Speaker 1: Welcome to Coffee Time,
Speaker 2: a
Speaker 1: podcast series on markets and economies from DBS group research
Speaker 1: Team will break Chief Economist welcoming you to our
Speaker 2: 77th episode,
Speaker 2: I'm excited about this one. There are macro economists and
Speaker 2: economic historians and then there is Barry Eichengreen. He's George
Speaker 2: C pardee and Helen and party professor
Speaker 1: of Economics and political
Speaker 2: science at the University
Speaker 1: of California at
Speaker 2: Berkeley. His contribution
Speaker 1: to economics
Speaker 2: and international finance stretches over four decades.
Speaker 1: Consider his
Speaker 2: seminal book,
Speaker 2: Golden Federer is the Gold Standard and the Great
Speaker 1: Depression, published in
Speaker 2: 1992, or
Speaker 1: the co authored volume
Speaker 2: in defense of public debt. Published just last year
Speaker 2: in between, Professor
Speaker 1: Eichengreen has delved
Speaker 2: deeply into exchange regimes, trade
Speaker 1: and monetary unions,
Speaker 2: financial market, contagion, banking crisis, global, international financial architecture and
Speaker 2: all of these in the context of now or a
Speaker 2: century ago and across
Speaker 1: events in the
Speaker 2: US eurozone, china latin America and so on. So truly
Speaker 1: an honor to have him
Speaker 2: on board today. Professor Barry Eichengreen, welcome to Covid Time.
Speaker 2: Thank you tom you're you're making me feel long in
Speaker 2: the tooth,
Speaker 2: but
Speaker 1: so relevant
Speaker 2: then and now, um professor, I have just read a
Speaker 2: long list of your expertise but I didn't
Speaker 1: mention post
Speaker 2: conflict reconstruction. Neither did I talk about sanctions, but you've
Speaker 2: been writing
Speaker 1: on these issues lately,
Speaker 2: given the war in Ukraine.
Speaker 1: So let's begin
Speaker 2: there
Speaker 2: in a recently published article in project syndicate. You wrote that,
Speaker 2: talking about marshall plan for Ukraine is a popular
Speaker 1: sport nowadays. But
Speaker 2: Ukraine's reconstruction
Speaker 1: must be done
Speaker 2: with full appreciation of the
Speaker 1: most relevant features
Speaker 2: of the plan that
Speaker 1: was put in motion close
Speaker 2: World War Two europe. So, if you may walk us
Speaker 2: through those features from your historical study,
Speaker 2: I I should probably start by mentioning the context for
Speaker 2: that historical study. I did my work on
Speaker 2: Uh the history of the Marshall plan some together with
Speaker 2: my colleague Brad Delong some together with a former student,
Speaker 2: now colleague mark at the beginning of the 1990s, because
Speaker 2: everybody was thinking about a Marshall plan for Eastern Europe
Speaker 2: and the former Soviet Union. So the context was different.
Speaker 2: Obviously,
Speaker 1: there was no war
Speaker 2: raging in that part of
Speaker 1: the world
Speaker 2: at the time. Um
Speaker 2: so the situation in Ukraine is somewhat different now, although
Speaker 2: I think marshall plan history is relevant once again. So
Speaker 2: I would I would make a couple of
Speaker 2: points building on that. Um post
Speaker 1: World War Two
Speaker 2: uh experience. First of all, um
Speaker 2: Marshall plan funds began to be dispersed even before the
Speaker 2: conflict in europe was entirely over. So the war with
Speaker 2: Nazi Germany was certainly over. But
Speaker 1: there was still a
Speaker 2: civil war raging in Greece
Speaker 2: Through 1949, uh into 1950. and Marshall Plan funds began
Speaker 2: to flow from the United
Speaker 1: States to
Speaker 2: The recognized government of Greece already in 1948. So one
Speaker 1: here sometimes
Speaker 2: today that we should wait until the conflict in in
Speaker 2: Ukraine is over,
Speaker 2: until the Russians withdraw or whatever before we begin to
Speaker 2: provide aid for reconstruction
Speaker 1: as opposed
Speaker 2: to military
Speaker 1: aid. Think
Speaker 2: marshall plan experience shows that uh thoughtfully
Speaker 2: administered and dispersed, we can begin to provide aid for
Speaker 2: reconstruction
Speaker 1: once the west of the country
Speaker 2: is secure, for
Speaker 1: example, uh already today.
Speaker 2: Um
Speaker 1: secondly, uh
Speaker 2: there has been talk
Speaker 1: about whether
Speaker 1: we the West should be providing mainly grants or loan
Speaker 1: guarantees and it's worth recalling that
Speaker 2: uh european
Speaker 1: countries came out of World War Two heavily indebted
Speaker 2: and we
Speaker 1: provided grants rather than uh more
Speaker 2: debt
Speaker 2: if you
Speaker 1: will. And I think that's relevant to Ukraine today as well.
