1 00:00:11,400 --> 00:00:15,280 Speaker 1: Hello, and welcome to another episode of the Odd Lots Podcast. 2 00:00:15,320 --> 00:00:19,599 Speaker 1: I'm Joe Wisenthal and I'm Tracy Allaway. Tracy, I know 3 00:00:19,760 --> 00:00:25,119 Speaker 1: it's sort of ghost to rag or say anything too 4 00:00:25,160 --> 00:00:28,800 Speaker 1: positive these days, isn't it ghost to use the word ghost? 5 00:00:29,080 --> 00:00:31,840 Speaker 1: It's probably ghost to use the word ghost too, But 6 00:00:31,960 --> 00:00:35,080 Speaker 1: I kind of want to brag about something, just real quickly, 7 00:00:35,159 --> 00:00:37,479 Speaker 1: or sort of you know, pat ourselves on the shoulder 8 00:00:37,520 --> 00:00:40,479 Speaker 1: for a second. Okay, go on, what is it? Well? 9 00:00:41,000 --> 00:00:45,480 Speaker 1: I'm happy about the fact that prior to this crisis, 10 00:00:46,280 --> 00:00:49,920 Speaker 1: we had a lot of guests on the podcast whose 11 00:00:49,960 --> 00:00:55,320 Speaker 1: expertise seems very relevant to the situation at hand. Now, yeah, 12 00:00:55,440 --> 00:00:58,319 Speaker 1: i'd say that's right. I mean, I'm trying to think 13 00:00:58,320 --> 00:01:00,920 Speaker 1: of some specific names, but the list is pretty long 14 00:01:01,000 --> 00:01:04,360 Speaker 1: at this point. Now the list is pretty long. We 15 00:01:04,440 --> 00:01:06,800 Speaker 1: don't have to go through specific names. But I feel like, 16 00:01:06,880 --> 00:01:10,759 Speaker 1: on some level, the fact that we have gone back 17 00:01:10,880 --> 00:01:14,319 Speaker 1: on the last several weeks, we've done so many episodes 18 00:01:14,360 --> 00:01:17,399 Speaker 1: with repeat guests, I think it says a sort of 19 00:01:17,680 --> 00:01:21,760 Speaker 1: good thing about our our episode selection leading up to this, 20 00:01:21,800 --> 00:01:24,080 Speaker 1: when we didn't know that there would be an imminent 21 00:01:24,440 --> 00:01:28,120 Speaker 1: global economic and financial crisis. Oh, absolutely, we have the 22 00:01:28,680 --> 00:01:32,839 Speaker 1: right people on speed dial. I'd put it that way, alright, alright, 23 00:01:32,840 --> 00:01:35,440 Speaker 1: that so that we can we can end end the bragging. 24 00:01:35,760 --> 00:01:40,280 Speaker 1: Uh now. But obviously once again we will be speaking 25 00:01:40,319 --> 00:01:44,280 Speaker 1: with someone who we talked to previously. Ah um, so 26 00:01:44,360 --> 00:01:47,000 Speaker 1: I know who it is. This time it's Richard Coup 27 00:01:47,280 --> 00:01:52,320 Speaker 1: from Nomura of balance sheet recession fame, and the last 28 00:01:52,360 --> 00:01:55,680 Speaker 1: time he came on it was really really interesting discussion 29 00:01:56,360 --> 00:01:58,560 Speaker 1: and I think it's going to be absolutely fascinating to 30 00:01:58,600 --> 00:02:02,240 Speaker 1: see how much of that balance sheet recession idea, if 31 00:02:02,280 --> 00:02:07,160 Speaker 1: anything at all, actually applies to our current situation. Right. So, 32 00:02:07,280 --> 00:02:11,800 Speaker 1: a lot of people, myself included, really discovered Richard Cou's 33 00:02:11,800 --> 00:02:15,640 Speaker 1: work during the last crisis. He wrote a fantastic book, 34 00:02:15,720 --> 00:02:20,760 Speaker 1: The Holy Grail of Macroeconomics, Lessons from Japan's Great Recession. 35 00:02:21,400 --> 00:02:25,360 Speaker 1: He's talked a lot about the need for fiscal policy 36 00:02:25,600 --> 00:02:29,080 Speaker 1: as a tool to restore balance sheet health, and of 37 00:02:29,120 --> 00:02:34,200 Speaker 1: course in this crisis, there's been this widespread consensus that 38 00:02:34,280 --> 00:02:39,400 Speaker 1: monetary policy alone is clearly insufficient to address the scale 39 00:02:39,480 --> 00:02:42,680 Speaker 1: and scope of the downturn, to replace all of the 40 00:02:42,720 --> 00:02:46,640 Speaker 1: lost income from households and businesses. And although we have 41 00:02:46,760 --> 00:02:49,600 Speaker 1: seen a lot of fiscal action around the world. There 42 00:02:49,639 --> 00:02:52,680 Speaker 1: continues to be a lot of debate about whether the 43 00:02:52,720 --> 00:02:55,359 Speaker 1: tools are right, and whether they're sufficient, and what kind 44 00:02:55,360 --> 00:02:59,400 Speaker 1: of recovery we have. So um looking forward to talking 45 00:02:59,440 --> 00:03:03,079 Speaker 1: to Richard now, Richard Coua, thank you very much for 46 00:03:03,160 --> 00:03:05,960 Speaker 1: joining us. Oh, thank you for having me here again. 47 00:03:06,880 --> 00:03:11,760 Speaker 1: So let's start big picture, or let's actually start in 48 00:03:11,840 --> 00:03:18,480 Speaker 1: the US, we saw a fairly substantial fiscal action performance 49 00:03:18,560 --> 00:03:21,440 Speaker 1: sort of passed at the end of March. Today is 50 00:03:21,600 --> 00:03:26,440 Speaker 1: April twenty three, and we're expected to see another tranch 51 00:03:26,840 --> 00:03:30,160 Speaker 1: of more grants being made available to businesses to keep 52 00:03:30,160 --> 00:03:34,519 Speaker 1: workers on payeroll plus a few other things expected to 53 00:03:35,400 --> 00:03:41,680 Speaker 1: pass this week. In your view, how sufficient or insufficient 54 00:03:41,720 --> 00:03:44,040 Speaker 1: have the policy measures that you've seen put in place 55 00:03:44,040 --> 00:03:47,600 Speaker 1: in the US so far been to address the size 56 00:03:47,600 --> 00:03:51,120 Speaker 1: and scope of this downturn. Well, if we take a 57 00:03:51,200 --> 00:03:55,720 Speaker 1: snapshot of g d P in all these countries United 58 00:03:55,760 --> 00:04:00,120 Speaker 1: States included, they have probably down quite substantially from what 59 00:04:00,200 --> 00:04:04,880 Speaker 1: we consider normal levels. But this is brought about by 60 00:04:04,920 --> 00:04:11,120 Speaker 1: this external shock, which is this coronavirus, and so ordinary 61 00:04:11,200 --> 00:04:15,960 Speaker 1: measures like uh riscal and MONELTI policies won't be a 62 00:04:16,160 --> 00:04:21,120 Speaker 1: match held because just because we had a loose monety 63 00:04:21,160 --> 00:04:24,800 Speaker 1: policy doesn't mean I will supply Jain problems or lockdown 64 00:04:24,880 --> 00:04:28,760 Speaker 1: problems will go away. And so this time I think 65 00:04:28,760 --> 00:04:33,159 Speaker 1: policies will have to be very specific to help those 66 00:04:33,160 --> 00:04:37,479 Speaker 1: people who are affected by this coronavirus, which is airlines 67 00:04:37,640 --> 00:04:42,080 Speaker 1: and traveling, the industry's restaurants, service sectors, and so forth. 68 00:04:42,920 --> 00:04:45,640 Speaker 1: And I think US has done a very good job 69 00:04:46,800 --> 00:04:50,680 Speaker 1: in coming up with these big policies very quickly. I 70 00:04:50,800 --> 00:04:54,240 Speaker 1: understand that large number of people already receiving payments from 71 00:04:54,279 --> 00:04:58,719 Speaker 1: the government, and once you see your bank accounts uh 72 00:04:58,920 --> 00:05:01,680 Speaker 1: filled with some some money from the government, I think 73 00:05:01,680 --> 00:05:06,960 Speaker 1: people will feel that all the government is really uh 74 00:05:07,240 --> 00:05:11,760 Speaker 1: worrying about myself and the economy. And I think that 75 00:05:11,839 --> 00:05:16,360 Speaker 1: has been very helpful in keeping people from becoming even 76 00:05:16,400 --> 00:05:21,840 Speaker 1: more desperate or falling into despair, because if you compare 77 00:05:21,920 --> 00:05:25,440 Speaker 1: that with what's happening in Japan, where I am, unusually 78 00:05:25,839 --> 00:05:30,680 Speaker 1: I am, they talked about a lot, but very little 79 00:05:30,680 --> 00:05:33,839 Speaker 1: payments have been made yet. And when you listen to 80 00:05:33,880 --> 00:05:37,480 Speaker 1: the people there, they say, well, then pliticians are talking 81 00:05:37,920 --> 00:05:41,960 Speaker 1: all these honesties, but we haven't seen anything yet. So 82 00:05:42,040 --> 00:05:45,480 Speaker 1: compared to that, I think the United States Germany are 83 00:05:45,560 --> 00:05:49,240 Speaker 1: doing a much better job. But whether that's sufficient or not, 84 00:05:49,560 --> 00:05:52,120 Speaker 1: I think we need to know how long this thing 85 00:05:52,240 --> 00:05:55,000 Speaker 1: is going to go on, when the vaccines would be 86 00:05:55,040 --> 00:05:59,280 Speaker 1: developed or some other ways we can we are able 87 00:05:59,320 --> 00:06:04,000 Speaker 1: to contain this this coronavirus, and that's a medical question unfortunately, 88 00:06:04,000 --> 00:06:07,919 Speaker 1: not an economic question, And so I think we have 89 00:06:08,000 --> 00:06:13,080 Speaker 1: to be ready to putting more at as it becomes necessary. 