Speaker 1: Bloomberg Audio Studios, Podcasts, Radio News.
Speaker 2: Hello and welcome to another episode of the Odd Lots podcast.
Speaker 3: I'm Joe Wassenthal and I'm Tracy Alloway.
Speaker 2: Today listeners get a special live episode of the podcast
Speaker 2: that we were recorded in Washington, DC at the annual
Speaker 2: meeting for the Institute for International Finance.
Speaker 3: That's right. We spoke with Ragoram Rajan. He is a
Speaker 3: professor at the University of Chicago Booth School of Business
Speaker 3: and of course the former head of India's Central Bank,
Speaker 3: and he is exactly the person you want to talk
Speaker 3: to when everyone seems to be talking about risks in
Speaker 3: the market.
Speaker 2: That's right, of course, and we bring it up in
Speaker 2: the conversation. He was sort of famous for being one
Speaker 2: of the early pupil to warn in I Guess two
Speaker 2: thousand and five about brewing risks of the financial system.
Speaker 2: So we talked about what's behind the surgeon gold, what's
Speaker 2: going on with central banks, and how seriously they're taking inflation,
Speaker 2: speculative fervor and frenzy in the market. All of the
Speaker 2: things that are relevant right now.
Speaker 4: So take a list.
Speaker 2: Let's get started. Why is gold up so much? Let's
Speaker 2: start with the really important question, What is your story
Speaker 2: or theory behind the seemingly NonStop demand for gold?
Speaker 5: Right, Well, there's no single story, right, it's a number
Speaker 5: of stories. First it started taking off what twenty twenty three.
Speaker 5: Clearly there is an element of geopolitical risk. Many central banks,
Speaker 5: looking at the militarization or the weaponization of payments, are
Speaker 5: basically saying, do I want all my reserves in developed
Speaker 5: country currencies? Do I want something which I control directly?
Speaker 5: So a movement to gold for that reason may have
Speaker 5: started initially a lot of central banks moving to more gold,
Speaker 5: but there are the reasons. I mean, what's the safe
Speaker 5: acet if you look around the world. Certainly, if you
Speaker 5: look at Japan, you know, huge amount of debt, probably
Speaker 5: higher inflation than in the past, and interest rates really low.
Speaker 5: Is that a place you want to put a lot
Speaker 5: of money? In the Euro area, well, it's always been
Speaker 5: a question of whether it's a cohesive unit, who's going
Speaker 5: to bail the system out when there's a problem, And
Speaker 5: of course the United States running large fiscal deficits you
Speaker 5: know till the eye can see, So you know a
Speaker 5: lot more questions about savee acets today, and that's the
Speaker 5: second feature. Third of cause interest rates coming down, gold
Speaker 5: is easier to hold. At that point, A bunch of
Speaker 5: reasons why this is happening, I would say at this
Speaker 5: point also that there is a fair amount of fraust,
Speaker 5: so you can't completely discount the fact that gold prices
Speaker 5: are probably moving along with the frauth as everything else.
Speaker 3: Was this something that was on your radar when you
Speaker 3: were at the RBI. Head of the RBI, how did
Speaker 3: you think of out reserve diversification?
Speaker 5: Then, well, yes, you do want to diversify your holdings.
Speaker 5: The worry about your reserve assets and developed countries being
Speaker 5: sequestered because of an angry president or prime minister wasn't
Speaker 5: as big a concern, but there was definitely a view
Speaker 5: that you needed some diversification. And you know, once you
Speaker 5: get beyond the big reserve currencies, you know it's harder
Speaker 5: to deal with the smaller countries. Gold is not liquid,
Speaker 5: that is a problem. It sits on your bandsheet, but
Speaker 5: if you want to transform it into something, it's sitting
Speaker 5: in your walls. How do you convince the others that
Speaker 5: it's a lot of countries have their gold in New
Speaker 5: York or in London. There it's a question of moving
Speaker 5: from one wall to another. But if it's in your
Speaker 5: home country, it's harder. You need to rent a seven
Speaker 5: four seven to take it elsewhere.
Speaker 2: Yeah, I was talking to someone last night who pointed
Speaker 2: this out. You know, there's this for a long time,
Speaker 2: the price of gold could sort of be model or
Speaker 2: linked to real raids in some way, and there's a
Speaker 2: sort of nice stable relationship. And they point out, you know,
Speaker 2: if you really look at when the divergence occurred, is
Speaker 2: not long after Russia's invasion of Ukraine, and of course
Speaker 2: the seizure of Russian assets, which fits into what you're
Speaker 2: talking about, which is that if you are, you know,
Speaker 2: a reserve manager at a bank or whatever, did that
Speaker 2: wake people up to the possibility that your fiat currency
Speaker 2: that isn't some foreign central bank or some foreign entity
Speaker 2: could just disappear one day in a way that your
Speaker 2: own custodied gold cannot.
Speaker 6: I think it did.
