Kenneth Rogoff on Monetary Moves, Fiscal Gambits, and Classical Chess

28:55You look over longer time periods, you know, just because economists think that those should be the dominant variables. It doesn't turn out to work that well. And all this stuff, there have been a lot of papers by economists looking at the decline. It's going the real interest rate going down, demographics going down, productivity going down. Looks great. Have you looked at a longer period? There's no there there. I mean, it just doesn't stand up. So I think there are other factors having to do with liquidity, default rest, changing nature of the production function, globalization. You know, I think there are many variables where assuming there's going to be some perversion to mean is just a pretty good thing to have in the back of your head.

29:40You know, you know, Carmen Reinhardt and I have this book this time is different. Very much on the theme of people just looking at five years or ten years and they, oh, it's just great. It's just going to go like this. And I think the real interest rates, an example, I would say the low inflation to another example. My students, for a long time, just didn't believe their death would be inflation again. I would teach it, they would fall asleep. I mean, I remember asking a question even to someone who was a research assistant at a big central bank explaining this to me about inflation. And she said, my generation doesn't ever expect to think about inflation, we don't have it.

30:19We're just gonna be examples of this. So no, I would suspect we will have, I really just said, and by the way, AI will raise the interest rate. But pro -demographics. Well, in case where it goes up with productivity. It does raise productivity, but the usual thing about demographics is they're less people to work with the machines and therefore the return on the machines is lower and the interest rate goes down. But if the people are being substituted for, which is new, I mean, we've always found way to reinsert ourselves, you won't necessarily even in a theoretical model, like Samuel Sons or Solas, get that effect.

31:02You wrote a famous 1987 paper on political business cycle theory. How relevant do you think political business cycles have been since then? Well, there's been a lot of papers on it. I mean, I don't think there's any question. Every politician in the world that they have the power tries to goose up the economy before it happens, I think empirically it's overwhelming that it's true. The question is, why does it fool anyone? Everybody should understand why that's going on. And without going to tell us that paper was about the paradox that I know you're just making things look good. I know you're hiding something from me so that you're exaggerating how long this can go on how much it's costing.

31:47But I'm going to vote for you anyway. And so, you know, that's what that paper was. It looked it as a signaling model. That's getting really wacky. But the fiscal versions of political business cycle theory, they don't have to fool anyone, right? You do get the money and society as a whole has to pay it back, but you can come out ahead. Okay. So, there's another, I'm going to just translate it a little bit for my model, one that Alberto L. Ossina, my late colleague Alberto L. Ossina did, and a number of others that said, part of the reason debt keeps piling up is we have the liberal party, the conservative party.

32:27When the liberal parties empower, they know that debt is bad, but they know they can spend now. And they know they might not control it in the future, so they spend a lot and they borrow. When the conservatives are in power, they cut taxes and build up the debt. I think that's a very powerful, very, very powerful theory of part of why debt builds up is whoever's in power, you know, says, don't panic attention to it. And of course, you know, I think we end up where we are now. In an earlier book you called for the phasing out of currency and large denomination bills, Do you still want to do this?

33:09Oh, I call out for phasing most currency. I'm not phasing it all out right away. That takes, you know, generation. Well, Sweden's done it. I mean, it doesn't take that long if people are on board. It's very hard to run across currency in Sweden today. You're right. And they didn't even pass laws. You're right. You have to travel 150 kilometers. You got to an ATM machine. But it's not completely phased out by any means. I mean, it's still there. So, first of all, we've had enough inflation that the $100 bill is now a $75 bill, I'll say to start with. But most of the world's currencies held in these large synomination notes.

33:52I mean, I've done further work, very little of its use in transactions. I think most of it is in the underground economy. It's not necessarily nefarious. There's drug dealing, human smuggling and everything, human trafficking. But I think the large majority of it is tax evasion. I mean, lots of people do that. Okay, I mean, I'm not trying to be holier than thou, and just say everybody does that as evil. But I'm looking at from the government's point of view, making money by saying, hey, people love these $100 bills and not figuring out that they're using them not to pay taxes. I've argued that that's penny wise and pound foolish.

