1 00:00:11,200 --> 00:00:14,960 Speaker 1: Hello, and welcome to another episode of the Odd Lots Podcast. 2 00:00:15,000 --> 00:00:19,280 Speaker 1: I'm Joe Wisn't Thal and I'm Tracy all Away. Tracy 3 00:00:19,440 --> 00:00:24,600 Speaker 1: sometimes we have guests on this podcast and my my 4 00:00:24,680 --> 00:00:26,880 Speaker 1: first thought that I always have is, how have we 5 00:00:26,960 --> 00:00:29,600 Speaker 1: waited this long to talk about? That? Is such a 6 00:00:29,680 --> 00:00:35,560 Speaker 1: humble brack? Sorry it is. I don't think it's a brag. 7 00:00:35,600 --> 00:00:37,479 Speaker 1: I think there are just like certain people who like 8 00:00:37,760 --> 00:00:40,400 Speaker 1: are like natural fits for the type of thing that 9 00:00:40,440 --> 00:00:43,600 Speaker 1: we talk about. And we've been doing this podcast for 10 00:00:43,720 --> 00:00:46,400 Speaker 1: years and it kind of seems crazy that we never 11 00:00:46,400 --> 00:00:49,880 Speaker 1: talked about. One day we're going to get Jerome Powell 12 00:00:49,960 --> 00:00:52,120 Speaker 1: on the podcast and we'll say, you know, like we 13 00:00:52,120 --> 00:00:54,600 Speaker 1: were thinking of having you on. You're such a natural fit. 14 00:00:54,720 --> 00:00:57,920 Speaker 1: I can't believe it took this long. Um, But yes, 15 00:00:58,320 --> 00:01:03,440 Speaker 1: you're absolutely right. There are people, well, there are people who, um, 16 00:01:03,480 --> 00:01:05,960 Speaker 1: you know, everyone talks about and I am going to 17 00:01:06,040 --> 00:01:07,760 Speaker 1: say that. I love that. It's like, how did we 18 00:01:07,880 --> 00:01:11,360 Speaker 1: not think to have follow him? I love that. Um. 19 00:01:11,400 --> 00:01:13,720 Speaker 1: There are people out there who have had a big 20 00:01:13,720 --> 00:01:17,479 Speaker 1: influence in markets and who consistently think about and write 21 00:01:17,520 --> 00:01:20,520 Speaker 1: about the subject matter that all Thoughts concerns itself with 22 00:01:21,080 --> 00:01:23,600 Speaker 1: and there are still some that we haven't had on 23 00:01:23,640 --> 00:01:28,279 Speaker 1: the podcast. This is true, right, So obviously very excited 24 00:01:28,280 --> 00:01:32,440 Speaker 1: about today's guests. We're gonna jump right into it. He's 25 00:01:32,959 --> 00:01:37,080 Speaker 1: a former managing director at Pimco. He is the coiner 26 00:01:37,120 --> 00:01:40,000 Speaker 1: of the term Minsky moment, even coined the term the 27 00:01:40,040 --> 00:01:44,720 Speaker 1: shadow banking system. Currently a senior Fellow, currently an adjug 28 00:01:44,760 --> 00:01:49,080 Speaker 1: professor at the McDonagh School of Business at Georgetown University. 29 00:01:49,200 --> 00:01:52,760 Speaker 1: We are going to be speaking to the economist and 30 00:01:52,920 --> 00:01:58,560 Speaker 1: investor Paul McCulley. I'm really excited about this conversation, so Paul, 31 00:01:58,600 --> 00:02:00,880 Speaker 1: thank you very much for joining us. Thank you very much, 32 00:02:00,960 --> 00:02:04,480 Speaker 1: Joe Paul. I listened to her speech you gave last 33 00:02:04,560 --> 00:02:08,320 Speaker 1: year at the U Levy Institute, and one of the things, 34 00:02:08,440 --> 00:02:12,280 Speaker 1: this sort of main theme that you identified is that 35 00:02:12,919 --> 00:02:15,799 Speaker 1: over the last you know, roughly forty years, we've had 36 00:02:15,840 --> 00:02:18,560 Speaker 1: these sort of big turning points, not just in sort 37 00:02:18,600 --> 00:02:22,360 Speaker 1: of business and market cycles, but it's sort of idea 38 00:02:22,440 --> 00:02:27,280 Speaker 1: cycles and policy cycles. So the late seventies, the rise 39 00:02:27,280 --> 00:02:34,040 Speaker 1: of monetorism, supply side policies under Reagan, monetary policy dominance 40 00:02:34,160 --> 00:02:38,760 Speaker 1: under Greenspan and Bernanke, and so the big question and 41 00:02:38,800 --> 00:02:41,359 Speaker 1: It's a big thing that Tracy and I have been 42 00:02:41,560 --> 00:02:44,440 Speaker 1: talking about a lot lately, is are we at the 43 00:02:44,480 --> 00:02:49,960 Speaker 1: cusp of a sort of new policy regime. The short 44 00:02:50,040 --> 00:02:57,720 Speaker 1: answer is unambiguously yes, and I want to stress unambiguously yes. 45 00:02:58,280 --> 00:03:02,320 Speaker 1: For the last forty years, essentially, we've been in a 46 00:03:02,360 --> 00:03:08,079 Speaker 1: monetary policy dominant world, and it's ebbed and flowed, demanding 47 00:03:08,200 --> 00:03:12,000 Speaker 1: upon the cycle. But it has been clearly a world 48 00:03:12,120 --> 00:03:17,600 Speaker 1: where monetary policy was the dominant lever in the monetary 49 00:03:17,720 --> 00:03:22,040 Speaker 1: physical policy mix. Uh. Sometimes you know, uh, the phrase 50 00:03:22,160 --> 00:03:25,799 Speaker 1: was used the only game in town, that the FED 51 00:03:25,880 --> 00:03:29,639 Speaker 1: could fix anything, and therefore the FED should fix anything, 52 00:03:30,120 --> 00:03:33,520 Speaker 1: and the FED should be in charge, and that actually 53 00:03:33,600 --> 00:03:37,560 Speaker 1: the FED should be the facto the fourth branch of 54 00:03:37,640 --> 00:03:41,440 Speaker 1: government because that's where the adults were and they could 55 00:03:41,520 --> 00:03:48,200 Speaker 1: make technocratic good decisions. Um. And this messy thing called democracy, 56 00:03:48,280 --> 00:03:51,560 Speaker 1: which was in charge of physical policy could be uh 57 00:03:51,680 --> 00:03:56,160 Speaker 1: pushed to the side, paid attention to as necessary. But 58 00:03:56,320 --> 00:04:00,840 Speaker 1: that we were living in a monetary policy dominant world, 59 00:04:01,400 --> 00:04:07,040 Speaker 1: which also would be a world in which effectively capitalism 60 00:04:07,120 --> 00:04:12,400 Speaker 1: would be superior to democracy. Uh. And the daily ebb 61 00:04:12,440 --> 00:04:16,480 Speaker 1: and flow of economic policy making. What do you think 62 00:04:16,920 --> 00:04:19,440 Speaker 1: makes this crisis different or maybe if I phrase it 63 00:04:19,480 --> 00:04:22,320 Speaker 1: a different way. Why do you think that change is 64 00:04:22,480 --> 00:04:25,640 Speaker 1: coming now? In particular, because we had people, you know, 65 00:04:25,680 --> 00:04:29,080 Speaker 1: writing and talking about the breakdown um in the church 66 00:04:29,080 --> 00:04:32,920 Speaker 1: and state separation of fiscal and monetary policy. Uh, back 67 00:04:32,920 --> 00:04:37,159 Speaker 1: in the nineteen eighties. So why now. Actually it's interesting 68 00:04:37,200 --> 00:04:40,800 Speaker 1: that you mentioned the nineteen eighties because that's essentially when 69 00:04:40,920 --> 00:04:46,200 Speaker 1: the church and state separation became very solidified, as in 70 00:04:46,320 --> 00:04:49,880 Speaker 1: almost a wall, if you will. Uh. In fact, I 71 00:04:49,920 --> 00:04:53,520 Speaker 1: think back to nineteen eighty I was actually in graduate school. 72 00:04:53,560 --> 00:04:57,120 Speaker 1: I was in New York at Columbia in nineteen eighty 73 00:04:57,640 --> 00:05:00,560 Speaker 1: when I graduated in nineteen eighty one, which was not 74 00:05:00,640 --> 00:05:04,520 Speaker 1: the most fortuitous time to graduate from business school. Uh, 75 00:05:04,560 --> 00:05:10,960 Speaker 1: but that's when Paul Boker was establishing essentially monetary policy dominance. 76 00:05:11,520 --> 00:05:15,000 Speaker 1: In fact, Mr Reagan had run on a policy of 77 00:05:15,040 --> 00:05:19,200 Speaker 1: supply side tax cuts, which were a trojan horse for 78 00:05:19,800 --> 00:05:22,360 Speaker 1: tax cuts for the rich. Uh. It was for not 79 00:05:23,040 --> 00:05:29,760 Speaker 1: essentially until Boker finally relented um from monetary policy. Dobins 80 00:05:29,839 --> 00:05:33,480 Speaker 1: continues saw the effect come through in the recovery of 81 00:05:33,480 --> 00:05:37,919 Speaker 1: the nineties. So I think the church and state separation 82 00:05:38,080 --> 00:05:43,320 Speaker 1: between monetary and fiscal policy really UH is rooted uh 83 00:05:43,320 --> 00:05:49,200 Speaker 1: in the epic turn forty years ago. UM, and it's 84 00:05:49,400 --> 00:05:53,240 Speaker 1: moved back and forth over town, depending up on the cycle. 