WEBVTT - Goldman's Jan Hatzius on the Lessons Learned in 2020 0:00:10.800 --> 0:00:14.840 Hello, and welcome to another episode of the Odd Lots Podcast. 0:00:14.920 --> 0:00:19.040 I'm Joe Wisn't Thal and I'm Tracy all Away. So 0:00:19.120 --> 0:00:22.560 I don't know about you, Tracy, but I would definitely 0:00:22.600 --> 0:00:26.159 say that when the crisis hit earlier this year and 0:00:26.239 --> 0:00:31.480 the stock market crashed and layoff surge, I definitely got 0:00:31.560 --> 0:00:36.000 pretty intense flashbacks to uh, the Great Recession, the financial 0:00:36.040 --> 0:00:39.159 crisis ten years ago. Yeah, I mean I think a 0:00:39.159 --> 0:00:42.640 lot of people did. I think there were The big 0:00:42.680 --> 0:00:45.480 debate that was going on at the time was whether 0:00:45.600 --> 0:00:49.000 or not two thousand eight or two thousand twenty was 0:00:49.040 --> 0:00:53.200 going to be like the defining financial crisis for a 0:00:53.240 --> 0:00:56.640 particular group of people. And um, I think that debate 0:00:56.680 --> 0:01:00.840 is still going on. But for sure, we've never seen 0:01:00.880 --> 0:01:05.120 anything quite like this. And in March we had of 0:01:05.200 --> 0:01:10.360 financial crisis alongside a real economy crisis with lots of 0:01:10.400 --> 0:01:13.080 businesses going into lockdown and things like that, and I 0:01:13.120 --> 0:01:15.720 think that was probably the major difference with what we 0:01:15.760 --> 0:01:20.920 saw in two right, And I think now in December 0:01:22.760 --> 0:01:25.920 and looking at the aftermath, we could say safely that 0:01:26.720 --> 0:01:29.520 so far, anyway, the aftermath of what we experienced in 0:01:29.560 --> 0:01:33.600 March and April has really been nothing like the financial crisis. 0:01:33.680 --> 0:01:36.800 Of course, we have stocks not just at all time highs, 0:01:36.840 --> 0:01:41.880 but um well above the pre crisis highs. Already, home prices, 0:01:42.520 --> 0:01:44.840 there's a housing boom happening, which probably not a lot 0:01:44.840 --> 0:01:47.400 of people would have guessed. You know, the unemployment rate, 0:01:47.480 --> 0:01:50.760 it's still quite elevated, but it's come down a lot 0:01:50.880 --> 0:01:54.400 faster than a lot of people anticipated. So that another 0:01:54.560 --> 0:01:58.240 sort of difference from two thousand, two thousand nine, where 0:01:58.520 --> 0:02:03.040 the recovery and unemployment was extremely slow. Yeah. I think 0:02:03.080 --> 0:02:05.040 that's right. And certainly if you talk to a lot 0:02:05.080 --> 0:02:07.520 of people in March, no one would have expected to 0:02:07.560 --> 0:02:10.160 see their maybound in risk assets that we've seen, and 0:02:10.280 --> 0:02:12.960 no one would have expected that everyone would be buying, 0:02:13.120 --> 0:02:15.440 you know, houses, or those people that can afford them 0:02:15.480 --> 0:02:19.800 would be buying the houses. Um. I do think the 0:02:19.880 --> 0:02:23.400 big difference this time around has probably been how quickly 0:02:24.000 --> 0:02:28.320 uh the Federal Reserve reacted, and also how quickly Washington 0:02:28.680 --> 0:02:31.560 rolled out that stimulus package, which kind of begs the 0:02:31.639 --> 0:02:35.520 question about what comes next, because as we're recording this, 0:02:36.400 --> 0:02:42.560 the next round of stimulus is stuck in political gridlock. Right. 0:02:42.639 --> 0:02:47.359 We are recording this h December Wednesday, December sixt or 0:02:47.440 --> 0:02:50.720 some headlines this morning that they might be UM close 0:02:50.800 --> 0:02:53.080 to a deal, so by the time people are listening, 0:02:53.080 --> 0:02:55.799 we'll probably know. Also there is an fo of C 0:02:56.080 --> 0:03:00.239 decision today, So again we're having this conversation prior air 0:03:00.800 --> 0:03:03.480 to that, you know, in the context of the sort 0:03:03.480 --> 0:03:07.359 of surprising recovery and how it's not like the GFC aftermath. 