Appearance
Kenneth Rogoff - In Good Company Transcript
Nicolola Tangan:
hi everyone I'm Nicolola Tangan, the head of the Norwegian fund and today I'm in good company with Ken Rogoff .
Now Ken is known for his insights into global finance economic history and for his incredible book which he wrote together with Carmen Reyhard, which is like a seminal book actually and it's called 《this time it's different. he's out with a new book coming up soon and you can look forward to it.
Ken wonderful to have you here.
Kenneth Rogoff:
wonderful to be here. thank you for having me on your podcast
Nicolola Tangan:
So Ken I think I've said once that discussing you know inflation with you that's a bit like discussing the Bible with Jesus, but I mean let's give it a go.
Kenneth Rogoff:
I don't know how we can live up to that
Nicolola Tangan:
Ken,how would you assess the current state of the global economy just now.
Kenneth Rogoff:
It was in modestly good shape.
But obviously it's being thrown into chaos with the restructuring of globalization that Donald Trump comes with.
What's happening in Europe you know it's a pretty wild time. It'd be a little bit much say it's unlike anything we've seen before. I think it feels a little like the 70s to me. Trump actually feels a little like Nixon to me but obviously we're in for a wild ride.
Nicolola Tangan:
Where are we in terms of American exceptionalism now.
Kenneth Rogoff:
Well it's been dented. I mean we sometimes call the US the hegeimon the one that dominates everything and it's almost like the hegeimon is turning on itself and Trump says and I hope he has a plan that it's all going to be better on the other side of this, but obviously the stock markets are getting nervous, everybody's getting nervous that there might not be a plan.
I don't know I mean he's the president of the United States. I wish his policies well but it's hard to understand exactly where he's going and what he's doing.
Again it feels like a throwback to the 70s in a lot of ways.
Nicolola Tangan:
what are your biggest concern when it comes to the current economic policy
Kenneth Rogoff:
I mean the the the biggest concern is that, we undermine the institutions that are the bedrock of US exceptionalism you trust the rule of law when the United States gives its word it keeps its word.
I'm not saying we always did that, but you know certainly with respect to paying our debts.
I'm concerned certainly about this view that people who believe in global trade and global integration are globalists. I'm an unapologetic globalist and this fracturing of the global economy, I mean Trump sometimes and his people sometimes say "Let's go back to the 50s."
Well we had a lot lower income back in the 50s, like okay maybe we'll have more manufacturing jobs, maybe, but things will cost a lot more, I mean it's just a little hard to know how much of its bluster theater he'll retreat obviously early on that's what everyone thought that, he was just saying this for his base and he would pull back but you know that's certainly not how it's been going.
Nicolola Tangan:
Where do you see tariffs a year from now.
Kenneth Rogoff:
You threw in the year from now. I mean it seems like he's spinning a wheel when he wakes up every morning, and first he spins the wheel to see what country it points at, and then he spins the wheel to see what tariff he wants to put on, and then he changes his mind the next day.
I mean that's a really hard thing to forecast. But I think he's very intent on it, so I'm guessing the US will have tariffs for example on Europe on the order of, I don't know, at least 10 you know 15% 20% and Europe will have retaliated and there'll have been a lot of noise back and forth.
He seems to be a believer, I even back in 2016 when he was first running someone who was close to him called me and just ask for did I have any general thoughts and I said, okay first of all this conversation never happened. I can't be seen as talking to you but if you ask me, I discussed some things but the tariffs are a terrible idea, why are you doing the tariffs, this is you know, the person said Well, you know, the candidate Trump, he knows politics better than I do and he thinks 80% of Americans love tariffs and actually you know, I sadly I find that hard to argue with my mother was a librarian, a brilliant woman, she sadly passed away a few years ago. But she liked tariffs and I would I'm an economist and she kind of knew I had a PhD in economist and I worked on international economics and I would say yeah, but you know it would make everything more expensive and do we really want to do this and I went into the whole rigomearroll about how we buy stuff from them and they'd buy stuff from us and she just wouldn't give in.
You know she did not agree and I mean that's a, you know very educated woman and so it's very popular and historically. This has been one of the issues where the president who knows that people like tariffs stands and says "Well you know this, you don't want to eat your your vegetables, but eat them and you'll grow and it'll be better."
And Trump didn't invent this by the way. Bernie Sanders who was came very close to being the candidate in 2016, is very influential in the Democratic party.
He had pretty much the same stuff, he wouldn't agree now but there's not a lot of open water between really the left, where the left was in the US and Trump i mean it's been one of those things, which you know, it's been obviously very good globalization's, been great for the United States, I mean the United States has been at the top, has benefited and yes there are problems with globalization but he seems to just think it's really good for him. We'll see how it plays out.
Nicolola Tangan:
How bad are tariffs for globalization?
Kenneth Rogoff:
So truth be told, if we just slapped on 20% tariffs it would be very bad like a big tax hike.
It would reduce trade, it would interfere with the global supply chains, and such.
It would not be the end of the world if together with that Trump did a bunch of sensible things, deregulation, you know finding ways to improve innovation, I don't know, but if he did on balance it could be okay. They do raise revenue
What's just been so weird about it is, the randomness of it, just you don't know what's coming, it's like he wants everyone to hide from him.
I sort of look at country, I don't know if you ever visited the North Pole but the penguins are sort of getting eaten by the polar bear and they're very sad about that, but they don't want to go in and fight the polar bear. They sort of hold back and that's how everyone is.
They want oh go look at the other country and anyway I think the real problem is the randomness and what it signals about other things to come.
