Speaker 1: Bloomberg Audio Studios, Podcasts, radio News. Hello and welcome to
Speaker 1: another episode of The Odd Laws podcast.
Speaker 2: I'm Joe Wisenthal and I'm Tracy Alloway.
Speaker 1: Tracy, you know, future economy, it's always uncertain, path of
Speaker 1: the path of inflation, path of employment, always big debates.
Speaker 1: I think what's really interesting right now compared to a
Speaker 1: few years ago maybe is, you know, at various times
Speaker 1: it's like inflation is going to come down, but there's
Speaker 1: a fight over how fast. Right And now you have
Speaker 1: a situation which there are people who argue both sides.
Speaker 1: Some peoples like, oh, no, we're on a you know,
Speaker 1: we're heading down the sort of camp, et cetera. And
Speaker 1: others are like, look, we're reaccelerating. It's going to get
Speaker 1: hot again. And we're recording this February eleventh. We just
Speaker 1: had a fairly strong jobs print, et cetera. And so
Speaker 1: some people are making the reacceleration argument.
Speaker 3: We are so back. So yeah, well that job's report,
Speaker 3: I mean it was a blowout numbers. Yeah, one hundred
Speaker 3: and thirty thousand jobs added in January versus expectations for
Speaker 3: sixty five thousand, and even if you drill down into it, like,
Speaker 3: it looks pretty good.
Speaker 4: Right, But you're absolutely right.
Speaker 3: So we used to argue about how far we would
Speaker 3: travel in one direction, you know, inflation. Is it going
Speaker 3: to be four percent, is it going to be five percent? Whatever,
Speaker 3: And now we're sort of arguing about which direction we're actually.
Speaker 1: Going to go totally. And I think, like, if you
Speaker 1: just look like, okay, one jobs report, can't you know,
Speaker 1: I take it with a grain of salt. There is
Speaker 1: there does seem to be a lot of evidence of
Speaker 1: some softening in the labor market by a lot of
Speaker 1: different measures, et cetera. Housing market continues to be fairly soft.
Speaker 1: On the other hand, look at various commodities, you know,
Speaker 1: look at copper, look at a bunch of other stuff,
Speaker 1: Look at trucking prices, freight picking back up, et cetera.
Speaker 3: I wrote about this in the AU Thoughts newsletter.
Speaker 1: Yeah, there's lots of things that are going in the
Speaker 1: other direction. And you say, look, this looks like reflation.
Speaker 3: Yeah, so we are going to be speaking with someone
Speaker 3: who had a non consensus call about a month ago.
Speaker 3: But again, I think it's becoming maybe more consensus by
Speaker 3: the day, by the hour, as we get these types
Speaker 3: of reports totally.
Speaker 1: Well, we really do have the perfect guest to sort
Speaker 1: of give us a different take, a sort of I
Speaker 1: would say it's still a little bit out of consensus call,
Speaker 1: but definitely not the direction that a lot of people
Speaker 1: want to see. Definitely not the direction if you think
Speaker 1: that the FED should cut rapidly this year. Maybe we'll
Speaker 1: talk some FED stuff. We're going to be speaking, of course,
Speaker 1: to Adam Posen, here's the president of the Peterson Institute,
Speaker 1: recently co author at apiece with Peter Orsag four percent inflation.
Speaker 1: What Adam, thanks for coming back and joining us here
Speaker 1: in studio four percent inflation?
Speaker 4: Really, thanks Tracy, Thanks Joe for having me back. Yeah.
Speaker 4: I mean I've got friends who say I should have
Speaker 4: just said three point five and the exactly, but I
Speaker 4: think it's realistic to think about four percent by the
Speaker 4: end of the year. On headline CPI and just going
Speaker 4: to the spirit of what both of you were saying,
Speaker 4: I think the direction of travel is up, not down,
Speaker 4: and pretty clearly that way. There's obviously, like you just said,
Speaker 4: today's job report, but I think there's a broader pattern.
Speaker 4: The issue isn't you know, like you say, one month,
Speaker 4: it's more about why the job's report looks the way
Speaker 4: it does. And if you look at prime age, like
Speaker 4: Tracy was saying about drilling down in the numbers, if
Speaker 4: you look at prime age labor force participation, which to
Speaker 4: me is one of the most important statistics you can
Speaker 4: look at, it's still pretty high. And there's this risk
Speaker 4: of women dropping out of the labor force to look
Speaker 4: after kids and elderly and sick people if they don't
Speaker 4: restore some of the Obamacare insurance subsidies. And there is
Speaker 4: a conundrum that if you're either they haven't deported yet
Speaker 4: or managed to drive out yet as many migrants as
Speaker 4: they think, or you're losing labor there too. So it's
Speaker 4: hard for me to see this as a very weak
Speaker 4: job market. The kinds of things people point to, like
Speaker 4: the slowing of wage growth or the vacancies over as
Speaker 4: compared to unemployment, I think, are not indicative of a
Speaker 4: demand side slowdown. They're indicative of what economists called mismatch,
Speaker 4: meaning less good functioning in the labor market. So just
Speaker 4: give you two quick examples. African American unemployment is up
Speaker 4: relative to average unemployment historically for both nasty and good reasons.
Speaker 4: That's been the case, but it'd come way down. So
Speaker 4: the question is is it going up because they're the
Speaker 4: canary in the coal mine, or is it because something
Speaker 4: specific hit African Americans. And unfortunately, I think it's something
Speaker 4: specific contributed to African American unemployment, which is DOSEE may
Speaker 4: not have cut overall government spending, but it massively reallocated
Speaker 4: where our government's spent. So Department of Education gone, a
Speaker 4: lot of environmental gone, a lot of health and human
Speaker 4: services gone. And these are things where you had a
Speaker 4: lot of government contractors that were African American owned or
Speaker 4: run or heavily populated. And so I think part of
Speaker 4: the reason African American unemployment is up, and that doesn't
Speaker 4: mean it's okay, it just means it's not a sign
Speaker 4: of demand shock or declining or soft market is because
Speaker 4: of this hit to this specific part of the workforce. Similarly,
Speaker 4: and I know you have had episodes talking about this issue,
Speaker 4: we see the phenomenon of young people having less hiring,
Speaker 4: particularly college educated people, young people not getting hired as much.
Speaker 4: And I think there's two things going on there. One
Speaker 4: is I mean it's real. Again, like with African American employment,
Speaker 4: I'm not saying it's not real. I'm just saying it's
Speaker 4: not telling you about the demand situation. So it is
Speaker 4: incredibly right well said, very tech speak. So you know,
Speaker 4: I think part of it is that we've the the
Speaker 4: rise in you, younger people unemployment college as younger people
Speaker 4: unemployment has been a very steady rise for a few years.
Speaker 4: It's actually a very it's not like suddenly, oh it
Speaker 4: got soft. It's been coming up slowly since roughly twenty
Speaker 4: twenty three. And to me, that has to do with
Speaker 4: the hiring and rematching coming out of COVID. That people
Speaker 4: moved a lot, companies moved a lot of people into
Speaker 4: new jobs, and they hired extra people in some sense,
Speaker 4: and so there's this overhang and that's particularly affecting young people.
