Speaker 1: Hello. 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 a first episode.
Speaker 1: So I have just come back from a full month
Speaker 1: of travel through the US europe and UK. And if
Speaker 1: there was one common topic I discussed with family, friends
Speaker 1: and colleagues during the trip, surprise surprise it was inflation
Speaker 1: but it was not just inflation, it was also things
Speaker 1: that stem from it from interest rate increases to recession risks,
Speaker 1: housing market, currency market volatility and of course the war
Speaker 1: in Ukraine.
Speaker 1: So I think it's appropriate to resume our series after
Speaker 1: my month of being away with a dive in global macro.
Speaker 1: I'm very pleased for that to have with us robert
Speaker 1: deco professor of economics at the University of southern California roberts.
Speaker 1: Specializations range from international
Speaker 1: finance to open economy and development as well as economies
Speaker 1: of Japan and East asia. In addition to academia robert
Speaker 1: has worked at the International monetary fund and was a
Speaker 1: visiting scholar at the Federal Reserve Board of Governors. Professor
Speaker 1: robert Michael, welcome to Kobe time.
Speaker 2: Thank you. Thank you. It's a real real pleasure and
Speaker 2: it's great to meet up with you again.
Speaker 1: I know it's been a long long time robert and
Speaker 1: I hope next time we meet it will be in person.
Speaker 2: Great
Speaker 1: robert. Normally we start our macro discussions with the U. S.
Speaker 1: And you were based in L. A. So we have
Speaker 1: to talk a lot about the U. S. But I
Speaker 1: would like to turn things around a bit and start
Speaker 1: with a key area of your interest, Japan. So sitting
Speaker 1: here in Singapore from the market side of the business,
Speaker 1: we have been struck by the extraordinary magnitude of depreciation
Speaker 1: we've seen this year. And as you well know that
Speaker 1: many financial markets participants have been basically calling the yield
Speaker 1: curve control of the bank of Japan unsustainable. But they're
Speaker 1: holding fast. So let's start with your perspective on Japan,
Speaker 2: mm hmm. Um I think they're quite disconnected from in
Speaker 2: terms of monetary policy from the United States and, and europe.
Speaker 2: And I think the reason for that is that
Speaker 2: Their view is that the domestic economies still still weak.
Speaker 2: Uh the wage increases have not have not, wages haven't
Speaker 2: risen that much. They're like 1.5, or so. And so
Speaker 2: the domestic economy is weak and they need to continue
Speaker 2: their
Speaker 2: Loose monetary policies to get the domestic economy to recover
Speaker 2: some more. And the inflation rates are there. Uh you know,
Speaker 2: it's not like 0.5 as it was like a couple
Speaker 2: of years ago, but it's still just a tad above two.
Speaker 2: So it's not, it's not, it's a bit above there.
Speaker 2: Their targets at the official target is a little bit
Speaker 2: of love to I guess. So it's sort of around
Speaker 2: that level now and uh so it hasn't exceeded it
Speaker 2: by
Speaker 2: any kind of margin. So I think the authorities feel
Speaker 2: that the they're loose monetary policies is still justified, justified
Speaker 2: at this point. The only concern there is the weekend,
Speaker 2: it hasn't been this week since the early nineties and
Speaker 2: that has resulted in given the high dollar based commodity
Speaker 2: prices and oil prices and
Speaker 2: of the input prices. That means that those prices are
Speaker 2: coming in even
Speaker 2: higher because of the weaker, weaker yen into Japan, which
Speaker 2: is um causing they import a lot of their foodstuffs,
Speaker 2: for example, food and energy. And that's causing some problems
Speaker 2: for households which their budgets are stressed quite a bit
Speaker 2: because of the high food prices and in terms of production,
Speaker 2: the high energy prices. So, so that's a concern. But
Speaker 2: there's um
Speaker 2: there hasn't been intervention and I don't think the exchange
Speaker 2: rate intervention has been taken taken very seriously. So um yeah,
Speaker 2: I think the
Speaker 2: of course if as if they have to start raising
Speaker 2: their short term interest rates, they can't maintain their 10
Speaker 2: year rate at 100.5% so that's going to have to go.
Speaker 2: So it's gonna whether they're um they're they're announcement of
Speaker 2: holding interest rates to interest rates constant would be, or
Speaker 2: at least the 10 year rate constant. It's gonna depend
Speaker 2: on what they're gonna do to the short rates, but
Speaker 2: they didn't, they haven't raised it and
Speaker 2: But I think it all depends on the inflation rate
Speaker 2: as it starts creeping up towards 3%, even if the
Speaker 2: domestic economy doesn't improve that that much. I think they're
Speaker 2: gonna have to start raising it
Speaker 2: and
Speaker 1: in terms of the sustainability of the yield curve control.
Speaker 1: Do you see any physical limits or it is really
Speaker 1: going to be a bit of an intellectual exercise for
Speaker 1: the good of the economy? They'll give up. It will
Speaker 1: not be something that
Speaker 2: I think they would have to give up if they
Speaker 2: start raising their short rates. Yeah, absolutely.
Speaker 2: No,
Speaker 1: I am just talking in terms of the quantitative, you
Speaker 2: know,
Speaker 1: magnitude.