Nicolola Tangan:
such as
Kenneth Rogoff:
Central bank independence
Nicolola Tangan:
We'll come back to that just. What will be the impact on inflation from the tariffs.
Kenneth Rogoff:
So that is not a big deal. I mean it raises prices, is the United States is pretty closed and it raises prices. There'll be a short-term effect that's I mean, it won't be pleasant and I think some of it will be inflation, some of it lower quality but the the problem is, more innovation slowing growth over the longer run.
Nicolola Tangan:
The effect on American consumers?
Kenneth Rogoff:
Well you know, of course we pay the tariffs dollar for dollar.
Every study shows that it shows it on other examples, it shows it when he put in tariffs in 2018 and so you know this whole story, it's a little bit obviously like Mexico will pay for the wall, the American consumers will pay the tariffs both in terms of higher prices and I think lower quality their goods that if they revert to the United States will be lower quality than we get at the moment, at least for a long time to come.
Nicolola Tangan:
You are a professional chess player and you're still avid in terms of you know playing. so how would you so, let's say now you're in Europe, how would you navigate the trade negotiations in the US from like a chess player point of view.
Kenneth Rogoff:
First of all, I'm still a grandmaster but I actually haven't played in decades, I follow at a distance.
I think you have to combine you know long-term strategy, what is it, we want to do, some of the things Trump is forcing Europe to do, it probably should have done a long time ago.
I've said whenever I've given talks in Europe over the years or at least often we need Europe to be a geopolitical counterweight to the United States.
You can't every time there's a presidential election and you know, you think people think you know, this is the worst thing that'll ever happen, i don't know what's to come every time there's a presidential election you can't suddenly rethink everything you need a counterbalance and Europe for whatever its frictions and divisions probably is more stable you don't have one election in France or Germany suddenly changing everything, change a lot but not everything so that's good.
On the other and you need to think about being more independent in tech that Mario Draghi the former head of the ECB wrote a report, where he made that point where Europe's lagged and those two things are connected, because military often provides the funding early on for tech startups, tech investment,
And I mean then there's short-term tactics which obviously really hard to know. I mean do you supplicate to Trump and kiss the ring or which your public hates but then he's not throwing a 200% tariff on you or do you just sort of turn the other cheek and hope that it calms down, i mean it's not good in a way but on the other hand it kind of forces Europe to be more assertive to be more independent in a way that I think has been a long time coming
Nicolola Tangan:
Will we have a recession in the US
Kenneth Rogoff:
I mean I think the odds have gone up sharply and it's sort of funny but the nature of the recession we might get is a loss of confidence, not an oil shock, not a pandemic not a global financial crisis, but among consumers particularly consumers who didn't vote for Trump, which is about half of people they think it's the end of the world, they think it's 2008/2009 the global financial crisis, the pandemic.
The indicators for the Democratic voters are just off the charts terrible, oddly enough they also think inflation's going to go through the roof.
You talk to the Republicans, everything's ducky, they economy is doing fine, there's nothing to worry about, president's doing a great job, inflation's going to be low. I mean they're looking at the same data and just drawing completely different conclusions.
Now half of all the consumers are Democrats.
Nicolola Tangan:
Have you seen this before that political inclination impacts the way you look at data this way.
Kenneth Rogoff:
Of course we see it but we saw it under Biden where the Republicans thought inflation was way higher than it was and the Democrats thought inflation was way lower than it was.
I mean just ask what's inflation and the Republicans just give a different answer but it is much more pronounced and it can cause a recession because the the Republicans are not going to spend enough to make up for what the Democrats aren't spending.
I get so many letters and emails from relatives friends even professional colleagues should I sell everything, you know is the world ending?
Nicolola Tangan: should they should they sell everything
Kenneth Rogoff:
Well, we ask you, Nikolai
I say to be calm and it's very hard for me to stay calm but I don't know how to second guessess all of this.
Nicolola Tangan:
What's your view on on potential tariffs on capital inflows
Kenneth Rogoff:
Well they'd been very strong before, so the idea was to bring more production into the United States. But I don't think this is something that's going to be like a first order effect.
When Biden put his kind of called it inflation reduction act but his environment act that had a ton of subsidies to invest in the United States and I think a lot of Europeans were really angry about that, saying you know this is just basic trade war, you're incentivizing people to invest in the United States, this violates general principle. So Trump didn't invent this.
I mean the tariffs are different than the subsidies. We were giving subsidies to invest in the US but it's six of one and half a dozen of the other you know it's I think economists would say it's not a very good way to run your business, it's better to have an environment where the regulation and the general work environment for companies is good and makes them want to invest.
I mean I won't ask you to comment but people were pouring their money into the US the US as you well know had been outperforming the last 10 years. Some remarkable data about that so exactly how you're improving things now I don't know.
Nicolola Tangan:
Do you believe there is such a thing as a Trump put
Kenneth Rogoff:
Where is he going to put it?
I mean he'll pull back is what you're saying, so you don't have to sell, because he's sounding untethered but it's all going to pull back at the same time.
He clearly looks at the market but this is someone who's very determined. To put his place in history, I don't know if it came from his childhood or something but he has this deep belief that tariffs are beautiful.
He says it again and again, it seemed to have worked very well for him politically. he in his first term when he said something he delivered it and so I don't, you know that was certainly the thinking that the markets had was that he would pull back.
Now I want to emphasize the real concerns the randomness of it if he just put in tariffs which we did think he was going to do and you know 10% 20%, it would not have been the end of the world, bad idea but not crippling you. It would hurt growth in the long run, it would hurt US welfare, but you know, nothing compared to some of the bigger things that go on so I don't believe in a Trump put put. I think he has conviction, you know you never know from day to day like tomorrow maybe he'll pull the tariffs off but in a year I'll have a tantrum at someone and they'll be back.
