WEBVTT - Michael Darda Expects Three Fed Rate Hikes This Year 0:00:00.120 --> 0:00:02.920 Brought you by Bank of America, Mary Lynch. Investing in 0:00:03.000 --> 0:00:08.000 local communities, economies and a sustainable future. That's a power 0:00:08.080 --> 0:00:12.360 of global connections, Mary Lynch, Pierce Fenner and Smith Incorporated 0:00:12.760 --> 0:00:27.400 Member s I p CEA. Welcome to the Bloomberg Surveillance Podcast. 0:00:27.840 --> 0:00:31.520 I'm Tom Keene with David Gura Dailey. We bring you 0:00:31.560 --> 0:00:36.600 insight from the best in economics, finance, investment, and international relations. 0:00:37.000 --> 0:00:41.600 Find Bloomberg Surveillance on iTunes, SoundCloud, Bloomberg dot Com, and 0:00:41.680 --> 0:00:49.360 of course on the Bloomberg. Let's turn our eye now 0:00:49.440 --> 0:00:51.880 to foreign affairs. I want to bring in our first guest, 0:00:51.920 --> 0:00:54.200 Micah Zenko. He is a senior fellow at the Council 0:00:54.240 --> 0:00:57.000 on Foreign Relations. Mica, thanks for joining us here here 0:00:57.000 --> 0:00:59.640 in this beautiful morning Pierre Power Breakfast. We've got the 0:00:59.640 --> 0:01:02.720 place all to ourselves. A lovely view across the park, 0:01:02.840 --> 0:01:05.560 Central Park with the snowfalling. What do you think the 0:01:05.640 --> 0:01:09.520 view is from China of the new Trump administration. We 0:01:09.720 --> 0:01:14.520 learned that the President Donald Trump sent a letter rather 0:01:14.600 --> 0:01:18.200 than a tweet, or rather than an actual phone call 0:01:18.560 --> 0:01:22.160 to Chinese President Jijing Ping, and I believe the President 0:01:22.240 --> 0:01:24.920 has spoken with a variety of foreign leaders. Why is 0:01:25.200 --> 0:01:28.000 this the way he's communicating with China? But most importantly, 0:01:28.000 --> 0:01:30.560 he's spoken by phone with the Taiwanese president before he 0:01:30.600 --> 0:01:34.160 spoke by phone with the leader recognized political leader of China. 0:01:34.680 --> 0:01:37.520 So it's hard to read the mindset of the individuals 0:01:37.560 --> 0:01:41.400 in Beijing. But the contrasting messages from senior officials from 0:01:41.440 --> 0:01:45.319 a president who makes the consistent claims of currency manipulation 0:01:45.319 --> 0:01:48.360 and trade wars to a Secretary of State and a 0:01:48.400 --> 0:01:50.760 White House spokesperson who has said that the United States 0:01:50.760 --> 0:01:53.960 will prevent China from building on islands which it claims 0:01:53.960 --> 0:01:58.000 it's there's essentially placing a naval blockade around them. So 0:01:58.120 --> 0:02:00.880 if I'm the Chinese government, I still know what Trump 0:02:00.920 --> 0:02:02.720 is serious about and what he means when he wants 0:02:02.720 --> 0:02:05.240 to have a constructive quote relationship. Well, maybe they'll be 0:02:05.320 --> 0:02:08.200 checking their Twitter account in order to get that information. 0:02:08.240 --> 0:02:10.400 And I just want to give you information about Twitter. 0:02:10.520 --> 0:02:15.280 Twitter coming in uh fourth a quarter adjusted earnings per 0:02:15.320 --> 0:02:18.960 share of sixteen cents versus the estimate of twelve cents, 0:02:19.000 --> 0:02:23.079 so a four cent beat and monthly users match estimates, 0:02:23.120 --> 0:02:25.720 So a lot of people still using Twitter, but perhaps 0:02:26.040 --> 0:02:29.519 not moving ahead I'm wondering if you could tell me, Mica, 0:02:29.760 --> 0:02:33.120 is there a strategy that you can divine from the 0:02:33.160 --> 0:02:35.960 actions of the Trump administration, because we know that China 0:02:36.200 --> 0:02:38.920 is in the cross hairs when it comes to trade 0:02:38.960 --> 0:02:42.680 but also when it comes to currency values. Sure. Well, 0:02:43.080 --> 0:02:46.200 my my assessment is this administration is still very young. Uh. 0:02:47.840 --> 0:02:51.120 Campaigns are consequence free events. You can say whatever you want, 0:02:51.200 --> 0:02:55.000 but once you become the running the running the actual country, 0:02:55.360 --> 0:02:57.960 you have to actually develop an implement policies. Right now, 0:02:58.000 --> 0:02:59.880 we haven't seen any. We've seen a