Speaker 4: I mean, AI's in there. I'm just that's not so anyway.
Speaker 4: I'm not trying to cherry pick data, but I'm just
Speaker 4: trying to say that if you match that with the
Speaker 4: more well known data, the layoffs are relatively low, the
Speaker 4: wage growth is slowing but it's not going to zero,
Speaker 4: That participation rate is high, that the monthly job numbers
Speaker 4: are fluctuating. But on the new baseline that we all
Speaker 4: rightly should be looking at solid. I don't see it
Speaker 4: as a week week labor market.
Speaker 3: So you just talked about the labor side, but your
Speaker 3: forecast for four percent inflation by the end of this
Speaker 3: year is comprised of many different things. So walk us
Speaker 3: through what exactly you're looking at to get that call.
Speaker 4: Thanks Tracy for the opportunity, which odd lots gives to
Speaker 4: give more than two points. But I think the message
Speaker 4: is there are I want to start with. Those are
Speaker 4: so many points if you kind of step back right
Speaker 4: and you say, all right, if I'm making a forecast
Speaker 4: for inflation over the next year or two, there's how
Speaker 4: softer typed the labor market is. There's how hot the
Speaker 4: economy is running, and those two obviously overlap. There's are
Speaker 4: we getting supply shocks like tariffs or anti migration policy.
Speaker 4: There's what's fiscal policy is doing, and then there's what's
Speaker 4: monetary policy doing, and very importantly, how credible is it?
Speaker 4: How is it being transmitted? So you go down that
Speaker 4: list and there's, to me, there's just an awful lot
Speaker 4: of inflationary stories. So tariff's, anti migration policy, there was
Speaker 4: a debate, or at least a bunch of people asserting, Oh,
Speaker 4: it didn't really matter, Look, inflation's not up that much. Well,
Speaker 4: my view, and I argued this in a Bloomberg Business
Speaker 4: Week piece a few weeks ago, is that we never
Speaker 4: should have expected the impact of these policies to be
Speaker 4: so fast. And in fact, if you go back, I'm
Speaker 4: not that we forecast it perfectly by any means, but
Speaker 4: if you go back to the stuff my colleagues McKinnon
Speaker 4: and Nolan and others at Peterson's who published a year
Speaker 4: and a half ago on what would be the likely
Speaker 4: effect of the tariffs or the migration policies, they were
Speaker 4: building in a one year lag from when the policies
Speaker 4: took effect, and so you know, roughly next quarter is
Speaker 4: when we should start to really see the policy hit.
Speaker 4: And we're seeing anecdotally in the beige books from the FED,
Speaker 4: in statements by the Amazon CEO, and my co author
Speaker 4: and part of this, Peter Orzag who runs Loizard, has
Speaker 4: many contacts in the business community who are talking about this.
Speaker 4: It takes time to make up your mind what you're
Speaker 4: going to do, even if you're a big company, let
Speaker 4: alone if you're a small company. It's very hard. So
Speaker 4: like do I get a new supplier. Do I move
Speaker 4: production to China? Out of China? Do I move it
Speaker 4: into Mexico? Do I move it into the US? Can
Speaker 4: I find a substitute? Do I raise prices now? Do
Speaker 4: I wait till my competitors raise prices? Can I get
Speaker 4: an exemption from the terrace? If I go meet with
Speaker 4: Howard Luttnik? You know, all this stuff takes time to
Speaker 4: work through. And the same thing is true for that's
Speaker 4: even before you factor in like inventories of imported goods.
Speaker 4: And they're waiting to see whether Trump actually sticks with
Speaker 4: the tariffs or not before they make a decision. And
Speaker 4: I would argue that the SAME's true for migrant families
Speaker 4: or migrant workers, undocumented migrant workers that they have hard
Speaker 4: to leave aside the human aspect, which is amazingly horrible,
Speaker 4: but eat just on the economics. They have to make
Speaker 4: up their minds. Is ice really coming for me? Are
Speaker 4: they coming to my town? Is my employer going to
Speaker 4: protect me? How long do I have before they get
Speaker 4: here to accumulate dollar pay before I have to leave?
Speaker 4: Can I hide and keep working if I go? Do
Speaker 4: I go legally? Do I take my kids with me?
Speaker 4: Do I not take my kid, do I try to
Speaker 4: come back again. These are irreversible decisions. It takes time,
Speaker 4: and you want to see uncertainty change or at least
Speaker 4: get settled before you make the decision. So to me,
Speaker 4: I think these inflationary pressures from the anti migration policy
Speaker 4: of tariffs are already here, but that they're going to
Speaker 4: accelerate and be more visible then to be much quicker.
Speaker 4: With the other points. Fiscal policy, I think the Republican
Speaker 4: majorities in the Congress and the President are going to
Speaker 4: want to pass a big blowout checks to people ahead
Speaker 4: of the midterm election. I think they are going to
Speaker 4: pass some restoration of the lower middle class subsidies for
Speaker 4: Obamacare insurance because it's really hurting people and it's really
Speaker 4: making people angry. You put those two together, that's well
Speaker 4: towards two percent of GDP in additional deficit. So say
Speaker 4: you risk weight it. Say you put a fifty percent
Speaker 4: chance on the checks being handed out, and you put
Speaker 4: i'd say an eighty to ninety percent chance on some
Speaker 4: amount of Obamacare subsidies coming back. You put in that
Speaker 4: weighted average, that still get you an additional percent plus
Speaker 4: of GDP on the deficit that people weren't figuring. Then
Speaker 4: you got a week er dollar. Then you've got the FED.
Speaker 4: And this is something we've talked about a few times
Speaker 4: when you've been kind enough to have me on the
Speaker 4: interest rate. For all Trump talking constantly about it and
Speaker 4: pressuring the FED doesn't summarize sufficiently the state of monetary
Speaker 4: conditions in the economy. So you've got all this private credit,
Speaker 4: You've got all the AI investment being funded either out
Speaker 4: of retained earnings or out of issued bonds, not based
Speaker 4: on credit, not based on normal bank borrowing or big stuff.
Speaker 4: And as Joe says, you have a soft housing market,
Speaker 4: but mortgage rates and real terms have been coming down,
Speaker 4: and it's not like mortgage money is unavailable, so it's
Speaker 4: not a tight credit environment. And so then finally, regret,
Speaker 4: we have to take into account all the attacks on
Speaker 4: the FED and the changes at the FED. And I'm
Speaker 4: not too into personalities. I don't think it matters that
Speaker 4: much which individual, but the structural forces on the FED
Speaker 4: for change, and you have to believe that makes the credibility,
Speaker 4: the likelihood that they're going to react in the right
Speaker 4: direction to this inflation soon enough lower, So Boom boom
Speaker 4: boom boom boom boom.