Nicolola Tangan: Let's move on to the dollar, what's your view now on the US dollar's global role.
Kenneth Rogoff:
so I think and my book argues that we sort of reached the peak 10 years ago in terms of the dollar's footprint and dominance in the global economy and lots of different measures you know, how many reserves people hold, number of transactions in dollars, what's priced in dollars and we won't need to go into detail, they all kind of tell the same story and I think there's this what I sort of portray, there's this sense in which the dollar has been lucky at different stages, the US has been good, the US system's good but as the US has faced challenggers, I think they've fallen short more than I would have guessed and it doesn't mean we'd have the euro instead of the dollar but it is a surprise that the euro right now is a regional currency. It's just basically not a central currency outside of Europe and of course the yen's hardly used at all, the renimi even less and I'm old enough I don't know if you are but I'm old enough to remember when Russia was considered much more seriously as an economic counterweight and we've been been lucky.
I actually towards the end of the book quote the Danish Grandmaster Ben Larson and he was asked, would you rather be lucky or good and he said, I'd rather be lucky and good and I think Americans forget the lucky part we just beat ourselves on the chest, we're the greatest country in the world, everybody loves us, so I think there are a lot of trends pushing towards the dollar still being at the top but not quite as much king of the Well as we were.
Nicolola Tangan:
Is there a scenario where the dollar loses its status as the world reserve currency in a bit more dramatic fashion what could cause that.
Kenneth Rogoff:
It would be great for the sales of my book with Carmen Reinhardt that you mentioned at the beginning to have a crisis of that magnitude.
I mean the the the the global currency normally changes slowly you know you had the Spanish peda and
Nicolola Tangan:
It's like 100 years
Kenneth Rogoff:
Yeah like a hundred years and there's usually you know you die a slow death over time and the newcomer comes up and you're even for a while and I would describe the dollar as late middleaged at the moment.
You know there's nobody's going to take over right now but for it to actually disappear you wouldn't have seen it, but there's actually a movie last year something like called civil war, where it's a dystopian, not so distant future where the dollars become worthless and everybody uses the Canadian dollar instead, I don't know you know but I don't see it happen dramatic happening dramatically.
Nicolola Tangan:
So how do you assess other nations efforts to decouple from the dollar then
Kenneth Rogoff:
well there's the uh PMIC stuff like when Lula says he doesn't want to use the dollar in Brazil and he has no power, I mean he's not able to do anything but I think the Chinese take it very seriously of wanting, it's not that they want to get everyone for everything to use the renimi, their Chinese currency, instead it's that they want to expand its footprint more things priced in Chinese currency, more loans priced in Chinese currency and they've got a couple reasons for this.
First of all they should have done that 20 years ago. I mean I haven't had engagement with them for over 20 years and have been puzzled they haven't done that if you're the euro, is not pegged to the dollar. There's a good reason the euro is not pegged to the dollar yet forever.
They had their renminbi, this big economy with its own business cycles, its own problems over time. It has become a little looser but I think what's really scared the daylights out of them is watching what the US has tried to do to Russia with the sanctions and you know we don't know but China is certainly thinking about, you know provoking the eye of the United States at some point by trying to take over Taiwan and looking at the sanctions and it isn't just the sanctions, it's the ability of the United States to see everything. a thing many people don't understand about the military and power and dominance of the United States is.
The US gets to make the rules of the game when bankers are negotiating over you know, what kind of transactions mechanism should we have, how swift is, something people may have heard of, the international messaging system that's used by banks, all of these negotiations, the US you know it's not like they say it's our bomb and we're going to go home. if you don't do what we want but they can and it gives them this tremendous power and so many things go through the United States.
We Donald Trump can possibly see some things, you bought, because the clearing goes through the United States. if it touches the dollar most of it goes to the United States so by getting more things into rembi, getting more things into the Chinese currency and developing their own, the word is rails, but their own clearing mechanisms, they can get around this. That's as big as all the other things that the Chinese are looking at when they're trying to diversify
Nicolola Tangan:
so official Chinese GDP growth is around 5%, some people think it's lower and you are quite skeptical when it comes to the official figure as well
Kenneth Rogoff:
Yeah absolutely. They're throwing people in jail for questioning the figure. they're academics who said in too publicly that they thought the growth was overstated and they got in trouble.
Nicolola Tangan:
What are the global implications of a Chinese economic slowdown
Kenneth Rogoff:
It's very big on energy exporters and commodity exporters. I mean if we were to turn around and tell you that China's growth's going to be 8% the next 2 or 3 years instead of I think it's going to be 2 or 3%, probably that would be very good for inflows into the Norwegian sovereign wealth fund, I mean and for Norway in general and for the United States as a big energy producer and good for Brazil and good for Argentina so that's one aspect.
Another aspect is the fact that they're in trouble, has panicked their savers, we were talking about the Democrats in the United States, people in China are, they have no confidence in the regime.
They have just lost confidence so they're trying to get people to consume but it's just collapsed, so they're forced to do a lot of artificial stuff to create the mirage of this figure of 5% and that loss of confidence has pushed interest rates down, they're going up all over the world, we can come to that. but in China they've been going down, they actually have deflation and by the way if your prices are going down continually and you're telling me you have 5% growth, I don't believe you, I mean it's just hard to sustain.
So how does that affect the rest of the world if they push that money out to the rest of the world in the form of trade surpluses and such it'll have a big effect but I don't think the rest of the world's going to accept that
Nicolola Tangan:
So do we have a some kind of japanification in China now then
Kenneth Rogoff:
Yes we do. The question is a matter of degree.