Speaker 1: They looking forward are are going to face uh
Speaker 2: difficult
Speaker 1: problem of debt renegotiation. They're going to have
Speaker 2: to restructure the debts
Speaker 1: that they inherited from the pre
Speaker 2: war period.
Speaker 1: Their economy will
Speaker 2: have shrunk.
Speaker 1: Uh those negotiations will take time. So I don't think
Speaker 1: we should add pile more
Speaker 2: debt
Speaker 2: on top
Speaker 1: of the existing
Speaker 2: debt if
Speaker 1: you will. And finally
Speaker 2: there's the question
Speaker 1: of how a marshall plan
Speaker 2: for
Speaker 1: Ukraine should be structured and
Speaker 2: administered.
Speaker 1: I don't think it should be administered by the Bretton
Speaker 1: woods institutions, for example, by the I. M. F. And
Speaker 1: the World Bank Russia
Speaker 2: being a
Speaker 1: member of the I. M. F. And the World Bank
Speaker 1: uh and uh in
Speaker 2: a position therefore
Speaker 1: to throw a wrench in the works if you will.
Speaker 1: The um
Speaker 1: uh brilliance of the marshall plan was that the US
Speaker 1: government set up autonomous self standing agency that could
Speaker 2: cut through red tape
Speaker 1: and wasn't uh
Speaker 2: answerable
Speaker 1: directly answerable to the bureaucracies of the U. S. State
Speaker 1: Department and the U. S. Treasury Department. And I think
Speaker 1: a self standing international agency maybe under the umbrella of
Speaker 1: the United
Speaker 2: Nations,
Speaker 1: uh maybe under the umbrella of the O. E. C. D.
Speaker 1: Would be the right way to go for Ukraine as well.
Speaker 1: Would you consider a BRD or the european union along
Speaker 1: the same lines? Well, I would I I would be
Speaker 1: prepared to consider
Speaker 2: E. B. R.
Speaker 1: D. Um E. B. R. D. Did not
Speaker 1: exactly distinguished itself in its early
Speaker 2: days.
Speaker 1: Um
Speaker 2: in
Speaker 1: The early 1990s it became famous more for for building
Speaker 1: lavish headquarters with with a lot of
Speaker 2: marble than
Speaker 1: it didn't dispersing funds. But it is presumably leaner and
Speaker 1: meaner now. And I I would um uh consider that
Speaker 1: uh I I don't think um
Speaker 1: Reconstruction of Ukraine is going to be an exclusively Eu endeavor.
Speaker 1: We're going to want to uh in in in enlist
Speaker 1: the support of the United States and Japan
Speaker 2: and others.
Speaker 1: So uh the european union, the european commission is clearly
Speaker 1: going to have to play a leading role. Whether it
Speaker 1: should house
Speaker 1: this autonomous agency though is another
Speaker 2: matter
Speaker 1: if I may ask you one more follow up
Speaker 2: question, what's your
Speaker 1: view on the refugees?
Speaker 2: So Ukraine is
Speaker 1: blessed with many skilled workers. Some of them presumably will
Speaker 1: fill the labor market gap. The skills mismatch that Poland
Speaker 1: had before this conflict. And of course, you know, the U. S.
Speaker 1: Is granting large number of green cards to Ukrainians and
Speaker 1: so on for the post conflict rebuilding. Would you want
Speaker 1: the refugees to go
Speaker 2: back as soon as
Speaker 1: possible? Is that what we saw in the case of
Speaker 1: europe
Speaker 2: post World War Two?
Speaker 1: Or it was the case that you know, many left
Speaker 1: regardless and many stayed on and that was sufficient?
Speaker 1: Well, in the case of of
Speaker 2: Ukraine, I think it is
Speaker 1: critically important to reverse the brain brain. Uh, among other things,
Speaker 2: Ukraine
Speaker 1: had
Speaker 1: relatively small but vibrant high tech sector. Uh people can
Speaker 1: work remote so maybe they can work from Poland
Speaker 2: for
Speaker 1: the Ukrainian
Speaker 2: startup.
Speaker 1: But I think more generally it will be important to
Speaker 1: attract back the skilled workers. There was a lot of
Speaker 1: labor
Speaker 1: displacement after World War Two, a lot of voluntary
Speaker 2: and
Speaker 1: some involuntary movement
Speaker 2: of labor
Speaker 1: from from the east to uh to the west. The
Speaker 2: big problem after
Speaker 1: World War Two was rebuilding the housing stock
Speaker 2: and
Speaker 1: uh thereby allowing
Speaker 2: people to move
Speaker 1: back to the
Speaker 2: urban centers
Speaker 1: and the industrial centers where their labor was needed where
Speaker 1: they were most productive. And this is going
Speaker 2: to be a big problem for
Speaker 1: Ukraine as well.