series of BLUs 0:03:00.000 --> 0:03:03.280 there's to Iran that you're very non specific, telling them 0:03:03.280 --> 0:03:06.480 their unnoticed uh, seemingly giving a pass about some of 0:03:06.560 --> 0:03:10.400 russians aggressive actions in the Baltics, as well as its 0:03:10.440 --> 0:03:13.639 inability to resolve it's military dispute in Crimea, and then 0:03:13.639 --> 0:03:16.160 taking a hard line with China, but again not making 0:03:16.200 --> 0:03:20.200 any specific demands on Chinese behavior. So, uh, the sense 0:03:20.200 --> 0:03:23.880 that there's a strategy, which means a clear vision and 0:03:24.000 --> 0:03:27.560 prioritized efforts to do so, there's nothing like that yet, 0:03:27.600 --> 0:03:29.560 but that doesn't mean there won't be. This is early 0:03:29.600 --> 0:03:33.120 stages now, the early stages also with the President and 0:03:33.240 --> 0:03:37.320 the administration's relationship with the Russia and Europe. And I'm 0:03:37.320 --> 0:03:40.360 wondering if you could just describe what is Vladimir Putin's 0:03:40.360 --> 0:03:43.920 intention and how does that fit into what's going on 0:03:44.040 --> 0:03:46.880 with the European Union. It seems as though he's being 0:03:46.920 --> 0:03:49.600 successful at least in stirring the pot with Europe. Well, 0:03:49.640 --> 0:03:52.040 if you were a chriminologist and you could read Vladimir 0:03:52.080 --> 0:03:54.280 Putin's mind, you would do really well UH in the 0:03:54.320 --> 0:03:57.680 currency markets, and you should have a job doing risk analysis, 0:03:57.680 --> 0:04:01.040 because nobody's really quite known what Latim Reputin wants. The 0:04:01.040 --> 0:04:03.680 one thing we do know from his behavior and statements 0:04:03.760 --> 0:04:07.120 is he cares about the political outcomes in which Russia 0:04:07.160 --> 0:04:09.200 has an interest, as lots of great powers do, as 0:04:09.240 --> 0:04:12.200 the United States does in the Middle East, as China 0:04:12.280 --> 0:04:15.880 does in East Asia. And it's his willingness to use 0:04:16.440 --> 0:04:21.960 information influence UH, using military force at below the threshold 0:04:21.960 --> 0:04:26.160 of actual conflict to have to influence outcomes in those states. 0:04:26.240 --> 0:04:29.400 That's what's most destabilize them, to destabilize them, but also 0:04:29.520 --> 0:04:33.680 to bring into bear political outcomes that are advantageous to him. 0:04:33.720 --> 0:04:36.440 There are certain parties that the Russian government favors over others, 0:04:36.520 --> 0:04:39.200 and they're very explicit about that. They're willing to funnel 0:04:39.240 --> 0:04:43.039 money to resources to provide messaging through the Internet and 0:04:43.080 --> 0:04:46.800 social media on behalf of them. And that has destabilized 0:04:46.800 --> 0:04:48.719 a lot of European Union because it's doing it faster 0:04:48.839 --> 0:04:52.000 and more successfully than any great power has done in 0:04:52.040 --> 0:04:55.360 the past. Um, we're speaking with Micah Zenko. He is 0:04:55.400 --> 0:04:58.680 a senior fellow at the Council on Foreign Relations. Were 0:04:58.680 --> 0:05:02.159 coming to from the p Year Hotel, the Power Breakfast 0:05:02.200 --> 0:05:06.320 at Perne and you know, Mica, as we look at 0:05:06.440 --> 0:05:10.560 the future of policy, it's going to be a different Europe, right. 0:05:10.560 --> 0:05:13.480 I mean, you have the UK leaving the European Union, 0:05:13.520 --> 0:05:16.120 you have elections that are coming up in the Netherlands 0:05:16.120 --> 0:05:20.400 and France and in Germany. Has Vladimir Putin, with the 0:05:20.440 --> 0:05:25.039 maybe unintended help of President Trump, has he been able 0:05:25.080 --> 0:05:27.880 to drive a wedge? And really, is it possible that 0:05:27.880 --> 0:05:31.120 the European Union could fracture as a result of these pressures? Well, 0:05:31.320 --> 0:05:34.960 any great power wants to fracture combined forces a rate 0:05:35.000 --> 0:05:37.080 against them, or believes that there are a raid against 0:05:37.120 --> 0:05:39.600 and well certainly perceives the rate against them. And as 0:05:39.640 --> 0:05:41.880 stated that if you read Russian military doctrine, if you 0:05:41.920 --> 0:05:43.960 read the statements of the Foreign Ministry, they believe the 0:05:43.960 --> 0:05:47.400 European Union is actively looking to suppress and contain Russia. 