Speaker 1: Hello, and welcome to another episode of the Odd Lots Podcast.
Speaker 1: I'm Tracy Alloway and I'm Joe. Wasn't all Joe? Do
Speaker 1: you remember you wrote something? I'm guessing it was a
Speaker 1: year or two ago, but you basically wrote about how
Speaker 1: finance was sort of ground zero for deglobalization and a
Speaker 1: trade war. Do you remember that. I don't remember the
Speaker 1: specific thing per se that you're talking about, but I
Speaker 1: feel like this has been a reoccurring theme for us
Speaker 1: and a couple of things I've written and you've written
Speaker 1: for a while now, thinking about like just this idea
Speaker 1: that if the world is going to deglobalize, and arguably
Speaker 1: it is an arguably President Trump, that's part of his mission,
Speaker 1: that finance might be really where you see it emerged first, right,
Speaker 1: Because I think what tends to happen when people talk
Speaker 1: about trade tensions or a trade war is people start
Speaker 1: thinking about tangible goods, you know, like semiconductors and chips
Speaker 1: and I don't know all sorts of commodities, but people
Speaker 1: rarely actually stop and think that, well, all that global
Speaker 1: trade is something that is being financed by someone, and
Speaker 1: the financiers in this case are financial institutions or large banks,
Speaker 1: and so it would make a lot of sense if
Speaker 1: they also get hit by the trade tensions. Absolutely, And
Speaker 1: if you look at the history of finance, and I
Speaker 1: remember this is something we talked about years ago on
Speaker 1: the podcast I think we're talking to Emmanuel Derman. If
Speaker 1: you look at the history of finance, so much of
Speaker 1: it corresponds to globalization and even the sort of explosion
Speaker 1: of derivatives and other measures designed to hedge risk. A
Speaker 1: lot of it is designed to sort of mitigate the
Speaker 1: risk of trading across to different countries with different currencies
Speaker 1: and so forth. So you really you can't talk about
Speaker 1: globalization without talking about all these instruments that have been
Speaker 1: built up by Wall Street banks. Very true, and you
Speaker 1: mentioned currencies just then. And the interesting thing is that
Speaker 1: even though we're talking about global trade and cross border
Speaker 1: financial transactions, of course the vast majority of these are
Speaker 1: still denominated in the U. S. Dollars. So you have
Speaker 1: this weird sort of space where things are happening between countries,
Speaker 1: between all these different entities, companies and banks, but many
Speaker 1: of the transactions are dollar denominated. And of course what
Speaker 1: we've seen recently has been about of US dollar strength,
Speaker 1: and the speculation has been that that has added to
Speaker 1: the pain of the trade war, at least up until
Speaker 1: rec on link. Yeah, there's a lot of different substories
Speaker 1: going on right now with the trade war with actions
Speaker 1: taken by the Trump administration. One of them that hasn't
Speaker 1: got a ton of attention is whether any of this
Speaker 1: is going to eventually contribute to the undollarization of the
Speaker 1: global economy, because people have been predicting that for a
Speaker 1: long time that maybe somehow global different trading partners might
Speaker 1: find an opportunity to come off the dollar, but nothing
Speaker 1: really has even come close to emerging that would actually
Speaker 1: replace the dollar. The Euro has flaws, the Chinese, you
Speaker 1: n for obvious reasons, is not in a position to
Speaker 1: really replace it. But with the various actions that the
Speaker 1: Trump administration has taken, obviously people wondering if there will
Speaker 1: be a renewed effort on part of various actors to
Speaker 1: get out of the dollar system, so to speak. Right,
Speaker 1: and even if there isn't a push to replace the
Speaker 1: dollar in some way, you can imagine that there will
Speaker 1: be renewed focus on the potential for a currency war,
Speaker 1: right devaluations to sort of increase your competitiveness when it
Speaker 1: comes to trade, so that seems to be the minimum. Anyway.
Speaker 1: The reason this intro is slightly disjointed is because we
Speaker 1: have a guest on today who not only can talk
Speaker 1: about everything from trade to cross border flows to currency regimes,
Speaker 1: but pretty much anything else cryptocurrency, financial stability, big tech,
Speaker 1: credit markets, overheating, you name it, he can talk about it. Yeah, exactly.
