Speaker 1: Hi you're listening to Kobe time, a podcast series on
Speaker 1: markets and economies from DBS group research. I'm Taimur baig
Speaker 1: chief economist. Welcome to our 69th episode,
Speaker 1: I promised a deep dive in global macro in the
Speaker 1: last episode and here we go. With great pleasure. We
Speaker 1: welcome back Mark sobel to our podcast.
Speaker 1: Mark is us chairman at official monetary and financial institutions forum,
Speaker 1: better known as um 50.
Speaker 1: He has been at the forefront of international financial diplomacy
Speaker 1: for several decades,
Speaker 1: Representing the us at the International Monetary Fund's executive report
Speaker 1: till April 2018.
Speaker 1: Prior to that, Mark was Treasury Deputy Assistant Secretary for
Speaker 1: International Monetary and Financial Policy. Between 2000 early 2015
Speaker 1: he helped lead Treasury preparations for G seven and G
Speaker 1: 20 Finance Minister and Central Bank governor meetings, formulating us
Speaker 1: positions in the I. M f coordinated
Speaker 1: treasury and regulatory agencies work in the financial stability board
Speaker 1: as well.
Speaker 1: Mark, welcome back to Kobe tai,
Speaker 2: thank you for having me. I'm flattered that anybody would
Speaker 2: want to hear my views a second time. So how
Speaker 2: can I help you today?
Speaker 1: Well, you were highly articulate and present in your last appearance.
Speaker 1: I expect nothing less this time either. Um Mark, you
Speaker 1: came to the show exactly a year ago and the
Speaker 1: biden administration was just getting going at that time.
Speaker 1: A year has gone by and we have been vaccinated, boosted,
Speaker 1: gone from delta to omicron
Speaker 1: And on the legislative side, the 1.9 trillion American rescue
Speaker 1: bill passed successfully through Congress, as did the 1.2 trillion
Speaker 1: bipartisan infrastructure bill.
Speaker 1: The Fed
Speaker 1: until now has kept extraordinary accommodation in place
Speaker 1: and as a result, we've got tons of job creation,
Speaker 1: wage growth and also inflation.
Speaker 1: So let's start with that. What's your take on all this?
Speaker 2: Well, thank you again. Um
Speaker 2: you just painted a semi positive picture. I agree with that.
Speaker 2: There's tremendous pessimism division in our country at this time.
Speaker 2: Um But I I think as you look back on
Speaker 2: the past year,
Speaker 2: there are good reasons to be sanguine and see the
Speaker 2: big picture as positive
Speaker 2: with astronautics of course. And we'll come back to those.
Speaker 2: Um You said that the vaccines came online. This was
Speaker 2: a
Speaker 2: modern miracle of science that so many people were vaccinated
Speaker 2: so quickly and
Speaker 2: could have been far worse, especially when you look at
Speaker 2: other plagues in history.
Speaker 2: Um, us GDP is above its pre pandemic level. It's
Speaker 2: close to potential unemployment's 4%, it was 15% I think
Speaker 2: at the peak of the crisis.
Speaker 2: Uh
Speaker 2: there are lots of debates about the biden team, but
Speaker 2: um
Speaker 2: it's much more cooperative and multilateral internationally.
Speaker 2: Um
Speaker 2: I'm sure we'll have words about china and Russia as
Speaker 2: well where
Speaker 2: it isn't so hunky dory, but okay.
Speaker 2: Um
Speaker 2: and
Speaker 2: notwithstanding the political divisiveness in this country,
Speaker 2: even under the trump administration, there were two fiscal bills passed,
Speaker 2: working with between the democrats and the republicans, you just mentioned,
Speaker 2: um the
Speaker 2: um
Speaker 2: biden bills,
Speaker 2: The 1.9 trillion bill. So the us has managed to
Speaker 2: use fiscal policy to compensate for a massive shortfall and
Speaker 2: private demand and if anything, we overdid it.
Speaker 2: Um, and the over
Speaker 2: Being overdone as seen in the excess savings that Americans have.
Speaker 2: This 2.5 trillion I think, which is a little bit
Speaker 2: more than 10% of GDP I guess
Speaker 2: Now I believe that the 1.9 trillion bill could have
Speaker 2: been better targeted and means tested, especially on the personal
Speaker 2: checks
Speaker 2: and the state and local government support.
Speaker 2: But it did provide support for americans and we don't
Speaker 2: have the extensive automatic stabilizers that the Europeans have
Speaker 2: and
Speaker 2: you know, um as our Congress habitually proves, um
Speaker 2: bismarck talked about sausage making the legislation well, it's not
Speaker 2: a pretty process.
Speaker 2: The infrastructure bill is a great accomplishment. Um, it's one
Speaker 2: that eluded Obama and trump administrations. We need it, we
Speaker 2: need it to be done well.
Speaker 2: Um, it will only unfurl
Speaker 2: over a long
Speaker 2: time.
Speaker 2: Of course there are
Speaker 2: are caveats to this positive story. Um you know, we'll
Speaker 2: come back to high us inflation.
Speaker 2: Um,
Speaker 2: we um
Speaker 2: as I said, we're a very divided society over how
Speaker 2: to respond to
Speaker 2: the pandemic. These
Speaker 2: epic fights about masks versus not masks.
Speaker 2: Um
Speaker 2: there's this question of the great resignation where we just
Speaker 2: had great job numbers and who knows what they mean
Speaker 2: for labor force participation, but labor force participation
Speaker 2: appears to be down.
Speaker 2: Um we have supply chain vulnerabilities. Um, and who knows
Speaker 2: uh, about
Speaker 2: with those
Speaker 2: where those will head.
Speaker 2: Um,
Speaker 2: the
Speaker 2: labor share of income doesn't seem to be rising yet.
Speaker 2: So you hear about big wage gains, but given the
Speaker 2: inflation and the wages don't seem to be keeping up.
Speaker 2: So um,
Speaker 2: putting it all together, I think we've done a good
Speaker 2: job and mending the pandemic damage. We've helped protect the vulnerable,
Speaker 2: We've made some good strides forward in our social safety net.