0:03:07.840 --> 0:03:11.320 I think one of the first clues or one of 0:03:11.360 --> 0:03:15.920 the first people who helped me really understand the difference 0:03:16.520 --> 0:03:19.440 was our guest. Today. We're gonna be speaking with h 0:03:19.639 --> 0:03:23.760 Jan Hats Here's the chief economist at Goldman Sachs or 0:03:23.880 --> 0:03:27.320 role he's occupied since and it was a note of 0:03:27.440 --> 0:03:31.400 his I think sometime in April making what at the 0:03:31.520 --> 0:03:36.360 time was I thought a pretty extraordinary call, which is 0:03:36.440 --> 0:03:39.560 that he thought, um, thanks to the Cares Act and 0:03:39.880 --> 0:03:44.360 fiscal stimulus, that household income would actually be up in 0:03:45.360 --> 0:03:46.840 which is not what you expect to see when the 0:03:46.920 --> 0:03:49.720 unemployment rate is spiking. And to me that was like 0:03:49.800 --> 0:03:52.320 one of the first times I saw someone like really 0:03:52.360 --> 0:03:55.280 crystallized this idea that this is going to be a 0:03:55.280 --> 0:03:57.640 different year that the two thousand and eight two thousand 0:03:57.680 --> 0:04:04.960 nine playbook cannot really apply to this kind of a crisis. Yeah, 0:04:05.000 --> 0:04:07.960 I agree, and a lot of people follow hatsis work, 0:04:08.000 --> 0:04:10.320 and I do think some of what he's written about 0:04:10.360 --> 0:04:14.120 recently kind of gets to the heart of the big 0:04:14.200 --> 0:04:18.280 question going into which is how is the consumer going 0:04:18.360 --> 0:04:22.160 to react? What's consumer confidence going to look like? Are 0:04:22.200 --> 0:04:25.640 we going to get this pent up demands scenario where 0:04:26.080 --> 0:04:28.640 once we get a vaccine and the lockdown gets rolled back, 0:04:28.680 --> 0:04:33.000 everyone goes out and spends and makes up for lost 0:04:33.040 --> 0:04:35.279 time by going to bars and restaurants and things like that. 0:04:35.680 --> 0:04:38.880 Or are we going to see sub sort of permanent 0:04:39.000 --> 0:04:44.480 damage to consumer confidence after the events of Absolutely well, 0:04:44.520 --> 0:04:47.520 I'm I can't think of a better guest to talk 0:04:47.560 --> 0:04:50.839 about to finish up this extraordinary year in the economy 0:04:50.839 --> 0:04:54.479 and look ahead to next year. Then, So, Jan, thank 0:04:54.480 --> 0:04:57.080 you very much for joining us. Thank you for having me. 0:04:57.240 --> 0:05:01.880 You guys are being too kind, So so tell us 0:05:01.880 --> 0:05:06.200 about the crash the crisis from your perspective. Hey, did 0:05:06.240 --> 0:05:10.200 you also get some of those two thousand eight, two 0:05:10.200 --> 0:05:16.640 thousand nine flashbacks and how quickly did you realize that 0:05:16.640 --> 0:05:20.839 that playbook would not apply to Well, we certainly got 0:05:20.880 --> 0:05:26.120 some flashbacks in in March. Given the sort of lack 0:05:26.240 --> 0:05:31.400 of normal functioning and a number of of financial markets, 0:05:31.520 --> 0:05:34.760 especially the bond markets. I mean, there was a there 0:05:34.760 --> 0:05:36.880 were a lot of comparisons, and there were a lot 0:05:36.880 --> 0:05:41.120 of people that thought, actually, if anything, this looks worse 0:05:41.240 --> 0:05:43.640 than than than two thousand and eight, and all that 0:05:43.760 --> 0:05:45.800 may have been in the in the heat of the moment. 0:05:45.800 --> 0:05:48.480 While you're going through it, of course, it always looks worse. 0:05:48.560 --> 0:05:53.640 But there were definitely some very very unsettled weeks when 0:05:53.640 --> 0:05:57.400 there was a lot of concern about about market functioning. 0:05:57.440 --> 0:06:00.080 I don't think there was ever the same kind of 0:06:00.160 --> 0:06:03.080 concern about the financial system, So I think that was 0:06:03.680 --> 0:06:06.479 a difference. Even even going through I think there was 0:06:06.520 --> 0:06:12.760 a generally greater degree of confidence that financial institutions were, 0:06:12.839 --> 0:06:16.520 you know, in much better shape, partly because of the 0:06:16.560 --> 0:06:20.480 regulatory response that we saw after the two thousand and 0:06:20.520 --> 0:06:23.880 eight crisis. But but in terms of market functioning, I 0:06:23.960 --> 0:06:26.520 think there were there were clearly some some