90 00:06:13,400 --> 00:06:15,680 Speaker 1: Just to step back for the for a second. One 91 00:06:15,720 --> 00:06:18,680 Speaker 1: of the things that I personally like about your balance 92 00:06:18,680 --> 00:06:21,560 Speaker 1: sheet recession framework is that there's a big focus on 93 00:06:21,600 --> 00:06:25,760 Speaker 1: the psychological impact of debt crises, and there's this notion 94 00:06:25,839 --> 00:06:29,640 Speaker 1: that people are so sort of emotionally scarred by the 95 00:06:29,680 --> 00:06:32,920 Speaker 1: experience that they're afraid to take on debt for years 96 00:06:32,960 --> 00:06:37,279 Speaker 1: to come. How much of the balance sheet recession framework 97 00:06:37,480 --> 00:06:41,680 Speaker 1: applies to the current economic crisis, because I can see 98 00:06:41,800 --> 00:06:44,800 Speaker 1: maybe not debt being an issue here, but I could see, 99 00:06:44,800 --> 00:06:48,480 Speaker 1: for instance, people increasing their savings for years to come 100 00:06:48,600 --> 00:06:52,280 Speaker 1: after this shock, right right, You know, there are a 101 00:06:52,360 --> 00:06:54,640 Speaker 1: lot of people out there who were worried that with 102 00:06:54,720 --> 00:06:57,760 Speaker 1: so much money into the system by the Federal Reserve 103 00:06:58,000 --> 00:07:02,400 Speaker 1: and the government also borrowing money, definitely inflation will be 104 00:07:02,440 --> 00:07:04,960 Speaker 1: a huge problem once we come out of this recession. 105 00:07:05,720 --> 00:07:09,320 Speaker 1: But when you think about it, those people who have savings, 106 00:07:09,960 --> 00:07:16,120 Speaker 1: that it's companies and individuals, they probably quite well about me, 107 00:07:17,200 --> 00:07:20,480 Speaker 1: sustained less damage than those people who didn't have much 108 00:07:20,480 --> 00:07:23,360 Speaker 1: savings so didn't have much retained earnings. In the companies, 109 00:07:24,000 --> 00:07:26,280 Speaker 1: I mean, if you didn't have much retained earnings, or 110 00:07:26,560 --> 00:07:29,920 Speaker 1: you bought back your shells and so forth, and then 111 00:07:29,960 --> 00:07:33,720 Speaker 1: suddenly your your revenue drives up or you're in a 112 00:07:33,840 --> 00:07:37,200 Speaker 1: huge mess, and I'm sure they have to scramble to 113 00:07:37,240 --> 00:07:39,280 Speaker 1: get the cash in place so that they can make 114 00:07:39,320 --> 00:07:43,880 Speaker 1: the payments. That kind of shock can affect people for 115 00:07:44,000 --> 00:07:49,360 Speaker 1: a very long time. And if you remember two US 116 00:07:49,400 --> 00:07:52,760 Speaker 1: had a banking crisis also, and it was a credit crunch, 117 00:07:53,640 --> 00:07:58,400 Speaker 1: and those businesses who suffered during that period almost never 118 00:07:58,480 --> 00:08:01,760 Speaker 1: bought money for the the rest following ten years or so. 119 00:08:02,120 --> 00:08:05,600 Speaker 1: If you remember that banking crisis, that was George Bush 120 00:08:05,680 --> 00:08:08,160 Speaker 1: the father, and I think the same thing will happen 121 00:08:08,320 --> 00:08:11,800 Speaker 1: this time again. With so many people talking about second wave, 122 00:08:12,080 --> 00:08:16,120 Speaker 1: third wave of of this coronavirus. Even we come out 123 00:08:16,120 --> 00:08:19,800 Speaker 1: of this one, the first wave, I'm sure people will 124 00:08:19,880 --> 00:08:23,080 Speaker 1: say to themselves. We really have to have some savings 125 00:08:23,120 --> 00:08:26,320 Speaker 1: for the rainy days. And if they go back to 126 00:08:26,400 --> 00:08:31,800 Speaker 1: this savings mode, corporates and individuals, then all the money 127 00:08:31,840 --> 00:08:34,520 Speaker 1: that was pumped into the system will be used to 128 00:08:34,559 --> 00:08:40,400 Speaker 1: save money instead of going into consumption or investments, and 129 00:08:40,600 --> 00:08:44,320 Speaker 1: that will keep inflation rates from picking up. And that's 130 00:08:44,360 --> 00:08:47,760 Speaker 1: exactly what happened during the balancy recession. For balancy recession, 131 00:08:48,160 --> 00:08:53,760 Speaker 1: people actually paying back debt because prior to the two 132 00:08:53,920 --> 00:08:58,240 Speaker 1: or eight leaving crisis, people leveraging themselves up to invest 133 00:08:58,280 --> 00:09:01,120 Speaker 1: in all sorts of assets. Then crisis happened as the 134 00:09:01,200 --> 00:09:05,120 Speaker 1: prices collapse, liabilities remain, their balances under water, so people 135 00:09:05,160 --> 00:09:08,800 Speaker 1: have to pay down debt, and that's what caused a 136 00:09:08,840 --> 00:09:11,600 Speaker 1: balancy recession because in the national economy, if someone is 137 00:09:11,640 --> 00:09:14,520 Speaker 1: saving money, including paying down debt, someone has to be 138 00:09:14,559 --> 00:09:17,600 Speaker 1: borrowing money to keep the economy going. Luckily, the US 139 00:09:18,440 --> 00:09:21,559 Speaker 1: did that, Japan did that, euro Zone didn't do that, 140 00:09:21,960 --> 00:09:25,040 Speaker 1: and that's how we saw all these differences in macro 141 00:09:25,120 --> 00:09:30,679 Speaker 1: performances this time around. Once we come out of this recession, 142 00:09:31,280 --> 00:09:33,760 Speaker 1: people will be saving money. They won't be paying down 143 00:09:33,800 --> 00:09:36,800 Speaker 1: debt perhaps, but they'll be saving money. But macro economically, 144 00:09:37,000 --> 00:09:41,720 Speaker 1: saving money and paying down debt have almost exactly the 145 00:09:41,760 --> 00:09:45,640 Speaker 1: same effect on the micro economy, and so I would 146 00:09:45,640 --> 00:09:50,280 Speaker 1: think that inflation is not a big problem going forward, 147 00:09:50,800 --> 00:09:53,440 Speaker 1: even after we come out of this this first way 148 00:09:53,960 --> 00:09:57,240 Speaker 1: or it's a last way. But and if that's not 149 00:09:57,320 --> 00:10:00,680 Speaker 1: the big worry, then the central bank, in the federal 150 00:10:00,679 --> 00:10:04,280 Speaker 1: government shoe a few shook a few much more ease 151 00:10:04,600 --> 00:10:09,160 Speaker 1: in putting additional policy major assess they become necessary. So 152 00:10:09,200 --> 00:10:12,880 Speaker 1: this is really interesting because at least so far, you 153 00:10:13,040 --> 00:10:17,720 Speaker 1: view the US fiscal responses having been fairly decent, at 154 00:10:17,760 --> 00:10:20,400 Speaker 1: least compared to Japan and perhaps some other places in 155 00:10:20,520 --> 00:10:24,160 Speaker 1: terms of how fast money is getting into bank accounts 156 00:10:24,200 --> 00:10:28,200 Speaker 1: and so forth. But sort of what it sounds like is, 157 00:10:28,600 --> 00:10:30,839 Speaker 1: you know, everyone, and it's kind of a cliche, is 158 00:10:30,880 --> 00:10:33,400 Speaker 1: trying to figure out the so called shape of the 159 00:10:33,440 --> 00:10:36,400 Speaker 1: recovery and U shape and W shape and V shape. 