Speaker 2: Well, they, so it's 0.5, so they can say, Okay,
Speaker 2: we'll make it 2%, 3%
Speaker 2: I don't, you know, it was all done to um
Speaker 2: so there's two, there's two things. One is uh it's,
Speaker 2: was to stimulate the economy kind of keep the long
Speaker 2: rates low. And the other thing is to have that
Speaker 2: have a certain gap between the short rates and the
Speaker 2: long rates to maintain the profitability of the banking system,
Speaker 2: right? Because they banks make money on the yoke and
Speaker 2: they're an important part of the japanese stock market and
Speaker 2: uh and the economy. So in that sense, I can,
Speaker 2: you know, they could kind of bump bump both up
Speaker 2: at a certain point. But um so that's, so that's
Speaker 2: certainly possible, but it's not as crucial as when they
Speaker 2: were suffering from near deflation, but that all this kind
Speaker 2: of came uh, you know, board because of that. So, right,
Speaker 1: they finally got what they wanted. But they got a
Speaker 1: bit too much of it. It seems like very quickly.
Speaker 2: I'm not so sure if it's too much yet. That's
Speaker 2: the surprise of the whole thing that it's a little
Speaker 2: bit of, it's the mystery continues because as the rest
Speaker 2: of the world europe,
Speaker 2: The US have inflation rates approaching 9% still just a
Speaker 2: little above two there. So, you know, it's still still
Speaker 2: a mystery there.
Speaker 1: Right. So in terms of that mystery, is it because
Speaker 1: that unlike the european or the US economy's
Speaker 2: Japan's
Speaker 1: fiscal supporter on the pandemic was not commensurately large, is it?
Speaker 1: Because they have chronically large output gap and therefore producers
Speaker 1: still have no power to raise crisis.
Speaker 2: Mm hmm. I think it's both the, as you, as
Speaker 2: you point out that the fiscal response was, was nothing
Speaker 2: like that in the US given their budget, budgetary situation
Speaker 2: is quite dire. You know, the the debt GDP ratio
Speaker 2: is much higher. So they don't have the fiscal space
Speaker 2: to didn't have the fiscal space to do that. And
Speaker 2: also the the
Speaker 2: yeah, the kind of general, um, but I got output
Speaker 2: gap and the recessed state of the economy going to um,
Speaker 2: you know,
Speaker 2: aging of the population and lack of productivity growth, TfB growth.
Speaker 2: Things like that. Yeah.
Speaker 1: Um, so to that point that,
Speaker 2: you know, t.
Speaker 1: F. P growth and aging and structural decline in economic growth,
Speaker 1: you have been, you know, writing about and following Japan
Speaker 1: through this entire phase, you know, struggles to get out
Speaker 1: of the nineties crisis through various policies to the
Speaker 1: arts and the tents, um, what are the broader lessons robert?
Speaker 1: I mean, sitting in Singapore, I see, you know, Singapore
Speaker 1: has an asian dynamic and as it sort of hits
Speaker 1: toward the frontier production, almost certainly, you know, structurally
Speaker 2: europe
Speaker 1: has the same issue, perhaps even us. So what are your,
Speaker 1: I
Speaker 2: don't know what lessons positive lessons Japan the rest of
Speaker 2: the world could learn from it. I think the
Speaker 2: the only lesson is that don't let your economy age
Speaker 2: some age so drastically. Uh, and that's hard to do
Speaker 2: with just pro NATO list policies that they like some
Speaker 2: european countries, Japan tried with, uh, certainly the abe administration
Speaker 2: with
Speaker 2: giving, um, essentially very inexpensive childcare and and subsidies for
Speaker 2: raising the number of Children. But that hasn't really work
Speaker 2: that much. And I think what what hurts the country is,
Speaker 2: is really the lack of lack of immigration and um,
Speaker 2: I think, I think Japan has a lot to learn from,
Speaker 2: from Singapore, I think to uh
Speaker 2: sort of bring in talent, try to bring in talent
Speaker 2: from all over the world at at various levels like
Speaker 2: um physical labor and also intellectual labor, but they haven't,
Speaker 2: they haven't done that. Um, although abe has tried and
Speaker 2: I think that's probably the biggest reason why they're suffering
Speaker 2: from an aging population that's more drastic than
Speaker 2: other countries and
Speaker 2: I think um
Speaker 2: so I mean, what do you do when you have
Speaker 2: a population is aging is Japan, I mean you have high,
Speaker 2: you have high debt, I think the policies that they
Speaker 2: took our sort of appropriate, you're not gonna have a
Speaker 2: lot of risk capital prices going up in a situation
Speaker 2: like that, so, but you have deflation and debt
Speaker 2: sort of, the JGB prices have been going up, so
Speaker 2: holding bonds have been a good asset choice and holding
Speaker 2: money has been a good asset choice. So um that's
Speaker 2: um so that's why the bonds found a ready market
Speaker 2: in Japan their debt. So I think, I think they've
Speaker 2: done about as given, given the aging of the population
Speaker 2: they've done about as um well as they could. Again,
Speaker 2: there's
Speaker 2: things like innovation policies and all that, but it's uh
Speaker 2: those things are always very hard to see. Um although
Speaker 2: this new um
Speaker 2: Kishida, the Prime Minister is um trying to um promote
Speaker 2: more innovation by bringing back sort of more of the
Speaker 2: Japan inc approach where you, you subsidize industries and things
Speaker 2: like that and that may bear fruit, but I'm,
Speaker 2: you know, that that era seems to have passed in
Speaker 2: the global economy. So, so, so I think, yeah, the
Speaker 2: only lesson is that try not to get your economy
Speaker 2: aging and be be more open to the international economy
Speaker 2: bring people in
Speaker 2: and
Speaker 2: but they, and I think europe is going that way
Speaker 2: and Singapore has as well. And of course the United
Speaker 2: States has always been very open to mobility of human capital.
