Speaker 1: Hi you're listening to copy time, a podcast series on
Speaker 1: markets and economies from DBS group research and 10 Rubik.
Speaker 1: Chief economist. Welcome to our 63rd episode.
Speaker 1: This is a very special episode for me see I
Speaker 1: was a graduate student in the late 1990s and in
Speaker 1: 1998 I happened to get a summer internship
Speaker 1: at the Washington D. C. Headquarters of the International monetary fund.
Speaker 1: I was highly interested in the drivers and implications of
Speaker 1: financial crisis and as luck would have it, I was
Speaker 1: pleased under the supervision of a young Brazilian economist with
Speaker 1: whom I would develop such good chemistry that we went
Speaker 1: on to co author three publications over the next few years,
Speaker 1: which no doubt contributed immensely to my PhD completion and
Speaker 1: subsequent employment at the I. M. F.
Speaker 1: That resilient economist, Ellen Goldfein soon thereafter left Washington D. C.
Speaker 1: To go back to his country where over the last
Speaker 1: two decades he has done just about everything across the
Speaker 1: public and private sector.
Speaker 1: Ellen Goldfein is presently chairman of the Board Credit Suisse
Speaker 1: brazil but it was recently announced that at the beginning
Speaker 1: of next year he would join the I. M. F.
Speaker 1: Western hemisphere department as the head
Speaker 1: Ellen was governor of the Central Bank of Brazil from
Speaker 1: 2016 to March 2019 and Deputy Governor from 2000 to
Speaker 1: 2003
Speaker 1: In 2018, he was named Central Banker of the Year
Speaker 1: by the Banker Magazine.
Speaker 1: Previously in his career, Ellen was partnered Chief economist and
Speaker 1: advisor to the board of Itau Unibanco
Speaker 1: Also he was founding partner of Quiano Investimentos and partner
Speaker 1: of Gavea Investimentos. Ellen go find a very warm welcome
Speaker 1: to Kobe time.
Speaker 2: Yeah, thank your time or it's um,
Speaker 2: he's walking into a memory lane remembering
Speaker 2: Especially on the 90s. Uh,
Speaker 2: well he wrote all these papers, you know, until today
Speaker 2: they are quite cited
Speaker 2: and the reward
Speaker 2: still I got all these uh, citation indexes and our
Speaker 2: paper is one of the
Speaker 2: the most cited because it's about contagion
Speaker 2: and then it's about
Speaker 2: Uh, you you mentioned 98 and it was just after
Speaker 2: the asian crisis and it's a,
Speaker 2: it was it was the moment where I was sitting
Speaker 2: in the asian department
Speaker 2: writing papers and it was very nice that you,
Speaker 2: you arrived and
Speaker 2: then the rest is history
Speaker 2: for both of us. I'm very happy to be here.
Speaker 2: Actually. I'm basically recording
Speaker 2: this. I'm not giving
Speaker 2: any interview any podcast but I'm doing this because just
Speaker 2: because of this,
Speaker 2: our relationship from there from the past,
Speaker 1: I'm very grateful for that and I really appreciate it.
Speaker 1: And as you were recalling, I'm also recalling that another
Speaker 1: paper that we worked on where we looked at the
Speaker 1: impact of one country's contagion and reaction in another and
Speaker 1: you had that innovative approach of looking at data from
Speaker 1: resident flu and non resident flows to sort of, you know,
Speaker 1: parts, you know, which part of the
Speaker 1: investor reacts first and what sort of inside information they
Speaker 1: have over the economy. I thought that was very innovative
Speaker 1: and I'm glad that you know, I got to work
Speaker 1: with you on that. I've seen many, many papers subsequently
Speaker 1: approaching that 20 years ago it was you know, very
Speaker 1: cutting edge
Speaker 1: Iran again, real pleasure. And I'm very grateful that you're
Speaker 1: with us. I want to start with talking about of course,
Speaker 1: what else? The global pandemic,
Speaker 1: What's your view on the fourth quarter and beyond for
Speaker 1: the global economy as vaccination admittedly spreading unevenly but spreading nonetheless.
Speaker 1: And we're even seeing some news about antiviral pills getting introduced.
Speaker 2: Well, hopefully we are
Speaker 2: at the beginning of the end
Speaker 2: uh of discovered it will not end immediately. I think
Speaker 2: it will take some time
Speaker 2: vaccinations are there
Speaker 2: booster shots are coming some countries,
Speaker 2: the symmetry on vaccination is still there
Speaker 2: but slowly and steadily. We are getting into
Speaker 2: developing economies more and more percentage of people vaccinated fully vaccinated.