160 00:10:36,679 --> 00:10:39,800 Speaker 1: I don't want to I don't think that's necessarily the 161 00:10:39,840 --> 00:10:42,600 Speaker 1: most useful thing to talk about, but just this idea 162 00:10:42,640 --> 00:10:45,760 Speaker 1: that this is going to leave a searing scar on 163 00:10:45,880 --> 00:10:49,200 Speaker 1: corporate behavior, and so whether it's buy backed or actual 164 00:10:49,280 --> 00:10:54,120 Speaker 1: capex or hiring, the experience that we're facing right now 165 00:10:54,480 --> 00:10:58,920 Speaker 1: will alter corporate behavior and potentially household behavior for years 166 00:10:58,960 --> 00:11:03,920 Speaker 1: to come. Yes, I believe so, just like this banking crisis, 167 00:11:04,000 --> 00:11:09,240 Speaker 1: the credit crunch back in that period effect that corporate 168 00:11:09,320 --> 00:11:13,160 Speaker 1: behavior for our for the following ten years. I think 169 00:11:13,200 --> 00:11:16,640 Speaker 1: we're going to see something similar that people said, oh gods, 170 00:11:16,760 --> 00:11:19,679 Speaker 1: we really have to have some savings, we cannot really 171 00:11:20,800 --> 00:11:27,680 Speaker 1: run two lean and that will affect macroeconomic performances if 172 00:11:27,720 --> 00:11:31,320 Speaker 1: so many people are increasing savings all at the same time. 173 00:11:32,520 --> 00:11:37,360 Speaker 1: So what does that imply for the policy response? Because 174 00:11:37,440 --> 00:11:40,720 Speaker 1: I guess when you have a balance sheet recession and 175 00:11:40,760 --> 00:11:44,600 Speaker 1: the emphasis emphasis is on debt, then the ideal policy 176 00:11:44,679 --> 00:11:48,559 Speaker 1: responses that governments sort of become the borrowers of last 177 00:11:48,600 --> 00:11:52,440 Speaker 1: resort and do stimulusm in various ways along those lines. 178 00:11:52,520 --> 00:11:57,160 Speaker 1: But if you have a crisis of sort of savings 179 00:11:57,240 --> 00:12:02,160 Speaker 1: I guess, or or cash flow, what can governments or 180 00:12:02,200 --> 00:12:04,839 Speaker 1: central banks actually do here? What what's the best thing 181 00:12:04,920 --> 00:12:09,320 Speaker 1: for them to do? Well? During balance recession, we have 182 00:12:09,400 --> 00:12:15,280 Speaker 1: a very special situation in which financial market and financial 183 00:12:15,320 --> 00:12:20,319 Speaker 1: market alone, or financial sector alone, it is flooded with cash. 184 00:12:20,520 --> 00:12:25,240 Speaker 1: Everyone else have no money. Uh, households are paying down 185 00:12:25,280 --> 00:12:30,480 Speaker 1: that companies are paying down debt, but financial market, if 186 00:12:30,480 --> 00:12:32,800 Speaker 1: you put yourself in the o position of the fund manager, 187 00:12:33,679 --> 00:12:36,760 Speaker 1: and all these savings, newly generated savings on the household 188 00:12:36,760 --> 00:12:41,160 Speaker 1: sectors coming to you, those corporate debt payments are coming 189 00:12:41,200 --> 00:12:44,880 Speaker 1: back to you. In the central bank trying to meet 190 00:12:44,920 --> 00:12:47,880 Speaker 1: the inflation targets also pumping money, which you have to 191 00:12:47,920 --> 00:12:51,240 Speaker 1: manage at some point, so you're flooded with cash, and 192 00:12:51,320 --> 00:12:54,400 Speaker 1: flooded in a sense that because everybody is paying down 193 00:12:54,400 --> 00:12:56,760 Speaker 1: that no one's borrowing money, so you're kind of stuck 194 00:12:56,840 --> 00:13:00,200 Speaker 1: with this cash. And if you're stuck with cash, there's 195 00:13:00,240 --> 00:13:03,440 Speaker 1: only one borrow we left, which is the government. You 196 00:13:03,559 --> 00:13:06,600 Speaker 1: end up buying government box. And that's the reason why 197 00:13:06,960 --> 00:13:10,720 Speaker 1: during the balancy recession, government bond iselds in spite of 198 00:13:10,760 --> 00:13:14,360 Speaker 1: a huge deficit, keeps on coming down. And we saw 199 00:13:14,400 --> 00:13:17,360 Speaker 1: that in Japan first, and then people thought that was 200 00:13:17,480 --> 00:13:20,719 Speaker 1: a bond market bubble, but it wasn't because government was 201 00:13:20,760 --> 00:13:23,160 Speaker 1: the only bara left, so all the money had to 202 00:13:23,160 --> 00:13:25,600 Speaker 1: go to the government, and then it happened after two 203 00:13:25,640 --> 00:13:30,840 Speaker 1: thousand eight. Also, that part, the fact that financial market 204 00:13:30,880 --> 00:13:34,760 Speaker 1: is flooded with cash, is one of the key characteristics 205 00:13:34,800 --> 00:13:40,040 Speaker 1: of balancy recession. Now, in this recession or coronavirus recession, 206 00:13:40,720 --> 00:13:44,240 Speaker 1: we have a different problem, and that is that everybody, 207 00:13:44,559 --> 00:13:47,920 Speaker 1: at least for the moment until the economy recovers, they 208 00:13:47,960 --> 00:13:52,040 Speaker 1: will be withdrawing money from the financial market, right because 209 00:13:52,040 --> 00:13:55,680 Speaker 1: people have to rely on their savings to make pends meet. 210 00:13:56,559 --> 00:14:01,400 Speaker 1: So households will be withdrawing savings, corporates will be withdrawing savings, 211 00:14:01,520 --> 00:14:04,520 Speaker 1: and corporates, some of them who don't have enough savings, 212 00:14:04,600 --> 00:14:08,720 Speaker 1: would be desperately borrowing money the distress, borrowing to make 213 00:14:08,760 --> 00:14:13,840 Speaker 1: the ends meet. So instead of this problem of not 214 00:14:13,960 --> 00:14:17,800 Speaker 1: having enough borrowers, which is the characteristics of balancing recession, 215 00:14:18,440 --> 00:14:22,120 Speaker 1: at the moment, we have a situation where savers are 216 00:14:22,120 --> 00:14:26,760 Speaker 1: disappearing because people are forced to dis save, whereas government 217 00:14:26,760 --> 00:14:29,480 Speaker 1: would be coming in to borrow, and corporates who needs 218 00:14:29,560 --> 00:14:33,320 Speaker 1: cash also are coming to borrow. And so financial market 219 00:14:33,360 --> 00:14:38,920 Speaker 1: gets much tighter, very sharply tighter in this type of recession, 220 00:14:39,680 --> 00:14:43,000 Speaker 1: and we already see that in credit spars in the 221 00:14:43,040 --> 00:14:46,280 Speaker 1: corporate bond market, where corporates used to be able to 222 00:14:46,280 --> 00:14:49,200 Speaker 1: borrow a very low rates until around the beginning of March, 223 00:14:49,480 --> 00:14:53,880 Speaker 1: and then suddenly all these corporates with slightly less than 224 00:14:53,920 --> 00:14:59,280 Speaker 1: the pristine credit ratings suddenly faced much higher borrowing rates. 