1 00:00:05,240 --> 00:00:08,119 Speaker 1: Hello, and welcome back to Stephanomics, the podcast that brings 2 00:00:08,160 --> 00:00:10,959 Speaker 1: you the global economy, and this week also brings you 3 00:00:11,000 --> 00:00:14,280 Speaker 1: the Bloomberg New Economy Forum. It was the final day 4 00:00:14,280 --> 00:00:16,040 Speaker 1: of the Forum today and I wanted to play you 5 00:00:16,120 --> 00:00:18,920 Speaker 1: most of a panel that I moderated about the end 6 00:00:18,960 --> 00:00:23,360 Speaker 1: of easy money policy making for an inflationary era. We 7 00:00:23,400 --> 00:00:26,560 Speaker 1: had a pretty high class set of speakers. Axel Weber, 8 00:00:26,880 --> 00:00:29,320 Speaker 1: the former head of the bundas Back now a senior 9 00:00:29,360 --> 00:00:34,040 Speaker 1: adviser to UBS, the investor Davode Sarah, chief executive officer 10 00:00:34,040 --> 00:00:38,680 Speaker 1: and founder of Algebra's Investments, and Geter Gopinath, formerly the 11 00:00:38,760 --> 00:00:42,519 Speaker 1: chief economist of the i m F, now it's first 12 00:00:42,760 --> 00:00:46,960 Speaker 1: deputy Managing Director. Of course we're talking about inflation. We 13 00:00:47,000 --> 00:00:49,440 Speaker 1: could have spent a lot of time talking again about 14 00:00:49,440 --> 00:00:51,559 Speaker 1: why central banks have got things so wrong, but I 15 00:00:51,600 --> 00:00:55,360 Speaker 1: was pretty keen to look ahead. What's the consequences of 16 00:00:55,440 --> 00:00:58,720 Speaker 1: this inflation that we're seeing and does it mean we 17 00:00:58,760 --> 00:01:01,880 Speaker 1: have to rethink some of the macro policy tool kit 18 00:01:02,160 --> 00:01:05,920 Speaker 1: that we developed for a rather different time. I started, though, 19 00:01:06,240 --> 00:01:10,520 Speaker 1: by asking Peter Governa, with her perspective at the International 20 00:01:10,520 --> 00:01:16,440 Speaker 1: Monetary Fund, whether collectively policymakers had done enough to confront inflation. 21 00:01:18,000 --> 00:01:20,679 Speaker 1: I mean, stephaniely, without a doubt, one of the biggest 22 00:01:20,720 --> 00:01:26,200 Speaker 1: challenges economies around the world are facing is inflation uh 23 00:01:26,319 --> 00:01:31,080 Speaker 1: and to bring inflation down at the time when growth 24 00:01:31,160 --> 00:01:34,280 Speaker 1: is also slowing for other reasons because of other forms 25 00:01:34,360 --> 00:01:41,560 Speaker 1: of supply sharks. I think what central banks around the 26 00:01:41,560 --> 00:01:47,160 Speaker 1: world have clearly recognized is that they need to move 27 00:01:47,200 --> 00:01:52,640 Speaker 1: in the determined fashion to durably bring inflation down. If 28 00:01:52,680 --> 00:01:55,880 Speaker 1: you see the total amount of rate increases that we've 29 00:01:55,880 --> 00:01:59,840 Speaker 1: seen in the US this past year, this is their 30 00:02:00,000 --> 00:02:03,320 Speaker 1: few parallels in terms of the last several decades to 31 00:02:03,360 --> 00:02:05,680 Speaker 1: see this much of an increase in such a short 32 00:02:05,720 --> 00:02:09,720 Speaker 1: period of time, But I was needed to address the 33 00:02:09,800 --> 00:02:13,079 Speaker 1: kind of inflation that we haven't seen in over four decades. 34 00:02:13,800 --> 00:02:16,280 Speaker 1: The US FED is at the point where they've raised 35 00:02:16,280 --> 00:02:23,560 Speaker 1: interest rates around basis points. They are very likely to 36 00:02:23,600 --> 00:02:26,160 Speaker 1: raise interest rates another round before the end of this year, 37 00:02:27,520 --> 00:02:30,120 Speaker 1: and then the question is what comes next, And I 38 00:02:30,120 --> 00:02:34,960 Speaker 1: think the question is more about how long are you 39 00:02:35,000 --> 00:02:38,240 Speaker 1: going to keep these rates at the at the levels 40 00:02:38,480 --> 00:02:42,600 Speaker 1: that they've moved them too, and we see a need 41 00:02:42,800 --> 00:02:47,040 Speaker 1: to keep it at over four percent for all of 42 00:02:47,120 --> 00:02:51,200 Speaker 1: twenty twenty three to be able to bring inflation down durably, 43 00:02:51,680 --> 00:02:53,680 Speaker 1: and like you said, it's very important to do that 44 00:02:53,800 --> 00:02:58,120 Speaker 1: because it's extremely regressive high levels of inflation. Now, there 45 00:02:58,120 --> 00:03:01,120 Speaker 1: are countries at other different points in their cycle, but 46 00:03:01,200 --> 00:03:03,840 Speaker 1: I focused on the US because in terms of spiller 47 00:03:03,960 --> 00:03:06,359 Speaker 1: was to the rest of the world, US policies had 48 00:03:06,360 --> 00:03:09,720 Speaker 1: the biggest effect. Actually, you're the former central banker on 49 00:03:09,880 --> 00:03:12,160 Speaker 1: this panel, and we should record that you were on 50 00:03:12,200 --> 00:03:16,720 Speaker 1: the record early in morning about inflation at the end 51 00:03:16,720 --> 00:03:20,920 Speaker 1: of But you have now had at least ninety central 52 00:03:20,919 --> 00:03:24,280 Speaker 1: banks raised interest rates this year, at least half of 53 