Speaker 2: Uh my country brazil started in
Speaker 2: in the left foot. But now you have
Speaker 2: Uh 50% fully vaccinated and more and almost fooled. Almost 90%.
Speaker 2: More than 90%.
Speaker 2: We have the first shot
Speaker 2: uh on on
Speaker 2: because there is a difference with nationalism. Nika they're giving
Speaker 2: three months. So
Speaker 2: between the first and the second, you have
Speaker 2: periods of time. But
Speaker 2: at the end of the day, I'm I'm starting to
Speaker 2: believe that we are at the beginning
Speaker 2: of the end of this covered
Speaker 2: markets of course are already ahead of the curve have
Speaker 2: boomed
Speaker 2: and economies advanced economies have recovered.
Speaker 2: So the U. S. Recovered from the fall of last year, europe,
Speaker 2: even even emerging markets are just basically
Speaker 2: Uh you may not want to call it a bishop
Speaker 2: recovery but everybody just fell a lot in 2020 and
Speaker 2: recovering 2021. So you question, the fourth part is basically
Speaker 2: what's going to happen after the Bishop Recovery?
Speaker 2: Uh We're gonna put video to recover.
Speaker 2: We're gonna hit some
Speaker 2: some wall and on,
Speaker 2: oh immediately I think most of the countries will hit
Speaker 2: the potential which won't mean either higher inflation and
Speaker 2: and will mean that you will have to aboard strong recovery,
Speaker 2: others have space.
Speaker 2: We are seeing
Speaker 2: quite a bit of monetary and fiscal stimulus. So whoever
Speaker 2: has space will just use the space.
Speaker 2: The rest that do not have space in terms of
Speaker 2: potential will just hit some limits.
Speaker 2: Uh and that's basically what I expect from 2020. We
Speaker 2: can talk about the limits on advanced economies which will
Speaker 2: basically give the
Speaker 2: the overall global scenario is shaped.
Speaker 1: Um You began by talking about brazil so maybe we
Speaker 1: just talk a little bit about latin America. I'm sitting
Speaker 1: here in Asia. You know, we don't follow latin America
Speaker 1: very closely but we do know that there are latin
Speaker 1: american economies which are very long the commodity cycle and
Speaker 1: we're seeing some strength and commodity prices and you mentioned
Speaker 1: the progress with vaccinations. So
Speaker 1: What's your overall sense of Latin as we head into 2022?
Speaker 2: Well, a tom was hardly hit by the covid.
Speaker 2: It it affected
Speaker 2: uh quite a bit of the population, the mood,
Speaker 2: even the political institutional arrangements were
Speaker 2: she cooks?
Speaker 2: I can give you several examples
Speaker 2: uh social unrest in chile before the covid.
Speaker 2: But now we have a constitution amendment that will be
Speaker 2: will be voting there
Speaker 2: uh next year, which changed
Speaker 2: a lot of the important rules
Speaker 2: and uh in chile. You have with sarah
Speaker 2: unrest in Colombia,
Speaker 2: A more difficult time in Colombia. You also have
Speaker 2: peru we had a terrorist election,
Speaker 2: a more
Speaker 2: uh huh
Speaker 2: candidate that was
Speaker 2: elected with now challenges to deliver what I promised.
Speaker 2: Uh So I will say that
Speaker 2: latin America has emerged from the covid
Speaker 2: With a lot of challenges, social challenges. one
Speaker 2: political challenges, but also economic challenge for example, that
Speaker 2: that has increased.
Speaker 2: So there are some smaller economies,
Speaker 2: we? Ve realized that
Speaker 2: I had to use
Speaker 2: whatever they call to
Speaker 2: uh maintain their economies functioning
Speaker 2: and now they have to deal with their lives. That's
Speaker 2: what what are you gonna do?
Speaker 2: Uh So
Speaker 2: yeah, that's economies are basically
Speaker 2: still stimulating their economies.
Speaker 2: But some of the
Speaker 2: emerging market economy, developing economies, especially in latin America do
Speaker 2: not have space
Speaker 2: to stimulate
Speaker 2: the space, Physical space. I mean,
Speaker 2: stimulus before I mentioned space in terms of potential output,
Speaker 2: but I don't think this is the limit
Speaker 2: in latin America is still a lot of unemployment.
Speaker 2: We still capacity
Speaker 2: to absorb.
Speaker 2: But the limit here is fiscal minutes.
Speaker 2: And this is where I believe
Speaker 2: the challenge will be economically.
Speaker 2: So political challenges is to do some challenges. Social challenges
Speaker 2: and they come from some economic difficulties where there are faced.