Speaker 1: So like we have this really unwieldy intro touching on
Speaker 1: all these things because our guest is so unusual and
Speaker 1: unique in his ability to pull together and cover all
Speaker 1: these uh, all these different strands of what's going on
Speaker 1: in world financial markets, in the economy. Exactly. We're going
Speaker 1: to see if we can narrow it down a bit,
Speaker 1: but without further ado. Our guest for today is hyun
Speaker 1: Sung Shin. He is economic advisor and head of research
Speaker 1: for the Bank for International Settlements and uh, if you
Speaker 1: haven't been following his research already, I highly encourage you
Speaker 1: to do so. Ken, it's so nice to have you
Speaker 1: on the show. But Tracy, hello, Joe, it's good to
Speaker 1: be here. Hello. So apologies again for that unwieldy intro,
Speaker 1: but I think it does speak to the breadth of
Speaker 1: your research, which is really wide and varied. Could you
Speaker 1: maybe just to begin with give us a sort of
Speaker 1: rundown of what your mandate actually is at the b
Speaker 1: I S. Yeah, I mean the b I S, as
Speaker 1: you know, is the oldest international financial institution we were
Speaker 1: set up in It's a body to foster the cooperation
Speaker 1: among central banks. We have around sixty member central banks
Speaker 1: and I'll task us to um IS to focus those discussions,
Speaker 1: help to facilitate cooperation among the central banks, both for
Speaker 1: monetary policy and for financial stability. We also host many
Speaker 1: of the international regulatory committees that that oversee some of
Speaker 1: the discussions, like the Basel Committee and the Financial Stability Board.
Speaker 1: It tell us about your role there because you the
Speaker 1: b I S puts out quite a bit of research.
Speaker 1: You put out quite a bit of research. What is
Speaker 1: the sort of overarching goal of what you're pursuing with
Speaker 1: the things you've been working on. You know, we're here
Speaker 1: to serve central banks and how they conduct monetary policy
Speaker 1: and also how they can serve as a guidians of
Speaker 1: financial stability, and so you know this is this is
Speaker 1: a very broad remit. As you can imagine so we
Speaker 1: have to be you know, pretty broad in our approach.
Speaker 1: You know, it's very kind of you too to be
Speaker 1: so complimentary, but I think this is you know, we
Speaker 1: regard this as being part of our job. And I
Speaker 1: think you you give a very good introduction to where
Speaker 1: we find ourselves in the in the global economy right now.
Speaker 1: And we had a very strong thousand seventeen in global growth.
Speaker 1: But since the middle of last year, we you know,
Speaker 1: we had this slowdown which at first seemed like just
Speaker 1: a reversion to the mean, but you know, it turned
Speaker 1: into something a little bit more, something a little bit deeper,
Speaker 1: where we saw the manufacturing and trade you know, contract
Speaker 1: even as employment, you know, remains strong. Um and consumption
Speaker 1: was was pretty strong, underpinned by the strong services sector.
Speaker 1: And what we try and do is to try and
Speaker 1: join the dots, and the dots actually could be in
Speaker 1: somewhat unfamiliar places in terms of the standard way that
Speaker 1: we classify, the way that we subdivide the different areas
Speaker 1: of economics, and and I think trade, manufacturing, global growth
Speaker 1: all turns out to be quite closely related to financial forces.
Speaker 1: And I think here is where the where the currency
Speaker 1: dimension comes in because it's it does seem from the
Speaker 1: accumulated evidence that the that the broad dollar index has
Speaker 1: something of the character of a of a barometer of
Speaker 1: global risk appetite. Mhm. Right, So, in some of your
Speaker 1: research before, you've actually published this really great chart that
Speaker 1: basically shows when the dollar strengthens, trade kind of drops
Speaker 1: and vice versa. Basically there's an inverse relationship between the
Speaker 1: green back and global trade. Can you walk us through
Speaker 1: exactly what's happening there and why does the dollar matter
Speaker 1: so much when it comes to this particular issue. But
Speaker 1: those of your listeners who are not perhaps familiar with
Speaker 1: this chart, I would just point them to the speech
Speaker 1: I gave in Berlin at the German Federal Minister of Finance.
Speaker 1: This was in the middle of May. And you know,
Speaker 1: if we chart the ratio of global exports to global GDP,
Speaker 1: that displays a very interesting pattern. And that ratio is
Speaker 1: a very interesting ratio because you know, trade is measured
Speaker 1: on a growth basis, in that you know, whenever shipments
Speaker 1: across the border, you can just tally it all up
Speaker 1: and it's measured in gross terms, and that you don't
Speaker 1: take into account the fact that some of the inputs
Speaker 1: into the exports were actually themselves imported. Whereas GDP is
Speaker 1: a value added measure. It's you know, it measures what
Speaker 1: is the total value of the goods produced as measured
Speaker 1: by the final output. Right, So if you take that
Speaker 1: ratio which is gross exports to GDP and you know,
Speaker 1: we can sum it up to the global level, what
Speaker 1: it gives you is the degree of double counting that
Speaker 1: happens when we measure gross exports, and that you know,
Speaker 1: if the same component is used for you know, as
Speaker 1: an input into another intermediate good, and then that intermediate
Speaker 1: good is exported into another country, which then gets processed
Speaker 1: into a further intermediate good which is than exported. The
Speaker 1: more times a particular component crosses the border, the larger
Speaker 1: will be the disparity between you know, grows exports and GDP.
Speaker 1: So you know, that ratio does fluctuate a lot, and
Speaker 1: it's a useful proxy for the activity of global value chains.