Speaker 1: So there was a great summary or overview of your view,
Speaker 1: and there's plenty of follow ups to ask about that. Well,
Speaker 1: let's just talk about the tariffs. So I certainly take
Speaker 1: your point that it would take any company a while
Speaker 1: before they decide their pricing strategy. Incidentally, not you know,
Speaker 1: some companies you know about almost a year after the
Speaker 1: tariffs are going in the other direction, for example, so
Speaker 1: they cut prices. So clearly like some companies are decided
Speaker 1: they cut but just don't tariffs, you know, even theoretically, like, yes,
Speaker 1: I can understand the argument there is a good reason
Speaker 1: to raise prices. On the other hand, tariffs are attacks,
Speaker 1: and generally we think of taxes as disinflationary. They take
Speaker 1: money out of the economy. Here's I guess the question
Speaker 1: is every company would love to be able to pass
Speaker 1: on higher costs. Does there need to be something on
Speaker 1: the demand side for them to be able to because
Speaker 1: another possibility is they just have to eat it in
Speaker 1: margins because the consumer is not willing or you know,
Speaker 1: as the pepsi consumer. Evidently they don't want to continue
Speaker 1: to pay high prices and goods like are tariffs per
Speaker 1: se inflationary or they only inflationary if there's sort of
Speaker 1: a demand boost something for like the checks or the
Speaker 1: Obamacare subsidies coming back, et cetera.
Speaker 4: That's a really good added layer sophistication to this, Joe,
Speaker 4: And you're absolutely right. It varies from company to company,
Speaker 4: from industry to industry. The decisions. Part of the decision
Speaker 4: making process is what is the competitive landscape, and we
Speaker 4: do see. I'm proud to say PepsiCo was one of
Speaker 4: the many corporate supporters of the Peterson Institute, a big
Speaker 4: fan and no, no, I have to be honest, and
Speaker 4: I'm proud to be honest. All our donors are listed
Speaker 4: on our website. But anyway, PepsiCo is arguably facing a
Speaker 4: lot of fundamental trends in the food industry and having
Speaker 4: to do with goops, having to do with health perceptions
Speaker 4: and things that of course are going to overwhelm for them.
Speaker 4: And they actually are not that exposed to tariffs compared
Speaker 4: to some other companies because they're not importing sugar and
Speaker 4: they're not importing inputs the way say auto company is.
Speaker 4: But anyway, but just that just illustrates your point that
Speaker 4: it is going to vary from company to company, And
Speaker 4: my argument was just that as a general thing, for
Speaker 4: any given company, it's not a trivial decision. You don't
Speaker 4: just go. But your point, your further point, Joe, that
Speaker 4: it's sort of conditional on demand, is absolutely right. So
Speaker 4: there there's two aspects to that. One is just literally
Speaker 4: what you said that if it turns out their slack demand,
Speaker 4: you may not see the rise in pricing as much
Speaker 4: because you're just the company. Any given company additionally has
Speaker 4: to decide, you know, how much am I going to
Speaker 4: lose market share if I raise prices. But additionally, there
Speaker 4: is an interactive effect that when you are when this
Speaker 4: is why I made so much about the labor market
Speaker 4: initially with Tracy. It's it's a question of not so
Speaker 4: much the demand side as your input side. Right, are
Speaker 4: we in a tight labor market? Are we in a
Speaker 4: tight supplies market for commodities? Do these things matter? And
Speaker 4: our expectations about inflation in the economy more broadly moving
Speaker 4: towards the high side, and so again, just to come
Speaker 4: back your bottom line point is right, it's interactive, and
Speaker 4: that's why when you talk about inflation, you want to
Speaker 4: have all these components.
Speaker 3: I have to say I spent thirty five dollars on
Speaker 3: three bags of chips and two dips on the weekend
Speaker 3: for the Super Bowl. To be fair, I got them
Speaker 3: from a gas station, so there was a markup, but
Speaker 3: it was so worth it, so good. I don't eat
Speaker 3: chips that often, but when I do.
Speaker 4: Yeah, yeah, yeah, no, we had, we had, we had
Speaker 4: Freedom scoops and uh they're so good. Yeah, I think
Speaker 4: super Bowl.
Speaker 3: Now we're just talking about stack food, which is fine. Okay,
Speaker 3: what about tariff's tariff inflation?
Speaker 4: That's yeah, that's true.
Speaker 3: Just from a math perspective, what you often hear is that, well,
Speaker 3: you know, you might have a price impact from tariffs,
Speaker 3: but it doesn't matter that much because it's a one
Speaker 3: off and then you know, the next year the base
Speaker 3: effect kind of goes away. But does it matter if
Speaker 3: we get four percent at the end of the year
Speaker 3: or would you expect this to be a sort of
Speaker 3: the start of a durable price increase cycle.
Speaker 4: Well, I think yes, it is a start of a durable,
Speaker 4: as you put, a price increased cycle. And again, it's
Speaker 4: partly to do with the general conditions, and it's partly
Speaker 4: to do with the nature of the tariffs and the shock.
Speaker 4: So I think in a world where the labor market
Speaker 4: is not high unemployment, lots of slack, whatever anybody says,
Speaker 4: in a world where they are going to be putting
Speaker 4: fiscal fuel on the fire, in a world where, whatever
Speaker 4: you think about the transition from J. Powell to nominated
Speaker 4: Kevin Moorsh and the attacks on the FED, you cannot
Speaker 4: believe that the Fed's credibility of commitment to low inflation
Speaker 4: is as strong as it was a few years ago.
Speaker 4: All of those things suggests that any given shock, any
Speaker 4: given price shock, will to me translate into higher and
Speaker 4: more persistent inflation than it would, say a few years
Speaker 4: ago in a different circumstance. The second point is, and
Speaker 4: there's this, I forget what it's now called, but there
Speaker 4: used to be the Million Prices project at Harford Business
Speaker 4: School that's been looking at the price pass through, and
Speaker 4: there've been others looking at it, and people at Peterson
Speaker 4: as well. The second thing is the migration shock, if
Speaker 4: it turns out they do drive out a million people,
Speaker 4: million workers, is going to have much bigger first round
Speaker 4: effects than the TARF shock. The TARRAF shock. I think
Speaker 4: reasonable listmates are they've already had one point year's worth
Speaker 4: of CPI effects roughly over the past year. I think
Speaker 4: if they really are pushing out the migrants, and we
Speaker 4: can go to why I keep putting it conditionally and
Speaker 4: saying I'm not sure they have yet, but if they
Speaker 4: really are, we're talking about something potentially four to six
Speaker 4: times as large. But then the final thing I want
Speaker 4: to emphasize, Tracy, is on the when you say about
Speaker 4: the durable size of inflation, it is a question of
Speaker 4: what people expect the monetary policy response to be. And
Speaker 4: so we have a very important lesson from the eighties,
Speaker 4: from forty years ago. Last time we had high inflation
Speaker 4: in the US, even under Paul Volker, they disinflated in
Speaker 4: nineteen eighty two after an oil shock, but they didn't
Speaker 4: take it all the way down. They stopped when it
Speaker 4: got to around four percent. And so then when the
Speaker 4: inflation came back in eighty five, it turned out to
Speaker 4: be more persistent and higher, and Volker and the FED
Speaker 4: had to do more to race rates. Most people would argue,
Speaker 4: I mean, clearly they did race rates more, but most
Speaker 4: of us would argue part of the reason for that
Speaker 4: was because it was the second round of inflation and
Speaker 4: they hadn't fully stamped it out the first time. And
Speaker 4: I think you can make the case again this is speculative,
Speaker 4: but I think there's a historical parallel here. If we
Speaker 4: get this kind of inflation shock now coming, it's five
Speaker 4: years or four years instead of three years, but four
Speaker 4: years after the last inflation, having again the inflation not
Speaker 4: come all the way down to two percent target. In
Speaker 4: this case, I think the upside risk is higher.
