WEBVTT - Raghuram Rajan on Surging Gold and Growing Risks to Financial Stability 0:00:02.720 --> 0:00:16.480 Bloomberg Audio Studios, Podcasts, Radio News. 0:00:18.640 --> 0:00:22.120 Hello and welcome to another episode of the Odd Lots podcast. 0:00:22.200 --> 0:00:24.439 I'm Joe Wassenthal and I'm Tracy Alloway. 0:00:24.640 --> 0:00:28.440 Today listeners get a special live episode of the podcast 0:00:28.480 --> 0:00:31.000 that we were recorded in Washington, DC at the annual 0:00:31.040 --> 0:00:33.640 meeting for the Institute for International Finance. 0:00:33.800 --> 0:00:37.040 That's right. We spoke with Ragoram Rajan. He is a 0:00:37.159 --> 0:00:40.000 professor at the University of Chicago Booth School of Business 0:00:40.080 --> 0:00:43.080 and of course the former head of India's Central Bank, 0:00:43.200 --> 0:00:45.360 and he is exactly the person you want to talk 0:00:45.400 --> 0:00:48.400 to when everyone seems to be talking about risks in 0:00:48.440 --> 0:00:48.920 the market. 0:00:49.080 --> 0:00:50.839 That's right, of course, and we bring it up in 0:00:50.880 --> 0:00:53.519 the conversation. He was sort of famous for being one 0:00:53.560 --> 0:00:56.360 of the early pupil to warn in I Guess two 0:00:56.440 --> 0:00:59.680 thousand and five about brewing risks of the financial system. 0:01:00.040 --> 0:01:03.000 So we talked about what's behind the surgeon gold, what's 0:01:03.080 --> 0:01:06.880 going on with central banks, and how seriously they're taking inflation, 0:01:07.400 --> 0:01:10.679 speculative fervor and frenzy in the market. All of the 0:01:10.720 --> 0:01:12.520 things that are relevant right now. 0:01:12.600 --> 0:01:13.520 So take a list. 0:01:14.560 --> 0:01:17.319 Let's get started. Why is gold up so much? Let's 0:01:17.319 --> 0:01:21.280 start with the really important question, What is your story 0:01:21.400 --> 0:01:24.720 or theory behind the seemingly NonStop demand for gold? 0:01:24.760 --> 0:01:27.800 Right, Well, there's no single story, right, it's a number 0:01:27.840 --> 0:01:31.200 of stories. First it started taking off what twenty twenty three. 0:01:31.800 --> 0:01:36.759 Clearly there is an element of geopolitical risk. Many central banks, 0:01:36.800 --> 0:01:41.440 looking at the militarization or the weaponization of payments, are 0:01:41.560 --> 0:01:45.720 basically saying, do I want all my reserves in developed 0:01:45.720 --> 0:01:50.240 country currencies? Do I want something which I control directly? 0:01:50.760 --> 0:01:53.440 So a movement to gold for that reason may have 0:01:53.560 --> 0:01:57.360 started initially a lot of central banks moving to more gold, 0:01:57.480 --> 0:01:59.600 but there are the reasons. I mean, what's the safe 0:01:59.640 --> 0:02:04.560 acet if you look around the world. Certainly, if you 0:02:04.880 --> 0:02:08.840 look at Japan, you know, huge amount of debt, probably 0:02:09.200 --> 0:02:12.720 higher inflation than in the past, and interest rates really low. 0:02:13.160 --> 0:02:14.839 Is that a place you want to put a lot 0:02:14.840 --> 0:02:18.360 of money? In the Euro area, well, it's always been 0:02:18.400 --> 0:02:22.079 a question of whether it's a cohesive unit, who's going 0:02:22.120 --> 0:02:24.680 to bail the system out when there's a problem, And 0:02:24.760 --> 0:02:28.000 of course the United States running large fiscal deficits you 0:02:28.080 --> 0:02:30.760 know till the eye can see, So you know a 0:02:30.760 --> 0:02:34.480 lot more questions about savee acets today, and that's the 0:02:34.520 --> 0:02:37.760 second feature. Third of cause interest rates coming down, gold 0:02:37.800 --> 0:02:41.480 is easier to hold. At that point, A bunch of 0:02:41.560 --> 0:02:44.640 reasons why this is happening, I would say at this 0:02:44.760 --> 0:02:47.680 point also that there is a fair amount of fraust, 0:02:47.720 --> 0:02:50.200 so you can't completely discount the fact that gold prices 0:02:50.480 --> 0:02:53.920 are probably moving along with the frauth as everything else. 0:02:55.360 --> 0:02:57.240 Was this something that was on your radar when you 0:02:57.280 --> 0:02:59.560 were at the RBI. Head of the RBI, how did 0:02:59.600 --> 0:03:02.120 you think of out reserve diversification? 