Speaker 1: So manufacturing has been the driver of global trade growth
Speaker 1: in the last few decades, and within the manufacturing trade,
Speaker 1: it's been the growth of the global value chains. It's
Speaker 1: a it's a supply chains that have been very, very important,
Speaker 1: and no country has been more important in this development
Speaker 1: than China. In fact, China has emerged. If you look
Speaker 1: at one of the charts in the in the in
Speaker 1: the brilliant speech that I mentioned, that's a very striking
Speaker 1: chart shows China going from somewhat of a small node
Speaker 1: in the year two thousand before they entered the w
Speaker 1: t O to really the the connecting lynchpin in the
Speaker 1: global trading system. Now, what do you need to sustain
Speaker 1: very elaborate global value chains like that. Well, for this
Speaker 1: to actually work, what you need is all the intermediate
Speaker 1: goods to be financed while they're in the intermediate good stage.
Speaker 1: So if you look at the just think about a
Speaker 1: corporate balance sheet when you have lots of intermediate goods
Speaker 1: that are whizzing back and forth, I mean they all
Speaker 1: be appearing either as inventories or they will be appearing
Speaker 1: as accounts receivable. You know, if if that good has
Speaker 1: crossed the boundary of the firm, and these are assets
Speaker 1: of the firm which need to be financed somehow, and
Speaker 1: typically they have been financed either through the firm's internal resources.
Speaker 1: But what we know very well from other studies is
Speaker 1: that the global banking system has been a very important
Speaker 1: source of funding for the the short term assets that
Speaker 1: that underpin the global value chain. And the other thing
Speaker 1: that we know from the other studies, some of it,
Speaker 1: you know you've already mentioned, is that financial conditions in
Speaker 1: dollars and and the dollar exchange rate itself is very
Speaker 1: closely correlated, and that when the dollar is strong, um
Speaker 1: this is when dollar credit tends to be somewhat tight
Speaker 1: and the funding conditions go up. The in particular cross
Speaker 1: border element seems to be very sensitive. So if you
Speaker 1: put two and two together and we combine it with
Speaker 1: the prevalence of dollar invoicing, what we have is the
Speaker 1: combination of the following fact that you need short term
Speaker 1: assets to be financed in order to support global value chains.
Speaker 1: You need the dollar financing to be rather free in
Speaker 1: order for the dollar financing to support those short term assets,
Speaker 1: and that means that you tend to see an expansion
Speaker 1: of trade when the dollar financing conditions are more accommodative,
Speaker 1: and that's when the dollar is weak. This ratio of
Speaker 1: the global exports to global GDP tends to move in
Speaker 1: the opposite direction uh to the strength of the dollar.
Speaker 1: What one could reasonably conjecture about the events of two
Speaker 1: thousand eighteen into the early part of two thousand nineteen,
Speaker 1: is that this was indeed the period when you know,
Speaker 1: we saw the dollar strengthened, and two thousand seventeen was
Speaker 1: a was a year when the dollar was actually quite weak.
Speaker 1: This was a period in spite of the fair increase
Speaker 1: in its policy rate, we saw very accommodated financial conditions. Now,
Speaker 1: it's I think important just to point out here that
Speaker 1: the dollar is an endogenous variable. It's a financial market price.
Speaker 1: So there isn't any particular causal story as to why
Speaker 1: the dollar is strong and why you might actually get
Speaker 1: these things going from the dollar to these other real variables.
Speaker 1: But if you want a barometer, if you want a
Speaker 1: concurrent indicator of what's going on, you cannot do much
Speaker 1: better than to look at the value of the of
Speaker 1: the broad dollar index. I mean that that was fantastic,
Speaker 1: and that was just sort of a rate explanation of
Speaker 1: what's going on. Actually pulled up your chart that you're
Speaker 1: referring to while you were explaining it. And what's really
Speaker 1: striking is, again we talk about deglobalization and the age
Speaker 1: of Trump. But as you pointed out in your speech
Speaker 1: and as the Church shows this ratio of world goods
Speaker 1: exports to GDP has really been falling ever since two
Speaker 1: thousand eleven. And in fact, if you even bigger picture,
Speaker 1: what you see from your chart is that from two
Speaker 1: thousand and one until about the start of the Great
Speaker 1: Financial Crisis, trade as a percentage of GDP had been
Speaker 1: going up. And that was also a period of significant
Speaker 1: dollar weakness and a lot of angst about oh, is
Speaker 1: there something the twin deficits and is the Euro get
Speaker 1: to replace the dollar and all that stuff, And then
Speaker 1: after the Great Financial Crisis you see a brief jump
Speaker 1: in a world trade that ratio, but then it's declining. So,
Speaker 1: as you point out, the dollar itself is not the
Speaker 1: causal variable, say it's a concurrent, it's endogenous. What is
Speaker 1: the story then that explains some of this deglobalization trend
Speaker 1: since the early aftermath of the Great Financial Crisis, or
Speaker 1: what might be some of the explanatory factors. Yes, Joe,
Speaker 1: I think that's so. That's a very good observation. And
Speaker 1: you know, for the for your listeners, the charts only
Speaker 1: plotted from the year two thousand. If you extend that
Speaker 1: back further, of course, you know there was a golden
Speaker 1: age of globalization when trade to GDP rose tremendously over
Speaker 1: a very very long time. So I think that's probably
Speaker 1: you know, the over the longer horizon if we go
Speaker 1: back to the seventies, eighties, and nineties, and the golden
Speaker 1: age of globalization was the was the late eighties and
Speaker 1: the nineteen nineties, that's probably much more to do with
Speaker 1: liberalization to you know, these longer range forces. But the
Speaker 1: but the period from two thousands three up to the crisis,
Speaker 1: that's probably better understood, as you say, in terms of
Speaker 1: what was happening to the dollar, but in particular what
Speaker 1: was happening to the banking sector and the ease with
Speaker 1: which you know, you could get credit from the banks.