0:05:47.520 --> 0:05:49.640 That is their narrative. Okay, But having said see that's 0:05:49.680 --> 0:05:53.840 interesting because having said that, you ask yourself if the 0:05:53.880 --> 0:05:57.640 President Trump, throughout the campaign, it's one has disparaged the 0:05:57.680 --> 0:06:01.919 defense spending of European nation. And if we take for 0:06:02.040 --> 0:06:04.880 fact that maybe the European military coordination is not as 0:06:04.960 --> 0:06:08.440 great as others the United States, then what is Vladiman 0:06:08.480 --> 0:06:11.279 Putin really worried about? Is it's psychological and political to 0:06:11.360 --> 0:06:14.479 deal with his own domestic issues or is there really something? 0:06:14.480 --> 0:06:18.279 What kind of threat really does the European Union militarily pose? 0:06:19.440 --> 0:06:22.719 Zero at the time being. But this is an old debate. 0:06:22.760 --> 0:06:25.240 As you remember, President Eisenhower used to say, the Europeans 0:06:25.279 --> 0:06:27.800 are playing Uncle Sam for Uncle Sucker. This is not 0:06:27.960 --> 0:06:31.559 something new that President Defense and bring umber our defense 0:06:31.600 --> 0:06:35.599 umbrella not spending adequate money. The difference is that under 0:06:35.839 --> 0:06:40.360 a NATO informal agreement that Russia the European defensemanners spent 0:06:40.400 --> 0:06:43.080 two of their GDP on defense, so only a handful 0:06:43.120 --> 0:06:45.400 of them do the United States States spends about two 0:06:45.440 --> 0:06:48.039 and a half to three pc. But what Trump is 0:06:48.040 --> 0:06:50.400 saying is differently. He is claiming that he wants the 0:06:50.400 --> 0:06:54.400 Europeans to reimburse the U S. Treasury for the U 0:06:54.480 --> 0:06:57.679 S forces in Europe and for the mutual defense treaty 0:06:57.720 --> 0:07:00.320 that we have with them. That's a significantly different thing. 0:07:00.400 --> 0:07:03.120 And nobody in Europe is going to hand money to 0:07:03.160 --> 0:07:05.479 the U S. Treasury on behalf of the U S 0:07:05.480 --> 0:07:08.280 serving as a Heshian mercenary army for the Europeans. So 0:07:08.880 --> 0:07:12.560 what Trump is worried about is the perceived efforts of 0:07:12.760 --> 0:07:18.040 Western forces to destabilize the political outcomes in Georgia and Ukraine. 0:07:18.360 --> 0:07:21.800 And there were what Western interests trying to have different outcomes, 0:07:21.840 --> 0:07:24.960 and in Georgian Ukraine, he believes those are within his 0:07:25.040 --> 0:07:28.320 sphere of influence, those are his orbit and Russia should 0:07:28.320 --> 0:07:31.920 determine the political outcomes there. So that is the primary difference, 0:07:31.960 --> 0:07:35.080 and he worries that coming across the border into Russian territory. 0:07:35.360 --> 0:07:38.240 We have yet to even discuss trade policy when it 0:07:38.280 --> 0:07:41.320 comes to Mexico and the United States. Is this a 0:07:41.560 --> 0:07:45.360 political fight that the president is after or is there 0:07:45.400 --> 0:07:49.640 really some substantive economic goal that can be achieved. The 0:07:49.720 --> 0:07:52.640 underlying issue is based on fear, which is the fear 0:07:52.720 --> 0:07:55.320 of what emerges from Mexico. I mean, he famously kicked 0:07:55.360 --> 0:07:59.640 off his campaign and June mischaracterizing the threat of rapists 0:07:59.640 --> 0:08:03.440 and ref gs and diseases, etcetera. I think trade practices 0:08:03.480 --> 0:08:06.080 are one that is just UH, the latest of an 0:08:06.200 --> 0:08:10.880 array of foreign fears if you open up NAFTA. As 0:08:10.920 --> 0:08:13.400 people who know about this much greater than I do say, 0:08:13.920 --> 0:08:15.640 it's unclear to me that the United States are going 0:08:15.680 --> 0:08:18.120 to cut a greater deal that is predictable, that is 0:08:18.200 --> 0:08:22.520 time bound, that provides the the assurances for US businesses 0:08:22.560 --> 0:08:25.760 and traders along the along the border, that will allow 0:08:25.880 --> 0:08:29.040 the US to do long term capital investments in Mexico 0:08:29.160 --> 0:08:31.920 and Mexico businesses to do trade with the United States. 