Speaker 2: They want to attract
Speaker 1: back
Speaker 1: the refugees skilled workers,
Speaker 2: but they're going to have
Speaker 1: to be able to house them and
Speaker 2: it will take
Speaker 1: years to rebuild the housing stock. So I think um
Speaker 1: modern
Speaker 2: technology can be
Speaker 1: part of the solution. They're modular housing and so forth.
Speaker 1: But where you
Speaker 2: can rebuild a
Speaker 1: bridge or a railway virtually overnight,
Speaker 1: pontoon
Speaker 2: bridges
Speaker 1: and uh, and and so forth, rebuilding the housing stock
Speaker 1: takes longer. And that will be a constraint on repatriation.
Speaker 1: Uh, Professor, I can I just want to press you
Speaker 1: a little more on the IMF's World Bank
Speaker 2: question. I just want to go back there for
Speaker 1: a second. Both institutions have already offered, you know, substantial
Speaker 1: assistance to the Ukrainian
Speaker 2: government. And of
Speaker 1: course, Ukraine has had multiple
Speaker 2: programs with the I. M.
Speaker 1: F. In the past by myself. And as an ep,
Speaker 1: actually worked on a Ukraine program 20 years ago. Um,
Speaker 1: you wouldn't want those
Speaker 1: interactions to be suspended even under your envisioned framework.
Speaker 2: No,
Speaker 1: I think,
Speaker 2: um, that
Speaker 1: the agency in in in charge of dispersing uh, bilateral
Speaker 1: aid
Speaker 2: from the United
Speaker 1: States to Ukraine, from the european union to Ukraine can
Speaker 1: also work with the
Speaker 2: I. M. F. And and
Speaker 1: and and the World Bank. But it's a matter of
Speaker 1: who's going to be in charge
Speaker 1: if you will. And what the um, where, where the
Speaker 1: organizing center will
Speaker 2: uh,
Speaker 1: be housed. And I think it should be housed outside
Speaker 1: the bank and outside the fund.
Speaker 1: I don't think your friends in Washington are going to
Speaker 1: be very happy to hear this. I'm gonna move on
Speaker 1: to one more subject on the conflict. So, this is
Speaker 1: the first line of an article you recently wrote for
Speaker 1: the East AsIA forum, what will be the demonstration effect
Speaker 1: of Western sanctions on
Speaker 2: Russia?
Speaker 1: Mm hmm.
Speaker 1: So it's widely argued that with
Speaker 2: uh,
Speaker 1: western sanctions and in particular with the virtually unprecedented step
Speaker 2: of freezing
Speaker 1: the
Speaker 2: foreign exchange
Speaker 1: reserves of Russia's
Speaker 2: central bank,
Speaker 1: there will be movement
Speaker 2: away from the
Speaker 1: dollar
Speaker 2: in particular
Speaker 1: movement away from reliance on Western financial institutions, both swift
Speaker 1: as a messaging system, the new york clearinghouse, US banks,
Speaker 1: etcetera. Uh, it's
Speaker 2: important though,
Speaker 1: to observe that you asked not about US sanctions, but
Speaker 1: about Western
Speaker 1: sentence where the West
Speaker 1: in this
Speaker 2: context means
Speaker 1: not only the United States and Canada and Western europe,
Speaker 1: but also Japan and South Korea and
Speaker 1: others. So in this context, the West is a set
Speaker 1: of economic and political
Speaker 2: values,
Speaker 1: if you will, meaning that there are relatively few places
Speaker 1: to
Speaker 2: go. So,
Speaker 1: the demonstration effect will be
Speaker 2: to make
Speaker 2: countries contemplating the possibility that one day
Speaker 1: they might be in the
Speaker 2: position that Russia
Speaker 2: is
Speaker 1: currently in um, China,
Speaker 1: uh,
Speaker 2: wonders
Speaker 1: whether there could be a more direct conflict with the
Speaker 1: United States
Speaker 2: over
Speaker 1: Taiwan. Most obviously,
Speaker 2: uh, such
Speaker 1: countries will want to hedge their bets, that will be
Speaker 1: the
Speaker 2: demonstration effect,
Speaker 1: but I think they will quickly
Speaker 1: come to
Speaker 2: learn that
Speaker 1: hedging their bets is
Speaker 2: not really
Speaker 1: possible in the short
Speaker 2: run because there's
Speaker 1: nowhere to
Speaker 1: turn uh, and, and building an alternative
Speaker 2: set of
Speaker 1: institutions that does
Speaker 2: create a
Speaker 1: viable alternative is a time consuming process. So I think
Speaker 1: the best case in point
Speaker 2: is china
Speaker 1: has been attempting to build an alternative to chips the
Speaker 1: new york based dollar based interbank clearing house china's alternative
Speaker 1: is called uh sips the cross
Speaker 2: border
Speaker 1: interbank
Speaker 2: payments
Speaker 1: system. China
Speaker 2: has been trying
Speaker 1: To build it for seven years now
Speaker 1: and it hasn't gotten
Speaker 2: too far,
Speaker 2: yep,
Speaker 1: I think
Speaker 2: china's alternative is viable
Speaker 1: and it will continue to grow, but it won't provide
Speaker 1: uh an alternative. In the
Speaker 2: short one.