So we, those of us who work on financial crisis look at Sweden on the one end,is like the fastest recovery ever and the other end is Japan which by some measures took two decades.
China's Sweden time is over, that's gone, they're having a longer crisis than that.
It looks to me like it'll be a few more years, I think that China has a lot of things going for it but they have this over centralization of power, which you know may undermine their longer term growth but it's you know certainly the the the deflation, the slow growth, the housing problem, the overbuilding in infrastructure and housing the similarities are are really quite remarkable.
Nicolola Tangan:
What about their ability to intervene in the market in different ways
Kenneth Rogoff:
Well, the thing is where China was doing really well, was their private sector they're they were very innovative, there are areas of tech where they're just fantastic and they're great investments in China if you could make them now but they crush them.
You know famously Jack Ma, who recently reappeared, had sort of he's the founder of Alibaba and one of the great innovators at China, just sort of disappeared and you know he was a little too vocal about his power, they started putting party hacks on the boards of financial firms of you know, their tech companies so they need to go back to this growth model where the private sector leads and the states not doing everything but President Xi's been very reluctant to let go of that power he's worried about instability
Nicolola Tangan:
There is quite a bit of manufacturing moving out of China how does this impact the situation
Kenneth Rogoff:
Well I mean there's still quite a manufacturing force but it's reduced invest
It's reduced investment into China so it's been great for Japan for Korea, for Singapore, Malaysia even Indonesia and India.
So as you well know a lot of companies have this China plus one strategy, meaning, we're leaving our stuff in China and by the way they can't get it out right now anyway and we're going to do our new investments, we're going to do our new investments somewhere else but I don't think that alone is the big thing. The big thing is that housing real estate's plummeting, consumers are panicked, they don't trust the government, they're not spending, that's really the big impetus of why they're so going growing so slowly
Nicolola Tangan:
A few sentences on India where do you see that
Kenneth Rogoff:
Well I mean India's been a positive story for a while right.
I mean we can still point to a lot of problems in India but they have faster growth rates than China, who'd have thought that and seemed to be for a while .
Modi is building infrastructure finally in India that you know is laying the groundwork for future growth.
They still have myriad problems, a few monopolies dominate a lot of the economy, we're talking about Donald Trump's tariffs india is already there and they've actually come down some but you know, not enough, so you know it's doing well I have to come back to chess, he's not as good as your boy Magnus Carlson who pulled out of things but you know the world champion Gash is from India amazing and there they won the world team championship too.
Nicolola Tangan:
I think I sent you the podcast with Magnus Carlson
Kenneth Rogoff:
You did and thank you.
And so you know if you can do that, you can do other things and so I'm that you know there I'm I'm optimistic but it's hard to get euphoric about India because it's just so hard to govern a country of 1.4 billion people.
Nicolola Tangan:
Moving on to inflation, how has your view on inflation changed over the last 10 years
Kenneth Rogoff:
so I have always thought inflation was in remission and not dead, and my academic papers have made this case.
My colleagues across all of academics, I think became in somehow mesmerized brainwashed by central banks, saying there's never going to be inflation, nothing to worry about, that assumption of no inflation is hardwired into all the top journal papers that have been coming out.
I mean I have a paper with some co-authors that has a different idea. I think in fact the period where inflation was really low, the central banks were good going back to Ben Larson, but they were also lucky because globalization helped, the rise of China helped, there was a general consensus away from populist policies, more or less and that helped, they had the wind at their backs.
Now they don't and not only did they have the wind at their backs in terms of these techno factors but the politics were leave the central bank alone, and that has been thrown by the wayside in many countries, so inflation doesn't have to be high, the central banks can control inflation but e economists prognosticators opinion makers had just forgotten that inflation's a political economy problem and if you don't really have central bank independence that's the core of it you're going to periodically run into trouble.
Nicolola Tangan:
is 2% uh still a realistic target
Kenneth Rogoff:
well I mean you're asking are they going to ever get down to 2% again.
What I think is they will but we will see, in the next my book, says 5 to seven years, but that was the I did the page the final day of page proof was just the day after Trump got elected.
I might make that a little faster now than 5 to seven years there's going to be another big burst of inflation similar to what we saw in the after the pandemic.
Nicolola Tangan:
What's going to cause that surge
Kenneth Rogoff:
What's going to cause, that will be another shock, where the central banks are ,you know, get put into a corner where they worry about recession, they worry about inflation but the pressures are going to be towards worrying about having a recession and they're just not going to be able to stand up to the politics the way they might have say in 2008 and 2009, so it depends on what kind of shock we get, if we get another one just like 2008 we won't, but I think there are a lot of kinds of shocks, call it a cyber war, another pandemic where it's very hard to maintain growth and keep inflation low so you know it hard to put my finger on exactly what it would be but a lot of kinds of shocks could make them need to raise interest rates.
I mean that's really what we're talking about US debt being out of control if that goes and I don't know what's happening but my best guess is that both parties want it to go up and it will, it's going to put upward pressure on interest rates and if the Federal Reserve raises interest rates. no problem there won't be inflation good luck with that even if Trump wasn't president.
They're already high it's very hard to do so I'm making a political economy call I'm not saying there's some you know constellation of shocks that's just going to happen in a certain way and create inflation, I'm saying that when the going gets tough, some of the you know some of them are going to hide and not fight the fight.
Nicolola Tangan:
when do you think we'll start to see it move up
Kenneth Rogoff:
well I mean this is like forecasting a financial crisis.