Speaker 2: I had
Speaker 1: uh indeed Ilan. I mean as you absolutely, you know,
Speaker 1: correctly point out that we not only have the issue
Speaker 1: whether the health crisis morphs into a financial crisis and
Speaker 1: economic crisis as the cost of dealing with the health
Speaker 1: crisis comes to you in the coming years. But also
Speaker 1: it seems like you know, social and political fabric have
Speaker 1: also been
Speaker 1: stretch substantially by the stress of the pandemic obviously
Speaker 1: and and many countries are you know sort of convulsing
Speaker 1: from that. So yeah, I think that you know, your
Speaker 1: your future institution a multilateral one and your former institution,
Speaker 1: bilateral government wants all will have their work cut out
Speaker 1: in the coming years.
Speaker 1: Uh Now of course one thing that can trip up
Speaker 1: latin America asia E. M. In general as we have
Speaker 1: seen in the past repeatedly is a rise in the U. S.
Speaker 1: Treasury yield from 94 onward. We have seen this game
Speaker 1: play out a number of times.
Speaker 1: Um So if we see you know, slight increase in U. S.
Speaker 1: 10 year yield and as to the course of next year,
Speaker 1: the U. S. Federal reserve carries out paper market starts
Speaker 1: pricing an interest rate hike
Speaker 1: late next year, early night in the following year.
Speaker 1: Um So you've already said about the debt but beyond that,
Speaker 1: you know, what is your sense of the shock absorption
Speaker 1: capacity of the global markets?
Speaker 2: I think I think the situation is
Speaker 2: a bit vulnerable in the sense that
Speaker 2: if you have that if you have
Speaker 2: prices markets are
Speaker 2: I have
Speaker 2: uh increase quite a bit prices are
Speaker 2: I? Evaluation and not
Speaker 2: I'm not cheap.
Speaker 2: Uh So
Speaker 2: if you have a period of
Speaker 2: more contraction is monetary policy coming from
Speaker 2: global markets?
Speaker 2: You all you tend to have a correction
Speaker 2: in prices, stock markets in general
Speaker 2: in the bond markets because to absolve the higher industry,
Speaker 2: the market interest that's going up.
Speaker 2: Mhm.
Speaker 2: But also
Speaker 2: the council markets,
Speaker 2: strong dollar means deposition
Speaker 2: across the border.
Speaker 2: So if you're in a world with higher inflation
Speaker 2: and you get the position
Speaker 2: of the currencies against the dollar,
Speaker 2: you tend to have more pressure inflation
Speaker 2: and that means more pressure on interest rates.
Speaker 2: And that that means that the challenge to a continuous recovery,
Speaker 2: which was your question
Speaker 2: and the beginning will be more difficult.
Speaker 2: So a beach
Speaker 2: definition of the scenario for next year
Speaker 2: will be whether we have higher interest rates
Speaker 2: globally.
Speaker 2: And as I will say, defined
Speaker 2: 90% of what we're gonna see
Speaker 2: next year,
Speaker 2: The other 10% Arabia's Democratic
Speaker 2: each country, how much vulnerable they are.
Speaker 2: What can they do? What is the policies and the
Speaker 2: rest
Speaker 2: But the the immediate impact
Speaker 2: is
Speaker 2: uh huh
Speaker 2: US Treasury yields
Speaker 2: other global interest rates.
Speaker 1: You know, I'm again thinking back, I think 20 years
Speaker 1: ago you had a paper on the pass through from
Speaker 1: depreciation to inflation. And as you were saying that I
Speaker 1: was thinking of that paper
Speaker 1: um so let's talk a little bit more about inflation
Speaker 1: because there is such a heated debate in the West
Speaker 1: in particular about the temporary and permanent nature of the
Speaker 1: ongoing rise in global inflation and even within temporary, you
Speaker 1: know how temporary the chip shortages will the last 3
Speaker 1: to 6 months if they last for nine months? Would
Speaker 1: producers start passing on those prices or will there
Speaker 1: margins come under pressure. So all those discussion is also
Speaker 1: going on. So I'm going to hear a little bit
Speaker 1: about what you're thinking is on this record in this regard.
Speaker 2: Well, I think global inflation has
Speaker 2: uh has several, several factors,
Speaker 2: several causes.
Speaker 2: Some of them you could see temporary, others not So
Speaker 2: the recovery from Covid was not planned.
Speaker 2: As the covid was not planned. You have all this
Speaker 2: there
Speaker 2: lockdowns and social distancing
Speaker 2: all of this affecting
Speaker 2: the supply chains. Somehow some sectors recovered immediately.