flashbacks. I 0:06:26.560 --> 0:06:30.640 think it was also clear, you know, taking a somewhat 0:06:30.640 --> 0:06:33.159 broader view and not just looking at what happened in 0:06:33.160 --> 0:06:37.000 the bond markets, that the economic backdrop was quite different 0:06:37.240 --> 0:06:40.560 the down turn. It became clear, you know, very quickly 0:06:40.960 --> 0:06:45.360 in in early March was probably going to be significantly 0:06:45.400 --> 0:06:48.320 bigger than what you had in two thousand and eight, 0:06:48.760 --> 0:06:52.719 just in terms of the decline in GDP in the 0:06:52.839 --> 0:06:59.000 second quarter and the you know, the drop was driven 0:06:59.000 --> 0:07:02.159 by very different fact It wasn't driven by financial factors, 0:07:02.839 --> 0:07:07.719 you know, ability to pay or or or asset values, 0:07:07.800 --> 0:07:10.960 but it was really driven by a physical constraint on 0:07:11.840 --> 0:07:15.640 on economic activity. So, I mean, there there were some similarities, 0:07:15.840 --> 0:07:20.080 but I also think that it became pretty clear that 0:07:20.320 --> 0:07:24.280 the economic environment was you know, it was just a 0:07:24.400 --> 0:07:28.120 very very different shock, and I had to be really 0:07:28.160 --> 0:07:32.800 analyzed I think, in its in its own right, and 0:07:32.840 --> 0:07:36.880 not not really through the lens not too much through 0:07:36.920 --> 0:07:40.760 the lens of two thousand and eight. MM. So Joe 0:07:40.800 --> 0:07:45.000 mentioned your April note where you sort of identified some 0:07:45.040 --> 0:07:48.160 of the differences between the crisis versus the two thousand 0:07:48.200 --> 0:07:52.840 eight crisis. Uh More recently, I believe you have a 0:07:52.880 --> 0:07:58.559 pretty out of consensus call on economic growth for versus 0:07:58.600 --> 0:08:01.560 the rest of the street. What are you seeing that 0:08:01.960 --> 0:08:05.400 other people aren't seeing at the moment? And also back 0:08:05.440 --> 0:08:11.200 in April, I think it goes back to the previous question. 0:08:12.080 --> 0:08:15.720 I do think that it's A, it's a very different cycle. 0:08:15.920 --> 0:08:18.560 So that's that's really the main answer. I think it's 0:08:18.600 --> 0:08:22.520 a it's a very different cycle. It was really driven 0:08:22.600 --> 0:08:26.680 by a health emergency that forced us to shut down 0:08:26.760 --> 0:08:31.560 parts of the economy. Uh And it wasn't driven by 0:08:31.760 --> 0:08:35.119 you know, a bursting asset bubble and a credit crisis 0:08:35.440 --> 0:08:39.400 that that you know, might have taken and did take 0:08:39.640 --> 0:08:43.080 years to unwind after the two thousand eight prices and 0:08:43.720 --> 0:08:46.319 through a degree to a much milder degree, even after 0:08:46.360 --> 0:08:51.440 the two thousand and one recession and after recession, those 0:08:51.480 --> 0:08:58.520 were all driven by really financial factors and financial imbalances 0:08:58.559 --> 0:09:01.680 that that to a long time to unwind. This was 0:09:01.760 --> 0:09:06.560 driven by uh A, you know, just very very different factors. 0:09:06.800 --> 0:09:09.120 You know. I think policy plays a very important role 0:09:09.160 --> 0:09:14.840 as well. As we discussed the policy response by both 0:09:15.000 --> 0:09:18.160 monetary and fiscal policy was so much more aggressive this time. 0:09:18.520 --> 0:09:22.520 And my favorite statistic in in terms of how that 0:09:22.600 --> 0:09:24.679 sort of looks in the economic data is the fact 0:09:24.720 --> 0:09:28.280 that the second quarter of two thousand twenty saw the 0:09:28.320 --> 0:09:33.360 biggest decline ever in GDP and the biggest increase ever 0:09:33.559 --> 0:09:37.400 in real disposible income. And most of these things are correlated. 