34:36And yeah, that's sort of the core of the argument. But from an efficiency point of view, don't you want a kind of price discrimination in your tax system? So say people pay their nannies with $100 bills. They wouldn't hire the nanny if they had to pay taxes furthermore if the transaction were recorded. They'd have to worry about social security issues. It's a lot of paperwork and bureaucracy, very forbidding for a lot of people. and you're just lowering output by not making it easy for them to pay the nanny with cash. So I do think about that, but the questions why we need $100 bills for that, I mean, you can pay your nanny with 20s and they'll be perfectly happy because actually the $100 bills are harder to work with, you know, for them.

35:18So, no, I think you want to have ways that that you can evade the law up to a point. I mean, marijuana is now legal in most places, and maybe the whole culture and society wouldn't have all if we didn't have a cash economy that could pay for that. So, again, I think it's a question of calibration, regulation, where you wanna put things. Do you worry about the example of the Canadian truckers where it becomes too easy to cut off people's bank accounts? And there's too much social power over a lot of people. Well, again, I'm getting rid of the large denomination notes and not straightforwardly the others.

36:03And so, yeah, no, we don't want to over. I absolutely agree. There's government accesses. The questions, do we have, we have drugs that help people after an operation and we want to have them. But does it want to mean mean we want to have them freely floating in the economy and And also we can phase out hundred dollar bills and fifty dollar bills and we can change our mind later You know and decide that we over did it. I don't think we would I think you know continue to go in that direction But it's it's a matter of costs and benefits. Do we also have to ban stable coins then because you can make a hundred dollar or $500 transaction in stablecoins, and not everyone's used to doing that now, but you figure within two years your AI can do it for you if need be.

36:52And we're dispushing more people into stablecoins. Well, you absolutely so in the same book I said we need to regulate crypto currents. Now, there are different kinds of stablecoins, and it's not clear where it's ending up in the long run. but I think stablecoins eventually have to have some kind of parallel revealability to what bank accounts have, not necessarily exactly the same, but I know that's where we're headed. I think the regulators are pretty favorable to stablecoins actually on the whole, but not if they're being used to evade taxes and all kinds of regulations. But the issue is can be abroad, in that sense it's quite different from domestic banks, from currency, someone has a stablecoin account, you know, and came in islands and they make a transaction with someone with a stablecoin account in Estonia.

37:43How much say do the US regulators really have over that? Well, we don't have much say over that. I mean, we do now with back, you already have that the case to some extent with bank accounts and you can mitigate the problem, you can't eliminate it. I mean, that's generally true of cryptocurrency. You can, you know, try to try to regulate it. You can't completely eliminate it. I mean, probably a lot of sanctions evasion is being done with stablecoins and cryptocurrency and clearly we have not been able to touch that. Should the US issue, you know, a CBDC, a digital coin? Let me put it this way.

38:22I don't think we should be the first to try this. Right now, we're on top. I mean, I kind of think we peed, but that's another question. We're winning. Why do you want to change the rules of the game when we're winning? Because it's not about the currency, it's about treasury bills, it's about the interest payment, it's about market clearing. And also we're so big, we probably are more likely headed towards having competitive stablecoins, which are regulated, which have some kind of lender or last resort, than a CBDC. I'm skeptical about it. You put yourself in a position where one screw up can paralyze everything.

39:05It wouldn't be good if we had five stablecoins and one of them had a problem. But I tend to think that's something for Latvia or Singapore to try and not necessarily the US. Maybe in 50 years. To be fair, Europe's talking about it, but about what we call a wholesale CBDC, which is among the bags and that's a completely different animal. A standard macro puzzle today. We had a disinflation from post -COVID inflation. It went from 8 .9 % to something not too far from 3%. And there's no big recession. How do you interpret that? Were the rational expectations people right that it was credible and we just did it?