We can say what happens once the shock hits, you know at the moment I don't see it happening at all near-term.
Nicolola Tangan:
What would be the most likely trigger, what are the most important things you look at
Kenneth Rogoff:
I mean having some the most likely trigger for getting a really big shock is some out of the box thing happening that we haven't seen before for a long time and
Nicolola Tangan:
such as, such as what
Kenneth Rogoff:
well, let me throw out another pandemic, because that's an easy one but I also think the possibility of ,a say, a cyber war is not far off and
Nicolola Tangan:
just explain to us why a cyber war will drive inflation
Kenneth Rogoff:
well it cuts growth and then the government does stuff to try to hold up consumption by spending money a debt event debt doesn't just mechanically turn into inflation. that's wrong it either turns into higher interest rates or inflation and at some point you know, I think there'll be pressures to you know they'll pack the central bank with people, who we call doves, it hasn't happened but you know it could or obviously we have Trump here and he has said he thinks he's smarter than the central bankers. he'd like a bigger voice a thing, a lot of people don't understand is the central, this, the Fed is not the Supreme Court, it does not have that kind of constitutional status, that the ECB does have and it could disappear in a week and by the way it isn't just Trump that wants it to disappear, the left wants it to disappear too, they have all these plans, they want to, you know, have it print money and give it away to people, so there's a lot of pressures on the Fed's independence coming from both sides of the spectrum.
Nicolola Tangan:
One more question before we spend more time on the Fed. The climate how can the climate suddenly impact inflation in your mind
Kenneth Rogoff:
well I mean I think a thing that is likely is that, storms are going to get worse, so I think a big thing that we've learned over the last few years, it had always been about what was going to happen in 2100 was that, these storms and climate extremes that we're experiencing are coming faster, so you have natural catastrophes which lower output and put upward pressure you could have geopolitical issues arise, say with migration, al Gore writes about that talks about this a lot, so I think the climates providing, I think I'm glad you raised it because I should have said it. You could have some kind of climate shock that's just out of the box we don't know how to deal with it and we deal with it by spending a lot of money which I'm not saying would necessarily be wrong but you then have a choice do you raise interest rates or do you allow inflation to go up and I bet we'd allow inflation to go up.
Nicolola Tangan:
just coming back to the political pressures that the Fed is facing now just what could you elaborate a bit more on that, please
Kenneth Rogoff:
well I mean the most fundamental point is that Fed independence is a new thing,Central bank independence is a new thing.
I mean the Fed was not the the Federal Reserve has this grand building that you see pictures of you've probably been to in the 20s and you know early 30s they were in a room in the Treasury, a few people this whole they were part of the treasury, most countries the central bank was part of the treasury, the notion of central bank independence which I, by the way I think I wrote the first paper on just 40 years ago now and back, then almost no one had independent central banks it's new it's experimental and there a lot of people who are saying well it's had its benefits but now that inflation's down we don't need it anymore. It was useful to bring inflation down, now we don't need it which of course you know they don't see that, that's why inflation's down because you have central bank independence. But it's political.
It doesn't have to be, it's not something you know, that's in our constitution
I couldn't comment on the ECB really is remarkably more independent but I think in most countries that's not the case.
Nicolola Tangan:
so how likely are we to see that the Fed loses its independence
Kenneth Rogoff:
well that's a strong statement of you know, loses its independence what I would say is near-term likely and I'm going to come back to drawing parallels between Trump and Nixon.
I think after he's done with Doge and all this pseudo cutting which isn't going to lead to that much and finally gets to the big tax cuts and other stimulus and maybe by creating a recession out of thin air.
Trump will have provided political cover for him to do all this stimulus we are going to start to get inflation pressures. Trump is not going to like it, Trump is not a person who sits back and quietly takes things when he doesn't like it .
I think and this may sound really out there. I think we're going to see Nixon like price controls like we saw in the 1970s maybe you know other kinds of controls, we're going to see things like, we Reinhardt and I label financial repression which we have to some degree
now since the financial crisis where banks and financial firms are forced to hold more debt at ending, up at lower returns than they'd like, so I think that you know kind of wilder stuff like that is coming to a theater near you soon.
I don't think we're going to wait to the fourth year of the Trump presidency for that. That stuff doesn't work indefinitely, it works for a little while and then eventually you know things spin out of control, so you know we're in for a wild ride, so sort of trying to make a smooth prediction like, I think inflation in 2026 is going to be 5%. I don't know what side of bed Donald Trump's going to wake up on, I don't know Vladimir Putin either, but I do see this willingness just like with the tariffs to use things that we globalist economists think are bad. he'll say they're good. I think they're good he'll say I think they're good and so I think we're going to see him reach into the toolkit and you know Fed independence comes later, the Fed does not like this stuff but you know that's sort of something that comes further down the road okay.
Nicolola Tangan:
so let's say now inflation climbs, jobs are strong, politicians don't want rates higher what will the Fed do
Kenneth Rogoff:
I think if left to its own devices, it will raise interest rates, i don't think there's any doubt about it.
Nicolola Tangan:
What form will the pressure come
Kenneth Rogoff:
I mean the the immediate pressure if jobs are strong it's nevertheless the case that there are people who lose by having interest rates high.
you know I talk to young people and tell them "You're earning a lot more than I did at your age." And they say "Yeah but look what a house costs look at how high interest rates are."
People who are buying cars I mean people care about interest rates a lot, but I I think the current Fed right here and now without some you know real turn of the screw coming from Congress, coming from the president. no.
they're going to raise interest rates if they see inflation but that's going to lead to a showdown at some point because nothing's perfect it's not just going to be this perfect world with jobs going up and interest rates are high because everybody's doing so well it's not going to be that simple so
Nicolola Tangan:
how important is business sentiment in shaping monetary policy
Kenneth Rogoff:
Not as important as consumer sentiment because consumer sentiment, 70% of consumption but it's business sentiment, is certainly very important.