0:03:02.240 --> 0:03:07.559 Then, well, yes, you do want to diversify your holdings. 0:03:07.680 --> 0:03:11.399 The worry about your reserve assets and developed countries being 0:03:11.440 --> 0:03:16.600 sequestered because of an angry president or prime minister wasn't 0:03:16.639 --> 0:03:19.880 as big a concern, but there was definitely a view 0:03:19.919 --> 0:03:23.720 that you needed some diversification. And you know, once you 0:03:23.960 --> 0:03:28.200 get beyond the big reserve currencies, you know it's harder 0:03:28.240 --> 0:03:31.320 to deal with the smaller countries. Gold is not liquid, 0:03:31.360 --> 0:03:33.600 that is a problem. It sits on your bandsheet, but 0:03:33.600 --> 0:03:36.160 if you want to transform it into something, it's sitting 0:03:36.200 --> 0:03:38.680 in your walls. How do you convince the others that 0:03:38.760 --> 0:03:42.120 it's a lot of countries have their gold in New 0:03:42.200 --> 0:03:44.600 York or in London. There it's a question of moving 0:03:44.600 --> 0:03:47.240 from one wall to another. But if it's in your 0:03:47.240 --> 0:03:50.760 home country, it's harder. You need to rent a seven 0:03:50.800 --> 0:03:52.280 four seven to take it elsewhere. 0:03:52.480 --> 0:03:54.880 Yeah, I was talking to someone last night who pointed 0:03:54.920 --> 0:03:57.480 this out. You know, there's this for a long time, 0:03:57.560 --> 0:04:00.280 the price of gold could sort of be model or 0:04:00.600 --> 0:04:02.760 linked to real raids in some way, and there's a 0:04:02.840 --> 0:04:05.280 sort of nice stable relationship. And they point out, you know, 0:04:05.280 --> 0:04:07.920 if you really look at when the divergence occurred, is 0:04:07.960 --> 0:04:11.200 not long after Russia's invasion of Ukraine, and of course 0:04:11.240 --> 0:04:14.920 the seizure of Russian assets, which fits into what you're 0:04:14.960 --> 0:04:17.680 talking about, which is that if you are, you know, 0:04:17.760 --> 0:04:20.520 a reserve manager at a bank or whatever, did that 0:04:20.640 --> 0:04:24.080 wake people up to the possibility that your fiat currency 0:04:24.279 --> 0:04:27.320 that isn't some foreign central bank or some foreign entity 0:04:27.360 --> 0:04:30.360 could just disappear one day in a way that your 0:04:30.400 --> 0:04:31.800 own custodied gold cannot. 0:04:32.200 --> 0:04:32.760 I think it did. 0:04:33.080 --> 0:04:36.719 I think that's a strong reason you see the movement 0:04:37.160 --> 0:04:40.880 starting in twenty two twenty three, it starts peaking up 0:04:40.880 --> 0:04:45.760 more strongly. But it's also the willingness to weaponize a 0:04:45.800 --> 0:04:48.520 lot of stuff. As you know, a number of countries 0:04:48.560 --> 0:04:51.920 are trying to build alternatives to Swift, because Swift can 0:04:51.960 --> 0:04:57.000 be weaponized. Now, these need not be your traditional sort 0:04:57.040 --> 0:05:01.080 of quote unquote rogue countries, which you know have been 0:05:01.120 --> 0:05:03.640 on the list of sanctions for a long time. This 0:05:03.760 --> 0:05:06.960 could be any country which fears political change. I mean, 0:05:06.960 --> 0:05:11.080 if Canada can turn out to be antagonistic to a 0:05:11.080 --> 0:05:15.039 close neighbor, what about a country five thousand miles away. 0:05:15.400 --> 0:05:19.039 So trust has broken down in the system, and that's 0:05:19.160 --> 0:05:21.360 part of the reason why people are trying to build 0:05:21.400 --> 0:05:24.880 alternatives which don't make them dependent. Payments are so crucial 0:05:25.440 --> 0:05:28.000 you don't want to be dependent on any one country 0:05:28.040 --> 0:05:30.120 that can change the nature of payments. 