Speaker 5: I think that's a strong reason you see the movement
Speaker 5: starting in twenty two twenty three, it starts peaking up
Speaker 5: more strongly. But it's also the willingness to weaponize a
Speaker 5: lot of stuff. As you know, a number of countries
Speaker 5: are trying to build alternatives to Swift, because Swift can
Speaker 5: be weaponized. Now, these need not be your traditional sort
Speaker 5: of quote unquote rogue countries, which you know have been
Speaker 5: on the list of sanctions for a long time. This
Speaker 5: could be any country which fears political change. I mean,
Speaker 5: if Canada can turn out to be antagonistic to a
Speaker 5: close neighbor, what about a country five thousand miles away.
Speaker 5: So trust has broken down in the system, and that's
Speaker 5: part of the reason why people are trying to build
Speaker 5: alternatives which don't make them dependent. Payments are so crucial
Speaker 5: you don't want to be dependent on any one country
Speaker 5: that can change the nature of payments.
Speaker 3: So it feels like we're at this really weird juncture
Speaker 3: where there's a lot of distrust in the system, a
Speaker 3: lot of unpredictability around the behavior of the United States
Speaker 3: in particular, and yet the US dollar and US treasuries
Speaker 3: form the basis of the global financial system. How do
Speaker 3: you see that evolving over time given some of these concerns,
Speaker 3: given concerted efforts to for instance, create a new.
Speaker 5: Swift, Well, I think part of the reason is the
Speaker 5: Tina factor. There is no alternative, right, The US market
Speaker 5: is still the deepest market in the world, treasure markets
Speaker 5: and so on. It is liquid. Many institutions operate here,
Speaker 5: and yeah, people still trust the rule of law prevailing
Speaker 5: in the US. Potentially, the fact that there's been so
Speaker 5: much agonizing about the seizure of Russian reserves is actually
Speaker 5: a good thing because it says that it doesn't happen
Speaker 5: on a whim, that countries actually think about it and
Speaker 5: then are finding ways that sort of look legal to
Speaker 5: actually sequester them.
Speaker 6: And so I think that's to the good.
Speaker 5: Of course, fact that it's even questioned is what a
Speaker 5: number of other countries worry about, that we may not
Speaker 5: have control of those reserves.
Speaker 2: Speaking of dollar alternatives, there is no alternative, Okay, we
Speaker 2: talk about gold. President Trump perceives the existence of this
Speaker 2: entity called the bricks to be an assault on the
Speaker 2: US dollar. You know, I always think it's pretty wild
Speaker 2: that there is this entity that exists because O'Neill thought
Speaker 2: it was a good acronym over twenty years ago. These
Speaker 2: were gonna be growth markets. But like, how seriously should
Speaker 2: we take this entity? What does it represent to you?
Speaker 2: Is there a germ of something that could represent so
Speaker 2: build something that is an alternative to the dollars.
Speaker 4: So how should we think about this this entity.
Speaker 5: Well, Jim O'Neil thought of it initially as this fast
Speaker 5: growing group of countries and it has, I mean, there's
Speaker 5: been differences across this group. China and India have grown
Speaker 5: much faster than the rest, and of course China has
Speaker 5: been spectacular in the early years of the brigs nomenclature.
Speaker 5: Is there a cohesive structure there on some issues where
Speaker 5: for example, it's sort of the emerging market collective against
Speaker 5: the industrial country collective issues such as green transition, who
Speaker 5: has responsibility? But again there's a lot of divergence. China
Speaker 5: has much more of an industrial base than say India.
Speaker 5: If you look at who emits you know most in
Speaker 5: the world, it's China. So even on the green issue,
Speaker 5: there is a divergence in opinion. I think with the
Speaker 5: addition to bricks of all these countries like Iran and
Speaker 5: so on, it becomes much less cohesive and seems much
Speaker 5: more like a anti West kind of structure, which certainly
Speaker 5: India doesn't subscribe to, which Brazil probably doesn't subscribe to.
Speaker 6: Again to the extent that some of the.
Speaker 5: Others, and of course within the bricks there are antagonisms, right,
Speaker 5: India and China for the border conflict in twenty twenty.
Speaker 5: So I think the sense that it is a cohesive group,
Speaker 5: it's a talking place, the sense that they will come
Speaker 5: together with a common currency, I mean, forget about it.
Speaker 6: That's not going to happen. May they build up a
Speaker 6: payments system which is different.
Speaker 5: Yeah, I mean yeah, I'm happy as a country to
Speaker 5: be part of five different payment systems.
Speaker 6: Gives me diversification.
Speaker 5: If somebody tries to put the squeeze on me, I
Speaker 5: move to a different payment system.
Speaker 6: But does that mean I'm going to quote with a currency.
Speaker 6: Probably not.
Speaker 3: So we started out talking about gold, which seems to
Speaker 3: reach a record high every day.
Speaker 1: Now.
Speaker 3: Stocks are also still pretty high. I know we had
Speaker 3: something of a correction recently, but yeah, for five minutes.
Speaker 3: In general, things seem to be going relatively well for
Speaker 3: equities as well, which is a very strange situation where
Speaker 3: you have the safe haven asset going up along with
Speaker 3: stocks still quite high. I know you famously presented a
Speaker 3: paper at the two thousand and five Jackson Hole where
Speaker 3: you talked about financial stability and risks that you saw
Speaker 3: in the system, and I think Alan Greenspan wasn't very
Speaker 3: nice about it at the time and probably lived on
Speaker 3: to regret that. But when you look at the market landscape, now,
Speaker 3: what risks do you see?