Speaker 2: And I think that's where it's been, it's been very
Speaker 2: hard for Japan to adapt. And they're kind of at
Speaker 2: their current
Speaker 2: current difficulties there robert,
Speaker 1: you sort of talked about one of the consequences of
Speaker 1: aging as debt and deflation. I don't know if you
Speaker 1: read this book, Charles good heart and Britain wrote this
Speaker 1: book a couple of years ago called the Great demographic reversal.
Speaker 1: And they have a sort of a provocative thesis which
Speaker 1: is we should not look at Japan and take away
Speaker 1: that aging and deflation come hand in hand? Japan's deflation
Speaker 1: is more related to
Speaker 1: recent market liberalization over the last two decades as well
Speaker 1: as you know china's exporting of you know, low prices
Speaker 1: to the tradable sector. And their point is that as U. S.
Speaker 1: And europe and other countries age, they will actually see
Speaker 1: inflationary impact because labor force shrinks and which demand will
Speaker 1: actually pick up.
Speaker 1: Um you
Speaker 2: know, I
Speaker 1: mean, I have always been in your camp because even
Speaker 1: in the I. M. F. When we wrote papers on demographic,
Speaker 1: the stylist fact common with aging was dissipation of price pressure.
Speaker 1: So what do you think of this pushback that it
Speaker 1: may actually be the other way around.
Speaker 2: So so they're arguing that wages are going to be
Speaker 2: increasing with with
Speaker 1: shrinking of the labor force,
Speaker 2: a shortage of shortage of the working age population
Speaker 2: and that yeah, I mean those um
Speaker 2: I think what's the Japanese lesson is that it's indeed true.
Speaker 2: The working age population has has has gone down, but again,
Speaker 2: that's been augmented by by imports from china and um
Speaker 2: china and the rest of the world. What what what's
Speaker 2: heard is that the demand for japanese products has
Speaker 2: has gone down like globally, right? Because of the competition
Speaker 2: in Korea and china and other Southeast asian countries and
Speaker 2: domestic still a large domestic economy, but
Speaker 2: the demand for um Japanese consumption goods such as um
Speaker 2: cars and also since it's the population, so aging, there's
Speaker 2: very little new household formation, so when you buy a house,
Speaker 2: there's all the stuff that goes into them and build
Speaker 2: a house material, but that demands just collapsed. So home
Speaker 2: electronics and materials to build housing, furniture, clothing
Speaker 2: because you're not working, people aren't working as much those.
Speaker 2: So domestic consumption demand um is growing miserably has been
Speaker 2: growing miserably and and that's contributed to the lack of
Speaker 2: domestic market growth and low investment because companies can't find
Speaker 2: markets for their products and so therefore low, low GDP
Speaker 2: and and deflation as a consequence.
Speaker 2: Um So yes, I I know Charles's arguments, I've heard
Speaker 2: other people comment on his book and it doesn't seem
Speaker 2: to be,
Speaker 2: had received a very widespread um widespread positive or widespread
Speaker 2: agreement and and I don't particularly agree agree with. I
Speaker 2: mean I think they need to argue that the which
Speaker 2: which they are charges arguing that the globalization, internationalization has ended.
Speaker 2: So that deflationary forces there and then all you have
Speaker 2: is this kind of high wages right?
Speaker 2: That's gonna cause that's gonna cause inflation. But
Speaker 2: you know it like I think the counter argument has been,
Speaker 2: well you're gonna still have globalized India is coming. Huh?
Speaker 2: The south south asian economies are coming on board and
Speaker 2: certainly Philippines and South East Asia have a young demographic.
Speaker 2: They're producing a lot. So that's that's going to continue.
Speaker 2: And that the
Speaker 2: um it's the and the robots are gonna robots are
Speaker 2: gonna come in and replace the labor anyway. So you
Speaker 2: may not need to need that much demand any of immigration.
Speaker 2: So it's a it's um it's it's an interesting it's
Speaker 2: an interesting hypothesis. Um
Speaker 2: But I'm not I'm not too I'm not too sure
Speaker 2: if it's gonna be right. Yeah.
Speaker 1: Very good. Now that's that's a very
Speaker 2: you know
Speaker 1: nuanced response. I appreciate that robert. All right, so let's
Speaker 1: cross the pacific back to your short. Um So during
Speaker 1: my visit to the U. S. Last month I heard
Speaker 1: nothing but stories of you know, soaring gas prices and
Speaker 1: soaring cost of hiring labor. So let's get a sense
Speaker 1: of your take on the inflation situation.