0:09:37.440 --> 0:09:39.240 When one is down the other style as well, and 0:09:39.360 --> 0:09:41.640 vice versa. In this case they were they not only 0:09:41.720 --> 0:09:45.000 went in opposite directions, but but in both cases to 0:09:45.040 --> 0:09:47.600 a to a record degree. And I think that really 0:09:48.080 --> 0:09:52.960 speaks to the enormously aggressive h policy response that we 0:09:53.000 --> 0:09:54.880 saw in the US and in a number of other 0:09:54.920 --> 0:09:59.199 countries as well. So, as mentioned in the intro, when 0:09:59.200 --> 0:10:02.360 we're recording this, we don't actually know, um, what's going 0:10:02.400 --> 0:10:05.200 to happen with whether there be an additional round of 0:10:05.720 --> 0:10:09.520 fiscal stimulus or not. But you know, one thing that 0:10:09.600 --> 0:10:11.800 we do know is that at least on the aggregate 0:10:11.920 --> 0:10:17.240 basis right now, household balance sheets, um, they look very healthy. 0:10:17.360 --> 0:10:18.880 People have a lot of cash, they have a lot 0:10:18.880 --> 0:10:22.960 of savings, um, and so forth. So look ahead, you know, 0:10:23.040 --> 0:10:27.199 let's say like we're having this conversation again in December, 0:10:29.600 --> 0:10:33.320 and presumably by then we've had a successful rollout of 0:10:33.360 --> 0:10:38.200 the vaccine and the economy is fully reopened. Knock on wood, 0:10:38.920 --> 0:10:44.720 How significant is the prospect of fiscal stimulus or how 0:10:44.800 --> 0:10:49.160 different does the economy look in December, whether we get 0:10:49.160 --> 0:10:52.920 this extra jolt of fiscal stimulus in the meantime to 0:10:53.040 --> 0:10:58.520 get us through from now until reopening. I think From 0:10:58.600 --> 0:11:03.079 that perspective, it's not clear how how big the difference 0:11:03.200 --> 0:11:06.680 is going to be between a situation where we get 0:11:06.760 --> 0:11:11.800 near term stimulus and a situation where we don't. I 0:11:11.840 --> 0:11:14.559 do think that in the shorter term, as far as 0:11:15.200 --> 0:11:18.640 you know, the remainder of two thousand and twenty and 0:11:18.840 --> 0:11:21.800 first quarter and maybe second quarter of two thousand and 0:11:22.080 --> 0:11:24.760 twenty one is concerned, it's going to make a significant difference. 0:11:24.840 --> 0:11:27.840 There is a still a strong case, I think, for 0:11:28.000 --> 0:11:30.680 providing additional support to the economy because in the in 0:11:30.720 --> 0:11:33.840 the short term, despite the fact that the vaccine is 0:11:33.920 --> 0:11:38.120 likely to help a lot and bring the economy back 0:11:38.160 --> 0:11:41.040 to normal um to a large extent in two thousand 0:11:41.040 --> 0:11:44.400 twenty one, in the short term, virus cases continue to 0:11:44.440 --> 0:11:48.680 be extremely high, and the economy is still, you know, 0:11:48.800 --> 0:11:53.480 far away from from full employment despite the progress that 0:11:53.480 --> 0:11:58.080 that we've made. So I think there is temporary weakness 0:11:58.080 --> 0:12:03.679 that I think it's very amenable to to to policy support, 0:12:03.880 --> 0:12:06.600 and there's a there's a strong case, especially if it's 0:12:06.960 --> 0:12:11.120 you know, temporary amount of weakness, is a strong case 0:12:11.240 --> 0:12:17.720 for using both monetary and especially fiscal policy to relieve 0:12:18.200 --> 0:12:22.480 the hardship that is being h that's being caused by 0:12:22.520 --> 0:12:25.760 by this, by this neotrom neotrom Don John. Of course, 0:12:25.800 --> 0:12:29.360 monitory and fiscal policy aren't aren't the right tools to 0:12:29.360 --> 0:12:33.360 address the health emergency itself, but they can maically reduce 0:12:33.840 --> 0:12:37.480 the fallout in terms of jobs and incomes and knock 0:12:37.520 --> 0:12:41.840 on effects to other sectors of the economy. M so. 0:12:42.360 --> 0:12:44.920 On that note, I have a related question, but how 0:12:45.000 --> 0:12:49.200 much I mean, we've seen financial conditions loosen quite significantly 0:12:49.360 --> 0:12:52.760 in the aftermath of everything that's happened in March. How 0:12:52.840 --> 0:12:59.000 much to easier financial conditions offset the damage to the 0:12:59.000 --> 0:13:05.000 real economy. Well, easier financial conditions certainly help in supporting 0:13:05.040 --> 0:13:09.000 accurate demand. I mean the point of our financial Conditions Index, 0:13:09.080 --> 0:13:13.560 which is currently at its easiest level on record, and 0:13:13.640 --> 0:13:17.559 we have this back to the early nineties. The point 0:13:17.600 --> 0:13:21.080 of the financial conditions index is to measure how the 0:13:21.160 --> 0:13:26.560 channels of monetary transmission, you know, on the yields, equity prices, 0:13:26.800 --> 0:13:30.720 credit spreads, currency, how they are affecting the real economy. 