0:05:30.560 --> 0:05:33.000 So it feels like we're at this really weird juncture 0:05:33.080 --> 0:05:35.640 where there's a lot of distrust in the system, a 0:05:35.720 --> 0:05:39.920 lot of unpredictability around the behavior of the United States 0:05:39.960 --> 0:05:44.560 in particular, and yet the US dollar and US treasuries 0:05:44.640 --> 0:05:47.719 form the basis of the global financial system. How do 0:05:47.760 --> 0:05:51.320 you see that evolving over time given some of these concerns, 0:05:51.360 --> 0:05:54.560 given concerted efforts to for instance, create a new. 0:05:54.480 --> 0:05:58.120 Swift, Well, I think part of the reason is the 0:05:58.200 --> 0:06:01.520 Tina factor. There is no alternative, right, The US market 0:06:01.600 --> 0:06:05.039 is still the deepest market in the world, treasure markets 0:06:05.080 --> 0:06:09.520 and so on. It is liquid. Many institutions operate here, 0:06:09.960 --> 0:06:13.160 and yeah, people still trust the rule of law prevailing 0:06:13.360 --> 0:06:16.479 in the US. Potentially, the fact that there's been so 0:06:16.600 --> 0:06:21.280 much agonizing about the seizure of Russian reserves is actually 0:06:21.279 --> 0:06:23.719 a good thing because it says that it doesn't happen 0:06:23.760 --> 0:06:27.080 on a whim, that countries actually think about it and 0:06:27.120 --> 0:06:31.120 then are finding ways that sort of look legal to 0:06:31.279 --> 0:06:32.839 actually sequester them. 0:06:33.240 --> 0:06:35.200 And so I think that's to the good. 0:06:35.640 --> 0:06:39.159 Of course, fact that it's even questioned is what a 0:06:39.440 --> 0:06:41.960 number of other countries worry about, that we may not 0:06:42.320 --> 0:06:44.039 have control of those reserves. 0:06:44.120 --> 0:06:47.719 Speaking of dollar alternatives, there is no alternative, Okay, we 0:06:47.760 --> 0:06:51.200 talk about gold. President Trump perceives the existence of this 0:06:51.680 --> 0:06:54.680 entity called the bricks to be an assault on the 0:06:54.800 --> 0:06:57.280 US dollar. You know, I always think it's pretty wild 0:06:57.320 --> 0:07:00.640 that there is this entity that exists because O'Neill thought 0:07:00.640 --> 0:07:03.159 it was a good acronym over twenty years ago. These 0:07:03.160 --> 0:07:06.159 were gonna be growth markets. But like, how seriously should 0:07:06.200 --> 0:07:08.479 we take this entity? What does it represent to you? 0:07:08.920 --> 0:07:12.320 Is there a germ of something that could represent so 0:07:12.440 --> 0:07:14.760 build something that is an alternative to the dollars. 0:07:14.800 --> 0:07:16.880 So how should we think about this this entity. 0:07:17.160 --> 0:07:20.560 Well, Jim O'Neil thought of it initially as this fast 0:07:20.560 --> 0:07:24.840 growing group of countries and it has, I mean, there's 0:07:24.840 --> 0:07:27.960 been differences across this group. China and India have grown 0:07:28.040 --> 0:07:30.200 much faster than the rest, and of course China has 0:07:30.240 --> 0:07:34.200 been spectacular in the early years of the brigs nomenclature. 0:07:35.200 --> 0:07:40.000 Is there a cohesive structure there on some issues where 0:07:40.160 --> 0:07:44.840 for example, it's sort of the emerging market collective against 0:07:44.880 --> 0:07:49.200 the industrial country collective issues such as green transition, who 0:07:49.280 --> 0:07:53.040 has responsibility? But again there's a lot of divergence. China 0:07:53.080 --> 0:07:55.840 has much more of an industrial base than say India. 0:07:56.200 --> 0:07:59.400 If you look at who emits you know most in 0:07:59.480 --> 0:08:02.160 the world, it's China. So even on the green issue, 0:08:02.480 --> 0:08:05.480 there is a divergence in opinion. I think with the 0:08:05.520 --> 0:08:08.920 addition to bricks of all these countries like Iran and 0:08:08.960 --> 0:08:13.200 so on, it becomes much less cohesive and seems much 0:08:13.240 --> 0:08:18.200 more like a anti West kind of structure, which certainly 0:08:18.280 --> 0:08:22.880 India doesn't subscribe to, which Brazil probably doesn't subscribe to. 0:08:23.040 --> 0:08:24.840 Again to the extent that some of the. 0:08:24.760 --> 0:08:29.040 Others, and of course within the bricks there are antagonisms, right, 0:08:29.120 --> 0:08:33.000 India and China for the border conflict in twenty twenty. 