00:03:24,320 --> 00:03:27,360 Speaker 1: them basis points in a single go, which most of 54 00:03:27,360 --> 00:03:29,680 Speaker 1: them have not done before. Are we now at a 55 00:03:29,720 --> 00:03:32,560 Speaker 1: point where central banks can have a more leisurely We're 56 00:03:32,560 --> 00:03:36,720 Speaker 1: not talking pivots, but a more leisurely pace. No. I think, 57 00:03:37,280 --> 00:03:41,360 Speaker 1: as Gito was indicating as a central banker, seventy five 58 00:03:41,440 --> 00:03:45,520 Speaker 1: basis point moves are usually conducted over the last couple 59 00:03:45,560 --> 00:03:49,320 Speaker 1: of decades. Only on the way down. When you are 60 00:03:49,440 --> 00:03:52,240 Speaker 1: ever been hit by a shock and you were behind 61 00:03:52,240 --> 00:03:55,320 Speaker 1: the curved by construction because something unexpected in the economy, 62 00:03:55,360 --> 00:03:58,520 Speaker 1: like in the financial crisis, on the way up. I 63 00:03:58,520 --> 00:04:00,520 Speaker 1: think it's a mirror image and and we don't want 64 00:04:00,520 --> 00:04:01,960 Speaker 1: to talk about the past, but it's a bit of 65 00:04:02,000 --> 00:04:04,920 Speaker 1: a mirror image of being laid in my view, by 66 00:04:05,000 --> 00:04:09,320 Speaker 1: design from the inflation targeting regime that was adopted and 67 00:04:09,360 --> 00:04:12,920 Speaker 1: therefore having to do faster steps because inflation didn't just 68 00:04:13,120 --> 00:04:16,320 Speaker 1: rise from below two percent to just above two percent 69 00:04:16,640 --> 00:04:18,880 Speaker 1: or three percent or four percent, when all the way 70 00:04:18,920 --> 00:04:21,359 Speaker 1: up to double digit and that's where I think a 71 00:04:21,400 --> 00:04:24,359 Speaker 1: lot of action was needed. If if central banks have 72 00:04:24,520 --> 00:04:28,080 Speaker 1: a dual mandate, which many of them have explicitly or implicitly, 73 00:04:28,520 --> 00:04:32,480 Speaker 1: the most violated objective in the central bank objective function 74 00:04:32,560 --> 00:04:36,239 Speaker 1: at the moment is inflation. It's way out of line 75 00:04:36,240 --> 00:04:39,280 Speaker 1: with the target, whilst the employment and the economy has 76 00:04:39,320 --> 00:04:42,719 Speaker 1: been holding up relatively well so far. And there is 77 00:04:42,760 --> 00:04:45,400 Speaker 1: a new shock with the war in Ukraine that has 78 00:04:45,440 --> 00:04:49,800 Speaker 1: added another negative supply shock to an already strained environment 79 00:04:50,520 --> 00:04:52,760 Speaker 1: that that central banks were facing. So I don't think 80 00:04:52,760 --> 00:04:55,640 Speaker 1: they're done. I think they've got some more work to do. 81 00:04:56,279 --> 00:04:59,640 Speaker 1: I think the belief in markets that central banks will 82 00:04:59,640 --> 00:05:03,040 Speaker 1: go and then come back in next year is in 83 00:05:03,080 --> 00:05:07,320 Speaker 1: my view, uh, both premature and not ideal. From a 84 00:05:07,360 --> 00:05:09,960 Speaker 1: central bank point of view, and with GETA, they probably 85 00:05:10,000 --> 00:05:13,359 Speaker 1: have to keep rates at which they go over the 86 00:05:13,400 --> 00:05:16,160 Speaker 1: spring next year at that level for the remainder of 87 00:05:16,200 --> 00:05:18,920 Speaker 1: the year and into twenty four to bring inflation down 88 00:05:19,200 --> 00:05:21,960 Speaker 1: towards they're objective, and it will take them two years 89 00:05:22,000 --> 00:05:25,360 Speaker 1: to really be in the vicinity again of their objective 90 00:05:26,080 --> 00:05:29,560 Speaker 1: bearing further shocks. But bearing further shocks is a very 91 00:05:29,640 --> 00:05:32,560 Speaker 1: brave assumption, and a lot of the things that are 92 00:05:32,560 --> 00:05:36,800 Speaker 1: in the pipeline, the transition to a greener economy, all 93 00:05:36,839 --> 00:05:40,720 Speaker 1: of this will have inflationary impacts on energy prices and 94 00:05:40,720 --> 00:05:42,680 Speaker 1: in other parts of life. So I think there is 95 00:05:42,720 --> 00:05:46,080 Speaker 1: a likely scenario where you will see repeated shocks that 96 00:05:46,080 --> 00:05:51,000 Speaker 1: will keep inflation eye and more persistently high, despite central 97 00:05:51,000 --> 00:05:54,920 Speaker 1: banks having adjusted monetary policy and having raised rates substantially 98 00:05:55,160 --> 00:05:57,960 Speaker 1: at least for the next year or two. And as 99 00:05:57,960 --> 00:05:59,760 Speaker 1: we know it's been discussed this week, it's not just 100 00:05:59,800 --> 00:06:02,320 Speaker 1: the moved to net zero, it's climate change itself also 101 00:06:02,400 --> 00:06:05,200 Speaker 1: produces more volatile inflation. I think we're pretty clear on 102 00:06:05,240 --> 00:06:08,520 Speaker 1: that Tai day from the investors standpoint, where where do 103 00:06:08,600 --> 00:06:13,400 Speaker 1: you think we are on this road? I think investors 104 00:06:13,440 --> 00:06:15,960 Speaker 1: right now have this view, at least what's priced in 105 00:06:16,000 --> 00:06:18,240 Speaker 1: the