0:13:30.720 --> 0:13:32.559 And if you're at a very easy level and you've 0:13:32.600 --> 0:13:36.760 seen a sizeable easing in terms of rates of change, 0:13:37.160 --> 0:13:42.400 then you're you're getting a positive impulse to uh to 0:13:42.960 --> 0:13:46.280 do the economy from that um and so that's certainly helping. 0:13:46.480 --> 0:13:49.839 But at the same time we are well below for 0:13:49.960 --> 0:13:55.040 employment and inflation is well below the FEDS target, so 0:13:55.880 --> 0:14:00.880 you know, more supportive the economy is. Still that's still helpful. 0:14:00.920 --> 0:14:04.480 And I would say also that on the fiscal side, 0:14:04.800 --> 0:14:09.559 of course, if you provide income support to those people 0:14:09.600 --> 0:14:13.920 in the economy are most aren't hit by the weakness. 0:14:14.080 --> 0:14:18.599 I mean that they generally don't benefit from easy financial conditions, 0:14:18.640 --> 0:14:23.120 that they might get an indirect benefit, but directly if 0:14:23.160 --> 0:14:26.520 financial conditions are easy, that doesn't replace income directly, so 0:14:26.640 --> 0:14:30.720 that's still a job for fiscal policy. Were you surprised 0:14:30.880 --> 0:14:34.560 speaking of not replacing income directly? I mean, we're having 0:14:34.600 --> 0:14:37.240 this debate now about stimulus, but we've had a long 0:14:37.320 --> 0:14:42.320 gap and the expanded unemployment insurance that was established under 0:14:42.320 --> 0:14:46.040 the Cares Act in late March that ran out I 0:14:46.080 --> 0:14:48.480 think at the end of July, so we've had this 0:14:49.080 --> 0:14:52.040 long gap of sort of a bit of a removal 0:14:52.080 --> 0:14:56.080 of fiscal support. Have you been Were you surprised in 0:14:56.160 --> 0:14:59.120 a sort of late summer the fall that there was 0:14:59.200 --> 0:15:02.960 not a more pronounced ramification from the end of that 0:15:03.480 --> 0:15:07.680 extra expanded aid to the unemployed. Yeah, we were a 0:15:07.680 --> 0:15:10.560 little surprised by that. We would have thought that we'd 0:15:10.560 --> 0:15:17.720 get a clearer signal or clearer signs of deterioration when 0:15:17.720 --> 0:15:20.600 we look at some of the micro data on spending 0:15:20.760 --> 0:15:25.560 by unemployed and employed people we did. We do find 0:15:25.760 --> 0:15:30.000 some very clear effects of the expiration of the of 0:15:30.040 --> 0:15:32.840 the six hundred dollar check checks, and then we see 0:15:33.120 --> 0:15:36.680 a sort of temporary increase in spending by the by 0:15:36.720 --> 0:15:40.000 the unemployed, again on the back of the executive orders 0:15:40.200 --> 0:15:44.520 that that partially replaced this um the six hundred dollars, 0:15:44.520 --> 0:15:47.000 but only for a temporary period, So that that shows 0:15:47.080 --> 0:15:50.320 up pretty clearly in the in the data. But it 0:15:50.720 --> 0:15:54.720 uh the levels are generally higher than you might have 0:15:55.200 --> 0:15:57.560 then you might have expected the potals of spending by 0:15:57.680 --> 0:16:00.240 by the unemployed. So I think it's it probably only 0:16:00.280 --> 0:16:04.760 shows you that the initial amount of income support, both 0:16:04.840 --> 0:16:10.160 from the unemployment benefits and from the tax rebates was 0:16:10.320 --> 0:16:13.720 large enough to provide a bit of a cushion and 0:16:14.200 --> 0:16:16.760 you know, boost spending. Who's the level of spending for 0:16:16.920 --> 0:16:20.080 a period of time. So it's probably still being boosted 0:16:20.080 --> 0:16:23.960 to some degree by the by the earlier stimulus. But 0:16:24.720 --> 0:16:27.840 that's obviously not going to last forever, and there are 0:16:27.920 --> 0:16:32.160 some signs, including in the in the November retail sales 0:16:32.200 --> 0:16:37.160 report