0:08:33.679 --> 0:08:37.000 So I think the sense that it is a cohesive group, 0:08:37.040 --> 0:08:39.880 it's a talking place, the sense that they will come 0:08:39.920 --> 0:08:42.680 together with a common currency, I mean, forget about it. 0:08:42.920 --> 0:08:45.800 That's not going to happen. May they build up a 0:08:45.880 --> 0:08:47.720 payments system which is different. 0:08:47.800 --> 0:08:51.000 Yeah, I mean yeah, I'm happy as a country to 0:08:51.040 --> 0:08:52.960 be part of five different payment systems. 0:08:53.040 --> 0:08:54.240 Gives me diversification. 0:08:54.679 --> 0:08:56.800 If somebody tries to put the squeeze on me, I 0:08:56.880 --> 0:08:58.400 move to a different payment system. 0:08:58.760 --> 0:09:01.560 But does that mean I'm going to quote with a currency. 0:09:01.600 --> 0:09:02.120 Probably not. 0:09:02.679 --> 0:09:05.520 So we started out talking about gold, which seems to 0:09:05.559 --> 0:09:07.320 reach a record high every day. 0:09:07.360 --> 0:09:07.600 Now. 0:09:08.280 --> 0:09:11.200 Stocks are also still pretty high. I know we had 0:09:11.280 --> 0:09:14.960 something of a correction recently, but yeah, for five minutes. 0:09:15.080 --> 0:09:18.440 In general, things seem to be going relatively well for 0:09:18.480 --> 0:09:21.920 equities as well, which is a very strange situation where 0:09:21.920 --> 0:09:24.920 you have the safe haven asset going up along with 0:09:25.160 --> 0:09:30.400 stocks still quite high. I know you famously presented a 0:09:30.440 --> 0:09:33.120 paper at the two thousand and five Jackson Hole where 0:09:33.120 --> 0:09:36.800 you talked about financial stability and risks that you saw 0:09:36.960 --> 0:09:40.199 in the system, and I think Alan Greenspan wasn't very 0:09:40.320 --> 0:09:43.199 nice about it at the time and probably lived on 0:09:43.240 --> 0:09:47.040 to regret that. But when you look at the market landscape, now, 0:09:47.440 --> 0:09:48.440 what risks do you see? 0:09:48.520 --> 0:09:52.200 Please say something equivalently historic, understand for our podcast, that's 0:09:52.240 --> 0:09:52.880 all we're asking. 0:09:53.040 --> 0:09:56.320 Let me say something historic in the sense of talking 0:09:56.360 --> 0:10:01.000 about history. Okay, look at every financial cris in the 0:10:01.080 --> 0:10:03.040 last one hundred years, and there are a couple of 0:10:03.080 --> 0:10:06.600 papers that have been written recently about it. If you 0:10:06.679 --> 0:10:10.920 look at the monitary policy settings before those crises, they. 0:10:10.840 --> 0:10:11.959 Always have a U shape. 0:10:12.720 --> 0:10:17.480 Easy times that's when the risks build up. Tightening that's 0:10:17.480 --> 0:10:20.440 when it starts crumbling and it falls apart. 0:10:20.600 --> 0:10:20.960 Okay. 0:10:21.600 --> 0:10:26.480 Whether that use shape is policy rates or whether it's 0:10:26.600 --> 0:10:32.240 some kind of deviation from neutral, it's always accommodative followed 0:10:32.240 --> 0:10:36.560 by tightening. That's when the financial collapse occurs. And the 0:10:36.559 --> 0:10:39.760 more the credit in the easy phase, the worst it is. Okay, 0:10:39.800 --> 0:10:42.880 that's what's been established post global financial crisis. And you 0:10:42.920 --> 0:10:46.040 can see that shape before the global financial crisis, and 0:10:46.280 --> 0:10:49.720 including in Europe where there were countries at the periphery 0:10:50.640 --> 0:10:53.760 where the shape was more pronounced because they have higher inflation. 