1 00:00:10,039 --> 00:00:13,720 Speaker 1: Welcome to the Bloomberg Surveillance Podcast. I'm Tom Keane. Always 2 00:00:14,000 --> 00:00:17,560 Speaker 1: with Michael McKee. Daily we bring you insight from the 3 00:00:17,560 --> 00:00:22,800 Speaker 1: best in economics, finance, investment, and international relations. Find Bloomberg 4 00:00:22,840 --> 00:00:27,280 Speaker 1: Surveillance on iTunes, SoundCloud, Bloomberg dot Com, and of course 5 00:00:27,760 --> 00:00:35,319 Speaker 1: on the Bloomberg. We are seven years on Tom from 6 00:00:35,320 --> 00:00:39,680 Speaker 1: the economic crisis and still struggling to get past a 7 00:00:39,720 --> 00:00:41,600 Speaker 1: two percent annual growth rate in the US. In the 8 00:00:41,640 --> 00:00:46,560 Speaker 1: world is even slower, that is not They are decidedly 9 00:00:46,640 --> 00:00:50,800 Speaker 1: not following the advice of John Maynard, Kein's economic historian. 10 00:00:50,880 --> 00:00:54,480 Speaker 1: Robert Skidelski is Kine's biographer, and he is nice enough 11 00:00:54,840 --> 00:00:59,920 Speaker 1: to join us now. One can only imagine Um, Lord 12 00:01:00,080 --> 00:01:04,800 Speaker 1: Kane's saying, did you learn nothing? You know? Did anybody 13 00:01:04,800 --> 00:01:08,800 Speaker 1: read my book? Is anybody interested in the general theory? 14 00:01:09,440 --> 00:01:14,000 Speaker 1: Lord's Guidelski? Because fiscal action is the one thing that 15 00:01:14,040 --> 00:01:18,880 Speaker 1: has really been missing in this recovery. Absolutely, and and 16 00:01:19,040 --> 00:01:23,720 Speaker 1: in fact, I think a reliance on monetary policy alone 17 00:01:23,959 --> 00:01:27,120 Speaker 1: has shown has been shown to be inadequate. There was 18 00:01:27,160 --> 00:01:32,319 Speaker 1: a little item someone said earlier, Um that lowering loaning 19 00:01:32,440 --> 00:01:37,039 Speaker 1: rates doesn't necessarily produce an increase in output, and um, 20 00:01:37,520 --> 00:01:42,440 Speaker 1: that is exactly true, because you can reduce the cost 21 00:01:42,520 --> 00:01:47,880 Speaker 1: of borrowing, but you still have to have profit expectations 22 00:01:47,880 --> 00:01:50,560 Speaker 1: such that people will want to borrow even at the 23 00:01:50,600 --> 00:01:52,760 Speaker 1: lower cost. And if the you know, if if if 24 00:01:52,800 --> 00:01:58,520 Speaker 1: your profit expectations are really down damaged, you know, it's 25 00:01:58,600 --> 00:02:01,600 Speaker 1: very difficult to get the rate of interest below a 26 00:02:01,680 --> 00:02:04,840 Speaker 1: declining expectation of profit. And I think that's one of 27 00:02:04,880 --> 00:02:07,560 Speaker 1: the things Kane said. And he said then that if that, 28 00:02:07,680 --> 00:02:10,840 Speaker 1: if you get into that situation where monetary policy really 29 00:02:10,840 --> 00:02:14,239 Speaker 1: doesn't work, um, and then you have to have fiscal policy. 30 00:02:14,440 --> 00:02:17,080 Speaker 1: And the trouble with fiscal policy is that, as a 31 00:02:17,080 --> 00:02:21,519 Speaker 1: result of stopping the slide down to another great depression, 32 00:02:21,560 --> 00:02:26,160 Speaker 1: government's got burdened with terrific debts and so they then thought, well, 33 00:02:26,200 --> 00:02:29,400 Speaker 1: you know, we can't have um, you know, the deficits 34 00:02:29,400 --> 00:02:32,400 Speaker 1: of ten per cent or GDP and that sort. So 35 00:02:32,400 --> 00:02:35,919 Speaker 1: we've got to have a physical consolidation. So physical policy 36 00:02:36,360 --> 00:02:41,040 Speaker 1: was really ruled out. Monetary policy is a weak tool 37 00:02:41,040 --> 00:02:44,120 Speaker 1: of recovery, and so we get the results that we have, 38 00:02:44,639 --> 00:02:49,080 Speaker 1: which is very hard to get growth up, elevated unemployment, 39 00:02:49,120 --> 00:02:53,160 Speaker 1: and in some of the world like Europe, really output 40 00:02:53,200 --> 00:02:57,280 Speaker 1: not recovered pre crash levels. Good morning, Lord Sky, wonderful 41 00:02:57,280 --> 00:03:01,960 Speaker 1: good morning from London. A careful read of your primer 42 00:03:02,160 --> 00:03:07,799 Speaker 1: on Kans from a few years ago is most sobering. 43 00:03:08,160 --> 00:03:12,320 Speaker 1: Is well, if we have politics that says we must 44 00:03:12,360 --> 00:03:17,120 Speaker 1: constrain our budgets, what is the alternative that that we 45 00:03:17,240 --> 00:03:20,920 Speaker 1: have to get to. What is the economic theory that 46 00:03:21,080 --> 00:03:24,680 Speaker 1: needs to be reinvigorated. Well, one of the one of 47 00:03:24,720 --> 00:03:27,760 Speaker 1: the most important things is don't get into this situation 48 00:03:27,800 --> 00:03:31,080 Speaker 1: in the first place, because once you're in a hole, 49 00:03:32,200 --> 00:03:37,920 Speaker 1: then it becomes complicated because issues of confidence, expectations, um 50 00:03:38,000 --> 00:03:42,120 Speaker 1: and so on and start operating, and particularly when one 51 00:03:42,400 --> 00:03:47,119 Speaker 1: government's many governments are reliant and reliance on foreign bond holders. 52 00:03:47,520 --> 00:03:50,840 Speaker 1: So you've got to try and not get there. And 53 00:03:51,000 --> 00:03:55,280 Speaker 1: one of the things wrong with economic policy before the 54 00:03:55,360 --> 00:03:58,760 Speaker 1: crash was that they didn't think this could happen. They 55 00:03:58,800 --> 00:04:02,559 Speaker 1: thought that if they just were able to keep inflation 56 00:04:03,320 --> 00:04:07,520 Speaker 1: at a constant rate, the economies would be more or 57 00:04:07,600 --> 00:04:10,520 Speaker 1: less stable, and you didn't have to worry about what 58 00:04:10,600 --> 00:04:14,040 Speaker 1: was going on in particular sectors. And I think they 59 00:04:14,040 --> 00:04:17,760 Speaker 1: didn't pay attention to the financial system at all. They 60 00:04:17,880 --> 00:04:20,600 Speaker 1: just thought it would be okay. It was self regulating 61 00:04:20,680 --> 00:04:25,359 Speaker 1: that disasters were so unlikely that you didn't reasonably have 62 00:04:25,520 --> 00:04:28,600 Speaker 1: to have to consider them. And I think that was 63 00:04:28,640 --> 00:04:32,000 Speaker 1: what went wrong, and that was the fault of economic theory, 64 00:04:32,120 --> 00:04:37,120 Speaker 1: macro theory as it was taught and applied before the crash. 65 00:04:37,160 --> 00:04:40,280 Speaker 1: I mean, I look at Mike McKee Kaine's The Return 66 00:04:40,320 --> 00:04:42,720 Speaker 1: of the Master Folks, I can't say enough about it. 67 00:04:42,720 --> 00:04:47,200 Speaker 1: It's your it's your cliff notes. And Robert Skodolski. Uh. 68 00:04:47,240 --> 00:04:51,560 Speaker 1: Instead of the three thousands some pages of his magisterial volumes, 69 00:04:51,680 --> 00:04:55,360 Speaker 1: you can you can go through two pages and really 70 00:04:55,400 --> 00:04:59,600 Speaker 1: get a terrific perspective on this engaged debate. What did 71 00:04:59,600 --> 00:05:04,840 Speaker 1: the lation Eastas get wrong? Um? The inflation Easta's well, 72 00:05:05,000 --> 00:05:09,000 Speaker 1: they they what they got wrong was in assuming that 73 00:05:09,080 --> 00:05:13,200 Speaker 1: all you had to do UM was just to keep 74 00:05:14,000 --> 00:05:18,240 Speaker 1: inflation at a constant rate. Um. That was Milton Friedman. 