future, the rates are going to go lower. But 106 00:06:18,400 --> 00:06:20,960 Speaker 1: here the beauty of Bank of England that has calculated 107 00:06:21,080 --> 00:06:25,560 Speaker 1: numbers for the last five century is never in developed 108 00:06:25,680 --> 00:06:30,920 Speaker 1: markets when core inflation passes five for more than twelve months, 109 00:06:30,960 --> 00:06:33,640 Speaker 1: they're being able to bring the core inflation number below 110 00:06:33,680 --> 00:06:37,000 Speaker 1: too in less than ten years. Only once in history 111 00:06:37,000 --> 00:06:40,000 Speaker 1: in the last century in less than five years. So 112 00:06:40,160 --> 00:06:43,440 Speaker 1: if history is of any help, I think rates are 113 00:06:43,440 --> 00:06:45,680 Speaker 1: going to stay higher for longer, and there are free 114 00:06:45,680 --> 00:06:49,480 Speaker 1: reason for it. The inflation shock comes from free main area. 115 00:06:49,800 --> 00:06:53,640 Speaker 1: The first one is green transition. The second is the 116 00:06:53,800 --> 00:06:57,400 Speaker 1: decaupling of the supply chain globally for geob political reason. 117 00:06:57,720 --> 00:07:02,600 Speaker 1: And further, remember green transition require materials which are no 118 00:07:02,720 --> 00:07:05,800 Speaker 1: longer in an abundant space. You know, think about copper. 119 00:07:05,839 --> 00:07:08,200 Speaker 1: We'll be looking for copper for two thousand years. We 120 00:07:08,240 --> 00:07:10,800 Speaker 1: need to find more copper in the next twenty years 121 00:07:10,840 --> 00:07:12,920 Speaker 1: that we've been found in the last two thousand years. 122 00:07:13,400 --> 00:07:16,920 Speaker 1: And when you add then the add there's consequences of 123 00:07:16,960 --> 00:07:20,920 Speaker 1: getting in transition and climate change on food, you add minerals, 124 00:07:21,520 --> 00:07:24,040 Speaker 1: and then you add the war, you're creating an effect 125 00:07:24,120 --> 00:07:26,560 Speaker 1: that's why I think inflation is going to be strategy. 126 00:07:26,600 --> 00:07:31,240 Speaker 1: It's slightly higher. Then if you think that we had 127 00:07:31,280 --> 00:07:34,720 Speaker 1: in developed market US and Europe, now people have better 128 00:07:34,760 --> 00:07:36,840 Speaker 1: balance sheet. You see it in the US, so a 129 00:07:36,920 --> 00:07:40,240 Speaker 1: recession is likely to be less, you know, shallow. We're 130 00:07:40,240 --> 00:07:41,960 Speaker 1: not going to be a harder recession. And as a 131 00:07:42,040 --> 00:07:44,240 Speaker 1: result of thin, central bank can keep rates higher. So 132 00:07:44,280 --> 00:07:46,600 Speaker 1: I think if the market is wrong, rates ain't going 133 00:07:46,680 --> 00:07:48,720 Speaker 1: to go down as stats as people think, in the 134 00:07:48,760 --> 00:07:50,920 Speaker 1: sense it is running together both things, as the current 135 00:07:50,960 --> 00:07:53,320 Speaker 1: inflation shop where people are dealing with, and then these 136 00:07:53,360 --> 00:07:56,640 Speaker 1: longer term trends, and people have thought that maybe this 137 00:07:56,680 --> 00:07:58,800 Speaker 1: was a sneak preview to those, But he's kind of saying, 138 00:07:59,080 --> 00:08:02,280 Speaker 1: we're already there, guitar, Do you buy into that that 139 00:08:02,360 --> 00:08:08,600 Speaker 1: we we're already in this structurally higher inflation world. Not fully. 140 00:08:09,680 --> 00:08:12,080 Speaker 1: I would say the following, which is what is true, 141 00:08:12,520 --> 00:08:17,760 Speaker 1: is we are likely entering a period where supply sharks 142 00:08:17,840 --> 00:08:20,840 Speaker 1: will play a bigger role then they did in the 143 00:08:20,880 --> 00:08:24,280 Speaker 1: last two decades. And supply sharks include sharks that come 144 00:08:24,400 --> 00:08:27,840 Speaker 1: from a climate. But also I think risks in terms 145 00:08:27,880 --> 00:08:31,080 Speaker 1: of economic fragmentation around the world. What could happen to 146 00:08:31,080 --> 00:08:35,800 Speaker 1: global trade. I think those risks could play an important role. 147 00:08:35,920 --> 00:08:41,840 Speaker 1: So we probably are entering an error where for central 148 00:08:41,880 --> 00:08:44,440 Speaker 1: banks they really have a trade off to deal with. 149 00:08:44,800 --> 00:08:46,720 Speaker 1: They didn't have a trade off. I mean it was 150 00:08:46,760 --> 00:08:49,400 Speaker 1: for the last couple of decades they could keep reducing 151 00:08:49,440 --> 00:08:52,800 Speaker 1: the unemployment rate and not see any inflation. They didn't 152 00:08:52,800 --> 00:08:54,719 Speaker 1: really have a trade off to deal with. But now 153 00:08:54,760 --> 00:08:58,160 Speaker 1: they actually are likely to have a most serious trade 154 00:08:58,160 --> 00:09:00,600 Speaker 1: off to deal with. But the question of the inflation 155 00:09:00,640 --> 00:09:04,920 Speaker 1: that we've seen now, I wouldn't not start with the 156 00:09:04,920 --> 00:09:08,199 Speaker 1: green transition of climates as being the leading factor for it. 157 00:09:08,880 --> 