0:08:31.960 --> 0:08:35.720 So I think once you start hearing from senior business 0:08:35.800 --> 0:08:39.040 leaders about the actual implications of opening up NAFTA, this 0:08:39.080 --> 0:08:41.679 administration will become much more reticent than how active they 0:08:41.720 --> 0:08:44.839 do that. I'm pim fox in for David go Our 0:08:44.880 --> 0:08:48.160 guest is Micah Zenko. He is a senior fellow at 0:08:48.200 --> 0:08:51.520 the Council on Foreign Relations UH, joining me now is 0:08:51.640 --> 0:08:54.400 uh my co host or actually I'm your co host, 0:08:54.440 --> 0:08:58.040 Tom Keen. Great to have you here at the Pierre. 0:08:58.120 --> 0:09:02.400 It's like real snow out there. It is. Michael Dart 0:09:02.440 --> 0:09:04.199 and I were going to walk over to can leisurely 0:09:04.240 --> 0:09:08.839 walk over the hold handle. Our taxicabs got us here 0:09:09.080 --> 0:09:11.160 in style. I gotta say, I thought the snow plowers 0:09:11.160 --> 0:09:13.320 were all out. Everything is good. You know the system 0:09:13.400 --> 0:09:16.680 is working. Does that work? Okay? That gives me my 0:09:16.760 --> 0:09:18.840 segue because I want to talk. I want to bring 0:09:19.280 --> 0:09:22.440 Micah Zenko. You know we talked about the system is 0:09:22.600 --> 0:09:26.520 working from your perception and your experience, and I know 0:09:26.559 --> 0:09:29.120 that you've also written a lot about drones. You've written 0:09:29.120 --> 0:09:32.240 about about military policy. Can you say that the system 0:09:32.360 --> 0:09:35.040 is working when the Press Secretary of the of the 0:09:35.080 --> 0:09:37.880 President of the United States has asked a question having 0:09:37.920 --> 0:09:41.120 to do with whether the government of Yemen has asked 0:09:41.520 --> 0:09:45.480 the United States to suspend drone strikes and you can't 0:09:45.480 --> 0:09:48.880 seem to get a specific yes or no answer. Why 0:09:49.000 --> 0:09:52.520 is that difficult? What? What is that message? Well, to 0:09:52.600 --> 0:09:55.679 be fair to the white spokesperson, he may want to 0:09:55.720 --> 0:09:58.040 be protecting whether or not the government you haven't approves 0:09:58.120 --> 0:10:01.600 these operations, there is domestic sense, it's there's domestic political 0:10:01.600 --> 0:10:05.280 sensitivities within Yemen. These are deeply unpopular operations, but the 0:10:05.360 --> 0:10:08.040 United States provides hundreds of millions of dollars over the 0:10:08.120 --> 0:10:11.400 years too. But who doesn't know that? I mean, that's 0:10:11.440 --> 0:10:14.280 like out in the media, online, social I mean, that's everywhere. 0:10:14.280 --> 0:10:17.880 Everybody knows it. And when an air strike, for example, 0:10:18.000 --> 0:10:21.120 the military even uh speaks directly to it. Well, the 0:10:21.200 --> 0:10:23.160 question is whether or not Well, when they're done by 0:10:23.160 --> 0:10:24.959 the U. S. Military, yes, we do. When they're done 0:10:24.960 --> 0:10:27.360 by the CIA, we pretend they don't. So that's and 0:10:27.400 --> 0:10:30.760 in Yemen, the CIA and the military run parallel drone programs, 0:10:30.800 --> 0:10:32.880 which is part of the confusion. So we cannot say 0:10:32.920 --> 0:10:35.440 which ones we actually do. That's the tripe. But I 0:10:35.440 --> 0:10:36.920 was going to say that the people on the ground 0:10:37.000 --> 0:10:39.240 don't care. No, they don't care who drops a bomb, 0:10:39.280 --> 0:10:42.160 including if it's the Saudi government, the American government, the CIA, 0:10:42.240 --> 0:10:44.360 or the military. You're correct, But they want to be 0:10:44.400 --> 0:10:47.640 able to maintain some distance, some degree of dissent when 0:10:47.679 --> 0:10:50.920 civilian casualties occur, as they did on the January with 0:10:51.000 --> 0:10:54.360 this raid in central Yemen. Uh So the bigger question 0:10:54.440 --> 0:10:58.719 was the spokesperson said phenomenally said, anyone who questions the 0:10:58.760 --> 0:11:02.120 success of this raid puts at risk the Navy seal 0:11:02.160 --> 0:11:04.880 who had been killed, which is quite remarkable because if 0:11:04.920 --> 0:11:07.360 you spend time with the military, they're the most critical 0:11:07.400 --> 0:11:10.360 and self honest to have their own operations. Well, I 0:11:10.400 --> 0:11:12.520 want to go back to what you wrote six years ago. 0:11:12.600 --> 0:11:14.880 This was very important at the time between threats and 0:11:14.960 --> 0:11:20.120 ward US discrete military operations in the post corld world. 