0:10:53.840 --> 0:10:56.480 So the monitary policy setting was too loose for them 0:10:57.040 --> 0:10:59.520 and countries at the core where it was much more 0:10:59.720 --> 0:11:02.920 eq and so Germany France didn't have the kind of 0:11:03.000 --> 0:11:06.960 financial crisis except through their lending to the peripheric countries, 0:11:07.640 --> 0:11:11.200 as did the peripheric countries. So what does that tell us. 0:11:11.600 --> 0:11:14.640 It tells us be really careful when you have a 0:11:14.679 --> 0:11:18.959 long period of easing followed by tightening. Now immediate reaction. Well, 0:11:18.960 --> 0:11:21.560 we had a tightening, nothing happened. Well, we had a 0:11:21.600 --> 0:11:25.680 tightening after an enormous amount of spending by governments which 0:11:25.920 --> 0:11:29.320 essentially took the debt up from the private sector. Banks 0:11:29.320 --> 0:11:31.320 got bailed out, remember the provision at the beginning of 0:11:31.320 --> 0:11:35.400 the pandemic. Nothing actually happened because things like the paycheck 0:11:35.440 --> 0:11:38.800 prorection program gave them the money back. So we had 0:11:38.840 --> 0:11:41.600 a lot of support from the public sector to the 0:11:41.640 --> 0:11:45.800 private sector. And that's why when the tightening happened, barn 0:11:45.880 --> 0:11:51.320 sheets weren't really adversely affected. But credit keeps growing, not 0:11:51.520 --> 0:11:55.440 in the households but in the corporate sector. So we 0:11:55.559 --> 0:11:58.719 haven't had a really strong tightening. Except remember in the 0:11:58.760 --> 0:12:02.000 tightening phase, we had Silken Valley Bank, which was people 0:12:02.080 --> 0:12:07.560 forget the largest crisis in terms of nominal losses in 0:12:07.600 --> 0:12:11.079 the US banking system, and yet twenty two bank runs 0:12:11.080 --> 0:12:14.000 at the same time as Silicon Valley Bank happened. Enormous 0:12:14.040 --> 0:12:17.800 intervention by the FED to support the banking system, including 0:12:18.280 --> 0:12:21.600 by pushing out reserves and back into the system and 0:12:21.720 --> 0:12:24.520 giving people an easy way to borrow against full nominal 0:12:24.600 --> 0:12:27.280 value of their liabilities. We forget that that was a 0:12:27.280 --> 0:12:32.640 big crisis which we avoided because of intervention. Going forward, 0:12:33.760 --> 0:12:36.160 you have a lot of frauth in the system. And 0:12:36.240 --> 0:12:39.440 now we're talking about cutting rates, But we're talking about 0:12:39.480 --> 0:12:42.679 cutting rates when inflation has been high for a reasonable 0:12:42.720 --> 0:12:45.240 amount of time. It's plat road at three, it's still 0:12:45.280 --> 0:12:47.920 nowhere near two. People are saying, is there a new 0:12:48.480 --> 0:12:50.040 sort of target three? 0:12:50.160 --> 0:12:50.920 Not two? 0:12:51.480 --> 0:12:54.480 And you're seeing that demand is still strong, whether it 0:12:54.559 --> 0:12:57.680 comes from resilient households, whether it comes from the AI boom, 0:12:57.920 --> 0:13:01.199 whether it comes from government spending, even while supply in 0:13:01.240 --> 0:13:04.920 the US is more constrained because of the immigration constraint 0:13:05.040 --> 0:13:09.880 that is being put so strong demand weaker supply. Is 0:13:09.920 --> 0:13:13.080 that really conducive to disinflation? 0:13:13.840 --> 0:13:14.240 Maybe not? 0:13:15.200 --> 0:13:17.719 And so what's the bottom line. You have a lot 0:13:17.720 --> 0:13:21.640 of frauth in anticipation of further cuts, and you have 0:13:22.000 --> 0:13:23.920 some risks that in fact it may go. 0:13:23.920 --> 0:13:25.160 The other way. 0:13:25.240 --> 0:13:28.360 And the system in many ways, whether it stocks, whether 0:13:28.400 --> 0:13:31.160 it's leveraged in some parts of the system, as we've seen, 0:13:31.920 --> 0:13:33.120 is priced for perfection. 0:13:49.120 --> 0:13:52.120 You hear from people that the FED and other officials 0:13:52.160 --> 0:13:56.640 and like policy has been modestly restrictive, somewhat restrictive. But 0:13:56.920 --> 0:13:59.559 as you just described, inflation is not close to to 0:14:00.240 --> 0:14:04.400 it's closer to three percent. Obviously, risky assets are surging 0:14:04.800 --> 0:14:07.959 even with some of the little like credit cockroaches. I 0:14:08.000 --> 0:14:10.760 think Jimmie Diamond used that term like, actually spreads have 0:14:11.000 --> 0:14:14.040 totally been fine. Do you think that term restrictive is 0:14:14.040 --> 0:14:16.920 at all appropriate to describe the current stance of monetary 0:14:16.960 --> 0:14:17.840 policy in the US. 0:14:18.000 --> 0:14:22.040 So restrictive is always in famous central bank speak relative 0:14:22.040 --> 0:14:24.560 to an r star, And nobody knows what our star is, 0:14:24.600 --> 0:14:27.200 what the equilibrium rate is. But if you think the 0:14:27.400 --> 0:14:31.840 strong demand and somewhat more constraints supply, our star is 0:14:32.280 --> 0:14:36.560 higher than it was historically. But look at another indicator. 