Speaker 1: I remember talking to a senior
Speaker 1: official at
Speaker 2: Beijing a few years
Speaker 1: ago and he argued that we coming from our Western
Speaker 1: persuasion think that without capital account convertibility, a country cannot
Speaker 1: have a fully international currency. And his argument was, you
Speaker 1: don't have to have corner solutions, you can have mid points.
Speaker 1: Um I sort of understand the wisdom behind that, but
Speaker 1: I fail to see it catching traction. I mean there
Speaker 1: are many countries
Speaker 2: which large
Speaker 1: run large and persistent trade deficits, vis a, vis china,
Speaker 1: so they can all have some sort of a glorified
Speaker 1: barter system.
Speaker 2: You know, you give me stuff, I pay you with
Speaker 2: R and B
Speaker 1: and then I buy stuff from you
Speaker 2: and you take the R and B back,
Speaker 1: but it
Speaker 2: hasn't really caught on, I mean in the last couple
Speaker 2: of months we're
Speaker 1: hearing petrol
Speaker 2: RMB and rubble RMB swap. Um so you, you remain
Speaker 2: unpersuaded that
Speaker 1: anytime soon. We're going to
Speaker 2: see any seismic movement.
Speaker 2: Yeah. You know, um it
Speaker 2: we we can monitor cross border use of the Renminbi
Speaker 2: in large part through swift because the ironic fact is
Speaker 2: even though china is building this cross border interbank payments system,
Speaker 2: it still sends instructions between
Speaker 1: domestic for
Speaker 2: transfers between domestic banks and foreign banks through
Speaker 1: Swift. It
Speaker 2: still depends on that
Speaker 2: Messaging system. If you look there, the renminbi accounts for 2%
Speaker 2: by value
Speaker 2: Of cross border payments, where the dollar accounts for 40%
Speaker 2: and the euro is not too far behind the dollar
Speaker 2: along that dimension. So
Speaker 1: the
Speaker 2: Renminbi is growing in
Speaker 1: importance over the last few years, its share by value
Speaker 1: of
Speaker 2: transactions through swift has risen
Speaker 1: From like 1.9% to 2.4% or some number
Speaker 2: in that
Speaker 1: neighborhood. But it's
Speaker 2: still very far
Speaker 1: from being a full fledged rival to the dollar.
Speaker 1: Absolutely.
Speaker 2: Um
Speaker 1: What about on the issue of weaponization of the dollar?
Speaker 1: This aspect that the US has pursued twice in the
Speaker 1: last one year. First it froze the Central Bank of
Speaker 1: Afghanistan's US based reserves. And now a large part of
Speaker 1: Russian Central bank's reserves are unusable because the same. I mean,
Speaker 1: that ought to give certain antagonist of the US pause
Speaker 1: in terms of holding US dollar assets.
Speaker 1: So it does give them pause. But the point is
Speaker 1: they don't have a lot of other places to go.
Speaker 1: They can't move into euros.
Speaker 1: They can't move into pounds sterling. Uh
Speaker 2: I
Speaker 1: recently
Speaker 1: published a paper together with a
Speaker 2: couple of colleagues
Speaker 1: both at the I. M. F
Speaker 2: observing that
Speaker 1: over the last couple of decades there has been gradual
Speaker 1: migration away from dollar reserves
Speaker 2: in a small
Speaker 1: part toward the Renminbi, but principally toward
Speaker 2: nontraditional
Speaker 1: reserve currencies like the Canadian dollar
Speaker 1: and the Australian dollar and the korean
Speaker 2: won. Those
Speaker 1: countries are all participating in in in in the sanctions.
Speaker 1: So they do not provide safe havens
Speaker 2: for
Speaker 1: countries contemplating moving away from the dollar. Really,
Speaker 2: the only place
Speaker 1: to go is toward the
Speaker 2: Renminbi
Speaker 1: and how freely you will be able to use your
Speaker 1: Renminbi reserves
Speaker 2: is
Speaker 1: uncertain both because of those regulatory restrictions that you mentioned
Speaker 1: before and because chinese banks
Speaker 2: are
Speaker 1: reluctant to
Speaker 2: flaunt
Speaker 1: Western sanctions to
Speaker 2: openly for
Speaker 1: fear of secondary
Speaker 1: sanctions.