75 00:05:18,680 --> 00:05:21,880 Speaker 1: He said, provided you can just keep inflation at a 76 00:05:22,000 --> 00:05:26,120 Speaker 1: constant rate, then the macro you would have removed the 77 00:05:26,320 --> 00:05:32,720 Speaker 1: main destabilizing um feature in in economic life. People would 78 00:05:32,760 --> 00:05:36,160 Speaker 1: have settled expectations. There would be an anchor there. The 79 00:05:36,320 --> 00:05:41,560 Speaker 1: central bank would always do anything anything necessary to hit 80 00:05:41,600 --> 00:05:44,440 Speaker 1: the inflation target, and that would make everything else go 81 00:05:45,200 --> 00:05:48,520 Speaker 1: sort of more or less all right, except except for 82 00:05:48,640 --> 00:05:51,920 Speaker 1: shocks that you know, it wasn't reasonable to predict. I 83 00:05:51,960 --> 00:05:54,520 Speaker 1: want to follow up on the inflation adea because Keynes 84 00:05:54,680 --> 00:05:59,960 Speaker 1: was not operating in a very an extraordinarily low inflation 85 00:06:00,080 --> 00:06:02,919 Speaker 1: in world, quite the opposite. What do you how do 86 00:06:02,920 --> 00:06:07,120 Speaker 1: you think he would have incorporated sort of zero inflation 87 00:06:07,800 --> 00:06:12,640 Speaker 1: deflation threat into his theory. Well, you see, by the 88 00:06:12,680 --> 00:06:15,640 Speaker 1: time he was writing came to write the General Theory, 89 00:06:15,720 --> 00:06:20,039 Speaker 1: you had had the Great Depression and their prices were falling. Well, 90 00:06:20,080 --> 00:06:24,359 Speaker 1: he wrote The Great Depression against a great General Theory 91 00:06:24,400 --> 00:06:30,880 Speaker 1: against the background of falling prices deflation um. Admittedly, earlier 92 00:06:30,920 --> 00:06:34,440 Speaker 1: on in the nineteen twenties, early nineteen twenties there was 93 00:06:34,560 --> 00:06:37,560 Speaker 1: there was sort of big inflation hyper inflation after the 94 00:06:37,560 --> 00:06:41,480 Speaker 1: First World War, and then he that was his monetarist phase, 95 00:06:41,560 --> 00:06:44,520 Speaker 1: if you like. He then said, look, we have got 96 00:06:44,600 --> 00:06:48,600 Speaker 1: to get rid of the gold standard and have monetary 97 00:06:48,640 --> 00:06:53,280 Speaker 1: policy that can target inflation. So that's why Milton Friedman 98 00:06:53,360 --> 00:06:58,000 Speaker 1: regarded his tract on Monetary Reform three is his best book, 99 00:06:58,160 --> 00:07:00,800 Speaker 1: and the General Theory is an unfort in it an 100 00:07:00,920 --> 00:07:05,840 Speaker 1: unfortunate regression. Um. But you see he This is the 101 00:07:05,960 --> 00:07:09,440 Speaker 1: point I've often made that economic theories and policies are 102 00:07:09,520 --> 00:07:14,080 Speaker 1: very dependent on circumstances. What the right policy is in 103 00:07:14,240 --> 00:07:18,200 Speaker 1: one set of it isn't necessarily the right policy in another. 104 00:07:18,360 --> 00:07:22,160 Speaker 1: Lord Skadewski is with us. He is the truly iconic 105 00:07:22,160 --> 00:07:27,280 Speaker 1: biographer of John Maynard Keynes, Lord Skadelski, we treasure the 106 00:07:27,360 --> 00:07:30,240 Speaker 1: guests that we speak to that have links to the past. 107 00:07:30,480 --> 00:07:34,400 Speaker 1: Is wonderful that the Nobel Laureate Michael Spence spends time 108 00:07:34,400 --> 00:07:38,200 Speaker 1: with us. He studied with Johnny Hicks at Oxford long 109 00:07:38,360 --> 00:07:44,160 Speaker 1: and far ago. Paul Krugman today revisits his plea that 110 00:07:44,320 --> 00:07:50,080 Speaker 1: modern economics respect nine thirty nine John Hicks. The thrust 111 00:07:50,200 --> 00:07:55,000 Speaker 1: of the laureate from Princeton's comments is simpler is better. 112 00:07:55,560 --> 00:08:02,679 Speaker 1: What does Robert Skidelski get out of complex modern mathematical economics? Well, 113 00:08:03,200 --> 00:08:08,000 Speaker 1: I don't. I I think you know, mathematics and economics 114 00:08:08,120 --> 00:08:13,080 Speaker 1: is here to stay. Um. It's use it's very useful, um, 115 00:08:13,120 --> 00:08:16,440 Speaker 1: but it can be extremely distracting. It can prevent you 116 00:08:17,120 --> 00:08:20,920 Speaker 1: seeing the wood for the trees. And I think that's 117 00:08:20,960 --> 00:08:27,640 Speaker 1: happened and particularly mathematical mathematical um formula in defense of 118 00:08:27,720 --> 00:08:32,440 Speaker 1: wrong theories can be very very hard to see through 119 00:08:32,720 --> 00:08:35,760 Speaker 1: and attack. And I think a lot of maths is 120 00:08:35,800 --> 00:08:40,440 Speaker 1: a defense. It's sort of almost something erected to stop 121 00:08:40,480 --> 00:08:44,600 Speaker 1: seeing people seeing what what what's going on? And I 122 00:08:44,600 --> 00:08:47,920 Speaker 1: think it has another big defect. Most people can't understand it, 123 00:08:48,440 --> 00:08:53,480 Speaker 1: and so it confines the circle of discussion to very 124 00:08:53,559 --> 00:08:56,800 Speaker 1: very few people. And a basic and certain basic ideas, 125 00:08:56,840 --> 00:08:59,040 Speaker 1: which is that if you know, if people have stopped 126 00:08:59,080 --> 00:09:03,199 Speaker 1: spending uh, the economy is going to is going to 127 00:09:03,240 --> 00:09:06,200 Speaker 1: sink and the government has to do something about it. 128 00:09:06,320 --> 00:09:09,920 Speaker 1: The basic common sense ideas like that tend to get 129 00:09:09,960 --> 00:09:16,520 Speaker 1: lost in this labyrinth of mathematical theorizing. So I think 130 00:09:16,679 --> 00:09:20,640 Speaker 1: maths can be excessive. Maths can be a big, big 131 00:09:20,720 --> 00:09:25,120 Speaker 1: drag on understanding what's going on. Well, that was exactly 132 00:09:25,720 --> 00:09:29,280 Speaker 1: Paul Krugman's point that if you had looked at a 133 00:09:29,320 --> 00:09:33,960 Speaker 1: simple model of the I S L m UH, that 134 00:09:34,000 --> 00:09:36,520 Speaker 1: you would have concluded the government needed to do something. 135 00:09:36,720 --> 00:09:39,240 Speaker 1: And he makes the further point though that at the 136 00:09:39,320 --> 00:09:43,240 Speaker 1: zero lower bound, the curves actually stopped curving, they go 137 00:09:43,360 --> 00:09:46,320 Speaker 1: flat because you can't take it negative and he said 138 00:09:46,360 --> 00:09:50,120 Speaker 1: that there you have an issue for theory of what 139 00:09:50,160 --> 00:09:54,040 Speaker 1: do you do next. The central banks, many of them, 140 00:09:54,040 --> 00:09:58,320 Speaker 1: have concluded you use negative interest rates to and uh, 141 00:09:58,760 --> 00:10:03,760 Speaker 1: you have just written very recently, um that that is 142 00:10:03,800 --> 00:10:07,439 Speaker 1: not necessarily a good idea, no, because you might then 143 00:10:07,480 --> 00:10:11,679 Speaker 1: get a downward race between negative interest rates and profit expectations. 144 00:10:12,040 --> 00:10:14,240 Speaker 1: I mean, how though, how low do you have to go? 145 00:10:14,600 --> 00:10:18,559 Speaker 1: And the thing is that if if, if profit expectations 146 00:10:18,600 --> 00:10:21,400 Speaker 1: are very very depressed, I mean, you've got to get 147 00:10:21,440 --> 00:10:25,920 Speaker 1: the interest rates below below the depressed level of the 148 00:10:25,920 --> 00:10:29,240 Speaker 1: profit expectations. And I mean, at some point it's just 149 00:10:29,360 --> 00:10:31,400 Speaker 1: not worth it, not worth it for banks to do that. 150 00:10:31,520 --> 00:10:36,320 Speaker 1: I mean they then start saying, okay, um, they you 151 00:10:36,440 --> 00:10:40,360 Speaker 1: store your cash um or I mean, and it's it's 152 00:10:40,360 --> 00:10:44,000 Speaker 1: certainly not part it's not it's not it's not a 153 00:10:44,080 --> 00:10:49,080 Speaker 1: profitable for people who make deposits to get negative interest rates. 154 00:10:49,240 --> 00:10:52,480 Speaker 1: They start putting their cash into into strong boxes. So 155 00:10:52,800 --> 00:10:55,360 Speaker 1: you can only do that to a limited extent. And 156 00:10:55,360 --> 00:11:00,520 Speaker 1: and and broadly speaking, the zero bound limit on interest 157 00:11:00,600 --> 00:11:03,680 Speaker 1: rate policy stand. You can try and tweak it a 158 00:11:03,720 --> 00:11:06,320 Speaker 1: little bit, but it stands. And then you have to 159 00:11:06,360 --> 00:11:08,680 Speaker 1: think of something else in the time that you got 160 00:11:08,720 --> 00:11:11,520 Speaker 1: left with you, Lord Skiddowski, we would be honored to 161 00:11:11,600 --> 00:11:15,439 Speaker 1: have you opine and negative interest rates. This is an 162 00:11:15,480 --> 00:11:20,240 Speaker 1: in nineteen three or nineteen six Kanes, is it. Yeah, Well, 163 00:11:20,880 --> 00:11:23,400 Speaker 1: Kane's never really had to to face that problem. He 164 00:11:23,440 --> 00:11:25,600 Speaker 1: did a bit in the in the in the Great 165 00:11:25,600 --> 00:11:30,880 Speaker 1: Depression when he really came to the conclusion that although, um, 166 00:11:31,040 --> 00:11:34,760 Speaker 1: you ought to fling everything at a very very um 167 00:11:35,040 --> 