0:11:20.720 --> 0:11:23.080 Your next essay in the post Trump world will be 0:11:23.440 --> 0:11:27.400 the discrete military operations of the Secretary of Defense. What 0:11:27.440 --> 0:11:31.320 are you watching for from General Maddis is he tries 0:11:31.360 --> 0:11:36.240 to bring normality to our defense and offense dialogue. Right. Well, 0:11:36.240 --> 0:11:38.960 Secretary Maddis now has a very different vision than when 0:11:38.960 --> 0:11:41.560 he was the commander of Central Command, which is the 0:11:41.600 --> 0:11:43.800 geographic area in the Middle East. The primary things that 0:11:43.840 --> 0:11:46.600 he wants to do is a share one. The homeland 0:11:46.679 --> 0:11:49.959 is secure, a shared defense systems are being protected and secure, 0:11:50.240 --> 0:11:53.679 US nuclear turrent works, and our Mutual Defense treaty allies 0:11:53.720 --> 0:11:57.080 feel comfortable. The problem is those four core missions of 0:11:57.080 --> 0:11:59.720 the U. S military are put at risk when President 0:11:59.720 --> 0:12:02.760 Trump says flipping things about nuclear weapons when he tells 0:12:02.800 --> 0:12:04.839 our tree allies, you better pay. Let me ask the 0:12:04.960 --> 0:12:08.320 question for all of our listeners worldwide, and particularly the 0:12:08.320 --> 0:12:10.880 people stuck in a snow bank on the East coast 0:12:10.880 --> 0:12:14.760 this morning, when do the adults enter the room? Well, 0:12:14.800 --> 0:12:16.960 the question is when do the adults and the presidents 0:12:16.960 --> 0:12:19.760 starts speaking on the same level. When do they start 0:12:19.800 --> 0:12:22.920 saying the same things? Because what Secretary Mattis says is calm, 0:12:23.200 --> 0:12:26.640 consistent in the US history and reassuring what has been 0:12:26.679 --> 0:12:29.440 said ince on the confirmation hearing is by Secretary Tillerson. 0:12:29.559 --> 0:12:32.079 What the White House says, uh is very different. So 0:12:32.120 --> 0:12:34.800 the question is when is the president and his candid 0:12:34.880 --> 0:12:38.720 going to speak consistently about core foreign policy messages Because 0:12:38.760 --> 0:12:40.800 they aren't yet. Well, let's just as student that they're not. 0:12:40.920 --> 0:12:44.040 Let's just assume that this is the new normal. To 0:12:44.280 --> 0:12:48.679 paraphrase Muhammad al Arian, it's the new normal in foreign policy. 0:12:49.160 --> 0:12:52.800 Take us through what you believe to be the biggest 0:12:52.960 --> 0:12:57.200 flashpoints that could erupt in the next six months. The 0:12:57.240 --> 0:12:59.720 single biggest flash point day to day is the Korean Peninsula, 0:12:59.760 --> 0:13:02.680 because that's where US and South Korean forces are prepared, 0:13:02.720 --> 0:13:05.520 as they say, to fight tonight because there could be 0:13:05.640 --> 0:13:08.840 a skirmish on the DMZ. There could be an exchange 0:13:08.840 --> 0:13:11.920 of fire which escalates to a full scale war. The 0:13:12.000 --> 0:13:13.960 U S forces have to be prepared to deter that 0:13:14.040 --> 0:13:16.280 sort of outcome. The second big one, and the most 0:13:16.320 --> 0:13:19.160 worrisome now is in the Persian Gulf because US and 0:13:19.160 --> 0:13:22.880 Iranian forces in the maritime domain there are raged so 0:13:22.920 --> 0:13:24.960 closely it's like they're in a phone booth together. They 0:13:25.040 --> 0:13:28.199 encounter each other within yards meters of each other consistently, 0:13:28.760 --> 0:13:31.760 and our National Security Advisor Michael Flynn has said that 0:13:31.800 --> 0:13:34.480 we are putting Iran on notice. They're trying to scare 0:13:34.520 --> 0:13:37.160 Iran to change its behavior. What Iran is supposed to 0:13:37.200 --> 0:13:39.040 change this behavior