Speaker 2: There, china
Speaker 1: is still heavily interdependent with the West. Chinese banks value
Speaker 1: their ability to do business with
Speaker 1: the West. That
Speaker 2: business is a whole
Speaker 1: lot more valuable to them than business with
Speaker 2: Russia.
Speaker 1: I suppose the wisdom in the post-1990-91 episode when Soviet
Speaker 1: Union broke up was that if we
Speaker 1: move towards economic integration and more liberalization countries like breakaway
Speaker 1: Russia or china post W. T. O. Would as you
Speaker 1: just pointed out that have certain interests in place, which
Speaker 1: would make them shy to embrace conflict. Um I think
Speaker 1: you still are holding on to the belief that
Speaker 1: conflict risk can be mitigated if there's deeper integration.
Speaker 1: Yeah.
Speaker 2: So,
Speaker 1: well we learned that there is no end to history.
Speaker 1: We learned that um uh economic fostering economic interdependence won't
Speaker 1: lead to
Speaker 2: changes
Speaker 1: in countries, fundamental changes in the country's political regimes. But
Speaker 1: if they have an economic stake in their relations
Speaker 2: with
Speaker 1: rivals, they will think
Speaker 2: twice about
Speaker 1: jeopardizing that
Speaker 2: through
Speaker 1: kio
Speaker 2: political action.
Speaker 1: So um
Speaker 2: Russia is kind of proof by counter example.
Speaker 1: Mr
Speaker 2: Putin for whatever reason,
Speaker 2: I hesitate to say in his wisdom for whatever reason,
Speaker 1: decided to go to
Speaker 2: war. And I
Speaker 1: think uh we
Speaker 2: have seen that the economic
Speaker 1: consequences
Speaker 2: are for for Russia are are very serious, quite profound
Speaker 2: and are not going
Speaker 1: to be reversed
Speaker 2: anytime
Speaker 2: in the foreseeable future,
Speaker 2: right? That's the
Speaker 1: demonstration effect.
Speaker 2: Um Alright
Speaker 1: enough
Speaker 2: about Russia and the war.
Speaker 1: Let's talk about something
Speaker 2: that commands the headlines every single
Speaker 1: day, the
Speaker 2: Great inflation of 20
Speaker 1: 22
Speaker 2: uh here, your
Speaker 1: take on it
Speaker 2: here.
Speaker 2: So
Speaker 1: I think this uh inflation will be with us for
Speaker 1: some
Speaker 2: time.
Speaker 1: We're still going to be battling with this problem in
Speaker 1: 2023 absent a recession. So that's a big caveat right
Speaker 1: uh unconditional forecasts of how inflation is going to play
Speaker 1: out
Speaker 2: our
Speaker 1: treacherous and they don't make a lot of sense because
Speaker 1: there's one scenario in which the U. S. And the
Speaker 1: world economy continued to expand
Speaker 2: and in that
Speaker 1: scenario I think in in inflation
Speaker 1: above 4%
Speaker 2: is
Speaker 1: going to persist in the United States in europe and
Speaker 1: Britain more generally.
Speaker 2: And there is another
Speaker 1: scenario in which we do tip into recession later this
Speaker 1: year or next year,
Speaker 2: in
Speaker 1: which case
Speaker 2: that bed is
Speaker 1: off, if you will, the pressure of demand
Speaker 1: will be less.
Speaker 1: The pressure on on inflation
Speaker 2: will
Speaker 2: come down
Speaker 1: faster of its own volition and the pressure on central
Speaker 1: banks to continue to raise rates will be less. So
Speaker 1: the way I
Speaker 2: think about the the the the problem in the no
Speaker 1: recession case
Speaker 2: is that
Speaker 2: the best case scenario
Speaker 1: in the US and
Speaker 2: europe is that uh
Speaker 2: in in in inflation comes
Speaker 1: down next
Speaker 2: year towards four
Speaker 1: percent.
Speaker 2: If the neutral real
Speaker 1: interest rates,
Speaker 2: Natural rate of real rate of interest is one half
Speaker 2: of 1%. The Fed has to jack up
Speaker 1: its policy rates to 4.5
Speaker 2: percent just to keep
Speaker 1: inflation
Speaker 2: steady
Speaker 2: at four.
Speaker 1: And if the Fed is
Speaker 2: uncomfortable with four,
Speaker 1: which it will be, it's going to
Speaker 2: have to raise rates
Speaker 2: above 4.5
Speaker 1: percent. So I think, you know, as we speak today,
Speaker 1: the markets are are displaying more volatility
Speaker 1: and signs of more worries. So they're finally catching up
Speaker 1: with this scenario, which is the
Speaker 1: you ain't seen nothing yet scenario in terms of central
Speaker 1: bank
Speaker 2: reactions. So,
Speaker 1: uh if economies continue to expand, I think that's what
Speaker 1: we will see continued financial volatility movement away
Speaker 2: from risk
Speaker 1: assets. Um and
Speaker 1: More than 2 50 basis point hikes by the Fed
Speaker 1: which is what's in the market, all that's in the
Speaker 1: market
Speaker 2: at the
Speaker 1: moment. I haven't quite gotten my head around how the
Speaker 1: recessionary scenario will play out. We're all collectively only beginning
Speaker 1: to think about that possibility.