Speaker 2: They actually some actually boom
Speaker 2: in the coffee because they were
Speaker 2: more demanded,
Speaker 2: others have not recovered. Yes. And part of the services,
Speaker 2: tourism
Speaker 2: airlines feel like that is still to still
Speaker 2: way to go in the recovery. But
Speaker 2: when you look at the same
Speaker 2: product
Speaker 2: when you have different changes and you know that
Speaker 2: in order to produce today globally you have fix produce
Speaker 2: all over all over the world
Speaker 2: and sometimes you have interruption in a part of the
Speaker 2: chain
Speaker 2: and for some reason the worker were not able to
Speaker 2: produce
Speaker 2: at the same level that other parts of the chill
Speaker 2: produced and that generated some scarcity
Speaker 2: and has you know scarcity in splashed
Speaker 2: shortages mean
Speaker 2: high inflation.
Speaker 2: So that is part of what I call the temporary
Speaker 2: part
Speaker 2: which is
Speaker 2: uh covid relating at semantic recovery
Speaker 2: tend to have this
Speaker 2: temporary supply disruptions
Speaker 2: and that was saying all over
Speaker 2: all of the global economy.
Speaker 2: Uh huh.
Speaker 2: But there is part of what we're seeing
Speaker 2: that is uh
Speaker 2: not only this
Speaker 2: supply effects Emperor supply effect.
Speaker 2: Arab it is basically
Speaker 2: roof recovery and
Speaker 2: when we see in the U. S.
Speaker 2: Very
Speaker 2: you see a lot of
Speaker 2: vargas is but not enough
Speaker 2: job
Speaker 2: jobs to fill designs is
Speaker 2: I need to generalize phenomenon
Speaker 2: that is leading to higher wages.
Speaker 2: one cannot ignore that that's the basic mechanism
Speaker 2: where demand driven inflation
Speaker 2: generates,
Speaker 2: it's inflation,
Speaker 2: more demand. The supply,
Speaker 2: labour market is tied
Speaker 2: wages go up
Speaker 2: at the beginning the mark up
Speaker 2: goes down but at some point
Speaker 2: this implies hard inflation.
Speaker 2: Another sign that there is some
Speaker 2: hit it
Speaker 2: global economy is that commodities boomed
Speaker 2: as you mentioned.
Speaker 2: I mean you see all the it's back and forth
Speaker 2: every time you have a
Speaker 2: crisis or problem in china.
Speaker 2: Oh there is a flight to quality and commodities go down.
Speaker 2: But
Speaker 2: trends
Speaker 2: when you look at oil and you look at
Speaker 2: metallics and
Speaker 2: those
Speaker 2: common is over the last
Speaker 2: two years after the comedy you started recovering comedy is
Speaker 2: going up.
Speaker 2: So that gives me a sign
Speaker 2: that
Speaker 2: this part of the inflation may not be so
Speaker 2: so temporary. So if you combine
Speaker 2: temporary effects
Speaker 2: plus the more permanent effect you get high inflation.
Speaker 2: And I believe that's the reason we are having
Speaker 2: inflation everywhere.
Speaker 2: On top of that
Speaker 2: as you mentioned there is exchange rates
Speaker 2: and exchange. It sometimes reflect
Speaker 2: just democratic issues. So
Speaker 2: if you have a country that has political problems or
Speaker 2: economic debt issues or
Speaker 2: you guys capital outflows and that means the deposition.
Speaker 2: Once you have the deposition there is
Speaker 2: past for effect.
Speaker 2: So and if you're in a recovery and that's part
Speaker 2: of the paper you mentioned. Thank you if you're in
Speaker 2: a recovery the past was higher
Speaker 2: and when you're not in the republic
Speaker 2: given the procession depends
Speaker 2: to have a higher or lower passport, the fate of
Speaker 2: some factors, one of them is going to recover or not.
Speaker 2: The second is if you do if your parents is
Speaker 2: already undervalued
Speaker 2: and sometimes these are on the planet and if you
Speaker 2: get an additional
Speaker 2: the procession coming from
Speaker 2: whatever reason that means higher pressure. So
Speaker 2: global in pleasure. Plus
Speaker 2: it is symptomatic inflation which is sovereign
Speaker 2: inflation. They're all giving
Speaker 2: more or less inflation
Speaker 2: uh in our major markets developing in that part
Speaker 1: from the perspective of central bank should supply side inflation
Speaker 1: be ignored.
Speaker 2: No I don't think they usually ignored
Speaker 2: but it should be treated differently
Speaker 2: from demand
Speaker 2: side inflation.
