Kenneth Rogoff | Podcast | In Good Company | Norges Bank Investment Management

[Music] Hi everyone, I'm Nicolola Tangan, the head of the Norwegian so we fund and today I'm in really 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. Uh and you can look forward to it. Ken, wonderful to have you here. Uh wonderful to be here. Thank you for having me on your podcast. So, um,

Ken, I think I've said once that discussing, you know, inflation with you, that's a bit like discussing, uh, the Bible with, uh, with with Jesus. But, I mean, let's let's give it a go, huh? I don't know how we can live up to that. Ken, um, how would you assess the current state of the global economy just now? Well, it was uh in modestly good shape, but obviously it's being thrown into chaos with uh the restructuring of globalization that Donald Trump comes with uh what's happening in Europe. Uh you know, it it's a pretty wild

time. I don't think it's 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 u obviously we're in for a wild ride. Where are we in terms of American exceptionalism now? Well, it's been dented. I mean, I'd almost 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 uh obviously the stock markets are getting nervous. Uh everybody's getting nervous that there might not be a plan. I don't know. I mean, I say I I he's the president of the United States. I wish his policies well, but uh it's 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. What are your biggest concern when it comes to the current economic policy? Well, I mean, the the the biggest concern

is that uh we undermine the institutions that are the bedrock of US exceptionalism. You trust the rule of law. Uh when the United States gives its word, it keeps its word. I'm not saying we always did that, but you know, uh certainly with respect to paying our debts, uh I'm concerned uh certainly about this view that people uh who believe in global trade and global integration are globalists. I'm an unapologetic globalist myself. uh and uh 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 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 uh you know that's uh um certainly not how it's been going. Where do you see tariffs a year from now? Whoa. You threw in the year from now. I mean, it seems

like he's spinning a wheel when he 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 that's a really hard thing to forecast, but I I I think he's very intent on it. So I'm guessing the US will have tariffs for example on Europe uh on on the uh on the order of uh uh 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 he he seems to be a believer. I even back in 2016 when he was first running someone who was uh close to him called me and just for did I have any general thoughts and I said okay first of all this conversation never happened I'm I 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

this is and uh you know the person said Well, you know, the candidate, uh, Trump, uh, he knows politics better than I do, and he thinks 80% of Americans love terrorists. And actually, you know, I, sadly, I find that hard to argue with. Um, my mother was a librarian, a brilliant woman. Uh, uh, 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 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 don't like tariffs, people like tariffs, stands and says, "Well, you know, this you you don't like you don't want to have to

eat your your vegetables, but eat them and you'll grow and it'll be better." And uh 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 it's been one of those things which, you know, uh it's it's been obviously very good. Globalization's been great for the United

States. Who are we kidding? I mean, the United States has been at the top. has benefited and yes, there are problems with globalization, but uh he he seems to just think it's really good for him. We'll we'll see how it plays out. How bad are Tar for globalization? 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 uh you know finding uh ways to uh improve innovation. I don't know. But if he did on balance it could be okay. They do raise revenue. What 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 I I sort of look at country I I don't know if you ever visited the North Pole, but the the uh uh 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 I I think the real problem is the randomness and what it signals about other things to come such as central bank independence. We'll come back to that. Just um what will be the impact on inflation from the tariffs? So that is not a big deal. I mean uh 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 uh innovation slowing growth over the longer run and uh the effect on American consumers well you know of course we pay the tariffs dollar for Every study shows that. It shows it on other examples. It shows it when he put in tariffs in 2018. And uh 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 will be lower quality than we get at the moment at least for a long time to come. Uh you are a professional uh chess player and you're still uh avid in terms of uh 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? F first of all I'm still a

grandmaster but I actually haven't played in decades. I follow uh 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 think I've I've said whenever I've given talks in Europe uh 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 uh for whatever its frictions and divisions probably is more 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. Uh on the other and you you uh you need to think about um 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 uh tech uh tech startups, tech investment and uh 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 it's it it's not it's not good in a way, but on the other hand, it kind

of forces Europe to g be more assertive, to be more independent in a way that I think has been a long time coming. Will we have a recession in the US? 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

20089, 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. Have you seen this before that um political uh inclination uh impacts the way you look at data this way?