Speaker 1: So this is interesting. You know when we were Rejection
Speaker 1: Hall of the last time we saw you, or that
Speaker 1: we did an episode with I mean Nachamara and talking
Speaker 1: about this idea of like the value of central credibility
Speaker 1: and there's like kind of a fixed stock of it,
Speaker 1: or the stock of credibility can deplete over time and
Speaker 1: it might take allow to refill the reservoir, so to speak.
Speaker 1: So what you're saying is sort of dovetails with that
Speaker 1: we just said that if you don't sort of in
Speaker 1: fairly short order smash it back to two percent, that
Speaker 1: there is this sort of like persistent cost that you
Speaker 1: might pay the next time there's a shock.
Speaker 4: That's that's generally what we see in the data and
Speaker 4: Professor Ackamar may have a different take on this, but
Speaker 4: but to my understanding of the research, including by a
Speaker 4: colleague of mine at Peterson, Joseph Kaniel, on some of
Speaker 4: these issues is if you fail to stomp it down,
Speaker 4: the anchoring as the phrases of inflation expectations is lower.
Speaker 4: And so a lot of people focus on the U
Speaker 4: Michigan Survey of inflation expectations or the New York Fed
Speaker 4: survey we had god I can her name, I apologize
Speaker 4: from you Michigan who runs that survey speak at Peterson's
Speaker 4: to last Friday. There's a video if you want to hear,
Speaker 4: and she can point to the fact that the long
Speaker 4: term inflation expectations haven't moved that much. My view is
Speaker 4: that only tells you so much because it's people have
Speaker 4: rational inattention. They don't spend their lives thinking about inflation
Speaker 4: unless they have to spend their lives thinking about inflation.
Speaker 4: And so the question is more when inflation comes out,
Speaker 4: do they react? And so besides the work of my
Speaker 4: colleague Joseph Gannon, there's a professor at Berkeley urigorod Nikschenko
Speaker 4: and his co authors who did a really interesting paper
Speaker 4: last summer, I think ahead of Jackson Hall at a
Speaker 4: different FED conference, showing that there was this persistently higher
Speaker 4: upside risk on inflation expectations.
Speaker 3: Since we're on monetary policy. You touched on this earlier,
Speaker 3: but one of the very interesting things in your argument is,
Speaker 3: you know, you contend that the transmission mechanism isn't quite
Speaker 3: what it used to be, possibly because of the expansion
Speaker 3: of private debt, it's less linked to bank right bank
Speaker 3: lending rates. Talk more about that, because if I see
Speaker 3: an inflationary environment and you say the durability of that
Speaker 3: inflation depends on what the central bank does in response,
Speaker 3: even if they raise rates, is that going to be
Speaker 3: enough to stamp it out? Because as we've seen, and
Speaker 3: we've asked a number of central bankers this question at
Speaker 3: this point, but financial conditions are still really really exactly exactly.
Speaker 4: No. I think you're absolutely right, And I know you
Speaker 4: recently did an episode with former FED Vice chair Rich Clarina,
Speaker 4: and when he was vice chair, he tried to promote
Speaker 4: this idea of I think I don't know if they
Speaker 4: actually called it. This was essentially monetary conditions index. I
Speaker 4: think it had fourteen pieces to it, but basically trying
Speaker 4: to get at what you just said conceptually that if
Speaker 4: you in the textbook, the central bank has three channels
Speaker 4: through which it tightens policy. One is it directly affects
Speaker 4: the amount of deposits and bank lending. The second is
Speaker 4: there are repercussions through the Yeo curve that if you
Speaker 4: move the short end of the Yeld curve, it decreases
Speaker 4: the further out the yeocurve and duration you go, but
Speaker 4: there is some repercussions along the curve. And then the
Speaker 4: third is this expectations channel. Does do people believe ultimately
Speaker 4: that the Fed will get things under control? But at
Speaker 4: the same time that's the textbook the working central bankers,
Speaker 4: and this overlap somewhat with the people who wrote the textbooks,
Speaker 4: although I'm not one of them, but the working central bankers,
Speaker 4: going back again, Voke Paul Volker, are very concerned about
Speaker 4: monetary transmission in the plumbing, meaning which parts of the
Speaker 4: financial system get affected how much by moves and interest
Speaker 4: rates or quantitative tightening or regulatory rules, and so. Vulgar
Speaker 4: famously was very upset when money market mutual funds came
Speaker 4: into play because the idea was those wouldn't be as
Speaker 4: affected by FED interest rate moves. I think a much
Speaker 4: more serious issue right now is the existence of private credit,
Speaker 4: where not only it exists, but it is growing and
Speaker 4: it's growing, but that we have very little supervisory or
Speaker 4: regulatory transparency into it, so the central bank or anybody
Speaker 4: doesn't really know how much is out there, where it's going,
Speaker 4: what terms, how shaky some of it might be. But anyway,
Speaker 4: so the point is, think about it again with the
Speaker 4: respect of the housing market. So we had a very
Speaker 4: strong FED tightening a couple of years ago, and normally
Speaker 4: up until a couple of years ago, one of the
Speaker 4: first places you would see that would be that there
Speaker 4: would be layoffs in single family and general residential construction,
Speaker 4: because these tend to be small firms that are very
Speaker 4: credit dependent, very both demand their customers are dependent on
Speaker 4: mortgages and supply. They need credit to do what they do.
Speaker 4: And usually the first, one of the very first effects
Speaker 4: on the real economy of a FED tightening would be
Speaker 4: contraction in that sector. We didn't see it. We saw
Speaker 4: very large FED tightening and essentially no unemployment rise in
Speaker 4: housing and not very much change in housing starts. And
Speaker 4: that's been replicated across a number of sectors what used
Speaker 4: to be called interest rate sensitive sectors in the economy.
Speaker 4: And so if you go back to where I started
Speaker 4: and you say there are these multiple channels, right, so
Speaker 4: two of the three channels arguably are weaker than they
Speaker 4: used to be. So the impact on the banking system
Speaker 4: is less representative of the impact on credit availability in
Speaker 4: the economy. The impact on expectations or reasons we were
Speaker 4: just talking about may not be as rapid or as strong. Again,
Speaker 4: the fact can get it back, going to how Joe
Speaker 4: summarized Emmy's work, I mean, you can get it back,
Speaker 4: but you probably have to do something to get it back.
