Kenneth Rogoff: Tariff Impacts, The Dollar's Future and Global Economic Shifts

0:01Hi, everyone. I'm Nikolaj Tangen, the head of the Norwegian So-en Wealth 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 Reinhart, 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. Wonderful to be here. Thank you for having me on your podcast.

0:39so 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 jesus but i mean let's let's give it a go i don't know how we can live up to that uh but um ken um how would you assess the current state of the global economy just now? Well, 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. It's a pretty wild time. I don't think it'd be a little bit much to say it's unlike anything we've seen before. I think it feels a little like the 70s to me.

1:28Trump actually feels a little like Nixon to me. But 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 almost said we sometimes call the US the hegemon, the one that dominates everything. And it's almost like the hegemon 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, I say he's the president of the United States.

2:10I 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. What are your biggest concerns when it comes to the current economic policy? Well, I mean, the biggest concern is that we undermine the institutions that are the bedrock of U.S. 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.

3:03I'm an unapologetic globalist myself. 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, OK, 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 it's bluster, theater, hill retreat. Obviously, early on, that's what everyone thought, that he was just saying this for his base. and he would pull back. But that's certainly not how it's been going. Where do you see tariffs a year from now? Whoa.

3:49You 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 U.S. will have tariffs, for example, on Europe on the order of, I don't know, at least 10, you know, 15 percent, 20 percent. And Europe will have retaliated. And there'll have been a lot of noise back and forth. He seems to be a believer.

4:37Even back in 2016, when he was first running, someone who was 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 can't be seen as talking to you. But if you ask me, I discuss some things, but the tariffs are a terrible idea. Why are you doing the tariffs? This is this is. And, you know, the person said, well, you know, the candidate Trump, he knows politics better than I do. And he thinks 80 percent of Americans love tariffs. And actually, you know, sadly, I find that hard to argue with. My mother was a librarian, a brilliant woman.

5:27She sadly passed away a few years ago, but she liked tariffs. And 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 it would make everything more expensive. And do we really want to do this? And I went into the whole rigmarole about how we buy stuff from them, and they buy stuff from us. And she just wouldn't give in. She did not agree. And I mean, that's a 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 as, well, you know, this you you don't like you don't want to have to eat your vegetables, but eat them and you'll grow and it'll be better.

6:19And Trump didn't invent this, by the way. Bernie Sanders, who 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 U.S. and Trump. I mean, it's been one of those things which, you know, it's been obviously very good. globalization has 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 he seems to just think it's really good for him.

7:02We'll see how it plays out. How bad are tariffs 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,

7:36deregulation, 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 them. I sort of look at country. I don't know if I've 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.

8:28Like if it just - Such as? Central bank independence. We'll come back to that, Ken. Just what will be the impact on inflation from the tariffs? So that is not a big deal. I mean, it raises prices. 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 problem is more innovation, slowing growth over the longer run. And the effect on American consumers? Well, you know, of course, we pay the tariffs dollar for dollar. Every study shows that. It shows it on other examples.

9:18It shows that 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. There are goods that if they revert to the United States will be lower quality than we got at the moment, at least for a long time to come. You are a professional chess player and you're still avid in terms of playing. So let's say now you're in Europe. How would you navigate the trade negotiations in the U.S. from a chess player point of view? First of all, I'm still a groundmaster, but I actually haven't played in decades.

10:07I follow the distance. I think you have to combine 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.

10:52You need a counterbalance. And Europe, for whatever it's 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 end, you need to think about being more independent in tech. 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 is really hard to know.

11:39I mean, do you supplicate to Trump and kiss the ring or which your public hates, but then he's not throwing a 200 percent 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.

12:13Will 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 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 is going to go through the roof.

13:00You talk to the Republicans, everything's ducky. The economy is doing fine. There's nothing to worry about. President's doing a great job. Inflation is going to be low. And they're looking at the same data and just drawing completely different conclusions. Now, half of all the consumers are Democrats. Have we seen this before, that political inclination impacts the way you look at data? I've never seen it. 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 yes, what's inflation?

13:46And the Republicans just give a different answer. But it is much more pronounced and it can cause a recession because 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? and should they sell everything well we ask you nikolai on that but no i mean i i i my uh 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 guess all of this what's your view on on potential tariffs on capital inflows well they'd been very strong before.