Speaker 2: Please say something equivalently historic, understand for our podcast, that's
Speaker 2: all we're asking.
Speaker 5: Let me say something historic in the sense of talking
Speaker 5: about history. Okay, look at every financial cris in the
Speaker 5: last one hundred years, and there are a couple of
Speaker 5: papers that have been written recently about it. If you
Speaker 5: look at the monitary policy settings before those crises, they.
Speaker 6: Always have a U shape.
Speaker 5: Easy times that's when the risks build up. Tightening that's
Speaker 5: when it starts crumbling and it falls apart.
Speaker 6: Okay.
Speaker 5: Whether that use shape is policy rates or whether it's
Speaker 5: some kind of deviation from neutral, it's always accommodative followed
Speaker 5: by tightening. That's when the financial collapse occurs. And the
Speaker 5: more the credit in the easy phase, the worst it is. Okay,
Speaker 5: that's what's been established post global financial crisis. And you
Speaker 5: can see that shape before the global financial crisis, and
Speaker 5: including in Europe where there were countries at the periphery
Speaker 5: where the shape was more pronounced because they have higher inflation.
Speaker 5: So the monitary policy setting was too loose for them
Speaker 5: and countries at the core where it was much more
Speaker 5: eq and so Germany France didn't have the kind of
Speaker 5: financial crisis except through their lending to the peripheric countries,
Speaker 5: as did the peripheric countries. So what does that tell us.
Speaker 5: It tells us be really careful when you have a
Speaker 5: long period of easing followed by tightening. Now immediate reaction. Well,
Speaker 5: we had a tightening, nothing happened. Well, we had a
Speaker 5: tightening after an enormous amount of spending by governments which
Speaker 5: essentially took the debt up from the private sector. Banks
Speaker 5: got bailed out, remember the provision at the beginning of
Speaker 5: the pandemic. Nothing actually happened because things like the paycheck
Speaker 5: prorection program gave them the money back. So we had
Speaker 5: a lot of support from the public sector to the
Speaker 5: private sector. And that's why when the tightening happened, barn
Speaker 5: sheets weren't really adversely affected. But credit keeps growing, not
Speaker 5: in the households but in the corporate sector. So we
Speaker 5: haven't had a really strong tightening. Except remember in the
Speaker 5: tightening phase, we had Silken Valley Bank, which was people
Speaker 5: forget the largest crisis in terms of nominal losses in
Speaker 5: the US banking system, and yet twenty two bank runs
Speaker 5: at the same time as Silicon Valley Bank happened. Enormous
Speaker 5: intervention by the FED to support the banking system, including
Speaker 5: by pushing out reserves and back into the system and
Speaker 5: giving people an easy way to borrow against full nominal
Speaker 5: value of their liabilities. We forget that that was a
Speaker 5: big crisis which we avoided because of intervention. Going forward,
Speaker 5: you have a lot of frauth in the system. And
Speaker 5: now we're talking about cutting rates, But we're talking about
Speaker 5: cutting rates when inflation has been high for a reasonable
Speaker 5: amount of time. It's plat road at three, it's still
Speaker 5: nowhere near two. People are saying, is there a new
Speaker 5: sort of target three?
Speaker 6: Not two?
Speaker 5: And you're seeing that demand is still strong, whether it
Speaker 5: comes from resilient households, whether it comes from the AI boom,
Speaker 5: whether it comes from government spending, even while supply in
Speaker 5: the US is more constrained because of the immigration constraint
Speaker 5: that is being put so strong demand weaker supply. Is
Speaker 5: that really conducive to disinflation?
Speaker 6: Maybe not?
Speaker 5: And so what's the bottom line. You have a lot
Speaker 5: of frauth in anticipation of further cuts, and you have
Speaker 5: some risks that in fact it may go.
Speaker 6: The other way.
Speaker 5: And the system in many ways, whether it stocks, whether
Speaker 5: it's leveraged in some parts of the system, as we've seen,
Speaker 5: is priced for perfection.
Speaker 2: You hear from people that the FED and other officials
Speaker 2: and like policy has been modestly restrictive, somewhat restrictive. But
Speaker 2: as you just described, inflation is not close to to
Speaker 2: it's closer to three percent. Obviously, risky assets are surging
Speaker 2: even with some of the little like credit cockroaches. I
Speaker 2: think Jimmie Diamond used that term like, actually spreads have
Speaker 2: totally been fine. Do you think that term restrictive is
Speaker 2: at all appropriate to describe the current stance of monetary
Speaker 2: policy in the US.
Speaker 5: So restrictive is always in famous central bank speak relative
Speaker 5: to an r star, And nobody knows what our star is,
Speaker 5: what the equilibrium rate is. But if you think the
Speaker 5: strong demand and somewhat more constraints supply, our star is
Speaker 5: higher than it was historically. But look at another indicator.