I've never se I've ne of course we see it but uh 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 yeah you 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? Should they should they sell everything? Well, we ask you Nikolai on that. But no, I mean I I I my uh I I say to be calm and uh I it's very hard for me to stay calm, but it's I I I don't know how to second guessess all of this. What um what's your view on on potential tariffs on capital inflows? Well, they'd been very strong before. So, the idea was to bring uh more production into the United States. Uh but I 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. Um 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. Uh you know it's I think economists would say it's not a very good way to run your business. uh it's better to have an environment where the regulation and the general uh work environment for companies is good and makes them want to invest. I mean I 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. Do

you believe there is such a thing as a Trump put? Where is he going to put it? I mean, uh, but he will he'll he'll he'll he'll pull back is what you're saying. So, you don't have to sell because he's sounding uh uh untethered, but it's all going to pull back at the at the at the same time. He clearly looks at the market, but this is someone who's very determined to put his place in history. He 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 I don't you know that that was certainly the 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 if he just put in tariffs which we did think he was going to do and you know 10% 20% it 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 to uh nothing compared to some of the bigger things that go on. So, I don't I don't believe in a Trump put put. Uh I think he has conviction. Uh 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. Yeah. Let's move on to the dollar. um what's so what's your view now on on the

US dollar's global role? So I think uh 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 uh you know how many res reserves people hold uh 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 is 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 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 I actually towards the end of the book quote the Danish Grandmaster Ben Larson uh 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 as we

were, is there a scenario where the dollar uh loses its status as the world reserve currency in a bit more dramatic fashion? What what could what could cause that? 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 you know you had the Spanish peda and it's like 100 years 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 I would describe the dollar as late middleaged at the moment uh you know there's no 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 uh last year something like called uh 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 no I don't see it happen dramatic happening dramatically. So how do you assess other nations

efforts to decouple from the dollar then? Well, there's the uh PMIC stuff like when Lula says he doesn't want to use the dollar in Brazil and he 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 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. F first

of all, they should have done that 20 years ago. I mean, I 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 rendity, 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 uh, 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 it isn't just, you know, it isn't just the sanctions, it's the ability of the United States to see everything. thing and I 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 uh transactions mechanism should we have how swift is something people may have heard of the uh international uh 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 uh 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. So uh official Chinese GDP growth is around 5%. Some people think it's it's lower and you are quite skeptical when it comes to the official figure as well, right? Yeah, absolutely. They're throwing people in in jail for questioning the figure.

They're academics who said in uh too publicly that they thought the growth was overstated and they got in trouble. What are the global implications of a Chinese economic slowdown? Well, um it's very big on uh energy exporters and commodity exporters. I mean, if you 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%. Uh probably that would be very good for inflows into the Norwegian sovereign wealth fund. I mean and for Norway in

general uh and for the United States as a big uh 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 uh 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 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 uh

that that loss of confidence has pushed interest rates down. They're going up all over the world. Uh 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. So, do we have a some kind of japanification in China now then? 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. Uh it looks to me like it'll be a few more years uh to I

don't I don't 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 uh 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. What about their ability to intervene in the market in different ways? 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 uh they're great investments in China if you could make them now. But they 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 uh party hacks on the boards of financial firms of you know uh 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. There is quite a bit of manufacturing moving out of China. How does this impact the situation? Well, I mean there's still quite a manufacturing force, but it's reduced invest. It's reduced investment into China. So uh 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 uh we're going to do our new investments somewhere else. But I 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. A few sentences on India. Where do you see that? Well, I mean, India's been a positive story for a while, right? I mean, uh, 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. Uh Modi is building infrastructure finally uh 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 they've actually come down some but you know not uh not not enough. So, you know, it's doing well. I sorry I have to come back to chess. The uh he's not he's not as good as uh

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. Um I think I sent you I think I sent you the podcast with Magnus Carlson. You you did. You did. Um and thank you. And so you know um if you can do that you can do other things. And so I'm that you know there 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. Moving on um to inflation. Um how has your uh view on inflation changed over the last 10 years? 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 I have a paper with some co-authors that has a different idea.

I think in fact the period where inflation was really low uh 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 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 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. Is 2% uh still a realistic target? Well, I mean, I uh you're asking, are they going to ever get down to 2% again? I think 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 uh after the pandemic what's going to cause that surge 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, you 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's it hard to put my finger on exactly what it would be, but a lot of kinds of shocks could make could

make them need to raise interest rates. I mean, that's really what we're talking about. uh 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 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 it's ve they're already high it's very hard to do so it's 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. When do you think we'll start to see it uh move up? Well, I mean, this is like forecasting a financial crisis. We can say what happens once the shock hits. uh you know at the moment uh I I don't see it happening at all near-term. What would be the most likely trigger? What's