Speaker 2: Yeah. So
Speaker 2: when people are forecasting right? It's like 8 8.5 9
Speaker 2: and
Speaker 2: um you know people have been forecasting a turn into
Speaker 2: lower inflation for the last three or three months or
Speaker 2: so and it hasn't happened yet.
Speaker 2: Um But if oil prices are declining somewhat and
Speaker 2: so I think simply by what people are saying what
Speaker 2: the I don't know the technical term of it but
Speaker 2: the since the level last year was was high, you
Speaker 2: know the growth, relatively speaking the growth,
Speaker 2: I was not going to raise the inflation as much.
Speaker 2: So that's gonna kind of mechanically bring it down. Um
Speaker 2: But kind of more more broadly thinking about the thinking
Speaker 2: about the economics. Um It's
Speaker 2: clearly this uh administration and um the central bank was
Speaker 2: it was very much very much behind the curve. And
Speaker 2: they're not even I mean the raising rates at a
Speaker 2: fairly rapid rapid clip but because of concerns about the
Speaker 2: financial markets and I think also about the labor markets
Speaker 2: they it's not the real rates are still
Speaker 2: quite negative. Yeah you have like 6% negative real real
Speaker 2: interest rates. So you can take overall, you know people
Speaker 2: think positive real interest rates are um less stimulative than
Speaker 2: negative real interest rates and you kind of still have
Speaker 2: negative real interest rates. So
Speaker 2: the stimulus today is it's less than before but it's
Speaker 2: it's still stimulate it's still a stimulative situation given the
Speaker 2: expected given the actual inflation. Right? So and and I
Speaker 2: can't really imagine this
Speaker 2: Central bank being like the Volcker central bank and you
Speaker 2: know and also we don't have a history of the
Speaker 2: entire seventies of having high inflation where Volker had the
Speaker 2: background and the support to do that. So this central
Speaker 2: bank I don't think it's going to do that and
Speaker 2: therefore you're going to kind of continue to have longer
Speaker 2: negative real interest rates and
Speaker 2: Therefore more stimulative than otherwise and inflation could um continue longer.
Speaker 2: Like you can't. So looking at this history in 1982
Speaker 2: you know we had to start to have these very
Speaker 2: rapid interest rate increases and
Speaker 2: the economy started growing again in 84 85 you like
Speaker 2: around the mid eighties combined with the collapse of Opec
Speaker 2: and the falling oil prices you started to have low
Speaker 2: and stable inflation in the like 85 85 86. And
Speaker 2: I think the decline in inflation is going to be
Speaker 2: a little more little more tamed and you know we
Speaker 2: may not reach 2% by
Speaker 2: 2024. We might I think I think it will be
Speaker 2: higher than that uh higher than that for longer. So
Speaker 2: if I were I the tips spread I mean let's
Speaker 2: say it's between two up 2.5 around 2.5
Speaker 2: And I think if I I would bet on something
Speaker 2: higher than 2.5 over the next five years on average.
Speaker 2: Yeah
Speaker 2: so that's mainly because of the more accommodating um more
Speaker 2: accommodating um
Speaker 2: not not a not a draconian monetary tightening sort of
Speaker 2: more accommodating. Being aware of the labor markets and the
Speaker 2: financial markets.
Speaker 1: Very interesting
Speaker 2: thing. So
Speaker 1: so robert you're basically saying that the demand side impulse
Speaker 1: is not going to go away even if we have
Speaker 1: some favorable developments on the supply side. So you know
Speaker 1: all production gets wrapped up the war in Ukraine ends
Speaker 1: even then you don't think the demands that impulse will
Speaker 1: go and therefore
Speaker 1: inflation net net will remain
Speaker 2: substantially
Speaker 1: above target.
Speaker 2: Yeah. Above target. That's right. I think I think there's
Speaker 2: two you know economists here kind of on both both
Speaker 2: sides of this like there's one group who say its
Speaker 2: supply side stuff temporary and you know the china's covid
Speaker 2: and um
Speaker 2: and the other group says yeah but it's it's a
Speaker 2: combination and uh um the
Speaker 2: like someone like Larry summers for example would say that
Speaker 2: it's
Speaker 2: you know it's um you gotta unless you tighten money
Speaker 2: or have a have a crank have a deep recession
Speaker 2: you're not gonna get the inflation rate down
Speaker 2: and I'm a little bit more towards the summer's camp
Speaker 2: on this that you need to you need to really
Speaker 2: you need to have a recession um
Speaker 2: Like not again it's very divided people people so you
Speaker 2: don't need a recession. We really need a recession to
Speaker 2: bring the inflation rate down to target and I don't
Speaker 2: think this
Speaker 2: um the demand side. Both, both the fiscal side and
Speaker 2: the monetary side because we're talking about even another some
Speaker 2: more money from more spending coming on before the health
Speaker 2: care and the prescription which I think are necessary things
Speaker 2: for the U. S. But we're not talking about fiscal
Speaker 2: tax tax increases or you know we're still, the debate
Speaker 2: is still on increasing government spending. So
Speaker 2: um for those reasons. Um Yes I I guess I
Speaker 2: agree with what you're saying.
