WEBVTT - Why a Strong Dollar Causes Most of the World Major Pain 0:00:13.240 --> 0:00:16.720 Hello, and welcome to another episode of the Odd Lots Podcast. 0:00:16.760 --> 0:00:21.919 I'm Tracy Alloway and I'm Joe. Wasn't all Joe? Do 0:00:22.000 --> 0:00:26.320 you remember you wrote something? I'm guessing it was a 0:00:26.400 --> 0:00:29.480 year or two ago, but you basically wrote about how 0:00:29.680 --> 0:00:34.320 finance was sort of ground zero for deglobalization and a 0:00:34.400 --> 0:00:38.320 trade war. Do you remember that. I don't remember the 0:00:38.360 --> 0:00:41.279 specific thing per se that you're talking about, but I 0:00:41.320 --> 0:00:45.120 feel like this has been a reoccurring theme for us 0:00:45.240 --> 0:00:48.360 and a couple of things I've written and you've written 0:00:48.400 --> 0:00:52.800 for a while now, thinking about like just this idea 0:00:52.880 --> 0:00:56.680 that if the world is going to deglobalize, and arguably 0:00:56.760 --> 0:01:00.440 it is an arguably President Trump, that's part of his mission, 0:01:01.080 --> 0:01:06.840 that finance might be really where you see it emerged first, right, 0:01:07.040 --> 0:01:09.680 Because I think what tends to happen when people talk 0:01:09.840 --> 0:01:13.440 about trade tensions or a trade war is people start 0:01:13.480 --> 0:01:18.160 thinking about tangible goods, you know, like semiconductors and chips 0:01:18.280 --> 0:01:21.280 and I don't know all sorts of commodities, but people 0:01:21.400 --> 0:01:24.360 rarely actually stop and think that, well, all that global 0:01:24.400 --> 0:01:29.560 trade is something that is being financed by someone, and 0:01:29.600 --> 0:01:34.319 the financiers in this case are financial institutions or large banks, 0:01:34.319 --> 0:01:36.000 and so it would make a lot of sense if 0:01:36.040 --> 0:01:39.880 they also get hit by the trade tensions. Absolutely, And 0:01:39.920 --> 0:01:42.480 if you look at the history of finance, and I 0:01:42.480 --> 0:01:45.480 remember this is something we talked about years ago on 0:01:45.520 --> 0:01:49.840 the podcast I think we're talking to Emmanuel Derman. If 0:01:49.880 --> 0:01:53.240 you look at the history of finance, so much of 0:01:53.280 --> 0:01:57.800 it corresponds to globalization and even the sort of explosion 0:01:58.120 --> 0:02:03.160 of derivatives and other measures designed to hedge risk. A 0:02:03.200 --> 0:02:05.760 lot of it is designed to sort of mitigate the 0:02:05.840 --> 0:02:10.320 risk of trading across to different countries with different currencies 0:02:10.360 --> 0:02:13.360 and so forth. So you really you can't talk about 0:02:13.400 --> 0:02:17.400 globalization without talking about all these instruments that have been 0:02:17.400 --> 0:02:20.680 built up by Wall Street banks. Very true, and you 0:02:20.720 --> 0:02:24.160 mentioned currencies just then. And the interesting thing is that 0:02:24.240 --> 0:02:27.480 even though we're talking about global trade and cross border 0:02:27.560 --> 0:02:31.720 financial transactions, of course the vast majority of these are 0:02:31.760 --> 0:02:35.360 still denominated in the U. S. Dollars. So you have 0:02:35.520 --> 0:02:41.680 this weird sort of space where things are happening between countries, 0:02:41.800 --> 0:02:46.160 between all these different entities, companies and banks, but many 0:02:46.200 --> 0:02:49.920 of the transactions are dollar denominated. And of course what 0:02:50.040 --> 0:02:53.640 we've seen recently has been about of US dollar strength, 0:02:53.800 --> 0:02:56.720 and the speculation has been that that has added to 0:02:56.919 --> 0:02:59.760 the pain of the trade war, at least up until 0:02:59.760 --> 0:03:03.400 rec on link. Yeah, there's a lot of different substories 0:03:03.440 --> 0:03:06.040 going on right now with the trade war with actions 0:03:06.080 --> 0:03:09.680 taken by the Trump administration. One of them that hasn't 0:03:09.720 --> 0:03:12.920 got a ton of attention is whether any of this 0:03:13.280 --> 0:03:17.240 is going to eventually contribute to the undollarization of the 0:03:17.280 --> 0:03:20.280 global economy, because people have