00:11:39,240 Speaker 1: deep depression and particularly quantitative easing, I mean he he 168 00:11:39,360 --> 00:11:43,640 Speaker 1: recommended that very very strongly in ninety one, at a 169 00:11:43,720 --> 00:11:47,679 Speaker 1: certain point, um, you find that it doesn't do the job. 170 00:11:48,120 --> 00:11:52,720 Speaker 1: It limits the damage. Possibly it produces a moderate recovery, 171 00:11:52,720 --> 00:11:55,800 Speaker 1: but it doesn't actually, it actually doesn't lift the economy 172 00:11:55,840 --> 00:11:58,079 Speaker 1: back to to to its previous level. And the President 173 00:11:58,080 --> 00:12:01,079 Speaker 1: Obama was quite right when he said the US has 174 00:12:01,160 --> 00:12:05,040 Speaker 1: recovered is ten percent above pre crash and Europeism. And 175 00:12:06,040 --> 00:12:08,400 Speaker 1: the main reason for that, I think is that the 176 00:12:08,480 --> 00:12:13,680 Speaker 1: United States had a much more liberal fiscal response to 177 00:12:13,720 --> 00:12:16,600 Speaker 1: the depression of the Europeans. I mean, they really did 178 00:12:16,840 --> 00:12:20,640 Speaker 1: use fiscal policy. Or the Americans always say they didn't 179 00:12:20,640 --> 00:12:24,199 Speaker 1: like budget deficits, in practice they're being actually quite tolerant 180 00:12:24,440 --> 00:12:27,680 Speaker 1: a budget deficits Robert Skodowski, thank you for the briefing. 181 00:12:27,679 --> 00:12:30,560 Speaker 1: We greatly appreciate it. Lord Skodowski for years at University 182 00:12:30,559 --> 00:12:33,440 Speaker 1: of work on other tenures, and of course the great 183 00:12:33,520 --> 00:12:49,480 Speaker 1: Keynes biography. Well, we are watching with interest events back 184 00:12:49,480 --> 00:12:53,320 Speaker 1: in the United States. Yesterday Janet Yellen UH was up 185 00:12:53,360 --> 00:12:57,000 Speaker 1: on Capitol Hill for the second day testifying before Congress 186 00:12:57,400 --> 00:13:00,600 Speaker 1: to monetary policy. And we did see a bit of 187 00:13:00,640 --> 00:13:05,120 Speaker 1: a turn in the markets after her performance. Not a lot, 188 00:13:05,160 --> 00:13:09,400 Speaker 1: but maybe we could say that the markets are have 189 00:13:09,480 --> 00:13:12,520 Speaker 1: a little bit more respect for the possibility of a 190 00:13:12,640 --> 00:13:16,120 Speaker 1: rate hike UH in the in this year. Put it 191 00:13:16,160 --> 00:13:18,440 Speaker 1: that way, not in the near future, but this year. 192 00:13:18,679 --> 00:13:22,520 Speaker 1: Jerome Schneider UH is the head of short term portfolio 193 00:13:22,600 --> 00:13:26,600 Speaker 1: management for pim Call. He joins us, Now, UM, did 194 00:13:26,600 --> 00:13:32,560 Speaker 1: you change anything, UH from an investment standpoint or even 195 00:13:33,040 --> 00:13:35,800 Speaker 1: your own opinion based on what the FED chair had 196 00:13:35,840 --> 00:13:38,200 Speaker 1: to say? Not not too terribly much, and good morning, 197 00:13:38,200 --> 00:13:41,320 Speaker 1: good afternoon to your gentlemen. UM. At this point in time, 198 00:13:41,400 --> 00:13:42,679 Speaker 1: you know it's more of a wait and see. The 199 00:13:42,760 --> 00:13:45,800 Speaker 1: data dependent FED is going to remain data dependent. The 200 00:13:46,120 --> 00:13:49,600 Speaker 1: big messaging changed back with the FED announcement and in 201 00:13:49,640 --> 00:13:53,560 Speaker 1: the subsequent UM the subsequent discussion in the press conference. 202 00:13:53,960 --> 00:13:56,160 Speaker 1: I think what we have to really realize at this point, 203 00:13:56,200 --> 00:13:58,520 Speaker 1: I mean you said it at the top, was the 204 00:13:58,520 --> 00:14:02,439 Speaker 1: market is continue to expect very minimal changes in tightening 205 00:14:02,440 --> 00:14:04,839 Speaker 1: policy from the FED. You know, we're still pricing out 206 00:14:04,880 --> 00:14:08,600 Speaker 1: not only uh, the less of probability of a rate hike, 207 00:14:08,640 --> 00:14:10,600 Speaker 1: a single rate hike this year in two thousand and sixteen, 208 00:14:10,679 --> 00:14:13,120 Speaker 1: but actually throughout two thousand seventeen at this point in 209 00:14:13,160 --> 00:14:15,560 Speaker 1: time as well. And I think you need to compare 210 00:14:15,559 --> 00:14:18,480 Speaker 1: and contrast that to the Fed's expectations. While they've come 211 00:14:18,480 --> 00:14:21,640 Speaker 1: down significantly with their sep the dots, so to speak, 212 00:14:21,920 --> 00:14:24,280 Speaker 1: you know, we're still they're still expecting somewhere between a 213 00:14:24,360 --> 00:14:27,120 Speaker 1: narrogate four hikes over the course of this year and 214 00:14:27,280 --> 00:14:31,720 Speaker 1: two thousand and seventeen. So that reconciliation process between Fed 215 00:14:31,800 --> 00:14:36,440 Speaker 1: expectations and market expectations is gonna still be a little 216 00:14:36,440 --> 00:14:38,640 Speaker 1: bit troubling for the market. And while we've bounced bounced 217 00:14:38,640 --> 00:14:42,000 Speaker 1: off the low rates that we saw about a week ago, um, 218 00:14:42,160 --> 00:14:44,720 Speaker 1: you know, it's really it's really more of a risk 219 00:14:44,760 --> 00:14:47,280 Speaker 1: on risk off notion as opposed to a recalibration or 220 00:14:47,280 --> 00:14:49,360 Speaker 1: re expectation of what the Fed's going to do at 221 00:14:49,360 --> 00:14:53,520 Speaker 1: this point in time. Were you surprised by the seeming 222 00:14:53,560 --> 00:14:57,080 Speaker 1: you turn the FED made when we went into the 223 00:14:57,160 --> 00:14:59,760 Speaker 1: main jobs report with everybody expecting that they would be 224 00:14:59,840 --> 00:15:01,720 Speaker 1: rad rates in June and then all of a sudden, 225 00:15:01,880 --> 00:15:03,800 Speaker 1: we're off the table until the end of the year. 226 00:15:03,840 --> 00:15:06,600 Speaker 1: If that, well, I wouldn't say that we're necessarily surprised 227 00:15:06,600 --> 00:15:09,160 Speaker 1: by the Fed, but you're surprised by the data, and 228 00:15:09,400 --> 00:15:12,280 Speaker 1: the second derivative that is surprised by the market's reaction 229 00:15:12,360 --> 00:15:14,960 Speaker 1: to the data. The FED has been very clear they 230 00:15:15,000 --> 00:15:17,400 Speaker 1: basically had an option, almost a free option, over the 231 00:15:17,440 --> 00:15:20,320 Speaker 1: previous course of this year, that they had the degrees 232 00:15:20,320 --> 00:15:22,920 Speaker 1: of freedom by being data dependent. It were positively, it 233 00:15:23,200 --> 00:15:25,960 Speaker 1: gave them basically a good amount of credibility to react 234 00:15:26,000 --> 00:15:28,880 Speaker 1: to data as it was improving, giving some leash as 235 00:15:28,920 --> 00:15:33,240 Speaker 1: financial conditions ebbed and flowed accordingly in January, February and March, 236 00:15:33,600 --> 00:15:35,560 Speaker 1: and when things started to improve, they leaned on the 237 00:15:35,640 --> 00:15:39,000 Speaker 1: data dependency became more vocal, and unfortunately, when we got 238 00:15:39,000 --> 00:15:41,280 Speaker 1: the jobs report last time, it went the other way. 239 00:15:41,320 --> 00:15:44,640 Speaker 1: So that data dependency worked against him in two ways. One, obviously, 240 00:15:44,800 --> 00:15:46,920 Speaker 1: it wasn't showing an economy from their point of view, 241 00:15:47,000 --> 00:15:49,440 Speaker 1: or really from the markets point of view somewhat debatable. 242 00:15:49,680 --> 00:15:51,920 Speaker 1: Um that that was as positive as they had hoped, 243 00:15:52,280 --> 00:15:57,200 Speaker 1: but it also really impeded their credibility, and so that optionality, 244 00:15:57,240 --> 00:16:01,240 Speaker 1: that data dependency became a question of credible y ultimately 245 00:16:01,240 --> 00:16:03,120 Speaker 1: in their turn, and so they had to do something 246 00:16:03,160 --> 00:16:05,800 Speaker 1: to reconcile that. How did they do that? They reconciled 247 00:16:05,840 --> 00:16:09,080 Speaker 1: it through the SEP the longer term expectations of rates growth, 248 00:16:09,080 --> 00:16:12,480 Speaker 1: et cetera, and try to get closer to the market's expectations. 