Speaker 1: I was about to ask you for a probability distribution
Speaker 1: around the two scenarios. But I think with your last sentence,
Speaker 1: I think your caveat is well taken. Um I want
Speaker 1: to ask you one follow up question on the US
Speaker 1: dollar and one question on inflation later on the U. S. Dollar.
Speaker 1: So you talked about risk aversion that
Speaker 1: routinely leads to the dollar strengthening and now we have
Speaker 1: perhaps a couple of 100 basis points of disinflation ahead
Speaker 1: of us and a couple 100 basis points of interest
Speaker 1: rate ahead of us in the next 6 to 8
Speaker 1: months just this year. So that's 400 basis points of
Speaker 1: increasing real interest rate under this scenario. Can the market
Speaker 1: really be that forward looking at pricing all of it,
Speaker 1: meaning the dollar has peaked or there's still substantial strength
Speaker 1: in the dollar lingering for the rest of the year.
Speaker 1: Yeah,
Speaker 1: so exchange rate forecasting is
Speaker 2: uh risky
Speaker 1: business. And and I can put on my
Speaker 2: academic cap
Speaker 1: and
Speaker 2: uh
Speaker 1: say I don't have skin in that game,
Speaker 1: if you will uh you know, efficient markets theory tells
Speaker 1: us that the markets have priced all this in, they
Speaker 1: know that the U. S. Economy is stronger than
Speaker 1: many other economies and that will be dollar positive because
Speaker 1: the Fed is going to be moving faster than other
Speaker 1: central banks. In response. They know the dollar is a
Speaker 1: traditional safe haven and and that um there will be
Speaker 1: more volatility favoring safe haven currencies going forward,
Speaker 2: that uh in
Speaker 1: principle all ought to be in in in the markets already.
Speaker 1: But
Speaker 1: 21st century economists, even academics
Speaker 2: are skeptical
Speaker 1: about efficient markets theories.
Speaker 2: So,
Speaker 1: you know, the markets were slow to cotton on to
Speaker 1: these ideas, maybe
Speaker 2: they haven't fully
Speaker 1: incorporated them yet. And we'll see a bit of additional
Speaker 1: dollar strength
Speaker 1: indeed,
Speaker 2: is a strong
Speaker 1: dollar not a problem for the US and basically a
Speaker 1: problem for the rest of the world,
Speaker 1: I think um That's what
Speaker 2: john Connolly
Speaker 1: would have said,
Speaker 2: right, it's our currency,
Speaker 1: It's your problem, Treasury Secretary in the 1970s for for
Speaker 1: the youngsters
Speaker 1: among among us. Um I don't think it's a problem
Speaker 1: for the US economy at the moment.
Speaker 2: If you look back at
Speaker 1: The at the mid 1980s when the dollar was so
Speaker 1: strong and it and that was
Speaker 2: associated with
Speaker 1: uh gaping trade deficits for the United States and the
Speaker 1: rust belt problem, the industrialization of the Heartland, that's not
Speaker 1: a problem at the moment. The U. S. Economy seems
Speaker 1: to be firing on all
Speaker 1: cylinders and uh
Speaker 1: ah
Speaker 1: uh certainly uh there's excess demand for
Speaker 2: a lot
Speaker 1: of things that are in supply chain
Speaker 2: shortage
Speaker 1: at the moment. But it's a big problem for the
Speaker 1: rest of the world because it
Speaker 2: feeds inflation,
Speaker 1: weak currencies feed inflation and the rest of the world
Speaker 1: and they create serious debt sustainability problems for countries with
Speaker 1: dollar denominated debts. So we're gonna see
Speaker 1: more problems developed along both of those lines.
Speaker 1: So professor in one area where the market's interviews very
Speaker 1: forward looking is the supply of the U. S. Dollar.
Speaker 1: So when we look at aggregate indicators of liquidity, it
Speaker 1: doesn't seem like there's major tightening taking place anywhere in
Speaker 1: the world.