Speaker 2: We maintained some demand.
Speaker 2: Um, and I think we were right to use fiscal
Speaker 2: policy to extend accommodation,
Speaker 2: um,
Speaker 2: even if it was too much of a good thing.
Speaker 2: Um, so you know,
Speaker 2: announce I'm positive notwithstanding
Speaker 2: Some of the kind of the negative mood one detects
Speaker 2: in America these days.
Speaker 1: Mark I, I take your point entirely, I mean, a
Speaker 1: year ago things were not looking that great. And now
Speaker 1: it's like, you know, Janet Yellen's dream, high pressure economy,
Speaker 1: lots of inflation, lots of job growth and lots of
Speaker 1: employment now we're talking about
Speaker 1: five, wage growth being not enough to keep pace with inflation. Well,
Speaker 1: that of course
Speaker 1: is not the best thing in the world you want
Speaker 1: real wage growth to take place, but at the same
Speaker 1: time it creates this
Speaker 1: massive nominal expansion of the economy, which is in the
Speaker 1: short term helps address debt issues,
Speaker 1: creates, you know, margin for companies and so on. So
Speaker 1: I can't really see um, it's the developments fully congruent with,
Speaker 1: you know, the dismal ratings that the government gets right now,
Speaker 1: but the administration gets right now.
Speaker 1: Of course
Speaker 1: This takes us to the natural transition towards inflation mark,
Speaker 1: looking at 2022,
Speaker 1: That's issue # one, the first four or five weeks
Speaker 1: of this year has been entirely driven by that narrative.
Speaker 1: How strong will the Fed go and how will the
Speaker 1: whole world sort of adjust to this regime of higher
Speaker 1: interest rates?
Speaker 1: And we're seeing the Bank of England move, we're seeing
Speaker 1: even the CCB which was like, you know,
Speaker 1: completely in a stupor now trying to suggest that, you know,
Speaker 1: somebody real normalization is warranted there. So and and of
Speaker 1: course within the U. S. Former officials, current officials have
Speaker 1: varying views on the transience of inflation on the Fed
Speaker 1: being ahead of the curve or not.
Speaker 1: Your former colleague Larry Summers wrote an article in the
Speaker 1: Washington post a series of many articles that he has written,
Speaker 1: basically saying that the Fed has sort of dropped the
Speaker 1: ball to some extent.
Speaker 1: I want to hear your view both on inflation as
Speaker 1: well as you know where the Fed is going.
Speaker 2: Okay, well this is a can of worms and I
Speaker 2: think one needs to demonstrate great humility in this terrain
Speaker 2: and I think critics don't exhibit sufficient humility.
Speaker 2: There's so much, we don't know, there's so much the
Speaker 2: Fed doesn't know,
Speaker 2: you know, there's no pandemic playbook for the Fed or
Speaker 2: crystal ball on what's going to happen with the pandemic
Speaker 2: um
Speaker 2: supply chains is not something anybody any economist is an
Speaker 2: expert
Speaker 2: in
Speaker 2: and
Speaker 2: one doesn't really fully understand this skew or the the
Speaker 2: shift in the relative prices between services and durables
Speaker 2: and whatnot and
Speaker 2: and then we have energy prices
Speaker 2: up and down but mainly up.
Speaker 2: Um So a lot of the mainstream forecasts for the U. S.
Speaker 2: Have fourth over 4th 22 inflation um going to the
Speaker 2: 2.5 to 3% range
Speaker 2: Further towards 2% in 2023.
Speaker 2: But inflation forecasts keep getting marked up including core prices
Speaker 2: and the risks are to the upside. I think most
Speaker 2: people would say
Speaker 2: you know, we've had some
Speaker 2: anomalous things pushing up prices in the US everybody always
Speaker 2: mentions used car prices.
Speaker 2: It's hard to continue that hard to continue seeing that
Speaker 2: happening at such a pace. But then again
Speaker 2: um
Speaker 2: rentals and other things maybe adjusting upward.
Speaker 2: Um, and who knows what's gonna go on with the
Speaker 2: pandemic and supply chain issues. Um,
Speaker 2: so I think as you alluded, you know, some people
Speaker 2: emphasize supply, other people emphasize demand. I think the argument
Speaker 2: on the demand side is if the economy
Speaker 2: is has
Speaker 2: a fixed potential and then you inject
Speaker 2: tons of stimulus in the economy that takes it beyond
Speaker 2: its potential. It just builds up prices
Speaker 2: um
Speaker 2: and you get inflation.
Speaker 2: Um So both monetary and fiscal policy have contributed to
Speaker 2: inflation from that standpoint and we'll need to play a
Speaker 2: role in its withdrawal
Speaker 2: but if the issue is more about supply or relative
Speaker 2: price shifts
Speaker 2: um then I guess there's a question about how much
Speaker 2: monetary policy can deal with the matter and how much
Speaker 2: of a forceful role do you
Speaker 2: apply ascribed to monetary policy to deal with a supply
Speaker 2: demand imbalance?
Speaker 2: Um But then again you have to be worried well
Speaker 2: if it persists, will this cause uh expectations to be
Speaker 2: de anchored and will this cause a wage price pile
Speaker 2: and all that?
Speaker 2: Um
Speaker 2: So um
Speaker 2: now
Speaker 2: this year I know
Speaker 2: fiscal is gonna turn consolidated. So I think if we
Speaker 2: had a 12% of GDP deficit last year, a lot
Speaker 2: of the estimates this year are kind of around 56%
Speaker 2: something like that. So that will
Speaker 2: take quite a bit of a demand out of the economy.
Speaker 2: You know, I'm not worried about our ability to finance
Speaker 2: ourselves etcetera
Speaker 2: et cetera.
Speaker 2: Um But on monetary policy again, well it can't fix
Speaker 2: supply chain issues, it can address demand. We're we're in
Speaker 2: uncharted water.
Speaker 2: Um
Speaker 2: At this point
Speaker 2: yeah
Speaker 2: the Fed seems to be signaling for
Speaker 2: hikes this year or so. They've speeded up the balance sheet.
Speaker 2: Um
Speaker 2: The ending of tapering.