Speaker 5: And I know people sort of complain about financial conditions
Speaker 5: indices and say what does it really mean? But look
Speaker 5: at the Chicago Financial Conditions Index. You know, almost right
Speaker 5: from the time of the FED raising interest rates, it
Speaker 5: has actually been coming down, becoming more supportive rather than less.
Speaker 5: So whatever the FED is saying about restrictive, yes, there's
Speaker 5: one part where it's really restricted.
Speaker 6: Nobody is getting a mortgage today at these rates. That's
Speaker 6: an exaggeration.
Speaker 5: But you're seeing the mortgage market is tight, so household
Speaker 5: borrowing against houses is dead in the water. But everywhere
Speaker 5: else look at credit spreads, they're really at historic lows.
Speaker 5: And that's suggesting that we have a funny financial market,
Speaker 5: which is actually quite frothy in many places. So I
Speaker 5: worry about that, and I worry because central banks sort
Speaker 5: of seem to say somebody else is going to take
Speaker 5: care of financial stability. Where about inflation versus growth? And
Speaker 5: when you talk about all the discussion about FED policy,
Speaker 5: there's not a lot of talk about where the financial
Speaker 5: markets are. And what I told you about the U
Speaker 5: shape suggests we should be paying more attention because this
Speaker 5: is the time the kind of vulnerabilities get created in
Speaker 5: the frenzy. Maybe it is AI investment moving from being
Speaker 5: financed internally to being financed by credit. Maybe it is
Speaker 5: some of the credit standards that are building first brands,
Speaker 5: as an example, is when the problems are built, and
Speaker 5: we should keep that in mind.
Speaker 3: You know, you mentioned the investment boom that we're seeing,
Speaker 3: and it does feel like AI related companies are spending
Speaker 3: enormous amounts of money, are ranging some very interesting, somewhat
Speaker 3: circular financing deals to each other with your central banker
Speaker 3: hat on how should a central bank deal with inflationary
Speaker 3: pressures that come from an investment boom versus, for instance,
Speaker 3: some other type of boom in the system.
Speaker 5: Well, this is the great Austrian dilemma, right what the
Speaker 5: Austrian economists used to call malinvestment. Is this malinvestment or
Speaker 5: is this good investment? Almost surely if you draw the
Speaker 5: parallel with say the telecom investment during the dot com boom,
Speaker 5: some of this infrastructure will be used.
Speaker 6: Eventually, the AI will.
Speaker 5: Get good enough for many companies to use it and
Speaker 5: improve productivity. I mean, we all know spectacular examples of
Speaker 5: AI in our work, and Bloomberg sort of summarizes a
Speaker 5: whole lot of stuff using AI. My turget writing becomes
Speaker 5: much more accessible. When I say, you know, make this engaging.
Speaker 5: I tell Chad GPT so there are ways that we
Speaker 5: all think the promise of AI will eventually show up.
Speaker 5: But it's that transition from when the infrastructure is created
Speaker 5: to when people use it and pay for it, which
Speaker 5: is the big issue, right because these are investments which
Speaker 5: are large, which have high depreciation rates at this point,
Speaker 5: and so they need the revenues in order to make
Speaker 5: them justify the investment costs. And there I worry a
Speaker 5: lot more. We've seen all these surveys saying companies, yeah,
Speaker 5: they have that toe in the water, but are they
Speaker 5: rolling out in a big way. Yeah, Goldman Sachs will
Speaker 5: because it has really smart programmers and people capable of
Speaker 5: doing that. The average company on the street is probably
Speaker 5: not that advanced, and maybe it's not as much into
Speaker 5: services etc. That it can employ it in such a
Speaker 5: big way. It will come, But the pace is really important,
Speaker 5: and the Austrians always talked about the fact that the
Speaker 5: pace is critical. If the pace is much longer down
Speaker 5: the line, at some point the markets realize that the
Speaker 5: net present value of these investments are not that high,
Speaker 5: especially if you add in that little piece about interest
Speaker 5: rates being higher than being lower, or star being higher,
Speaker 5: long rates therefore being higher and that would make the
Speaker 5: present value of the revenues lower than we anticipate. So
Speaker 5: I do worry that this investment is something that may prove.
Speaker 6: A little more elusive the returns. What does the central
Speaker 6: Bank do about it? I think cautions.
Speaker 5: I think it tells the supers look for this kind
Speaker 5: of lending, make sure that it is it is reasonable,
Speaker 5: but it has to have an eye on the credit
Speaker 5: expansion that is taking place and say, well, that's part
Speaker 5: of my calculation as to whether we're really in a
Speaker 5: boom time and whether I need to cut rates further.
Speaker 5: So I would factor that into my rate decision, and
Speaker 5: I presume that's part of what they're looking at.