85 00:05:53,720 --> 00:05:57,080 Speaker 1: But I take on your point very much with respect 86 00:05:57,120 --> 00:06:01,960 Speaker 1: to a decade ago when the church and state separation 87 00:06:02,520 --> 00:06:07,960 Speaker 1: was softened quite dramatically by necessity or as the FED 88 00:06:08,000 --> 00:06:11,760 Speaker 1: would like to say, by excellency, with the financial crisis, 89 00:06:11,800 --> 00:06:17,400 Speaker 1: because we hit the zero bound for policy rates, and 90 00:06:17,480 --> 00:06:21,560 Speaker 1: the moment you hit the zero bound for policy rates, UH, 91 00:06:21,600 --> 00:06:28,000 Speaker 1: then almost definitionally you will change, uh, the paradigm of 92 00:06:28,200 --> 00:06:33,240 Speaker 1: monetary policy dominance. And we had that big experiment, if 93 00:06:33,279 --> 00:06:37,839 Speaker 1: you will, of monetary and physical policy cooperation back in 94 00:06:39,040 --> 00:06:43,440 Speaker 1: the period following the financial crisis. But then once it 95 00:06:43,560 --> 00:06:48,360 Speaker 1: was over or not over, but had reached beyond its 96 00:06:48,400 --> 00:06:52,600 Speaker 1: crisis proportions, then effectively there was a morphing back to 97 00:06:52,680 --> 00:06:56,679 Speaker 1: the whole notion that we need to normalize the central 98 00:06:56,680 --> 00:07:01,480 Speaker 1: banks balance sheet, normalized short term interest rates. And of 99 00:07:01,520 --> 00:07:04,919 Speaker 1: course you also had around the same time, UH, the 100 00:07:05,040 --> 00:07:09,479 Speaker 1: advent of the Tea Party, which wanted to normalize, if 101 00:07:09,520 --> 00:07:14,000 Speaker 1: you will, budget deficits. So conceptually we could have had 102 00:07:14,080 --> 00:07:18,880 Speaker 1: this epic turn a decade ago where we would have 103 00:07:18,960 --> 00:07:23,520 Speaker 1: moved to a regime of full physical dominance, but we 104 00:07:23,640 --> 00:07:28,160 Speaker 1: resisted it as a society. I think very much too 105 00:07:28,400 --> 00:07:33,560 Speaker 1: democracies regret that was a decade ago. But now I 106 00:07:33,600 --> 00:07:37,280 Speaker 1: think any pretense is over and we're clearly in a 107 00:07:37,400 --> 00:07:42,360 Speaker 1: physical policy dominant world. And I say that with incredible 108 00:07:42,720 --> 00:07:46,800 Speaker 1: admiration for the Federal Reserve UH. And I stand in 109 00:07:46,920 --> 00:07:51,320 Speaker 1: awe in many respects of share Pal and his willingness 110 00:07:51,360 --> 00:07:56,160 Speaker 1: to recognize the fact that facts on the ground had changed, 111 00:07:56,320 --> 00:08:00,520 Speaker 1: particularly with the nature of this pandemic, and that we 112 00:08:00,640 --> 00:08:05,600 Speaker 1: clearly need to be in a physcal policy dominated world, 113 00:08:05,760 --> 00:08:10,000 Speaker 1: and the FED will be highly supporting UH. And I 114 00:08:10,040 --> 00:08:14,400 Speaker 1: would also say subordinate. So I want to talk a 115 00:08:14,440 --> 00:08:17,200 Speaker 1: little bit about the framing of the this discussion, because 116 00:08:17,240 --> 00:08:20,280 Speaker 1: you said something very interesting I thought at the beginning 117 00:08:20,320 --> 00:08:22,640 Speaker 1: that talks about this in a slightly different way than 118 00:08:22,680 --> 00:08:24,800 Speaker 1: most people. So we talk about this idea of like 119 00:08:25,360 --> 00:08:29,240 Speaker 1: some handoff between Okay, the FED is going to UH 120 00:08:29,360 --> 00:08:33,120 Speaker 1: be our primary engine of stability, and now there's some 121 00:08:33,240 --> 00:08:36,440 Speaker 1: handoff to fiscal policy. But you frame it a little 122 00:08:36,440 --> 00:08:39,920 Speaker 1: bit differently, which is more the handoff from a sort 123 00:08:39,960 --> 00:08:45,679 Speaker 1: of walled gardens secluded temple of people working at the 124 00:08:45,760 --> 00:08:49,520 Speaker 1: FED to a handoff to democracy. And this is a 125 00:08:49,559 --> 00:08:52,320 Speaker 1: point that actually Tracy has made a bunch that as 126 00:08:52,360 --> 00:08:56,360 Speaker 1: we talk a lot about sort of new regimes, MMT 127 00:08:56,640 --> 00:09:00,719 Speaker 1: ideas and so forth, these ideas are in a capable 128 00:09:00,880 --> 00:09:05,080 Speaker 1: from politics. Their downstream from politics. You can't technocratically implement 129 00:09:05,400 --> 00:09:09,000 Speaker 1: fiscal policy. Talk to us just sort of about the 130 00:09:09,080 --> 00:09:12,800 Speaker 1: framing of thinking about this as the reassertion of democracy 131 00:09:12,960 --> 00:09:17,640 Speaker 1: in managing the economy. That is a profound question. I've 132 00:09:17,640 --> 00:09:21,040 Speaker 1: written major papers on it and given way too many 133 00:09:21,120 --> 00:09:25,680 Speaker 1: speeches on it over the years. Uh, And we live 134 00:09:25,960 --> 00:09:31,880 Speaker 1: very much in a mixed economy. And capitalism are our 135 00:09:32,080 --> 00:09:39,040 Speaker 1: market based economy, and democracy are fellow travelers, and in 136 00:09:39,080 --> 00:09:46,559 Speaker 1: many respects they are a holy marriage of incompatibility in 137 00:09:46,600 --> 00:09:52,760 Speaker 1: the sense that both democracy and capitalism are governance systems, 138 00:09:53,480 --> 00:09:58,800 Speaker 1: but they're distinctly different, and that democracy, at its core 139 00:09:59,800 --> 00:10:04,360 Speaker 1: is is a socialist governance system. And I don't say 140 00:10:04,400 --> 00:10:09,520 Speaker 1: that pejoratively. I say that district descriptively because you think 141 00:10:09,520 --> 00:10:13,400 Speaker 1: in terms of the power of democracy is one person, 142 00:10:13,640 --> 00:10:19,520 Speaker 1: one vote, each with inalienable rights. That sounds like socialism 143 00:10:19,520 --> 00:10:23,240 Speaker 1: to me, and it sounds really really good. Uh So, 144 00:10:23,559 --> 00:10:30,600 Speaker 1: democracy is inherently founded on a socialist distribution of power. 145 00:10:30,800 --> 00:10:36,600 Speaker 1: All people are created equal. Uh So, that's a governance system. 146 00:10:36,920 --> 00:10:41,160 Speaker 1: And then capitalism is also a governance system, but is 147 00:10:41,240 --> 00:10:45,920 Speaker 1: the antithesis of socialism in the sense that it is 148 00:10:45,960 --> 00:10:52,199 Speaker 1: a cumulty voting system. Not all are created equal. Under 149 00:10:52,360 --> 00:10:56,320 Speaker 1: the banner of capitalism. It's the matter of the more 150 00:10:56,480 --> 00:11:00,800 Speaker 1: dollars you have, the more votes you have. It is 151 00:11:01,240 --> 00:11:07,640 Speaker 1: fundamentally a kumulty voting system. An example I frequently used 152 00:11:07,640 --> 00:11:11,720 Speaker 1: when I'm giving speeches and so forth, is the decision 153 00:11:11,800 --> 00:11:16,080 Speaker 1: when you get onto a airplane whether or not you 154 00:11:16,160 --> 00:11:18,959 Speaker 1: get one of the big seats, are you get one 155 00:11:19,000 --> 00:11:21,600 Speaker 1: of the little seats, are you know, go left on 156 00:11:21,640 --> 00:11:25,040 Speaker 1: the plane or go right on the plane? Is a 157 00:11:25,120 --> 00:11:30,320 Speaker 1: capitalist decision, and it's based upon kumul ty voting. If 158 00:11:30,360 --> 00:11:33,880 Speaker 1: you want to have one of the big seats, you 159 00:11:33,960 --> 00:11:38,440 Speaker 1: have to have a lot of votes otherwise known as dollars. 160 00:11:38,800 --> 00:11:41,400 Speaker 1: And there's nothing wrong with that system. It's a market 161 00:11:41,400 --> 00:11:46,000 Speaker 1: based system, but it is categorically not predicated on the 162 00:11:46,040 --> 00:11:51,640 Speaker 1: notion that all citizens are created equal. It's it's founded 163 00:11:51,679 --> 00:11:54,840 Speaker 1: on the notion that the more dollars you have the 164 00:11:54,880 --> 00:11:58,120 Speaker 1: more power you have. So we live in a mixed 165 00:11:58,160 --> 00:12:03,880 Speaker 1: economy of cap realism and democracy, and they're supposed to 166 00:12:03,880 --> 00:12:08,560 Speaker 1: be in conflict all of the time because they're fundamentally different. 167 00:12:08,920 --> 00:12:13,839 Speaker 1: But the tie that binds them uh is fundamentally the 168 00:12:13,960 --> 00:12:19,800 Speaker 1: rule of law, because capitalism requires an enforceable rule of law, 169 00:12:20,760 --> 00:12:26,520 Speaker 1: and an enforceable, credible rule of law is the one 170 00:12:26,720 --> 00:12:34,319 Speaker 1: thing that capitalism categorically cannot do for itself. So democracy's 171 00:12:34,440 --> 00:12:40,199 Speaker 1: gift to capitalism is a rule of law, and democracy 172 00:12:40,360 --> 00:12:47,120 Speaker 1: can do a credible, enforceable rule of law round it 173 00:12:47,440 --> 00:12:53,400 Speaker 1: in justice, and that is a true gift of democracy 174 00:12:53,480 --> 00:12:57,360 Speaker 1: to capitalism. So I think both can flourish. I think 175 00:12:57,360 --> 00:12:59,880 Speaker 1: this trade off that we hear about all the time 176 00:13:00,000 --> 00:13:05,480 Speaker 1: democracy versus capitalism in many respects is a false trade 177 00:13:05,480 --> 00:13:10,080 Speaker 1: off because they have to coexist. They need each other. 178 00:13:10,760 --> 00:13:16,840 Speaker 1: Capitalism needs an incredible rule of law and democracy needs efficiency, 179 00:13:17,440 --> 00:13:21,520 Speaker 1: and capitalism is a master at efficiency. You win or 180 00:13:21,679 --> 00:13:25,720 Speaker 1: you lose based upon whether or not you're smart or dumb. Uh. 181 00:13:26,000 --> 00:13:30,880 Speaker 1: So I think what we're evolving too is a better, 182 00:13:31,280 --> 00:13:38,760 Speaker 1: more sustainable, more just mix between democracy and capitalism. That 183 00:13:38,880 --> 00:13:40,880 Speaker 1: was a really long win answer to your question but 184 00:13:40,920 --> 00:14:02,240 Speaker 1: I'm but I'm quite passionate about this, just on the 185 00:14:02,320 --> 00:14:07,120 Speaker 1: intertwining of monetary with fiscal policy. What what downsides do 186 00:14:07,200 --> 00:14:11,120 Speaker 1: you see if any? And I'm thinking back to you know, 187 00:14:11,160 --> 00:14:15,400 Speaker 1: when when Congress was debating over stimulus measures, the additional 188 00:14:15,480 --> 00:14:19,160 Speaker 1: unemployment checks. That took a really, really long time, and 189 00:14:19,600 --> 00:14:22,280 Speaker 1: there's a lot of criticism of that process. And meanwhile, 190 00:14:22,280 --> 00:14:26,280 Speaker 1: the Federal Reserve acted fairly quickly to address market turmoil 191 00:14:26,680 --> 00:14:30,360 Speaker 1: back in March. What do you see as either negatives 192 00:14:30,520 --> 00:14:36,000 Speaker 1: or or tradeoffs in the mix of fiscal with monetary policy. 