is unclear, and what the U S 0:13:39.040 --> 0:13:41.320 will do in responses uncertain. We need to you have 0:13:41.320 --> 0:13:43.960 a home more extundon conversation. I just put your book 0:13:43.960 --> 0:13:47.520 out on Twitter, folks, making Zenko's important book on discreet 0:13:47.559 --> 0:13:50.840 war from a number of years ago. A lot of 0:13:51.160 --> 0:13:53.440 work as well, Yeah, a lot of newer work as 0:13:53.480 --> 0:13:57.319 well with the Council on Foreign Relations. Mika Zinko, thank you, really, 0:13:57.360 --> 0:13:59.160 thank you, thank you for coming in through the snow 0:13:59.240 --> 0:14:02.880 glad to hopefully here the Pure Hotel always beautiful, but 0:14:02.920 --> 0:14:18.560 now it's your reindeers parked outside. The reindeers outside non 0:14:18.720 --> 0:14:20.640 coming down here. For all of you, drive careful on 0:14:20.680 --> 0:14:24.400 the Eastern seaboard. Bloomberg twelve hundred, Boston, Bloomberg eleven three 0:14:24.400 --> 0:14:26.960 oh in New York. We say good morning to the 0:14:26.960 --> 0:14:30.120 rest of you. Check your plane flights. Even if you're 0:14:30.200 --> 0:14:33.480 Dallas to Denver. Things could get messed up today. There's 0:14:33.520 --> 0:14:36.160 a lot of delays here, a lot of flight cancelations. 0:14:36.240 --> 0:14:37.840 Flight aware of saying that I think there were more 0:14:37.840 --> 0:14:43.360 than flight cancelations already. Michael Darda took the surveillance Sikorski 0:14:43.400 --> 0:14:45.920 to get here from Connecticut and he joins us now 0:14:45.920 --> 0:14:48.200 and then Kim, we've been talking through the morning with 0:14:48.320 --> 0:14:51.320 Mr Darta. Let's let's start with the animal spirit. Can 0:14:51.360 --> 0:14:53.920 we get nominal g d P out of a four percent? 0:14:54.000 --> 0:14:57.120 Can we get real growth plus inflation to a point 0:14:57.120 --> 0:15:00.520 where the confidence really gets restored? Well, Um, I think 0:15:00.520 --> 0:15:05.160 the answer is uh plus four percent on nominal temporarily yes, 0:15:05.320 --> 0:15:08.000 But from a longer term perspective that will really depend 0:15:08.040 --> 0:15:11.240 on whether productivity growth picks up in a meaningful way. 0:15:11.240 --> 0:15:14.120 And that's a much bigger question mark. So think of 0:15:14.160 --> 0:15:18.800 the sustainable nominal growth rate is growth potential productivity plus 0:15:18.880 --> 0:15:21.200 labor force growth. You know that's been running it just 0:15:21.280 --> 0:15:24.000 about one percent per annum over the last five or 0:15:24.040 --> 0:15:28.400 six years, plus the FEDS two percent inflation target. So 0:15:28.480 --> 0:15:31.360 we've been using a figure of three to four percent 0:15:31.480 --> 0:15:36.480 in terms of sustainable long term nominal GDP growth. Four 0:15:36.520 --> 0:15:39.600 percent being on the optimistic end, three percent more of 0:15:39.600 --> 0:15:44.520 the pessimistic side. But for figures that are well beyond that, 0:15:44.560 --> 0:15:46.560 I think we're gonna need to see a pretty hefty 0:15:46.600 --> 0:15:50.840 pickup in productivity. Hope springs eternal, but you know we'll see. 0:15:51.000 --> 0:15:54.000 Hope's not a strategy either, you know, Michael, he mentioned 0:15:54.000 --> 0:15:58.400 the two key elements, right, productivity and labor force growth. 0:15:58.920 --> 0:16:01.400 Let's take each one of the If we can labor 0:16:01.640 --> 0:16:07.320 force growth, this is a demographic change exactly based on 0:16:07.400 --> 0:16:10.880 the actual numbers that you have looked at. Does it 0:16:10.920 --> 0:16:14.760 make sense to limit or make more difficult the entry 0:16:14.760 --> 0:16:17.200 to the United States of more people who are willing 0:16:17.240 --> 0:16:20.000 to work? Great question. The answer is no, it does not. 0:16:20.280 --> 0:16:24.479 So there's a lot of optimism about whether certain reforms 0:16:24.480 --> 0:16:28.960 to you know, regulation or taxation will lift productivity. But 0:16:29.120 --> 0:16:33.120 the other part of productive potential is these low working 0:16:33.160 --> 0:16:37.120 age population growth figures just point point five pc per 0:16:37.240 --> 0:16:40.080 and I'm expected over