Speaker 2: You know, we started this conversation and talk a little
Speaker 2: bit about geopolitics, the seizure of Russian gold and other
Speaker 2: sort of big, deep issues related to trust. Something I'm
Speaker 2: very interested is not geopolitics but politics. I mean, we're
Speaker 2: in DC right now where the government is currently shut
Speaker 2: down with no imminent prospect as far as anyone knows,
Speaker 2: of reopening. There are similar evident dysfunctions elsewhere in the
Speaker 2: rich world. The complete collapse of the two party system
Speaker 2: in the UK, for example, seems to be getting a
Speaker 2: lot of attention when you think about, you know, the
Speaker 2: sort of ability of central banks to do their job
Speaker 2: to address concerns. How worried are you about the political
Speaker 2: environment that buttresses the independence of the autonomy of these institutions.
Speaker 6: It's a great question, you know.
Speaker 5: The view about what distinguished developed countries from emerging markets
Speaker 5: and developing countries was always is the institutions, and Trio
Speaker 5: won the Nobel Prize for it. Last here, the developed
Speaker 5: countries have strong institutions. The developing and emerging markets don't
Speaker 5: have strong institutions. So was the prescription for development, build
Speaker 5: the institutions.
Speaker 4: It's that simple. Just build good institutions, was the change.
Speaker 6: It didn't work.
Speaker 5: You put in, you know, inflation targeting regimes in other countries,
Speaker 5: maybe politicians got into the act, pushed the center bank.
Speaker 5: Didn't work as well. What worked was getting the politics right,
Speaker 5: consensus amongst the parties in a country that this was
Speaker 5: the way to develop. Let's not go to the extremes
Speaker 5: on spending. Let us, you know, have a much more
Speaker 5: modest spending program.
Speaker 6: Let's bring inflation in check. Let's give the.
Speaker 5: Central bank its independence. Okay, When the politics became more
Speaker 5: conducive to macroeconomic stability the institutions naturally developed. I would
Speaker 5: argue that in Brazil it was a combination of the
Speaker 5: parties deciding that we don't want to go the old way.
Speaker 5: So Cardoso is the guy who brought in inflation targeting,
Speaker 5: but it was Lula who appointed governors who would continue
Speaker 5: that rather than reversing it as soon as he came
Speaker 5: into power. That combination right left combination, which built into
Speaker 5: the consensus, gave Brazil a strong institution, the Central Bank,
Speaker 5: which actually carries it through and has carried it through.
Speaker 5: We're not seeing the kind of inflation in Brazil that
Speaker 5: we're seeing in Argentina. Brazil broke from.
Speaker 6: The back, and I think you can see this again and.
Speaker 5: Gain in many emerging markets. Why am I telling the
Speaker 5: story because our confidence in industrial country institutions should be
Speaker 5: directly proportional to our confidence in the politics being consensual.
Speaker 5: And that consensus, as you say, has broken down in
Speaker 5: part because parties of the extreme left and the extreme
Speaker 5: right are looking more appealing than parties at the center
Speaker 5: because they offer unorthodox solutions. Solutions we've tried before in history,
Speaker 5: often when not work. But it's time to try them
Speaker 5: again because we haven't seen them not work recently. Let's
Speaker 5: try the old experiment again, shut down the economy and
Speaker 5: see what happens. So my sense is that we blame
Speaker 5: it on the institutions not being strong enough. These institutions
Speaker 5: are as strong as we can make them, but it's
Speaker 5: the politics that has to support them. When the center
Speaker 5: bank is assaulted at every corner by the administration, there
Speaker 5: is no set of structures can protect it, and almost
Speaker 5: surely it will bend. It is naturally, you know, you
Speaker 5: protect the tenure of the central bank governor or the.
Speaker 6: Chairman, that's not going to help.
Speaker 5: If you can affect its finances, you can affect who's
Speaker 5: appointed next. There's so many levers the government has, so
Speaker 5: institutions cannot be made fully independent. They will always bend.
Speaker 5: And that's what we're saying. It's the politics that has changed,
Speaker 5: not so much the institution.
Speaker 3: Is there anything a central bank can do to, if
Speaker 3: not be fully independent, at least protect its ability to
Speaker 3: say no.
Speaker 5: Well, I think ultimately it comes down to the integrity
Speaker 5: and the backbone of the people there. They can try
Speaker 5: and be as persuasive as they can, but there's some battles.
Speaker 5: They really have to fight and say, look, you know
Speaker 5: I've tried. You said no, no, no, It's my turn
Speaker 5: to say no. And that can take you a little
Speaker 5: way because you have some institution protection, not a whole lot.
Speaker 5: I think cheer Powell has in this country has done
Speaker 5: as good a job as could be expected from anyone.
Speaker 5: He has had the integrity, had the backbone, has ignored
Speaker 5: all the slights and the arrows that have come his way.
Speaker 6: But there's only so much he can do.
Speaker 4: And actually the term expires.
Speaker 6: One of his term expires. But he also has to
Speaker 6: keep an eye center.
Speaker 5: Banks have to play out the politics also without being
Speaker 5: elected politicians. What would be harmful for the FED is
Speaker 5: if it becomes obvious that the Fed sort of created
Speaker 5: a recession. They're being set up in a sense to
Speaker 5: be the four guys if there is a recession, and
Speaker 5: that is why you ben, because you don't want to
Speaker 5: be the guys who held rates so high that there.