225 00:14:59,360 --> 00:15:03,520 Speaker 1: And that's the characteristics of this type of recession. I mean, 226 00:15:03,520 --> 00:15:06,200 Speaker 1: this federal result brought rates down to zero, pump comes 227 00:15:06,240 --> 00:15:10,040 Speaker 1: on money into the system, but corporate borrowing rates are 228 00:15:10,160 --> 00:15:14,680 Speaker 1: significantly higher now than just two months ago. And a 229 00:15:14,760 --> 00:15:18,360 Speaker 1: so called financial condition index, the one that Chicago Fed 230 00:15:18,920 --> 00:15:22,320 Speaker 1: puts out, which shows how tight the financial market is, 231 00:15:22,800 --> 00:15:26,160 Speaker 1: we see that it's much tighter now in spite of 232 00:15:26,200 --> 00:15:30,280 Speaker 1: all the work by the Fed. So in this situation 233 00:15:30,840 --> 00:15:34,960 Speaker 1: financial market flooded with cash, that characteristics and balancing recession 234 00:15:35,200 --> 00:15:39,360 Speaker 1: doesn't apply. And if you have a very tight financial 235 00:15:39,400 --> 00:15:42,760 Speaker 1: market as we do now, central bank will have to 236 00:15:43,040 --> 00:15:46,240 Speaker 1: continuously pump money into the system to make sure that 237 00:15:46,360 --> 00:15:48,400 Speaker 1: we really don't get into the kind of crisis we 238 00:15:48,440 --> 00:15:52,400 Speaker 1: saw back into thousand and eight, and so this time around, 239 00:15:52,480 --> 00:15:55,880 Speaker 1: I would say that central bank has a huge role 240 00:15:55,920 --> 00:15:59,360 Speaker 1: to play, in addition to fiscal policy by the government, 241 00:16:00,080 --> 00:16:04,760 Speaker 1: to make sure that financial market continues to operate in 242 00:16:04,760 --> 00:16:08,680 Speaker 1: in halfway decent manner. When you look at the actions 243 00:16:08,880 --> 00:16:12,080 Speaker 1: of the Federal Reserve or other central banks, do you 244 00:16:12,080 --> 00:16:17,280 Speaker 1: feel good that they recognize this. I think I believe 245 00:16:17,320 --> 00:16:21,960 Speaker 1: that they are doing a good job. And only central 246 00:16:22,000 --> 00:16:25,920 Speaker 1: bank that I worry about is the ECB, because ECB 247 00:16:26,160 --> 00:16:31,080 Speaker 1: cannot openly try to help individual governments, right that that's 248 00:16:31,120 --> 00:16:34,520 Speaker 1: against the brandate. But everyone else Bank of Japan, Bank 249 00:16:34,600 --> 00:16:38,240 Speaker 1: of England, Federal Reserve, they are I don't know what 250 00:16:38,400 --> 00:16:40,920 Speaker 1: that I can say openly, but you know they are 251 00:16:41,120 --> 00:16:46,600 Speaker 1: very really willingly adding money to the system to make 252 00:16:46,600 --> 00:17:00,560 Speaker 1: sure that financial market doesn't become too tight. Mm hmm. 253 00:17:01,600 --> 00:17:06,320 Speaker 1: Just in terms of the differences between how different countries 254 00:17:06,359 --> 00:17:11,719 Speaker 1: are responding to the coronavirus outbreak and the economic damage 255 00:17:11,720 --> 00:17:15,159 Speaker 1: that it's causing. You spoke a little bit about the US. 256 00:17:15,800 --> 00:17:17,920 Speaker 1: I know you focused a lot of your time on 257 00:17:18,160 --> 00:17:22,040 Speaker 1: Japan as well, but how are you viewing the crisis 258 00:17:22,080 --> 00:17:26,680 Speaker 1: response in Europe in particular, because it seems like there 259 00:17:26,720 --> 00:17:31,240 Speaker 1: we might have a problem of cohesion within the Eurozone block. 260 00:17:32,440 --> 00:17:35,920 Speaker 1: Japan was very slow incoming at the beginning, but now 261 00:17:36,000 --> 00:17:41,159 Speaker 1: they have reasonably good policies moving forward. Very little payment 262 00:17:41,160 --> 00:17:43,320 Speaker 1: has been made to the to the households or or 263 00:17:43,359 --> 00:17:45,960 Speaker 1: the companies yet, but at least I think the debate 264 00:17:46,040 --> 00:17:49,679 Speaker 1: is moving in the right direction. In Europe. However, we 265 00:17:49,840 --> 00:17:55,480 Speaker 1: discovered in two thousand and eight that national governments really 266 00:17:55,520 --> 00:17:59,680 Speaker 1: don't have much room for fiscal policy. You know, in Europe. 267 00:18:00,040 --> 00:18:04,720 Speaker 1: When they decided to join euro individual countries or the 268 00:18:04,800 --> 00:18:09,160 Speaker 1: voters of individual countries were told that they're giving up 269 00:18:09,200 --> 00:18:12,520 Speaker 1: their sovereignty amounty policy, but they still have sovereignty on 270 00:18:12,560 --> 00:18:17,040 Speaker 1: fiscal policy. And that's how everybody agreed to join Europe. 271 00:18:17,720 --> 00:18:21,720 Speaker 1: But once they're started and when into town a fiscal 272 00:18:21,720 --> 00:18:25,400 Speaker 1: policy became necessary because of the balancy recession, they discovered 273 00:18:25,480 --> 00:18:29,040 Speaker 1: that they don't have a sovereignty on fiscal policy for 274 00:18:29,119 --> 00:18:34,240 Speaker 1: two reasons. One is that the Mastery Treaty which created 275 00:18:34,280 --> 00:18:37,639 Speaker 1: the euro says individual governments can bor only three percent 276 00:18:37,720 --> 00:18:40,520 Speaker 1: of GDP and if you go beyond that, you get punished. 277 00:18:41,560 --> 00:18:44,719 Speaker 1: But if private sector only saves three percent of GDP, 278 00:18:44,800 --> 00:18:47,439 Speaker 1: that'll be okay. But if the private sector, like in Spain, 279 00:18:47,600 --> 00:18:51,359 Speaker 1: was saving seven percent of GDP after the umbursing of 280 00:18:51,440 --> 00:18:54,320 Speaker 1: the bubble, but the government could only borrow three, then 281 00:18:54,359 --> 00:18:58,199 Speaker 1: the remaining four percent becomes the deflationary gap, and Spain 282 00:18:58,280 --> 00:19:03,440 Speaker 1: probably experienced you know, unemployment rate or or something at 283 00:19:03,480 --> 00:19:06,320 Speaker 1: that point. If the Spanish government said, oh, we have, 284 00:19:06,760 --> 00:19:10,639 Speaker 1: you know, plenty of savings seven GDP savings from the 285 00:19:10,680 --> 00:19:14,320 Speaker 1: private sector. We just used a seven percent to fill 286 00:19:14,359 --> 00:19:20,840 Speaker 1: the deflationary gap. Well, that didn't work because in the Eurozone, 287 00:19:20,920 --> 00:19:25,400 Speaker 1: all these people, now, all these countries, the investors are 288 00:19:25,440 --> 00:19:31,600 Speaker 1: faced with choice of eighteen government bond markets, all denominated 289 00:19:31,640 --> 00:19:36,280 Speaker 1: in currency. And so if Spain seems to be ramping 290 00:19:36,359 --> 00:19:40,720 Speaker 1: up a fiscal stimulus, all these investors, including those in Spain, 291 00:19:40,800 --> 00:19:44,200 Speaker 1: were quick move money to Germany or someone else where. 292 00:19:44,560 --> 00:19:48,120 Speaker 1: Deva said, it's not so large. And then even though 293 00:19:48,359 --> 00:19:52,639 Speaker 1: Spain had seven percent private sector savings, government could not 294 00:19:52,760 --> 00:19:55,680 Speaker 1: use the seven They could barely use maybe one or 295 00:19:55,720 --> 00:19:58,880 Speaker 1: two because the money ran out. And that I think 296 00:19:59,080 --> 00:20:02,720 Speaker 1: is one of the key problems of the Eurozone that 297 00:20:02,840 --> 00:20:06,359 Speaker 1: all these government bonds are denominated in the same currency, 298 00:20:07,119 --> 00:20:10,840 Speaker 1: whereas in the US it's u S traguries in dollars. 299 00:20:11,320 --> 00:20:13,720 Speaker 1: Japan is in the end, so all these investors who 300 00:20:13,720 --> 00:20:17,919 Speaker 1: cannot take a large foreign exchange risk are forced to 301 00:20:17,960 --> 00:20:21,440 Speaker 1: hold government bonds when privacy actor is not borrowing money. 