been predicting that for a 0:03:20.320 --> 0:03:26.200 long time that maybe somehow global different trading partners might 0:03:26.280 --> 0:03:29.840 find an opportunity to come off the dollar, but nothing 0:03:29.919 --> 0:03:32.560 really has even come close to emerging that would actually 0:03:32.960 --> 0:03:36.280 replace the dollar. The Euro has flaws, the Chinese, you 0:03:36.440 --> 0:03:38.880 n for obvious reasons, is not in a position to 0:03:39.280 --> 0:03:42.960 really replace it. But with the various actions that the 0:03:43.000 --> 0:03:47.960 Trump administration has taken, obviously people wondering if there will 0:03:47.960 --> 0:03:50.600 be a renewed effort on part of various actors to 0:03:50.960 --> 0:03:53.880 get out of the dollar system, so to speak. Right, 0:03:54.000 --> 0:03:56.600 and even if there isn't a push to replace the 0:03:56.680 --> 0:03:59.839 dollar in some way, you can imagine that there will 0:03:59.880 --> 0:04:02.800 be renewed focus on the potential for a currency war, 0:04:02.960 --> 0:04:07.040 right devaluations to sort of increase your competitiveness when it 0:04:07.040 --> 0:04:09.680 comes to trade, so that seems to be the minimum. Anyway. 0:04:10.400 --> 0:04:14.920 The reason this intro is slightly disjointed is because we 0:04:14.960 --> 0:04:18.119 have a guest on today who not only can talk 0:04:18.160 --> 0:04:22.640 about everything from trade to cross border flows to currency regimes, 0:04:22.640 --> 0:04:28.000 but pretty much anything else cryptocurrency, financial stability, big tech, 0:04:28.760 --> 0:04:34.479 credit markets, overheating, you name it, he can talk about it. Yeah, exactly. 0:04:34.520 --> 0:04:37.560 So like we have this really unwieldy intro touching on 0:04:37.640 --> 0:04:42.440 all these things because our guest is so unusual and 0:04:42.560 --> 0:04:47.000 unique in his ability to pull together and cover all 0:04:47.040 --> 0:04:49.880 these uh, all these different strands of what's going on 0:04:50.040 --> 0:04:53.320 in world financial markets, in the economy. Exactly. We're going 0:04:53.360 --> 0:04:54.960 to see if we can narrow it down a bit, 0:04:55.040 --> 0:04:58.960 but without further ado. Our guest for today is hyun 0:04:59.120 --> 0:05:03.040 Sung Shin. He is economic advisor and head of research 0:05:03.200 --> 0:05:07.400 for the Bank for International Settlements and uh, if you 0:05:07.440 --> 0:05:10.400 haven't been following his research already, I highly encourage you 0:05:10.440 --> 0:05:12.760 to do so. Ken, it's so nice to have you 0:05:12.800 --> 0:05:16.200 on the show. But Tracy, hello, Joe, it's good to 0:05:16.240 --> 0:05:22.120 be here. Hello. So apologies again for that unwieldy intro, 0:05:22.480 --> 0:05:25.600 but I think it does speak to the breadth of 0:05:25.640 --> 0:05:28.560 your research, which is really wide and varied. Could you 0:05:28.600 --> 0:05:31.159 maybe just to begin with give us a sort of 0:05:31.200 --> 0:05:34.440 rundown of what your mandate actually is at the b 0:05:34.560 --> 0:05:37.920 I S. Yeah, I mean the b I S, as 0:05:37.960 --> 0:05:41.800 you know, is the oldest international financial institution we were 0:05:41.839 --> 0:05:48.320 set up in It's a body to foster the cooperation 0:05:48.360 --> 0:05:52.760 among central banks. We have around sixty member central banks 0:05:53.600 --> 0:05:57.440 and I'll task us to um IS to focus those discussions, 0:05:57.480 --> 0:06:01.760 help to facilitate cooperation among the central banks, both for 0:06:01.839 --> 0:06:06.520 monetary policy and for financial stability. We also host many 0:06:06.560 --> 0:06:11.800 of the international regulatory committees that that oversee some of 0:06:11.839 --> 0:06:15.360 the discussions, like the Basel Committee and the Financial Stability Board. 0:06:16.000 --> 0:06:18.479 It tell us about your role there because you the 0:06:18.520 --> 0:06:20.640 b I S puts out quite a bit of research. 