39:45Or the people who say it was all supply shocks? Are they right? Or it's a big puzzle to me. What do you think? Well, I think it is a big puzzle. It's the first thing to say. I mean, I'm not going to claim I thought that was going to be painless bringing the inflation right down. I don't think I was out there quite at the Larry Summers level banging on the table, you know, saying that there had to be a big recession. I certainly do not buy the ID was all supply shocks. That's just nonsense. So there are these people who say, oh, it was just the supply chain, the shipping lanes were closed and all that stuff.

40:19And as soon as the supply chains were back, inflation was down. Excuse me, the supply chain problems make the price go up when they go away. The price should come down. It did not. And so there clearly was, you know, even in countries which didn't do as much macro stimulus as we did, they did a lot. and they all, of course, kept their monetary policy easy. But yeah, I mean, the credibility is remarkable. I mean, if you look at inflation expectations, they moved a little bit. I mean, I'm talking about the professional, the consumer ones moved a little more, but consider what just happened. That inflation expectations didn't move more.

41:02It's remarkable. And to come back to the earlier point about solving our debt, if we ever have an inflation, I don't think that's going to happen again when we have a second inflation. That time, that time, the credibility is really going to be shot. What else do you think of as an unresolved puzzle in macro? Besides the disinflation. Boy, that's a really good thing because I think about research questions all the time. It's certainly been very surprising to me of how much bank regulation has created all these arbitrage issues across things that didn't exist. Like, I'm not sure this completely unresolved, but you know, when I was doing my book with Mori Absel, we thought of what we call covered interest parity as just, you know, something that holds like, you know, law.

41:53In other words, if you borrow in one country and you borrow in another country, but do some kind of forward contract on do it, you got the same interest. There's not true anymore. And I think there's just a range of these puzzles that have come up since the crisis. I suppose another one would be, you know, what kind of inflation rate do we really want to have? There's a lot of debate about that. There are people who say it shouldn't be 2%, it should be 4%, some people it should be 0%, I think that's a big question. Do you have any guess on the covered interest parity issue? because that bugs me all the time.

42:33You think it's an institutional friction or there's some kind of unmeasured risk that we're not seeing or picking up or something else? I mean, it seems to be that the banks are prevented from undoing it, that we have some of these regulations, for example, that just restrict the size of your balance sheet. And the banks used to just be able to freely borrow and land and undo things. So you borrow in one currency, land in the other currency, and that's how you don't undo it. But there's just been a range of puzzles like that. And of course, the biggest puzzle is productivity. Like if I go to a country like the UK, how do we get productivity?

43:14And exchange rates are still a puzzle. I mean, you asked a question about it before, but we don't have a good, you know, it's police status factory explanation of them. You'll be doing a book tour in the UK soon. Why is their growth, their productivity growth been so slow? Again, we all might admit this is a puzzle, but it surprised me. They have plenty of science. They have some great universities. They play the key role in developing vaccines, other innovations, and they seem entirely stuck. Well, I mean, it's been a generalized problem in Europe, although you think they'd been doing better.

43:51I think part of it is this sucking sound of the United States with the brain drain that we have. You and I both know about deep -mind British company, you know, ends up in California. And I think there are many examples like that where when something goes well, the US sucks them off. Yeah, probably they have this profound problem of the north and the south. The south is rich and the north is poor and they just have not been able to figure that out. So you know, if you go to London, they're doing great and they're still doing great, but they've had trouble finding jobs that the manufacturing jobs are going.

44:33They haven't figured out how to substitute for them. The US has had the tech revolution. I mean, if you took that away, we don't look so good anymore. A lot of countries don't seem to have a sucking sound problem, though. So the talented people in Northern UK go to Southern UK, but you look at Germany, the Netherlands, you don't see the same thing happening in those places. Is it because London is so good that the country as a whole grows more slowly? Is that a kind of curse for the aggregate number? You know, it's still the case that those countries have hardly been models of dynamism, Germany and the Netherlands.