193 00:14:36,400 --> 00:14:44,200 Speaker 1: Monetary policy can be very efficient, and there's a very 194 00:14:44,200 --> 00:14:48,320 Speaker 1: simple reason for that is that it is one step 195 00:14:48,400 --> 00:14:54,600 Speaker 1: removed from their sausage making of democracy. That's why we 196 00:14:54,680 --> 00:14:59,880 Speaker 1: have political independence. There's a mandate obviously from Congress which 197 00:15:00,080 --> 00:15:03,320 Speaker 1: created the FED, the fens not the fourth branch of government. 198 00:15:03,760 --> 00:15:07,800 Speaker 1: There's a mandate, the full employment and price stability mandate. 199 00:15:08,240 --> 00:15:12,280 Speaker 1: But as a practical matter, the Federal Reserve can move 200 00:15:12,640 --> 00:15:18,040 Speaker 1: very very quickly because the decision making process is not 201 00:15:18,240 --> 00:15:23,440 Speaker 1: subject to the bagarities of democracy. And also it can 202 00:15:23,480 --> 00:15:29,160 Speaker 1: have a very very quick impact because essentially the central 203 00:15:29,160 --> 00:15:35,360 Speaker 1: bank becomes the marginal player are the price center across 204 00:15:35,400 --> 00:15:41,040 Speaker 1: the entire array of financial conditions. So monetary policy can 205 00:15:41,120 --> 00:15:46,359 Speaker 1: move very very quickly and can actually have a profound 206 00:15:46,520 --> 00:15:54,880 Speaker 1: effect on financial conditions. What monetary policy can't do efficiently 207 00:15:55,480 --> 00:16:01,920 Speaker 1: at all is to channel the horsepower of UH, the 208 00:16:02,000 --> 00:16:07,200 Speaker 1: money monopoly to main Street. It is always a bank 209 00:16:07,320 --> 00:16:13,320 Speaker 1: shot through Wall Street and financial conditions, And so monetary 210 00:16:13,400 --> 00:16:18,440 Speaker 1: policy has the benefit of incredible efficiency, but it has 211 00:16:18,520 --> 00:16:23,680 Speaker 1: the liability, UH that it can't get to Main Street directly. 212 00:16:24,160 --> 00:16:29,000 Speaker 1: And main Street is the home of democracy. And whence 213 00:16:29,280 --> 00:16:33,320 Speaker 1: once you hit the zero lower bound, And the reason 214 00:16:33,440 --> 00:16:37,440 Speaker 1: we've hit the zero lower bound, UH is because the 215 00:16:37,480 --> 00:16:40,520 Speaker 1: FED failed. And here I'm not criticizing the Fed. I'm 216 00:16:40,560 --> 00:16:44,960 Speaker 1: just making an observation. The FED failed to ever in 217 00:16:45,000 --> 00:16:50,400 Speaker 1: the last ten years achieve its inflation target. So therefore 218 00:16:51,000 --> 00:16:55,560 Speaker 1: there was a very little space to ease interest rates 219 00:16:55,640 --> 00:17:00,640 Speaker 1: in your traditional sort of way to stimulate private sector borrowing, 220 00:17:00,680 --> 00:17:03,200 Speaker 1: you know, housing cars, all of that sort of stuff 221 00:17:03,400 --> 00:17:05,520 Speaker 1: things we learned in school about. You know, how does 222 00:17:05,560 --> 00:17:10,000 Speaker 1: monetary policy work on main Street? It wasn't out of 223 00:17:10,040 --> 00:17:14,520 Speaker 1: ammunition once it hit zero. But once you hit zero, 224 00:17:14,720 --> 00:17:20,040 Speaker 1: effectively you have to become a partner of the physical authority. 225 00:17:20,520 --> 00:17:24,240 Speaker 1: So when you asked the question about downside, I think 226 00:17:24,280 --> 00:17:30,119 Speaker 1: the big downside of too much central bank independence, and 227 00:17:30,160 --> 00:17:33,960 Speaker 1: I think we've certainly had it uh and and really 228 00:17:33,960 --> 00:17:36,480 Speaker 1: in this century because it goes back to prior to 229 00:17:36,520 --> 00:17:39,879 Speaker 1: the financial crisis as well, that if you have too 230 00:17:40,000 --> 00:17:45,760 Speaker 1: much central bank independence, that effectively that becomes the soul 231 00:17:46,320 --> 00:17:52,520 Speaker 1: tool of overall economic policy. UH. And monetary policy works 232 00:17:52,520 --> 00:17:58,959 Speaker 1: through markets, and by definition, stimulating the economy or supporting 233 00:17:59,040 --> 00:18:04,720 Speaker 1: the economy with monetary policy alone is going to dramatically 234 00:18:05,280 --> 00:18:12,359 Speaker 1: exacerbate income and wealth inequality, which is an an anathemah 235 00:18:12,400 --> 00:18:16,760 Speaker 1: to the spirit and the justice of democracy. So that's 236 00:18:16,800 --> 00:18:23,639 Speaker 1: the downside of leaning too heavily on monetary policy, UH, 237 00:18:23,800 --> 00:18:27,879 Speaker 1: is that you end up going against a fundamental tenant 238 00:18:28,359 --> 00:18:32,399 Speaker 1: um of democracy because monetary policy works by driving up 239 00:18:32,480 --> 00:18:37,359 Speaker 1: asset prices and low and behole rich people owned assets. 240 00:18:37,400 --> 00:18:40,640 Speaker 1: That's simple. Every answer you've given given me like five 241 00:18:40,680 --> 00:18:42,679 Speaker 1: ideas for questions. But I have a simple one, and 242 00:18:42,680 --> 00:18:46,720 Speaker 1: it's one that we recently. We're talking to Vituur Constancia, 243 00:18:46,720 --> 00:18:50,040 Speaker 1: a former ec B vice president, do we know what 244 00:18:50,160 --> 00:18:53,000 Speaker 1: causes inflation? And we talked about the FED failing to 245 00:18:53,040 --> 00:18:57,600 Speaker 1: hit its inflation goals. But a do we have a 246 00:18:57,640 --> 00:19:00,760 Speaker 1: confident theory of what causes inflation and and does the 247 00:19:00,760 --> 00:19:04,680 Speaker 1: central bank actually have the tool the tools to hit 248 00:19:04,680 --> 00:19:09,840 Speaker 1: its mandate fascinating question. Joe In fact chere Powell has 249 00:19:09,920 --> 00:19:12,520 Speaker 1: commented on this issue and a lot of people have 250 00:19:13,080 --> 00:19:17,520 Speaker 1: as well, is that we really don't have a robust 251 00:19:17,600 --> 00:19:23,919 Speaker 1: theoretical framework for what determines inflation anymore. I mean, the 252 00:19:24,000 --> 00:19:29,959 Speaker 1: workhorse for my lifetime, Uh, probably before that too, was 253 00:19:30,040 --> 00:19:35,359 Speaker 1: the Philip's curve. And essentially the Philip's curve has flattened dramatically, 254 00:19:35,840 --> 00:19:40,400 Speaker 1: so that trade off between resource utilization as the FED 255 00:19:40,480 --> 00:19:46,760 Speaker 1: would say, and inflation has broken down dramatically. So the 256 00:19:46,840 --> 00:19:50,280 Speaker 1: short answer is, I don't think the FED or my 257 00:19:50,400 --> 00:19:59,119 Speaker 1: profession has a good workable theoretical framework for inflation anymore. Uh. 258 00:19:59,119 --> 00:20:03,439 Speaker 1: And that is really a big, big issue when you 259 00:20:03,480 --> 00:20:08,240 Speaker 1: think in terms of central bank independence, which I think 260 00:20:08,359 --> 00:20:13,080 Speaker 1: some degree of it is always necessary for efficiency. But 261 00:20:13,119 --> 00:20:18,080 Speaker 1: if you don't have a good workable theory on what 262 00:20:18,200 --> 00:20:24,800 Speaker 1: determines inflation, then it is a very dangerous proposition to 263 00:20:25,000 --> 00:20:30,159 Speaker 1: lean too heavily on the central bank as your only 264 00:20:30,400 --> 00:20:37,639 Speaker 1: game in town because central bank independence theoretically is to 265 00:20:38,480 --> 00:20:46,520 Speaker 1: cut off the risk of democracy inherent inflationary bias on 266 00:20:46,600 --> 00:20:51,320 Speaker 1: the whole notion that democracy involves elected officials who would 267 00:20:51,359 --> 00:20:55,520 Speaker 1: always like to have the economy hotter rather than slower, 268 00:20:56,400 --> 00:21:01,640 Speaker 1: who presumably would always like to spend more than they tax, 269 00:21:02,800 --> 00:21:09,200 Speaker 1: who presumably would have a chronic systematic tendency to overheat 270 00:21:09,760 --> 00:21:15,440 Speaker 1: the economy, which would therefore lead to inflation. So the craison, 271 00:21:15,600 --> 00:21:20,680 Speaker 1: the atra of central bank independence UH is to cut 272 00:21:20,720 --> 00:21:26,879 Speaker 1: off the fat tail of inflation, because democracy, through the 273 00:21:26,960 --> 00:21:33,200 Speaker 1: electoral process, inherently has a pro inflation bias. And that's 274 00:21:33,200 --> 00:21:36,639 Speaker 1: not prijority, it's just inherent in the structure. The last 275 00:21:37,240 --> 00:21:41,240 Speaker 1: presidential camp candidate who tried to run on a platform 276 00:21:41,280 --> 00:21:46,840 Speaker 1: of increasing taxes didn't do terribly wealth in So the 277 00:21:46,880 --> 00:21:52,399 Speaker 1: reason for central bank independence and the isolation from the 278 00:21:52,480 --> 00:21:55,679 Speaker 1: political process, or as I like to refer to it 279 00:21:55,760 --> 00:22:02,400 Speaker 1: as the de facto fourth branch status, is to do 280 00:22:02,560 --> 00:22:07,919 Speaker 1: that which democracy can't do or the physical authority can't do, 281 00:22:08,720 --> 00:22:15,400 Speaker 1: which is say no and actually keep the economy from 282 00:22:15,480 --> 00:22:20,840 Speaker 1: running hot. So that really is the UH foundation for 283 00:22:21,080 --> 00:22:23,800 Speaker 1: central bank independence, and you would see that in Europe 284 00:22:24,320 --> 00:22:28,040 Speaker 1: very much as well. But if you end up in 285 00:22:28,080 --> 00:22:32,680 Speaker 1: a world where actually the fat tale that you're dealing 286 00:22:32,720 --> 00:22:37,720 Speaker 1: with is not too hot economy generating inflation, but a 287 00:22:37,840 --> 00:22:46,440 Speaker 1: two cold economy and also a fat tale risk of deflation, UH, 288 00:22:46,520 --> 00:22:52,600 Speaker 1: then your fundamental argument for rigid central bank independence no 289 00:22:52,680 --> 00:22:56,760 Speaker 1: longer holds. And I think the whole world is experiencing 290 00:22:57,440 --> 00:23:02,719 Speaker 1: that reality. And here I'm not criticizing central banks, uh, 291 00:23:02,760 --> 00:23:06,480 Speaker 1: and particularly not the Federal Reserve. But the world changed 292 00:23:06,840 --> 00:23:10,360 Speaker 1: in part because of our forty year love affair with 293 00:23:10,840 --> 00:23:15,720 Speaker 1: capitalism and globalism, uh, and the demise of unions and 294 00:23:15,760 --> 00:23:18,840 Speaker 1: all sorts of other sort of things, and that we 295 00:23:18,960 --> 00:23:22,000 Speaker 1: found out you can run this economy with an incredibly 296 00:23:22,119 --> 00:23:28,439 Speaker 1: low on employment rate and have no inflation echo whatsoever. 