249 00:16:13,000 --> 00:16:15,760 Speaker 1: The market accordingly obviously, you know, said this is really 250 00:16:15,760 --> 00:16:18,440 Speaker 1: bad data. Um, but we'll wait and see if that holds. 251 00:16:18,440 --> 00:16:20,400 Speaker 1: And if it was a one, you know, a one 252 00:16:20,480 --> 00:16:22,680 Speaker 1: hit wonder, so to speak. If this all turned on 253 00:16:22,760 --> 00:16:25,960 Speaker 1: the data we saw on Jobs Day for the May 254 00:16:25,960 --> 00:16:30,800 Speaker 1: payrolls report, can it change that much again the other way, 255 00:16:30,960 --> 00:16:34,160 Speaker 1: should pay rolls rebound? Yeah? Absolutely, And all you have 256 00:16:34,200 --> 00:16:35,720 Speaker 1: to do is look at history. And it was one 257 00:16:35,720 --> 00:16:38,200 Speaker 1: of my colleagues yesterday pointed out look at two thousand four. 258 00:16:38,960 --> 00:16:41,400 Speaker 1: Back in February two thousand four, you had an employment 259 00:16:41,440 --> 00:16:44,640 Speaker 1: report that was really disappointing. As the March release of 260 00:16:44,680 --> 00:16:47,560 Speaker 1: the February report UM, and when you look at it, it 261 00:16:47,480 --> 00:16:49,920 Speaker 1: it was a realas a positive twenty one thousand of 262 00:16:50,040 --> 00:16:53,160 Speaker 1: jobs created. And then the subsequent month in March, which 263 00:16:53,240 --> 00:16:56,040 Speaker 1: was released in early April, you had an expectation of 264 00:16:56,080 --> 00:16:59,280 Speaker 1: positive three thousand, so it whip solved back the other 265 00:16:59,320 --> 00:17:02,680 Speaker 1: way positively, and then you basically had a sequence which 266 00:17:02,760 --> 00:17:04,800 Speaker 1: led to a FED hike, only a mirror you know, 267 00:17:04,840 --> 00:17:08,359 Speaker 1: basically two months later in June, and obviously June the 268 00:17:08,480 --> 00:17:12,840 Speaker 1: hiking sequence. So the data does change, can change historically quickly, 269 00:17:13,240 --> 00:17:16,040 Speaker 1: and you can have anomali. So I'm not necessarily suggesting 270 00:17:16,080 --> 00:17:19,119 Speaker 1: that this data UM, this data may or will, but 271 00:17:19,280 --> 00:17:21,520 Speaker 1: I do think that there's actually some positive undertones in 272 00:17:21,560 --> 00:17:24,400 Speaker 1: the data that many people dismissed very very quickly based 273 00:17:24,400 --> 00:17:26,680 Speaker 1: on the headline data. It's very dangerous at this point 274 00:17:26,680 --> 00:17:30,280 Speaker 1: in time, Jerome, we really talked to people where two years, 275 00:17:30,320 --> 00:17:33,080 Speaker 1: two years is a long term. It's great to talk 276 00:17:33,119 --> 00:17:35,320 Speaker 1: to somebody in the short term space. Don't call me 277 00:17:35,359 --> 00:17:37,680 Speaker 1: short sided though, no, I will not do that. But 278 00:17:37,960 --> 00:17:40,960 Speaker 1: within this is the idea of what do you look 279 00:17:41,000 --> 00:17:43,239 Speaker 1: at when you come in in the morning, is a 280 00:17:43,280 --> 00:17:46,080 Speaker 1: measurement of fear within the liquidity markets. It used to 281 00:17:46,119 --> 00:17:49,960 Speaker 1: be commercial paper, live or ois and that is there 282 00:17:50,040 --> 00:17:55,760 Speaker 1: a measurement now or things so distorted you're flying blind. No, 283 00:17:56,040 --> 00:17:58,560 Speaker 1: you're definitely aren't flying blind, but you you might not 284 00:17:58,840 --> 00:18:01,120 Speaker 1: be able to fly with visual sightings. And I think 285 00:18:01,160 --> 00:18:04,080 Speaker 1: that's where we are in the marketplace. People for many years, 286 00:18:04,080 --> 00:18:06,359 Speaker 1: forty years in fact, before the financial crisis, you know, 287 00:18:06,400 --> 00:18:09,119 Speaker 1: flew by visual sightings, just looked out the window, hopefully 288 00:18:09,160 --> 00:18:11,040 Speaker 1: they figured out where they were. But then you had 289 00:18:11,080 --> 00:18:13,200 Speaker 1: indicators that sort of had points of stress, as you 290 00:18:13,200 --> 00:18:16,960 Speaker 1: alluded to libor SCP. I actually would suggest that we 291 00:18:17,000 --> 00:18:19,160 Speaker 1: get back to the more vanilla indicators at this point 292 00:18:19,200 --> 00:18:21,640 Speaker 1: in time, because some of them have gotten distorted as 293 00:18:21,640 --> 00:18:24,159 Speaker 1: we've gotten to that zero bound. But you know, in 294 00:18:24,240 --> 00:18:26,240 Speaker 1: terms of fear, you can look at repo markets, you 295 00:18:26,240 --> 00:18:28,959 Speaker 1: can look at repo functioning. You know today you have 296 00:18:29,280 --> 00:18:32,240 Speaker 1: you know, repo rates trading north of fifty basis points 297 00:18:32,240 --> 00:18:34,879 Speaker 1: north of the interest on access reserves level. And not 298 00:18:34,920 --> 00:18:37,440 Speaker 1: necessarily that's a sign of immediate fear, but it's a 299 00:18:37,480 --> 00:18:40,400 Speaker 1: sign of just mild, mild i'll call it stress preparation, 300 00:18:40,480 --> 00:18:43,159 Speaker 1: liquidity management. That you might see the market over the 301 00:18:43,240 --> 00:18:45,200 Speaker 1: you know, over the next forty eight hours. And I 302 00:18:45,240 --> 00:18:47,479 Speaker 1: wouldn't I wouldn't take anything more than that. But it 303 00:18:47,560 --> 00:18:50,959 Speaker 1: does give you an insight of where who needs funding, 304 00:18:51,119 --> 00:18:53,480 Speaker 1: what needs to be fund funded, and and it gives 305 00:18:53,520 --> 00:18:56,680 Speaker 1: you a relative sense based upon where the FED ideally 306 00:18:56,680 --> 00:18:59,200 Speaker 1: would like their risk free rate to be, so you know, 307 00:18:59,280 --> 00:19:01,879 Speaker 1: repo repo rates to me get back gets back to 308 00:19:01,880 --> 00:19:04,320 Speaker 1: the original plumbing of the financial Systeming becomes a very 309 00:19:04,359 --> 00:19:06,960 Speaker 1: important indicator. And then the second element to that is 310 00:19:06,960 --> 00:19:09,480 Speaker 1: obviously where short term treasuries are treating not only T 311 00:19:09,640 --> 00:19:12,880 Speaker 1: bills but short term treasury coupons in relation to the 312 00:19:12,880 --> 00:19:15,840 Speaker 1: FED UM, the Fed's benchmark rates and and and there 313 00:19:15,840 --> 00:19:17,960 Speaker 1: has been a reasonable amount of selling in that front 314 00:19:18,040 --> 00:19:21,280 Speaker 1: end anticipation of raising simil liquidity over the past few weeks, 315 00:19:21,320 --> 00:19:23,800 Speaker 1: but again nothing systemic. I just think it's more of 316 00:19:23,840 --> 00:19:25,840 Speaker 1: a tactical issue at this point in time. Were you 317 00:19:25,920 --> 00:19:29,040 Speaker 1: satisfied with Janet Yellen's answer that the FIT is aware 318 00:19:29,080 --> 00:19:33,760 Speaker 1: of your concerns about liquidity but doesn't think there's any problem. Um. Absolutely, 319 00:19:33,840 --> 00:19:36,480 Speaker 1: and I think that their overall concerns and most central 320 00:19:36,480 --> 00:19:38,520 Speaker 1: banks are and and people have been very public over 321 00:19:38,560 --> 00:19:41,880 Speaker 1: the past few weeks about how they think about managing liquidity, etcetera. 322 00:19:42,080 --> 00:19:45,520 Speaker 1: So in this world, in this environment, you know, central 323 00:19:45,520 --> 00:19:50,080 Speaker 1: banks were unaware, um sometimes people could arguably say oblivious 324 00:19:50,240 --> 00:19:54,280 Speaker 1: to liquidity management issues. And now as we've evolved, they've 325 00:19:54,359 --> 00:19:56,720 Speaker 1: not only they're not only not oblivious, but they're quite 326 00:19:56,720 --> 00:20:00,600 Speaker 1: well prepared and communicating that prepared game plan is one 327 00:20:00,760 --> 00:20:03,280 Speaker 1: is one prophylactic to that. So it's very important to 328 00:20:03,320 --> 00:20:06,359 Speaker 1: identify that central banks have become more proactive, you know, 329 00:20:06,560 --> 00:20:10,440 Speaker 1: to to manage liquidity, and a forced institutions banks and 330 00:20:10,880 --> 00:20:13,440 Speaker 1: other people to be to be as aggressive. You know 331 00:20:13,480 --> 00:20:15,879 Speaker 1: at PIMCO where I have always been very active in 332 00:20:15,880 --> 00:20:19,120 Speaker 1: liquidity management and reacting dynamically to that. So it's something 333 00:20:19,119 --> 00:20:20,639 Speaker 1: it's part of our blood or part of our DNA. 334 00:20:21,000 --> 00:20:23,160 Speaker 1: It's part of your DNA. But the DNA didn't work 335 00:20:23,200 --> 00:20:25,679 Speaker 1: at negative interest rates. What do you do with the 336 00:20:25,720 --> 00:20:28,480 Speaker 1: German two? You're I mean, you're in the bunker, You've 337 00:20:28,480 --> 00:20:33,720 Speaker 1: got portfolio managers bugging you, You've got your own portfolio responsibilities. 