Speaker 1: And you know, we we now know the full story
Speaker 1: with the benefit of hindsight. That was a very very
Speaker 1: special period. And what we've seen since the crisis is
Speaker 1: the banking sector hasn't really been hasn't really recovered its
Speaker 1: mojo if you like, they have been better capitalized. We
Speaker 1: are now well over the crisis. But what's happened is
Speaker 1: the environment, you know, financial environment in terms of the
Speaker 1: slope of the yield curve, in terms of their interest
Speaker 1: margins of the banks. That has been very far from
Speaker 1: the story before the crisis, which was really very much
Speaker 1: more conducive to the increase in leverage. The child itself
Speaker 1: is is a very striking one because, as you say,
Speaker 1: this ratio of exports to global GDP never really went
Speaker 1: back to the pre crisis peak. It's been on this
Speaker 1: downward trend since two thousand and eleven, with only a
Speaker 1: brief respite in two thousand seventeen, which uh, you know,
Speaker 1: turned out to be a little bit of a blit
Speaker 1: um in in retrospect because this was particular period when
Speaker 1: financial conditions were were looser. Tracy. You know, one other
Speaker 1: thing that occurs to me looking at this chart of
Speaker 1: global trade relative to g d P, it looks a
Speaker 1: lot like a chart that you would get if you
Speaker 1: plotted emerging market stock prices relative to developed market equities,
Speaker 1: because that's one of those things where e ms did
Speaker 1: great pre crisis, and then they massively outperformed in the
Speaker 1: immediate aftermath of the crisis, but then they've just been
Speaker 1: totally mediocre ever since then. So kind of a clue
Speaker 1: perhaps too what drives em equities, right, and that sort
Speaker 1: of gets back to that cross border dynamic. But um
Speaker 1: here and I wanted to concentrate on on one thing,
Speaker 1: which is I guess it's sort of expected that banks
Speaker 1: play an outsized role in transmitting um financial conditions or
Speaker 1: monetary policy to the rest of the world or the
Speaker 1: real world, if you will. And I'm just wondering, given
Speaker 1: that monetary policy has been so easy host two thousand eight,
Speaker 1: and yet we've seen cross border lending sort of contract
Speaker 1: or global trade contract by your measurement, does that mean
Speaker 1: that the bank's transmission mechanism is effectively broken? Is banking
Speaker 1: not doing what it's supposed to be doing. Asked to
Speaker 1: whether financial conditions have been have been loose or tight,
Speaker 1: I think it's it's very much. It has been very
Speaker 1: accommodative in the sense that long term interest rates have
Speaker 1: been low. This has been very conducive to the issuance
Speaker 1: of fixed income instruments, especially corporate bonds. If we look
Speaker 1: at the composition of of the increase in debt, it's
Speaker 1: far less the liabilities of intermediary It's it's far less
Speaker 1: bank lending that's been at the center of the story.
Speaker 1: It's much more the issuance of long term instruments, long
Speaker 1: term capital market instruments like corporate bonds. If you look
Speaker 1: at one of the charts that in the in the speech,
Speaker 1: what we see is that even as bank lending denominated
Speaker 1: in dollars has really been quite weak since the crisis,
Speaker 1: dollar denominated issuance of corporate bonds has been has been
Speaker 1: very strong. Now for the purpose of supporting trade. The
Speaker 1: problem is that, you know, trade relies very much on
Speaker 1: the short term funding coming primarily from the banks, and
Speaker 1: you know, as well as the firm's own own equity.