the what's what are the most important things you look at? I mean h having some the most likely trigger for getting a really big shock is some out ofthebox thing happening that we haven't seen before for a long time and uh such as such as what? Well 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 uh and just explain to us why a so cyber war will drive inflation. Well, it cuts growth and then the government

uh does stuff to try to hold up consumption by spending money. Uh 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 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 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 there's a lot of pressures on on the Fed's independence coming from both sides of the spectrum. One more question before we spend more time on

the Fed. uh the climate, how can the climate suddenly uh impact inflation in your mind? 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 uh 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 uh 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 just coming back to the uh

political pressures that the Fed is facing now just what uh could you elaborate a bit more on that please? Well, I mean the mo the most fundamental point is that Fed independence is a new thing. Uh 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 uh 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 we it was useful to bring inflation down. Now we don't need it, which of course, you know, they don't they don't see that that's why inflation's down because you have

central bank independence. Uh but it's it's political. It it doesn't have to be. It's not 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. So, how likely are we to see that the Fed loses its independence? 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 uh 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 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. uh we're going to see things like we uh 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 I don't know what side of bed Donald Trump's going to wake up up on. I don't know Vladimir Putin either. Uh but I I 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 I 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 that's sort of something that comes further down the road. Okay. So let's say now inflation uh climbs, jobs are strong, politicians don't want rates higher. What will the Fed do? Oh, I think I think if left to its own devices, it will raise interest rates. I don't think there's any doubt about it. What form will the pressure come? Well, I

mean it's it it the the immediate pressure if jobs are strong, it's nevertheless the case that there are people who lose by having interest rates high. Um, 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." Uh, people who are buying cars, I mean, people care about interest rates a lot. So, uh, no, 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 they're going to raise interest rates if they see inflation, but that's 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 it's it's not going to be that simple. So, uh how important is business sentiment in shaping monetary policy? Not as important as consumer sentiment because consumer sentiment 70% of consumers are 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 I I wouldn't I 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. Um, but you know, it's not I I don't think there's any one thing that's oversized. Is that a good

thing to listen to economists? Well, what am I going to say? No, I I I I think uh I think you know when it comes to the Fed, uh 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. It should be on inflation. Should central banks spend time on climate issues? Basically, it uh let me start with the Fed and I would say uh 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 uh 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 um you know the environment I would say the ECB is following Europe Europe European dictates it's not telling it's not making its own forecast of the environment but that said I

I find it very thin pretext for having the ECB uh 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 I think businesses are pretty good at worrying about their own business risks. So, it it shouldn't be that that central banks should be a team player, but very much a follower when it comes to the environment. Talking about what central banks should or shouldn't do, uh should they publish forward guidance curves for interest rates? I I think that's been overdone. I think

the whole thing that came under another friend of mine, Ben Bernani, uh, who is, you know, a great Fed chair, but I think this whole thing about here's the dot plot here that that tells where they think interest rates are going. Uh, you know, here's everything we think we're going to do, it got overdone. And the the problem is, uh, 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. But how how tied are they? How tied are they by their own forecast? Well, they're not completely tied, but it's awkward, you know. Was it was that the reason why the why the ECB was slow to increase rates, for instance? You think? Well, I think they I I think I think part partly it was a case where a lot of people were thrown off in their forecasts. Uh 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 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 they we could go off into the theory of it that they should look through temporary shocks, but they this was a big shock. They they screwed up on this. They they should have raised interest rates sooner. Yeah. Moving on to debt. Uh is the current level of US debt sustainable? Well, yes and no. I mean, uh no in the sense with on its current path, it's going to have to get resolved by inflation. Uh it's not going to get I 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. Uh interest rates will be low. We're not inventing anything. Everybody's getting old. And I I I debated this with him uh 10 years ago. Paul Krugman, even Peter Teal, actually Gary Kasparov uh 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 it 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 uh rate it's going, we're going to need be need 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. uh 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 shame on you etc uh so I I think we're eventually going to have to make these adjustments but so far no one's really been prepared for that what kind of adjustments can

we see 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. Uh, 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 tell I 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. Where is the debt level where investors suddenly will

demand a sharply higher coupon? No, but I don't I 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 uh 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, uh, 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 I mean, having really high debt for an advanced country weighs on growth because it reduces your options. You you're a little more nervous about doing stimulus. You're a little more numerous about doing investment. Uh but it's not it's you know 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. Hm. We didn't budget for that. And

you know that's just an example. And I by the way I think Europe's going to end up having to put a lot more in than uh leaders are beginning to talk about yet. Why do you say that? I mean I think the United States even if Harris had won, she was the one opposing Trump. uh 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 uh towards the end of the cold war is 3 and a half% of GDP now.