00:09:11,120 Speaker 1: I think what we had was a very unique period 158 00:09:11,360 --> 00:09:15,720 Speaker 1: of the pandemic now the war and we've seen very 159 00:09:15,760 --> 00:09:19,200 Speaker 1: extraordinary recoveries that have come along with very large amounts 160 00:09:19,240 --> 00:09:22,480 Speaker 1: of support that was provided during the worst time of 161 00:09:22,520 --> 00:09:25,760 Speaker 1: the pandemic in terms of both money, ships policy support, 162 00:09:25,920 --> 00:09:28,920 Speaker 1: and also especially fiscal policy support, so people with high 163 00:09:29,000 --> 00:09:31,640 Speaker 1: levels of savings, and now you've seen that money being 164 00:09:31,679 --> 00:09:35,679 Speaker 1: spent alongside you do have a supply side problem to 165 00:09:35,840 --> 00:09:39,000 Speaker 1: which is that in markets like the US and the UK, 166 00:09:39,960 --> 00:09:43,319 Speaker 1: labor supply hasn't come back to what it was pre pandemic. 167 00:09:43,760 --> 00:09:46,679 Speaker 1: You still have the pandemic hitting other parts of the world. 168 00:09:46,679 --> 00:09:50,520 Speaker 1: In China, we in cases going up that's affecting supply chains. 169 00:09:50,559 --> 00:09:53,520 Speaker 1: So I think those are the main factors. I still 170 00:09:53,559 --> 00:09:56,520 Speaker 1: do believe monetary policy works in the traditional way of 171 00:09:56,600 --> 00:09:59,760 Speaker 1: reducing demand by raising interest rates, and we are seeing 172 00:09:59,760 --> 00:10:03,680 Speaker 1: that happen in in the U S and other countries. 173 00:10:04,120 --> 00:10:07,439 Speaker 1: It's going to take some time. I don't think it's 174 00:10:07,440 --> 00:10:12,160 Speaker 1: going to take many, many decades like that. And they said, 175 00:10:12,720 --> 00:10:16,079 Speaker 1: but again, um, so I would make that distinction. I mean, 176 00:10:16,160 --> 00:10:18,400 Speaker 1: but what we're trying to solve now and what the 177 00:10:18,520 --> 00:10:21,680 Speaker 1: risks are there on the horizon? Accellent. We're focusing on 178 00:10:21,760 --> 00:10:25,960 Speaker 1: policy making. Um clearly we've seen I mean the UK 179 00:10:26,800 --> 00:10:28,600 Speaker 1: had some of its own problems, but it also there 180 00:10:28,679 --> 00:10:32,280 Speaker 1: was a structural issue which many countries face of balancing 181 00:10:32,320 --> 00:10:35,920 Speaker 1: now in this more challenging world, the fiscal and the monetary. 182 00:10:36,080 --> 00:10:40,360 Speaker 1: Do you think we have the right sense of what 183 00:10:40,440 --> 00:10:43,960 Speaker 1: that how fiscal and monetary needs to work together or 184 00:10:44,000 --> 00:10:48,720 Speaker 1: not work together in this environment. Yes, So two things, 185 00:10:49,040 --> 00:10:52,320 Speaker 1: and I need alluded to it. One thing you have 186 00:10:52,400 --> 00:10:57,240 Speaker 1: to see is that what happened after COVID, namely a 187 00:10:57,360 --> 00:11:02,000 Speaker 1: massive expansion of balance sheets of government and finance, largely 188 00:11:02,120 --> 00:11:08,000 Speaker 1: by emissions and purchases of sovereign debt into the balance 189 00:11:08,000 --> 00:11:11,520 Speaker 1: sheet of a central bank. Was a coordinated extension of 190 00:11:11,640 --> 00:11:14,520 Speaker 1: balance sheets on the sides of the central bank, roughly 191 00:11:14,559 --> 00:11:18,840 Speaker 1: to the tune of of global GDP and of governments, 192 00:11:19,000 --> 00:11:22,080 Speaker 1: and a lot of that, unlike in the financial crisis, 193 00:11:22,640 --> 00:11:25,560 Speaker 1: was going to private households in forms of paychecks and 194 00:11:25,600 --> 00:11:29,360 Speaker 1: really increased demands. So there was quite a demand stimulus 195 00:11:29,360 --> 00:11:33,120 Speaker 1: that we saw necessarily so in but he was kept 196 00:11:33,160 --> 00:11:36,480 Speaker 1: in place, at least from the monetary side, way too long, 197 00:11:36,480 --> 00:11:38,600 Speaker 1: and I think that is part why we saw inflation. 198 00:11:39,040 --> 00:11:41,160 Speaker 1: The other side we haven't talked about is the balance 199 00:11:41,200 --> 00:11:44,480 Speaker 1: sheets really what will happen with them in the future. Now, 200 00:11:44,640 --> 00:11:47,360 Speaker 1: if you look at the S and P five, then 201 00:11:47,400 --> 00:11:50,480 Speaker 1: you look at the you know, added balance sheet of 202 00:11:50,480 --> 00:11:54,640 Speaker 1: the major three central banks Europe, Japan and the US, 203 00:11:55,160 --> 00:11:58,680 Speaker 1: you see a very high correlation between how financial markets 204 00:11:58,920 --> 00:12:02,560 Speaker 1: have been performing and the liquidity put into the system 205 00:12:02,640 --> 00:12:06,160 Speaker 1: by the central banks. Now, going forward, central banks don't 206 00:12:06,240 --> 00:12:10,240 Speaker 1: just raise rates, they're also reducing their balance sheet. And actually, 207 00:12:10,280 --> 00:12:13,319 Speaker 1: if you look at Europe, because some of the liquidity 208 00:12:13,440 --> 00:12:17,600 Speaker 1: was provided through long term financing, operations that have an 209 00:12:17,679 --> 00:12:20,319 Speaker 1: end date and not been prolonged. A lot of the 210 00:12:20,400 --> 00:12:23,880 Speaker 1: success liquidity will go relatively fast in the short period 211 00:12:24,360 --> 00:12:27,240 Speaker 1: of early next year, and then the reduction or balance 212 00:12:27,280 --> 00:12:30,119 Speaker 1: sheet will add to a down draft that will continue 213 00:12:30,160 --> 00:12:33,400 Speaker 1: to draw liquidity structurally out of the markets, and so 214 00:12:33,559 --> 00:12:38,400 Speaker 1: the price for liquidity and the price for investments will 215 00:12:38,679 --> 00:12:41,120 Speaker 1: in my view in the future be quite a bit higher. 