Speaker 1: So you know, for a while, when balance sheets were
Speaker 1: quite strong in the corporate sector, the weak bank lending
Speaker 1: probably wasn't such a big break on on trade and
Speaker 1: global value chain activity. But what we've seen is that
Speaker 1: over time, especially in the emerging markets, especially firms in China,
Speaker 1: there has been a lot of long term dead isssudants
Speaker 1: by the non financial corporates. And so when you are
Speaker 1: starting with already quite a leverage balance sheet and you
Speaker 1: see conditions tightening, that is a very different story from
Speaker 1: when you start with a pretty strong balance sheet and
Speaker 1: you have a lot more internal resources that you can deploy,
Speaker 1: and the banking sector really isn't anywhere there to give
Speaker 1: you that support. So it's it's really the combination of
Speaker 1: the banking sector still repairing, still somewhat to subdued because
Speaker 1: of the of the very special yield cut conditions since
Speaker 1: the crisis, together with the cumulated debts that have happened
Speaker 1: since the crisis. And so what you've seen is that
Speaker 1: you know, these things are coming to a head more recently.
Speaker 1: I think that's the way that I would say. So
Speaker 1: if you go back to the pre crisis era, obviously
Speaker 1: we saw rapid expansion in global trade, which, as you
Speaker 1: point out, was a period of easy lending and banks
Speaker 1: being quite willing to finance things, but of course we
Speaker 1: all know how that ended with a gigantic financial crisis
Speaker 1: economic collapse. Is there a way to get back to
Speaker 1: the pre crisis era from a trade perspective, in a
Speaker 1: more sustainable manner, so we can actually see that line
Speaker 1: turn up again for a while, but it not inevitably
Speaker 1: lead towards disaster. What all this raises is the intriguing
Speaker 1: possibility that you know, although we we like to make
Speaker 1: this very sharp distinction between the real economy and the
Speaker 1: financial markets, and then you know, think about excess is
Speaker 1: only happening in the financial markets. Well, you know, there
Speaker 1: there is a sense where some very very extended global
Speaker 1: value chain structures may only be sustainable with really really
Speaker 1: extraordinarily lose financial conditions. And so so if you like,
Speaker 1: you know, there could be you know, bubble like features
Speaker 1: of real activity as well if it's really very heavily extended.
Speaker 1: And so we should think about you know, um, one
Speaker 1: of the things that we emphasize here at the b
Speaker 1: I S is long term sustainability. So what is sustainable
Speaker 1: in the long term? What kind of economic activities are
Speaker 1: resilient to to sharks, and and what can policymakers do
Speaker 1: to bring these things about? So, I mean, those are
Speaker 1: the things that we tend to focus on. We try
Speaker 1: to have a longer term perspective on these things. And
Speaker 1: and within that broad framework, you know, you could argue
Speaker 1: that just pushing on the acceleator, just trying to extend
Speaker 1: the global value chains further. You know, that may be
Speaker 1: okay to boost the real quantities you know, in the
Speaker 1: process of lengthening, but then you are setting yourself up
Speaker 1: for a more you know, a sharp pullback when when
Speaker 1: conditions tighten. Well, I wanted to sort of press on
Speaker 1: this point because you mentioned that, you know, host two
Speaker 1: thousand eight, a lot of this global financing is coming
Speaker 1: in the form of bonds being issued by corporates rather
Speaker 1: than your typical bank loans. But the thing that those
Speaker 1: two things often have in common is their currency, so
Speaker 1: all dollar denominated. And this gets back to Joe's emerging
Speaker 1: market point as well. I'm just wondering how vulnerable do
Speaker 1: you think the world economy is to a dollar liquidity
Speaker 1: squeeze at this point. On that question, I think we
Speaker 1: have to distinguish between the kinds of acute episodes that
Speaker 1: we saw in the run up to the two eight crisis,
Speaker 1: which have to do with very rapidly leveraging, very rapid
Speaker 1: contraction of wholesale funding by banks and bank like intermediaries.
Speaker 1: I mean, that was a very very sharp pullback, and
Speaker 1: that was a very acute episode. I don't think we
Speaker 1: have the same kind of vulnerabilities in the banking set
Speaker 1: are right now. I mean, if anything, the banks have
Speaker 1: been quite subdued as we have just talked about. But
Speaker 1: in fact, the you know, the vulnerabilities, you know, they're
Speaker 1: more you know, longer term, you feel like I mean
Speaker 1: they have to do with the debts of non intermediate
Speaker 1: non banks. You know, they're more chronic, if you like,
Speaker 1: I mean they rather than acute. In in some countries,
Speaker 1: especially those countries that didn't experience the worst of the
Speaker 1: global financial crisis, the household debt has continued to rise.
Speaker 1: House prices are now very high, Corporate debt is high
Speaker 1: pretty much across the board, both advanced and emerging economies,
Speaker 1: and so you know, those forces can act as a
Speaker 1: break on potential stimulants towards really really economic activity. I mean,
Speaker 1: there's a there's a limit to how much that households
Speaker 1: would take on. You know, there may be you know,
Speaker 1: limited room for further monetary policy tools to stimulate growth,
Speaker 1: for example. So one of the things that we we
Speaker 1: have been saying here this year is that, you know,
Speaker 1: we need to have a more balanced mix of policy.