0:06:20.960 --> 0:06:23.680 You put out quite a bit of research. What is 0:06:23.720 --> 0:06:27.440 the sort of overarching goal of what you're pursuing with 0:06:27.480 --> 0:06:30.360 the things you've been working on. You know, we're here 0:06:30.400 --> 0:06:33.640 to serve central banks and how they conduct monetary policy 0:06:33.680 --> 0:06:36.880 and also how they can serve as a guidians of 0:06:36.960 --> 0:06:39.599 financial stability, and so you know this is this is 0:06:39.600 --> 0:06:42.359 a very broad remit. As you can imagine so we 0:06:42.440 --> 0:06:44.960 have to be you know, pretty broad in our approach. 0:06:45.040 --> 0:06:46.839 You know, it's very kind of you too to be 0:06:46.880 --> 0:06:48.600 so complimentary, but I think this is you know, we 0:06:48.680 --> 0:06:51.640 regard this as being part of our job. And I 0:06:51.640 --> 0:06:55.480 think you you give a very good introduction to where 0:06:55.480 --> 0:06:58.360 we find ourselves in the in the global economy right now. 0:06:58.720 --> 0:07:01.760 And we had a very strong thousand seventeen in global growth. 0:07:01.839 --> 0:07:05.240 But since the middle of last year, we you know, 0:07:05.279 --> 0:07:08.280 we had this slowdown which at first seemed like just 0:07:08.360 --> 0:07:11.120 a reversion to the mean, but you know, it turned 0:07:11.160 --> 0:07:14.320 into something a little bit more, something a little bit deeper, 0:07:14.640 --> 0:07:17.560 where we saw the manufacturing and trade you know, contract 0:07:18.480 --> 0:07:23.680 even as employment, you know, remains strong. Um and consumption 0:07:23.920 --> 0:07:29.440 was was pretty strong, underpinned by the strong services sector. 0:07:29.640 --> 0:07:32.520 And what we try and do is to try and 0:07:34.040 --> 0:07:37.040 join the dots, and the dots actually could be in 0:07:37.200 --> 0:07:41.560 somewhat unfamiliar places in terms of the standard way that 0:07:41.600 --> 0:07:45.400 we classify, the way that we subdivide the different areas 0:07:45.400 --> 0:07:51.240 of economics, and and I think trade, manufacturing, global growth 0:07:51.720 --> 0:07:56.040 all turns out to be quite closely related to financial forces. 0:07:57.040 --> 0:08:00.400 And I think here is where the where the currency 0:08:00.400 --> 0:08:02.840 dimension comes in because it's it does seem from the 0:08:02.880 --> 0:08:07.840 accumulated evidence that the that the broad dollar index has 0:08:07.880 --> 0:08:10.840 something of the character of a of a barometer of 0:08:10.920 --> 0:08:15.640 global risk appetite. Mhm. Right, So, in some of your 0:08:15.680 --> 0:08:19.560 research before, you've actually published this really great chart that 0:08:19.640 --> 0:08:24.120 basically shows when the dollar strengthens, trade kind of drops 0:08:24.160 --> 0:08:27.680 and vice versa. Basically there's an inverse relationship between the 0:08:27.680 --> 0:08:30.920 green back and global trade. Can you walk us through 0:08:30.960 --> 0:08:34.679 exactly what's happening there and why does the dollar matter 0:08:34.800 --> 0:08:37.880 so much when it comes to this particular issue. But 0:08:37.960 --> 0:08:40.360 those of your listeners who are not perhaps familiar with 0:08:40.360 --> 0:08:43.199 this chart, I would just point them to the speech 0:08:43.320 --> 0:08:48.280 I gave in Berlin at the German Federal Minister of Finance. 0:08:48.440 --> 0:08:52.360 This was in the middle of May. And you know, 0:08:52.400 --> 0:08:56.760 if we chart the ratio of global exports to global GDP, 0:08:57.640 --> 0:09:00.079 that displays a very interesting pattern. And that ratio is 0:09:00.120 --> 0:09:03.120 a very interesting ratio because you know, trade is measured 0:09:03.120 --> 0:09:07.079 on a growth basis, in that you know, whenever shipments 0:09:07.520 --> 0:09:09.839 across the border, you can just tally it all up 0:09:10.360 --> 0:09:12.400 and it's measured in gross terms, and that you don't 0:09:12.760 --> 0:09:16.200 take into account the fact that some of the inputs 0:09:16.240 --> 0:09:21.760 into the exports were actually themselves imported. Whereas GDP is 0:09:21.920 --> 0:09:24.960 a value added measure. It's you know, it measures what 0:09:25.080 --> 0:09:28.040 is the total value of the goods produced as measured 0:09:28.040 --> 0:09:30.800 by the final output. Right, So if you take that 0:09:30.960 --> 0:09:35.520 ratio