Speaker 2: Um
Speaker 2: Mhm.
Speaker 2: We haven't seen what their bounce sheet plans will be
Speaker 2: but a lot of people think there's going to be
Speaker 2: a good bit of bounce sheet reduction this year, they
Speaker 2: have said it will be
Speaker 2: um faster.
Speaker 2: Um And the Fed has said it's going to be
Speaker 2: data dependent which is appropriate because the data are very
Speaker 2: uncertain
Speaker 2: and that will leave the door open to more than
Speaker 2: four hikes or less than four hikes if needed.
Speaker 2: Um I can't really say if I think if I
Speaker 2: know whether inflation is 50 demand, 50% demand, 50% supply
Speaker 2: or 70, 30, 3070 or or whatnot.
Speaker 2: Um So I think
Speaker 2: you know every meeting should be live if needed and
Speaker 2: uh and we'll see what gets done. Um Let's just
Speaker 2: say
Speaker 2: I think it's hard being a central banker these days
Speaker 2: um and I would want to have to be jay
Speaker 2: Powell having to go before the cameras all the time
Speaker 2: with
Speaker 2: 1000 critics waiting in the wings
Speaker 2: but
Speaker 1: he's of course promised to be humble and nimble, which
Speaker 1: I think is something that you would endorse. Um Mark
Speaker 2: actually one other thing, can I say, one other thing
Speaker 2: um It's about financial conditions in the U. S. Um
Speaker 2: I should have said this,
Speaker 2: you know, I think financial conditions indices are very imperfect
Speaker 2: and whatnot. But I think they they provide useful information
Speaker 2: um
Speaker 2: and
Speaker 2: you know,
Speaker 2: equities have come down in recent weeks but I think
Speaker 2: they're pretty stretched probably still
Speaker 2: Um we've seen the short rates move up considerably two
Speaker 2: years for example, but the 10 year that's up but
Speaker 2: uh
Speaker 2: I wouldn't say I'd say moderately so real rates remain
Speaker 2: very negative.
Speaker 2: You know, fx is less important component of financial conditions
Speaker 2: index for the U. S. And for others because we're
Speaker 2: such a closed
Speaker 2: economy.
Speaker 2: Um And
Speaker 2: I see financial conditions still is overly accommodated. And I
Speaker 2: also do think that the Fed in recent years
Speaker 2: has perhaps overly.
Speaker 2: Do I dare say coddled markets through its various puts.
Speaker 2: Um And so I think the market's need to take
Speaker 2: on board to a greater extent the evolving shifts in
Speaker 2: the monetary policy landscape.
Speaker 2: So
Speaker 2: back to you.
Speaker 1: So to follow ups to that first, as you know
Speaker 1: as we speak, we're speaking in the first week of
Speaker 1: february 2nd to february, the the Atlanta Fed now cast
Speaker 1: suggests that you know thanks to the surgeon omicron, the
Speaker 1: current run rate for the G. D. P. Is probably
Speaker 1: close to zero.
Speaker 1: It'll probably come back and snap back very quickly.
Speaker 1: But activities did get disrupted in the first few months
Speaker 1: of the first few weeks of the year.
Speaker 1: Uh and then this is happening at a time when
Speaker 1: inflation is running at 7%. So we're already at a
Speaker 1: bit of a weird combination like a misery index if
Speaker 1: you will with such as that. You know, things are
Speaker 1: pretty bad. I mean you could argue that you know
Speaker 1: by the time the quarter ends it'll be not as
Speaker 1: miserable growth will pick back and pick up.
Speaker 1: But is there a risk if the Fed indeed has
Speaker 1: to signal four or five rate hikes that the market's
Speaker 1: ability to absorb that or the economy's ability to absorb
Speaker 1: that is not there. And then we end up with
Speaker 1: a bit of a stagflation scenario where
Speaker 1: growth is low inflation is high and that's basically the
Speaker 1: worst of all worlds.
Speaker 2: You know, growth always bounces around from quarter to quarter
Speaker 2: and we did have,
Speaker 2: oh macron and the like. So
Speaker 2: You know, I guess the question you have to ask
Speaker 2: yourself is, what's your outlook for 2022? Um you know,
Speaker 2: you know I see forecasts 3-4 I think is the
Speaker 2: number and
Speaker 2: unemployment 4%.
Speaker 2: So uh
Speaker 2: The misery index of 7-8% is pretty darn good, especially
Speaker 2: when you compare it with
Speaker 2: The 70s stagflation. So
Speaker 2: so uh I'm perhaps a bit more upbeat on this
Speaker 2: question than uh than you are
Speaker 2: very
Speaker 1: good.
Speaker 1: And on the rule of the exchange rate you just
Speaker 1: alluded to the the dollar not being a major factor
Speaker 1: in terms of the financial conditions index. Um But higher
Speaker 1: interest rates
Speaker 1: ought to be associated with some degree of stronger U. S. Dollar,
Speaker 1: which also means lower imported inflation. Is that a tool
Speaker 1: that's useful for the Fed?
Speaker 2: Uh
Speaker 2: You know in the US we don't think about the
Speaker 2: dollar as a tool. Um
Speaker 2: Mhm.
Speaker 2: The view is
Speaker 2: the dollar floats. Let the markets float, There is information
Speaker 2: to be gleaned from the dollar that obviously factors into
Speaker 2: the way policymakers think about
Speaker 2: um the stance of monetary policy or macro policy. But
Speaker 2: um
Speaker 2: you know I I don't,
Speaker 2: yeah
Speaker 2: there can be cases where
Speaker 2: the dollar weighs more heavily on policymakers thinking I'm thinking
Speaker 2: back to the global financial crisis when there were times
Speaker 2: when the dollar was really really weak against the euro
Speaker 2: and that might have constrained monetary policy options. But in
Speaker 2: general um
Speaker 2: I don't
Speaker 2: I don't think so. And
Speaker 2: you know, you could argue, well if us is raising
Speaker 2: rates um that's going to uh
Speaker 2: make the dollar go much higher.