297 00:23:28,960 --> 00:23:36,920 Speaker 1: So that's the configuration of secular forces, long lasting forces 298 00:23:36,960 --> 00:23:40,560 Speaker 1: that have brought us to this juncture. And all the 299 00:23:40,640 --> 00:23:46,880 Speaker 1: things I just said were in place before the pandemic hit. 300 00:23:47,359 --> 00:23:50,439 Speaker 1: So these are not new things. It's just once the 301 00:23:50,520 --> 00:23:55,520 Speaker 1: pandemic hit, then it put them into technicolor in a 302 00:23:55,600 --> 00:24:03,080 Speaker 1: way that was beyond imagination. To the pandemic. Capitalism has 303 00:24:03,119 --> 00:24:09,160 Speaker 1: always had a very dark underbelly, and I'm a capitalist, 304 00:24:09,160 --> 00:24:13,760 Speaker 1: so therefore I'm not criticizing capitalism. I am just saying 305 00:24:13,800 --> 00:24:18,520 Speaker 1: it has a dark underbelly because it is a cumulative 306 00:24:19,000 --> 00:24:24,560 Speaker 1: voting system. The more dollars you have, the more votes 307 00:24:25,200 --> 00:24:32,560 Speaker 1: you have, and if you have robust, full throated cowboy capitalism, 308 00:24:32,600 --> 00:24:41,120 Speaker 1: it is inherently I think disinflationary or deflationary for main 309 00:24:41,200 --> 00:24:46,440 Speaker 1: street UH. And it is also going to skew your 310 00:24:46,520 --> 00:24:51,440 Speaker 1: income and wealth distribution UH in a very anti democratic 311 00:24:51,600 --> 00:24:55,480 Speaker 1: sort of way. In fact, when if you asked the question, UH, 312 00:24:55,520 --> 00:24:58,240 Speaker 1: you know, from the standpard of a good workable theory 313 00:24:58,480 --> 00:25:01,440 Speaker 1: of inflation, I think where we're gonna be morphing to 314 00:25:02,080 --> 00:25:06,840 Speaker 1: over time. Is that a working model of inflation? This 315 00:25:06,880 --> 00:25:12,679 Speaker 1: is not something that you can specify necessarily econometrically. Is 316 00:25:12,680 --> 00:25:15,639 Speaker 1: that inflation at the end of the day, is going 317 00:25:15,680 --> 00:25:24,720 Speaker 1: to reflect the relative pricing power of capital versus labor UH. 318 00:25:24,760 --> 00:25:30,199 Speaker 1: And capitalism obviously has had the dominant role UH in 319 00:25:30,400 --> 00:25:37,600 Speaker 1: power in our economy. If capital is the dominant power 320 00:25:37,640 --> 00:25:42,359 Speaker 1: in your economy versus labor, you will tend to have 321 00:25:42,600 --> 00:25:48,159 Speaker 1: a disinflationary environment. You will have an environment where also 322 00:25:48,359 --> 00:25:53,280 Speaker 1: you will drive corporate profit margins to generational highs. His 323 00:25:53,440 --> 00:26:00,119 Speaker 1: share of national income and Wall Street will absolutely, unambiguously 324 00:26:01,000 --> 00:26:07,400 Speaker 1: love it. In contrast, if you switch to labor, which 325 00:26:07,400 --> 00:26:12,480 Speaker 1: could also be called the citizens of democracy, that labor 326 00:26:12,720 --> 00:26:18,840 Speaker 1: has relative power versus capital, then you will tend to 327 00:26:18,880 --> 00:26:28,240 Speaker 1: see a bias George power inflation, lower shares for corporate 328 00:26:28,240 --> 00:26:34,960 Speaker 1: profits relative to national income, UH, and more chickens and 329 00:26:35,080 --> 00:26:39,959 Speaker 1: Main Street pots. What does that? What is the dominance 330 00:26:40,080 --> 00:26:44,879 Speaker 1: of deflation mean for the Federal reserves mandate? For instance? Like, 331 00:26:45,000 --> 00:26:47,719 Speaker 1: could you see a scenario where they start targeting wage 332 00:26:47,720 --> 00:26:51,359 Speaker 1: growth instead of something like full employment? Or I guess 333 00:26:51,359 --> 00:26:53,399 Speaker 1: to put it in other ways, if you were running 334 00:26:53,400 --> 00:26:56,280 Speaker 1: the FED, what would you be targeting at this juncture? 335 00:26:57,840 --> 00:26:59,679 Speaker 1: Kind Of hard for me to think in terms of 336 00:26:59,720 --> 00:27:08,200 Speaker 1: that that last construct. But I don't envision the FED 337 00:27:08,400 --> 00:27:15,399 Speaker 1: targeting wages per se. But I do think that the 338 00:27:15,560 --> 00:27:24,320 Speaker 1: FED has and will look at wages as a measure 339 00:27:24,640 --> 00:27:30,560 Speaker 1: of whether or not the economy is fully employed. And 340 00:27:31,080 --> 00:27:35,840 Speaker 1: given the fact that they've lost the ability to specify 341 00:27:36,080 --> 00:27:41,680 Speaker 1: the NEHRU or the natural rate of unemployment. And here 342 00:27:41,680 --> 00:27:43,720 Speaker 1: I'm not again, I'm not criticizing the FED. It's just 343 00:27:43,800 --> 00:27:48,000 Speaker 1: the fact that they have spent the last decade revising 344 00:27:48,080 --> 00:27:53,680 Speaker 1: down UH. They're estimates of the natural rate unemployment. I 345 00:27:53,680 --> 00:27:58,960 Speaker 1: think very prudently, the FED will quit trying to operate 346 00:27:59,040 --> 00:28:02,400 Speaker 1: with precision. You know it is the naturative unemployment four 347 00:28:02,440 --> 00:28:05,520 Speaker 1: point seven or four point four. Joe, I'm sure you 348 00:28:05,560 --> 00:28:08,840 Speaker 1: remember all of these debates. You know, you know exactly 349 00:28:08,840 --> 00:28:13,000 Speaker 1: where NEHRU is. And particularly following two thousand and twelve, 350 00:28:13,960 --> 00:28:18,760 Speaker 1: when under Ben Bernanki's leadership, that FED start publishing uh 351 00:28:18,800 --> 00:28:22,400 Speaker 1: it's estimate of NEHRU and then spent the next eight 352 00:28:22,480 --> 00:28:26,840 Speaker 1: years revising it down every year. I think where the 353 00:28:26,880 --> 00:28:30,920 Speaker 1: FED has evolved to very appropriately. And here I will 354 00:28:31,320 --> 00:28:34,800 Speaker 1: be the first and the last man in the room 355 00:28:34,960 --> 00:28:39,960 Speaker 1: of plotting uh is. Rather than a bunch of wonks 356 00:28:40,040 --> 00:28:45,240 Speaker 1: trying to figure out where NEHRU is. UH is, let 357 00:28:45,680 --> 00:28:51,000 Speaker 1: the data tell you where it is, which another way 358 00:28:51,400 --> 00:28:56,080 Speaker 1: is saying is let the tightness of the labor market, 359 00:28:56,600 --> 00:29:02,560 Speaker 1: which is presumed to be a harbor of inflation, actually 360 00:29:03,320 --> 00:29:07,880 Speaker 1: UH tell the story. Now presume the outcome. Let the 361 00:29:07,960 --> 00:29:11,480 Speaker 1: data tell the story. Well, let me ask you a 362 00:29:11,600 --> 00:29:15,800 Speaker 1: question because and just bringing it to monetary policy right now, 363 00:29:15,880 --> 00:29:21,560 Speaker 1: because one thing that's striking thinking about today in versus 364 00:29:21,560 --> 00:29:26,840 Speaker 1: the crisis aftermath in two thousand nine. Is markets in 365 00:29:26,920 --> 00:29:30,680 Speaker 1: two thousand nine expected the first rate hikes or sort 366 00:29:30,680 --> 00:29:33,680 Speaker 1: of normalization to come soon, and some people thought in 367 00:29:33,840 --> 00:29:36,239 Speaker 1: early two thousand nine we would get rate hikes by 368 00:29:36,240 --> 00:29:40,040 Speaker 1: the end of two thousand nine or early and uh. 369 00:29:40,080 --> 00:29:43,840 Speaker 1: Instead the first rate hikes weren't util Like now, the 370 00:29:43,880 --> 00:29:46,680 Speaker 1: market seems to have this appreciation that even if we 371 00:29:46,680 --> 00:29:49,080 Speaker 1: were to get, say a cp I spike of the 372 00:29:49,120 --> 00:29:51,320 Speaker 1: short term, that the FED would look through it. And 373 00:29:51,360 --> 00:29:54,000 Speaker 1: it's just not in a hurry at all two hike rates. 