which is gross exports to GDP and you know, 0:09:35.559 --> 0:09:38.960 we can sum it up to the global level, what 0:09:39.040 --> 0:09:41.880 it gives you is the degree of double counting that 0:09:41.960 --> 0:09:44.840 happens when we measure gross exports, and that you know, 0:09:44.880 --> 0:09:49.560 if the same component is used for you know, as 0:09:49.600 --> 0:09:53.240 an input into another intermediate good, and then that intermediate 0:09:53.240 --> 0:09:57.079 good is exported into another country, which then gets processed 0:09:57.080 --> 0:10:01.160 into a further intermediate good which is than exported. The 0:10:01.240 --> 0:10:05.560 more times a particular component crosses the border, the larger 0:10:05.640 --> 0:10:09.800 will be the disparity between you know, grows exports and GDP. 0:10:10.280 --> 0:10:13.120 So you know, that ratio does fluctuate a lot, and 0:10:13.400 --> 0:10:18.040 it's a useful proxy for the activity of global value chains. 0:10:18.080 --> 0:10:23.960 So manufacturing has been the driver of global trade growth 0:10:24.120 --> 0:10:28.480 in the last few decades, and within the manufacturing trade, 0:10:28.520 --> 0:10:31.040 it's been the growth of the global value chains. It's 0:10:30.800 --> 0:10:34.160 a it's a supply chains that have been very, very important, 0:10:34.480 --> 0:10:37.439 and no country has been more important in this development 0:10:37.720 --> 0:10:40.360 than China. In fact, China has emerged. If you look 0:10:40.400 --> 0:10:42.080 at one of the charts in the in the in 0:10:42.120 --> 0:10:44.840 the brilliant speech that I mentioned, that's a very striking 0:10:44.920 --> 0:10:49.480 chart shows China going from somewhat of a small node 0:10:49.520 --> 0:10:51.840 in the year two thousand before they entered the w 0:10:51.920 --> 0:10:56.120 t O to really the the connecting lynchpin in the 0:10:56.120 --> 0:11:00.560 global trading system. Now, what do you need to sustain 0:11:01.080 --> 0:11:03.840 very elaborate global value chains like that. Well, for this 0:11:04.000 --> 0:11:07.439 to actually work, what you need is all the intermediate 0:11:07.480 --> 0:11:12.960 goods to be financed while they're in the intermediate good stage. 0:11:12.960 --> 0:11:14.520 So if you look at the just think about a 0:11:14.520 --> 0:11:18.400 corporate balance sheet when you have lots of intermediate goods 0:11:18.440 --> 0:11:21.079 that are whizzing back and forth, I mean they all 0:11:21.160 --> 0:11:25.080 be appearing either as inventories or they will be appearing 0:11:25.160 --> 0:11:27.960 as accounts receivable. You know, if if that good has 0:11:28.000 --> 0:11:30.880 crossed the boundary of the firm, and these are assets 0:11:30.920 --> 0:11:33.080 of the firm which need to be financed somehow, and 0:11:33.120 --> 0:11:37.920 typically they have been financed either through the firm's internal resources. 0:11:37.960 --> 0:11:40.200 But what we know very well from other studies is 0:11:40.240 --> 0:11:43.240 that the global banking system has been a very important 0:11:44.240 --> 0:11:48.640 source of funding for the the short term assets that 0:11:48.640 --> 0:11:51.760 that underpin the global value chain. And the other thing 0:11:51.760 --> 0:11:54.200 that we know from the other studies, some of it, 0:11:54.520 --> 0:11:59.040 you know you've already mentioned, is that financial conditions in 0:11:59.200 --> 0:12:03.800 dollars and and the dollar exchange rate itself is very 0:12:03.840 --> 0:12:07.560 closely correlated, and that when the dollar is strong, um 0:12:07.559 --> 0:12:10.559 this is when dollar credit tends to be somewhat tight 0:12:11.000 --> 0:12:15.640 and the funding conditions go up. The in particular cross 0:12:15.679 --> 0:12:19.439 border element seems to be very sensitive. So if you 0:12:19.520 --> 0:12:22.120 put two and two together and we combine it with 0:12:22.240 --> 0:12:26.160 the prevalence of dollar invoicing, what we have is the 0:12:26.200 --> 0:12:30.439 combination of the following fact that you need short term 0:12:30.440 --> 0:12:33.800 assets to be financed in order to support global value chains. 