216 00:12:41,200 --> 00:12:43,560 Speaker 1: What you saw in the UK was actually because of 217 00:12:43,559 --> 00:12:47,640 Speaker 1: a financial stability concern. The central Bank that was actually 218 00:12:47,720 --> 00:12:50,880 Speaker 1: on course for reducing its balance sheet had to intervene 219 00:12:50,920 --> 00:12:53,960 Speaker 1: in the market and pump liquidity in for three days, 220 00:12:53,960 --> 00:12:56,760 Speaker 1: as Andrew Bailey announced at the IF meeting in Washington, 221 00:12:56,840 --> 00:13:00,600 Speaker 1: d C. In order to stabilize some of the UK 222 00:13:01,040 --> 00:13:04,920 Speaker 1: pension funds that use derivative instruments and therefore got an 223 00:13:04,920 --> 00:13:08,320 Speaker 1: exposure to strong movements in financial markets. So I wouldn't 224 00:13:08,360 --> 00:13:11,280 Speaker 1: be surprised if we have further episodes in the market 225 00:13:11,679 --> 00:13:16,880 Speaker 1: were that combined great increase and withdrawal of liquidity will 226 00:13:16,960 --> 00:13:20,160 Speaker 1: lead to pocket of weaknesses in financial markets because of 227 00:13:20,280 --> 00:13:23,400 Speaker 1: leverage strategies getting cold and not being able to be 228 00:13:23,760 --> 00:13:26,720 Speaker 1: continued as they are. How dangerous is it to have 229 00:13:26,880 --> 00:13:30,520 Speaker 1: quantitative tightening. The shrinking of central bank balance sheets continued, 230 00:13:30,679 --> 00:13:34,280 Speaker 1: and we had traditionally said it was a tool when 231 00:13:34,280 --> 00:13:35,640 Speaker 1: the balance sheet was going out, and it was a 232 00:13:35,640 --> 00:13:38,120 Speaker 1: tool that was less well understood than the impact of 233 00:13:38,160 --> 00:13:40,880 Speaker 1: interest rates. So is it dangerous for central banks to 234 00:13:41,000 --> 00:13:45,320 Speaker 1: keep plowing ahead? I think it's dangerous if they don't 235 00:13:45,400 --> 00:13:48,920 Speaker 1: understand where the leverage is. And so I think we 236 00:13:49,080 --> 00:13:52,680 Speaker 1: will probably see central bank keeping the assets they have. 237 00:13:53,160 --> 00:13:55,560 Speaker 1: By the way, for ten years we haven't seen inflation. 238 00:13:56,000 --> 00:13:59,200 Speaker 1: So the world is designed to have inflation around two 239 00:13:59,240 --> 00:14:02,959 Speaker 1: to three. We had zero for ten years. It's great 240 00:14:03,040 --> 00:14:05,200 Speaker 1: that we're gonna have free four for the next tent. 241 00:14:06,080 --> 00:14:07,920 Speaker 1: It's just simply that you know, when you do an 242 00:14:07,960 --> 00:14:10,480 Speaker 1: average over twenty years, probably the an average is gonna 243 00:14:10,559 --> 00:14:13,839 Speaker 1: end up being about right. Yeah, And hence we need 244 00:14:13,880 --> 00:14:16,040 Speaker 1: some inflation because the only way to deflate that to 245 00:14:16,120 --> 00:14:21,680 Speaker 1: GDP is for inflation. That's always happening in history. One 246 00:14:21,680 --> 00:14:25,440 Speaker 1: of the places you look to think about hidden financial 247 00:14:25,480 --> 00:14:29,520 Speaker 1: stability risks is the i m FS PLAY Financial Stability Report. 248 00:14:31,120 --> 00:14:34,200 Speaker 1: Do you do you agree that we put there are 249 00:14:34,240 --> 00:14:38,240 Speaker 1: potentially some sort of unexploded consequences out there for the 250 00:14:38,360 --> 00:14:43,200 Speaker 1: quantitative tightening in central bank balance sheets. Well, I think, well, 251 00:14:43,480 --> 00:14:48,600 Speaker 1: without a doubt, there are significant segments of the financial 252 00:14:48,640 --> 00:14:53,520 Speaker 1: market that live in the shadows that are not well regulated. 253 00:14:54,080 --> 00:14:58,440 Speaker 1: We call them non bank financial institutions, and that is 254 00:14:58,480 --> 00:15:00,920 Speaker 1: where we are likely to be surprised. And that's what 255 00:15:01,000 --> 00:15:05,400 Speaker 1: happened in the UK. So as our Global Financial Stability 256 00:15:05,440 --> 00:15:08,040 Speaker 1: Report show that when you do a global stress test 257 00:15:08,120 --> 00:15:14,840 Speaker 1: for the banking system, advanced economy banks are quite resilient 258 00:15:15,640 --> 00:15:21,080 Speaker 1: too some very serious downside scenarios. Emerging market banks less so. 259 00:15:21,400 --> 00:15:23,880 Speaker 1: So in a very severe downside scenario, which is in 260 00:15:23,920 --> 00:15:27,600 Speaker 1: the GFSR, we have about thirty percent of emerging markets 261 00:15:27,600 --> 00:15:31,600 Speaker 1: who breach minimum capital requirements. That's a pretty serious event. 