338 00:20:34,119 --> 00:20:37,200 Speaker 1: What do you do with a Danish negative, a German negative, 339 00:20:37,280 --> 00:20:40,440 Speaker 1: a Swiss negative? Yeah, So it's it's very important. It's 340 00:20:40,480 --> 00:20:42,280 Speaker 1: not so much of a question of what I do 341 00:20:42,520 --> 00:20:44,280 Speaker 1: you know, fortunately in the US and most of my 342 00:20:44,359 --> 00:20:47,359 Speaker 1: clients are dollar denominated and investors. What we have to 343 00:20:47,400 --> 00:20:50,000 Speaker 1: think about the second derivative of that reaction, what do 344 00:20:50,080 --> 00:20:52,920 Speaker 1: the investors who are inflicted infected with those negative interest 345 00:20:53,000 --> 00:20:55,600 Speaker 1: rates do? And as we've moved from a world of 346 00:20:55,800 --> 00:20:57,919 Speaker 1: you know, positive interest rate policy to zero interest rate 347 00:20:57,960 --> 00:21:00,760 Speaker 1: policies or to negative interest rate policy NERP, we got 348 00:21:00,760 --> 00:21:03,680 Speaker 1: to this world of rope relatively attractive interest rate policy. 349 00:21:04,000 --> 00:21:07,520 Speaker 1: And and most importantly what that does is creates demand 350 00:21:07,560 --> 00:21:11,120 Speaker 1: for short dated US assets because they're still nominally positive 351 00:21:11,240 --> 00:21:14,439 Speaker 1: even on a hedge basis. So some people might find, 352 00:21:14,560 --> 00:21:17,480 Speaker 1: you know, uh, find it attracted to buy um, you know, 353 00:21:17,600 --> 00:21:20,200 Speaker 1: bones and shots, you know, at negative yields, and and 354 00:21:20,200 --> 00:21:22,800 Speaker 1: and and they do that for capital preservation or you know, 355 00:21:22,880 --> 00:21:25,560 Speaker 1: perhaps as a trade, you know, as a forecast of 356 00:21:25,600 --> 00:21:29,800 Speaker 1: ECB cuts in the future. But from a capital preservation standpoint, 357 00:21:29,880 --> 00:21:32,159 Speaker 1: those in the front end, what we're trying to do 358 00:21:32,240 --> 00:21:36,600 Speaker 1: is maintain diversification or portfolios reduced that exposured interest rates, 359 00:21:36,640 --> 00:21:38,720 Speaker 1: because that is the most volatile subset of a of 360 00:21:38,760 --> 00:21:41,440 Speaker 1: a portfolio composition at this point in time. And look 361 00:21:41,640 --> 00:21:45,560 Speaker 1: broadly you know about how we can generate income, you know, 362 00:21:45,600 --> 00:21:48,959 Speaker 1: really to outpace even modest inflation. So capital preservation at 363 00:21:48,960 --> 00:21:51,520 Speaker 1: this point in time is key and foremost by having 364 00:21:51,520 --> 00:21:55,199 Speaker 1: those portfolios low lowan volatility and producing income. Are you 365 00:21:55,320 --> 00:21:58,960 Speaker 1: using leverage to goose income? How quaint that was two 366 00:21:58,960 --> 00:22:02,119 Speaker 1: decades ago? Yeah, you know it was quaint. And leverage 367 00:22:02,119 --> 00:22:04,760 Speaker 1: is cheap and abundant, and balances at banks were miscalculated 368 00:22:04,800 --> 00:22:07,080 Speaker 1: in that sense. You know, there are there are structural leverage. 369 00:22:07,119 --> 00:22:10,879 Speaker 1: There are strategies which deplaced uh structural leverage um and 370 00:22:11,160 --> 00:22:13,359 Speaker 1: and those happened. But you know, in terms of capital 371 00:22:13,560 --> 00:22:17,240 Speaker 1: management management strategies, leverage isn't a key component. You know, 372 00:22:17,680 --> 00:22:20,040 Speaker 1: leverage is fairly priced at this point in time. There 373 00:22:20,040 --> 00:22:23,119 Speaker 1: isn't necessarily a cheap leverage out there that everybody's running 374 00:22:23,119 --> 00:22:26,439 Speaker 1: to systemically. And at the same time, even the leverage 375 00:22:26,480 --> 00:22:29,840 Speaker 1: that banks use, meaning issuance and commercial paper markets, even 376 00:22:29,840 --> 00:22:33,520 Speaker 1: borrowing security or un security has it's gotten more fairly 377 00:22:33,560 --> 00:22:37,200 Speaker 1: priced as the cost of capital has been rationalized by 378 00:22:37,280 --> 00:22:40,320 Speaker 1: by by the by the market, and by the regulations 379 00:22:40,320 --> 00:22:41,880 Speaker 1: that have come into play over the past few years. 380 00:22:43,000 --> 00:22:46,320 Speaker 1: Before we go get your opinion on the overnight bank 381 00:22:46,440 --> 00:22:49,760 Speaker 1: funding rate, which is a new a new measure gend 382 00:22:49,840 --> 00:22:53,840 Speaker 1: up by the New York Fed, which apparently, from what 383 00:22:53,880 --> 00:22:56,639 Speaker 1: I understand, will replace the Federal funds rate, is the 384 00:22:56,680 --> 00:23:00,960 Speaker 1: FEDS target and may even replace Liebor over time as 385 00:23:01,000 --> 00:23:04,680 Speaker 1: a global benchmark for lending. Yeah, we're you know, we're 386 00:23:04,800 --> 00:23:07,800 Speaker 1: always you know, working with uh, you know, officials to 387 00:23:07,880 --> 00:23:09,440 Speaker 1: try to figure out, you know, what is the best 388 00:23:09,480 --> 00:23:12,560 Speaker 1: way to articulate risk and risk free rates, etcetera. You know, 389 00:23:12,760 --> 00:23:14,720 Speaker 1: we have to still at the same time be practitioners 390 00:23:14,760 --> 00:23:16,560 Speaker 1: in the market. So looking at T bills and repos 391 00:23:16,560 --> 00:23:19,399 Speaker 1: imagtioned before is an effective benchmark for us at this 392 00:23:19,440 --> 00:23:21,639 Speaker 1: point in time. But you know, we're we're working with 393 00:23:21,680 --> 00:23:24,320 Speaker 1: them to identify ways to get a more broad seat 394 00:23:24,320 --> 00:23:27,680 Speaker 1: set of the market and most importantly reflect actual activity 395 00:23:27,760 --> 00:23:30,439 Speaker 1: in the market. And that's their ultimate goal in identifying that, 396 00:23:30,520 --> 00:23:33,200 Speaker 1: you know, utilizing something where there's a reportable activity. So 397 00:23:33,400 --> 00:23:35,600 Speaker 1: there's been a lot of discussions, a lot of panels 398 00:23:35,800 --> 00:23:37,640 Speaker 1: um and and over the past few years we've been 399 00:23:37,680 --> 00:23:40,000 Speaker 1: white papers and now those white papers are turning in 400 00:23:40,040 --> 00:23:42,600 Speaker 1: to really some propulsion for the for the regulators to 401 00:23:42,600 --> 00:23:45,280 Speaker 1: to come up with something. But don't expect it overnight, 402 00:23:45,440 --> 00:23:47,399 Speaker 1: and I think you know, as much as we would 403 00:23:47,400 --> 00:23:49,439 Speaker 1: like everything converted on a you know the flip of 404 00:23:49,440 --> 00:23:52,399 Speaker 1: a switch and know the announcements to speak, it's not 405 00:23:52,440 --> 00:23:54,680 Speaker 1: going to happen. There's structural changes moving from a live 406 00:23:54,800 --> 00:23:57,320 Speaker 1: or benchmark to to you know, any any type of 407 00:23:57,320 --> 00:24:00,399 Speaker 1: o b f R overnight being funding rate at this 408 00:24:00,440 --> 00:24:02,439 Speaker 1: point in time. So stay tuned and we could be 409 00:24:02,440 --> 00:24:05,080 Speaker 1: talking about it for a couple of years. Jeron Schneider, 410 00:24:05,200 --> 00:24:07,440 Speaker 1: thank you so much with Pimco on the short term space. 