Speaker 2: one of the months that inflation things are much easier
Speaker 2: because the demand side inflation means that
Speaker 2: you have an inflation and you have to go back
Speaker 2: to your target.
Speaker 2: Well you have to uh you don't have a inflation
Speaker 2: target but you have just the target or you just
Speaker 2: care about inflation. You have to react
Speaker 2: because inflation is up.
Speaker 2: If you have a demand side inflation
Speaker 2: you're reacting when
Speaker 2: you are
Speaker 2: yeah
Speaker 2: above full full employment you are
Speaker 2: or overheating.
Speaker 2: You are below the national rate of unemployment. Whatever
Speaker 2: is your definition of that you are hitting. So demand
Speaker 2: side inflation. You get high inflation when the economy is
Speaker 2: strong
Speaker 2: so you react and you
Speaker 2: to celebrate the economy
Speaker 2: and you and you and you rain on inflation at
Speaker 2: the same time
Speaker 2: and you don't get a recession you just get a
Speaker 2: deceleration with low inflation. That's easier to deal.
Speaker 2: Probably the supply is that the correlation is there is
Speaker 2: the opposite.
Speaker 2: Whenever you have high inflation can the supply shock. It's
Speaker 2: also the case where you're not in full employment,
Speaker 2: you tend to have either
Speaker 2: it's a supply shock that generates
Speaker 2: typically a nine struck generates a recession or it's just
Speaker 2: uh
Speaker 2: temporary supply ship that could not allow you to
Speaker 2: to produce or you are shortage shortage of production. So
Speaker 2: whenever the central bank reacts
Speaker 2: to avoid inflation, it makes recession worse or makes the
Speaker 2: deceleration worse
Speaker 2: and that's not
Speaker 2: not ideal moment to do it. However,
Speaker 2: central banks still have to react. So
Speaker 2: they I will say that the
Speaker 2: yeah,
Speaker 2: accepted protocol. If you can say that
Speaker 2: is that you react to the secondary effect of
Speaker 1: inflation,
Speaker 1: you
Speaker 2: allow prices to go up
Speaker 2: price levels. So you don't you don't want the oil
Speaker 2: shock to go down. You don't want the
Speaker 2: the relative prices too
Speaker 2: move back. You don't want a recession,
Speaker 2: You don't want this one time impulse
Speaker 2: to just feed into inflation.
Speaker 2: So if you allow wages to get it to absorb
Speaker 2: the past inflation and put them to the future to
Speaker 2: prices and then you get service ISMs had nothing to do.
Speaker 2: For example, in the initial start to start
Speaker 2: having increases. So you react to the secondary effect
Speaker 2: of these sharks. So
Speaker 2: the man inflation you just react
Speaker 2: normally supply, you react to the secondary effect that you
Speaker 2: absorb
Speaker 2: first round effect.
Speaker 1: Well, putting on that makes sense. Um So
Speaker 1: temporary, permanent demand supply side, whatever the causes
Speaker 1: the Federal Reserve is of course looking at this with
Speaker 1: an innovation a couple of years ago it came up
Speaker 1: with this average inflation targeting framework.
Speaker 1: And there is this view that it could be by
Speaker 1: design increasing the risk of policy error because it's more
Speaker 1: of a
Speaker 1: rear view mirror policy. It's not as preemptive as the
Speaker 1: earlier reaction function was. And it could then start getting
Speaker 1: into policy credibility. Of course, you know, we don't see
Speaker 1: evidence of that in the market based indicators but that
Speaker 1: seems to be one fear around average inflation targeting framework.
Speaker 1: What's your view on that?
Speaker 2: Yeah,
Speaker 2: well my view is that
Speaker 2: for quite some time even the heads
Speaker 2: advanced economies and I will say global inflation has been
Speaker 2: subdued
Speaker 2: but it has been below target for
Speaker 2: some of those economies
Speaker 2: and that means that they had to react some way
Speaker 2: to get back to target
Speaker 2: and one of the devices
Speaker 2: was to
Speaker 2: affect expectations
Speaker 2: and to say that even infiltration goes up,
Speaker 2: they will not react immediately.
Speaker 2: And a way to commit for that was the average
Speaker 2: inflation tarik who say well
Speaker 2: even if inflation goes up
Speaker 2: it will take that, I will look at the average,
Speaker 2: I will not look at the
Speaker 2: the the the the margin
Speaker 2: So that is somehow a way to commit yourself
Speaker 2: two
Speaker 2: having
Speaker 2: low nominal rates which
Speaker 2: if inflation goes up
Speaker 2: means lower real rates
Speaker 2: and that's the way to stimulate the economy when you
Speaker 2: are
Speaker 2: a very low inflation below your target.