262 00:15:32,360 --> 00:15:35,680 Speaker 1: But I think the real unknown is the non bank 263 00:15:35,760 --> 00:15:39,840 Speaker 1: financial system, and that's exactly where we have hidden leverage, 264 00:15:39,880 --> 00:15:44,160 Speaker 1: where we have uh, you know, dark corners, which which 265 00:15:44,200 --> 00:15:48,240 Speaker 1: come up only when things get really difficult, like we 266 00:15:48,280 --> 00:15:50,440 Speaker 1: saw in the UK. So that's something that we are 267 00:15:50,480 --> 00:15:53,720 Speaker 1: worried about. It more generally, in terms of the financial 268 00:15:53,800 --> 00:15:58,040 Speaker 1: conditions at the moment, we see a distinction between you know, 269 00:15:58,200 --> 00:16:02,440 Speaker 1: investment grade assets which everywhere around the world training are 270 00:16:02,880 --> 00:16:05,720 Speaker 1: the spreads are quite low, they you haven't seen much 271 00:16:05,720 --> 00:16:08,400 Speaker 1: movement there, but if you look at frontier markets, that's 272 00:16:08,400 --> 00:16:10,840 Speaker 1: where you're seeing a lot of stress Already. We have 273 00:16:10,880 --> 00:16:14,320 Speaker 1: about sixty of low income countries that are already in 274 00:16:14,400 --> 00:16:18,280 Speaker 1: high debt distress, and I'm about of emerging markets now. 275 00:16:18,320 --> 00:16:21,760 Speaker 1: That does not make a systemic debt crisis for sure, 276 00:16:22,800 --> 00:16:25,960 Speaker 1: but again, we're in very risky times, like the war 277 00:16:26,040 --> 00:16:29,720 Speaker 1: is not over, the pandemic is not over, and we 278 00:16:29,800 --> 00:16:32,560 Speaker 1: haven't won the fight against inflation, so interest rates may 279 00:16:32,600 --> 00:16:34,520 Speaker 1: need to go up much more than any of us 280 00:16:34,520 --> 00:16:40,040 Speaker 1: would like it. Argentina, Scott a lot of debt, a 281 00:16:40,040 --> 00:16:42,600 Speaker 1: lot of it borrowed from the IMF. It has some 282 00:16:42,680 --> 00:16:45,320 Speaker 1: of the highest inflation rates in South America. What's your 283 00:16:45,320 --> 00:16:48,600 Speaker 1: advice to them about how to balance those two? And 284 00:16:48,640 --> 00:16:50,840 Speaker 1: I was just saying that there is no tension between 285 00:16:51,200 --> 00:16:53,560 Speaker 1: what fiscal policy and monetary policy need to do. They're 286 00:16:53,560 --> 00:16:55,640 Speaker 1: all have to go in the exact same direction, which 287 00:16:55,640 --> 00:16:59,520 Speaker 1: is they have to be on the restrictive side. You 288 00:16:59,560 --> 00:17:02,160 Speaker 1: know that part of the I am A program which 289 00:17:02,680 --> 00:17:05,560 Speaker 1: working with the authorities that was green on, which is 290 00:17:06,359 --> 00:17:09,560 Speaker 1: you know what, Argentina, it tanks the economy. Sorry if 291 00:17:09,600 --> 00:17:13,760 Speaker 1: it tanks the economy, then that doesn't support So there's 292 00:17:13,840 --> 00:17:16,240 Speaker 1: one way that we know how to bring inflation down, 293 00:17:16,480 --> 00:17:21,400 Speaker 1: which requires reducing demand in the economy. The Argentina economy 294 00:17:21,600 --> 00:17:25,160 Speaker 1: is growing at a healthy rate, it's there are headwinds 295 00:17:25,200 --> 00:17:28,560 Speaker 1: to it at this moment also from external shocks. But 296 00:17:29,640 --> 00:17:34,680 Speaker 1: you know, having inflation now is over sevent and if 297 00:17:34,720 --> 00:17:38,159 Speaker 1: we want to have durable growth, we know that you 298 00:17:38,240 --> 00:17:41,159 Speaker 1: need to bring inflation down. So just to make a 299 00:17:41,200 --> 00:17:44,280 Speaker 1: point to a dry said, which is inflation helps with 300 00:17:44,359 --> 00:17:47,840 Speaker 1: debt to GDP, clearly not the case on a long 301 00:17:47,920 --> 00:17:50,840 Speaker 1: term basis. Argentina for instance, as an example, where once 302 00:17:50,840 --> 00:17:53,960 Speaker 1: you live in a high inflation environment, that gets priced 303 00:17:54,040 --> 00:17:57,080 Speaker 1: into your interest rates and then there's no gain at 304 00:17:57,119 --> 00:17:59,840 Speaker 1: all in having that kind of inflation. So yes, you 305 00:17:59,880 --> 00:18:04,240 Speaker 1: have a very short term benefits because there's surprise inflation 306 00:18:04,320 --> 00:18:08,000 Speaker 1: and you're you've boarded low rates and you have surprised inflation. 