Speaker 4: So you're left with this middle channel, which is the
Speaker 4: yield curve. And even in normal times or less chaotic times,
Speaker 4: there never was a lock step between what happened at
Speaker 4: the short end of the curve and what happens at
Speaker 4: the long end of the curve. And Dallas President Laurie
Speaker 4: Logan gave a speech a few weeks ago, I think
Speaker 4: on some of the aspects of this where she's an expert,
Speaker 4: But the bottom line, I keep using that phrase, sorry,
Speaker 4: but the bottom line is you again, directionally, if the
Speaker 4: fed tightens. All three of these channels will have some
Speaker 4: tightening effect, but there's good reason to think that none
Speaker 4: of these effects will be as powerful bang for your
Speaker 4: rate hike as it used to be.
Speaker 1: Let's talk about AI spend. The numbers were already gonna
Speaker 1: be eyewatering for twenty twenty six, and now they're going
Speaker 1: to be more eyewatering than that. And we got numbers
Speaker 1: from Alphabet and Amazon. They were just much higher than right.
Speaker 1: I mean, we're talking like, you know this moves GDP
Speaker 1: GDP altering numbers, like talk to us about how you
Speaker 1: see the ripple out effects from that spending.
Speaker 4: So it's fascinating and I actually listen to you all
Speaker 4: for some of your insights when you talk to people
Speaker 4: more in that space than I am as a macro
Speaker 4: economist thinking about it. So the first point starting game
Speaker 4: with the monetary transmission aspect is so much of this
Speaker 4: is self finance or easily financed. So so Google's now
Speaker 4: is showing I guess this one hundred year pond. Yeah,
Speaker 4: I hope, so in the sense of I hope everybody's
Speaker 4: still around in one hundred years and gets paid back,
Speaker 4: and that would be nice.
Speaker 3: I'm pretty sure.
Speaker 1: Yeah, well, you know, it's it's a British bond, it's
Speaker 1: a sterling base because of those Yeah, the LDIA the
Speaker 1: longer yeah yeah, yeah, they're fortunate.
Speaker 3: Hold that mean is like most of it has been
Speaker 3: cash of course.
Speaker 4: Yeah. So my point was even the parts that are
Speaker 4: not cash financed are being very easily financed. So that's
Speaker 4: the first point there. There is no credit crowding out
Speaker 4: in the rest of the economy because of this, there
Speaker 4: is no credit constraint on them doing this. That has
Speaker 4: an interesting implication, which I've mentioned at various times in
Speaker 4: recent months, that makes it all the more striking how
Speaker 4: little investment we're getting from the rest of the economy.
Speaker 4: I mean, so if you think about sort of the
Speaker 4: litany of reasons that a Trump administration official ex ante
Speaker 4: could give for why there should be investment boom beyond AI. Right,
Speaker 4: We've made permanent the tax cuts that are favorable to
Speaker 4: corporate investment. We are deregulating, we are doing things to
Speaker 4: make the labor market more friendly to employers. We've got
Speaker 4: cheaper energy prices until AI pushes up some of that,
Speaker 4: but broadly speaking, cheaper domestic energy supply, and we got
Speaker 4: a FED that until recently looked like it was cutting rates.
Speaker 4: So beyond AI, there should have been an investment boom.
Speaker 4: And my view is that a lot of the Trump
Speaker 4: administration's creation of massive uncertainty, including through the terraffs and
Speaker 4: the anti migration policy, but in other fields as well,
Speaker 4: is why you don't have an investment boom outside of AI.
Speaker 4: And it's not because of tight credit, and people should
Speaker 4: be taking that more seriously. Again, that doesn't change what
Speaker 4: you just said, Joe. It's eyewatering what AI does, So
Speaker 4: that doesn't mean the total GDP has to contract, But
Speaker 4: I think people should notice the fact that we haven't
Speaker 4: had an investment boom. My colleague Karen Dinah and Peterson
Speaker 4: presented on some of this in her forecast in October.
Speaker 4: We haven't had the investment boom outside of AI. Then
Speaker 4: the big ticket. There are a number of things we
Speaker 4: can think about, but the big ticket issue, which some
Speaker 4: FED officials and Trump officials have been talking about, is
Speaker 4: productivity growth. How much does this generate productivity growth? How soon?
Speaker 4: How job displacing is it, What's the effect on inflation?
Speaker 4: So let me give you my take. My view is
Speaker 4: we're in the process of the baton sort of being
Speaker 4: handed in the in the imagine a summer Olympics, a
Speaker 4: relay race and the one runner hands the baton. I
Speaker 4: think a lot of the labor market changes that took
Speaker 4: place during and after COVID, nobody knew they would be
Speaker 4: x anti but ex posts they turned out to be
Speaker 4: pro productivity growth. There was a lot of good reallocation
Speaker 4: of workers, and I think that's running out because that
Speaker 4: was a one off thing, and so now the AI
Speaker 4: is the main is increasingly the main source of the
Speaker 4: productivity growth growth. But I also think, going back to
Speaker 4: something you were saying earlier about the tariffs, when you
Speaker 4: have a supply shock, positive or negative, it's indeterminate how
Speaker 4: much of that shows up in prices versus real things.
Speaker 4: So like we've had this discussion of tariffs. Could it
Speaker 4: be a one off? Could it be recessionary from the
Speaker 4: tariffs and therefore not price inflationary. We can go into why.
Speaker 4: I don't think that's right, But you have to do
Speaker 4: the same process thinking about productivity growth. It's a positive
Speaker 4: supply shock, but how much of it shows up as
Speaker 4: real income gains and how much of it shows up
Speaker 4: as disinflation has to be determined. And my reading of
Speaker 4: the history is when you get a leap forward in
Speaker 4: a general purpose technology, you get the real income grains
Speaker 4: up front, and you get the disinflationary part later, because
Speaker 4: I mean not all the real income gains, but it's
Speaker 4: primarily real income gains initially. Because what happens again, going
Speaker 4: back to stuff we were talking about, it takes businesses
Speaker 4: a while to figure out how do I use this technology,
Speaker 4: how do I change my production process, how do I
Speaker 4: change my hiring and training process? What are the new
Speaker 4: products I can offer? But there's cool products that people
Speaker 4: want and use right away. So if you think about
Speaker 4: the Internet in the nineties when Solo famously said the
Speaker 4: computers are everywhere but in the statistics, well, you know,
Speaker 4: a bunch of us were starting to use computers getting
Speaker 4: productivity gains, but it took several years before Walmart and
Speaker 4: ups and science firms figured out how to make use
Speaker 4: of this and to change their processes. So sorry to
Speaker 4: be so long winded, but I think this is overlaps
Speaker 4: with a lot of stuff that you hear a lot
Speaker 4: to talk about with some of you, some of your
Speaker 4: other guests. These are non trivial business decisions, non trivial
Speaker 4: investment decisions. So if I'm sitting at the FED, yes,
Speaker 4: in theory, I don't know whether terriffs are going to
Speaker 4: be mostly recessionary or mostly inflationary. For the reasons we've discussed,
Speaker 4: I think they're going to be mostly inflationary starting now,
Speaker 4: unless recessionary. If you're talking about AI. I think if
Speaker 4: I were a central banker again and I had to
Speaker 4: make a call, or I am making a forecast call now,
Speaker 4: I think you're going to see the real income effects
Speaker 4: in the next couple of years predominantly and not so
Speaker 4: much the disinflationary effects. Then they're coming. They're coming, but
Speaker 4: they're not there yet.