0:12:34.600 --> 0:12:38.319 You need the dollar financing to be rather free in 0:12:38.480 --> 0:12:42.599 order for the dollar financing to support those short term assets, 0:12:42.720 --> 0:12:45.040 and that means that you tend to see an expansion 0:12:45.080 --> 0:12:48.719 of trade when the dollar financing conditions are more accommodative, 0:12:48.760 --> 0:12:52.760 and that's when the dollar is weak. This ratio of 0:12:53.600 --> 0:12:58.800 the global exports to global GDP tends to move in 0:12:58.840 --> 0:13:01.840 the opposite direction uh to the strength of the dollar. 0:13:02.280 --> 0:13:06.240 What one could reasonably conjecture about the events of two 0:13:06.320 --> 0:13:10.680 thousand eighteen into the early part of two thousand nineteen, 0:13:10.840 --> 0:13:13.800 is that this was indeed the period when you know, 0:13:13.840 --> 0:13:17.880 we saw the dollar strengthened, and two thousand seventeen was 0:13:17.920 --> 0:13:21.000 a was a year when the dollar was actually quite weak. 0:13:21.400 --> 0:13:24.560 This was a period in spite of the fair increase 0:13:24.640 --> 0:13:28.720 in its policy rate, we saw very accommodated financial conditions. Now, 0:13:29.280 --> 0:13:31.520 it's I think important just to point out here that 0:13:31.760 --> 0:13:35.400 the dollar is an endogenous variable. It's a financial market price. 0:13:35.520 --> 0:13:39.040 So there isn't any particular causal story as to why 0:13:40.040 --> 0:13:42.640 the dollar is strong and why you might actually get 0:13:42.679 --> 0:13:45.719 these things going from the dollar to these other real variables. 0:13:45.760 --> 0:13:48.760 But if you want a barometer, if you want a 0:13:49.600 --> 0:13:52.679 concurrent indicator of what's going on, you cannot do much 0:13:52.720 --> 0:13:55.080 better than to look at the value of the of 0:13:55.080 --> 0:13:58.559 the broad dollar index. I mean that that was fantastic, 0:13:58.760 --> 0:14:01.320 and that was just sort of a rate explanation of 0:14:01.480 --> 0:14:04.560 what's going on. Actually pulled up your chart that you're 0:14:04.559 --> 0:14:08.240 referring to while you were explaining it. And what's really 0:14:08.280 --> 0:14:13.280 striking is, again we talk about deglobalization and the age 0:14:13.280 --> 0:14:15.920 of Trump. But as you pointed out in your speech 0:14:15.960 --> 0:14:20.000 and as the Church shows this ratio of world goods 0:14:20.040 --> 0:14:23.680 exports to GDP has really been falling ever since two 0:14:23.680 --> 0:14:27.480 thousand eleven. And in fact, if you even bigger picture, 0:14:27.520 --> 0:14:30.280 what you see from your chart is that from two 0:14:30.320 --> 0:14:32.840 thousand and one until about the start of the Great 0:14:32.880 --> 0:14:36.320 Financial Crisis, trade as a percentage of GDP had been 0:14:36.360 --> 0:14:39.880 going up. And that was also a period of significant 0:14:39.880 --> 0:14:42.760 dollar weakness and a lot of angst about oh, is 0:14:42.800 --> 0:14:45.400 there something the twin deficits and is the Euro get 0:14:45.400 --> 0:14:47.840 to replace the dollar and all that stuff, And then 0:14:48.640 --> 0:14:51.800 after the Great Financial Crisis you see a brief jump 0:14:51.920 --> 0:14:56.040 in a world trade that ratio, but then it's declining. So, 0:14:56.080 --> 0:14:58.760 as you point out, the dollar itself is not the 0:14:58.920 --> 0:15:03.800 causal variable, say it's a concurrent, it's endogenous. What is 0:15:03.880 --> 0:15:10.200 the story then that explains some of this deglobalization trend 0:15:10.680 --> 0:15:15.600 since the early aftermath of the Great Financial Crisis, or 0:15:15.640 --> 0:15:21.240 what might be some of the explanatory factors. Yes, Joe, 0:15:21.280 --> 0:15:23.280 I think that's so. That's a very good observation. And 0:15:24.520 --> 0:15:27.880 you know, for the for your listeners, the charts only 0:15:27.920 --> 0:15:30.320 plotted from the year two thousand. If you extend that 0:15:30.440 --> 0:15:32.800 back further, of course, you know there was a golden 0:15:32.840 --> 0:15:38.640 age of globalization when trade to GDP rose tremendously over 0:15:38.680 --> 0:15:41.360 a very very long time. So I think that's probably 