0:14:36.600 --> 0:14:40.440 And I know people sort of complain about financial conditions 0:14:40.640 --> 0:14:44.000 indices and say what does it really mean? But look 0:14:44.040 --> 0:14:48.640 at the Chicago Financial Conditions Index. You know, almost right 0:14:48.680 --> 0:14:51.600 from the time of the FED raising interest rates, it 0:14:51.640 --> 0:14:55.400 has actually been coming down, becoming more supportive rather than less. 0:14:56.000 --> 0:14:59.320 So whatever the FED is saying about restrictive, yes, there's 0:14:59.360 --> 0:15:01.040 one part where it's really restricted. 0:15:01.200 --> 0:15:04.360 Nobody is getting a mortgage today at these rates. That's 0:15:04.400 --> 0:15:05.400 an exaggeration. 0:15:05.520 --> 0:15:09.479 But you're seeing the mortgage market is tight, so household 0:15:09.520 --> 0:15:13.680 borrowing against houses is dead in the water. But everywhere 0:15:13.680 --> 0:15:17.360 else look at credit spreads, they're really at historic lows. 0:15:17.880 --> 0:15:21.440 And that's suggesting that we have a funny financial market, 0:15:21.480 --> 0:15:25.320 which is actually quite frothy in many places. So I 0:15:25.360 --> 0:15:28.400 worry about that, and I worry because central banks sort 0:15:28.400 --> 0:15:30.280 of seem to say somebody else is going to take 0:15:30.320 --> 0:15:35.040 care of financial stability. Where about inflation versus growth? And 0:15:35.440 --> 0:15:38.160 when you talk about all the discussion about FED policy, 0:15:38.680 --> 0:15:41.120 there's not a lot of talk about where the financial 0:15:41.160 --> 0:15:44.040 markets are. And what I told you about the U 0:15:44.160 --> 0:15:46.960 shape suggests we should be paying more attention because this 0:15:47.000 --> 0:15:51.080 is the time the kind of vulnerabilities get created in 0:15:51.160 --> 0:15:55.360 the frenzy. Maybe it is AI investment moving from being 0:15:55.400 --> 0:15:59.400 financed internally to being financed by credit. Maybe it is 0:15:59.480 --> 0:16:02.400 some of the credit standards that are building first brands, 0:16:02.400 --> 0:16:07.000 as an example, is when the problems are built, and 0:16:07.040 --> 0:16:08.120 we should keep that in mind. 0:16:08.720 --> 0:16:11.920 You know, you mentioned the investment boom that we're seeing, 0:16:12.080 --> 0:16:15.360 and it does feel like AI related companies are spending 0:16:15.840 --> 0:16:20.440 enormous amounts of money, are ranging some very interesting, somewhat 0:16:20.440 --> 0:16:26.040 circular financing deals to each other with your central banker 0:16:26.160 --> 0:16:30.040 hat on how should a central bank deal with inflationary 0:16:30.120 --> 0:16:34.560 pressures that come from an investment boom versus, for instance, 0:16:34.960 --> 0:16:37.120 some other type of boom in the system. 0:16:37.600 --> 0:16:41.880 Well, this is the great Austrian dilemma, right what the 0:16:41.920 --> 0:16:47.960 Austrian economists used to call malinvestment. Is this malinvestment or 0:16:48.040 --> 0:16:51.560 is this good investment? Almost surely if you draw the 0:16:51.600 --> 0:16:55.240 parallel with say the telecom investment during the dot com boom, 0:16:55.560 --> 0:16:58.120 some of this infrastructure will be used. 0:16:58.240 --> 0:17:00.200 Eventually, the AI will. 0:17:00.120 --> 0:17:03.560 Get good enough for many companies to use it and 0:17:03.640 --> 0:17:07.480 improve productivity. I mean, we all know spectacular examples of 0:17:07.640 --> 0:17:11.399 AI in our work, and Bloomberg sort of summarizes a 0:17:11.440 --> 0:17:15.399 whole lot of stuff using AI. My turget writing becomes 0:17:15.480 --> 0:17:19.600 much more accessible. When I say, you know, make this engaging. 