I think it will go up uh again regardless of Harris or Trump winning. But uh 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 it's not just going to 2%. There's decades of underinvestment that need to be made up for. And that that's going to be that's going to be a big adjustment for Europe. Yeah. Do you see a scenario where the US defaults

on his treasury bonds? 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. So, uh yeah. Can you restructure them? Can you restructure them into longer duration obligations? 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 cars. 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 if you're printing one of the big currencies that and you have a lot of cards you can play. So looking for something sudden 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 uh 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. Uh, 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. In uh Euro and Carmen's book um this time is different. You lay out the potential consequences of big uh debt buildups. Now, how did

the aftermath of the financial crisis match your predictions? Well, actually, you know, uncannily so. I mean uh if you look at uh we we gave that by the way uh we were looking at private financial crisis and not government debt crisis and what we're talking about um and and I think what you're talking about but um you know if you look at uh how much unemployment went up on average in the US how long it lasted um uh how much uh uh stock markets fell fell, how much housing prices fell. It was remarkably uh on

our on our averages. We 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 uh you know now the de you know the debate is certainly changed uh around financial crisis. Why um haven't the big debt levels in

Europe been a problem? 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. Uh the the Europe has wildly underperformed the last 10 years. And how much of this is due to the high debt levels, you think? Well, I think the high debt levels some of the

responses that Europe needs to uh invest more in infrastructure to improve education uh on occasion to do uh stimulus when there's a transaction. I I you know I would say uh I mean I wouldn't want to overstate the weight. It's very hard to parse that. But if you look at uh you know how much uh 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 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 uh macro policy. You care about education, investment, uh you know, helping with uh 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 that was that was nutty and unfortunately became almost uh a religion in some circles. 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 u it's 100 trillion dollars right what so what's going to happen here given what you are seeing now uh deglobalization tariffs um central bank independence um I mean all the geopolitical issues we see just how how will

this mountain of debt pan out. Well, so the good news is that central bank independence up to this point has worked. It's given people more confidence. It allowed uh debt levels to be higher maybe than they would have otherwise. But I 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. They're they're not in your country. They're not in my country. Uh 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 it's not something that, you know, necessarily precipitates change immediately. You know, the next time there's a big crisis in Europe with these kind of interest rates, it maybe it's going

to be a little harder to work out a package when it doesn't seem like a free lunch. I 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. Can we spend a moment on technology? Is there a um could it be that we potentially underestimate the deflationary effect of new technology including AI? What do you think? Absolutely we could. Um so you know it's possible that technology will produce an effect like globalization did putting downward pressure on

wages and putting downward uh pressure on prices. And that's a distinct possibility. But on the other hand, I think uh AI is also going to lead to a lot of uh political tensions, uh 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 uh 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. the uh 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 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 um automate and uh it's just unbelievable and there are many firms like yours so that's really interesting but uh it creating efficiencies it's doing a lot of good things and 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. 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 uh you know, it's it's a there's it's a very difficult world that our children face with tremendous uncertainty about what jobs are. Uh 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 they don't want to plan a career that's going to go away. It's very unsettling. Um I I I try to be an optimist about it, but I 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. Do you think um the high valuations in AI related companies uh and a potential in deflation here could trigger a new financial crisis? 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, uh

railroads, uh 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 what it's worth so of course there's a lot of volatility around it and uh there's the potential to have you know sudden valuation changes collapses I you know uh hesitate to say that I don't see a financial crisis around the corner but uh 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. Where are you the most different from other economists in your views now you think? Well, where I have been different uh for some uh 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. Uh I was uh alone in saying when they rise debt which seems like a free lunch today uh is not going to be

I would say I was also pretty isolated in saying China was not going to grow to the moon uh that it would have a financial crisis. I think to some extent you know though uh I'm I'm still fringe on saying those things believe it or not but less so. One thing I say in my book uh 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 uh I again I I I think we did see some of

that in the Nixon era. I think we're going to see it again. But uh you know that that I 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. Well, Ken, it's uh been amazing uh tapping into your your insights and uh and

visions. So, uh, big thank you for spending time with us and, uh, very much very much look forward to to keeping in touch and I'm just so happy I don't have to face you on the, you know, on the chessboard. You do fine. I I I was It's been many decades, but I look forward to speaking to you again soon. Very good. Thanks a million. So long. Bye.