Speaker 2: But
Speaker 2: you know, I I personally think
Speaker 2: the dollar is a bit on the top heavy side.
Speaker 2: Um
Speaker 2: I think that when
Speaker 2: the dollar does well when there's a big risk off
Speaker 2: environment or there's a big risk on environment, but if
Speaker 2: it's somewhere in between, I
Speaker 2: think
Speaker 2: conditions can be calm and
Speaker 2: the dollar isn't going to be
Speaker 2: substantially bit up. And let's remember we have a pretty
Speaker 2: big current account deficit and that has to be financed.
Speaker 2: So when I put it all together, I
Speaker 2: I you know,
Speaker 2: I always say nobody should ever make an exchange rate prediction,
Speaker 2: anybody who does is a fool. But I kind of
Speaker 2: being foolish think if the dollar range trades, I won't
Speaker 2: be all that surprised this year.
Speaker 1: I have to say Mark when you said that you
Speaker 1: know in the US we don't really talk too much
Speaker 1: about the dollar.
Speaker 1: The former president did talk a lot about the U. S. Dollar.
Speaker 1: I think he was very gung ho about a weak
Speaker 1: dollar for most of his presidency. And then at the
Speaker 1: end of flip
Speaker 1: I
Speaker 2: have to defend myself on that, you know, um The
Speaker 2: period when I was a Treasury kind of running that
Speaker 2: bit was
Speaker 2: 2000 2015. So II was of the view um that
Speaker 2: you just don't talk about it and talking about it
Speaker 2: all and get you in trouble.
Speaker 2: And that was the constants of the
Speaker 2: Bush and Obama administrations. So you're you are totally right.
Speaker 2: Um And I'm reflecting my experience is indeed
Speaker 1: indeed. I'd like to think that your experience is reflective
Speaker 1: of the present administration to some extent and their policy framework.
Speaker 1: Um
Speaker 2: I think it is
Speaker 1: indeed indeed. Um Okay fiscal. Um we had some momentum
Speaker 1: building up for build back better but now it seems
Speaker 1: to have sort of dissipated entirely.
Speaker 1: Is that a big deal?
Speaker 2: Um
Speaker 2: So I think that
Speaker 2: two
Speaker 2: build back better in name
Speaker 2: and current form is not going to happen.
Speaker 2: Almost certainly dead
Speaker 2: months and months of effort
Speaker 2: and
Speaker 2: um there we are. And
Speaker 2: another complicating factor is that
Speaker 2: there are a lot of legislative priorities so
Speaker 2: we need another bill to keep the government open.
Speaker 2: Um They're working on an
Speaker 2: competitiveness bill that addresses china
Speaker 2: there's going to be the supreme court vacancy.
Speaker 2: Um So I one never knows what's going to happen
Speaker 2: in D. C. Politics but if
Speaker 2: Something is going to happen it will be scaled back.
Speaker 2: Um I've heard some some of my friends who follow
Speaker 2: the hill say you know something 500 billion to a trillion.
Speaker 2: Um It certainly won't be what the progressives wanted.
Speaker 2: Um
Speaker 2: Now the politics are extraordinarily different difficult. The republicans will
Speaker 2: oppose anything
Speaker 2: in the Democratic Party. You have the splits between progressives
Speaker 2: and centrists and differences over what should be emphasized.
Speaker 2: Um
Speaker 2: And
Speaker 2: I have to say I think the democrats really
Speaker 2: badly handled communications about the matter.
Speaker 2: Alwyn heard it first was $3.5 trillion dollars
Speaker 2: and uh
Speaker 2: they didn't do a good job of getting into people's
Speaker 2: psyche what's in the bill and why that would be
Speaker 2: helpful to them.
Speaker 2: Um
Speaker 2: And
Speaker 2: I think that there was a
Speaker 2: perception that it was a very activist bill
Speaker 2: and given the current inflation situation um in America I
Speaker 2: think many are just wary about the idea of activism
Speaker 2: from the government.
Speaker 2: Um
Speaker 2: Now is it a big deal if it dies.
Speaker 2: Um
Speaker 2: So two answers to that one. Look it doesn't help
Speaker 2: the president and his agenda.
Speaker 2: Um If you can pull off something it's it's it'll
Speaker 2: be a win, it'll be good.
Speaker 2: Um
Speaker 2: The perception that democrats are
Speaker 2: at loggerheads with one another between the progressives and the
Speaker 2: centrists is hardly helpful
Speaker 2: and biden is pulling low and so when he doesn't
Speaker 2: achieve his agenda that doesn't help him
Speaker 2: now. beyond that. I think you're asking a question about
Speaker 2: social preference
Speaker 2: and you know in my view, I think initiatives like
Speaker 2: child tax credit, universal pre k
Speaker 2: childcare support,
Speaker 2: paid family leave,
Speaker 2: um more climate spending. I think there are issues that
Speaker 2: the american people could get behind if
Speaker 2: they were led um to do so um
Speaker 2: properly.
Speaker 2: Um
Speaker 2: but again the odds don't seem to be on the
Speaker 2: side of passage
Speaker 2: of even a modified reduced bill at this point.
Speaker 1: Right unfortunate, especially in the climate part, I was hoping
Speaker 1: that this administration would be able to trickle charge some
Speaker 1: of it. I know that there are some climate provisions
Speaker 1: in the earlier two bills
Speaker 1: but hopefully, you know
Speaker 1: at some point, you know, some parts of this bill
Speaker 1: can be put back and trained.
Speaker 1: Um Mark, let's sort of you know, switch gear a
Speaker 1: little bit and talk about international economics.
Speaker 1: Um when the biden administration came to power, I think
Speaker 1: we never really expected it to undo everything that the
Speaker 1: trump administration do immediately.
Speaker 1: But here has gone by trump era tariffs have not
Speaker 1: been touched.
Speaker 1: CPP Cp Tpp is not going anywhere as far as
Speaker 1: the U. S. Is concerned, it's going ahead without the U. S.
Speaker 1: And in the last two years, global coordination on vaccine
Speaker 1: production and distribution which really ought to have been led
Speaker 1: by the U. S.