Speaker 5: But that comes at the cost of potentially sort of
Speaker 5: weighing the risks on both sides and maybe cutting when
Speaker 5: inflation is still a much bigger issue in other times,
Speaker 5: you might be more resistant to these cuts.
Speaker 4: I was gonna ask.
Speaker 2: Is the fact that, again the FED would never say
Speaker 2: that we're comfortable at two point five. They're never gonna
Speaker 2: officially say that. But the facto, you look at that
Speaker 2: line and it came down quite a bit from its
Speaker 2: peak in twenty twenty two or whenever that was. So
Speaker 2: they made a lot of progress, but it sort of
Speaker 2: stalled out. That gap between where they are now and
Speaker 2: what the official goal is to some extent is that
Speaker 2: itself an indication of the political change that extra mile
Speaker 2: or whatever it is, is not worth it in this environment.
Speaker 5: First, I agree with you, they will never say that
Speaker 5: extra mile is not whether and I don't think it's
Speaker 5: in front and center of their mind. They think that.
Speaker 5: I do think they believe that the risks are more
Speaker 5: towards economic weakness. Now, of course, we don't know whether
Speaker 5: the weak jobs numbers are because of demand or supply,
Speaker 5: and that's still an open question. When we get the
Speaker 5: jobs data, etc. We're going to look at it more closely.
Speaker 5: Companies are not firing, they're also not hiring, and maybe
Speaker 5: they don't at this point productively gains, etc. So it's
Speaker 5: still an open question whether.
Speaker 6: There's economic weakness.
Speaker 5: I think the FED is putting some weight on that. Now,
Speaker 5: what I'm arguing is maybe they're putting more weight on
Speaker 5: that because back of their mind, it's also this view
Speaker 5: that they don't want the FED to be blamed for
Speaker 5: a recession. This is the wrong time to have a
Speaker 5: FED created recession. From the larger institutional perspective. Again, there's
Speaker 5: not front of mind. This is back of mind, and
Speaker 5: you would keep that in mind. So yeah, it's not
Speaker 5: that they say three percent is okay. They would love
Speaker 5: to go towards two. It's just which risk is bigger
Speaker 5: right now.
Speaker 3: When you were at the RBI and you had to
Speaker 3: make the decision basically are you going to try to
Speaker 3: get control of inflation or are you going to focus
Speaker 3: on short term growth? At that time, what were the
Speaker 3: sort of political considerations going through your mind.
Speaker 5: Well, they made very clear to you what the political
Speaker 5: considerations are. The politicians always want lower interest rates. They
Speaker 5: hear it from the industrialists, they hear it from every constituency.
Speaker 5: And while I was at the RBI, we didn't have
Speaker 5: an inflation committee, which is what I pushed, and we
Speaker 5: got that over my term.
Speaker 6: But I was always making the decision.
Speaker 5: The problem when you're making the decision is that there's
Speaker 5: a single point of contact for people to pressure. And
Speaker 5: so I heard it from a lot of politicians, this
Speaker 5: is what we like. What you have to tell them is, look, yeah,
Speaker 5: that's what you like, but you also like low inflation.
Speaker 5: And in order to get low inflation, I have to
Speaker 5: be more restrictive, and as soon as I can, I
Speaker 5: will reduce rates. But believe me, at this point it's
Speaker 5: not in your interest for me to do it. And
Speaker 5: they respect that when you explain it to them very
Speaker 5: carefully and you say, look, they would push you, but
Speaker 5: if you succumb, you bear the entire blame because they
Speaker 5: will say, you know, he could have said no, and
Speaker 5: of course what would happen if he said no.
Speaker 6: We don't know.
Speaker 5: But you are meant to be their protection and it's
Speaker 5: important you recognize that and have the backbone to stand
Speaker 5: up now. Fortunately, and you have this very long title
Speaker 5: for me. Initially I had a tenured position in academia,
Speaker 5: so I could say no and you know.
Speaker 6: Lose my job.
Speaker 5: I go back to a position in academia. Many civil
Speaker 5: servants don't have that luxury, but that gives you back
Speaker 5: moon the fact that you can say No, is very
Speaker 5: very important, and you know Powell has that he doesn't
Speaker 5: need the job, he doesn't need the money. He obviously
Speaker 5: cares about doing a good job for the country, and
Speaker 5: he cares about his legacy. So I think it's good
Speaker 5: to be that way. Less good if you're a careerist
Speaker 5: and appointed precisely because you've said yes.
Speaker 2: I have an Indian economy related question that's a little
Speaker 2: bit sideways from central banking and macro. There is a
Speaker 2: lot of fantasizing or dreaming or hoping that India could
Speaker 2: be a manufacturing center. That's sort of another gravitational poll
Speaker 2: that's separate from China. I'm sure Apple they're doing a lot,
Speaker 2: but they would love to have more of their sort
Speaker 2: of advanced production in India. There's moving some final assembly.
Speaker 2: What are the main constraints? How realistic in your view
Speaker 2: is that prospect that there could be a meaningful shift
Speaker 2: of supply chains to India outside of China.
Speaker 5: India has made changes over the last decade or so
Speaker 5: in terms of infrastructurectually started before the Global Financial crisis.