Speaker 2: But in the
Speaker 1: uh
Speaker 1: dollar desks around the world there is you know already
Speaker 1: you can see this sort of panic around not there
Speaker 1: not being enough dollar and so on. Um So that
Speaker 1: that I find interesting that quantitative tightening hasn't come yet
Speaker 1: but people are charging a premium in their local currencies
Speaker 1: for dollar supply
Speaker 1: um on the inflation. I read recently this book by
Speaker 1: Charles Good Heart, which came out last year, where his
Speaker 1: point was that the next two decades or so would
Speaker 1: be characterized by a sport of inflation as opposed to
Speaker 1: the disinflation of the last three decades
Speaker 2: for structural
Speaker 1: reasons aging
Speaker 2: contrary to
Speaker 1: what we thought in the context of Japan is actually
Speaker 1: going to be inflationary
Speaker 1: um de globalization is going to be a fact of
Speaker 1: life that's inflationary as well and
Speaker 2: china, you know, both suffering
Speaker 1: from the globalization
Speaker 2: and aging would also contribute toward inflation.
Speaker 1: So what's
Speaker 2: your view on this
Speaker 1: structural inflation
Speaker 2: story?
Speaker 2: I have immense respect for my uh colleague
Speaker 1: Charles good
Speaker 2: Heart. I tend to uh disagree with him on this one.
Speaker 2: I looked back at the 1970s and there were central
Speaker 1: bankers like
Speaker 2: uh Fed Chairman Arthur Burns who cited structural
Speaker 1: explanations
Speaker 2: for the high inflation of that decade. But along came
Speaker 2: paul Volcker
Speaker 2: in 1979 and he
Speaker 1: showed that its central banks
Speaker 2: that determine the rate of inflation that even if there
Speaker 2: are strong labor unions or uh big firms with market
Speaker 2: power or whatever or unfavorable demographics, that would be the
Speaker 2: current version
Speaker 2: that
Speaker 2: uh tend to create more
Speaker 1: inflation, Other things
Speaker 2: equal.
Speaker 2: Those other things are not equal and particular
Speaker 1: central bank
Speaker 2: policy is not equal. So I think uh central bankers
Speaker 1: views of
Speaker 2: what is attainable in terms of inflation and what is
Speaker 2: desirable in terms of inflation
Speaker 2: from the
Speaker 1: point of view of
Speaker 2: maintaining their credibility and therefore the effectiveness of their policies
Speaker 2: is that
Speaker 1: they're going to have to do whatever
Speaker 2: it takes
Speaker 2: to invoke Mario Draghi um inflation back down toward
Speaker 1: target that
Speaker 2: is within their capacity and that is desirable.
Speaker 2: Um Regardless of what structural factors demographic or
Speaker 1: otherwise might be pushing
Speaker 2: in the other direction,
Speaker 2: how quickly they can achieve that uh is
Speaker 1: another issue recalled
Speaker 2: the first rule of
Speaker 1: forecasting, give them a forecast digested
Speaker 1: or give them a date. Never give them both. Um
Speaker 1: You know, I had a question for you, I'm reading
Speaker 1: through that question. I realized it's a rhetorical question but
Speaker 1: for the benefit of the viewers of this podcast I'm
Speaker 1: gonna read it out. But you don't have to answer
Speaker 1: because I think you've answered the question in the quotation
Speaker 1: that I have. So this came out in current history
Speaker 1: earlier this year and you wrote
Speaker 1: cryptocurrencies like Bitcoin are too volatile to possess the essential
Speaker 1: attributes of money,
Speaker 1: stable coins have fragile currency packs that diminish their utility
Speaker 1: in transactions and central bank digital currencies are a solution.
Speaker 1: In search of a problem.
Speaker 2: How great
Speaker 1: these three sentences and given what's happening in the last
Speaker 1: couple of weeks, you've been incredibly present here. I'm not
Speaker 1: gonna press you on this question. I think you have
Speaker 1: summed it up very very well here. Um would you
Speaker 1: like to add anything or
Speaker 1: we'll move on.
Speaker 1: Um Yeah, I think that speaks for itself. Indeed. Indeed brilliant.
Speaker 1: And and how good does this sound? Okay. My final
Speaker 1: question and this is about your latest book which was
Speaker 1: entitled in defense of public debt and those who have
Speaker 1: not read it should because it talks about the productive
Speaker 1: aspects of public expenditure fueled by public debt that can
Speaker 1: help and those of us who have worked in Bretton
Speaker 1: woods institutions for long have struggled with how to account
Speaker 1: in the fiscal side
Speaker 1: expenditure that matters for long term growth and not, I
Speaker 1: highly recommend this book. Um but this is a difficult
Speaker 1: year for anybody willing to issue
Speaker 2: debt.
Speaker 1: We already have in the emerging markets, you know, debt
Speaker 1: default and making some debt crisis. So what's the way
Speaker 1: forward for governments which are already heavily indebted?
Speaker 1: Okay,
Speaker 2: I don't think
Speaker 1: there's a single way forward.
Speaker 2: Certainly
Speaker 1: um low low income countries and some middle income countries
Speaker 1: are going to
Speaker 2: have to restructure their
Speaker 1: debts. The international
Speaker 2: policy
Speaker 1: community has
Speaker 2: acknowledged that
Speaker 1: fact already for a couple of years
Speaker 1: now.