Speaker 1: So rather than simply relying on just one engine monetary policy,
Speaker 1: we have to think of this as a as a
Speaker 1: jumper jet with with four engines. Right, So it's monetree policy.
Speaker 1: But not only that, we have fiscal policy, macropodential frameworks,
Speaker 1: and not last, but not least, you know, structural reforms
Speaker 1: I mean, and structural reforms doesn't mean just cutting jobs
Speaker 1: and the reducing work is protection. I think it's it's
Speaker 1: more to do with finding ways to you know, reinvigorate
Speaker 1: growth through very key you know, investments in key sectors.
Speaker 1: And this of course is linked to the infrastructure investment
Speaker 1: angle as well. So you know, things are certainly not
Speaker 1: as precarious as they were in two thousand seven, but certainly,
Speaker 1: you know, we haven't really seen uh, you know, the
Speaker 1: return to vigorous growth that we would really ideally would
Speaker 1: like to have seen by now. It's I think, you know,
Speaker 1: to do our jobs better, we have to take a
Speaker 1: step back and try and get the right diagnosis for this.
Speaker 1: And and I think this is where these longer term
Speaker 1: studies like you know, the trade to GDP, you know,
Speaker 1: how the financial system is evolving. I think these are
Speaker 1: longer term developments really important as kind of you know,
Speaker 1: as the as the backdrop for our policy discussions. When
Speaker 1: you talk about grow prudential tools as being one of
Speaker 1: the engines to restimulate growth, what are you referring to specifically,
Speaker 1: So you know, macroprudential frameworks have to do with ways
Speaker 1: of complementing monetary policy so that the financial system is resilient,
Speaker 1: that it can be that it can function in a
Speaker 1: way that helps us to you know, route the benefits
Speaker 1: of cheap financing conditions more broadly, but target the you know,
Speaker 1: target those measures to those sectors or to those areas
Speaker 1: where you know you'd expect the vulnerabilities to be to
Speaker 1: be highest. So you know, if you're worried about FFX debt,
Speaker 1: then regulations that are targeted to those sectors, you know,
Speaker 1: maybe appropriate. If you're if you're worried about mortgages, you
Speaker 1: know that maybe one other area. So it's not going
Speaker 1: to be a magic bullet in the sense that you know,
Speaker 1: this is not going to be you know, watertight, and
Speaker 1: that it's going to be immune to circumvention and so on.
Speaker 1: But nevertheless, you may be able to deal with you know,
Speaker 1: emerging financial vulnerabilities without having to resort to monetary policy,
Speaker 1: which will have a much broader impact. And so, you know,
Speaker 1: together with fiscal policy. It's it's just one of the
Speaker 1: various many tools that policy makers should be using. Right
Speaker 1: So if you've spot risks building up in the system,
Speaker 1: then the better tool to deal with those might not
Speaker 1: be a sort of change in the benchmark policy rate
Speaker 1: because that affects a bunch of things at the same time.
Speaker 1: But maybe some sort of macro prudential limitation that would
Speaker 1: target that specific area. So on that note, UM, I
Speaker 1: gotta ask, do you think that policymakers have made enough
Speaker 1: use of macro prudential tools in the years since the
Speaker 1: financial crisis? And also have they done enough with macro
Speaker 1: prudential tools specifically when it comes to the US and
Speaker 1: its credit market. I mean, the answer to your question
Speaker 1: is yes. I mean, there has been quite an extensive
Speaker 1: move towards both putting on the books these policies to
Speaker 1: be you know, to be wheeled out whenever necessary. But
Speaker 1: the emerging markets have really you know led the way
Speaker 1: they've shown advanced economies how these additional tools can be used.
Speaker 1: And you know, in a way for the emerging markets,
Speaker 1: there is nothing new under the sun with macroprudential instruments.
Speaker 1: I mean, they are an apart and parcel of the
Speaker 1: policy mix. You know, it now has this new shiny label,
Speaker 1: but it's really old wine in new bottles. You know.
Speaker 1: I think for the US, the use of the stress
Speaker 1: tessel the banks. Um, you know that that's been a
Speaker 1: very important tool. You know, the US having gone through
Speaker 1: the very sharp crisis in two thousand and eight, two
Speaker 1: thousand nine, it's one of those countries which, um, you know,
Speaker 1: if you look at all the aggregate measures, looks you know,
Speaker 1: probably in in UH in reasonably good shape because it's
Speaker 1: the leverage of the banking sector is household debt is
Speaker 1: pretty low, you know, the the you know, the corporate
Speaker 1: sector like anywhere you has seen you know, great area
Speaker 1: stitions of corporate debt. There is the there is a
Speaker 1: leverage loan discussion, but on the whole, the US doesn't
Speaker 1: seem you know, that badly placed, nor the you know,
Speaker 1: nor the ur area. I think, if anything, the ural
Speaker 1: area is UM is one of those areas what apart
Speaker 1: from the very high sovereign debt levels it in terms
Speaker 1: of household debt it is on the low side as well.