374 00:29:54,280 --> 00:29:57,640 Speaker 1: And so I'm curious, A. Is this progress, this sort 375 00:29:57,640 --> 00:30:01,560 Speaker 1: of idea that the FED isn't going to so perceived 376 00:30:01,560 --> 00:30:04,400 Speaker 1: to be so aggressive in fighting inflation if it picks up, 377 00:30:04,880 --> 00:30:07,800 Speaker 1: is that progress? And b is it effective? So will 378 00:30:07,840 --> 00:30:11,520 Speaker 1: we see a more robust recovery than we saw last 379 00:30:11,520 --> 00:30:14,880 Speaker 1: time because of this perception that the Fed would be 380 00:30:14,920 --> 00:30:17,360 Speaker 1: willing to let it run hot while it looks for 381 00:30:17,400 --> 00:30:23,440 Speaker 1: real signs of labor market tightness. Yes, and yes and yes. 382 00:30:23,520 --> 00:30:25,640 Speaker 1: I think if I got the order of your questions, 383 00:30:26,120 --> 00:30:28,960 Speaker 1: I know it is a pack a bunch of no no, no, no, no, no, no. 384 00:30:29,000 --> 00:30:32,080 Speaker 1: This is this is great fun. This is what I 385 00:30:32,200 --> 00:30:36,400 Speaker 1: do UH, and I think that we ask the society 386 00:30:36,560 --> 00:30:40,880 Speaker 1: and the FED very very much as an institution UH 387 00:30:41,000 --> 00:30:46,560 Speaker 1: learns from experience and learning that the Phillips curve has 388 00:30:46,600 --> 00:30:52,440 Speaker 1: become flatter than a pancake is a existential piece of 389 00:30:52,520 --> 00:30:59,320 Speaker 1: information UH. That the economy can be more fully employed 390 00:31:00,120 --> 00:31:04,080 Speaker 1: uh than previously thought as in the last previous forty 391 00:31:04,200 --> 00:31:08,280 Speaker 1: damn years. I think that's very much where the FEDS 392 00:31:08,440 --> 00:31:13,240 Speaker 1: mindset is. Is they are politically independent to fight inflation, 393 00:31:13,760 --> 00:31:17,440 Speaker 1: but that war has been one and over one. UH, 394 00:31:17,480 --> 00:31:21,960 Speaker 1: So therefore they should have a very cooperative approach with 395 00:31:22,120 --> 00:31:25,320 Speaker 1: the physical authority. Their job is not to say no. 396 00:31:26,040 --> 00:31:29,800 Speaker 1: Their job is to say yes. Their job is to 397 00:31:30,080 --> 00:31:37,040 Speaker 1: say yes to bigger budget deficits. That is their job, 398 00:31:37,120 --> 00:31:41,280 Speaker 1: and in fact j is saying it every day in 399 00:31:41,400 --> 00:31:45,160 Speaker 1: subtle ways and increasingly less subtling. God bless him for 400 00:31:45,280 --> 00:31:48,920 Speaker 1: being less subtle about it. Because we so desperately need 401 00:31:49,720 --> 00:31:55,880 Speaker 1: robust physcal policy relief and support for capitalism because of 402 00:31:55,920 --> 00:32:00,480 Speaker 1: the unique nature of the pandemic as well as the 403 00:32:00,680 --> 00:32:07,400 Speaker 1: all of the social injustices that were exposed by the 404 00:32:07,480 --> 00:32:10,920 Speaker 1: shock of the pandemic. So yeah, I think the FED 405 00:32:11,080 --> 00:32:17,720 Speaker 1: has learned a huge amount. And actually I think, uh, 406 00:32:17,760 --> 00:32:23,760 Speaker 1: the political establishment very much has uh learned a lot 407 00:32:23,800 --> 00:32:27,520 Speaker 1: as well, as they have a whole lot more degrees 408 00:32:27,560 --> 00:32:32,600 Speaker 1: of freedom to act in a proper democratic fashion and 409 00:32:32,720 --> 00:32:36,040 Speaker 1: not have to worry about being slapped on the risk 410 00:32:36,800 --> 00:32:40,080 Speaker 1: by the monetary authority. So yeah, I think we've learned 411 00:32:40,560 --> 00:32:43,800 Speaker 1: a lot as the society. I think we've learned a 412 00:32:43,840 --> 00:32:49,520 Speaker 1: lot with respect to the institutions of economic management, um. 413 00:32:49,640 --> 00:32:53,120 Speaker 1: And I think we as a society are also relearning 414 00:32:53,160 --> 00:32:59,480 Speaker 1: the core tenants of democracy, which is for citizens not 415 00:33:00,120 --> 00:33:03,280 Speaker 1: just to have you know, one person, one vote and 416 00:33:03,560 --> 00:33:11,400 Speaker 1: inalienable rights as concepts, but actually to live those propositions 417 00:33:11,920 --> 00:33:16,120 Speaker 1: uh in the making of policy. And actually, one of 418 00:33:16,120 --> 00:33:20,719 Speaker 1: the things that's been delightfully surprising to me is just 419 00:33:21,000 --> 00:33:26,520 Speaker 1: how quickly the congressional center of gravity has moved to 420 00:33:27,200 --> 00:33:31,360 Speaker 1: recognizing these propositions. I mean, I think they would have 421 00:33:31,440 --> 00:33:36,920 Speaker 1: recognized them over time, because the political process is fed 422 00:33:37,040 --> 00:33:41,840 Speaker 1: up uh with income and wealth any quality, which I 423 00:33:41,880 --> 00:33:44,400 Speaker 1: consider to be the approximate cause of the fact that 424 00:33:44,840 --> 00:33:47,320 Speaker 1: Mr Trump's in the White House. So I think we 425 00:33:47,360 --> 00:33:50,520 Speaker 1: would have gotten there over time. I would call it 426 00:33:50,600 --> 00:33:57,960 Speaker 1: democratic enlightenment, small D democrat enlightenment, but the pandemic has 427 00:33:58,040 --> 00:34:01,400 Speaker 1: really driven home we don't have time to do this 428 00:34:01,560 --> 00:34:04,240 Speaker 1: in the fullness of time. We need to do it 429 00:34:04,760 --> 00:34:09,800 Speaker 1: right now. UH and naval gazing about the long term 430 00:34:09,840 --> 00:34:15,640 Speaker 1: consequence of budget Devisit is no longer the parlor game 431 00:34:15,800 --> 00:34:20,040 Speaker 1: in Washington, and I consider that to be a delightful 432 00:34:20,560 --> 00:34:24,919 Speaker 1: moment in history. The budget dev is is quite big 433 00:34:25,040 --> 00:34:27,760 Speaker 1: enough to take care of itself and needs to be bigger. 434 00:34:28,719 --> 00:34:31,080 Speaker 1: Just on that note, should the food measure fiscal space? 435 00:34:31,640 --> 00:34:36,040 Speaker 1: That's a fascinating question. You're absolutely right, UM, and actually 436 00:34:36,480 --> 00:34:43,759 Speaker 1: come up with a analytical framework by which UH Congress 437 00:34:43,800 --> 00:34:46,920 Speaker 1: could be guided on how big the budget deficits should be. 438 00:34:47,719 --> 00:34:49,960 Speaker 1: Is that what you're referring to. I'm not sure. I've 439 00:34:49,960 --> 00:34:53,879 Speaker 1: never been asked that question before. Yeah, I think that's right. 440 00:34:54,400 --> 00:34:56,400 Speaker 1: I was gonna say, if we agree that fiscal space 441 00:34:56,480 --> 00:35:00,000 Speaker 1: might be bigger than we imagine before, then is there 442 00:35:00,080 --> 00:35:02,800 Speaker 1: a role for the Federal Reserve to try to gauge 443 00:35:02,840 --> 00:35:06,760 Speaker 1: that and maybe help Congress in figuring out how much 444 00:35:06,800 --> 00:35:10,200 Speaker 1: there is and how it might be best deployed. That 445 00:35:10,400 --> 00:35:15,000 Speaker 1: is really at a great existential question. I certainly think 446 00:35:15,160 --> 00:35:22,040 Speaker 1: that the Fed should be very cooperatively involved in and 447 00:35:22,160 --> 00:35:29,239 Speaker 1: analytically so UH with the physical Authority and trying to 448 00:35:30,600 --> 00:35:34,160 Speaker 1: figure out the answer to that question, because we really 449 00:35:34,200 --> 00:35:38,239 Speaker 1: don't know the answer. But I don't think that the 450 00:35:38,360 --> 00:35:42,759 Speaker 1: FED should take it further to the point where effectively 451 00:35:43,000 --> 00:35:47,520 Speaker 1: they would say to the Physical Authority, based upon our 452 00:35:47,560 --> 00:35:51,000 Speaker 1: best modeling work and all of this sort of thing, uh, 453 00:35:51,040 --> 00:35:58,640 Speaker 1: that you have X allowance two run budget deficit. I 454 00:35:58,680 --> 00:36:01,040 Speaker 1: don't think that FED wants to go that direction. I 455 00:36:01,080 --> 00:36:05,799 Speaker 1: don't think the FED shouldn't go that direction of effectively 456 00:36:06,640 --> 00:36:12,520 Speaker 1: giving the Fiscal Authority on an allowance to exercise democracy. 457 00:36:12,560 --> 00:36:17,480 Speaker 1: That that would be reminiscent of effectively Paul Boker and 458 00:36:17,560 --> 00:36:22,640 Speaker 1: Alan Greenspan effectively telling Congress what to do uh, and 459 00:36:22,719 --> 00:36:26,440 Speaker 1: if they didn't do it, then they would be consequences. 460 00:36:26,840 --> 00:36:30,920 Speaker 1: So I don't think that that the FED should establish 461 00:36:31,520 --> 00:36:35,480 Speaker 1: the moral equivalent of the f O m C for 462 00:36:36,200 --> 00:36:42,120 Speaker 1: fiscal policy. Now that's a fascinating angle of a thought, however, 463 00:36:42,400 --> 00:36:48,160 Speaker 1: in that should Congress itself have the moral equivalent of 464 00:36:48,239 --> 00:36:52,520 Speaker 1: an f O m C uh. And that's an idea 465 00:36:52,600 --> 00:36:57,000 Speaker 1: that I think is very intriguing and certainly doesn't originate 466 00:36:57,040 --> 00:37:01,000 Speaker 1: with me whatsoever. In fact, a guy who wrote effectively 467 00:37:01,040 --> 00:37:06,040 Speaker 1: a book on that concept was Alan Blinder over a 468 00:37:06,120 --> 00:37:11,720 Speaker 1: decade ago. If we're gonna have monetary policy, have a demonstrable, 469 00:37:11,960 --> 00:37:17,480 Speaker 1: technocratic or wonky sort of body to to debate and 470 00:37:17,560 --> 00:37:21,160 Speaker 1: determine these sorts of things, maybe there should be something 471 00:37:21,920 --> 00:37:26,960 Speaker 1: equivalent over on the congressional side that sets physical policy. 472 00:37:27,000 --> 00:37:30,120 Speaker 1: Because you've got a huge body there, you know, for 473 00:37:32,840 --> 00:37:36,120 Speaker 1: that's not an efficient way to make these sorts of decisions. 