Speaker 2: Yeah that I
Speaker 1: suppose you know
Speaker 2: so
Speaker 1: extending that summer's Dicle argument that you need substantial rise
Speaker 1: in unemployment or a deep recession to bring prices under
Speaker 1: control that desirable. I mean what would you rather have
Speaker 1: live with inflation or lose your job? I think most
Speaker 1: people will say the former.
Speaker 2: I think that's right. I think that that's there in
Speaker 2: there in lies the political conundrum that's exactly right that
Speaker 2: I'm a tenured professor so I'd rather have low prices
Speaker 2: so summers but that's not good for your for the
Speaker 2: for the lovely baristas and charming waiters and
Speaker 2: you know the very helpful um
Speaker 2: Production workers. It's and it's not a good thing so
Speaker 2: that that's the and the it's it's a little bit different.
Speaker 2: Again the 80s was a different different thing that
Speaker 2: the political sort of composition of the electorate was different
Speaker 2: from today. So I think now it's less it's more
Speaker 2: diverse and younger. The younger people have much the U. S.
Speaker 2: One of the interesting compared to Japan is that the
Speaker 2: millennium population fraction of the voting public is now larger
Speaker 2: than the baby boom generation. Whereas Japan you have so
Speaker 2: many old people that the old people still kind of
Speaker 2: have political power but here the power is shifting to
Speaker 2: more people thirties, twenties thirties and they you know this
Speaker 2: inflation is actually good for them better for them than
Speaker 2: for us. So I think that's the there's a shift
Speaker 2: and politicians are rationally responding to that so there is
Speaker 2: going to be an inflationary more of an inflation of
Speaker 2: bias today than in the 19. And this other people
Speaker 2: have kind of commented on this but I think that's
Speaker 2: I can't I agree with that. Yeah.
Speaker 1: Right. But but that's about the political imperative
Speaker 2: I would like to
Speaker 1: think the Federal reserve is above that.
Speaker 2: Okay. Yeah probably. That's right. But
Speaker 2: Well if the Feds interested in 2% inflation what? Right.
Speaker 2: I mean fed has a dual mandate but uh which
Speaker 2: makes which makes it more complicated. But
Speaker 2: yeah it wasn't
Speaker 2: You know, they didn't even have a mandate in the 1980s.
Speaker 2: So it was and they still kept still lowered it
Speaker 2: to um
Speaker 2: um I think inflation was thought to be evil number
Speaker 2: one today. It's today it's not and I think um
Speaker 2: some inflation is beneficial for the U. S. Debt as well.
Speaker 2: So and maybe we're not gonna talk about emerging markets
Speaker 2: but the
Speaker 2: um I think the U. S. Would like to have
Speaker 2: the dollar with a weaker than than it is currently
Speaker 2: for the U. S. Economy
Speaker 2: but you know, but still foreigners who hold dollars such
Speaker 2: as uh the chinese japanese and the Germans. I mean
Speaker 2: they're the the inflation is not not helpful for they're
Speaker 2: gonna have capital losses there too. So I think I
Speaker 2: think it's um
Speaker 2: yeah so so for those various reasons um I think
Speaker 2: inflation is gonna be a little elevated. I
Speaker 2: I do think being an old old sort of an
Speaker 2: older economist. Um
Speaker 2: I do think that this credibility of the Fed in
Speaker 2: the 1980s was gained at great cost of inflation and
Speaker 2: the unemployment. And uh I'm
Speaker 2: I'm a little bit
Speaker 2: um have mixed feelings that
Speaker 2: you know, the credibility of the Fed as an inflation
Speaker 2: fighter is is sort of
Speaker 2: quite a little bit less today than than it used
Speaker 2: to be. And it's kind of incredible is being dissipated
Speaker 2: a little bit. Um You know, looks at financial markets
Speaker 2: and that's a very good thing.
Speaker 2: So so for those reasons I think inflation will be
Speaker 2: will be um
Speaker 2: more elevated but but who knows, you know, we might
Speaker 2: actually have a have a recession for regardless of what
Speaker 2: the Fed. Um I don't know it might not be
Speaker 2: from over tightening but recessions start from all unexpected reasons
Speaker 2: and
Speaker 2: you have one and then the problem is solved so.
Speaker 2: Right
Speaker 1: and you
Speaker 2: know so
Speaker 1: you know we're talking we're recording this on friday morning
Speaker 1: on thursday we had the second quarter GDP data which
Speaker 1: showed the US economy contracting on the back of the
Speaker 1: first quarter contraction. So I suppose it would have to
Speaker 1: start with housing.
Speaker 1: So what's your local observation the red hot southern California
Speaker 1: housing market? Is it getting dented by the higher interest rates? Yeah.
Speaker 2: Yeah the the the mo higher mortgage rates certainly dented
Speaker 2: like in my neighborhood um you know you have
Speaker 2: Maybe two or 3% prices have fallen since its peak
Speaker 2: in peak. You look at so all over southern California
Speaker 2: the higher end form higher end houses are selling less
Speaker 2: and yes indeed I think for the time being housing
Speaker 2: prices have peaked and they started falling
Speaker 2: So they've fallen maybe like 2% over the last two months. Yeah.
Speaker 2: Around here.