Speaker 3: Can we go back to the transmission mechanism and the
Speaker 3: re old curve for a second, because one of the
Speaker 3: reasons we wanted to talk to you, it's not just
Speaker 3: because of the report, but also because you're a former
Speaker 3: central banker, used to be with the Bank of England.
Speaker 3: The Monetary Policy Committee over there. There is talk at
Speaker 3: the moment of a new Treasury accord and Warsh has
Speaker 3: kind of signaled some interest in this, So that would
Speaker 3: basically be tying the Fed's balance sheet to Treasury finance
Speaker 3: and in some way coordinating presumably to you know, lower
Speaker 3: short term rates and allow the Treasury to issue more
Speaker 3: bills and thereby lower the deficit.
Speaker 2: Is that a good idea?
Speaker 4: No, okay, explain Yeah. So during the euro crisis, when
Speaker 4: I was at Bank of England, I gave a speech
Speaker 4: that central bank independence is about the power to say no.
Speaker 4: But you didn't have to always say no, right, so
Speaker 4: you don't want to be I made the analogy a
Speaker 4: teenager or a toddler, but I think I used teenager.
Speaker 4: You know, you don't assert your independence by no matter
Speaker 4: what your parents says to you disagreeing. So the idea
Speaker 4: that there should be some coordination between Treasury and FED,
Speaker 4: or between the central Bank and the finance ministry is
Speaker 4: not unreasonable. But the idea that there should be an
Speaker 4: ongoing accord, as opposed to say, an emergency response during
Speaker 4: the financial crisis during COVID, is what's scared. And it's
Speaker 4: scary because if you go back to the work on
Speaker 4: central bank independence, there's a huge amount of data analysis
Speaker 4: on this and historical records, and I was one of
Speaker 4: the many contributors to that literature. Turns out there are
Speaker 4: two things that predict whether a central bank is inflationary
Speaker 4: or not, And one is does the governor or the
Speaker 4: chair get fired and replaced a lot out of turn
Speaker 4: out of the normal sequence. And the other is does
Speaker 4: the central bank buy bonds pretty directly from the treasury.
Speaker 4: And there's whole list of all these other aspects of
Speaker 4: central bank independence about voting rules and transparency, and those
Speaker 4: don't have any predictive power. But those two things, do
Speaker 4: you do you directly by government bonds? And do you
Speaker 4: have a lot of turnover at the top leadership? Do
Speaker 4: predict higher inflation? And we saw this on the leadership
Speaker 4: side with air Doowan and Turkey and Mody in India
Speaker 4: in recent years where they forced rapid turnover.
Speaker 3: How many central bank heads did Turkey actually go through?
Speaker 4: Doesign It was four or five? I think in India's
Speaker 4: case it was like three, and again in very short
Speaker 4: spans of time. So you know, the idea that we
Speaker 4: have an orderly transition from Powell to warsh at the
Speaker 4: end of Pal's term is chair. I mean, that's not
Speaker 4: what we're talking about, but I think it is important
Speaker 4: to contextualize the things that Treasury Secretary of Bessent and
Speaker 4: the administration are talking about visa via FED are things
Speaker 4: that historically, over time in other countries have produced high inflation.
Speaker 4: So I mean, I can make it more complicated than that,
Speaker 4: but just full stop. So then there comes the question
Speaker 4: of how much can you fix a fiscal problem through
Speaker 4: short term debt management and financial engineering, and the answer
Speaker 4: as you can so generally. And this goes to stuff
Speaker 4: that both worship be Sent complained about in public going
Speaker 4: into the elections in twenty twenty four, which was they
Speaker 4: complained that the Yellen Treasury.
Speaker 3: Was finance Treasury issuance. Yeah, and then they still kept
Speaker 3: issuing lots of bills.
Speaker 4: You did the same thing, yeah, And I beyond pointing
Speaker 4: out the hypocrisy, which I guess is par for the course,
Speaker 4: I think they had more validity with what they were
Speaker 4: saying before than what they're saying now. And again it's
Speaker 4: not a good sign about the fiscal sustainability of the US.
Speaker 4: If what you're trying to do is, you know, get
Speaker 4: the loan with a free toaster to bridge over your
Speaker 4: monthly credit card bill, there is risk to doing more
Speaker 4: short term issuance. So I mean it's worth thinking back
Speaker 4: a few years ago, right when rates were incredibly low,
Speaker 4: and the Treasury started considering issuing one hundred year bonds
Speaker 4: or very long term bonds, or at least increasing the
Speaker 4: issuance of thirty years versus short bills to fund infrastructure,
Speaker 4: to fund long term investment, and there was pushback from
Speaker 4: something called the Treasury bar Advisory Committee t back exactly
Speaker 4: and the Treasury Secretary at the time, I think was
Speaker 4: Jack Blue said, Okay, we're not going to do it.
Speaker 4: And the pushback was twofold. First, the general principle that
Speaker 4: the US government should be issuing across the range of
Speaker 4: maturities on a very deliberate basis to continue to maintain
Speaker 4: the US Treasury's international and national role as the most liquid,
Speaker 4: most deep, most stable asset in the world, and that
Speaker 4: if you start aiming it for short term advantage, you
Speaker 4: lose that, and that will show up in higher borrowing
Speaker 4: costs because then the number of people park in treasuries
Speaker 4: because it's the domestic inform because it's the safe, stable asset,
Speaker 4: goes down because it's less safe and less stable. But
Speaker 4: then there was also the rationale that you don't know
Speaker 4: what's going to happen. I mean, look at the fluctuations
Speaker 4: we had from surplus at the end of the nineties
Speaker 4: to rising interest rates in the early two thousands, to
Speaker 4: incredibly low interest rates for a decade after the financial crisis,
Speaker 4: to now rising. You know this is not smart if
Speaker 4: you can borrow long to borrow short.
Speaker 3: We are recording this on Jobs Day, of course, the
Speaker 3: New Jobs Day, which is Wednesday, Yeah, February.
Speaker 4: My mind.
Speaker 2: I don't like it.
Speaker 1: I don't like it.
Speaker 3: It feels weird. But we just got some truth social
Speaker 3: posts out of saying these are great job numbers, much
Speaker 3: better than expected. America should therefore be paying the lowest
Speaker 3: interest r.
Speaker 1: Yeah, and I see the views rates is like a reward, Yeah,
Speaker 1: reward for good work. We could go and I have
Speaker 1: so many questions gone long time, but I wanted to
Speaker 1: sort of get your take on, especially like around Davos,
Speaker 1: some of the tensions around Greenland and Europe and all that.