45:15You're right. They've been able to keep people more partly because they're not English speaking. But again, a lot of the difference in how we've done is our tech sector. That's been a lot of the innovation going through the economy. I don't want to sound like I'm drunk with what's going on with their tech sector and how it affects other things, but if you took that away, our numbers would look like theirs. Is Malay going to make it succeed in Argentina? What does it depend upon? Well, I hope so. I think he's the best chance that Argentina has had in a long time, which is fair to say very low bar.

45:55The thing that he's done that I have not seen before is balancing the budget. it. If you're a big borrower and you keep defaulting, sort of a starting point is figuring out how not to have to borrow money. He's managed to do that. I mean, I don't know that all his libertarian visions necessarily will come to pass. No, he's provided some stability for the inflation. I mean, it's so, Argentinian, as you know, was one of the richest countries in the world by any measure at the turn of the 20th century, you know, in 1900. Now they're lower middle income country. Their per capita income's below Brazil, which is hard to get your head wrapped around.

46:37So, I mean, I think there are many reasons, but I certainly, you know, perinism, socialism has not done well by Argentina. But has he balanced the budget? I know he announced a balanced budget, but this is April 2025 and they just borrow a 20 million dollars from the IMF. It doesn't sound like a very balanced budget. Well, I mean, it's counting the interest payments on the IMF. And yeah, I mean, he inherited this big debt. They're paying the interest. It's very low interest on the big debt. And I don't know how that's ultimately going to get resolved. I mean, they have a lot of problems I had, but you know there's a lot of strengths than Argentina if they can grow again.

47:19I don't want to sound, you know, pan -glossian about Argentina, but goodness they had inflation of 200 % when he took over. The economy was in free fall. So look, you know there's no magic wand.

47:43You can once a grandmaster, always a grandmaster. So you can't just say you don't know. Let's do cash the next dominant chess player. Or will he be first among key equals? Well, he's not even nearly first now, even among, you know, others. I mean, there's a number of Indian players who were very good. I wouldn't put him ahead of Nakamura or Karawana, much less Carlson. But he's ambitious. He's talented. I wish him the best. I mean, it's wonderful that he won, but I mean, it's got a long way to go to be Casperot, Fisher, Carlson. It'd be fabulous for Chas, if he does that. I don't see it yet, do you?

48:24Well, Nakamura, Karawana, in five years, they'll be out of the scene maybe before then. Carlson is already in a sense out of the scene. I think he has a 30 or 40 % chance of being not a truly dominant player, but say the way an on or Kramnik were at their peak. You know, one of the top two or three very consistently and world champion for some number of cycles. Not the way Kasparov was, but something quite impressive. I'm close to it. Well, I mean, it'd be fantastic. Yeah. Yeah. Okay. I thought you were asking a different question. No, the next, not the current dominant, but is he the next? No, he could absolutely, I mean, a non -Den Kramnik were amazing and he could absolutely do that.

49:04I mean, he's close to having done it. If he, he'll have a much more difficult challenge or next time I would suspect. I mean, Dengue's an Uber talent, the person he beat, but clearly had all sorts of mental problems in the match. I mean, he's been depressed and you could see him sort of losing it in some games. What were your impressions of Bobby Fisher when you met him? Well, I mean, he was amazing. First of all, when I met him, he came every day to the 1969 US junior championship over 10 days, and he sat and he analyzed with us and the first thing was just the, what's he doing with us? Why is he wasting his time with us?

49:47We just thought he was so generous. But obviously, you know, his absolute intensity, his commitment. I don't know if you remember, it's hard to imagine, but he actually used to be weak at rock endings, weak for somebody like that. So he locked himself in a room for three months and did nothing but study rock endings and got to be very good. He got a hotel, he told us about got a hotel room, you know, with no view. And then, you know, certainly some of the ideas he showed, But I still think about it. I won a game and he went over with me against Steve Spencer, the last game of the tournament, which I won.