Speaker 1: So I think we are in terms of the lessons
Speaker 1: from two thousand and eight, UM, I think we you know,
Speaker 1: we should never be complacent about this, but I don't
Speaker 1: think we are in you nearly in as bad a
Speaker 1: state as in two thousand and six, two thousand seven.
Speaker 1: But having said all that, you know, we we know
Speaker 1: that you know, these things never happen in exactly the
Speaker 1: same way. And so I think this is where, you know,
Speaker 1: clear thinking is needed. And I think this is where
Speaker 1: you know, we need to sit around and be you know,
Speaker 1: imaginative and just use our imagination as to what, uh,
Speaker 1: you know, what might happen, and then just test those
Speaker 1: conjectures uh and say you know, well, you know that's
Speaker 1: a good story, but through the numbers, uh, you know,
Speaker 1: actually actually back up your story. And so this is
Speaker 1: what we do, uh pretty much has our day jobs here.
Speaker 1: We um, we take these scenarios and we put them
Speaker 1: through their paces, and I think this is the way
Speaker 1: that we try and um, you know, come to a
Speaker 1: more balanced few. So looking to the here and now,
Speaker 1: and you talked about how in seventeen it looked like
Speaker 1: the global economy was looking fairly robust. Then it started
Speaker 1: slipping in early eighteen. It looked like it might just
Speaker 1: be a sort of reversion to the mean, but then
Speaker 1: it got a little deeper. It went a little longer
Speaker 1: than just something temporary encyclical. Wide perception is now the
Speaker 1: global economy is not doing that great, and we've recently
Speaker 1: seen the federal reserve take a more dovish stance, pretty
Speaker 1: much signaling the clear end of the raid hiking cycle
Speaker 1: and the likely commencement of a rate cutting cycle or
Speaker 1: at least some rate cuts. So in your view, sort
Speaker 1: of what is the story of the last two years
Speaker 1: and right now, like what explains why this downturn was
Speaker 1: perhaps a little more deep than people expected. And is
Speaker 1: this the start of a meaningful turn where the shift
Speaker 1: and FED policy might reinvigorate the global economy or our
Speaker 1: central bankers really just sort of trying to squeeze water
Speaker 1: from a stone here with further easing from the ECB
Speaker 1: and the FED, where you know, maybe you give a
Speaker 1: little bit of a pop to financial markets, but at
Speaker 1: this point we're just leaning way too heavily on one
Speaker 1: of the four engines to do anything meaningful. Yeah, Joe,
Speaker 1: that's a very good question. I wish I knew the
Speaker 1: full answer to that, but I think, you know, if
Speaker 1: we just look back over the last couple of years, uh,
Speaker 1: In the two thousand seventeen was a very interesting year
Speaker 1: because this was a year when on all accounts, the
Speaker 1: FED was on its steady course in normalizing monetary policy.
Speaker 1: See and yet the dollar is weak and financial conditions
Speaker 1: were loosen, so there was no you know, one for
Speaker 1: one relationship with the first monetary stance. I think that's, uh,
Speaker 1: that's worth thinking about because that's also very useful in
Speaker 1: thinking about why the first half of two thousand nineteen
Speaker 1: has been pretty challenging, even though you know, over the
Speaker 1: end of the year the Fed went on a more
Speaker 1: patient you know, I went on a pause. Now. It's
Speaker 1: it's true that the dollar has weakened, and you know
Speaker 1: the biggest beneficiaries of that weakening have actually been emerging
Speaker 1: market currency. So you know, if that trend were to continue,
Speaker 1: and we think that the previous relationships are going to
Speaker 1: reassert themselves, and you know, that should be a course
Speaker 1: for some comfort. Now having said that, at every turn, uh,
Speaker 1: you know, we are starting with a different stock, right,
Speaker 1: so you know, stocks do change over time, and so
Speaker 1: the same kind of push that would that would actually
Speaker 1: push a small car may not have the same impact
Speaker 1: you know, when when when it's fully laden and it's
Speaker 1: a larger car. And so you know, I don't think
Speaker 1: we can really say for sure, but as a you know,
Speaker 1: as a market observer, as an economic commentator, who who
Speaker 1: cares about the twists and turns of the global economy.
Speaker 1: I think, you know, we could do far worse than
Speaker 1: than track. You know how the dollar shifts visa via
Speaker 1: the emerging market currencies, So so let's see how that
Speaker 1: plays out. Well, it's been amazing having you on the program.
Speaker 1: Thank you so much. I think we managed to hit
Speaker 1: basically a lot of big topics in the short amount
Speaker 1: of time. So thanks again, excellent, excellent, Thank you so much.
Speaker 1: That was great. So Joe, I really and avoid that conversation.