released this morning, that that was maybe maybe running 0:16:37.160 --> 0:16:41.080 out at this point. Mm hmm. So this is something 0:16:41.080 --> 0:16:45.160 that I'm really curious about. But how much did stimulus 0:16:45.160 --> 0:16:49.480 sort of muddy the outlook the future outlook for for 0:16:49.520 --> 0:16:53.520 consumers and consumer confidence? And also how are you thinking 0:16:53.560 --> 0:16:57.760 about the consumer going into because as I mentioned, there 0:16:57.880 --> 0:17:01.760 is this debate at the moment. Are the unusual events 0:17:01.800 --> 0:17:06.000 of this year going to encourage people to, you know, 0:17:06.440 --> 0:17:11.240 permanently cut back on spending and raise their savings because 0:17:11.760 --> 0:17:15.359 they're more uncertain and they're worried that an unexpected event 0:17:15.440 --> 0:17:18.200 like a global pandemic could come out of nowhere and 0:17:18.480 --> 0:17:21.159 they might use their jobs and things like that. Or 0:17:21.440 --> 0:17:24.560 are we going to see this big rebound in consumer 0:17:24.600 --> 0:17:28.480 spending the pent up demand theory as the vaccine gets 0:17:28.560 --> 0:17:32.560 ruled out and lockdown gets ruled back. I think you've 0:17:32.640 --> 0:17:35.480 laid out well the two sort of extremes in that 0:17:35.800 --> 0:17:38.400 in that discussion. I'm more on the on the side 0:17:38.440 --> 0:17:40.880 of the second rather than the first. I don't think 0:17:40.880 --> 0:17:45.840 that there's going to be a permanent impact I think, 0:17:46.840 --> 0:17:49.440 you know, people are going to go My expectation would 0:17:49.480 --> 0:17:52.879 be people are going to go back to spending money 0:17:53.400 --> 0:17:57.840 on on on similar types of service activities and service 0:17:57.880 --> 0:18:02.399 experiences that they will spending money on before. You obviously 0:18:02.480 --> 0:18:05.840 always subject to their own economic situation and a bunch 0:18:05.840 --> 0:18:07.760 of other factors. But I don't think that there's going 0:18:07.800 --> 0:18:11.560 to be a large amount of behavior or scarring h 0:18:12.000 --> 0:18:15.639 if you get into an environment where the risk of 0:18:15.680 --> 0:18:18.680 getting infected is much lower or the consequences of being 0:18:18.680 --> 0:18:21.480 in fact that are much lower, and I think there 0:18:21.520 --> 0:18:25.440 could be some degree of pent up demand for services. 0:18:25.480 --> 0:18:28.960 I think that's more uncertain whether whether you are going 0:18:29.000 --> 0:18:34.120 to see say demand for travel and and and entertainment 0:18:34.560 --> 0:18:38.680 actually move above the previous day in the pre pandemic 0:18:38.680 --> 0:18:41.520 baseline for a while. I think it's harder to know. 0:18:42.080 --> 0:18:44.480 It wouldn't be, you know, behaviorally, it wouldn't be true 0:18:44.480 --> 0:18:46.960 surprising that if you haven't been able to do any 0:18:47.000 --> 0:18:49.920 of these things, you might do, uh, you know, you 0:18:50.000 --> 0:18:52.320 might go to an extra concert or do a do 0:18:52.400 --> 0:18:55.160 an extra trip. But for me, the main thing would 0:18:55.160 --> 0:18:59.199 be that these are still sectors of the economy that 0:18:59.760 --> 0:19:03.320 that operating far below normal and I think when we 0:19:03.400 --> 0:19:06.919 have a vaccine, and when the vaccine has led to 0:19:07.440 --> 0:19:10.560 you know, effectively heard immunity, you know, whenever that is 0:19:10.640 --> 0:19:13.240 sometimes in two thousand and twenty one, I think we'll 0:19:13.320 --> 0:19:17.280 we'll see a return to normal levels for these parts 0:19:17.320 --> 0:19:19.200 of the economy, and that that is going to give 0:19:19.240 --> 0:19:22.000 you a boost to the level of GDP by you know, 0:19:22.080 --> 0:19:24.440 maybe two percent or so if you take it an aggregate. 