the next few decades about a 0:16:40.160 --> 0:16:43.400 third of the post war average growth rate in a 0:16:43.520 --> 0:16:47.240 much more restrictive posture. And immigration will only and I 0:16:47.320 --> 0:16:49.960 ramplify the headwinds, you know. And I raised this not 0:16:49.960 --> 0:16:53.160 not to really bring up necessarily immigration issue, but the 0:16:53.200 --> 0:16:55.800 worker issue, because if you don't have enough workers contributing 0:16:55.840 --> 0:16:59.040 to things like social security and paying taxes, you're gonna 0:16:59.040 --> 0:17:02.080 blow a whole even a bigger hole through the federal 0:17:02.160 --> 0:17:05.199 budget exactly. And you know, one issue that we have, 0:17:05.280 --> 0:17:07.240 and it makes sense to put this in the context 0:17:07.320 --> 0:17:10.520 of what kind of tax changes can we expect. There's 0:17:10.560 --> 0:17:15.159 about a four percentage point you know of GDP increase 0:17:15.320 --> 0:17:19.159 in spending on the back of an aging population in medicare. 0:17:19.720 --> 0:17:23.440 So where is the room to move to dramatic and 0:17:23.560 --> 0:17:26.080 draconian tax cuts that you know, at least on a 0:17:26.080 --> 0:17:29.119 static basis, lose a lot of revenue. There just isn't 0:17:29.240 --> 0:17:31.560 room for that. So if you know, going for more 0:17:31.560 --> 0:17:36.680 efficiency in the code, yes, but huge unfunded tax reductions, 0:17:36.880 --> 0:17:39.160 I don't think so. Let's come back and talk about 0:17:39.160 --> 0:17:41.160 this sort of the the word that's not being set 0:17:41.200 --> 0:17:44.000 through all this is austerity, and what is the state 0:17:44.000 --> 0:17:46.359 of austerity in Europe? What is the state of austerity? 0:17:46.440 --> 0:17:51.160 Particularly within the majority Republicans on Capitol Hill. We're talking 0:17:51.160 --> 0:17:54.560 to Michael Dart about the austerity that isn't or maybe 0:17:55.040 --> 0:18:00.639 it is. Is this an austere Congress? There is? Mrs 0:18:00.640 --> 0:18:04.360 Reagan said years ago, We'll just say no, that's the mystery, 0:18:04.400 --> 0:18:07.399 isn't it. Well, that's really the pressing question, Tom. What 0:18:07.480 --> 0:18:10.520 I will say is there are a handful of Republican 0:18:11.000 --> 0:18:15.159 senators now who have expressed reservations about going down the 0:18:15.400 --> 0:18:21.400 George W. Bush path of shoehorning a tax cuts through 0:18:21.400 --> 0:18:25.440 a reconciliation process, which is essentially a stick of dynamite 0:18:25.480 --> 0:18:29.040 that blows up on a future Congress with no spending 0:18:29.119 --> 0:18:32.639 restraint in rising debt levels. But but to be clear 0:18:32.960 --> 0:18:36.520 here at the Pierre Hotel, are we not talking Reagan, 0:18:36.920 --> 0:18:40.280 but we're really talking in ethos of the governor uh 0:18:40.320 --> 0:18:43.680 and former Vice President Nelson Rockefeller. Is that really what 0:18:43.680 --> 0:18:47.120 we're reducing? Well, well, we'll have to see about that. 0:18:47.400 --> 0:18:50.359 I guess from a broader perspective, I would just say 0:18:50.840 --> 0:18:55.439 sixty vote hurdle for permanent tax changes. If we want 0:18:55.840 --> 0:18:59.080 changes in regulatory or tax policy to have an impact 0:18:59.280 --> 0:19:04.240 on sentives in productivity, they need to be permanent, not temporary. 0:19:04.359 --> 0:19:06.919 The demand side effects will end up offset by the 0:19:06.920 --> 0:19:10.640 federal reserve, So that really needs to be the focus. 0:19:10.840 --> 0:19:14.240 Is it permanent or temporary? Does it have the ability 0:19:14.240 --> 0:19:17.520 to lift incentives and productivity? And then we can move 0:19:17.560 --> 0:19:19.680 on from there. But I think at least in terms 0:19:19.680 --> 0:19:21.560 of the proposals that are out there, we'd have to 0:19:21.640 --> 0:19:25.000 expect that they'd be pretty watered down and may not 0:19:25.119 --> 0:19:27.320 even happen in some cases. We'll see what can get 0:19:27.320 --> 0:19:30.560 through the U. S. Senate. Uh, Michael Darta, you're an economist, 0:19:30.600 --> 0:19:32.840 so you get to have two opinions about this. And 0:19:32.880 --> 0:19:35.280 I want to focus on dot frank for just a moment, 0:19:35.359 --> 0:19:38.359 because this is a very important industry and you know, 0:19:38.600 --> 0:19:41.280 it has gone through the financial business has gone through 0:19:41.280 --> 0:19:44.119 a revolution in you know, the space of seven years. 