Speaker 1: Has been somewhat patchy,
Speaker 1: am I being too pessimistic in my prognosis or or
Speaker 1: this is how things have been.
Speaker 2: Um
Speaker 2: Well, uh
Speaker 2: nobody who knows me has ever accused me of being
Speaker 2: optimistic and cheery, but I'm going to say that I
Speaker 2: think the
Speaker 2: proverbial glass is more than half full.
Speaker 2: So um in the world of international finance and diplomacy
Speaker 2: tone matters. Um and let's
Speaker 2: remember
Speaker 2: that a little more than a year ago, our rhetoric
Speaker 2: in the U. S. Was nativists, it was bilateral ist,
Speaker 2: it was anti multilateralists.
Speaker 2: We had a president who threw away a G seven
Speaker 2: communique
Speaker 2: ripped up international agreements, denigrated other countries with less than
Speaker 2: polite words.
Speaker 2: And, you know, our president and frankly preferred Vladimir Putin
Speaker 2: and kim jong un to Angela Merkel and Justin Trudeau.
Speaker 2: So um
Speaker 2: that is gone, That tone is gone and rightly so.
Speaker 2: Um biden and his team are working with others.
Speaker 2: They're trying to be constructive.
Speaker 2: Um
Speaker 2: you know, look at the role they're playing and on
Speaker 2: Russia and Ukraine and how closely they are working with others.
Speaker 2: Um At this point, I mean, the West is more
Speaker 2: unified now than it probably has been for for years.
Speaker 2: Um
Speaker 2: There have been some marginal moves on trade tensions. Um
Speaker 2: you know, the
Speaker 2: there
Speaker 2: going
Speaker 2: Airbus have a deal. The Treasury worked out the international
Speaker 2: tax agreement, whether Congress passes, it is another question um
Speaker 2: on financial sanctions. The biden team is working much more
Speaker 2: closely with allies trying to work with them, especially on
Speaker 2: the Russia Ukraine
Speaker 2: um sanctions rather than following a unilateralist um
Speaker 2: path.
Speaker 2: And
Speaker 2: they definitely are trying to
Speaker 2: work more closely overseas on climate issues.
Speaker 2: And then since I'm
Speaker 2: old Treasury ex Treasury guy always have to say the U. S.
Speaker 2: Remains a very open economy, very open financial system. The
Speaker 2: strong U. S. Economy is imparting huge global demand and
Speaker 2: I don't hear anybody complaining about that. So um
Speaker 2: that said um
Speaker 2: I think it's important americans do not want to be
Speaker 2: the policeman of the world.
Speaker 2: The afghan departure will reinforce that.
Speaker 2: Um basically americans want to see our country's global footprint reduced.
Speaker 2: Um
Speaker 2: Now CP TPP um
Speaker 2: is an example of less than desirable constancy between trump
Speaker 2: and biden in my mind,
Speaker 2: you'll get no argument from me.
Speaker 2: I think the abandonment of TPP by the U. S.
Speaker 2: Was a huge colossal mistake.
Speaker 2: Um It hurt us in ASia and only seeds ground
Speaker 2: to china
Speaker 2: and um I'd like to see us return but I'm
Speaker 2: not holding my breath over that.
Speaker 2: Um It's just not gonna happen. The republicans aren't the
Speaker 2: free trade party of the past. The democrats have their
Speaker 2: own fissures on trade.
Speaker 2: Um
Speaker 2: And
Speaker 2: so
Speaker 2: so that's why I'm not even more effusive. But again
Speaker 2: I do think that
Speaker 2: the rest of the world should
Speaker 2: feel positively about the change tenor
Speaker 2: coming out of the United States on international diplomacy but
Speaker 2: we
Speaker 1: should not hold our breath on the trump era tariffs.
Speaker 1: They're going to stay
Speaker 2: um
Speaker 2: I think there are a lot of people that would
Speaker 2: like to um
Speaker 2: chip away at them
Speaker 2: move away from them, but they will do so very,
Speaker 2: very hesitantly and
Speaker 2: perhaps you'll see more exceptions and exclusions and things of
Speaker 2: that nature. But it's it's not easy political sailing on
Speaker 2: trade on the trade front, the United States at this
Speaker 1: point. Right.
Speaker 1: Um you recently wrote an article and I really, really
Speaker 1: enjoyed it. It was a very provocative title. German and
Speaker 1: chinese growth models are outdated. I wonder if it was
Speaker 1: your editorial, you who came up with that title. Um
Speaker 1: and let's begin with china, Haven't we been predicting china's
Speaker 1: collapse for decades
Speaker 1: and hasn't it's widely flagged structural challenges like excess investment, leverage,
Speaker 1: overhang aging have been around for a while.
Speaker 1: So why is this moment in China's economic history and
Speaker 1: Inflection point?
Speaker 2: Well, it'll come as a shock to you. But every
Speaker 2: once in a while I can have a catchy thought
Speaker 2: and I actually came up
Speaker 1: with the title myself.
Speaker 2: Um tough question. Fair question. And I'll bet you it's
Speaker 2: really important question to Southeast Asia in particular.
Speaker 2: I always think of the african proverb about when the
Speaker 2: two elephants fight the grass gets stomped on and I'm
Speaker 2: not calling Singapore grass, but you get the draft. Um,
Speaker 2: So I want to start
Speaker 2: um
Speaker 2: in a different place. I want to ask, um,
Speaker 2: a lot of people
Speaker 2: ask, you know, why is the US being so hard.
Speaker 2: And to me, I think
Speaker 2: a fundamental question in thinking about
Speaker 2: uh how china's approach to this administration and really
Speaker 2: rests on the question of
Speaker 2: how has china changed. President G is a very different
Speaker 2: animal than his predecessors and much more authoritarian, much more status,
Speaker 2: much more controlling,
Speaker 2: putting power in the Communist Party, liberal reforms have been
Speaker 2: set back.
Speaker 2: Um and uh
Speaker 2: so it's a much more
Speaker 2: aggressive china in my view and a lot of the
Speaker 2: concerns over industrial policy and technological theft etcetera etcetera quite valid.