411 00:24:07,480 --> 00:24:22,840 Speaker 1: He's had a short term portfolio management at Pimco. In 412 00:24:23,040 --> 00:24:29,760 Speaker 1: five days, the Henley racaha begins on the Thames Um. 413 00:24:29,840 --> 00:24:33,600 Speaker 1: The only thing I'm not sure of is uh who 414 00:24:33,800 --> 00:24:36,439 Speaker 1: to root for? So we are going to turn to 415 00:24:36,760 --> 00:24:41,040 Speaker 1: our recognized expert on it. He attended both Queens College 416 00:24:41,200 --> 00:24:44,560 Speaker 1: at Cambridge and St Anthony's College at Oxford, so uh, 417 00:24:44,560 --> 00:24:50,040 Speaker 1: he has a very good background in Crewe. Muhammad l 418 00:24:50,119 --> 00:24:54,120 Speaker 1: Arion joins us now is a Bluebird Good columnist, Chief 419 00:24:54,160 --> 00:24:57,800 Speaker 1: Economic Advisor at Alliance. How do you choose sides when 420 00:24:57,800 --> 00:25:00,800 Speaker 1: you when you are sipping your pims at the regatta? 421 00:25:00,920 --> 00:25:03,800 Speaker 1: Mohammed but first got Offenoon, gentlemen, it's nice to have 422 00:25:03,880 --> 00:25:06,720 Speaker 1: you in London. Um, I don't go to the regattas, 423 00:25:06,760 --> 00:25:09,320 Speaker 1: but the truthing side is easy. Whenever it's came arid 424 00:25:09,400 --> 00:25:11,960 Speaker 1: resus Oxford, I always too as Cambridge. Is there a 425 00:25:12,040 --> 00:25:16,080 Speaker 1: reason for that? Yeah, I had a better time the economics. 426 00:25:16,119 --> 00:25:19,240 Speaker 1: There was much multiverse. They taught you four different schools 427 00:25:19,280 --> 00:25:23,600 Speaker 1: of thought, everything from Neoclassical to Marxist with Kines and Arrow. 428 00:25:23,600 --> 00:25:28,520 Speaker 1: Recardian opposite was much more traditional and less thought profiling. 429 00:25:29,000 --> 00:25:33,400 Speaker 1: That goes right to our theme of the day, Mohammed, 430 00:25:33,440 --> 00:25:37,919 Speaker 1: as we cannot speak about, uh the political economics of 431 00:25:37,960 --> 00:25:41,359 Speaker 1: this nation, and that is the idea of the orthodoxy 432 00:25:41,440 --> 00:25:44,120 Speaker 1: with which central banks are working right now, you mentioned 433 00:25:44,160 --> 00:25:47,520 Speaker 1: four schools. Are we making up a fifth school now 434 00:25:47,680 --> 00:25:50,520 Speaker 1: with Janet Yell and Mario dragging and the rest of 435 00:25:50,520 --> 00:25:54,280 Speaker 1: the team. You know, when you think of when central 436 00:25:54,280 --> 00:25:58,119 Speaker 1: banks are best, it's when they have a good vision 437 00:25:58,119 --> 00:26:01,560 Speaker 1: of the outlook, when it turns to be correct, and 438 00:26:01,600 --> 00:26:05,240 Speaker 1: when they have the tools to actually make good change. 439 00:26:05,680 --> 00:26:10,000 Speaker 1: And I think, as Janet Ellen's testimony this week illustrated 440 00:26:10,080 --> 00:26:13,920 Speaker 1: yet again, all three are lacking, not just for the Fed, 441 00:26:14,640 --> 00:26:16,760 Speaker 1: but also for other central banks, and I think that's 442 00:26:16,840 --> 00:26:22,720 Speaker 1: understandable given the fluidity we're seeing in economics, finance, and politics. 443 00:26:23,320 --> 00:26:29,399 Speaker 1: We had the the interesting column by Paul Krugman this 444 00:26:29,440 --> 00:26:34,960 Speaker 1: morning suggesting simpler is better better in modeling efforts to 445 00:26:35,480 --> 00:26:39,560 Speaker 1: understand the economy. But he he did suggest that at 446 00:26:39,600 --> 00:26:42,439 Speaker 1: the zero lower bound, it is much more difficult to 447 00:26:42,520 --> 00:26:46,120 Speaker 1: even use simple models. Oh absolutely, I mean there are 448 00:26:46,560 --> 00:26:50,760 Speaker 1: fundamental changes. You spoke earlier about the puzzle or the 449 00:26:50,800 --> 00:26:55,000 Speaker 1: mystery of productivity. There's also the mystery of labor participation. 450 00:26:55,160 --> 00:26:57,080 Speaker 1: There is also the mystery of how can you have 451 00:26:57,160 --> 00:26:59,919 Speaker 1: such a big gap between economic risk speaking or business 452 00:27:00,040 --> 00:27:04,960 Speaker 1: investment and financially speaking. So this is an unusually mysterious world, 453 00:27:05,320 --> 00:27:08,040 Speaker 1: and I think that's good. Reasons for that, um it 454 00:27:08,119 --> 00:27:10,960 Speaker 1: has to do with the fact that we are trying 455 00:27:11,600 --> 00:27:18,080 Speaker 1: to change growth models, having exhausted a model that overly 456 00:27:18,119 --> 00:27:21,280 Speaker 1: dependent on finance first private finance up the two thousand 457 00:27:21,320 --> 00:27:24,000 Speaker 1: and eight and sends two thousand and eight. The use 458 00:27:24,000 --> 00:27:28,159 Speaker 1: of central banks bound streets bring us into gain theory. 459 00:27:28,680 --> 00:27:34,200 Speaker 1: Professor Krugman today paying homage to John Hicks and nine 460 00:27:34,680 --> 00:27:38,919 Speaker 1: the ideas Mike mentioned of simpler systems. I guess simpler 461 00:27:39,040 --> 00:27:43,320 Speaker 1: leads to a more constructive game theory. In our complexities today, 462 00:27:43,440 --> 00:27:47,480 Speaker 1: in our mathematics today, have we lost our wiggle room? 463 00:27:47,760 --> 00:27:50,800 Speaker 1: Have we lost our ability to maneuver in our game? 464 00:27:51,520 --> 00:27:53,520 Speaker 1: So there's two games going on. I think there's the 465 00:27:53,600 --> 00:27:57,840 Speaker 1: game that economists slipped into because it looked very sophisticated 466 00:27:57,880 --> 00:28:01,399 Speaker 1: and rigorous, which is to will simplify in order to 467 00:28:01,520 --> 00:28:06,560 Speaker 1: capture human behavior through simple equations. And that has proven 468 00:28:06,600 --> 00:28:11,160 Speaker 1: to be the wrong approach. It was, and it's one 469 00:28:11,240 --> 00:28:17,120 Speaker 1: that lead to misfecasting and bad policy decisions. So we 470 00:28:17,119 --> 00:28:19,720 Speaker 1: we somehow assume the way a lot of behavior of 471 00:28:19,760 --> 00:28:23,639 Speaker 1: finance by trying to pursue mathematical rigor um. And I 472 00:28:23,680 --> 00:28:27,399 Speaker 1: think the profession is recognizing that, and it's trying to 473 00:28:27,440 --> 00:28:31,320 Speaker 1: bring back a bigger element of behavior of finance into it, 474 00:28:31,400 --> 00:28:33,119 Speaker 1: and and that's a good thing. But there's a bigger 475 00:28:33,200 --> 00:28:36,200 Speaker 1: game going on, which is at the global level there 476 00:28:36,280 --> 00:28:40,680 Speaker 1: is very little coordination, and you are playing what Mike Spends, 477 00:28:40,960 --> 00:28:45,200 Speaker 1: the Nobel Prize winner calls an uncoordinated, coordinated game. It's 478 00:28:45,240 --> 00:28:47,360 Speaker 1: supposed to be coordinated, but it's been being played an 479 00:28:47,480 --> 00:28:52,280 Speaker 1: uncoordinated fashion, and therefore you get strange outcomes. I mean, 480 00:28:52,320 --> 00:28:54,680 Speaker 1: this is important, folks, and I'm going to be blunt 481 00:28:54,720 --> 00:28:58,200 Speaker 1: a primer. Here is the only game in town, Central 482 00:28:58,240 --> 00:29:02,440 Speaker 1: Banks and instability, Muhammad Hilarian momm And I put your 483 00:29:02,440 --> 00:29:05,520 Speaker 1: book on my reading list on Amazon, and the reason 484 00:29:05,600 --> 00:29:08,800 Speaker 1: I do is your chapter on game theory. How does 485 00:29:08,880 --> 00:29:14,640 Speaker 1: Janet Yellen use laryan game theory? She's crying, They're all trying, 486 00:29:14,680 --> 00:29:18,000 Speaker 1: They're all trying to understand better, how, how how people 487 00:29:18,000 --> 00:29:21,080 Speaker 1: behave I found it interesting yesterday that when she she 488 00:29:21,200 --> 00:29:24,680 Speaker 1: was post quite hard on negative interest rates, and she 489 00:29:24,840 --> 00:29:28,720 Speaker 1: came back and said, we're not contemplating that. We're not 490 00:29:28,760 --> 00:29:31,160 Speaker 1: going to do that, and for good reasons. If she 491 00:29:31,200 --> 00:29:34,200 Speaker 1: looks at what's happening in Japan, people are not responding 492 00:29:34,240 --> 00:29:37,400 Speaker 1: to negative interest rates the way the textbook would have 493 00:29:37,440 --> 00:29:40,120 Speaker 1: said they would. You know, the textbooks very simple. The 494 00:29:40,160 --> 00:29:43,920 Speaker 1: lower you take interest rates, the more you encourage people 495 00:29:44,400 --> 00:29:47,600 Speaker 1: to spend an invest Today, what we're finding is the 496 00:29:47,600 --> 00:29:51,920 Speaker 1: opposite is happening. Why because because human behavior is such 497 00:29:52,040 --> 00:29:56,200 Speaker 1: that it starts wondering why our interest rates so absolutely 498 00:29:56,280 --> 00:30:01,360 Speaker 1: low or negative and they start this engaging from the system. 