I mean it affects investment investment, affects future growth and I'd also say the Federal Reserve probably takes the business forecast to be a little more professional than the consumers. when the professionals are saying you're doing a bad job they listen a little more. but the Fed listens to everybody, business sentiment's important, financial market sentiment, political sentiment, consumer sentiment. They even listen a little bit to economists like me, but you know I don't think there's any one thing that's oversized
Nicolola Tangan:
is that a good thing to listen to economists
Kenneth Rogoff:
well what am I going to say.
I think you know when it comes to the Fed, the only complaint I would have about my professional colleagues, what I see in the journals is, they just became mesmerized that there'd never be inflation yeah so actually a lot of them have really leaned into this idea the Fed should deal with the environment social justice, inequality and all of those things are really important they're very valuable but it's wrong and actually a survey of the American Economic Association just a couple years ago showed incredible naive Tay among academic economists about where the Fed's focus should be on inflation.
Nicolola Tangan:
Should central banks spend time on climate issues
Kenneth Rogoff:
Basically let me start with the Fed and I would say, of course they should follow whatever policy is set by Congress but they shouldn't be leading the pack the Fed doesn't have the personnel, it doesn't have the knowledge and above all it doesn't have the democratic accountability to be the leader.
And pushing the Fed to be the leader in climate change is just a ticket to having it lose its focus and I would say you know I would say the same thing about inequality and of course Fed policy affects inequality but in a very difficult to calibrate way.
Congress should fix it, now the ECB is different and my friend Christine Lagarde would certainly raise her eyebrows if I were saying you shouldn't look at you know the environment I would say the ECB is following European dictates,it's not making its own forecast of the environment but that said I find it very thin pretext for having the ECB intervene by saying you're not worrying about the business risks coming from the environment enough, we're worrying about the business risks.
I mean I think businesses are pretty good at worrying about their own business risks, so it shouldn't be that. Central banks should be a team player but very much a follower when it comes to the environment
Nicolola Tangan:
Talking about what central banks, should they publish forward guidance curves for interest rates
Kenneth Rogoff:
I think that's been overdone.
I think the whole thing that came under another friend of mine, Ben Bernani, who is you know a great Fed chair, but I think this whole thing about here's the dot plot here that tells where they think interest rates are going.
You know here's everything we think we're going to do it got overdone and the the problem is markets don't believe it and then you get to a year later and the Fed's a little bit tied its hands by giving this forward guidance or the central bank, the Bank of England, the Central Bank of Norway, they they've tied their hands a little bit and you know in some sense they're the only ones listening to themselves.
Nicolola Tangan:
But how tied are they by their own forecast
Kenneth Rogoff:
well they're not completely tied but it's awkward you know
Nicolola Tangan:
Was that the reason why the ECB was slow to increase rates for instance you think
Kenneth Rogoff:
I think partly it was a case where a lot of people were thrown off in their forecasts.
I think the main reason everyone was slow to increase rates really was that they wanted to be the things looked like they could get really bad. they didn't get really bad and they were trying to be cautious.
I just want to make one point about this. I often hear the line that well it was just the supply side, it was just supply chain problems that made prices go up that's why we had inflation. okay fine, but then the supply chain problems went away, why didn't the price of paper towels come down? why didn't the price of everything come down?
That was a central bank mistake. I mean they we could go off into the theory of it that they should look through temporary shocks but this was a big shock they screwed up on this. They should have raised interest rates sooner yeah
Nicolola Tangan:
Moving on to debt. Is the current level of US debt sustainable
Kenneth Rogoff:
well yes and no.
I mean no in the sense with on its current path, it's going to have to get resolved by inflation.
It's not going to get, I think again going back to my colleagues in the profession there were these people who argued interest rates would be lower forever.
Larry Summers had this. I don't know if you've ever had this line in your podcast, secular stagnation, we're never going to grow again, interest rates will be low, we're not inventing anything, everybody's getting old and I debated this with him 10 years ago, paul Krugman even Peter Teal actually Gary Kasparov, at one time and I've always thought you know that people are very short, they're looking at the recent past too much and if you look at a longer time period, you would see that this period of low interest rates was going to go away.
I think it has and if interest rates come way down well, any debt sustainable , if you don't have to pay interest on it, but with the level we have and the rate it's going we're going to need, be needing to make adjustments.
I don't think politicians have prepared people to make the adjustments so at the you know what I see happening eventually and it'll happen together with a big shock like we discussed pandemic, we're going to have a a big inflation that's going to partly bring the debt down but this time interest rates are going to go up a lot more.
Investors were forgiving last time to both the ECB and the Fed and others that okay, that was an accident we really believe you, it's not going to happen again you know ,fool me once shame on you etc.
so I think we're eventually going to have to make these adjustments but so far no one's really been prepared for that
Nicolola Tangan:
What kind of adjustments can we see
Kenneth Rogoff:
well you either lower raise taxes or lower spending. I mean you have to do something to do, with adjusting what you're spending.
The US is running a I think it's a 7% of GDP deficit this year. I mean and it'll come down a bit but who knows how much all the projections are.
The debts currently at 36 trillion. the Congressional Budget Office I think has it going to 65 trillion in 10 years so there are lots of things you can.
I'm not about what you should adjust. I'm not about the size of government. that's a separate question but you know some kind of adjustments will need to be made and one of the things that has really puzzled me throughout all this is that particularly on the left they just want to make debt really big, that's been the argument for a long time.