0:19:24.480 --> 0:19:45.600 Obviously much bigger increases in all specific sectors. So I 0:19:45.680 --> 0:19:49.520 wanna shift the conversation a little bit because besides the 0:19:49.560 --> 0:19:52.679 sort of immediate what we're seeing in the economy, you know, 0:19:52.840 --> 0:19:56.040 Tracy and I always like to talk about economic ideas 0:19:56.119 --> 0:19:59.840 and how those evolved. You have been a long time. 0:20:00.520 --> 0:20:02.800 I don't know. You just sort of take you look 0:20:02.800 --> 0:20:07.600 at the economy through what's known as a sectoral balances framework, 0:20:07.640 --> 0:20:11.720 which is associated with the economist Wind Godly, who has 0:20:11.760 --> 0:20:15.240 been an influence on your work. Um, I'm curious if 0:20:15.280 --> 0:20:17.560 you can sort of give us our listeners, like a 0:20:17.600 --> 0:20:20.080 brief description of what this is and how that helps 0:20:20.119 --> 0:20:22.960 you look at the economy, and then like how that's 0:20:22.960 --> 0:20:28.320 helped you understand the economy in and looking ahead. What 0:20:28.440 --> 0:20:31.760 the framework talks about because I do think it's sort 0:20:31.760 --> 0:20:33.919 of a it's a different way of thinking about the 0:20:33.960 --> 0:20:39.000 economy than certainly I would say most Wall Street economists. Yeah, 0:20:39.080 --> 0:20:44.240 it's it's basically a focus on especially the private sector 0:20:44.440 --> 0:20:48.639 financial balance, which is just the difference between the total 0:20:48.720 --> 0:20:53.760 income and total spending of all households and businesses. And 0:20:54.119 --> 0:20:58.040 you could disaggregate households and businesses, but I often find 0:20:58.080 --> 0:21:01.200 it more useful to look at together because in some 0:21:01.240 --> 0:21:05.480 cases there it's difficult to distinguish between where the household 0:21:05.480 --> 0:21:09.440 sector ends and where the business sector begins. If you think, 0:21:09.480 --> 0:21:14.399 for example, of of small businesses and an entrepreneurs. So 0:21:14.440 --> 0:21:18.359 if you if you aggregate up the the entire private sector, 0:21:19.080 --> 0:21:24.679 and private sector runs a financial deficit that happens, you know, 0:21:24.760 --> 0:21:28.399 often on the back of large asset price increases or 0:21:28.400 --> 0:21:32.160 asset price bubbles, for example in the late stock market 0:21:32.200 --> 0:21:38.080 bubble or the two thousand's housing market bubble. That means 0:21:38.560 --> 0:21:42.639 that the private sector is quite vulnerable too. You know 0:21:42.840 --> 0:21:47.480 that that developments in asset markets or other shocks, because 0:21:47.720 --> 0:21:51.600 they are already spending beyond the current level of income 0:21:52.320 --> 0:21:58.760 and having to finance the difference with net debt accumulation 0:21:59.160 --> 0:22:04.960 and can continue as long as asset markets are are 0:22:05.280 --> 0:22:08.920 performing well. But if asset markets start to turn down, 0:22:09.359 --> 0:22:12.080 households and farms need to cut their spending relative to 0:22:12.080 --> 0:22:17.080 the income. That generates a negative impulse to aggreate demand 0:22:17.200 --> 0:22:19.879 and often results in a in a recession. And we 0:22:19.920 --> 0:22:24.320 saw this pretty clearly in the US in not only 0:22:24.359 --> 0:22:26.479 the two thousand eight prices but also in the two 0:22:26.560 --> 0:22:29.760 thousand and one recession, and frankly, we've seen it time 0:22:29.760 --> 0:22:34.639 and time again in in in other advanced economies in 0:22:35.040 --> 0:22:39.160 the last two or three decades, in you know, Europe, 0:22:39.600 --> 0:22:41.639 in the in the run up to the to the 0:22:41.680 --> 0:22:45.040 two thousand eight crisis, Spain as an extreme example. We've 0:22:45.080 --> 0:22:48.840 seen similar things in in the UK in the early 0:22:48.920 --> 0:22:52.639 ninety nineties and a bunch of other economies. So this 0:22:52.800 --> 0:22:55.520 is something that I'm quite focused on as a warning 0:22:55.560 --> 0:22:59.000 sign of financial imbalances and vulnerability of the of the 0:22:59.040 --> 0:23:04.280 real economy. And basically, households and firms living beyond their means, 0:23:04.400 --> 0:23:07.879 or at least beyond the short term means is is 0:23:07.880 --> 0:23:10.680 a dangerous sign and one of the things in two 0:23:10.680 --> 0:23:15.800 thousand and twenty and especially