499 00:30:01,560 --> 00:30:04,520 Speaker 1: You see this in Japan where households are taking their 500 00:30:04,520 --> 00:30:06,760 Speaker 1: cash out of banks and they would rather keep it 501 00:30:06,840 --> 00:30:11,959 Speaker 1: at home. Um, that is counter to what central banks 502 00:30:12,080 --> 00:30:14,080 Speaker 1: had thought and what the Bank of Japan in particularly 503 00:30:14,120 --> 00:30:17,400 Speaker 1: was hoping for. Do you expect then, maybe the Bank 504 00:30:17,440 --> 00:30:21,040 Speaker 1: of Japan or the ECB to reverse course on that. No, 505 00:30:21,360 --> 00:30:23,640 Speaker 1: if anything, I expect him to do more, but not 506 00:30:23,760 --> 00:30:26,280 Speaker 1: to interest rates, but through the balance sheet. So we're 507 00:30:26,320 --> 00:30:29,840 Speaker 1: gonna have this very strange situation whereby the US will 508 00:30:29,960 --> 00:30:35,360 Speaker 1: slowly normalize, remember the loosest tightening in his history, whereas 509 00:30:35,640 --> 00:30:37,840 Speaker 1: the ECB and the Bank of Japan are going to 510 00:30:37,920 --> 00:30:42,120 Speaker 1: press even harder on the Quei accelerator. I don't think 511 00:30:42,120 --> 00:30:44,720 Speaker 1: they're going to venture deeper into negative territory and interest 512 00:30:44,800 --> 00:30:47,920 Speaker 1: rates because they're starting to see the adverse economic and 513 00:30:47,920 --> 00:30:51,320 Speaker 1: political consequences. But I suspect that will use that balance 514 00:30:51,360 --> 00:30:54,200 Speaker 1: sheets even more with this. Muhammad in his book is 515 00:30:54,240 --> 00:30:57,360 Speaker 1: as must be the only game in town. Dr Hilarian, 516 00:30:57,440 --> 00:30:59,240 Speaker 1: what's great? As you turned the page of your book 517 00:30:59,800 --> 00:31:03,680 Speaker 1: and there's an insight in a little l arian get 518 00:31:03,320 --> 00:31:08,400 Speaker 1: the knife out jab You have a beautiful few pages 519 00:31:08,600 --> 00:31:13,920 Speaker 1: on Rajan of Chicago and of the RBI in India. 520 00:31:14,240 --> 00:31:17,640 Speaker 1: He is exiting as head of their central bank and 521 00:31:17,680 --> 00:31:22,120 Speaker 1: he's on a panel and Hillarian mentions that Rajon is 522 00:31:22,160 --> 00:31:25,920 Speaker 1: criticized as a member of the b I S brigade. 523 00:31:26,360 --> 00:31:29,160 Speaker 1: What does the b I S brigade in his Muhammad 524 00:31:29,200 --> 00:31:33,000 Speaker 1: Hilarian a card carrying member so to be as brigade 525 00:31:33,080 --> 00:31:37,560 Speaker 1: in that discussion, who was referred to people like him? 526 00:31:37,680 --> 00:31:43,400 Speaker 1: Like me? Who were we that years of experimental policies 527 00:31:43,440 --> 00:31:47,840 Speaker 1: by central banks have led to major mac market distortions, 528 00:31:48,520 --> 00:31:54,680 Speaker 1: artificially elevated asset prices and will have unfortunate spillover effects 529 00:31:54,680 --> 00:31:58,800 Speaker 1: of other countries. And U Rojin, the outgoing governor of 530 00:31:58,840 --> 00:32:02,440 Speaker 1: the r BI, has been the leader of that brigade. 531 00:32:02,520 --> 00:32:07,600 Speaker 1: He's been the one bringing to international discussion this perspective 532 00:32:07,760 --> 00:32:12,600 Speaker 1: of you cannot ignore the actual and potential spillover effects 533 00:32:12,680 --> 00:32:14,560 Speaker 1: and so will shame that he's going to be leaving 534 00:32:15,280 --> 00:32:18,600 Speaker 1: um the Central Bank of India. Can we get out 535 00:32:18,640 --> 00:32:23,800 Speaker 1: of this distorted world without enormous pain? Is Janet Yelling 536 00:32:23,840 --> 00:32:26,320 Speaker 1: and company and the other central bankers around the world, 537 00:32:26,320 --> 00:32:28,440 Speaker 1: are they gonna be able to pull it off? In theory, 538 00:32:28,600 --> 00:32:31,920 Speaker 1: you can, and what you need for that is sustained 539 00:32:32,080 --> 00:32:36,280 Speaker 1: the high inclusive growth in practice, I think is going 540 00:32:36,320 --> 00:32:41,000 Speaker 1: to prove very difficult. And the problem Mike and Thomas, 541 00:32:41,000 --> 00:32:43,640 Speaker 1: you know, is not really the engineering. I think most 542 00:32:43,680 --> 00:32:47,560 Speaker 1: economists agree on what you need. The problem is one 543 00:32:47,600 --> 00:32:50,480 Speaker 1: of politics. Um it's I mean, you can be hopeful 544 00:32:50,520 --> 00:32:52,600 Speaker 1: if if you look at what's coming up in terms 545 00:32:52,760 --> 00:32:57,600 Speaker 1: of the US presidential elections. Um. Certainly Hillary Clinton's platform 546 00:32:57,680 --> 00:33:00,640 Speaker 1: speaks to issues that you need to do infrastrate to spending, 547 00:33:00,720 --> 00:33:05,760 Speaker 1: tax reform, um invested in education. And if you look 548 00:33:05,800 --> 00:33:10,280 Speaker 1: into Europe, one hopes for some sort of wake up 549 00:33:10,320 --> 00:33:15,320 Speaker 1: call in terms of completing the region architecture and moving 550 00:33:15,400 --> 00:33:19,400 Speaker 1: forward on growth enhancing policies. Well, you mentioned Hillary Clinton 551 00:33:19,440 --> 00:33:23,760 Speaker 1: looking for infrastructure growth. The president President Obama telling John 552 00:33:23,800 --> 00:33:26,360 Speaker 1: Michael Thwaite in Company and the Business Week interview out 553 00:33:26,400 --> 00:33:30,080 Speaker 1: today that that's his greatest economic frustration is he hasn't 554 00:33:30,120 --> 00:33:34,880 Speaker 1: been able to do more infrastructure growth. The next maybe 555 00:33:35,000 --> 00:33:38,600 Speaker 1: lasting in the central bank toolbox is helicopter money, which 556 00:33:39,000 --> 00:33:41,400 Speaker 1: it doesn't have to be just money given to taxpayers. 557 00:33:41,560 --> 00:33:45,920 Speaker 1: It's basically refers to financing debt through the central bank. 558 00:33:47,280 --> 00:33:50,959 Speaker 1: Do you think that could be sold as a way 559 00:33:51,080 --> 00:33:54,800 Speaker 1: to deal with the politics you get the spending, but 560 00:33:54,920 --> 00:33:58,560 Speaker 1: you don't increase the deficits on both sides are happy. Mind, 561 00:33:58,600 --> 00:34:01,280 Speaker 1: that's going to be a really hot TEP and it's 562 00:34:01,320 --> 00:34:03,880 Speaker 1: a very whisky one for central banks because it opens 563 00:34:03,880 --> 00:34:07,560 Speaker 1: them up to political interference. I mean, central banks already 564 00:34:07,880 --> 00:34:11,239 Speaker 1: are getting very close to the line that separates them 565 00:34:11,239 --> 00:34:14,759 Speaker 1: from being a monetary institution from and from being a 566 00:34:14,800 --> 00:34:18,080 Speaker 1: fiscal institution. They are very close to that line. If 567 00:34:18,080 --> 00:34:24,759 Speaker 1: they cross that line explicitly, then we whisk their political autonomy. 568 00:34:24,800 --> 00:34:28,360 Speaker 1: And if their political autonomy is under mine, their effectiveness 569 00:34:28,800 --> 00:34:31,439 Speaker 1: is on the mind. So I think of that not 570 00:34:31,800 --> 00:34:35,759 Speaker 1: as a second best, because it's clearly not the first best. 571 00:34:35,760 --> 00:34:39,120 Speaker 1: The first better is let's do it directly. Um I don't. 572 00:34:39,160 --> 00:34:40,680 Speaker 1: I don't view to the second best. I view it 573 00:34:40,680 --> 00:34:43,600 Speaker 1: as a fifth or sixth best, and let's let's try 574 00:34:43,680 --> 00:34:46,319 Speaker 1: to pursue the first best. It is absurd, and I 575 00:34:46,360 --> 00:34:52,719 Speaker 1: repeat absurd, that we're not pursuing high productivity enhancing infrastructure 576 00:34:52,760 --> 00:34:57,360 Speaker 1: investment with interest rate solo. Within this is the idea 577 00:34:57,440 --> 00:35:01,200 Speaker 1: of transparency. It's a word. I remember, uh Mohammed you 578 00:35:01,320 --> 00:35:04,719 Speaker 1: talking about transparency. I think it was an event i'll 579 00:35:04,760 --> 00:35:07,600 Speaker 1: say ten years ago and I m F, I can't remember. 