Anyone who thinks that big debt is a problem is in favor of austerity. they think you must not want to give people stuff and I would say no just raise taxes if you want to give people more stuff and bigger transfers all for it more power to you but raise taxes this whole idea of it's a free lunch.
You can just give everything away you're shooting yourself in the foot which the Biden administration did to some extent and on the right they say "Oh we can do whatever we want because when we cut taxes growth just soarses doesn't cost anything." And it soarses a little but it doesn't pay for itself so they've both been telling this fiction which I think now interest rates are saying the markets don't believe
Nicolola Tangan:
Where is the debt level where investors suddenly will demand a sharply higher coupon?
Kenneth Rogoff:
no. but I don't think in the case of the United States that happens because we we have the inflation card to play and you can play it a little, you can play it a lot so when you go to an emerging market that borrows in dollars it can happen very suddenly, that Greece was an example they were borrowing in Euro but they didn't control it can happen very suddenly.
I think in the case of the United States. It's more you'll see it in the interest rate but probably not you know all at once. it's gone up after people you know see what's going on but I think this whole idea I mean, having really high debt for an advanced country weighs on growth because it reduces your options.
You're a little more nervous about doing stimulus, you're a little more numerous about doing investment. but it's a question of what kind of risk what's coming in the future.
Let's look at Europe. oops they have to build up their military, we didn't budget for that and you know that's just an example and by the way I think Europe's going to end up having to put a lot more in than leaders are beginning to talk about yet
Nicolola Tangan:
Why do you say that?
Kenneth Rogoff:
I mean I think the United States, even if Harris had won, she was the one opposing Trump, is not prepared to defend Europe, the Middle East and Asia at the same time.
The US defense budget which I was like 8% of GDP towards the end of the cold war is 3 and a half% of GDP now.
I think it will go up again regardless of Harris or Trump winning but most of the foreign policy experts I talked to think the US does not have the capacity to project power in two regions at once much less three.
and so it's going to fall to Europe to take more responsibility and it's not just going to 2%, there's decades of underinvestment that need to be made up for and that's going to be a big adjustment for Europe
Nicolola Tangan:
yeah do you see a scenario where the US defaults on his treasury bonds
Kenneth Rogoff:
I mean again, it would be so good for sales of my book with Carmen Reinhardt from 2009 if that happened but you know and it would be total dysfunction to do that it would be so stupid because we we can print money, we don't need to default on our Treasury bonds.
Nicolola Tangan:
Can you restructure them into longer duration obligations
Kenneth Rogoff:
That's not going to happen.
What already happened after the financial crisis was we put in all these restrictions to make the bank safer that had them basically hold more Fed debt which is basically Treasury bonds and more Treasury bonds.
so we can put in restrictions we can put in rules the US has a lot of cards i mean, look at Japan japan's debts very high, their growth's been terrible by the way.
But their debts very high, they have a lot of financial repression in Japan and they haven't had growth but there if you're printing one of the big currencies that and you have a lot of cards, you can play, so looking for something a sudden turn, I think's you know not where it's going, of course in the real the 10-year inflation index Treasury when Larry Summers did a secular stagnation speech was average zero over those 10 years that got to minus one now it's around two you know it's a 3% swing and US interest payments have gone up in a short period from 250 billion to nearly a trillion and that's very painful but for the moment there are ways to adjust but you know it certainly one doesn't really feel like comfortable with what's going on right now and that's one of the reasons I think if we come back to my thesis that the US dollar peaked in 2015 there's the competition from China, crypto but a lot of the big problems are inside, the unwillingness to confront debt concerns, about the independence of the central bank, you know just like that was the problem in Rome at the end of the day, I think that's also going to weaken the dollar and the dollar's footprint a lot.
Nicolola Tangan:
in Euro and Carmen's book 《this time is different》 you lay out the potential consequences of big debt buildups. now how did the aftermath of the financial crisis match your predictions.
Kenneth Rogoff:
well actually you know uncannily, so i mean if you look at, we gave that by the way, we were looking at private financial crisis and not government debt crisis and what we're talking about and I think what you're talking about but you know if you look at how much unemployment went up on average in the US, how long it lasted, stock markets fell how much, housing prices fell, it was remarkably on our averages.
We didn't write them as predictions. we just said these are the averages there were a lot of people making fun of us when our book came out. the New York Times had almost a two-page article saying these crazy people think this recession's going to last a long time, they think the stock market's going to go down further, they think housing prices won't come back for years and yyou know the debate is certainly changed around financial crisis
Nicolola Tangan:
why haven't the big debt levels in Europe been a problem
Kenneth Rogoff:
yeah but I mean so we didn't write about that in our book we had a paper papers after that.
We just argued it weighed on growth. when you're a big rich country it's the case of Japan so if you look at Italy, you look at Japan, obviously Greece but you can go to France this has weighed on growth. The Europe has wildly underperformed the last 10 years
Nicolola Tangan:
And how much of this is due to the high debt levels you think
Kenneth Rogoff:
well I think the high debt levels some of the responses that Europe needs to invest more in infrastructure to improve education, on occasion to stimulus when there's a transaction, I would say, I mean I wouldn't want to overstate the weight it's very hard to parse that but if you look at, you know how much, particularly after the global financial crisis, look at the low debt countries and how much they were able to stimulate their economies they did better.