in the two thousand in 0:23:15.840 --> 0:23:19.640 the in the spring lockdowns in the second quarter that 0:23:19.760 --> 0:23:23.760 was very, very different from those past episodes was that 0:23:24.359 --> 0:23:27.800 the private sector was actually running a huge financial surplus, 0:23:27.880 --> 0:23:31.040 and much of a surplus than you'd ever seen before 0:23:31.720 --> 0:23:35.040 in in post war history. And you know, well, that's 0:23:35.080 --> 0:23:37.119 not the only thing that matters for the for the 0:23:37.119 --> 0:23:41.640 economic artwork was certainly one thing that gave us confidence 0:23:41.680 --> 0:23:46.120 in calling for a pretty rapid recovery from the sort 0:23:46.119 --> 0:23:49.320 of margin April lows. So I do think it had 0:23:49.320 --> 0:23:52.160 a big impact on our on our thinking in two 0:23:52.160 --> 0:23:56.360 thousand and twenty, And of course it was very related 0:23:56.640 --> 0:24:01.960 to the policy decisions that we just talked about, the 0:24:02.000 --> 0:24:06.720 decision to provide substantial amounts of transfers to the alsalts 0:24:06.760 --> 0:24:11.120 that should up in the private financial as well. Right, So, 0:24:11.600 --> 0:24:13.680 I mean, on a related note, since we're talking about 0:24:13.720 --> 0:24:18.960 financial imbalances. On the one hand, the policy response did 0:24:19.040 --> 0:24:25.040 help enormously in stabilizing markets and in providing a cushion 0:24:25.200 --> 0:24:30.360 for consumers, as we've been discussing. But now with stocks 0:24:30.400 --> 0:24:34.240 sort of all time highs and with you know, the 0:24:34.280 --> 0:24:38.080 corporate bond market booming, and lots of other weird things 0:24:38.119 --> 0:24:41.760 happening in capital markets like SPACs and and big I 0:24:41.880 --> 0:24:44.920 p O booms and things like that. Do you see 0:24:45.520 --> 0:24:50.680 an issue of financial instability looming or do you worry 0:24:50.720 --> 0:24:55.640 about moral hazard at all? I don't see I would 0:24:55.640 --> 0:25:01.119 say imminent signs of financial imbalances that are that that 0:25:01.160 --> 0:25:04.760 are relevant for for monitor that they need to be addressed, 0:25:04.800 --> 0:25:07.200 let's say, by by monetary policy. I don't. I don't 0:25:07.200 --> 0:25:09.640 see that. UM. I mean, of course you should never 0:25:09.640 --> 0:25:12.959 say never. It's always something that that I think central 0:25:12.960 --> 0:25:18.000 banks and policymakers have monitor. But again, if I go 0:25:18.160 --> 0:25:22.960 back to the private sector of financial balanced as you know, 0:25:23.040 --> 0:25:27.160 one metric of financial imbalances, the private sector is still 0:25:27.240 --> 0:25:30.840 running a very large surplus. Past kind of asset price 0:25:30.920 --> 0:25:35.800 bus that that that have had really negative effects on 0:25:36.520 --> 0:25:39.280 the on the real economy have typically been preceded by 0:25:39.520 --> 0:25:44.439 large private sector UH deficits where you know, households and 0:25:44.480 --> 0:25:49.040 farms were effectively spending too much relative to the income 0:25:49.080 --> 0:25:52.879 flaw on the back of very rapid debt accumulation, and 0:25:53.200 --> 0:25:57.440 so these increases and asset prices had much more tangible 0:25:57.440 --> 0:26:01.399 effects on you know, people's borrowing spending behavior. I'm not 0:26:01.440 --> 0:26:04.119 seeing that. UM. You know, that doesn't mean of course 0:26:04.680 --> 0:26:08.640 that there there couldn't be any any imbalances, and there 0:26:08.840 --> 0:26:11.920 certainly doesn't mean that they couldn't be price the clients 0:26:12.200 --> 0:26:15.639 in in different markets. But I do think that it 0:26:15.680 --> 0:26:19.000 tells you probably that the vulnerability of the real economy 0:26:19.440 --> 0:26:22.960 to these kinds of adjustments is probably lower than it 0:26:23.240 --> 0:26:26.240 would have been in many of these other episodes. That's 0:26:26.280 --> 0:26:29.320 that's where that would be my starting point, and it's 0:26:29.440 --> 0:26:33.800 I think similar in spirit at least two the reviews 0:26:33.960 --> 0:26:38.520