580 00:35:07,600 --> 00:35:11,880 Speaker 1: It was so long ago. What's our next step in 581 00:35:12,040 --> 00:35:16,399 Speaker 1: banking transparency? I mean more press conferences. That doesn't get 582 00:35:16,400 --> 00:35:19,120 Speaker 1: it done, doesn't UM, that doesn't get it done. And 583 00:35:19,440 --> 00:35:22,120 Speaker 1: I think we have to seriously consider whether you can 584 00:35:22,239 --> 00:35:25,919 Speaker 1: be overly transparent at some point, or put in another way, 585 00:35:26,000 --> 00:35:30,920 Speaker 1: overly data dependent. UM. It is striking how expectations of 586 00:35:30,960 --> 00:35:36,520 Speaker 1: a June hike fluctuated so widely in May April Major. 587 00:35:36,719 --> 00:35:40,000 Speaker 1: You would expect that as we get closer to the 588 00:35:40,040 --> 00:35:43,960 Speaker 1: actual f MC meeting, you would have a convergence. Instead, 589 00:35:44,360 --> 00:35:47,440 Speaker 1: in those three months we saw them. We saw three 590 00:35:47,480 --> 00:35:51,279 Speaker 1: wound trips between expectations of over thirty for a weight 591 00:35:51,360 --> 00:35:54,640 Speaker 1: hike to under five. And that tells you that there's 592 00:35:54,680 --> 00:35:57,960 Speaker 1: something wrong with communication. It also tells you that we 593 00:35:58,120 --> 00:36:01,239 Speaker 1: overly dated dependent, being with sole by every short term 594 00:36:01,320 --> 00:36:04,840 Speaker 1: data reading. Mike, I want to set this up because Mom, 595 00:36:04,840 --> 00:36:07,480 Speaker 1: and I'm sure you're very aware this providing the excellence. 596 00:36:07,520 --> 00:36:10,560 Speaker 1: A few days ago and the important paper of James 597 00:36:10,600 --> 00:36:13,560 Speaker 1: Bullard of St. Louis was one Michael McKee. Mike, you 598 00:36:13,600 --> 00:36:18,239 Speaker 1: had the best coverage of that important paper. Frame the 599 00:36:18,280 --> 00:36:20,879 Speaker 1: paper and then go to Dr Larry and with your 600 00:36:20,920 --> 00:36:25,759 Speaker 1: important question on Bullard and regimes. Well, basically, Jim Bullard says, 601 00:36:25,840 --> 00:36:29,160 Speaker 1: the standard way of forecasting what's going to happen to 602 00:36:29,200 --> 00:36:32,120 Speaker 1: the economy and therefore draw the inference for interest rates 603 00:36:32,200 --> 00:36:36,759 Speaker 1: is a converging model where you add up what you 604 00:36:36,840 --> 00:36:41,480 Speaker 1: expect to happen in various areas of the economy, and 605 00:36:41,520 --> 00:36:44,120 Speaker 1: then you make the you guess the the interest rate 606 00:36:44,200 --> 00:36:47,560 Speaker 1: you would use at that convergence point. But he says 607 00:36:48,040 --> 00:36:51,960 Speaker 1: we're now in a different kind of economy, a regime 608 00:36:52,160 --> 00:36:55,319 Speaker 1: economy where nothing is likely to change, and therefore you 609 00:36:55,360 --> 00:36:58,640 Speaker 1: cannot forecast what future interest rates will be. And I 610 00:36:58,680 --> 00:37:02,040 Speaker 1: guess what Tom would like to Dr Elian is your 611 00:37:02,120 --> 00:37:06,200 Speaker 1: view of Dr Bullard's thesis. I thought the most important 612 00:37:06,239 --> 00:37:10,560 Speaker 1: element of President Bullard's April, which is a really important one. 613 00:37:10,560 --> 00:37:13,000 Speaker 1: I encourage people to read it. Luck you have, Mike 614 00:37:13,040 --> 00:37:16,520 Speaker 1: and Tom, is that he took a major step from 615 00:37:16,520 --> 00:37:20,320 Speaker 1: a cyclical world to a structural world. Um, a really 616 00:37:20,360 --> 00:37:22,520 Speaker 1: major step. I mean, central banks have been moving slowly 617 00:37:22,560 --> 00:37:25,880 Speaker 1: through that world. President Bullet took a major step. What 618 00:37:26,040 --> 00:37:29,239 Speaker 1: I have difficulty with whether it is the view that 619 00:37:29,320 --> 00:37:32,000 Speaker 1: nothing is changing or the view that seclist TechNation can 620 00:37:32,040 --> 00:37:34,200 Speaker 1: continue for the next five to seven years. Is that 621 00:37:34,239 --> 00:37:37,200 Speaker 1: we're seeing an erosion of the two critical elements that 622 00:37:37,239 --> 00:37:41,160 Speaker 1: have underpinned the last few years. One is that growth, 623 00:37:41,280 --> 00:37:45,360 Speaker 1: while low, is at least stable, and second that central 624 00:37:45,360 --> 00:37:49,840 Speaker 1: bank can effectively repress financial volatility. And those two elements 625 00:37:49,920 --> 00:37:53,799 Speaker 1: have been key to what we've seen in terms of 626 00:37:54,400 --> 00:37:57,600 Speaker 1: economic outcomes and financial outcomes. I think both of these 627 00:37:57,640 --> 00:38:00,600 Speaker 1: factors are now in play. So I like to and 628 00:38:00,640 --> 00:38:02,360 Speaker 1: you've heard me say this, I'd like to describe it 629 00:38:02,400 --> 00:38:04,759 Speaker 1: more as a t junction. The world we're on is 630 00:38:04,800 --> 00:38:08,759 Speaker 1: coming to a gradual end, but what comes thereafter is 631 00:38:08,840 --> 00:38:12,680 Speaker 1: very uncertain. There's nothing prety destined yet about what comes thereafter. 632 00:38:12,719 --> 00:38:15,080 Speaker 1: It depends on choices that will be made over the 633 00:38:15,080 --> 00:38:18,080 Speaker 1: next few quarters. Precisely, I was hoping you would go here. 634 00:38:18,160 --> 00:38:23,000 Speaker 1: But the Bullard prescription is to set up more choice 635 00:38:23,000 --> 00:38:27,960 Speaker 1: sets along the time continuum that lead to more TEA decisions. 636 00:38:28,040 --> 00:38:30,920 Speaker 1: And I would suggest, Cherry Yelling would say, a greater 637 00:38:31,040 --> 00:38:35,400 Speaker 1: prospect of making the wrong decision if you go regime 638 00:38:35,480 --> 00:38:38,919 Speaker 1: to regime to regime. Is that a risk that there's 639 00:38:38,960 --> 00:38:42,560 Speaker 1: too many te decisions? It is a risk, and it's 640 00:38:42,640 --> 00:38:46,400 Speaker 1: particularly with who when you only have one set of 641 00:38:46,600 --> 00:38:50,520 Speaker 1: tools in play. UM, And that's the irony is that 642 00:38:50,560 --> 00:38:53,520 Speaker 1: we have been trying to pursue too many objectives with 643 00:38:53,760 --> 00:38:56,680 Speaker 1: too few tools, and therefore we've gotten a whole series 644 00:38:56,680 --> 00:39:01,319 Speaker 1: of problem Imagine that we were having conversation two years ago, 645 00:39:01,680 --> 00:39:05,560 Speaker 1: and I would have predicted negative normal interest rates, overt 646 00:39:06,160 --> 00:39:11,200 Speaker 1: of global government debt creating at negative yields, China a 647 00:39:11,280 --> 00:39:14,680 Speaker 1: well managed economy, starting to pick policy mistakes, let alone 648 00:39:14,760 --> 00:39:17,359 Speaker 1: all the politics we've seen. UM. I think we've got 649 00:39:17,400 --> 00:39:20,560 Speaker 1: to recognize that if you pursue too many objectives with 650 00:39:20,600 --> 00:39:23,480 Speaker 1: too few tools, you get a whole series of unthinkable 651 00:39:23,520 --> 00:39:26,840 Speaker 1: than improbable. The way to continue this discussion, folks, is 652 00:39:26,880 --> 00:39:29,719 Speaker 1: to get Muhammad Hilarian back on. We will do that 653 00:39:29,800 --> 00:39:33,160 Speaker 1: as a schedule allows. The other way is to read 654 00:39:33,160 --> 00:39:35,759 Speaker 1: his book, The Only Game in Town, Central Banks, Instability 655 00:39:35,760 --> 00:39:38,880 Speaker 1: and Avoiding the Next Collapse. Muhammed Hilarian, It's on my 656 00:39:39,000 --> 00:39:43,120 Speaker 1: read this list and you should read it. Thanks for 657 00:39:43,200 --> 00:39:47,560 Speaker 1: listening to the Bloomberg Surveillance podcast. Subscribe and listen to 658 00:39:47,719 --> 00:39:52,880 Speaker 1: interviews on iTunes, SoundCloud, or whichever podcast platform you prefer. 659 00:39:53,480 --> 00:39:56,920 Speaker 1: I'm on Twitter at Tom Keane Michael McKee is at 660 00:39:57,040 --> 00:40:01,319 Speaker 1: Economy Before the podcast You Can Always Care Chess worldwide. 661 00:40:01,640 --> 00:40:09,719 Speaker 1: I'm Bloomberg Radio h