Speaker 1: Right. And what about that component in the C. P. I.
Speaker 1: Owners equivalent for rent? Yeah.
Speaker 2: So that that would help kind mechanically that would help.
Speaker 2: And also rents if the economy is a little weak
Speaker 2: or landlords can't hike rents as quickly.
Speaker 2: Right? So that so actual rents are not going to
Speaker 2: be rising as much and certainly the imputed rents as
Speaker 2: housing prices fall are going to be um um lower
Speaker 2: so that that will bring down and the housing components
Speaker 2: a large component of the CPI I so that's gonna
Speaker 2: bring it down and you have energy and
Speaker 2: energy and energy coming down. Foods are concerned that we
Speaker 2: haven't seen declining food prices yet. So but
Speaker 1: right. You know actually that's probably even a graver concern
Speaker 1: for emerging markets. We will talk about that
Speaker 1: uh momentarily. So one upshot from this higher interest rate
Speaker 1: has been this is amazing you know, strength of the U. S.
Speaker 1: Dollar on the at the expense of the rest of
Speaker 1: the world. So I was in London I mean 1
Speaker 1: $19 for a pound. I don't remember that ever. Uh
Speaker 1: And and similarly, you know your dollar going towards parity
Speaker 1: and of course more importantly emerging market currencies coming under pressure.
Speaker 1: Um So
Speaker 1: to the point of
Speaker 2: discussing
Speaker 1: About recession and perhaps the Fed not being inclined to
Speaker 1: engineer a massive recession meaning sooner or later they will
Speaker 1: relent from taking interest rates a past 4% or something.
Speaker 1: What is the market began to price that out? Is
Speaker 1: the dollar peaking or you see further and if you
Speaker 1: do see further dollar strength, what does it mean for?
Speaker 2: I'm sort of I thought it was. Yeah, I mean
Speaker 2: I think it's um
Speaker 2: I follow the dollar rate and I think it's peak
Speaker 2: there 130. You know 33 or so. So I think
Speaker 2: you've seen, I mean inflation should you know you and
Speaker 2: I are specialists like inflation should depreciate the US currency.
Speaker 2: You have the interest rate stuff but that's the cap
Speaker 2: brings in capital flows but also simply by purchasing power parity,
Speaker 2: the monetarist argument that should help push the inflation. Right?
Speaker 2: So the the and which is the desire of the
Speaker 2: Fed as well to some extent to a large extent.
Speaker 2: So
Speaker 2: I think the yeah, I mean I think it's a
Speaker 2: good the dollar has
Speaker 2: reached a peak or close to its peak and
Speaker 2: that's why we're sort of upset. We didn't travel this
Speaker 2: summer because it wouldn't be it would have been the
Speaker 2: time to go to europe or Japan or where?
Speaker 1: Right. Right. But I guess, you know, there are two
Speaker 1: ends of this argument. So one and the dollar across
Speaker 1: the basket of currencies may have peaked. But the sort
Speaker 1: of narrative that we're seeing out of europe and elsewhere,
Speaker 1: they are also falling into, you know, major recessionary dynamics.
Speaker 2: Yeah.
Speaker 1: You'll still find europe rather reasonably priced. Uh
Speaker 2: the
Speaker 1: dollar substantially weaker
Speaker 2: like a week. You're right, The U. S. Economy, why
Speaker 2: the dollar stronger is partly the high interest rates but
Speaker 2: also the the real economy stronger than Japan and europe.
Speaker 2: And that's that certainly helps in strengthening the strengthening the currency.
Speaker 2: So yeah,
Speaker 1: so robert you and I both as students as well
Speaker 1: as professionals through our carriers have seen every single rate
Speaker 1: hike cycle out of the US being accompanied by some
Speaker 1: sort of an E. M. Crisis some deeper than others.
Speaker 2: Yeah. Are
Speaker 1: we going to see ways of default and and major
Speaker 1: crisis
Speaker 2: now, capitals, capitals flowing out. Right. So if that if
Speaker 2: that continues to accelerate, then you're gonna have investment
Speaker 2: investment declining. And these countries have to start raising interest
Speaker 2: rates to defend their currencies. And
Speaker 2: uh
Speaker 2: so it's not um
Speaker 2: it's not a it's not a it's not a particular
Speaker 2: positive outlook, but one should also, I think, look at
Speaker 2: emerging markets um sort of country by country, I think
Speaker 2: we first sort of, you and I first connected because
Speaker 2: we were working on a similar topic, interest rate, interest rate,
Speaker 2: defense of currencies. And and these are these are countries
Speaker 2: and um these are and so we looked at, I
Speaker 2: think you and I you work with the
Speaker 2: I guess he he became the governor of the Bank
Speaker 2: of brazil,
Speaker 1: who's now the head of the western hemisphere department of
Speaker 1: the I m f
Speaker 2: Okay, there you go, you and that's a that was
Speaker 2: a great paper. And so I think,
Speaker 2: I think ultimately it depends on the on the fundamental
Speaker 2: kind of strengths of these emerging markets. Like if they're
Speaker 2: if they're fundamentals are really strong, this is they can
Speaker 2: they're going to be able to withstand, withstand this capital outflows,
Speaker 2: higher us interest rates. And
Speaker 2: um but I think in in in those cases of
Speaker 2: these emerging lands also during the Latin american crisis of
Speaker 2: the 1919 eighties. Each country, it was not just simply
Speaker 2: driven by um the high interest rates during the Volcker era.