14:38So 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 principles. So Trump didn't invent this. I mean, the tariffs are different than the subsidies. We were giving subsidies to invest in the U.S., but it's six of one and half a dozen of the other.

15:27you 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 u.s the u.s 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? I don't know. Where is he going to put it? I mean, in the sense that he'll pull back, is what you're saying.

16:14So 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. 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.

17:04If 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. Yeah, it would hurt growth in the long run. It would hurt U.S. welfare. But, you know, nothing compared to some of the bigger things that go on. So I don't believe in a Trump put, but 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.

17:48Let's move on to the dollar. What's your view now on the U.S. dollar's global role? So I think, and my book argues, that we sort of reached the peak 10 years ago in terms of the dollars footprint and dominance in the global economy. And in lots of different measures, 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 is there's their sense in which the dollar has been lucky at different stages. The US has been good. The US system's good.

18:38But as the US has faced challengers, 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 yens hardly used at all, the renminbi 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 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?

19:24And 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 hill as we were. 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? It would be great for the sales of my book with Carmen Reinhart that you mentioned at the beginning to have a crisis of that magnitude. But that's, I mean, the global currency normally changes slowly.

20:12You know, you have the Spanish peseta. It's like 100 years, right? Yeah, like 100 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 middle age at the moment. 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 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 no i don't see it happen happening dramatically.

21:00So how do you assess other nations' efforts to decouple from the dollar then? Well, there's the polemic 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 reninbi, 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 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 own 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 u.s 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 ire of the United States at some point by trying to take over Taiwan and looking at the sanctions.

22:32And it isn't just, you know, it isn't just the sanctions, it's the ability of the United States to see everything. And a thing many people don't understand about the military and power and dominance of the United States is the U.S. gets to make the rules of the game. When bankers are negotiating over what kind of transactions, mechanisms 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, 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.

23:16and 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 Renembi, by 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 official Chinese GDP growth is around 5%.

24:02Some people think 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 jail for questioning the figure. They're academics who said 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, 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 is going to be 8 % the next two or three 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.

24:57And for the United States, it's a big energy producer and good for Brazil, 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, 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.

25:44But 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 is going to accept that. So do we have some kind of Japanification in China now then? Yes, we do. The question's a matter of degree. So we, those of us who work on financial crises, look at Sweden on the one end as like the fastest recovery ever.

26:30And 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 China has a lot of things going for it, but they have this over-centralization of power, which may undermine their longer-term growth. But it's certainly the deflation, the slow growth, the housing problem, the overbuilding in infrastructure and housing. The similarities 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.

27:21They were very innovative. Their areas of tech where they're just fantastic. And they're great investments in China, if you could make them now. but they they crushed them you know famously jack ma who recently reappeared had sort of he's the founder of alibaba and one of the great innovators in 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 their tech companies so they need to go back to this growth model where the private sector leads and the state's not doing everything. But President Xi has been very reluctant to let go of that power.

28:10He'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 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.

28:52The 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 growing so slowly. A few sentences on India. Where do you see that? Well, I mean, India has 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. know, 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.

29:34A 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, not enough. So, you know, it's doing well. I, sorry, I have to come back to chess. The, he's not, he's not as good as your boy, Magnus Carlsen, who pulled out of things, but you know, the world champion Gukash is from India. Amazing. And there's, they won the world team championship too. I think I sent you the broadcast with Magnus Carlsen. You did. You did. And thank you. And so, you know, if you can do that, you can do other things.

30:21And so 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.

30:36Moving on to inflation. How has your 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 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.

31:43There 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 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 two percent uh still a realistic targets?

32:38Well, I mean, 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 five to seven years, but that was the, I did the page, the final day of page cruise was just the day after Trump got elected, I might make that a little faster now than five to seven years. There's going to be another big burst of inflation, similar to what we saw after the pandemic. And it's not that central bank... What's going to cause that? What's going to cause that will be another shock where the central banks 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.

33:31And 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's 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. U.S. debt being out of control. If that goes, I don't know what's happening, but my best guess is that both parties want it to go up and it will.

34:19It'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 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 them are going to hide and not fight the fight. When do you think we'll start to see it move up? Well, I mean, this is like forecasting a financial crisis.