Speaker 2: These were concerns that were on the plate of the
Speaker 2: Obama administration trump, put them on steroids and whatnot.
Speaker 2: And um
Speaker 2: you know, I think in the past when the two
Speaker 2: of us have chatted, we've,
Speaker 2: you know, you've wondered if the biden tone was that
Speaker 2: different and
Speaker 2: and I think that um
Speaker 2: it is different but that a lot of the substance
Speaker 2: very much remains um
Speaker 2: the same. Um
Speaker 2: now why is china
Speaker 2: different um
Speaker 2: now,
Speaker 2: well I guess sometimes I think about stein's law, something
Speaker 2: can't go on forever. It will stop.
Speaker 2: Um
Speaker 2: President G. himself said Chinese GDP would double by 2035.
Speaker 2: Um so that means growth needs to average four and 3/4%
Speaker 2: over this period, but if it's higher at the beginning
Speaker 2: part it'll be lower at the
Speaker 2: In the 2nd part of the period.
Speaker 2: Um
Speaker 2: I think there are other, I think there are reasons
Speaker 2: why things are different now. I think first of all
Speaker 2: the demographic
Speaker 2: kink is soon upon china,
Speaker 2: it wasn't a decade ago, but now it's beginning to
Speaker 2: hit china,
Speaker 2: china's heavily relied on trade in the past. Um
Speaker 2: Yeah,
Speaker 2: You and I both know in the early 2000s or 10%
Speaker 2: of GDP current account surpluses now.
Speaker 2: Um
Speaker 2: the current account
Speaker 2: Before the crisis was getting close to the balance, but
Speaker 2: they still run a trade surplus now around 3% of
Speaker 2: GDP and this isn't an $18 trillion dollar economy.
Speaker 2: So, um,
Speaker 2: I think that
Speaker 2: global growth is gonna slower this decade. Um you know,
Speaker 2: we see potential slowing in
Speaker 2: fairly modest in europe and Japan, um
Speaker 2: Under two in the us
Speaker 2: china itself is slowing, so um
Speaker 2: um
Speaker 2: it just seems to me that china is the world's
Speaker 2: number two economy now, it's global footprint is just way
Speaker 2: too big for it to rely on the external sector
Speaker 2: uh as a major support for growth and that if
Speaker 2: it does, it's going to cause uh
Speaker 2: ramping up of protectionist pressures around the world.
Speaker 2: Um
Speaker 2: the
Speaker 2: china economists often say that much of the growth over
Speaker 2: the last two decades was driven by the absorption of
Speaker 2: rural labor.
Speaker 2: Um
Speaker 2: I don't know if that process is complete, but many
Speaker 2: experts say it is largely uh completed
Speaker 2: chinese growth has relied on savings and investment, high levels
Speaker 2: of them
Speaker 2: And the efficiency of investment is plummeted. So basically it's
Speaker 2: taking over 7% of GDP and investment these days to
Speaker 2: generate 1% point
Speaker 2: of growth
Speaker 2: um that was
Speaker 2: 3-5%,,
Speaker 2: you know, many seven a decade ago or so.
Speaker 2: Um
Speaker 2: Much of the investment has run through large state owned
Speaker 2: um commercial banks um to going to S. O. E. S.
Speaker 2: And um
Speaker 2: meanwhile the government is cracking down on the private sector
Speaker 2: At a time when according to the recent IMF article
Speaker 2: for report on China that the total fact TFT total
Speaker 2: factor productivity growth is under 1%.
Speaker 2: Um
Speaker 2: and
Speaker 2: I'm one who believes that the private sector is a
Speaker 2: better engine for growth and state owned enterprises.
Speaker 2: Um So I don't see that as auguring well for growth.
Speaker 2: Um debt and leverage our high the authorities want to
Speaker 2: seem seem
Speaker 2: to be wanting to crack down on debt and leverage.
Speaker 2: They know that if they do so to forcefully it's
Speaker 2: going to
Speaker 2: um further cause growth diploma. So they let their foot
Speaker 2: off the pedal a little bit. But the overall trend
Speaker 2: towards restraint I think is there
Speaker 2: um
Speaker 2: weaknesses in the real estate sector,
Speaker 2: even if managed
Speaker 2: Financially are going to have to put a crimp on
Speaker 2: a growth. It's 30% of GDP
Speaker 2: um
Speaker 2: consumption growth. So china wants to transition to consumption and
Speaker 2: services led growth.
Speaker 2: But consumption remains very low.
Speaker 2: I think fiscal policy could play a
Speaker 1: role in
Speaker 2: helping build the social safety net to a greater extent
Speaker 2: in china,
Speaker 2: but again, I think that the overall direction of fiscal
Speaker 2: policy is modestly
Speaker 2: in restraining.
Speaker 2: Um,
Speaker 2: so, um, when I put it all together, um, I
Speaker 2: think that the future growth drivers could face a challenge
Speaker 2: and um, I kind of wonder whether
Speaker 2: china's and this is other analysts have raised this point.
Speaker 2: You know, we'll be able to escape this middle income trap.
Speaker 2: So I hope that well, and of course, coming back
Speaker 2: to where I started
Speaker 2: us, china tensions,
Speaker 2: geopolitical tensions are not going to improve the picture.
Speaker 2: So when you put it all together,
Speaker 2: that's why I think this time may be different.
Speaker 1: Okay, fair enough. And your article was about both Germany
Speaker 1: and china because you talked about Germany sort of history
Speaker 1: of focusing on
Speaker 1: heavy industry and and large enterprises and in the context
Speaker 1: of Germany who provided a playbook for economic revitalization for
Speaker 1: the shows government, you talked about climate change digitalization, infrastructure
Speaker 1: investment are three areas where they can push for growth.
Speaker 1: So, in the context of Germany, my question is, do
Speaker 1: you think they can deliver and also in the context
Speaker 1: of china,
Speaker 1: why can china grow through
Speaker 1: climate and digitalization.
