Biden is doing. 0:20:36.080 --> 0:20:40.359 Certainly politically, it makes what he's doing, and uh, you know, 0:20:40.680 --> 0:20:44.480 we're we're in this terrible situation and he's sort of 0:20:44.520 --> 0:20:46.800 getting done what he thinks he can get done. And 0:20:47.160 --> 0:20:49.480 they're parts of the infrastructure bill that make a lot 0:20:49.520 --> 0:20:51.080 of sense. There are a lot of things we could 0:20:51.080 --> 0:20:55.520 do in this country addressing inequality. I will say, at 0:20:55.560 --> 0:20:57.680 the end of the day, you have to raise taxes 0:20:57.760 --> 0:20:59.920 to pay for this. If we're just not the nest 0:21:00.000 --> 0:21:02.879 on the physical infrastructure, but the what they called the 0:21:02.960 --> 0:21:07.560 social infrastructures transfer programs great, but you gotta pay for it. 0:21:08.560 --> 0:21:11.400 Ken rogof James Diamond wrote a sixty six page letter 0:21:11.440 --> 0:21:14.520 this week. He running JP Morgan, and part of the 0:21:14.560 --> 0:21:17.320 discussion is we have two quarters of boom, and then 0:21:17.320 --> 0:21:19.800 there's a question about how we come out of a 0:21:19.840 --> 0:21:22.760 boom the runway. Do we drop off sharply, do we 0:21:23.000 --> 0:21:26.480 as ease out of it? If you will, Mr Diamond 0:21:26.680 --> 0:21:30.920 very optimistic about an extended good g DP in America. 0:21:31.080 --> 0:21:34.600 What is the academic history of how we come off 0:21:34.760 --> 0:21:39.240 a boom economy or are we flying blind? Well? Look, 0:21:39.400 --> 0:21:41.879 we are to some extent flying blind here at this 0:21:42.000 --> 0:21:46.160 pandemic is quite different than the financial crisis. People who 0:21:46.280 --> 0:21:48.800 you know say, there's almost exactly the same thing. That's 0:21:48.840 --> 0:21:52.399 just crazy. We don't know what's next. If I go 0:21:52.480 --> 0:21:56.119 back to I mentioned Robert Bondello, my intellectual grandfather. His 0:21:56.240 --> 0:22:00.000 student Rudy Dorn. But she had a great book twenty Years. 0:22:00.119 --> 0:22:02.639 It's Sebastian AdWords of U. C. L. A. And a 0:22:02.800 --> 0:22:07.040 theme of it is that populism actually works great for 0:22:07.080 --> 0:22:11.280 a while. Uh and their timeline was sort of two 0:22:11.359 --> 0:22:14.359 to four years. You get a boom, but then you 0:22:14.440 --> 0:22:17.120 get problems at the end of the boom. The problem, 0:22:17.200 --> 0:22:19.280 you know, we talked about, will there be inflation? Will 0:22:19.359 --> 0:22:22.560 something go wrong? Larry Summers you mentioned, you know, raise 0:22:22.640 --> 0:22:26.720 the point. I don't think it's an immediate problem, but obviously, 0:22:26.760 --> 0:22:29.639 if at some point you run the war economy and 0:22:29.680 --> 0:22:33.159 don't stop, it will be a problem. And politically it 0:22:33.280 --> 0:22:35.800