474 00:37:36,160 --> 00:37:41,440 Speaker 1: So I would certainly be supportive of Congress establishing something 475 00:37:41,480 --> 00:37:48,319 Speaker 1: that would have similarity to the f on C too, 476 00:37:48,719 --> 00:37:54,080 Speaker 1: deliberate in a technocratic way, informed by politics and so forth, 477 00:37:54,160 --> 00:38:01,439 Speaker 1: but actually informed analytically on determining you know, how much 478 00:38:01,560 --> 00:38:06,120 Speaker 1: physical space uh there is, you know, kind of like 479 00:38:06,360 --> 00:38:08,839 Speaker 1: you know, the f O m C is always you know, 480 00:38:08,920 --> 00:38:13,279 Speaker 1: focused on what is nehru? What is nehru? What is nehru? 481 00:38:13,400 --> 00:38:16,640 Speaker 1: And then everything shifted to what is our star? What 482 00:38:16,880 --> 00:38:20,880 Speaker 1: is your natural real rate of interest? Uh? So I 483 00:38:20,920 --> 00:38:27,200 Speaker 1: would be very open and supportive of of Congress having 484 00:38:27,320 --> 00:38:31,360 Speaker 1: a body that would you know, deliberate about these sorts 485 00:38:31,360 --> 00:38:36,960 Speaker 1: of things and inform the elected officials. In fact, conceptually 486 00:38:37,239 --> 00:38:44,960 Speaker 1: you could morph the CBO in that direction. Heretofore CBO 487 00:38:45,120 --> 00:38:49,480 Speaker 1: has tried to, you know, essentially say we'll just bottle 488 00:38:49,600 --> 00:38:54,680 Speaker 1: out UH the implications of policy proposals and what it 489 00:38:54,719 --> 00:38:58,160 Speaker 1: means for the budget deficit and all that feedback loop 490 00:38:58,280 --> 00:39:01,080 Speaker 1: into py go and pay forwards and all of that 491 00:39:01,320 --> 00:39:06,600 Speaker 1: sort of stuff. So conceptually you could take the CBO 492 00:39:07,520 --> 00:39:12,359 Speaker 1: and turbo charge it into the moral equivalent of the 493 00:39:12,480 --> 00:39:16,560 Speaker 1: f O m C. And again, UH, Alan Blinder is 494 00:39:16,600 --> 00:39:21,359 Speaker 1: a brilliant man, has some really longstanding viewpoints on that, 495 00:39:21,520 --> 00:39:24,000 Speaker 1: and I would hardly recommend that you have him on. 496 00:39:40,480 --> 00:39:43,920 Speaker 1: I want to shift the conversation to actual UH markets 497 00:39:43,960 --> 00:39:46,760 Speaker 1: and investing for a moment. As you mentioned at the beginning, 498 00:39:46,760 --> 00:39:51,080 Speaker 1: you're a managing director at PIMCO, and this whole environment 499 00:39:51,200 --> 00:39:54,040 Speaker 1: these last forty years, I mean, it's clearly just been 500 00:39:54,080 --> 00:39:57,319 Speaker 1: fantastic for investors. If you just bought stocks, Sure you 501 00:39:57,440 --> 00:40:01,040 Speaker 1: hit a few scary months here to there, but by 502 00:40:01,080 --> 00:40:03,960 Speaker 1: and large they've just gone up. If you had a balanced, 503 00:40:04,000 --> 00:40:08,279 Speaker 1: sort of classical sixty portfolio, you've done phenomenally well and 504 00:40:08,400 --> 00:40:12,759 Speaker 1: less volatility because of this sort of way we've crushed inflation. 505 00:40:13,400 --> 00:40:15,319 Speaker 1: But if you're thinking like sort of like from a 506 00:40:15,400 --> 00:40:19,479 Speaker 1: portfolio management had on and you think, okay, we've come 507 00:40:19,520 --> 00:40:21,960 Speaker 1: to the end of all these trends. As you say 508 00:40:22,000 --> 00:40:26,000 Speaker 1: we're going to have this shift, then how what does 509 00:40:26,040 --> 00:40:31,600 Speaker 1: that mean for sort of traditional portfolio allocation and risk management? 510 00:40:31,680 --> 00:40:33,799 Speaker 1: And will the ideas that worked over the last forty 511 00:40:33,840 --> 00:40:36,040 Speaker 1: years they are people gonna have to come up with 512 00:40:36,080 --> 00:40:40,759 Speaker 1: new ideas. If the ideas that have worked over the 513 00:40:40,840 --> 00:40:48,120 Speaker 1: last forty years work going forward, then democracy has failed. 514 00:40:50,080 --> 00:40:57,399 Speaker 1: And I say that with great conviction may passion. If 515 00:40:57,440 --> 00:41:00,960 Speaker 1: what has worked an investment management for the last forty 516 00:41:01,040 --> 00:41:07,080 Speaker 1: years were to continue working, not immediately today or tomorrow 517 00:41:07,120 --> 00:41:11,080 Speaker 1: the next day, but if it were to work on 518 00:41:11,120 --> 00:41:14,680 Speaker 1: a secular basis for the next five years, ten years, 519 00:41:14,760 --> 00:41:23,240 Speaker 1: twenty years, then we have unambiguously failed as a democracy. 520 00:41:23,280 --> 00:41:29,840 Speaker 1: Because the reason the financial markets have done so spectacularly 521 00:41:30,040 --> 00:41:35,480 Speaker 1: well over the last forty years is because we've been 522 00:41:35,520 --> 00:41:42,080 Speaker 1: at a forty year disinflationary environment. I mean, you've had 523 00:41:42,120 --> 00:41:47,000 Speaker 1: your cyclical ups and downs, but not ambiguously we've had 524 00:41:47,560 --> 00:41:54,840 Speaker 1: forty years of disinflation. And that's because effectively, we shifted 525 00:41:55,040 --> 00:42:02,440 Speaker 1: power in our economy, both domestically and globally from labor 526 00:42:03,800 --> 00:42:10,560 Speaker 1: to capital, and capital has had the dominant UH influence 527 00:42:10,880 --> 00:42:14,719 Speaker 1: in our economy for the last forty years, and global 528 00:42:15,160 --> 00:42:22,399 Speaker 1: globalization is simply capitalism on a global stage. A disinflationary 529 00:42:22,600 --> 00:42:29,279 Speaker 1: environment because of the dominance of capitalism, will also give 530 00:42:29,360 --> 00:42:34,000 Speaker 1: you a fall over time in our star that real 531 00:42:34,680 --> 00:42:39,880 Speaker 1: natural interest rate. It will also tend to dampen volatility. 532 00:42:40,120 --> 00:42:42,480 Speaker 1: So when you think in terms of the three big 533 00:42:42,520 --> 00:42:45,120 Speaker 1: forces of the last forty years that have made your 534 00:42:45,160 --> 00:42:51,960 Speaker 1: old thing look wonderfully, well, those three forces is what 535 00:42:52,080 --> 00:42:58,200 Speaker 1: drove it is the supremacy of capitalism over democracy, disinflation, 536 00:42:58,880 --> 00:43:03,080 Speaker 1: and a falling natural real interest rate. And you can, 537 00:43:03,160 --> 00:43:06,000 Speaker 1: just I love teaching this to my students, you can 538 00:43:06,000 --> 00:43:10,120 Speaker 1: plug all three of those UH into a Gordon formula 539 00:43:10,520 --> 00:43:12,959 Speaker 1: here I mean to be testing, you know, days ago 540 00:43:13,120 --> 00:43:17,040 Speaker 1: from NBA school, but it's a really simple proposition of 541 00:43:17,080 --> 00:43:20,520 Speaker 1: how you value things. And the Gordon formula is one 542 00:43:20,560 --> 00:43:26,920 Speaker 1: dollar divided by the risk free interest rate minus the 543 00:43:27,040 --> 00:43:32,080 Speaker 1: growth rate of profits plus a risk premium. And we've 544 00:43:32,080 --> 00:43:38,440 Speaker 1: had a forty year tail wind of effectively falling real 545 00:43:39,000 --> 00:43:44,240 Speaker 1: interest rates, which by definition is going to increase the 546 00:43:44,280 --> 00:43:52,239 Speaker 1: market value of all income streams. And that's what capitalism 547 00:43:52,360 --> 00:43:58,160 Speaker 1: is about is ownership claims on income streams. So actually, 548 00:43:58,200 --> 00:44:04,040 Speaker 1: it's been uh forty years of incredible run uh bullmark 549 00:44:04,320 --> 00:44:11,239 Speaker 1: invaluation for financial assets, and I certainly hope as a 550 00:44:11,320 --> 00:44:16,400 Speaker 1: citizen that is not repeated. So I think my old profession, 551 00:44:16,440 --> 00:44:19,480 Speaker 1: I'm retired now, I don't manage anybody's money but my own. 552 00:44:19,800 --> 00:44:23,920 Speaker 1: I mean, I really hope that my old profession figures 553 00:44:24,000 --> 00:44:30,520 Speaker 1: out a new paradigm for its own health. Because what's happened, 554 00:44:30,560 --> 00:44:35,080 Speaker 1: what's worked the last forty years should not work unless 555 00:44:35,120 --> 00:44:39,600 Speaker 1: you want democracy to fail. Okay, the old approach the 556 00:44:40,400 --> 00:44:44,040 Speaker 1: won't work. Is there something that will work in the 557 00:44:44,040 --> 00:44:49,400 Speaker 1: new system if democracy works, are their portfolios that can 558 00:44:49,640 --> 00:44:52,959 Speaker 1: still work if we have this uh you know, reassertion 559 00:44:53,160 --> 00:45:00,440 Speaker 1: of democratic economic management. Actually, I'm not so much critical 560 00:45:00,680 --> 00:45:06,400 Speaker 1: of the sixty forty proposition. It's the payoff of the 561 00:45:06,480 --> 00:45:12,399 Speaker 1: sixty forty proposition, the rate of return. Actually, I don't 562 00:45:12,400 --> 00:45:14,960 Speaker 1: know what the right number is gonna be going forward 563 00:45:15,120 --> 00:45:20,719 Speaker 1: on the split between equity and fixed income. I think 564 00:45:20,719 --> 00:45:25,680 Speaker 1: the sixty forties pretty ingrained in our society, but theoretically 565 00:45:25,680 --> 00:45:28,319 Speaker 1: it should be based upon you know, volatilities and all 566 00:45:28,320 --> 00:45:31,279 Speaker 1: of that sort of thing. But actually one fly in 567 00:45:31,320 --> 00:45:37,560 Speaker 1: the autment on the sixty proposition is that, uh, as 568 00:45:37,560 --> 00:45:42,960 Speaker 1: we've seen, particularly in the last decade, that equities and 569 00:45:43,120 --> 00:45:48,760 Speaker 1: treasury bonds have had a wonderful negative correlation. But differently, 570 00:45:49,560 --> 00:45:53,200 Speaker 1: you hedge equity risk with credit risk free duration risk, 571 00:45:53,800 --> 00:45:57,520 Speaker 1: and you know, Bridgewater built it's you whole business model 572 00:45:57,600 --> 00:46:03,000 Speaker 1: on that proposition of risk parity, and risk parity models 573 00:46:03,200 --> 00:46:06,840 Speaker 1: don't work all that very well when you have nowhere 574 00:46:06,960 --> 00:46:10,200 Speaker 1: to go for the price of the treasury bond. So 575 00:46:10,440 --> 00:46:15,719 Speaker 1: by definition, treasuries will be less of a quote unquote 576 00:46:15,880 --> 00:46:19,719 Speaker 1: hedge to equity risk going forward. And I think that's 577 00:46:19,800 --> 00:46:26,239 Speaker 1: hugely important for my profession of investment management is recognizing that, 578 00:46:26,440 --> 00:46:30,760 Speaker 1: just as a result of a arithmetic uh, that government 579 00:46:30,800 --> 00:46:35,400 Speaker 1: duration long government duration is less useful as a hedge 580 00:46:35,440 --> 00:46:38,479 Speaker 1: against equity risk going forward. So I think that's where 581 00:46:38,520 --> 00:46:43,120 Speaker 1: a lot of PhD uh dissertations should be written going forward. UH. 582 00:46:43,160 --> 00:46:49,560 Speaker 1: And it has profound implications for risk parity business models. 