Speaker 2: So they came out with uh
Speaker 1: sustainability
Speaker 1: initiative
Speaker 2: Back in 2020
Speaker 1: towards the beginning
Speaker 2: of the Covid
Speaker 2: crisis. But there has been very little
Speaker 1: progress in
Speaker 2: actually implementing that.
Speaker 1: And only a
Speaker 2: small handful of countries that
Speaker 1: have
Speaker 2: approached the
Speaker 1: authorities and their
Speaker 2: private creditors
Speaker 1: to restructure
Speaker 2: debts that are clearly not
Speaker 2: sustainable. So we're gonna have to keep crying and try
Speaker 2: harder to deal with that problem. On the other hand,
Speaker 2: there are uh advanced economies, the United States,
Speaker 1: most of the
Speaker 2: economies of the european union Japan, which
Speaker 1: don't have an immediate
Speaker 2: crisis of debt
Speaker 1: sustainability
Speaker 2: because
Speaker 1: uh
Speaker 2: our is
Speaker 1: still less than she
Speaker 2: because the effective real rate of interest paid on those
Speaker 2: debts is less than the real growth rate
Speaker 1: of their economies. They're
Speaker 2: able to grow the denominator
Speaker 1: of the debt to GDP ratio
Speaker 1: faster than
Speaker 2: the numerator
Speaker 1: unless they continue to add to the numerator rapidly by
Speaker 1: running
Speaker 2: big
Speaker 1: primary budget
Speaker 1: deficits. I do think that we need
Speaker 2: to look
Speaker 1: forward to uh era when maybe growth is going to
Speaker 1: be slower because of Charles, good hearts, unfavorable demographics. When
Speaker 1: the real
Speaker 2: interest rate is going to begin
Speaker 1: to trend
Speaker 2: very
Speaker 1: slowly and gradually upward, it tends to move slowly over
Speaker 2: historical time
Speaker 1: when that relationship will be less favorable. From the point
Speaker 1: of view of debt sustainability, we're
Speaker 2: going to have to think
Speaker 1: as well about the next crisis when governments are going
Speaker 1: to have to do whatever it takes, including on the
Speaker 1: fiscal front. So we've learned
Speaker 1: that crisis come
Speaker 1: more often than we used to think
Speaker 2: that
Speaker 1: the period of the great moderation is over and there
Speaker 1: will be another
Speaker 1: uh global
Speaker 2: financial crisis
Speaker 1: or pandemic
Speaker 2: or climate
Speaker 1: change related crisis that will
Speaker 2: require deploying
Speaker 1: the available fiscal resources. So those are
Speaker 2: both
Speaker 1: arguments
Speaker 2: for
Speaker 1: moving in the direction of fiscal consolidation
Speaker 2: once or
Speaker 1: assuming that
Speaker 2: recovery is
Speaker 1: secure. So I think that's what the advanced economies are
Speaker 1: going to have to do. And in the United States
Speaker 1: for example, we have come a long way in the
Speaker 1: last year
Speaker 2: in terms of
Speaker 1: reducing the size of the budget deficit, it's come down
Speaker 1: from
Speaker 1: effectively from 14% of GDP to 6% of GDP. How
Speaker 1: much more fiscal grab do you want to
Speaker 2: add
Speaker 2: in the short
Speaker 1: Run one might ask, but we're going to have to
Speaker 1: stay that course. I think uh in the interest of
Speaker 1: debt sustainability and in
Speaker 2: terms of
Speaker 1: enhancing our capacity to borrow in in the event of
Speaker 1: another crisis of some sort
Speaker 1: going forward.
Speaker 2: So this
Speaker 1: problem needs to be attended to uh immediately in the
Speaker 1: case of low income countries in the medium term, in
Speaker 1: the case of of advanced economies,
Speaker 1: you've touched on a critical issue. I think
Speaker 2: january april,
Speaker 1: I think the Treasury Department's reports suggest that the overall
Speaker 1: deficit in january april was almost zero or slight surplus.
Speaker 1: Uh And as a result, Treasury Supply is is substantially
Speaker 1: lower than anything anybody expected. Uh This has been a
Speaker 1: through the force. Professor Barry Eichengreen, thank you so much
Speaker 1: for your time and insights.
Speaker 2: Timer. Thank
Speaker 1: you.
Speaker 1: It's a
Speaker 2: pleasure.
Speaker 1: And thanks to our listeners to for your time, Kobe
Speaker 1: time was produced by Kendall Rich from Spy studios, daisy
Speaker 1: Sharma and violently provided additional assistance. All 77 episodes of
Speaker 1: Coffee Time are available on all
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Speaker 2: Spotify. And
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Speaker 2: are concerned, you can find them all by
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Speaker 2: Library.
Speaker 2: Have
Speaker 1: a great
Speaker 2: day