0:19:44.200 --> 0:19:48.400 Let's say, is there anything that can be done that 0:19:48.520 --> 0:19:53.399 would not create huge delays from opposition and confrontation. Is 0:19:53.400 --> 0:19:55.679 there anything that can be done and let's say the 0:19:55.720 --> 0:20:03.080 next three months that would make people who are experts 0:20:03.200 --> 0:20:07.879 at making decisions on credit, uh feel like they're not 0:20:08.000 --> 0:20:10.720 being watched twenty four hours a day, seven days a 0:20:10.760 --> 0:20:15.280 week by a regulator or or someone who might uh 0:20:15.680 --> 0:20:18.439 be a right might want to be a regulator. Right. Well, 0:20:18.720 --> 0:20:21.200 perhaps I would just say, and if we're talking about 0:20:21.280 --> 0:20:25.280 Dodd Frank the Vocal Rule financial regulatory reform, the banks 0:20:25.280 --> 0:20:27.879 have put together this big wish list which looks more 0:20:27.960 --> 0:20:30.520 like roll it all back and nothing that replaces it 0:20:30.600 --> 0:20:34.080 in essence, as my friend Scott Sumner says, a return 0:20:34.600 --> 0:20:37.920 to the regulatory structure that led to the banking crises 0:20:37.960 --> 0:20:40.920 of the eighties and then the subprime meltdown. So that's 0:20:40.920 --> 0:20:45.400 probably not a viable option. Uh So we'll see what happens. 0:20:45.720 --> 0:20:48.600 Fed Chair Yelling recently said, take a look at making 0:20:48.840 --> 0:20:51.680 you know, some of the reforms more efficient and effective. 0:20:52.119 --> 0:20:55.359 That's quite different than a wholesale roll back with nothing 0:20:55.400 --> 0:20:57.600 to replace it. And you could actually go down the 0:20:57.600 --> 0:21:00.240 same path of reasoning for the A. C. A. Obama here, 0:21:00.560 --> 0:21:03.399 you know, repeal and replace, what replaces it? What are 0:21:03.440 --> 0:21:05.560 the effects if you end up with millions of people 0:21:05.640 --> 0:21:08.520 losing coverage? At least you end up with a political 0:21:09.359 --> 0:21:13.640 bomb exploding, and so you know, both with regulatory reform 0:21:13.800 --> 0:21:16.639 and the A C. A. I'm waiting with bated breath, 0:21:17.000 --> 0:21:19.400 bated waiting with bated breath on the on the Fed, 0:21:19.480 --> 0:21:22.040 how many interest rate increases this year and when market 0:21:22.040 --> 0:21:26.000 expects to dot plot is looking for three? My guests 0:21:26.000 --> 0:21:29.000 would be three in the last three quarters of the years. 0:21:29.280 --> 0:21:33.280 You get there with your nominal GDP call, well, I 0:21:33.320 --> 0:21:35.719 get there this way. That was just under four, right, 0:21:35.760 --> 0:21:38.240 He was saying, what was the point, I think we're 0:21:38.280 --> 0:21:41.400 going to be over for this year, But he said 0:21:41.440 --> 0:21:44.119 on the trend, Yeah, the trend is going to be 0:21:44.280 --> 0:21:47.119 three to four. In my opinion, if growth potential is 0:21:47.240 --> 0:21:50.200 running between one and two and you are being generous there, 0:21:50.640 --> 0:21:55.400 four's jet four sustained for is generous. So I think 0:21:55.480 --> 0:21:58.240 with the recovery and credit markets that's taken place over 0:21:58.280 --> 0:22:00.760 the course of the last year, and the bump up 0:22:00.760 --> 0:22:04.280 and inflation expectations in the improvement in the labor market, 0:22:04.640 --> 0:22:08.080 the FED will be able to to lift rates gradually 0:22:08.119 --> 0:22:11.320 this year without throwing the business cycle off of a cliff. 0:22:11.680 --> 0:22:15.440 So two to three I think is reasonable. Um, And 0:22:15.560 --> 0:22:17.720 you know, we know that the futures markets aren't looking 0:22:17.880 --> 0:22:20.960 you know, probabilities very low for March, so it would 0:22:21.000 --> 0:22:23.640 have to be more back end loaded if they're going 0:22:23.680 --> 0:22:26.120 to do three. But I thought everybody who I thought, 0:22:26.160 --> 0:22:28.000