Speaker 5: The Global financial crisis interrupted that process, but if you
Speaker 5: look at Indian infrastructure today, it's come a long way
Speaker 5: from the Indian.
Speaker 6: Infrastructure of old.
Speaker 5: Look at the Indian airports. I mean they're as good
Speaker 5: as the best in the world, certainly in the major cities,
Speaker 5: but across railways improving their ability to freight. There are
Speaker 5: some private sector ports which have the efficiency that posts
Speaker 5: elsewhere in the world have. So infrastructure great job makes
Speaker 5: it much easier. Still some issues to be ironed out.
Speaker 5: Power is an issue that needs to be more fixing.
Speaker 5: But green power is a big, big growth area and
Speaker 5: that contributes a lot to the par grad Lots of
Speaker 5: positives some states. India is not a uniform country. The
Speaker 5: South and the West are more developed, more advanced in
Speaker 5: terms of labor capabilities, a lot of manufacturing coming there.
Speaker 5: I sort of advise the state of tham Nada. There's
Speaker 5: a lot of Asian manufacturing which is coming. Crocs opening
Speaker 5: up plant there. We have Fox Gone etc. A lot
Speaker 5: of them looking at Indian women, discipline, workforce, educated and
Speaker 5: they want them to work in their factories. So that's
Speaker 5: the good news. India still has, you know, issues with bureaucracy.
Speaker 5: It has issues with taxation. We need to make the
Speaker 5: taxation much more predictable. It has still issues with Yes,
Speaker 5: there are a strong group of Indian engineers that you
Speaker 5: can do to improve engineering. This is why the whole
Speaker 5: number of companies are starting what they call global Capability
Speaker 5: centers in India to do.
Speaker 6: Their R and D.
Speaker 5: But getting high school educated, good quality workers, you've got
Speaker 5: to go to the South and the West because they're
Speaker 5: not so available in other parts.
Speaker 6: Of the countries. So India has to work harder there.
Speaker 6: If we didn't have.
Speaker 5: The kind of tariffs that the US put on India,
Speaker 5: it would look a lot more attractive. I think they're
Speaker 5: working on it. You know, there's some good news emerging
Speaker 5: on Indian purchases of Russian oil and so on, so
Speaker 5: I think there will be a deal done. India could
Speaker 5: well be one of the alternatives to China. But is
Speaker 5: there a place for a one point four billion country
Speaker 5: even as China stays in manufacturing with a one point
Speaker 5: four billion population. Probably not, And that's where India is
Speaker 5: going to be much more focused on services. We have
Speaker 5: to see what AI does there. But Indian services is
Speaker 5: the positive growth story for India. India now accounts for
Speaker 5: about four and a half percent of service exports in
Speaker 5: the world, and that's growing really fast. Indian service exports
Speaker 5: are on power with Indian manufacturing exports. So it's something
Speaker 5: that I think you will look to more. You know,
Speaker 5: where's the labor arbestrage today? It's not in your low
Speaker 5: skilled worker, it's in your high skilled worker. And Indian
Speaker 5: MBA costs you fifty thousand dollars from the best schools
Speaker 5: in India, a US NBA who whom I teach, costs
Speaker 5: you about five times that amount. That's where the labor
Speaker 5: arbitrage is because today you can employ that worker there
Speaker 5: and give a presentation to your client here.
Speaker 6: That's what the pandemic did.
Speaker 5: That's why services are exploding.
Speaker 3: Since you mentioned tariffs and we were talking about manufacturing,
Speaker 3: what responsibility, if any, and what ability does the central
Speaker 3: bank in India have to offset the impact of the tariffs.
Speaker 5: This is true of central banks everywhere right. The tariff,
Speaker 5: since it's largely set by the US and others haven't
Speaker 5: joined in yet, is a demand shock for the rest
Speaker 5: of the world. They're not seeing as much in terms
Speaker 5: of demand in the US, and is a supply shock
Speaker 5: for the US. So that's another reason why inflation may
Speaker 5: be higher in the US where our star is sort
Speaker 5: of higher and for the rest of the world, it's
Speaker 5: an opportunity to lower lower rates. And I mean, if
Speaker 5: you look at Indian inflation, it's been lower than anticipated. Again,
Speaker 5: I usually don't comment to Indian monasty policy. People think
Speaker 5: I know more than I.
Speaker 6: Do, and I don't.
Speaker 5: But across the world, I think there's more scope for
Speaker 5: the central banks to come in. I would still say
Speaker 5: that you do need to look at you know, Froth,
Speaker 5: more so in the US where the frauth seems to
Speaker 5: be more pronounced, but certainly I mean, Japan is a
Speaker 5: place where inflation is picking up and people are getting
Speaker 5: more antsy about inflation, and central bank has sort of
Speaker 5: stayed a little behind the curve to make sure that
Speaker 5: it is sustained inflation. At some point it will have
Speaker 5: to react. So but barring that, most of the countries
Speaker 5: have room to actually cut rates.
Speaker 2: Let's actually let's go back to Froth with our a
Speaker 2: few minutes left. You mentioned the sort of risks that
Speaker 2: emerge when the central bank isn't cutting them out at
Speaker 2: a time when financial conditions are already loose, et cetera.