302 00:20:21,680 --> 00:20:26,080 Speaker 1: But in the Eurozone there's this possibility of capital flight 303 00:20:26,359 --> 00:20:31,760 Speaker 1: between government bond markets, and that effectively removed the fiscal 304 00:20:31,880 --> 00:20:35,120 Speaker 1: room for all all these eighteens, well I should say 305 00:20:35,119 --> 00:20:38,240 Speaker 1: seventeen countries. The eighteen one, the one that is doing 306 00:20:38,280 --> 00:20:41,680 Speaker 1: the best, of course, gets the opposite effect. All these 307 00:20:41,680 --> 00:20:44,720 Speaker 1: money will be coming into your company country. And that's 308 00:20:44,760 --> 00:20:48,239 Speaker 1: where Germany is at the moment. So fiscal policy is 309 00:20:48,280 --> 00:20:51,560 Speaker 1: not really available to very many countries in the Eurozone, 310 00:20:52,280 --> 00:20:55,320 Speaker 1: and monetary policy, of course, they lost the sovereignty over it. 311 00:20:56,280 --> 00:20:58,240 Speaker 1: So if you put yourself in the position of any 312 00:20:58,440 --> 00:21:04,439 Speaker 1: Italian or and yet you have a devastated economy, so 313 00:21:04,560 --> 00:21:08,080 Speaker 1: many people dying every day, and you cannot even use 314 00:21:08,080 --> 00:21:12,680 Speaker 1: your monetary and fiscal policies to fight the economic depression. 315 00:21:13,960 --> 00:21:18,359 Speaker 1: And I find this very very disturbing, and I hope 316 00:21:18,359 --> 00:21:20,480 Speaker 1: they can come up with some sort of a compromise 317 00:21:20,880 --> 00:21:24,320 Speaker 1: where even though Mastery Treaty says you cannot or more 318 00:21:24,359 --> 00:21:27,480 Speaker 1: than three percenter GDP, they will somehow come up with 319 00:21:27,480 --> 00:21:31,119 Speaker 1: the ways to help Italy and Spain and other countries 320 00:21:31,600 --> 00:21:35,520 Speaker 1: that are very badly affected by this coronavirus UH and 321 00:21:35,760 --> 00:21:39,840 Speaker 1: need fiscal stimulus very badly, especially the kind of fiscal 322 00:21:40,480 --> 00:21:47,440 Speaker 1: spending that goes directly to the affected industries, households and companies. Yeah, 323 00:21:47,480 --> 00:21:51,800 Speaker 1: I remember reading your this thesis, you set out about 324 00:21:51,800 --> 00:21:54,639 Speaker 1: these sort of savings leakages from the periphery to German 325 00:21:54,640 --> 00:21:57,719 Speaker 1: boon back during the last prices, and I thought it 326 00:21:57,760 --> 00:22:02,640 Speaker 1: was fascinating only get back to sort of ideal government 327 00:22:02,720 --> 00:22:07,160 Speaker 1: policies in the post crisis phase. So once the health 328 00:22:07,520 --> 00:22:10,919 Speaker 1: aspect of the crisis begins to fade and people start 329 00:22:10,960 --> 00:22:14,480 Speaker 1: in theory reopening up stores and coming back to work. 330 00:22:15,320 --> 00:22:18,280 Speaker 1: We talked before about the searing effect that this will 331 00:22:18,320 --> 00:22:22,720 Speaker 1: have in terms of people's inclination to save. Perhaps corporrates 332 00:22:22,760 --> 00:22:25,960 Speaker 1: will remain much less levered, or they're going to be 333 00:22:26,080 --> 00:22:30,480 Speaker 1: very slow to hire and expand kpex after seeing revenues 334 00:22:30,560 --> 00:22:34,760 Speaker 1: disappear in an instant. Obviously, as you say, okay, central 335 00:22:34,760 --> 00:22:37,240 Speaker 1: banks need to do their part to make maintain liquidity. 336 00:22:37,280 --> 00:22:40,240 Speaker 1: Governments need to do their part to mean spending. But 337 00:22:40,359 --> 00:22:42,520 Speaker 1: how do you get off the cycle? And I guess 338 00:22:42,520 --> 00:22:45,719 Speaker 1: this goes back to your work looking in Japan. What 339 00:22:45,800 --> 00:22:50,680 Speaker 1: did Japan fail to do in the post crisis period 340 00:22:50,960 --> 00:22:53,840 Speaker 1: of its own crisis that it was never or that 341 00:22:53,920 --> 00:22:57,880 Speaker 1: it was It had an extremely difficult time reviving the 342 00:22:57,960 --> 00:23:02,399 Speaker 1: inclination to borrow and spend, so beyond just having the 343 00:23:02,400 --> 00:23:05,760 Speaker 1: government run large deficits. What do they need to do 344 00:23:05,840 --> 00:23:10,280 Speaker 1: policy wise to get the private sector back into a 345 00:23:10,359 --> 00:23:16,000 Speaker 1: sort of aggressive stand. There's a lot of feeling outside 346 00:23:16,119 --> 00:23:20,840 Speaker 1: Japan that Japan did a very poor job of post 347 00:23:21,240 --> 00:23:24,919 Speaker 1: post bubble period, but you know, Japan actually managed to 348 00:23:25,000 --> 00:23:29,480 Speaker 1: keep its GDP above the bubble peak. For the entire 349 00:23:29,560 --> 00:23:33,359 Speaker 1: thirty years, Japanese GDP never fell below the peak of 350 00:23:33,359 --> 00:23:38,000 Speaker 1: the bubble. And with that GDP was kept. GDP kept 351 00:23:38,080 --> 00:23:40,800 Speaker 1: means private sector had the income to pay down debt, 352 00:23:41,560 --> 00:23:44,480 Speaker 1: and they kept on paying down debt. They were already 353 00:23:44,520 --> 00:23:47,600 Speaker 1: finished with their payments. The balance seats are probably the 354 00:23:47,640 --> 00:23:52,119 Speaker 1: cleanest in the world. But because this experience lost it 355 00:23:52,240 --> 00:23:58,240 Speaker 1: for so long, people became very averse to borrowing. And 356 00:23:58,520 --> 00:24:02,280 Speaker 1: if you remember the Americans after the Great Depression, they 357 00:24:02,320 --> 00:24:05,439 Speaker 1: went through the exactly the same experience, and many of 358 00:24:05,480 --> 00:24:08,920 Speaker 1: these Americans never borrow money until they die, right because 359 00:24:08,920 --> 00:24:12,680 Speaker 1: the experience was so bad. And we faced the same 360 00:24:12,720 --> 00:24:17,840 Speaker 1: problem after when the Japanese bubble burst, and Japanese bubble 361 00:24:18,320 --> 00:24:23,120 Speaker 1: was absolutely massive. You know, when the Imperial Palace gardens 362 00:24:23,119 --> 00:24:27,399 Speaker 1: in the middle of Tokyo about five kilometers, this was 363 00:24:27,480 --> 00:24:30,480 Speaker 1: the entire state of California. You know how bad the 364 00:24:30,480 --> 00:24:33,159 Speaker 1: bubble was. True, I've heard that fact many times. That 365 00:24:33,320 --> 00:24:39,240 Speaker 1: really is true. Well, if you kind of extrapolate from 366 00:24:39,359 --> 00:24:42,680 Speaker 1: the surrounding areas and they keep on the extrapolating, then 367 00:24:42,720 --> 00:24:45,280 Speaker 1: you get that result. But I mean, I know they 368 00:24:45,359 --> 00:24:48,080 Speaker 1: never really put the palace on market. But that's right, 369 00:24:48,119 --> 00:24:52,120 Speaker 1: that's so, this is all academic at all. So when 370 00:24:52,119 --> 00:24:55,480 Speaker 1: the bubble burst, the amount of wealth Japanese loss just 371 00:24:55,640 --> 00:24:58,960 Speaker 1: on stock market and real estate was like fifteen hundred 372 00:24:59,040 --> 00:25:04,520 Speaker 1: trillion yen, which is three times Japan's GDP. The amount 373 00:25:04,520 --> 00:25:07,719 Speaker 1: of wealth the American loss during the Great Depression was 374 00:25:07,760 --> 00:25:11,360 Speaker 1: equivalent to one year's worth of nineteen twenty nine GDP. 375 00:25:11,520 --> 00:25:15,320 Speaker 1: Japan was equivalent to three years of nineteen nine GDP. 376 00:25:16,320 --> 00:25:20,080 Speaker 1: And because it took so long, people began very uh 377 00:25:20,440 --> 00:25:24,879 Speaker 1: averse to borrowing. We could have used more policies to 378 00:25:25,040 --> 00:25:29,040 Speaker 1: encourage people to borrow, like accelerate the depreciation allowances and 379 00:25:29,080 --> 00:25:32,399 Speaker 1: so forth, and some of those were actually put in place, 380 00:25:33,000 --> 00:25:36,680 Speaker 1: but those policies have to be super attractive to get 381 00:25:36,720 --> 00:25:42,080 Speaker 1: these people off the trauma trauma of borrowing money, and 382 00:25:42,160 --> 00:25:44,960 Speaker 1: the one that we did put in in Japan wasn't 383 00:25:45,040 --> 00:25:50,560 Speaker 1: all that attractive. Too much paperwork, too many conditions, and 384 00:25:50,600 --> 00:25:55,000 Speaker 1: so unfortunately they didn't create positive response as much as 385 00:25:55,000 --> 00:25:59,200 Speaker 1: we expected. In the US case, after the two thousand 386 00:25:59,320 --> 00:26:03,320 Speaker 1: eight firsting of the bubble, US actually did a fairly 387 00:26:03,320 --> 00:26:07,640 Speaker 1: good job of keeping the economy from losing its bottom. 