583 00:46:49,960 --> 00:46:53,560 Speaker 1: But away from that issue, I think it's just the 584 00:46:53,719 --> 00:47:00,840 Speaker 1: rate of return on ownership claims otherwise known as assets 585 00:47:01,440 --> 00:47:06,120 Speaker 1: going forward, because I would like to believe, and I 586 00:47:06,200 --> 00:47:10,319 Speaker 1: fully believe the FED would like. This outcome is that 587 00:47:10,480 --> 00:47:16,160 Speaker 1: inflation goes up from here over the next five to 588 00:47:16,360 --> 00:47:22,080 Speaker 1: ten years. And inflation going up would be a d 589 00:47:22,360 --> 00:47:28,560 Speaker 1: delightful thing for democracy because that means that labor is 590 00:47:28,719 --> 00:47:36,360 Speaker 1: gaining bargaining power, our pricing power versus capital. So therefore 591 00:47:36,520 --> 00:47:40,080 Speaker 1: I will applaud all day long as a citizen. But 592 00:47:40,200 --> 00:47:45,720 Speaker 1: it will also tend to be a inflationary tail wind, 593 00:47:46,360 --> 00:47:50,880 Speaker 1: not a disinflationary tail wind. And actually I'm saying that 594 00:47:50,960 --> 00:47:54,080 Speaker 1: in a very positive sort of thing, not a negative 595 00:47:54,120 --> 00:47:56,840 Speaker 1: thing like you hear frequently, Oh this is this is 596 00:47:56,920 --> 00:47:59,960 Speaker 1: gonna lead to inflation. I pray it leads to inflation. 597 00:48:00,239 --> 00:48:03,480 Speaker 1: If it does not lead to inflation, then it has failed. 598 00:48:04,239 --> 00:48:07,160 Speaker 1: And that over the next five to ten years, if 599 00:48:07,200 --> 00:48:12,680 Speaker 1: we shift more power to the people, if you will, 600 00:48:12,880 --> 00:48:15,480 Speaker 1: you don't do that so much directly as you do 601 00:48:15,520 --> 00:48:20,440 Speaker 1: that uh through the democratic process UM, and you get 602 00:48:20,520 --> 00:48:25,919 Speaker 1: higher inflation, that it means that UM evaluation should come 603 00:48:26,000 --> 00:48:29,400 Speaker 1: down for financial assets. Or if you want a bumper 604 00:48:29,480 --> 00:48:34,359 Speaker 1: sticker for it, is that the environment, the pro democracy 605 00:48:34,520 --> 00:48:41,240 Speaker 1: environment that I envision in the generation ahead, is barish, 606 00:48:41,480 --> 00:48:46,759 Speaker 1: not bullish. For pe multiples, the last forty years have 607 00:48:46,960 --> 00:48:56,920 Speaker 1: been a bull market invaluation, and going forward, I think 608 00:48:56,960 --> 00:49:01,680 Speaker 1: that Wall Street and the investment management business and the 609 00:49:01,760 --> 00:49:06,000 Speaker 1: wealthy need to recognize there's such a thing as a 610 00:49:06,239 --> 00:49:12,840 Speaker 1: bear market evaluation, which would be a secular decline and 611 00:49:13,000 --> 00:49:19,400 Speaker 1: pe multiples, a bear market in bonds, a increase in 612 00:49:20,320 --> 00:49:24,839 Speaker 1: cap rates UH for real estate and so forth. So 613 00:49:25,040 --> 00:49:29,960 Speaker 1: I think for the investment world, UM, there needs to 614 00:49:30,000 --> 00:49:34,560 Speaker 1: be a embrace of the notion that the forty year 615 00:49:35,200 --> 00:49:41,640 Speaker 1: evaluation expansion epic is over. Don't necessarily mean in the 616 00:49:41,719 --> 00:49:46,399 Speaker 1: next few months. I'm talking about long term secular trends here. 617 00:49:47,480 --> 00:49:50,640 Speaker 1: There's one more topic that we really need to ask 618 00:49:50,680 --> 00:49:52,680 Speaker 1: you about, and I think Joe Joe mentioned in the 619 00:49:52,719 --> 00:49:55,439 Speaker 1: intro that you know you coined the term Minsky moment. 620 00:49:55,480 --> 00:49:59,640 Speaker 1: You also coined the term shadow banking with Sultan Poser, 621 00:49:59,760 --> 00:50:03,719 Speaker 1: who has been on our podcast a couple of times. Now, UM, 622 00:50:03,760 --> 00:50:07,960 Speaker 1: how do you think shadow banks contributed or what role 623 00:50:08,040 --> 00:50:12,759 Speaker 1: did they play in the recent market turmoil UM that 624 00:50:12,800 --> 00:50:19,800 Speaker 1: we've seen this year. I think shadow banks morphed after 625 00:50:19,840 --> 00:50:26,000 Speaker 1: the financial crisis. Obviously the biggest shadow banks became real 626 00:50:26,040 --> 00:50:32,200 Speaker 1: banks UH after Lehman went down, and the impulse to 627 00:50:32,400 --> 00:50:37,080 Speaker 1: create a shadow bank shifted to other spaces, but shadow 628 00:50:37,120 --> 00:50:42,759 Speaker 1: banking is very much alive and will always be with 629 00:50:42,840 --> 00:50:47,279 Speaker 1: us because it's too tempting. Essentially, a shadow bank is 630 00:50:47,320 --> 00:50:54,800 Speaker 1: nothing more than using a traditional banking model, which is 631 00:50:54,840 --> 00:51:01,960 Speaker 1: inherently profitable, and doing it UH without government constraints. Julia 632 00:51:02,000 --> 00:51:05,200 Speaker 1: will always be with us. The notion of eliminating shadow 633 00:51:05,239 --> 00:51:09,480 Speaker 1: banking is nonsensical, and I think it should be nonsensical 634 00:51:09,600 --> 00:51:15,440 Speaker 1: because shadow banking is basically an arbitrage around traditional banking, 635 00:51:15,520 --> 00:51:19,480 Speaker 1: which is a joint venture between the public and private sector, 636 00:51:20,080 --> 00:51:23,200 Speaker 1: and shadow banking is simply saying, let's take the public 637 00:51:23,239 --> 00:51:26,960 Speaker 1: sector out of the banking model and make it a 638 00:51:27,000 --> 00:51:29,440 Speaker 1: private one picks up when we blow up, and then 639 00:51:29,440 --> 00:51:31,880 Speaker 1: we'd like the public sector back. And I think shadow 640 00:51:31,880 --> 00:51:34,920 Speaker 1: banking will be with us for a long period of time, 641 00:51:35,360 --> 00:51:37,080 Speaker 1: and it should be with us for a long period 642 00:51:37,080 --> 00:51:40,160 Speaker 1: of time. It's just endemic to capitalism that you always 643 00:51:40,160 --> 00:51:45,839 Speaker 1: want to arbitrage government rules. In the most recent episode, 644 00:51:46,840 --> 00:51:51,520 Speaker 1: I think that shadow banks, and here I'm just I 645 00:51:51,560 --> 00:51:55,840 Speaker 1: can use effectively call it the non banking sector, probably 646 00:51:56,680 --> 00:52:05,520 Speaker 1: exacerbated the malfunk auctioning of the financial markets. And remember 647 00:52:06,080 --> 00:52:09,080 Speaker 1: UH share Powace Pound at the table that a lot 648 00:52:09,120 --> 00:52:12,759 Speaker 1: of what they've been doing is to restore and support 649 00:52:13,560 --> 00:52:22,280 Speaker 1: market functioning, and market functioning requires market makers. And after 650 00:52:22,520 --> 00:52:31,520 Speaker 1: the financial crisis, essentially UM government democracy dramatically limited the 651 00:52:31,600 --> 00:52:37,279 Speaker 1: ability of Wall Street uh market makers to act like 652 00:52:37,440 --> 00:52:41,760 Speaker 1: hedge funds, because that's essentially what they were doing. Lehman 653 00:52:41,800 --> 00:52:45,400 Speaker 1: Brothers would be a perfect example, with leverage half the 654 00:52:45,480 --> 00:52:49,520 Speaker 1: distance to the moon. So the depth of Wall Streets 655 00:52:49,560 --> 00:52:54,840 Speaker 1: ability to absorb a risk on part of the system 656 00:52:55,840 --> 00:52:59,040 Speaker 1: was regulated out of existence, not out of the existence, 657 00:52:59,080 --> 00:53:04,359 Speaker 1: it was looted dramatically. Uh. So therefore, when you get 658 00:53:04,400 --> 00:53:09,600 Speaker 1: a shock, then non market makers effectively can lock up 659 00:53:09,600 --> 00:53:13,600 Speaker 1: the markets very very quickly. Uh. And therefore you have 660 00:53:13,680 --> 00:53:16,879 Speaker 1: to have the FED come in and effectively be the 661 00:53:16,920 --> 00:53:21,680 Speaker 1: market maker of last resort, which is what they've been 662 00:53:21,760 --> 00:53:25,359 Speaker 1: doing obviously. So I'm not sure I would so much 663 00:53:25,840 --> 00:53:29,800 Speaker 1: say that, you know, shadow banks are a culprit or 664 00:53:29,840 --> 00:53:34,600 Speaker 1: anything of that nature, but they were truly major players 665 00:53:34,640 --> 00:53:38,839 Speaker 1: and basically saying we've gotten hit with a shock that 666 00:53:38,960 --> 00:53:44,400 Speaker 1: induces radical uncertainty and we need to offload will risk 667 00:53:45,320 --> 00:53:50,360 Speaker 1: and in UM the post dot Frank world, whilst the 668 00:53:50,440 --> 00:53:55,799 Speaker 1: traditional banking sector simply doesn't have the capacity to be 669 00:53:55,920 --> 00:54:00,319 Speaker 1: the shock absorber in the system. Uh. That all mighty 670 00:54:00,400 --> 00:54:03,480 Speaker 1: has to be the sovereign, as manifest in the Central 671 00:54:03,480 --> 00:54:09,480 Speaker 1: Bank itself. Paul mcculey, that was a great conversation, and 672 00:54:09,840 --> 00:54:14,720 Speaker 1: thank you so much for coming on out love UM absolutely, Pature, 673 00:54:14,760 --> 00:54:16,880 Speaker 1: thank you, Tracy and Joe, thank you. That was great. 