Speaker 1: And again, if I haven't said it already, Um Huan's
Speaker 1: research work is really great and definitely worth reading. And
Speaker 1: I think at this point he must have a library.
Speaker 1: I mean I remember papers of his going back to
Speaker 1: like two thousand eight, so he has this huge body
Speaker 1: of work. I gotta say, it's pretty difficult to narrow
Speaker 1: it down to a thirty minute podcast, but hey, we tried.
Speaker 1: Can I just say there were two things that really
Speaker 1: jumped out at me Um about that conversation. So one
Speaker 1: is I really enjoy the sort of way he was
Speaker 1: able to blend these sort of big theoretical insights with
Speaker 1: very tangible real world consequences. So all these ideas about
Speaker 1: the relationship between financing conditions and the state of global
Speaker 1: trade and the state of the economy, and then being
Speaker 1: able to actually put sort of meat on the bone,
Speaker 1: so to speak, and to show how it plays out
Speaker 1: in the actual data. I think it was really cool.
Speaker 1: And also I was just really impressed by the sort
Speaker 1: of clarity of the conversation, because I always find the
Speaker 1: b I S work to be kind of intimidating. I
Speaker 1: don't know if I should admit that, but I click
Speaker 1: on their papers that I read them, and it's the
Speaker 1: sort of austere gray and I'm like, oh God, this
Speaker 1: is going to be above my head and I'm not
Speaker 1: going to be able to understand it, and it's going
Speaker 1: to use all this stuff that I don't know about.
Speaker 1: But I just found it to be an incredibly clear
Speaker 1: and simple to understand conversation. So I really appreciated that. Well,
Speaker 1: I don't think you're alone in finding the b I
Speaker 1: s intimidating. And I'm going to admit that my dad,
Speaker 1: who's my sort of benchmark for mainstream America, definitely thinks
Speaker 1: the Bank for International Settlements is some sort of like
Speaker 1: shadowy cabal that controls the world economy. And global business.
Speaker 1: So um, there is that conspiracy theory out there. But
Speaker 1: on a serious note, h there was one thing that
Speaker 1: that came through to me in that conversation, and it's
Speaker 1: the notion of the Federal Reserve as the sort of
Speaker 1: world's central bank. And I don't think like you know,
Speaker 1: that narrative or that question pops up every once in
Speaker 1: a while, but not nearly as much as as it should,
Speaker 1: especially given the attention on trade at the moment. Yeah, absolutely,
Speaker 1: and especially and of course at the June press conference,
Speaker 1: FED Sherman Powell making very clear how much world events
Speaker 1: and world conditions were influencing the FEDS thinking right now,
Speaker 1: So any notion that the FED can just oh, just
Speaker 1: look at the data within US borders clearly not a
Speaker 1: realistic thing to do in t right, But also vice versa,
Speaker 1: because there's this weird chicken and egg situation where yes,
Speaker 1: the US can be impacted by external events and the
Speaker 1: rest of the world, but then by reacting to external events,
Speaker 1: the FED ends up influencing them as well. And again
Speaker 1: it's so weird that people don't talk about it more.
Speaker 1: And we have this debate again sort of like on
Speaker 1: the fringes about whether or not the FED has a
Speaker 1: another mandate in the form of um worrying about how
Speaker 1: it's monetary policy actually impacts say, emerging market economies or
Speaker 1: other parts of the world. Well, and also to that point,
Speaker 1: I really liked his last point. I think it was
Speaker 1: one of his last points about even there the sort
Speaker 1: of undirect relationship between FED policy and financial conditions as
Speaker 1: exemplified by seventeen, in which it looked like the FED
Speaker 1: or the FED was in fact on a very steady
Speaker 1: series of hikes to move rates higher all the while
Speaker 1: it was a year of a week dollar and loosening
Speaker 1: financial conditions. So even the relationship between what the FED
Speaker 1: does and what the ultimate outcome on financial conditions is
Speaker 1: is itself sort of very unlinear relationship. Yeah, basically, it's
Speaker 1: all very complicated. That's my conclusion. It's all very complicated.
Speaker 1: That's my conclusion to all Right, this has been another
Speaker 1: episode of the All Thoughts podcast. I'm Tracy Alloway. You
Speaker 1: can follow me on Twitter at Tracy Alloway, and I'm
Speaker 1: Joe Why Isn't All? You can follow me on Twitter
Speaker 1: at the Stalwart, and you should follow our guest on Twitter,
Speaker 1: Hun Song Shin. He's at Hyun Soong Shin, and be
Speaker 1: sure to follow our producer on Twitter, Laura Carlson. She's
Speaker 1: at Laura M. Carlson. Follow the Bloomberg head of podcast
Speaker 1: Francesca Levie at Francesca Today, and check out the home
Speaker 1: of Bloomberg Podcasts on Twitter at the handle at podcasts.
Speaker 1: Thanks for listening.