307 00:18:08,080 --> 00:18:10,480 Speaker 1: So you can bring that to GDP down. But from 308 00:18:10,520 --> 00:18:14,240 Speaker 1: the experience, we know that is not a durable way 309 00:18:14,440 --> 00:18:18,600 Speaker 1: to bring that to GDP down and Argentina. Argentina is 310 00:18:18,600 --> 00:18:21,560 Speaker 1: an outlier here. If you look at actually what getas 311 00:18:21,640 --> 00:18:24,400 Speaker 1: job would be in in any of the previous cycles, 312 00:18:24,920 --> 00:18:27,119 Speaker 1: you would have not seen the stability of many of 313 00:18:27,160 --> 00:18:30,720 Speaker 1: the emerging markets that frontloaded some of the interest rate 314 00:18:30,760 --> 00:18:34,080 Speaker 1: increases before the established central banks did in order to 315 00:18:34,119 --> 00:18:37,439 Speaker 1: prevent outflows from their markets into the US and other market. 316 00:18:37,800 --> 00:18:42,359 Speaker 1: Emerging markets have been amazingly resilient so far. But the 317 00:18:42,400 --> 00:18:46,040 Speaker 1: problem is this frontier markets that the weakest and poorest economies, 318 00:18:46,320 --> 00:18:51,959 Speaker 1: because they're facing massive distress. There is a likely rating 319 00:18:52,040 --> 00:18:55,040 Speaker 1: cycle that is going to set in where even those 320 00:18:55,080 --> 00:18:58,000 Speaker 1: that are just about investment grade might get downgrades to 321 00:18:58,080 --> 00:19:02,480 Speaker 1: sub investment grade. The s from rising interest rates on 322 00:19:02,640 --> 00:19:05,160 Speaker 1: these markets, which are the poorest economies of this world. 323 00:19:05,320 --> 00:19:08,040 Speaker 1: It's going to be massive. Are We're gonna be talking 324 00:19:08,119 --> 00:19:11,600 Speaker 1: much more about sovereign debt and developed and developing economies 325 00:19:11,640 --> 00:19:14,800 Speaker 1: next year, having spent the last year really focused on 326 00:19:14,840 --> 00:19:18,560 Speaker 1: monetary policy, not in development market because I think we've 327 00:19:18,600 --> 00:19:21,960 Speaker 1: seen in the UK yours. No, because I think there's 328 00:19:21,960 --> 00:19:27,359 Speaker 1: one advantage currency. Remember, the candacy market is adjusting fast. 329 00:19:27,880 --> 00:19:30,399 Speaker 1: You have seen it in Europe. You know we're paying 330 00:19:30,520 --> 00:19:34,520 Speaker 1: five to six percent for hydro carbon ut gas and 331 00:19:34,560 --> 00:19:38,080 Speaker 1: oil more compared to the United States, and immediately the 332 00:19:38,160 --> 00:19:41,720 Speaker 1: cadency is adjusted in the UK, the panther is adjusted 333 00:19:41,760 --> 00:19:44,359 Speaker 1: fast of the last twenty thirty years. In the gaping productivity, 334 00:19:45,320 --> 00:19:47,840 Speaker 1: I think an image market, and there's a distinction those 335 00:19:47,960 --> 00:19:51,119 Speaker 1: the producer that our food producer are in a good shape. 336 00:19:51,840 --> 00:19:54,800 Speaker 1: The issue here with the war is those that don't 337 00:19:54,800 --> 00:19:57,080 Speaker 1: have enough food that we need to import food, so 338 00:19:57,200 --> 00:20:01,439 Speaker 1: sub Sahanan, Africa, Egypt, the industry Lanca. So if they 339 00:20:01,440 --> 00:20:04,200 Speaker 1: have a problem in the food supply chain with rising 340 00:20:04,280 --> 00:20:06,480 Speaker 1: rates and high level of that, it might end up 341 00:20:06,480 --> 00:20:09,880 Speaker 1: being an absolute catastrophe. And so I think here actually 342 00:20:09,920 --> 00:20:13,000 Speaker 1: where we need to be all worried. Well, I think 343 00:20:13,040 --> 00:20:16,199 Speaker 1: that just alluded to something very important. We're starting to 344 00:20:16,240 --> 00:20:19,400 Speaker 1: see the first round effects of inflation come off, and 345 00:20:19,600 --> 00:20:22,119 Speaker 1: why Central Max have to keep at it is to 346 00:20:22,280 --> 00:20:26,000 Speaker 1: prevent second round inflation very effects and from this to 347 00:20:26,080 --> 00:20:29,920 Speaker 1: become embedded in the wage price mechanism of the economy, 348 00:20:30,119 --> 00:20:33,800 Speaker 1: because once people start believing they should index their contracts 349 00:20:33,800 --> 00:20:36,960 Speaker 1: to four or five percent inflation as opposed to that's 350 00:20:36,960 --> 00:20:40,400 Speaker 1: where it becomes very long lasting and embedded in the economy. 351 00:20:40,800 --> 00:20:42,919 Speaker 1: And that's why in the in the seventies it was 352 00:20:42,960 --> 00:20:45,760 Speaker 1: so hard to get rid of inflation because it had 353 00:20:45,840 --> 00:20:49,080 Speaker 1: become embedded in the economy. We still have the chance 354 00:20:49,119 --> 00:20:54,040 Speaker 1: to prevent that, but it requires determined action that markets 355 00:20:54,080 --> 00:20:57,560 Speaker 1: and market participants will see inflation is going to colm 356 00:20:57,600 --> 00:21:00,560 Speaker 1: down over a reasonable period of time, not the decade. 