Speaker 1: And it occurs to me like one of the themes
Speaker 1: of this conversation, particularly as it relates to tariffs and
Speaker 1: also immigration, is that people don't make up their minds
Speaker 1: at once, right. Corporate leaders don't just say okay, tariff's
Speaker 1: are up.
Speaker 4: Because these are big decisions and they're uncertain. You don't
Speaker 4: know if Trump's going to give it away or yeah,
Speaker 4: that's right.
Speaker 1: There's a huge lag and then once you make the decision,
Speaker 1: that's like your big mistakes. And I've been thinking about this,
Speaker 1: like in the context of Europe, because obviously Europe still
Speaker 1: has this very tight economic and security relationship with the
Speaker 1: United States, and the European leaders kind of have to
Speaker 1: make a bet, which is is Trump the new normal
Speaker 1: here in the United States or will the next president
Speaker 1: I have adopt a posture, an economic and security posture
Speaker 1: that's sort of like the old president. So no one
Speaker 1: really knows for sure, but this is like a high
Speaker 1: consequence choice to make, because if the next president is
Speaker 1: going to be sort of a you know, more normy
Speaker 1: on this stuff, then maybe you know it. You just
Speaker 1: sort of grinn and Barrett for the next few years
Speaker 1: and then or at some point, if the relationship is
Speaker 1: going to be dramatically changed, Europe really needs to rethink
Speaker 1: like how much it spends on military and maybe rethink
Speaker 1: about do we want a closer orientation with China whatever
Speaker 1: it is. And this big decision to make, So I'm curious,
Speaker 1: like your take. Like European leaders right now, they haven't
Speaker 1: pulled the ripcord yet on the United States. There's a
Speaker 1: lot of frustration, but they haven't. We still have this
Speaker 1: type relationship.
Speaker 2: Is it.
Speaker 1: Are we getting closer to where European leaders might think, Look,
Speaker 1: this is never going to go back maybe sort of
Speaker 1: the Carness pachures like, we're never going to go back
Speaker 1: to the old relationship with the United States. We're in
Speaker 1: a new world.
Speaker 4: It is the great big picture question. Joe and I
Speaker 4: have been writing on this and talking with European leaders
Speaker 4: on this. I published a piece in Foreign Affairs in
Speaker 4: September called the New Economic Geography, in which I talked
Speaker 4: about if I argued that this is a fundamental, lasting
Speaker 4: change because the US is ceasing to be the insurance
Speaker 4: provider in both security and economic terms that it was,
Speaker 4: and that I think it's very fair to say unrealistic
Speaker 4: whatever happens in terms of successor to the current administration.
Speaker 4: Even if the success administration, whether it's another Republican, a Democrat,
Speaker 4: some kind of new party centrist, whatever it is, is
Speaker 4: not going to immediately credibly reverse everything that's been said.
Speaker 4: And so it's analogous the parallel you were giving. I
Speaker 4: think is right, and there's a fundamental economic theory by
Speaker 4: Dixon and Pindick called about investment that investment under uncertainty
Speaker 4: you delay because in a sense it's irreversible once once,
Speaker 4: once something happens and you commit down a certain path.
Speaker 4: It's not literally irreversible, but it locks you in. It's
Speaker 4: not just sunk cost fallacy. It's rational. So going from
Speaker 4: the abstract to the real. We're coming up on the
Speaker 4: new Munich Security Conference, annual Munich Security Conference, and in
Speaker 4: March twenty twenty four, Vice president of j d Vance
Speaker 4: gave a speech there in the preceding week in Paris
Speaker 4: in which he basically twenty fty five. Sorry, right, we're
Speaker 4: in twenty twenty six. You're absolutely right March twenty twenty five,
Speaker 4: in which he basically said, you know, NATO Ukraine, but
Speaker 4: NATO cannot count on us the way they used to.
Speaker 4: And he gave arguments for why that was good for
Speaker 4: NATO and good for the US and all that, and
Speaker 4: we can debate that, but it was a very shocking,
Speaker 4: big shift. And then, as you mentioned, Prime Minister Carney,
Speaker 4: now the most famous ex central banker in the world,
Speaker 4: gave a speech in Davos a few weeks ago which
Speaker 4: was very much about the trying to say for Canada,
Speaker 4: it was a general loss of this framework that we've
Speaker 4: all functioned in. And interestingly, almost exactly a year ago,
Speaker 4: I was in Ottawa, brought in by the Canadian government
Speaker 4: to brief them on the likely implications of the Trump
Speaker 4: It was right before the election where Carney moved from
Speaker 4: appointed to ongoing Prime Minister. But anyway, at that time,
Speaker 4: I you know, I was dealing with absolutely shocked Canadians
Speaker 4: and like you said, right, so the first time during
Speaker 4: Trump's one, people said, discounting the adults are in the room,
Speaker 4: maybe it'll change. Under Biden, things did change, but on
Speaker 4: tariffs and a lot of things that had been a
Speaker 4: one way ratchet, they didn't go back. I stuff absolutely
Speaker 4: and it was unilateral and I think excited. But anyway,
Speaker 4: and the Biden team did a lot of bad things,
Speaker 4: continued a lot of bad things, and did a lot
Speaker 4: of bad things. They weren't as hostile on the security front,
Speaker 4: they were Transatlantis is there, but on the economic front
Speaker 4: they didn't really roll back, and in some ways they
Speaker 4: made worse some of what Trump won did, and so
Speaker 4: by the time you get to a year ago, which
Speaker 4: is even before Advance's Munich speech, the Canadians are saying themselves,
Speaker 4: oh my god, we did a perfect example. We just
Speaker 4: realized we have no Internet pipes that don't run through
Speaker 4: the US. We either have US satellites or we have
Speaker 4: US cables. We literally have no access to the Internet
Speaker 4: without the US permission. And that encapsulates what's going on
Speaker 4: right that you took for granted that if you were
Speaker 4: not Russia or Iran, the US would not weaponize things
Speaker 4: against you, and that's no longer a feasible thing. So,
Speaker 4: going specifically to Europe, this is the biggest challenge to
Speaker 4: Europe since the war. This is a situation where a
Speaker 4: lot of European officials, very much in line with your characterization, Joe,
Speaker 4: a year ago, we're still in denial, or we're still
Speaker 4: having a lot of conversations with people like me about
Speaker 4: is this going to last? Can we wait it out?