0:15:41.680 --> 0:15:43.760 you know, the over the longer horizon if we go 0:15:43.840 --> 0:15:47.920 back to the seventies, eighties, and nineties, and the golden 0:15:47.920 --> 0:15:50.480 age of globalization was the was the late eighties and 0:15:50.560 --> 0:15:53.520 the nineteen nineties, that's probably much more to do with 0:15:53.920 --> 0:15:57.760 liberalization to you know, these longer range forces. But the 0:15:58.040 --> 0:16:01.440 but the period from two thousands three up to the crisis, 0:16:02.360 --> 0:16:06.120 that's probably better understood, as you say, in terms of 0:16:06.320 --> 0:16:09.400 what was happening to the dollar, but in particular what 0:16:09.440 --> 0:16:12.360 was happening to the banking sector and the ease with 0:16:12.440 --> 0:16:15.840 which you know, you could get credit from the banks. 0:16:15.960 --> 0:16:18.200 And you know, we we now know the full story 0:16:18.720 --> 0:16:21.000 with the benefit of hindsight. That was a very very 0:16:21.040 --> 0:16:25.240 special period. And what we've seen since the crisis is 0:16:25.280 --> 0:16:29.320 the banking sector hasn't really been hasn't really recovered its 0:16:29.320 --> 0:16:32.160 mojo if you like, they have been better capitalized. We 0:16:32.240 --> 0:16:35.200 are now well over the crisis. But what's happened is 0:16:35.720 --> 0:16:39.680 the environment, you know, financial environment in terms of the 0:16:39.720 --> 0:16:42.120 slope of the yield curve, in terms of their interest 0:16:42.160 --> 0:16:46.360 margins of the banks. That has been very far from 0:16:47.160 --> 0:16:51.120 the story before the crisis, which was really very much 0:16:51.160 --> 0:16:54.760 more conducive to the increase in leverage. The child itself 0:16:54.920 --> 0:16:57.360 is is a very striking one because, as you say, 0:16:58.040 --> 0:17:03.760 this ratio of exports to global GDP never really went 0:17:03.800 --> 0:17:06.720 back to the pre crisis peak. It's been on this 0:17:06.920 --> 0:17:10.399 downward trend since two thousand and eleven, with only a 0:17:10.440 --> 0:17:13.359 brief respite in two thousand seventeen, which uh, you know, 0:17:13.800 --> 0:17:15.359 turned out to be a little bit of a blit 0:17:15.640 --> 0:17:19.680 um in in retrospect because this was particular period when 0:17:20.080 --> 0:17:38.480 financial conditions were were looser. Tracy. You know, one other 0:17:38.520 --> 0:17:41.720 thing that occurs to me looking at this chart of 0:17:42.000 --> 0:17:45.840 global trade relative to g d P, it looks a 0:17:45.880 --> 0:17:48.320 lot like a chart that you would get if you 0:17:48.760 --> 0:17:54.639 plotted emerging market stock prices relative to developed market equities, 0:17:54.680 --> 0:17:57.480 because that's one of those things where e ms did 0:17:57.480 --> 0:18:00.919 great pre crisis, and then they massively outperformed in the 0:18:00.920 --> 0:18:03.600 immediate aftermath of the crisis, but then they've just been 0:18:03.640 --> 0:18:08.040 totally mediocre ever since then. So kind of a clue 0:18:08.080 --> 0:18:12.480 perhaps too what drives em equities, right, and that sort 0:18:12.520 --> 0:18:15.160 of gets back to that cross border dynamic. But um 0:18:15.240 --> 0:18:18.320 here and I wanted to concentrate on on one thing, 0:18:18.359 --> 0:18:22.960 which is I guess it's sort of expected that banks 0:18:23.200 --> 0:18:29.320 play an outsized role in transmitting um financial conditions or 0:18:29.480 --> 0:18:32.159 monetary policy to the rest of the world or the 0:18:32.200 --> 0:18:36.200 real world, if you will. And I'm just wondering, given 0:18:36.240 --> 0:18:40.760 that monetary policy has been so easy host two thousand eight, 0:18:40.880 --> 0:18:44.639 and yet we've seen cross border lending sort of contract 0:18:45.000 --> 0:18:49.640 or global trade contract by your measurement, does that mean 0:18:49.640 --> 0:18:54.639 that the bank's transmission mechanism is effectively broken? Is banking 0:18:54.680 --> 0:18:57.760 not doing what it's supposed to be doing. Asked to 0:18:57.760 --> 0:19:01.240 whether financial conditions have been have been loose or tight, 0:19:01.320 --> 0:19:05.480 I think it's it's very much. It has been very 0:19:05.520 --> 0:19:08.080 accommodative in the sense that long term interest rates have 0:19:08.160 --> 0:19:12.040 been low. This has been very conducive to the issuance 0:19:12.119 --> 0:19:16.800 of fixed income instruments, especially corporate bonds. If we look 0:19:16.800 --> 0:19:21.840 at the composition of of the increase in debt, it's 0:19:21.880 --> 0:19:24.840 far less the liabilities of intermediary It's it's far less 0:19:24.840 --> 0:19:27.280 bank lending that's been at the center of the story. 