Speaker 2: So by design
Speaker 2: you say you're not going to react to the margin.
Speaker 2: The problem is when you get to the marching
Speaker 2: and inflation is up
Speaker 2: and you have already committed to not react
Speaker 2: to stimulate the economy.
Speaker 2: So what we see today is basically
Speaker 2: the commitment
Speaker 2: that you
Speaker 2: promise you have to deliver
Speaker 2: because you don't deliver,
Speaker 2: you won't be able next time too
Speaker 2: promise and people believe
Speaker 2: so now you're getting the inflation,
Speaker 2: you are committed to lower interest real interface and you're
Speaker 2: delivering that.
Speaker 2: Of course
Speaker 2: that's good in the way up
Speaker 2: because you allow the economy to
Speaker 2: some more degrees of freedom.
Speaker 2: As you mentioned
Speaker 2: once you guys inflation and
Speaker 2: want inflation to go down,
Speaker 2: then you're in the opposite side,
Speaker 2: which means that you will accept
Speaker 2: higher inflation
Speaker 2: even though
Speaker 2: you need to be preemptive and you need to somehow
Speaker 2: produce inflation. So you're basically in the way down. You
Speaker 2: are
Speaker 2: with every inflation you're using part of you, what you
Speaker 2: mentioned
Speaker 2: the real mirror, you were looking at
Speaker 2: passive relations and
Speaker 2: you'll have to
Speaker 2: see what happens. So
Speaker 2: it is it isn't
Speaker 2: traditional classic
Speaker 2: trade off
Speaker 2: the commitment
Speaker 2: and flexibility
Speaker 2: and we are now
Speaker 2: basically pain
Speaker 2: the prices of commitment of past commitments.
Speaker 2: And we could build
Speaker 2: how we could have a scenario was going to be lucky.
Speaker 2: I'll take the lack out of it. But you could
Speaker 2: have a scenario
Speaker 2: where inflation is temporary
Speaker 2: and the costs are very small
Speaker 2: following an average and
Speaker 2: you've done well and no, we're not overreacting
Speaker 2: or
Speaker 2: you will have a more permanent inflation
Speaker 2: were the consciousness this will be
Speaker 2: much dear because
Speaker 2: you will be seen husband behind the curve
Speaker 2: and trying to raise interest of inflation is already embedded
Speaker 2: in prices. So
Speaker 2: I will say next year
Speaker 2: will be crucial
Speaker 2: to start to define whether
Speaker 2: we have we are having a temporary inflation
Speaker 2: and being more
Speaker 2: uh huh.
Speaker 2: I will say slow
Speaker 2: and moving out which is good
Speaker 2: or permanent inflation were
Speaker 2: you'll have to run
Speaker 2: behind
Speaker 2: what you lost.
Speaker 1: All right.
Speaker 1: I mean I think that you know I mean if
Speaker 1: one is going to go
Speaker 1: formerly toward average inefficient targeting one should probably actually say
Speaker 1: very clearly you know over which period which is still
Speaker 1: sort of ambiguous as far as the Fed is concerned.
Speaker 1: They might as well say it's a price level target
Speaker 1: in my view.
Speaker 1: Um So Ellen related to this is staying with the
Speaker 1: Fed but this is also applicable to the Bank of
Speaker 1: Japan and the C. V. And to some extent some
Speaker 1: emerging markets as well that you know a lot of
Speaker 1: money printing since the GFC. And until very recently you
Speaker 1: know there was no you know manifestation of major inflation.
Speaker 1: And we also now have
Speaker 1: parallel to this this new line of thinking that if
Speaker 1: the government wants to
Speaker 1: spend into productive areas they should just issue that
Speaker 1: central banks should help them in terms of the financing
Speaker 1: if it needs even monetization so be it
Speaker 1: but but it's okay because it will raise long term
Speaker 1: growth rate, it will address social inequities and therefore we
Speaker 1: should not spend too much time worrying about debt levels
Speaker 1: and so on.
Speaker 1: Um It seems like a bit of a call for
Speaker 1: a paradigm shift from what you and I studied in
Speaker 1: school or practice in our professional careers. What's your view
Speaker 1: on this?
Speaker 2: My view is that we are still,
Speaker 2: we have not still abolished the limit.