Speaker 4: Is this going to turn around? At this point, nobody
Speaker 4: believes it's going to turn around, or at least nobody
Speaker 4: believes it is going to turn around sufficiently and last
Speaker 4: in a way that the Europeans can count on whoever's next,
Speaker 4: the same way they took for granted. Now the Trump
Speaker 4: people would say that's good, they're not taking us for granted,
Speaker 4: but from an economic point of view that it was
Speaker 4: a good thing. The large parts of the world could
Speaker 4: take the US enforcing the rules of the game, providing
Speaker 4: some basic security of navigating the seas, and property rights
Speaker 4: and trade relations and access in and out of treasuries,
Speaker 4: access in and out of US markets. We took all
Speaker 4: that for granted. Was a huge boon to business. It
Speaker 4: was a huge boon to investment. It was a huge
Speaker 4: boon to two way train. So it is a very
Speaker 4: big deal. And so a number of people in Europe
Speaker 4: are involved in various projects trying to come up with
Speaker 4: what's next. And two colleagues of mine at Peterson are
Speaker 4: very active. Olivier Blanchard, the famous French economist who's now
Speaker 4: back in France, is leading an effort on what future
Speaker 4: for Europe. My colleague Jacob kirka Gard, who's based in Brussels,
Speaker 4: does a lot of work on how much common European
Speaker 4: funding is going into the military and how sustainable is
Speaker 4: that the big thing. One of the things Jacob points
Speaker 4: out is you do have a split in Europe, not
Speaker 4: so much about how much they distrust Trump or distrust
Speaker 4: the US, lost faith in the US, but over how
Speaker 4: imminent they see the military threat from Saint Putin. So
Speaker 4: the amount of spending that these countries are doing on
Speaker 4: military is a declining function of how close they are
Speaker 4: to Russian I mean, you can literally do the scatterplot.
Speaker 4: Poland and the Baltics, and Swedes and the Norwegians, Norways
Speaker 4: not part of Europe, it's part of anyway are spending
Speaker 4: a lot more. Germany's in the middle, Spain and Portugal
Speaker 4: are not spending. But you're back in a world of
Speaker 4: that kind of geo in geopolitics really mattering. The final
Speaker 4: thing I would say in this, because we're coming up
Speaker 4: in the Munich Security Conference, is ahead of this. There
Speaker 4: was an announcement of a new idea backed by Meritz
Speaker 4: in Germany and Macron and France of sort of a
Speaker 4: leadership committee in Europe moving ahead. So it would be Germany, France, Poland, Spain,
Speaker 4: Italy basically the big countries plus Netherlands, and that was
Speaker 4: a no go for decades in Europe that things had
Speaker 4: to be done by involving everybody. Things had to be
Speaker 4: done by qualified majority or unanimity. And this is a statement.
Speaker 4: Problems are moving too fast. We have to stand up.
Speaker 4: And so my view, which is ultimately more optimistic than
Speaker 4: a lot of Europeans, is that what Europe chooses to do,
Speaker 4: they have a lot of agency. They will have a
Speaker 4: lot to determine the outcome of how bad things go
Speaker 4: for them and for the rest of the world, as
Speaker 4: Trump and She end up pursuing similar bad economic policies.
Speaker 3: I mean, it is very telling about our current moment
Speaker 3: in time that we're talking about the Munich Security Conference
Speaker 3: as like a macroecademic at all.
Speaker 4: Right, right, absolutely right.
Speaker 3: It used to be just for foreign policy monks exactly.
Speaker 4: Now it's for econ wnks yah.
Speaker 3: That's right. Also, why are they holding it on Valentine's
Speaker 3: Day weekend?
Speaker 4: No, they do all these things. It's like the ECV
Speaker 4: CenTra conference is always on July fourth weekend. It's just
Speaker 4: they ostentatiously don't watch the Hallmark channel. It's just no good.
Speaker 1: Adam Posen, thank you, that was fantastic. That was a
Speaker 1: great conversation. We could ask you so much more, but
Speaker 1: really appreciate you coming on odd Lots again.
Speaker 4: Really glad to be with you both in odd lots.
Speaker 4: Keep up the good work and thank you for having
Speaker 4: me all right, take care.
Speaker 2: Thanks so much, Adam Tracy.
Speaker 1: I thought that was a great conversation. Your point there
Speaker 1: at the end of tailed with something else he said
Speaker 1: about the sort of the link now between security and macro.
Speaker 1: I was thinking about that observation. We should definitely do
Speaker 1: more on this. You know, Canada not having access to
Speaker 1: the Internet unless it's through the US. So how do
Speaker 1: you solve it? Well, like you spend, you build new pipes,
Speaker 1: you build new under C cables, you build more satellites.
Speaker 1: But that's spending, right, that's inflation. Yeah, and so you
Speaker 1: know again it's the same thing with we talked about
Speaker 1: it with Jeff Curry. E're spending trillions on defense. These
Speaker 1: concerns about whether the degree to which countries can rely
Speaker 1: on the US anymore. The way you address to these
Speaker 1: concern there's a lot more spending.
Speaker 3: Absolutely, to me, we are saying some inflationary science, right,
Speaker 3: like we talked about them at the beginning, and you
Speaker 3: can't really ignore them. I guess the big question is
Speaker 3: how much of this is like a temporary like blit
Speaker 3: in terms of building back inventories. Yeah, you know, maybe
Speaker 3: people ran them down all last year because they didn't
Speaker 3: know exactly what was going to happen with tariffs. But
Speaker 3: now now they really have to stalk back up. And
Speaker 3: so you're getting this like one time inflationary hike or
Speaker 3: is this the start of something that's kind of I
Speaker 3: know we keep using the word durable.
Speaker 1: Oh, but it is the right question, is the right Yeah?
Speaker 4: Totally.
Speaker 3: And like if you look at something like trucking rates,
Speaker 3: and again, like we're interested in trucking rates, we did
Speaker 3: a lot of episodes on it, but also they're just
Speaker 3: a good macroeconomic indicator. We've seen some glimmers of a
Speaker 3: record there, so freight rates are starting to go up,
Speaker 3: but everyone's kind of saying, well, we need to see
Speaker 3: like six weeks of sustained improvement. So I think that's
Speaker 3: kind of like the question right now, February eleventh, do
Speaker 3: we get more sustained inflationary indicators over the next month
Speaker 3: or two?
Speaker 1: Absolutely? And you know, again, you know it's interesting even
Speaker 1: if we had had this conversation, say a month ago
Speaker 1: something like that, when you know, it looked like maybe
Speaker 1: there was more, you know, the story of job market
Speaker 1: softening was less unambiguous or something like that. When you
Speaker 1: think about the new fed shair, it's like, okay, do
Speaker 1: we need rate cuts right away? It's like twenty five
Speaker 1: basis points fifty baits a point. Maybe they could be
Speaker 1: a little lower. It's not the end of the world
Speaker 1: if there is a reacceleration, if we actually are seeing
Speaker 1: gathering steam again, and the incoming fedshair still has this
Speaker 1: impulse that like you have to like cut rates, you
Speaker 1: have to establish I mean Trump joked, but not really
Speaker 1: a joke. He's like, oh, i'd sue if Kevin worsh
Speaker 1: doesn't cut raids. If you have the sort of rate
Speaker 1: cut into a period of we're actually sitting re acceleration,
Speaker 1: that's like a very different story and put more fuel
Speaker 1: on the fire. So a lot of sort of interesting
Speaker 1: risks out there.
Speaker 3: Yeah, people were kind of ambivalent about a rate cut
Speaker 3: even when the labor market was softening. Yeah, and then
Speaker 3: if you say you're going to cut rates when it's reaccelerating,
Speaker 3: well we could go on.
Speaker 2: Go on. Shall we leave it there, Let's leave it there.
Speaker 3: This has been another episode of the odd Lots podcast.
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Speaker 2: Thanks for listening