50:30And he showed me his ideas. As I hadn't thought of any of them, you know, it was just his fertile, I don't know if they were better to be completely honest than what I played. I mean, of course, he's much better than me. But I mean, just the imagination of there was this then, we're talking about and move before on move five of just things that wouldn't occur to me. And part of the Fisher legend was that at least supposedly he was the greatest over the board analyst of any chess player. Well, Gary Kasparov was no fool and same as Carl Senemann, I don't know, but he was a staff, he was way above everybody in his generation.

51:10He did not have the prep, but the Russians had. He worked on his own. He was not working with the team. The Russians had all this communication and coaches and everything and by the way, you know, I was representing the US and the World Junior Championships and things like that. Everybody was a big disadvantage that you didn't have a trainer or coach, you know, organizing information. Fisher was doing that at the highest level, so he must have been by far the best hour of the board player then. But not a player. I mean, just someone, if you would sit down with them at the board and show them your game, the claim I've heard is that Fisher was a more astute analyst, even then Kasparov.

51:50Kasparov might have been the better player, but just willing to put his entire mental energy into over the board analysis sitting there. I think that's part of the Fisher legend. I mean, it's part of the legend. I mean, he was amazing. I played against really all the top players then with the exception of Spaski. And, you know, they were all phenomenal, but they were all equally good calculators. So the best calculator I ever played was actually Yugoslav Player Reach II or III named Luby Evich. And he beat me, I don't know, I was 16 years old. And to try to salvage Simego, I said, well, what if I did this, what were you gonna do?

52:32And I showed him my best. I thought it was just like a great variation. I don't remember how long, 10 moves. And he goes, mm -hmm. Yeah, but then I do this. Actually, it's this and he goes something 15 moves. I never played Fisher. He wrote an article about me once as you know, but I never played him. But of course, I could he well imagine it would be the same. But I'm not sure I could tell the difference with Casperov, Carlson, you know, at that level. When Magnus spoke with Lex Friedman, he drew a distinction between players who were incredible calculators. He called Gukesh one of those and players who were incredible with evaluation.

53:11And he called himself one of those. He thinks he's actually not the best calculator. Do you broadly agree with that distinction? Well, I think it's an interesting question. It's funny because I've seen him write about Carpov who I did play. And he said, I don't know how Carpov does it. He just knows where to put the pieces. He just knows where everything goes. And he's not having to calculate like I do. and between his great nemesis was Cardbach. And between the two of them, he was the calculator. And Cardbach was no slouch, but Casperop was better. I think maybe as Gary gets older, you know, I mean, you're compared of advantage as the calculators, probably at your peak at a younger age.

53:52And Gary, you know, developed other tools. But I mean, he was really good at both. I so, but I would have put Casperop as a calculator like a fear calculator. Now you must have been out of practice, but I believe you drew Magnus in a game of Speed chess in 2012. Is that the correct year? Yeah, it really happened. How did it happen? What's the story? Well, sort of what I tell people is if you were a professional golfer once and you play three holes with somebody anything can happen, you know, the law of large numbers, but you know going more into it, he let me have white. We played a Rulopas Spanish opening, which he had been playing all the time.

54:38He played a variation. I hadn't prepared. I mean, just what he was playing all the time. Did he play the briar? Like he used to do? He played the briar. No, that's right. He played the briar. And I didn't even know that he played it at the time. I mean, he played a lot of things. I didn't know he was playing that. And you know, so I knew where the pieces go. I didn't, I mean, I knew what I was trying to do them where the pieces go. And at one point, he made an overly aggressive move that just was a big mistake. And I saw it. And I got winning advantage. It wasn't easy winning advantage. I'm convinced that if he had continued the game, he would have won.