674 00:54:17,239 --> 00:54:31,399 Speaker 1: Thank you Paul. That was great. Tracy. I feel like 675 00:54:31,880 --> 00:54:34,200 Speaker 1: we've hit on a lot of these themes that we 676 00:54:34,320 --> 00:54:37,080 Speaker 1: touched on with Paul in several of our recent episodes 677 00:54:37,120 --> 00:54:40,279 Speaker 1: really throughout this crisis. But I don't think anyone has 678 00:54:40,400 --> 00:54:44,839 Speaker 1: really put all the pieces together, uh as well as 679 00:54:44,880 --> 00:54:49,320 Speaker 1: Paul Ken in terms of really politics, macro policy, fiscal handoff, 680 00:54:49,360 --> 00:54:53,319 Speaker 1: and then also like just what it means for investing. Yeah. Um, 681 00:54:53,400 --> 00:54:55,920 Speaker 1: Paul is really able to bring all those sort of 682 00:54:56,560 --> 00:55:00,239 Speaker 1: different strands together in one big narrative. And I think 683 00:55:00,800 --> 00:55:03,920 Speaker 1: I think there's a tendency on the part of investors 684 00:55:03,960 --> 00:55:08,360 Speaker 1: in the market to sort of dismiss concerns about inequality 685 00:55:08,480 --> 00:55:13,400 Speaker 1: as not really relevant to investing. UM. But I think 686 00:55:14,080 --> 00:55:16,359 Speaker 1: Paul made a really good point that if you think 687 00:55:16,360 --> 00:55:20,200 Speaker 1: that the deflation that has basically caused risk assets to 688 00:55:20,360 --> 00:55:22,680 Speaker 1: go up or contributed to risk assets going up for 689 00:55:22,719 --> 00:55:25,480 Speaker 1: the past forty years. All of that is because of 690 00:55:25,560 --> 00:55:29,719 Speaker 1: that handoff or that dominance of capital versus labor. Then 691 00:55:29,760 --> 00:55:34,200 Speaker 1: the inequality question becomes really really important for anyone investing. 692 00:55:34,280 --> 00:55:38,480 Speaker 1: It's not just a topic of you know, social dynamics 693 00:55:38,520 --> 00:55:41,200 Speaker 1: and justice and things like that. Yeah. I think the 694 00:55:41,200 --> 00:55:43,640 Speaker 1: way like I think about it is like maybe people 695 00:55:43,840 --> 00:55:48,600 Speaker 1: think that fixing inequalities like a technical fix that it's like, Okay, 696 00:55:48,680 --> 00:55:51,960 Speaker 1: we have this like robust economy, booming market, what we 697 00:55:52,000 --> 00:55:55,040 Speaker 1: need to do something about inequality too, as if it's 698 00:55:55,080 --> 00:55:57,960 Speaker 1: just like this little piece of it, rather than seeing 699 00:55:58,000 --> 00:56:02,320 Speaker 1: how widening in equal quality, as Paul puts, it is 700 00:56:02,360 --> 00:56:07,760 Speaker 1: actually at the heart of this incredible economic and market 701 00:56:07,840 --> 00:56:10,000 Speaker 1: model that we've had. And it's sort of like, you know, 702 00:56:10,080 --> 00:56:12,600 Speaker 1: kind of playing people maybe think of this game's Jenga. 703 00:56:12,760 --> 00:56:14,560 Speaker 1: Let's move this little piece, but we can keep the 704 00:56:14,560 --> 00:56:17,279 Speaker 1: whole thing up. But it's really sort of integral to 705 00:56:17,320 --> 00:56:19,799 Speaker 1: how it all works and how or the clauses of it. 706 00:56:19,800 --> 00:56:24,040 Speaker 1: It's really deeply connected. I think that's absolutely right. And 707 00:56:24,320 --> 00:56:26,120 Speaker 1: the other thing I will say is that even though 708 00:56:26,200 --> 00:56:30,200 Speaker 1: we talk a lot about the handoff from monetary policy 709 00:56:30,200 --> 00:56:33,319 Speaker 1: into fiscal policy or the mixing of the two. And 710 00:56:33,400 --> 00:56:36,280 Speaker 1: we're starting to see some change on that front, even 711 00:56:36,320 --> 00:56:39,759 Speaker 1: though that's happening, and you know, Paul thinks that that 712 00:56:39,840 --> 00:56:42,719 Speaker 1: could be the thing that sort of brings capital and 713 00:56:42,840 --> 00:56:46,520 Speaker 1: labor labor back into balance, or you know, democracy back 714 00:56:46,600 --> 00:56:51,000 Speaker 1: into play. So far, all of the measures unleashed by 715 00:56:51,000 --> 00:56:56,080 Speaker 1: the Federal Reserve have had the effect of increasing inequality 716 00:56:56,120 --> 00:56:58,240 Speaker 1: as far as I can see, like both for individuals 717 00:56:58,280 --> 00:57:00,960 Speaker 1: and for capital markets as well, where you know, big 718 00:57:01,000 --> 00:57:05,320 Speaker 1: companies can access this booming bond market and smaller firms 719 00:57:05,320 --> 00:57:07,920 Speaker 1: are still locked out because they can't get loans from 720 00:57:08,040 --> 00:57:11,120 Speaker 1: you know, run of the millbanks. Look at today, we're 721 00:57:11,120 --> 00:57:15,680 Speaker 1: recording this August. It's now been weeks since the unemployment 722 00:57:15,680 --> 00:57:19,880 Speaker 1: insurance expansion lapsed, and there is not obviously a lot 723 00:57:19,880 --> 00:57:22,000 Speaker 1: of political appetite right now. Now maybe by the time 724 00:57:22,040 --> 00:57:24,360 Speaker 1: people are listening to it, they'll have something, but we 725 00:57:24,600 --> 00:57:27,480 Speaker 1: everyone's like talking, including policy, like Okay, this is the handoff, 726 00:57:27,520 --> 00:57:30,120 Speaker 1: this is the moment. And if we see we're the 727 00:57:30,160 --> 00:57:32,919 Speaker 1: middle of a crisis, ten percent unemployment and we still 728 00:57:32,960 --> 00:57:37,320 Speaker 1: can't get an unemployment insurance expansion. So for as obvious 729 00:57:37,400 --> 00:57:39,240 Speaker 1: it is, as it is to some people that there's 730 00:57:39,240 --> 00:57:41,800 Speaker 1: a hand off, the reality in d C is we're 731 00:57:41,840 --> 00:57:46,240 Speaker 1: a long way in practice from actually having a sustained, 732 00:57:46,400 --> 00:57:50,160 Speaker 1: robust fiscal framework that's outside of just a few months 733 00:57:50,160 --> 00:57:53,240 Speaker 1: and the worst part of the crisis. We're clearly not 734 00:57:53,280 --> 00:57:56,120 Speaker 1: there yet. Yeah. I think that's right, But it also 735 00:57:56,160 --> 00:57:58,480 Speaker 1: does make you think what happens when when we do 736 00:57:58,600 --> 00:58:02,400 Speaker 1: finally get like actually substantial fiscal stimulus in some form 737 00:58:02,480 --> 00:58:06,280 Speaker 1: or another. I also just think in general, and this 738 00:58:06,360 --> 00:58:08,280 Speaker 1: is a point that you've made a bunch of times, 739 00:58:08,360 --> 00:58:11,960 Speaker 1: both a podcast and on Twitter. It's like, and you know, 740 00:58:12,000 --> 00:58:13,880 Speaker 1: to what you said before about inequality, but it's like 741 00:58:14,280 --> 00:58:17,480 Speaker 1: this is all downstream from politics. Like the idea of 742 00:58:17,520 --> 00:58:22,880 Speaker 1: separating political fights from economic management or whatever, or the 743 00:58:22,920 --> 00:58:26,200 Speaker 1: idea that we can have a handoff from monetary to 744 00:58:26,280 --> 00:58:28,640 Speaker 1: fiscal policy, but in a way that somehow like a 745 00:58:28,760 --> 00:58:32,800 Speaker 1: political it's unrealistic, Like the fight has to be and 746 00:58:32,840 --> 00:58:35,000 Speaker 1: it's happening, of course, but the fight is first and 747 00:58:35,040 --> 00:58:38,720 Speaker 1: foremost in politics, and then the change in policies, if 748 00:58:38,760 --> 00:58:42,320 Speaker 1: we were to get one, comes after that. Yeah, the 749 00:58:42,360 --> 00:58:46,160 Speaker 1: problem is and always has been politics and I'm not sure, 750 00:58:46,320 --> 00:58:51,600 Speaker 1: you know, formally recognizing that does much to change the situation. Um, 751 00:58:51,640 --> 00:58:54,000 Speaker 1: maybe it's a start, but I think I'm just very 752 00:58:54,000 --> 00:58:59,840 Speaker 1: cynical about politics in general. I think you're you're well justified. Okay, 753 00:59:00,680 --> 00:59:04,000 Speaker 1: so we leave it there. Let's leave it there, all right. 754 00:59:04,240 --> 00:59:06,960 Speaker 1: This has been another episode of the All Thoughts podcast. 755 00:59:07,000 --> 00:59:09,440 Speaker 1: I'm Tracy Alloway. You can follow me on Twitter at 756 00:59:09,440 --> 00:59:13,040 Speaker 1: Tracy Alloway, and I'm Joe Wisn't thought you could follow 757 00:59:13,120 --> 00:59:16,360 Speaker 1: me on Twitter at the Stalwart. Follow our producer on Twitter, 758 00:59:16,440 --> 00:59:20,720 Speaker 1: Laura Carlson. She's at Laura M. Carlson. Followed the Bloomberg 759 00:59:20,760 --> 00:59:24,360 Speaker 1: head of podcast, francesco Leavi at Francesca Today, and check 760 00:59:24,400 --> 00:59:27,880 Speaker 1: out all of our podcasts under the handle at podcasts. 761 00:59:28,000 --> 00:59:28,760 Speaker 1: Thanks for listening.