Speaker 2: Okay, um,
Speaker 2: so yes, the article postulated that Germany has traditionally been
Speaker 2: an export led economy
Speaker 2: and we still see that in this massive current account surpluses,
Speaker 2: savings is quite high,
Speaker 2: personal corporate and even public in recent years, while investments
Speaker 2: been restrained
Speaker 2: and um, I also noted in the piece that Germany's
Speaker 2: automotive industry has played a huge role in the economy's
Speaker 2: growth
Speaker 2: and it may face difficult transition periods with the electrification
Speaker 2: of cars and whatnot.
Speaker 2: Um,
Speaker 2: and then, as you said to help stimulate domestic demand
Speaker 2: growth reduce its
Speaker 2: external dependence
Speaker 2: at the time of a slowing global economy, which we
Speaker 2: just discussed,
Speaker 2: um, I observed that the new government could help modernize
Speaker 2: growth model and support the economy through investment in climate
Speaker 2: digitalization and infrastructure.
Speaker 2: And let's give the Germans credit. The Schultz team understands
Speaker 2: this
Speaker 2: and they have even articulated this vision.
Speaker 2: Uh, one should never underestimate the ability of the german
Speaker 2: economy to adjust. You know what it did after reunification
Speaker 2: was quite impressive.
Speaker 2: Um,
Speaker 2: you know, the greens are in power now and definitely
Speaker 2: have a climate agenda and the like
Speaker 2: now
Speaker 2: you asked, I mean, is this going to, will they
Speaker 2: carry through on it?
Speaker 2: And I think it could be quite challenging for them
Speaker 2: to do so.
Speaker 2: Um,
Speaker 2: german fiscal behavior is
Speaker 2: conservative
Speaker 2: perhaps
Speaker 2: from the standpoint of many americans, excessively conservative.
Speaker 2: Of course, one could always ask who are we americans
Speaker 2: given the way we run our fiscal policy to comment
Speaker 2: on anybody else's.
Speaker 2: Um, but
Speaker 2: and they deserve good credit um
Speaker 2: for their commitment to financial stability,
Speaker 2: but with negative real interest rates and huge investment needs,
Speaker 2: it would be a good time to step up investments
Speaker 2: in these areas,
Speaker 2: but I think that there are constrained by their conservativism
Speaker 2: and then the debt break laws
Speaker 2: and well I think they can find some ways to
Speaker 2: work around the debt break, they're going to face political
Speaker 2: and other constraints in doing so.
Speaker 2: So I expect them to do more.
Speaker 2: Um but I'm doubtful about a significant ramp up.
Speaker 2: Um
Speaker 2: You know, let's just say the current-account surpluses 7% now.
Speaker 2: So that means the savings investment imbalance is 7%.
Speaker 2: So let's say um they step up public uh
Speaker 2: deceiving,
Speaker 2: let's say the current account goes from 7 to 5%.
Speaker 2: Um You know, is is that
Speaker 2: is that such an epic change?
Speaker 2: Um and in those circumstances will still be relying excessively
Speaker 2: on
Speaker 2: demand from elsewhere to support the german economy.
Speaker 2: Um So I think they're going to be politically hand
Speaker 2: strung Now
Speaker 2: you then just ask me, well why can't this be
Speaker 2: china's playbook? And
Speaker 2: and
Speaker 2: I think implicitly you're asking me why why do I
Speaker 2: think it could work for Germany but not for china.
Speaker 2: Um
Speaker 2: So this can indeed be china's playbook. Um
Speaker 2: And
Speaker 2: you know, if you haven't read the china article for,
Speaker 2: it's worth reading it, but it describes some of the
Speaker 2: playbooks that china has in these areas.
Speaker 2: Um
Speaker 2: And uh
Speaker 2: you know, it's kind of hard
Speaker 2: one might imagine why why are you talking about infrastructure
Speaker 2: in china because if you've gone to chinese airports or
Speaker 2: written train from Beijing to shanghai, you think well pretty
Speaker 2: darn good infrastructure certainly relative to the United States.
Speaker 2: Um
Speaker 2: I guess at the end of the day um
Speaker 2: I mentioned g cracking down in the private sector, she
Speaker 2: being more controlling, more authoritarian,
Speaker 2: the party playing a greater role in the economy.
Speaker 2: And as an american, I have an innate,
Speaker 2: greater faith in the private sector to deliver innovation than government,
Speaker 2: even if the government, even if governments have a role
Speaker 2: to play in helping catalyze um processes of R and
Speaker 2: D etcetera.
Speaker 2: And um
Speaker 2: and again I I think china is changing
Speaker 2: and um
Speaker 2: I think that in the end
Speaker 2: this direction is going to weaken China's growth potential and productivity.
Speaker 2: So it comes down to
Speaker 2: the role of the state
Speaker 2: I guess in my mind,
Speaker 1: Mark, I'll share with you two anecdotes. So I spoke
Speaker 1: with David Victor who's a professor at UcsD used to
Speaker 1: be the climate adviser for Pete bulleted during his campaign run.
Speaker 1: And David's argument was that, you know, basic mainstream economics
Speaker 1: sort of, you know, falls short in terms of you know,
Speaker 1: how to deal with climate change. And the
Speaker 1: general observation that economists are making on the climate change side,
Speaker 1: it has to be top down coming from the government
Speaker 1: whether it is carbon pricing or upgrading the infrastructure to
Speaker 1: deal with climate change and renewables.
Speaker 1: And the second anecdote that I want to share with
Speaker 1: you is that, you know, when I spoke with joon
Speaker 1: ma who's used to be PBOC chief economist and now
Speaker 1: represents china in the G 20 climate change roundtable and
Speaker 1: june sort of, you know, models that
Speaker 1: Over 5% of GDP and will
Speaker 1: expenditure is needed by china to reach 2060 0 goals.
Speaker 1: So that's you know, trillions of dollars, literally that china's
Speaker 1: public and private sector would have to put aside for
Speaker 1: again the green transition. So it seems to me that
Speaker 1: the zeitgeist of climate change seem to suggest that it
Speaker 1: should be a top down uh
Speaker 1: project and china seems to be following along that
Speaker 1: which most Western climate economists would argue that is the
Speaker 1: right way to go about it. Not necessarily allow the
Speaker 1: private sector to figure out how to internalize all these
Speaker 1: negative externalities from climate change, but
Speaker 1: let the government sort of dictate what the price of
Speaker 1: carbon should be and how the transition timetable should be.