0:19:27.320 --> 0:19:31.479 It's much more the issuance of long term instruments, long 0:19:31.600 --> 0:19:36.560 term capital market instruments like corporate bonds. If you look 0:19:36.560 --> 0:19:39.520 at one of the charts that in the in the speech, 0:19:39.520 --> 0:19:43.920 what we see is that even as bank lending denominated 0:19:43.920 --> 0:19:47.400 in dollars has really been quite weak since the crisis, 0:19:48.080 --> 0:19:51.119 dollar denominated issuance of corporate bonds has been has been 0:19:51.200 --> 0:19:55.919 very strong. Now for the purpose of supporting trade. The 0:19:55.920 --> 0:19:58.639 problem is that, you know, trade relies very much on 0:19:58.680 --> 0:20:02.639 the short term funding coming primarily from the banks, and 0:20:02.720 --> 0:20:05.680 you know, as well as the firm's own own equity. 0:20:05.760 --> 0:20:09.600 So you know, for a while, when balance sheets were 0:20:09.720 --> 0:20:13.879 quite strong in the corporate sector, the weak bank lending 0:20:13.920 --> 0:20:17.960 probably wasn't such a big break on on trade and 0:20:18.000 --> 0:20:21.119 global value chain activity. But what we've seen is that 0:20:21.240 --> 0:20:26.600 over time, especially in the emerging markets, especially firms in China, 0:20:27.440 --> 0:20:30.160 there has been a lot of long term dead isssudants 0:20:30.240 --> 0:20:35.160 by the non financial corporates. And so when you are 0:20:35.240 --> 0:20:39.000 starting with already quite a leverage balance sheet and you 0:20:39.119 --> 0:20:42.520 see conditions tightening, that is a very different story from 0:20:42.520 --> 0:20:45.760 when you start with a pretty strong balance sheet and 0:20:45.840 --> 0:20:48.679 you have a lot more internal resources that you can deploy, 0:20:48.920 --> 0:20:52.720 and the banking sector really isn't anywhere there to give 0:20:52.760 --> 0:20:55.919 you that support. So it's it's really the combination of 0:20:56.040 --> 0:21:02.040 the banking sector still repairing, still somewhat to subdued because 0:21:02.080 --> 0:21:05.760 of the of the very special yield cut conditions since 0:21:05.800 --> 0:21:09.560 the crisis, together with the cumulated debts that have happened 0:21:09.600 --> 0:21:11.960 since the crisis. And so what you've seen is that 0:21:12.160 --> 0:21:14.760 you know, these things are coming to a head more recently. 0:21:14.960 --> 0:21:17.480 I think that's the way that I would say. So 0:21:17.800 --> 0:21:21.119 if you go back to the pre crisis era, obviously 0:21:21.280 --> 0:21:24.959 we saw rapid expansion in global trade, which, as you 0:21:25.000 --> 0:21:29.159 point out, was a period of easy lending and banks 0:21:29.160 --> 0:21:32.320 being quite willing to finance things, but of course we 0:21:32.359 --> 0:21:36.640 all know how that ended with a gigantic financial crisis 0:21:36.880 --> 0:21:40.679 economic collapse. Is there a way to get back to 0:21:41.960 --> 0:21:46.760 the pre crisis era from a trade perspective, in a 0:21:46.800 --> 0:21:49.960 more sustainable manner, so we can actually see that line 0:21:50.000 --> 0:21:53.320 turn up again for a while, but it not inevitably 0:21:53.640 --> 0:21:58.320 lead towards disaster. What all this raises is the intriguing 0:21:58.400 --> 0:22:01.520 possibility that you know, although we we like to make 0:22:01.560 --> 0:22:05.840 this very sharp distinction between the real economy and the 0:22:05.920 --> 0:22:10.679 financial markets, and then you know, think about excess is 0:22:10.680 --> 0:22:13.080 only happening in the financial markets. Well, you know, there 0:22:13.359 --> 0:22:18.720 there is a sense where some very very extended global 0:22:18.800 --> 0:22:22.760 value chain structures may only be sustainable with really really 0:22:22.840 --> 0:22:26.720 extraordinarily lose financial conditions. And so so if you like, 0:22:27.040 --> 0:22:30.320 you know, there could be you know, bubble like features 0:22:30.400 --> 0:22:34.160 of real activity as well if it's really very heavily extended. 