357 00:21:00,920 --> 00:21:03,680 Speaker 1: I would say two years, three years at the most. 358 00:21:03,520 --> 00:21:07,320 Speaker 1: That helps you anchor inflation expectations. They have not run away, 359 00:21:07,320 --> 00:21:11,000 Speaker 1: so we're not yet lost this inflation battle, but I 360 00:21:11,040 --> 00:21:12,960 Speaker 1: think we need to be really focused on that now 361 00:21:13,000 --> 00:21:15,159 Speaker 1: for the for the period to come, at least for 362 00:21:15,200 --> 00:21:18,119 Speaker 1: the next couple of months. Peter, just a quick response 363 00:21:18,160 --> 00:21:20,160 Speaker 1: to that, So, I mean, do you do you agree 364 00:21:20,480 --> 00:21:24,000 Speaker 1: that we've dealt with the first round, but we still 365 00:21:24,040 --> 00:21:26,639 Speaker 1: need to be very cautious about second round effects. But 366 00:21:26,720 --> 00:21:29,400 Speaker 1: I think also what damadays say, because we've had warnings 367 00:21:29,400 --> 00:21:31,440 Speaker 1: from the European Central Bank just in the last couple 368 00:21:31,480 --> 00:21:33,879 Speaker 1: of days, do you agree that there's not likely to 369 00:21:33,960 --> 00:21:37,040 Speaker 1: be any issues around sovereign debt in the Eurozone in 370 00:21:37,080 --> 00:21:42,280 Speaker 1: the next year or two. So agree with Axcel on 371 00:21:43,240 --> 00:21:46,080 Speaker 1: the fact that it is very important for central banks 372 00:21:46,080 --> 00:21:52,280 Speaker 1: to stay the course. We've had false dawns before. One 373 00:21:52,400 --> 00:21:56,520 Speaker 1: in good inflation reading does not make a trend, and 374 00:21:56,560 --> 00:21:59,760 Speaker 1: we have enough lessons from history of central banks who 375 00:22:00,040 --> 00:22:06,440 Speaker 1: have kind of moved changed course too quickly UH and 376 00:22:06,480 --> 00:22:10,560 Speaker 1: then created an even bigger problem that required grinding the 377 00:22:10,600 --> 00:22:14,480 Speaker 1: economy to hold an even deeper recessions UH than would 378 00:22:14,480 --> 00:22:16,919 Speaker 1: have happened if they had just stayed the course. So 379 00:22:16,960 --> 00:22:20,120 Speaker 1: I think that's absolutely right, and we are there at 380 00:22:20,119 --> 00:22:22,320 Speaker 1: this point that we should this interrom actial state of 381 00:22:22,400 --> 00:22:28,679 Speaker 1: course in terms of sovereign death issues in UH in 382 00:22:29,240 --> 00:22:31,479 Speaker 1: the UR area. Firstly, I think that there have been 383 00:22:31,520 --> 00:22:34,800 Speaker 1: a lot of important developments in the European Union in 384 00:22:34,800 --> 00:22:38,600 Speaker 1: the your area compared to the previous the GFC. You 385 00:22:38,640 --> 00:22:41,960 Speaker 1: have your stability mechanism that is there to help countries 386 00:22:42,000 --> 00:22:47,080 Speaker 1: deal with surprise events or sudden tightening market liquidity. The 387 00:22:47,160 --> 00:22:52,359 Speaker 1: ECB has put in place a transmission protection mechanism, which 388 00:22:52,400 --> 00:22:56,520 Speaker 1: is you know, which is will help them UH raise 389 00:22:56,600 --> 00:22:59,240 Speaker 1: interest rates but ensure that you don't have very disorderly 390 00:22:59,280 --> 00:23:03,000 Speaker 1: market conditions in certain sovereign debt markets. So I think 391 00:23:03,040 --> 00:23:06,680 Speaker 1: that they have more instruments in place, that better mechanisms 392 00:23:06,680 --> 00:23:10,119 Speaker 1: in place to protect themselves to stand run. But but 393 00:23:10,480 --> 00:23:13,840 Speaker 1: there's still question routes about Italy or your Do you 394 00:23:13,880 --> 00:23:16,160 Speaker 1: think we're on the path now where Italy will be 395 00:23:16,359 --> 00:23:19,680 Speaker 1: able to sustain the kind of increase in borrowing costs 396 00:23:19,680 --> 00:23:22,520 Speaker 1: we've seen. I think we're in a time when there 397 00:23:22,600 --> 00:23:25,800 Speaker 1: is a lot of uncertainties. So, like I said, the 398 00:23:25,840 --> 00:23:28,679 Speaker 1: war is not over. We haven't seen the end of 399 00:23:28,720 --> 00:23:32,159 Speaker 1: the energy crisis. This winter is turning out to be 400 00:23:33,400 --> 00:23:36,840 Speaker 1: warmer and that really helps, but the bigger problem is 401 00:23:36,920 --> 00:23:39,720 Speaker 1: next winter. So all of that means that the ability 402 00:23:39,800 --> 00:23:43,120 Speaker 1: to raise resources to repay your death you know, those 403 00:23:43,160 --> 00:23:47,240 Speaker 1: those challenges will remain, uh, you know. At the same time, 404 00:23:48,359 --> 00:23:51,199 Speaker 1: I do think that there's been improvement in policymaking, and 405 00:23:51,200 --> 00:23:53,800 Speaker 1: there's been an improvement in institutions that you help see 406 00:23:53,880 --> 00:23:59,440 Speaker 1: guard against worst outcomes. Petty company as Sarah Banks Favor, 407 00:23:59,520 --> 00:24:06,680 Speaker 1: Thank you, so thank you. That's it for these mini 408 00:24:06,720 --> 00:24:10,440 Speaker 1: episodes from the New Economy Forum in Singapore. Stephanomics will 409 00:24:10,480 --> 00:24:15,520 Speaker 1: be back from London next week. Meantime, check out at 410 00:24:15,600 --> 00:24:19,880 Speaker 1: Economics on Twitter and the Bloomberg News website and terminal 411 00:24:20,200 --> 00:24:24,119 Speaker 1: for all our economic news and analysis. This episode is 412 00:24:24,160 --> 00:24:27,760 Speaker 1: produced by Yang Yang and the executive producer of Stephanomics 413 00:24:28,119 --> 00:24:28,920 Speaker 1: is Mike Sasso.