0:17:19.920 --> 0:17:23.840 I tell Chad GPT so there are ways that we 0:17:23.880 --> 0:17:27.320 all think the promise of AI will eventually show up. 0:17:28.040 --> 0:17:31.959 But it's that transition from when the infrastructure is created 0:17:32.000 --> 0:17:34.840 to when people use it and pay for it, which 0:17:34.880 --> 0:17:38.520 is the big issue, right because these are investments which 0:17:38.560 --> 0:17:41.680 are large, which have high depreciation rates at this point, 0:17:42.080 --> 0:17:45.440 and so they need the revenues in order to make 0:17:45.520 --> 0:17:50.200 them justify the investment costs. And there I worry a 0:17:50.280 --> 0:17:53.840 lot more. We've seen all these surveys saying companies, yeah, 0:17:53.840 --> 0:17:56.119 they have that toe in the water, but are they 0:17:56.240 --> 0:17:59.640 rolling out in a big way. Yeah, Goldman Sachs will 0:17:59.720 --> 0:18:03.040 because it has really smart programmers and people capable of 0:18:03.080 --> 0:18:06.600 doing that. The average company on the street is probably 0:18:06.760 --> 0:18:10.400 not that advanced, and maybe it's not as much into 0:18:10.440 --> 0:18:13.679 services etc. That it can employ it in such a 0:18:13.680 --> 0:18:17.080 big way. It will come, But the pace is really important, 0:18:17.280 --> 0:18:20.800 and the Austrians always talked about the fact that the 0:18:20.920 --> 0:18:25.160 pace is critical. If the pace is much longer down 0:18:25.200 --> 0:18:28.479 the line, at some point the markets realize that the 0:18:28.480 --> 0:18:31.399 net present value of these investments are not that high, 0:18:31.800 --> 0:18:35.000 especially if you add in that little piece about interest 0:18:35.119 --> 0:18:38.200 rates being higher than being lower, or star being higher, 0:18:38.320 --> 0:18:41.679 long rates therefore being higher and that would make the 0:18:41.720 --> 0:18:45.639 present value of the revenues lower than we anticipate. So 0:18:46.160 --> 0:18:52.440 I do worry that this investment is something that may prove. 0:18:52.560 --> 0:18:55.639 A little more elusive the returns. What does the central 0:18:55.680 --> 0:18:58.360 Bank do about it? I think cautions. 0:18:58.880 --> 0:19:01.400 I think it tells the supers look for this kind 0:19:01.440 --> 0:19:04.480 of lending, make sure that it is it is reasonable, 0:19:05.200 --> 0:19:07.040 but it has to have an eye on the credit 0:19:07.440 --> 0:19:10.600 expansion that is taking place and say, well, that's part 0:19:10.680 --> 0:19:14.520 of my calculation as to whether we're really in a 0:19:14.520 --> 0:19:16.760 boom time and whether I need to cut rates further. 0:19:17.240 --> 0:19:21.159 So I would factor that into my rate decision, and 0:19:21.240 --> 0:19:24.320 I presume that's part of what they're looking at. 0:19:24.520 --> 0:19:27.200 You know, we started this conversation and talk a little 0:19:27.240 --> 0:19:30.480 bit about geopolitics, the seizure of Russian gold and other 0:19:30.560 --> 0:19:33.879 sort of big, deep issues related to trust. Something I'm 0:19:33.960 --> 0:19:36.880 very interested is not geopolitics but politics. I mean, we're 0:19:36.920 --> 0:19:40.679 in DC right now where the government is currently shut 0:19:40.760 --> 0:19:43.879 down with no imminent prospect as far as anyone knows, 0:19:44.040 --> 0:19:48.600 of reopening. There are similar evident dysfunctions elsewhere in the 0:19:48.680 --> 0:19:51.439 rich world. The complete collapse of the two party system 0:19:51.720 --> 0:19:54.520 in the UK, for example, seems to be getting a 0:19:54.560 --> 0:19:57.919 lot of attention when you think about, you know, the 0:19:58.000 --> 0:20:01.160 sort of ability of central banks to do their job 0:20:01.280 --> 0:20:05.639 to address concerns. How worried are you about the political 0:20:05.720 --> 0:20:10.440 environment that buttresses the independence of the autonomy of these institutions. 