Germany is able to do stuff now because it has saved for a rainy day and it's a rainy day and they're making use of it. I think they should have made use of it sooner but yeah I mean you know it depends on how you spend the money obviously
I mean debt's not the be all and end all of macro policy you care about education, investment, you know helping with smoothing over recessions but the people who Let me put this another way, running deficits is great, it's good for your economy, having a big debt is not good for your economy because it prevents you from as easily running deficits and there are all these people who said you shouldn't care, it doesn't matter a wit and that was nutty and unfortunately became almost uh a religion in some circles
Nicolola Tangan:
I think if you add up all the all the government debt across the world according to IMF where you were the chief economist for some time. It's 100 trillion dollars right.
so what's going to happen here, given what you are seeing now, deglobalization tariffs, central bank independence, I mean all the geopolitical issues we see just how will this mountain of debt pan out.
Kenneth Rogoff:
well so the good news is that central bank independence up to this point has worked. it's given people more confidence it allowed debt levels to be higher maybe than they would have otherwise.
But I think a lot of this question has to do with where do you think interest rates are going that, you people often say is this debt level high, is that debt level high. well, tell me what interest rate you're paying and I can give you a lot better answer.
A lot of the this debate around debt took place when there was this you know zealous belief that interest rates would stay zero and so why ever think about it.
They're not in your country, they're not in my country, they're not in many places around the world and interest payments have gone up
It's more painful and I think you know countries will need to make adjustments but it's not something that you know necessarily precipitates change immediately.
The next time there's a big crisis in Europe with these kind of interest rates ,it's going to be a little harder to work out a package when it doesn't seem like a free lunch.
I think what Europe did during the pandemic was great but interest rates were negative so wasn't very hard to persuade the Germans to do it now they're not
Nicolola Tangan:
can we spend a moment on technology, could it be that we potentially underestimate the deflationary effect of new technology including AI what do you think
Kenneth Rogoff:
absolutely we could.
So you know it's possible that technology will produce an effect like globalization did, putting downward pressure on wages and putting downward pressure on prices and that's a distinct possibility but on the other hand I think AI is also going to lead to a lot of political tensions, a lot of worker displacement.
so yes there's definitely a bright side to AI and I've been arguing that for for years back when I did the debate with Peter Teal and Gary Kasparov just over a decade ago.
They were arguing this idea there wouldn't be growth again and I said I'm a chess player, I see what's going on with AI, it looks to me like it's going to be good. what worries me is that it's going to be so fast humans mankind will not be able to adjust to it and that's what worries me right now
You know the potentially chaotic change that could happen with AI, we obviously see it in warfare but we may see it in the workplace as well you know.
Nicolola Tangan:
we are just seeing a dramatic uh increase in efficiency in our firm on the back of it last year probably 15%, I suspect this year we'll see 20% efficiency gain
is just you know totally democratize the way people around the firm here code and automate and it's just unbelievable
Kenneth Rogoff:
There are many firms like yours so that's really interesting but it creating efficiencies it's doing a lot of good things
Nicolola Tangan:
Some people like you know Venod Kosla, the venture capitalist he believes that computer will be free labor will be free on the back of robots and so on. I mean can we then at the end actually use GDP to measure the economy
Kenneth Rogoff:
well it's been a long time since GDP was a really accurate measure of the economy, there are a lot of things it doesn't capture but you know it's a very difficult world that our children face with tremendous uncertainty about what jobs are.
I see so many people graduate college trying to see how to make a million dollars in a year because they don't know what they'll be doing in three years
They don't want to plan a career that's going to go away. it's very unsettling. I try to be an optimist about it but I don't buy this idea that don't worry about inflation because this is going to make everything cheaper.
These political pressures on central banks are very very powerful so I think inflation is going to be a problem for the next several decades even though I do think AI will transform our lives
Nicolola Tangan:
Do you think the high valuations in AI related companies and a potential in deflation here could trigger a new financial crisis
Kenneth Rogoff:
well a lot of financial crises have come because there's a new technology and everybody gets all excited about it the the steam engines, railroads, airplanes you know you name it, often there's a new technology everybody thinks it's amazing and it's hard to evaluate I mean hard to know what it's worth. so of course there's a lot of volatility around it and there's the potential to have sudden valuation changes collapses.
I hesitate to say that I don't see a financial crisis around the corner but I don't right now there's an awful lot of regulation which makes it more difficult. I think if we get a financial crisis look for it coming out of crypto rather than necessarily high valuations of AI firms.
Nicolola Tangan:
where are you the most different from other economists in your views now you think?
Kenneth Rogoff:
well where I have been different for some in many places over the years but right now where I've been different is, I was sort of all alone in arguing that real interest rates weren't going to be low forever among academic economists people write in opinion pages, I was alone in saying when they rise debt which seems like a free lunch today, is not going to be, I would say, I was also pretty isolated in saying China was not going to grow to the moon that it would have a financial crisis I think to some extent, you know though I'm still fringe on saying those things believe it or not but less so.
One thing I say in my book is that the dollar is not going to be what you're used to that it reached its peak and it's coming down that is way out of consensus and again I think we did see some of that in the Nixon era I think we're going to see it again but you know that that I've sort of discussed over the the our time here some of the reasons I thought that was true, it's not just the dollar is going to come down in value. I think that too. But that its footprint's going to fall. we live in a dollar dominant world the dollar is going to stay first but gradually its place is going to come down
Nicolola Tangan:
well Ken. it's uh been amazing tapping into your insights and visions so big thank you for spending time with us and very much look forward to to keeping in touch and I'm just so happy I don't have to face you on the chessboard.
Kenneth Rogoff:
you do fine.
It's been many decades but I look forward to speaking to you again soon.
Nicolola Tangan:
very good. thanks a million
Kenneth Rogoff:
solong bye