388 00:26:08,119 --> 00:26:10,320 Speaker 1: And the US companies were never involved in the bubble 389 00:26:10,400 --> 00:26:14,000 Speaker 1: to begin with. It was the household sector, and so 390 00:26:14,160 --> 00:26:18,040 Speaker 1: US company could still borrow, and I think US was 391 00:26:18,080 --> 00:26:21,000 Speaker 1: able to come out sooner than other countries, even the 392 00:26:21,080 --> 00:26:26,359 Speaker 1: US was the epicenter of of that crisis. Now this one, 393 00:26:27,040 --> 00:26:30,679 Speaker 1: it's the household, it's the company's both both sectors are involved, 394 00:26:31,320 --> 00:26:35,000 Speaker 1: and those effected sectors I'm sure will take a long 395 00:26:35,080 --> 00:26:40,280 Speaker 1: time to recover, and especially the psychological part. My guess 396 00:26:40,359 --> 00:26:43,600 Speaker 1: is that once we get to that stage, government will 397 00:26:43,640 --> 00:26:48,480 Speaker 1: probably tried to come out with incentives to get these 398 00:26:48,520 --> 00:26:51,440 Speaker 1: guys off the trauma. You know, this is a psychological thing. 399 00:26:51,520 --> 00:26:57,320 Speaker 1: So if you make the program super attractive, which is 400 00:26:57,320 --> 00:26:59,399 Speaker 1: not what Japan did unfortunately, but if you come up 401 00:26:59,440 --> 00:27:03,040 Speaker 1: with the various active policy and if people said, if 402 00:27:03,080 --> 00:27:05,760 Speaker 1: it's that attracted, maybe I should try the bar at once, 403 00:27:05,800 --> 00:27:08,360 Speaker 1: and if they borrow it and then they have a 404 00:27:08,400 --> 00:27:12,440 Speaker 1: good result, then that trauma will be over and I 405 00:27:12,920 --> 00:27:17,600 Speaker 1: hope that's how we will overcome this problem after this 406 00:27:17,840 --> 00:27:21,879 Speaker 1: pandemic is behind us. Mhm. What do you think this 407 00:27:22,000 --> 00:27:27,439 Speaker 1: means for the relationship between central banks and governments? Because 408 00:27:27,760 --> 00:27:31,160 Speaker 1: I'm thinking clearly governments are going to have to borrow 409 00:27:31,240 --> 00:27:34,479 Speaker 1: a lot of money in order to finance whatever fiscal 410 00:27:34,520 --> 00:27:38,760 Speaker 1: stimulus they undertake, and I suspect that means that central 411 00:27:38,800 --> 00:27:41,280 Speaker 1: banks are going to have to step in and help 412 00:27:41,320 --> 00:27:44,440 Speaker 1: them in some way, either by you know, doing QWI 413 00:27:44,600 --> 00:27:47,320 Speaker 1: type asset purchases. But a lot of people are also 414 00:27:47,359 --> 00:27:52,640 Speaker 1: talking about sort of direct monetary financing by central banks 415 00:27:52,680 --> 00:27:56,840 Speaker 1: of government debt at this point, do you see that 416 00:27:56,920 --> 00:28:01,560 Speaker 1: kind of relationship happening, Well, I see probably noticed. I 417 00:28:01,720 --> 00:28:07,520 Speaker 1: was the strongest opponent of the use of KILLY or 418 00:28:07,640 --> 00:28:12,440 Speaker 1: use of helicopter money direct financing m m T during 419 00:28:12,480 --> 00:28:16,879 Speaker 1: balancy recession, because my point was that the recession was 420 00:28:16,960 --> 00:28:20,480 Speaker 1: caused by the exers savings in the private sector. Everybody's 421 00:28:20,520 --> 00:28:24,560 Speaker 1: paying down debt. That means the money needed to finance 422 00:28:24,640 --> 00:28:27,879 Speaker 1: the government deficit is all in the private sector. So 423 00:28:27,960 --> 00:28:30,560 Speaker 1: let the private sector financial government debt instead of the 424 00:28:30,560 --> 00:28:34,400 Speaker 1: central bank. That was my argument all along. That's where 425 00:28:34,400 --> 00:28:37,359 Speaker 1: I crashed with people like Paul Paul Krugman, who said, 426 00:28:37,440 --> 00:28:40,800 Speaker 1: what center man should also come into to help. But 427 00:28:40,960 --> 00:28:44,080 Speaker 1: I argue from the people in the finance as a 428 00:28:44,120 --> 00:28:47,880 Speaker 1: member of the financial sector, that financial sector is absolutely 429 00:28:47,880 --> 00:28:51,240 Speaker 1: flooded with cash. If the private sector cannot even lead 430 00:28:51,280 --> 00:28:54,880 Speaker 1: to the government, then the private sector will end up 431 00:28:54,960 --> 00:28:58,200 Speaker 1: lending to in some funny places that could cause another bubble. 432 00:28:59,280 --> 00:29:04,240 Speaker 1: So I was very much against quee helicopter money kind 433 00:29:04,240 --> 00:29:07,840 Speaker 1: of arguments during that recession when financial market was flooded 434 00:29:07,880 --> 00:29:12,360 Speaker 1: with cash. But this time I'm actually all for it. 435 00:29:12,920 --> 00:29:15,840 Speaker 1: And that's because, for the reason I mentioned two earlier, 436 00:29:16,640 --> 00:29:20,040 Speaker 1: people are this saving. Now financial market is not flooded 437 00:29:20,120 --> 00:29:24,200 Speaker 1: with cash. It's actually seeing cash being withdrawn to make 438 00:29:24,680 --> 00:29:27,959 Speaker 1: by all these people who are making ends meet. And 439 00:29:28,040 --> 00:29:31,840 Speaker 1: so if the center bank doesn't come in two finance 440 00:29:31,920 --> 00:29:35,200 Speaker 1: the deficit, at least in the short run, interest rates 441 00:29:35,240 --> 00:29:38,440 Speaker 1: can go sky high and that will start causing another 442 00:29:38,440 --> 00:29:41,360 Speaker 1: set of problems. And so I very much like to 443 00:29:41,400 --> 00:29:45,440 Speaker 1: see central bank come in and um solve some of 444 00:29:45,480 --> 00:29:51,320 Speaker 1: these government bonds through quee until we are out of 445 00:29:51,360 --> 00:29:55,120 Speaker 1: this mess, until some medical solutions are found to this 446 00:29:55,280 --> 00:29:59,840 Speaker 1: this crisis. Now, once that medical solution is found in 447 00:30:00,040 --> 00:30:04,880 Speaker 1: we are out of this pandemic, then Central Bank should 448 00:30:04,960 --> 00:30:11,760 Speaker 1: be withdrawing that liquidity that it put in during the crisis, because, 449 00:30:12,800 --> 00:30:17,320 Speaker 1: as I mentioned earlier, by that time private sector should 450 00:30:17,320 --> 00:30:20,600 Speaker 1: be increasing savings again. Instead of this saving, they will 451 00:30:20,640 --> 00:30:24,680 Speaker 1: be rebuilding the savings that that they drew down during 452 00:30:24,720 --> 00:30:28,720 Speaker 1: the pandemic. And when the private sector as a group 453 00:30:29,200 --> 00:30:33,560 Speaker 1: is increasing savings, then inflation cannot happen. You know, if 454 00:30:33,600 --> 00:30:36,520 Speaker 1: the private sector as a group is actually saving money, 455 00:30:36,920 --> 00:30:40,480 Speaker 1: money multiplier turns negative at the margin, and that's the 456 00:30:40,480 --> 00:30:43,800 Speaker 1: reason why in the last ten twelve years central bank 457 00:30:43,840 --> 00:30:47,160 Speaker 1: could never get to their inflation target because if the 458 00:30:47,160 --> 00:30:49,520 Speaker 1: money multiplies negative at the margin, you know, we can 459 00:30:49,600 --> 00:30:52,360 Speaker 1: put all the money into the system, you multiply with 460 00:30:52,400 --> 00:30:56,200 Speaker 1: the negative number, you go absolutely nowhere. And so once 461 00:30:56,280 --> 00:31:00,200 Speaker 1: we return to that world, hopefully sooner than later, h 462 00:31:00,960 --> 00:31:05,640 Speaker 1: at that point, central banks should be withdrawing money slowly 463 00:31:05,840 --> 00:31:09,080 Speaker 1: at the beginning, so that at the end of the day, 464 00:31:09,760 --> 00:31:13,080 Speaker 1: god knows how many years that is from now, access 465 00:31:13,240 --> 00:31:17,360 Speaker 1: liquidity in the financial market is no longer a big issue, 466 00:31:18,520 --> 00:31:20,920 Speaker 1: and so it has to It has to do tons 467 00:31:21,000 --> 00:31:25,600 Speaker 1: of liquidity injections during the pandemic when the government needs 468 00:31:25,600 --> 00:31:28,800 Speaker 1: the money, when the private sectors withdrawing money financial sector. 