Speaker 2: These countries really had domestic, they borrowed too much during
Speaker 2: the oil surplus of the 19 seventies and
Speaker 2: their investments were not good, right? They were investing in
Speaker 2: kind of crappy projects and that's when the interest rates rose.
Speaker 2: That that's why they heard similarly the situation
Speaker 2: the asian countries right during the 1919 1919 nineties. So
Speaker 2: I feel that it's not, it's not saying oh the U. S.
Speaker 2: Interest rates have risen, capital is going to be more
Speaker 2: or less, it's gonna not gonna be floating as much
Speaker 2: to our countries, they're gonna go back. Well if you
Speaker 2: have um if you have a fundamental like Singapore is
Speaker 2: not going to have any problem. If you have fundamentally
Speaker 2: strong economy,
Speaker 2: it's going to it's going to be um you're gonna
Speaker 2: be able to withstand it fine. And most of these cases,
Speaker 2: you know, we we study individual countries or regions and
Speaker 2: they have flaws. They're severely flawed in some way and
Speaker 2: this capital outflow just exacerbates. And I think um I
Speaker 2: mean as far as I I follow asia much more,
Speaker 2: much more carefully than anywhere else. And I feel that,
Speaker 2: I mean certainly, you know Korea is no longer emerging market,
Speaker 2: that's fine, they're fine, Japan basically is fine, china's Singapore
Speaker 2: is fine. Yeah, I feel generally it seems very strong
Speaker 2: in that in that region. So um
Speaker 2: I'm not I'm not that I'm not that concerned um
Speaker 2: concerned about it. And yeah, but again, I don't know,
Speaker 2: I don't know the individual countries in latin America for example,
Speaker 2: as well. So,
Speaker 1: robert when you were talking in the context of talking
Speaker 1: with the US earlier that food prices have not come down.
Speaker 1: So I suppose my worry is that energy food mix.
Speaker 1: I mean, there are manifestations of various supply side developments
Speaker 1: around the world, but the extent of they can create
Speaker 1: distress for particularly commodity in
Speaker 1: important economies.
Speaker 2: I think that's right, like Vietnam for example, but
Speaker 1: that's that's where the worries are that even this year's
Speaker 1: high energy prices will feed into higher food prices next year,
Speaker 1: fertilizing other channels. Um so, so in some ways,
Speaker 2: just
Speaker 1: Like the 70s, it really ends and begins and ends
Speaker 1: with oil, if you can get some oil under control.
Speaker 1: I think a lot of the discussions were happening
Speaker 1: having will probably start to fade. So, so let's let's
Speaker 1: hope for that
Speaker 2: oil prices come under. Um but
Speaker 1: but see even on that issue, robert, I have a
Speaker 1: lot of, you know, conflicting thoughts in my head because
Speaker 1: on one hand, the the desire now to pump more
Speaker 1: oil more coal, because we have high energy prices, I
Speaker 1: worry that that will undermine the climate change agenda. And
Speaker 1: I also feel that, you know, basic economic sort of
Speaker 1: dictates that you do want
Speaker 1: the relative prices of fossil fuel products to be high otherwise,
Speaker 1: why would anybody start investing or using alternative fuel. What
Speaker 1: are your thoughts on this? Well,
Speaker 2: it's the usual the argument that the market will solve
Speaker 2: the energy shortage problem and promote
Speaker 2: it's it's clearly that clearly that case. And
Speaker 2: um but it's it's it's the pace if you secular
Speaker 2: early expect as we do, you have
Speaker 2: eventually oil running up out and oil prices rising over
Speaker 2: 50 years. And also you have a climate climate problem
Speaker 2: where the
Speaker 2: in that case, the government needs to subsidize because it's
Speaker 2: kind of a public good. Right. In those cases,
Speaker 2: you can have this increase. Um um
Speaker 2: and what price was secular, the increasing that promote conservation
Speaker 2: and conservation and moving towards um more energy efficient types
Speaker 2: of transportation systems, I think, I think that will that
Speaker 2: will continue. But I think it's just the pace, the
Speaker 2: rapid rise over the last year of of commodity prices.
Speaker 2: That's um um that's difficult to deal with. And and
Speaker 2: that's not a it's not a long term
Speaker 2: um structural change kind of argument. You know, that's that's
Speaker 2: more of a more of a shock. That, um is,
Speaker 2: um these disturbances are maybe hard to manage in the
Speaker 2: in the in the short room because um
Speaker 2: they're not they're not insured against these shocks. A lot
Speaker 2: of these countries that for the reasons you mentioned inflation,
Speaker 2: food prices going up sharply, they don't have the stuff
Speaker 2: stored and, you know, they're not hedged with against these,
Speaker 2: um these food and oil prices and that that's that's
Speaker 2: going to create a problem.
Speaker 2: So yeah in the short run
Speaker 2: um
Speaker 2: I think you will
Speaker 2: these these shocks um if you can smooth them that
Speaker 2: that's fine but if you can't um
Speaker 2: um I won't say that um
Speaker 2: that these shocks are good things because they're gonna promote
Speaker 2: energy sufficiency because that's more of a longer term thing.