0:22:34.280 --> 0:22:36.959 And so we should think about you know, um, one 0:22:37.000 --> 0:22:39.080 of the things that we emphasize here at the b 0:22:39.160 --> 0:22:44.280 I S is long term sustainability. So what is sustainable 0:22:44.480 --> 0:22:48.679 in the long term? What kind of economic activities are 0:22:48.720 --> 0:22:53.320 resilient to to sharks, and and what can policymakers do 0:22:53.440 --> 0:22:55.840 to bring these things about? So, I mean, those are 0:22:55.840 --> 0:22:58.600 the things that we tend to focus on. We try 0:22:58.600 --> 0:23:01.600 to have a longer term perspective on these things. And 0:23:01.359 --> 0:23:04.919 and within that broad framework, you know, you could argue 0:23:05.080 --> 0:23:08.920 that just pushing on the acceleator, just trying to extend 0:23:09.000 --> 0:23:12.080 the global value chains further. You know, that may be 0:23:12.200 --> 0:23:16.159 okay to boost the real quantities you know, in the 0:23:16.160 --> 0:23:19.280 process of lengthening, but then you are setting yourself up 0:23:19.359 --> 0:23:24.120 for a more you know, a sharp pullback when when 0:23:24.160 --> 0:23:28.120 conditions tighten. Well, I wanted to sort of press on 0:23:28.160 --> 0:23:31.520 this point because you mentioned that, you know, host two 0:23:31.520 --> 0:23:34.280 thousand eight, a lot of this global financing is coming 0:23:34.280 --> 0:23:38.320 in the form of bonds being issued by corporates rather 0:23:38.400 --> 0:23:41.680 than your typical bank loans. But the thing that those 0:23:41.680 --> 0:23:45.080 two things often have in common is their currency, so 0:23:45.200 --> 0:23:49.040 all dollar denominated. And this gets back to Joe's emerging 0:23:49.040 --> 0:23:53.199 market point as well. I'm just wondering how vulnerable do 0:23:53.240 --> 0:23:57.240 you think the world economy is to a dollar liquidity 0:23:57.280 --> 0:24:00.560 squeeze at this point. On that question, I think we 0:24:00.600 --> 0:24:05.040 have to distinguish between the kinds of acute episodes that 0:24:05.080 --> 0:24:08.520 we saw in the run up to the two eight crisis, 0:24:08.960 --> 0:24:12.679 which have to do with very rapidly leveraging, very rapid 0:24:12.760 --> 0:24:17.880 contraction of wholesale funding by banks and bank like intermediaries. 0:24:18.240 --> 0:24:20.960 I mean, that was a very very sharp pullback, and 0:24:21.600 --> 0:24:24.199 that was a very acute episode. I don't think we 0:24:24.320 --> 0:24:27.360 have the same kind of vulnerabilities in the banking set 0:24:27.359 --> 0:24:29.440 are right now. I mean, if anything, the banks have 0:24:29.560 --> 0:24:33.600 been quite subdued as we have just talked about. But 0:24:34.040 --> 0:24:36.480 in fact, the you know, the vulnerabilities, you know, they're 0:24:36.480 --> 0:24:39.439 more you know, longer term, you feel like I mean 0:24:39.480 --> 0:24:43.240 they have to do with the debts of non intermediate 0:24:43.320 --> 0:24:45.919 non banks. You know, they're more chronic, if you like, 0:24:46.080 --> 0:24:49.399 I mean they rather than acute. In in some countries, 0:24:49.840 --> 0:24:52.879 especially those countries that didn't experience the worst of the 0:24:52.960 --> 0:24:57.040 global financial crisis, the household debt has continued to rise. 0:24:57.520 --> 0:25:02.280 House prices are now very high, Corporate debt is high 0:25:02.359 --> 0:25:06.720 pretty much across the board, both advanced and emerging economies, 0:25:06.720 --> 0:25:10.439 and so you know, those forces can act as a 0:25:10.480 --> 0:25:16.399 break on potential stimulants towards really really economic activity. I mean, 0:25:16.400 --> 0:25:19.320 there's a there's a limit to how much that households 0:25:19.359 --> 0:25:23.119