469 00:31:29,320 --> 00:31:32,240 Speaker 1: But once this pandemic is over, when the private sector 470 00:31:32,320 --> 00:31:36,600 Speaker 1: is now trying to increase savings, then that means there 471 00:31:36,640 --> 00:31:40,200 Speaker 1: will be no inflation because money multiplies negative of the margin. 472 00:31:40,720 --> 00:31:43,480 Speaker 1: Then you use that time when the private sector is 473 00:31:43,480 --> 00:31:46,520 Speaker 1: still rebuilding savings for the central bank to remove some 474 00:31:46,600 --> 00:31:49,120 Speaker 1: of the liquidity that was put into the system. I 475 00:31:49,160 --> 00:31:52,239 Speaker 1: think has to go in that sequence. So we've been 476 00:31:52,280 --> 00:31:58,000 Speaker 1: talking a lot obviously about corporate behavior post prices. What 477 00:31:58,120 --> 00:32:01,520 Speaker 1: about in terms of household behavior? You mentioned incentives for corporates, 478 00:32:01,520 --> 00:32:05,720 Speaker 1: like maybe some sort of tax incentives for capital investment, 479 00:32:06,120 --> 00:32:09,840 Speaker 1: things like that. When will, of course, in the immediate 480 00:32:09,840 --> 00:32:12,640 Speaker 1: wink of the crisis that you mentioned, households likely to 481 00:32:12,680 --> 00:32:15,320 Speaker 1: start to rebuild the savings that they've drawn down to 482 00:32:15,480 --> 00:32:20,640 Speaker 1: provide sustenance during times of no employment or no income. 483 00:32:21,360 --> 00:32:24,000 Speaker 1: What does the so what do the scars of the 484 00:32:24,040 --> 00:32:27,480 Speaker 1: past tell us about how households will behave in the years, 485 00:32:27,520 --> 00:32:31,800 Speaker 1: in the years to in the years to come. Well, 486 00:32:31,840 --> 00:32:36,360 Speaker 1: I think it comes in different phases here. Also during pandemic. 487 00:32:36,400 --> 00:32:39,080 Speaker 1: Of course, household there are two kinds. Right, If you're 488 00:32:39,080 --> 00:32:42,000 Speaker 1: still getting paid during this crisis, but you won't be 489 00:32:42,040 --> 00:32:44,560 Speaker 1: able to spend the money because yeah, in a lockdown world, 490 00:32:45,480 --> 00:32:49,160 Speaker 1: these people will be actually saving money. About for those 491 00:32:49,200 --> 00:32:52,320 Speaker 1: people who are affected by the coronavirus and then their 492 00:32:52,400 --> 00:32:56,240 Speaker 1: income has dried up, their savings have dried up. When 493 00:32:56,280 --> 00:32:59,000 Speaker 1: the economy begins to do better, those people will be 494 00:32:59,040 --> 00:33:03,720 Speaker 1: increasing savings. But for those people who still had income 495 00:33:03,800 --> 00:33:08,320 Speaker 1: during this period, either by working from home and so forth, 496 00:33:09,400 --> 00:33:12,440 Speaker 1: in the short run, they will be so happy to 497 00:33:12,480 --> 00:33:17,920 Speaker 1: spend money. Right, So when the lockdown is over, pandemics 498 00:33:17,920 --> 00:33:21,680 Speaker 1: here is behind us, it's normal fear of second wave 499 00:33:21,720 --> 00:33:25,120 Speaker 1: of third wave. They will be spending a lot of money. 500 00:33:25,400 --> 00:33:28,760 Speaker 1: So we're gonna have a very sharp V shaped recovery 501 00:33:28,960 --> 00:33:33,959 Speaker 1: from those kinds of consumption behavior. But at the same time, 502 00:33:34,360 --> 00:33:40,080 Speaker 1: this is a global pandemic. Global means that even though 503 00:33:40,120 --> 00:33:43,000 Speaker 1: the country that came out of the crisis would be 504 00:33:43,040 --> 00:33:49,120 Speaker 1: seeing some sharp pickup in consumption, that sharp increase I 505 00:33:49,160 --> 00:33:53,040 Speaker 1: think will peter down as we go along because there 506 00:33:53,040 --> 00:33:56,960 Speaker 1: are other countries that are still being affected, which means, 507 00:33:57,200 --> 00:34:00,040 Speaker 1: for example, tourist industries will never really get back to 508 00:34:00,120 --> 00:34:04,000 Speaker 1: where they will before as long as other countries are 509 00:34:04,120 --> 00:34:09,680 Speaker 1: still being inaffected. Supply chains will still be affected, foreign 510 00:34:09,719 --> 00:34:14,240 Speaker 1: demand will still be affected. And so what I envisioned 511 00:34:14,360 --> 00:34:17,759 Speaker 1: is that once this pandemic is behind us, there will 512 00:34:17,800 --> 00:34:22,360 Speaker 1: be a V shaped recovery for perhaps a couple of months, 513 00:34:22,440 --> 00:34:26,320 Speaker 1: and then it begins to kind of slow down until 514 00:34:26,480 --> 00:34:30,960 Speaker 1: other economies recovered. And this is different from the UH 515 00:34:31,200 --> 00:34:34,600 Speaker 1: seventeen years ago when we had a source experience. Source 516 00:34:35,000 --> 00:34:40,200 Speaker 1: actually only affected certain parts of Asia only, and so 517 00:34:40,480 --> 00:34:45,839 Speaker 1: when that pandemic was behind or epidemic was contained, since 518 00:34:45,880 --> 00:34:50,520 Speaker 1: other countries are all doing quite well, including Japan, those 519 00:34:50,719 --> 00:34:54,359 Speaker 1: countries that are affected by Source could experience a real 520 00:34:54,480 --> 00:34:59,400 Speaker 1: V shaped recovery. But this time the V shaped recovery 521 00:34:59,440 --> 00:35:04,040 Speaker 1: will be m short lift, and I think it'd be 522 00:35:04,080 --> 00:35:07,160 Speaker 1: a it would be a very slow recovery until the 523 00:35:07,239 --> 00:35:11,560 Speaker 1: fear of this coronavirus is completely behind us, and that 524 00:35:11,560 --> 00:35:13,560 Speaker 1: that's gonna take a long time, because you know, we 525 00:35:13,640 --> 00:35:15,640 Speaker 1: have so many countries in the world and some of 526 00:35:15,640 --> 00:35:22,439 Speaker 1: them are just beginning to feel this pandemic. Richard coop Uh, 527 00:35:22,760 --> 00:35:25,160 Speaker 1: it was great to have you joined us. Really appreciate 528 00:35:25,239 --> 00:35:29,319 Speaker 1: you coming back to apply some of your wisdom and 529 00:35:29,520 --> 00:35:32,839 Speaker 1: theory to this current moment. And I hope you're well 530 00:35:33,120 --> 00:35:36,640 Speaker 1: and looking forward to hopefully chatting with you again when 531 00:35:36,680 --> 00:35:41,640 Speaker 1: we see more of what the ultimate recovery eventually looks like. Well, 532 00:35:41,680 --> 00:35:44,880 Speaker 1: I'm looking forward to it. Thanks so much, Chure. That 533 00:35:44,960 --> 00:35:53,880 Speaker 1: was great, Treacy. You know what I was thinking about 534 00:35:53,960 --> 00:35:57,640 Speaker 1: during that um during that discussion is so his book 535 00:35:57,719 --> 00:36:03,280 Speaker 1: about Richard's book about the aftermath of Japan's Great Recession 536 00:36:03,800 --> 00:36:07,200 Speaker 1: is called the Holy Grill of Macroeconomics. But I feel like, 537 00:36:07,760 --> 00:36:11,160 Speaker 1: just since then, there's been like all these other potential 538 00:36:11,480 --> 00:36:14,200 Speaker 1: holy grills that have just illuminated so much. Like you 539 00:36:14,280 --> 00:36:17,240 Speaker 1: think Japan is, like, Okay, this tells us so much, 540 00:36:17,560 --> 00:36:21,520 Speaker 1: but now we have so many other extraordinary examples of 541 00:36:21,640 --> 00:36:25,920 Speaker 1: crises intention since then that he could probably write like 542 00:36:25,960 --> 00:36:28,919 Speaker 1: four or five sequels by that. Yeah, it's kind of like, 543 00:36:29,160 --> 00:36:31,879 Speaker 1: maybe I'm carrying the analogy too far, But it's sort 544 00:36:31,880 --> 00:36:34,080 Speaker 1: of like that scene from Indiana Jones where you have 545 00:36:34,239 --> 00:36:37,480 Speaker 1: all the different cups right and to choose exactly the 546 00:36:37,560 --> 00:36:41,360 Speaker 1: right one to fit a situation that you've never really 547 00:36:41,400 --> 00:36:43,840 Speaker 1: been in before. Wow, Okay, I think I'm stretching that 548 00:36:43,880 --> 00:36:46,160 Speaker 1: way too far. I think that really works because that 549 00:36:46,239 --> 00:36:47,840 Speaker 1: was actually one of the things that was striking to 550 00:36:47,880 --> 00:36:51,000 Speaker 1: be listening to him is how all of these crises 551 00:36:51,480 --> 00:36:53,920 Speaker 1: are similar but just like a little bit different, And 552 00:36:54,000 --> 00:36:59,160 Speaker 1: it's really important to appreciate the subtle differences, whether it's 553 00:36:59,200 --> 00:37:01,520 Speaker 1: the corporate set there there was participating in the bubble, 554 00:37:01,520 --> 00:37:05,680 Speaker 1: whether it's real estate, households, et cetera, to understand like 555 00:37:05,760 --> 00:37:08,239 Speaker 1: sort of like which policy or responses are going to 556 00:37:08,280 --> 00:37:11,560 Speaker 1: work back. Yeah, it's also really interesting to hear from 557 00:37:11,600 --> 00:37:16,160 Speaker 1: someone who was against KIWI in the previous crisis really 558 00:37:16,239 --> 00:37:19,279 Speaker 1: talk about the need for it here and even sort 559 00:37:19,280 --> 00:37:23,520 Speaker 1: of hint at a layer of modern monetary theory or 560 00:37:23,840 --> 00:37:26,480 Speaker 1: direct monetary financing or whatever you want to call it 561 00:37:26,600 --> 00:37:29,200 Speaker 1: um sort of being necessary this time around. That's a 562 00:37:29,200 --> 00:37:33,839 Speaker 1: big change, right, the idea of more explicit cooperation and 563 00:37:33,920 --> 00:37:39,680 Speaker 1: coordination between the central Bank and the and the fiscal authorities. 564 00:37:39,840 --> 00:37:42,000 Speaker 1: Actually just think like, and you brought it up at 565 00:37:42,040 --> 00:37:45,160 Speaker 1: the beginning, the psychological component of recovery is going to 566 00:37:45,200 --> 00:37:48,799 Speaker 1: be so huge because so many households in businesses have 567 00:37:48,880 --> 00:37:52,600 Speaker 1: experienced the laws of income. That was that was fathom ale. 568 00:37:52,640 --> 00:37:55,880 Speaker 1: I mean basically a dent losses in many cases in 569 00:37:55,880 --> 00:37:58,600 Speaker 1: the span of a few weeks. Nobody really anticipates that 570 00:37:58,640 --> 00:38:02,160 Speaker 1: kind of downturn. Plus the behavioral changes associated with the 571 00:38:02,200 --> 00:38:05,680 Speaker 1: health emergency and the way all of our lives have 572 00:38:06,560 --> 00:38:09,200 Speaker 1: just changed going on day to day living, it really 573 00:38:09,239 --> 00:38:12,239 Speaker 1: feels like that's going to be such a big component 574 00:38:12,400 --> 00:38:16,400 Speaker 1: obviously what any recovery looks like. Yeah, it sort of 575 00:38:16,440 --> 00:38:19,359 Speaker 1: reminds me of those stories you hear about people who 576 00:38:19,600 --> 00:38:22,960 Speaker 1: survived the Great Depression and then ended up, for instance, 577 00:38:23,040 --> 00:38:25,719 Speaker 1: hoarding food for the rest of their lives. Like, I'm 578 00:38:25,760 --> 00:38:27,680 Speaker 1: sure there are going to be those sorts of lingering 579 00:38:27,719 --> 00:38:30,880 Speaker 1: emotional effects and we're all going to be hoarding toilet 580 00:38:30,920 --> 00:38:33,920 Speaker 1: paper or something like that forever, or at least keeping 581 00:38:33,920 --> 00:38:36,160 Speaker 1: more in the house than we used to. But on 582 00:38:36,239 --> 00:38:38,520 Speaker 1: a on a serious note, the other thing that I 583 00:38:38,560 --> 00:38:42,280 Speaker 1: think is really important was his point about the pace 584 00:38:42,440 --> 00:38:45,799 Speaker 1: of the recovery, because it's certainly something we've experienced here 585 00:38:45,840 --> 00:38:49,400 Speaker 1: in Hong Kong. Even if Hong Kong starts to recover 586 00:38:49,800 --> 00:38:53,440 Speaker 1: and the number of new coronavirus cases starts to go down, 587 00:38:54,120 --> 00:38:56,920 Speaker 1: when it picks up elsewhere in the world and we 588 00:38:57,000 --> 00:39:00,279 Speaker 1: see economies elsewhere start to shut down. That's of has 589 00:39:00,320 --> 00:39:03,440 Speaker 1: a ripple effect and comes back to hit Hong Kong. 590 00:39:03,520 --> 00:39:06,160 Speaker 1: So even if one country recovers, if the rest of 591 00:39:06,200 --> 00:39:09,200 Speaker 1: the world is in trouble, it's going to prolong the 592 00:39:09,239 --> 00:39:12,839 Speaker 1: economic pain. Yeah. I really liked his point about there 593 00:39:12,840 --> 00:39:15,880 Speaker 1: will be some people around the world, people who managed 594 00:39:15,920 --> 00:39:18,680 Speaker 1: to hold onto their incomes and jobs during the duration 595 00:39:18,719 --> 00:39:21,480 Speaker 1: of the crisis, who will probably go on some sort 596 00:39:21,520 --> 00:39:24,480 Speaker 1: of big spending spree the moment they can going out 597 00:39:24,480 --> 00:39:27,920 Speaker 1: shopping and restaurants, etcetera. And you might get the appearance 598 00:39:27,920 --> 00:39:31,319 Speaker 1: of a V. But the sort of the widespread nous 599 00:39:31,520 --> 00:39:34,480 Speaker 1: of the crisis and the unevenness of the page at 600 00:39:34,480 --> 00:39:39,360 Speaker 1: which different parts of the economy opens up almost guarantees 601 00:39:39,400 --> 00:39:43,400 Speaker 1: that that can't last very long. It will be very uneven. 602 00:39:43,560 --> 00:39:45,799 Speaker 1: So even if we get a little V probably won't 603 00:39:45,800 --> 00:39:50,680 Speaker 1: turn into a true V, lowercase V versus a big V. 604 00:39:50,960 --> 00:39:54,040 Speaker 1: God another another letter to add to the to the 605 00:39:54,080 --> 00:39:57,759 Speaker 1: to the right. That's good, all right, Um, should we 606 00:39:57,840 --> 00:40:00,680 Speaker 1: leave with there? Let's leave with there? Okay. This has 607 00:40:00,719 --> 00:40:04,440 Speaker 1: been another episode of the All Thoughts podcast. I'm Tracy Halloway. 608 00:40:04,520 --> 00:40:07,359 Speaker 1: You can follow me on Twitter at Tracy Halloway and 609 00:40:07,400 --> 00:40:09,640 Speaker 1: I'm Joe, Why Isn't All? You can follow me on 610 00:40:09,680 --> 00:40:12,719 Speaker 1: Twitter at The Stalwart. Be sure to follow our producer 611 00:40:12,840 --> 00:40:17,200 Speaker 1: Laura Carlson. She's at Laura M. Carlson. Follow the Bloomberg 612 00:40:17,239 --> 00:40:21,120 Speaker 1: head of podcast, Francesco Levie at Francesca Today, as well 613 00:40:21,160 --> 00:40:25,440 Speaker 1: as all of the Bloomberg podcasts under the handle at podcasts. 614 00:40:25,680 --> 00:40:26,440 Speaker 1: Thanks for listening.