Speaker 1: Um So that was, you know, just my two cents that,
Speaker 1: you know,
Speaker 2: that's fair, it's fair to say that the government has
Speaker 2: to create the kind of the
Speaker 2: the incentive framework. So carbon pricing and regulation and the like,
Speaker 2: but at that point,
Speaker 2: you know, I think
Speaker 2: the private sector is going to have to take over
Speaker 2: and
Speaker 2: we'll see, we'll see how china does. I wish them
Speaker 2: the best and
Speaker 2: I wish my country would
Speaker 2: be much more proactive in this area as well.
Speaker 1: Right.
Speaker 1: Um Mark both you and I have spent some years
Speaker 1: of our lives in the I? M f so I
Speaker 1: want to end this discussion asking you a question on
Speaker 1: the I. M. F.
Speaker 1: Recently I had martin mull highs and on my podcast,
Speaker 1: martin used to be the director of the Strategic Policy
Speaker 1: Review Department in the I. M. F. Recently retired
Speaker 1: and he seemed to be a bit uneasy about a
Speaker 1: middle of the road conservative multilateral organization like the IMF
Speaker 1: being increasingly tasked with dealing with climate change issues or
Speaker 1: gender or inequality and so on. So martin of course
Speaker 1: thinks these are important issues. It just feels that the I. M. F.
Speaker 1: Has been successful, being narrow and focused on balance of
Speaker 1: payments on fiscal and that's where
Speaker 1: most of the energy of the organization should be
Speaker 1: your thoughts.
Speaker 2: So this is complicated terrain,
Speaker 2: martin mull horizon is a wonderful thoughtful individual and uh
Speaker 2: I commend you for having him,
Speaker 2: I'm sure he was a great guest.
Speaker 2: Um
Speaker 2: So um
Speaker 2: let me just make one general observation which martin wouldn't make,
Speaker 2: but it would be kind of observation somebody like me
Speaker 2: would make because um I wasn't an I. M. F. Staff,
Speaker 2: I was,
Speaker 2: I have
Speaker 2: representing a shareholder
Speaker 2: and
Speaker 2: you know, ultimately
Speaker 2: the IMF is a shareholder organization.
Speaker 2: Um It's
Speaker 2: remained relevant
Speaker 2: and been successful because it has adapted to what
Speaker 2: shareholders wanted over time.
Speaker 2: You know, we
Speaker 2: the soviet union collapses, we throw the I? M f
Speaker 2: in there to do all the economic research and that's
Speaker 2: what the shareholders wanted. We wanted the I. M. F.
Speaker 2: To get involved in um
Speaker 2: you know, dealing with debt issues
Speaker 2: solving emerging market debt crisis, we wanted the IMF to
Speaker 2: go into low income countries, so
Speaker 2: so it doesn't,
Speaker 2: so it is responsive to shareholders and um
Speaker 1: the whole world disease
Speaker 2: with climate issues, for example,
Speaker 2: um these days, so,
Speaker 2: you know, I think it's appropriate
Speaker 2: for the IMF to be head in this direction,
Speaker 2: so long as it's
Speaker 2: consistent with its mandate and done in a reasonable way.
Speaker 2: Um
Speaker 2: So,
Speaker 2: you know, what is,
Speaker 2: what is reasonable?
Speaker 2: Well, research is one thing, I'm research by the I. M. F.
Speaker 2: On carbon pricing, I think it's been very good and useful.
Speaker 2: Um
Speaker 2: Climate
Speaker 2: can be a macro critical issue, you can imagine small
Speaker 2: island economy,
Speaker 2: this is something they've got to factor into their
Speaker 2: um budget.
Speaker 2: Um And
Speaker 2: you know, everybody jokes that the IMF stands for, it's
Speaker 2: mostly
Speaker 2: fiscal.
Speaker 2: Um
Speaker 2: So
Speaker 2: I I think that
Speaker 2: if it's defined in this macro critical way to use
Speaker 2: a somewhat nebulous but semi meaningful term in the context
Speaker 2: of the IMF
Speaker 2: there is a role for climate,
Speaker 2: there may be a role for equity, I
Speaker 2: less convinced of that, but but there are no doubt
Speaker 2: important issues
Speaker 2: there.
Speaker 2: Um
Speaker 2: So
Speaker 2: again, it should be consistent with the mandate. Um
Speaker 2: You know, the fund should not be doing what the
Speaker 2: World Bank does. The IMF should be focused on
Speaker 2: stabilization, it should be focused on the relevant structural reforms
Speaker 2: that go along with areas like fiscal
Speaker 2: um
Speaker 2: yeah
Speaker 2: et cetera.
Speaker 2: But I but I think that
Speaker 2: it can play
Speaker 2: a role.
Speaker 2: Um
Speaker 2: it's not black or white, it's a shade of gray
Speaker 2: and uh you know whether it's uh
Speaker 2: charcoal or light, I think that's an issue that still
Speaker 2: needs to be sorted out.
Speaker 2: Mm hmm.
Speaker 1: Very, very nuanced. That's great. Thank you so much mark
Speaker 1: for your time and insights.
Speaker 2: It's been fun. Always a pleasure to see you. And
Speaker 2: uh hopefully the next time I see you we will
Speaker 2: not have a 12 or 13 our bridge between us.
Speaker 1: It will be wonderful and I look forward to that.
Speaker 1: Hopefully in april
Speaker 1: let me also thank our listeners. On a concluding note,
Speaker 1: Kobe time was produced by martin Tuckey daisy Sharma and
Speaker 1: violently provided additional assistance.
Speaker 1: It is for information only and does not represent any
Speaker 1: trade ideas or recommendations.
Speaker 1: All 69 episodes of copy time are available on youtube
Speaker 1: and on all major podcast platforms including apple google and Spotify.
Speaker 1: As for our research publications, webinars and live streams. You
Speaker 1: can find them all by googling DBS Research library, have
Speaker 1: a great day