0:20:10.600 --> 0:20:11.959 It's a great question, you know. 0:20:12.080 --> 0:20:18.080 The view about what distinguished developed countries from emerging markets 0:20:18.080 --> 0:20:23.360 and developing countries was always is the institutions, and Trio 0:20:23.560 --> 0:20:27.240 won the Nobel Prize for it. Last here, the developed 0:20:27.240 --> 0:20:33.439 countries have strong institutions. The developing and emerging markets don't 0:20:33.480 --> 0:20:38.560 have strong institutions. So was the prescription for development, build 0:20:38.600 --> 0:20:39.360 the institutions. 0:20:39.680 --> 0:20:42.320 It's that simple. Just build good institutions, was the change. 0:20:42.359 --> 0:20:43.119 It didn't work. 0:20:44.160 --> 0:20:47.880 You put in, you know, inflation targeting regimes in other countries, 0:20:48.400 --> 0:20:51.920 maybe politicians got into the act, pushed the center bank. 0:20:52.240 --> 0:20:56.360 Didn't work as well. What worked was getting the politics right, 0:20:57.160 --> 0:21:00.399 consensus amongst the parties in a country that this was 0:21:00.440 --> 0:21:03.240 the way to develop. Let's not go to the extremes 0:21:03.320 --> 0:21:06.120 on spending. Let us, you know, have a much more 0:21:06.200 --> 0:21:07.959 modest spending program. 0:21:08.400 --> 0:21:11.600 Let's bring inflation in check. Let's give the. 0:21:11.280 --> 0:21:15.840 Central bank its independence. Okay, When the politics became more 0:21:15.920 --> 0:21:22.120 conducive to macroeconomic stability the institutions naturally developed. I would 0:21:22.240 --> 0:21:26.359 argue that in Brazil it was a combination of the 0:21:26.400 --> 0:21:29.480 parties deciding that we don't want to go the old way. 0:21:30.040 --> 0:21:33.800 So Cardoso is the guy who brought in inflation targeting, 0:21:34.200 --> 0:21:38.440 but it was Lula who appointed governors who would continue 0:21:38.440 --> 0:21:40.600 that rather than reversing it as soon as he came 0:21:40.640 --> 0:21:45.400 into power. That combination right left combination, which built into 0:21:45.400 --> 0:21:50.120 the consensus, gave Brazil a strong institution, the Central Bank, 0:21:50.160 --> 0:21:53.240 which actually carries it through and has carried it through. 0:21:53.440 --> 0:21:55.679 We're not seeing the kind of inflation in Brazil that 0:21:55.680 --> 0:21:58.040 we're seeing in Argentina. Brazil broke from. 0:21:57.880 --> 0:21:59.840 The back, and I think you can see this again and. 0:22:00.080 --> 0:22:02.639 Gain in many emerging markets. Why am I telling the 0:22:02.680 --> 0:22:07.760 story because our confidence in industrial country institutions should be 0:22:07.840 --> 0:22:11.960 directly proportional to our confidence in the politics being consensual. 0:22:12.440 --> 0:22:15.560 And that consensus, as you say, has broken down in 0:22:15.680 --> 0:22:18.439 part because parties of the extreme left and the extreme 0:22:18.520 --> 0:22:22.119 right are looking more appealing than parties at the center 0:22:22.240 --> 0:22:27.160 because they offer unorthodox solutions. Solutions we've tried before in history, 0:22:27.200 --> 0:22:29.840 often when not work. But it's time to try them 0:22:29.840 --> 0:22:34.080 again because we haven't seen them not work recently. Let's 0:22:34.200 --> 0:22:36.840 try the old experiment again, shut down the economy and 0:22:36.880 --> 0:22:40.960 see what happens. So my sense is that we blame 0:22:41.000 --> 0:22:44.560 it on the institutions not being strong enough. These institutions 0:22:44.600 --> 0:22:47.640 are as strong as we can make them, but it's 0:22:47.680 --> 0:22:51.720 the politics that has to support them. When the center 0:22:51.840 --> 0:22:57.240 bank is assaulted at every corner by the administration, there 0:22:57.320 --> 0:23:02.240 is no set of structures can protect it, and almost 0:23:02.280 --> 0:23:06.040 surely it will bend. It is naturally, you know, you 0:23:06.119 --> 0:23:09.440 protect the tenure of the central bank governor or the. 0:23:09.080 --> 0:23:11.200