Speaker 2: It could be that the limits in the last few
Speaker 2: decades
Speaker 2: where
Speaker 2: far away from what we
Speaker 2: expected because of the
Speaker 2: global nature of what we have seen
Speaker 2: and incorporation of large chunks of operation
Speaker 2: into the global
Speaker 2: economy
Speaker 2: let me have pushed
Speaker 2: prices to go down
Speaker 2: not to go down, but inflation to go down.
Speaker 2: Uh and it may have given impression
Speaker 2: that the inflation will never come,
Speaker 2: but it will never happen.
Speaker 2: So then you started with
Speaker 2: theories
Speaker 2: that will tell you that it's forever
Speaker 2: uh that whatever you bring
Speaker 2: well the world whatever you that limit
Speaker 2: and or limit, you can continue doing it. And it's
Speaker 2: always
Speaker 2: a very,
Speaker 2: I will say a very enticing proposition because if you
Speaker 2: don't have that limits,
Speaker 2: you can just spend whatever you want because
Speaker 2: just you should get
Speaker 2: and if you don't have limits to spending, it's wonderful
Speaker 2: for
Speaker 2: politicians because they don't want to,
Speaker 2: they don't need to care about budget constraint they just
Speaker 2: spent
Speaker 2: and
Speaker 2: what is the problem with another bridge?
Speaker 2: What is the problem for another support?
Speaker 2: What is the problem for another
Speaker 2: um
Speaker 2: another program? Either infrastructure or not
Speaker 2: or just writing checks
Speaker 2: there's no limit. So why do you care?
Speaker 2: And if there is a limit for that,
Speaker 2: you just print it and he was printing is free.
Speaker 2: Just do it.
Speaker 2: And of course there's enough people like me
Speaker 2: have their very suspicions
Speaker 2: of this non limited theories.
Speaker 2: We just say, look, it's just does it, it's not
Speaker 2: gonna work forever.
Speaker 2: It's good that we don't try to breach this limit.
Speaker 2: Uh maybe we already reached the limits because
Speaker 2: inflation seems to be back and we're discussing whether it's
Speaker 2: permanent
Speaker 2: or temporary,
Speaker 2: maybe it's permanent and they understand then the party's over,
Speaker 2: maybe it's temporary and we still have
Speaker 2: more to go on this
Speaker 2: trying to with the limits. But
Speaker 2: what I would say is that what if you look
Speaker 2: at history,
Speaker 2: it tells us that it takes long
Speaker 2: but eventually
Speaker 2: you reach the limits
Speaker 2: and then you say why why why we
Speaker 2: why we didn't stop the excesses,
Speaker 2: Why we have not stopped before. Let's regulate better. Let's
Speaker 2: do a different thing.
Speaker 2: Ask for more capital. As for more regulation,
Speaker 2: let's pray we do stuff.
Speaker 2: But in the way up
Speaker 2: we just keep
Speaker 2: entertaining theories that basically say
Speaker 2: no excessive, they don't exist. Just go free
Speaker 2: and then we face the crisis and then we blame everybody.
Speaker 2: But at the end of the day we should blame
Speaker 2: the non limit theories have been quite difficult
Speaker 2: because of the coffee that the citizens
Speaker 2: of the crisis
Speaker 2: to still argue
Speaker 2: that's what that whatever you do to support your economy,
Speaker 2: you support the poor,
Speaker 2: you have consciousness of the need to governments to act.
Speaker 2: But at the same time, no,
Speaker 2: there are limits of what you can do
Speaker 2: in terms of budgets and monetary policy store.
Speaker 1: Final question, Ilan, I mean, half or two more questions.
Speaker 1: One question first, is that have economists as professionals, has
Speaker 1: done a poor job of sort of figuring out what
Speaker 1: the limit is. Because I remember a decade ago, there
Speaker 1: was a whole Reinhart Rogoff paper and they looked at,
Speaker 1: you know, hundreds of years of, you know, debt crisis
Speaker 1: and they had certain thresholds
Speaker 1: um which many developed countries have pushed through in in
Speaker 1: recent years, and and therefore, you know, you have the
Speaker 1: proponents of free lunch, you will say, look, they went
Speaker 1: past the Reinhart Rogoff threshold and nothing has happened. So
Speaker 1: why should developing countries uh do anything differently? So, firstly,
Speaker 1: I mean, do you think that, you know, there are
Speaker 1: ways to sort of establish
Speaker 1: such limits? Or is it really,
Speaker 1: you know,
Speaker 1: country by country idiosyncratic?
Speaker 2: No, I think that just that it could be the
Speaker 2: case that for
Speaker 2: some specific reason
Speaker 2: we we just faced
Speaker 2: and there's inflationary decades,
Speaker 2: let's assume
Speaker 2: just for reasoning
Speaker 2: That you have 2,000 2010, 2020,
Speaker 2: 20 years of abnormal low inflation,
Speaker 2: I just give you one reason for that was
Speaker 2: logical operation of
Speaker 2: of
Speaker 2: big chance of the population to the global market.