Speaker 2: Yeah
Speaker 1: indeed. Um So robert earlier we were talking about you
Speaker 1: know the proton good heart thesis that one push back
Speaker 1: against the idea that the world is de globalizing is
Speaker 1: that well there are many other parts of the world
Speaker 1: that will remain very much globalized and we have favorable
Speaker 1: demographic to bring us you know cheap manufacturing for income.
Speaker 1: But we certainly cannot avoid the firm fact that the
Speaker 1: west is trying to drive us away
Speaker 2: from
Speaker 1: relying too much on china so that china plus one
Speaker 1: strategies and you know finding ways to push back against I. P.
Speaker 1: And all that sort of stuff. So so this this
Speaker 1: narrative of pushback would that undermine global growth prospects? I
Speaker 1: mean we have been such a big data to china's
Speaker 1: growth over the last two decades. Where are we going
Speaker 1: to get alternative sources of growth if we're going to
Speaker 1: start pushing china toward the corner.
Speaker 2: Um No I don't
Speaker 2: well chinese growth you know it's it's it's enormous but
Speaker 2: it's it's not going to see the see that those
Speaker 2: high single digit growth rates that did it. It's gonna
Speaker 2: drop 554% which was like korean levels, these are the
Speaker 2: kind of examples that you see all first japan, then
Speaker 2: the knicks and then the china so its growth rate
Speaker 2: is gonna
Speaker 2: gonna go down, go down to some extent and you
Speaker 2: know I've always been, maybe people have different views on
Speaker 2: it but I'm hopeful for
Speaker 2: they tend to focus a lot of demographics but I'm
Speaker 2: hopeful for like the Philippines and
Speaker 2: the South south asian countries um and even africa and
Speaker 2: to take take up some of this to take up
Speaker 2: some of this like I mean I'm an internationalist and
Speaker 2: um I think um
Speaker 2: the
Speaker 2: the west has compared Eastern, it was a very china
Speaker 2: faced a very benign environment until fairly global environment until now.
Speaker 2: And so you know I hope I hope that
Speaker 2: I hope that benign environment will continue but
Speaker 2: you know there's this this geo geopolitical issue that that
Speaker 2: you know that's that's going on right now. Um my
Speaker 2: my feeling is that as I was saying unlike the
Speaker 2: soviet union china was the beneficiary of the of the
Speaker 2: global system and of a benign global system and I
Speaker 2: think their their leaders are going to realize that
Speaker 2: you know what are we going to gain from kind
Speaker 2: of exciting with being sort of pariahs of the international
Speaker 2: system because they gain and and just doing this calculus
Speaker 2: of how
Speaker 2: europe and the rest of the open part of Asia
Speaker 2: and the United States um that that of where their
Speaker 2: future is gonna lie will make them
Speaker 2: and I and I don't will they may not admit it,
Speaker 2: but
Speaker 2: a rational actor would kind of
Speaker 2: jointly determine sort of global where the global economy would
Speaker 2: belong with the U. S. And I think european countries
Speaker 2: like china would and I so I'm not I don't
Speaker 2: think it's gonna head in the direction of let's um
Speaker 2: you know,
Speaker 2: let's be a pariah of the goal because they they
Speaker 2: benefited so much and it's it's just been so good
Speaker 2: for china, whereas for the soviet union, I think it's
Speaker 2: arguable where the internationalization has helped them that much except
Speaker 2: for the oil prices and stuff. But for china it's
Speaker 2: um it's very clear so I'm not that negative about
Speaker 2: china kind of disappearing from global the global picture. Yeah
Speaker 1: that is robert. I mean
Speaker 2: this is this is again it's like the the most
Speaker 2: the very important political economy question, I don't think anyone
Speaker 2: has an answer right?
Speaker 1: Um Well I guess, you know, I I worry the
Speaker 1: other side of the thing which is that it's not
Speaker 1: just a question of whether china was to be part
Speaker 1: or not. I think the answer to that is pretty
Speaker 1: clear they do, but the pushback that they're getting particularly
Speaker 1: from the US and perhaps increasingly this is a coalition
Speaker 1: of democracies
Speaker 1: and how that ends up worries me quite a bit
Speaker 1: and it's I'm not alone sitting here in Singapore. There
Speaker 1: are others also worry that countries also gets sort of,
Speaker 1: you know, pulled and pushed between these two great powers
Speaker 1: and how that sort of gets in the way of
Speaker 1: investment and so on. But
Speaker 2: there's no doubt about that.
Speaker 1: But I'm glad that you still are sort of, you know,
Speaker 1: pinning your hopes on rational actors. That's what we need.
Speaker 2: Right,
Speaker 1: robert deco. Thank you so much for your time and
Speaker 1: it
Speaker 2: was really, really great talking to you and don't be
Speaker 2: a stranger. I'll see you in L. A. Yeah,
Speaker 1: I will try to make this happen. Thanks to our
Speaker 1: listeners as well, Kobe time was produced by ken Del
Speaker 1: Ridge from Spy studios daisy Sharma and validly provided additional assistance.
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