Speaker 4: Push that forward a little bit.
Speaker 2: If there is some event something bad happens, it's not
Speaker 2: going to look like two thousand and eight. Most likely,
Speaker 2: the balance sheets of households are allow stronger. Banks seem
Speaker 2: to be much stronger.
Speaker 6: Than they were.
Speaker 2: Where would you look for something actually bad emerging out
Speaker 2: of this sort of cocktail that you described.
Speaker 5: That's a great question because leverage, So the dot com
Speaker 5: bust wasn't as big a deal. Yeah, and that's what
Speaker 5: gave the FED confidence. You remember the Alan Greenspan speech
Speaker 5: in two thousand and four. Effectively, we can't predict bubbles,
Speaker 5: what's the bubble and what's not when it's building, but
Speaker 5: we can pick up the pieces when it bursts, and
Speaker 5: so therefore we're not going to try and.
Speaker 6: You know, ward off bubbles.
Speaker 5: This is despite his Irrational Exuberance speech, which was precient,
Speaker 5: but it didn't act on it. Right, he made that
Speaker 5: speech in ninety six. Now, the point I'm trying to
Speaker 5: make is it's leverage which kills because leverage then transmits
Speaker 5: through the system. The one hundred billion in subprime mortgage
Speaker 5: backed securities that were to.
Speaker 6: That was what that's the problem.
Speaker 5: We don't so I can tell you the candidates. There's
Speaker 5: been a huge increase in private credit. There is a
Speaker 5: huge increase in low quality bonds without the bond covenants,
Speaker 5: and the kind of credit events and the what's the
Speaker 5: violence on creditors that's happening.
Speaker 6: How much of that?
Speaker 5: But it also depends on who holds them. Are these
Speaker 5: entities that have runnable claims? Are these entities that a
Speaker 5: lot of other borrows depend on, so that when they
Speaker 5: shut down, somebody gets cut out of the market, and
Speaker 5: then there's this sequence of defaults. Is there a contagion
Speaker 5: built in somewhere? So if you look at the two
Speaker 5: thousand and eight seven eight crisis, when did the problems
Speaker 5: really build up?
Speaker 6: In five six seven?
Speaker 5: And John Taylor sort of has this graph showing that
Speaker 5: the FED policy was too easy, should have raised rates
Speaker 5: much more at that point according.
Speaker 6: To the tailor rule.
Speaker 5: One can debate that, and Bernanke has debated that. But
Speaker 5: the point is the problems emerge in the time of
Speaker 5: too easy money before it collapses. So we are in
Speaker 5: that period when things look really good, the future looks
Speaker 5: infinitely rosy, and this is where you know you can
Speaker 5: see that that credit standards may may weaken. Banks have
Speaker 5: a lot of money that they want to lend. They
Speaker 5: are lending to the guys who pass the private credit
Speaker 5: on and so there's a lot of exposure there. You know,
Speaker 5: the IMF came out with some statements yesterday that a
Speaker 5: whole bunch of banks that Tier one capital would be
Speaker 5: wiped out if there was serious defaults in the private
Speaker 5: credit industry. So lots of connections, building frauth, a huge
Speaker 5: technology which promises in finite bounty. These are all worrisome signs.
Speaker 5: Does it have to lead to a bus No. But
Speaker 5: there's a famous paper in two thousand and two by
Speaker 5: Claudia Boio and Philip Low, who became Governor of the
Speaker 5: Reserve Bank of Australia, which basically says the combination to
Speaker 5: warry is an increasing asset prices and an increase in
Speaker 5: credit when you see both run for the hills. So
Speaker 5: we're seeing that emerging.
Speaker 3: Shall I try one more time to get that headline
Speaker 3: very very quickly? Is private credit your candidate for an
Speaker 3: upcoming financial blow up?
Speaker 4: No?
Speaker 6: Would?
Speaker 5: I would say it's a combination of the untested private
Speaker 5: credit and the fact that we have huge hopes built
Speaker 5: into the future and are investing accordingly. It's that combination
Speaker 5: credit plus asset prices. We seem to project a glorious future,
Speaker 5: which I worry about.
Speaker 6: Again.
Speaker 5: It's not a certainty about a blow up, but it's
Speaker 5: a cost for worry.
Speaker 4: And you also said run for the hills. I'm going
Speaker 4: to make that.
Speaker 2: I'm going to make the twit rug around Roger, and
Speaker 2: thank you so much for doing this. Really appreciate getting
Speaker 2: the chance to chat it.
Speaker 3: All right. That was our episode with ragu Rejon, recorded
Speaker 3: live in front of an audience at the annual IIF
Speaker 3: meetings in Washington, DC. This has been another episode of
Speaker 3: the Authoughs podcast. I'm Tracy Alloway. You can follow me
Speaker 3: at Tracy Alloway.
Speaker 2: And I'm Jill Wisenthal. You can follow me at the Stalwart.
Speaker 2: Follow our producers Carmen Rodriguez at Carman armand Dashel Bennett
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