Speaker 2: That for me is a very reasonable explanation for low
Speaker 2: inflation
Speaker 2: for two or three decades. Let's assume that that's happening
Speaker 2: to two decades.
Speaker 2: We as an economist we don't have the data
Speaker 2: to say that this is just one larger cycle
Speaker 2: and not just a permanent change.
Speaker 2: So you're we're here we look at the past dana.
Speaker 2: It gives us an information.
Speaker 2: If it doesn't come in one year
Speaker 2: It doesn't come in five years it doesn't have in
Speaker 2: 10 years and then we are conclude that will never come.
Speaker 2: But maybe I was fun of time
Speaker 2: generation
Speaker 2: is
Speaker 2: 2030 years. Looking like eternity
Speaker 2: move for the economy.
Speaker 2: It's not an intelligent just 20 years
Speaker 2: but we have a generation economist memories papers
Speaker 2: it just takes its for happen because it's
Speaker 2: so life those part of life.
Speaker 2: But when people were looking at it from the past
Speaker 2: will say well there was these 2 20 years of
Speaker 2: low inflation. The guys believe that these 20 years is
Speaker 2: forever
Speaker 2: and then they screwed up.
Speaker 2: Okay
Speaker 2: then they had to
Speaker 2: inflation went up actually just have to go up. You
Speaker 2: had some
Speaker 2: crisis and then they again learned the least. Lessen the
Speaker 2: disagreements
Speaker 1: very well. Put it on. I I love the way
Speaker 1: you sort of you know frame that gives me some
Speaker 1: food for thought as well.
Speaker 1: All right. Finally
Speaker 1: it's been almost a little more than 2 20 years
Speaker 1: since you left Washington D. C. And went back to brazil.
Speaker 1: You've done all sorts of things in this last 20
Speaker 1: years and now starting in january 2022 you'll be heading
Speaker 1: the western hemisphere department. The I. M. F. What's your
Speaker 1: personal reflection on that?
Speaker 2: Well, it's so nice to be able to have a
Speaker 2: full cycle.
Speaker 2: We started like
Speaker 2: young economies
Speaker 2: trying to figure out
Speaker 2: how the world behaves how american markets behave.
Speaker 2: We wrote those papers
Speaker 2: but we also wanted to know what will happen with
Speaker 2: our careers.
Speaker 2: We was just at the beginning
Speaker 2: Now we have spent 20 years later.
Speaker 2: Oh yeah 2025 years later. Actually
Speaker 2: we are we are back.
Speaker 2: I am back to
Speaker 2: try to go back to public policy.
Speaker 2: I always liked the fact that
Speaker 2: and we can have experiencing in the private sector, learn
Speaker 2: how markets work,
Speaker 2: learn how, how people react to different
Speaker 2: incentive policies,
Speaker 2: how people read
Speaker 2: public policy policymakers
Speaker 2: way of communicating
Speaker 2: and then be able to go back to
Speaker 2: public sector
Speaker 2: and continue to try to help.
Speaker 2: But we studied, we evolved phds,
Speaker 2: we learn
Speaker 2: um
Speaker 2: I always thought that there was
Speaker 2: part of us that give us back society
Speaker 2: are that they invested in us.
Speaker 2: In addition that
Speaker 2: I think public policy is fun.
Speaker 2: It's fun to see,
Speaker 2: try to
Speaker 2: figure out how to
Speaker 2: how to help the economies.
Speaker 1: Well I don I wish you the very best of luck.
Speaker 1: I know that you have a few months between your
Speaker 1: current job and the next job. So rest well enjoy
Speaker 1: the end of the year. And I look forward to
Speaker 1: seeing you in Washington one of these days.
Speaker 2: Yes, I unfortunately will not rest because I still have
Speaker 2: to do the transition here. My current job.
Speaker 2: I have
Speaker 2: do all the changes position, hiring everything.
Speaker 2: But I hope to get today and that we've
Speaker 2: full energy
Speaker 2: to work and
Speaker 2: company will
Speaker 2: keep in touch. Let's do that.
Speaker 2: And if you're in Washington please come by
Speaker 1: uh you can count on that island. Uh thank you
Speaker 1: again very very much And thanks to our listeners as well,
Speaker 1: Copay time was produced by Martin Tuckey Daisy Sharma and
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Speaker 1: googling dBS research that great. Have a great day