55:17But at some point, he had a choice of repeating moves and he was losing. And so he just repeated moves. I'm not saying I would have won. I think it would have lost to be kept playing, but it just happened. I did it 10 ,000, 20 ,000 times more. I don't think it would happen. What do you think of Fisher Random as the future of chess? Because that seems to be what Magnus wants. I don't like it, frankly, but what's your opinion? I'm with you, Tyler. I mean, I take joy from classical chess. I love watching a beautiful classical chess game. I can relate to it. You know, I mean, I'm hardwired to think about it.

55:56And Fisher random chess, and it's a little bit like looking at problems. I respect chess problems, but the positions are often weird and improbable. I just have trouble relating to Fisher random chess. I hope I change, I'm just speaking from my age, but I'm so invested in classical chess. I love classical chess. I think about classical chess all the time. I don't know. Why don't you like it? With classical chess, not every game, but most games I feel like I can look at the board and have a decent idea what's going on. And I might be wrong, but even then I can figure out, exposed why I was wrong.

56:35With Fisher random, I don't have that sense unless it evolves back into a classical looking like position. So from a spectator's point of view, why should I care? That's how I would put it. Yeah, I mean, we're on the same page on that, but on the other hand, you mentioned Gukesh and the computers have just dominated the preparation. That's why Carlson stopped. He's in West Fendell. Yeah, how are we going to solve that problem then? If we don't do Fisher Random, what is your proposed solution? Because I have one. I'll tell you mine, but you tell me yours. Tell me yours. Tell me yours. That we randomize the first few moves of the opening.

57:09So some percentage of games through computer randomization would be like 1B4, 1B6, and then they start playing. But you do that with many permutations. They're all playable positions. As you well know, no Grandmaster game would go 1B4, 1B6. But there's no reason why you can't play from that position. And if you have 500 opening alternatives like that, the players don't control. I just don't think they can prep that much, the Berlin, the Marshall, the whatever, all these four straws. draws, I think they actually have to play chess. I love that idea. And yeah, it creates some randomness in what initial positions you get.

57:46But I love that idea. I mean, that sounds much better to me. I would much do that. I have to say as a player, I played like that because I was very isolated in the United States. I wasn't following all the opening innovations. So I played all kinds of openings to be unpredictable. But if everyone does, it's easier to do. It's like every game is between two Ken Rhaegans is one way to put it. Yeah, no, no. I like your idea. I think it's a great idea. I endorse that. Thank you. Final question for you. For our listeners, your book's coming out. It's on very important issues of currencies, international trade, international finance.

58:25It draws upon a lifetime of your learning and practice and advising. What does it you think you'll do next? Well, I have a lot, you know, like any academic, I already have my next few years of projects. Some of them, right, frankly, you know, grow out of the book. I think people forgotten about political economy. They just think, you know, if the central bank says the inflation rates 2 % on average, it'll be 2 % and we go home. And I worked on that early in my life. I wrote the first paper on why you should have an independent central bank. And I'm working on it again, admittedly with some very talented young people, including Marina Halek at Yale and Pierre Yarat, who's at Columbia, but now actually on the Council of Economic Advisors.

59:13And just thinking that, no, the political pressures are important, so that's an important topic. I'm also working on China's scenario. I've been working on for a long time, so I have some thoughts about comparing China and Japan, for example. But I have a lot of things I'm excited about. The part of what was so great about the book is I've had sort of, I would describe a mini reticence in my research and I'm able, at least I feel that way. I made out of the rest of the world, thinks that. But it gives me joy sort of to have some confidence about, you know, some of the ideas, although as you say, there's much more to it.

59:52Again, everyone, Ken's new and excellent book is Our Dollar Your Problem. Ken Rogoff, thank you very much. Thank you.

1:00:04Thanks for listening to Conversations with Tyler. You can subscribe to the show on Apple Podcasts, Spotify, or your favorite podcast app. If you like this podcast, please consider giving us a rating and leaving a review. This helps other listeners find the show. On Twitter, I'm Attyler Cowan and the show is At Cowan Convos. Until next time, please keep listening and learning.