35:00We can say what happens once the shock hits. 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 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 uh such as such as what well Let me throw out another pandemic because that's an easy one. But I also think the possibility of a cyber war is not far off. Just explain to us why a cyber war will drive inflation. Well, it cuts growth.

35:45And then the government does stuff to try to hold up consumption by spending money. Debt doesn't just mechanically turn into inflation. That's wrong. It either turns into higher interest rates or inflation. And at some point, I think there'll be pressures to, they'll pack the central bank with people who we call doves. That hasn't happened, but 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. I think a lot of people don't understand is the central, the Fed is not the Supreme Court. It does not have that kind of constitutional status that the ECB does have.

36:34And 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 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. One more question before we spend more time on the Fed. The climate, how can the climate suddenly 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.

37:32You could have geopolitical issues arise, say with migration. Al Gore talks about this a lot. So I think the climate's providing, 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 to raise interest rates or do you allow inflation to go up. And I bet we'd allow inflation to go up.

38:12Just coming back to the political pressures that the Fed is facing now, just what, could you elaborate a bit more on that, please? 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 Federal Reserve has this grand building that you see pictures of, you've probably been to. In the 20s and early 30s, they were in a room in the treasury, a few people. They were part of the treasury. In 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.

39:04It's new, it's experimental. And there are 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, they don't see that that's why inflation is down, because you have central bank independence. But it's political. It doesn't have to be. It's not something 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?

39:46Well, 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 the 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.

40:29I 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 other kinds of controls. We're going to see things like 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.

41:14It 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, it's 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 Fed independence comes later.

41:57The Fed does not like this stuff, but that's sort of something that comes further down the road. Okay. So let's say now inflation climbs, jobs are strong, politicians don't want rates higher what will the fed do no i think i think if left to its own devices it will raise interest rates yeah yeah sure but i mean about it but i think in what form will the pressure come well i mean it's it's it's the the immediate pressure if jobs are strong it's nevertheless the case that there are people who lose by having interest rates high. I talk to young people and tell them, you're earning a lot more than I did at your age.

42:46And they say, yeah, but look what a house costs. Look at how high interest rates are. People who are buying cars, people care about interest rates a lot. So, no, but 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, oh, 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.

43:26So 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 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 wouldn't. The Fed listens to everybody. Business sentiment is important. Financial market sentiment, political sentiment, consumer sentiment.

44:13They even listen a little bit to economists like me. but you know it's not 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 but 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. 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.

44:57They're very valuable, but it's wrong. And actually, a survey of the American Economic Association just a couple of years ago showed incredible naivete 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, 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.

45:43And 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 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 a very thin pretext for having the ECB intervene by saying, you're not worrying about the business risks coming from the environment enough.

46:38We'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. Talking about what central banks should or shouldn't do, should they publish forward guidance curves for interest rates? I think that's been overdone. I think the whole thing that came under another friend of mine, Ben Bernanke, who is 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.

47:19Here's everything we think we're going to do. It got overdone. And the problem is markets don't believe it. And then you get to a year later and the feds 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 tied are they how tied are there by their own forecast well they're not completely tied but it's awkward you know but was it what was that the reason why the why the ecb was slow to increase rates for instance, you think?

47:59Well, 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?

48:46That was a central bank mistake. I mean, 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.

49:05Moving on to debt. Is the current level of U.S. debt sustainable? 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 Thiel, actually Gary Kasparov at one time.

49:55And I've always thought 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's 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 be needing to make adjustments. I don't think politicians have prepared people to make the adjustments. So what I see happening eventually, and it'll happen together with a big shock, like we discussed, pandemic.

50:40We're going to have 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. Fool me once, shame on you, et cetera. So 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 raised taxes or lower spending. I mean, you have to do something to do with adjusting what you're spending.

51:28The U.S. is running a, I think it's a 7 % of GDP deficit this year. I mean, 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't. I'm not about what you should adjust. I'm not about the size of government. That's a separate question. But some kind of adjustments will need to be made. And one of the things that's really puzzled me throughout all this is that particularly on the left, they just want to make debt really big.

52:13That'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 that 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 soars, doesn't cost anything.

52:50And it soars 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 a debt level where investors suddenly will demand a sharply higher coupon? No, but I don't think in the case of the United States that happens because 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 Europe, but they didn't control it in heaven very suddenly.

53:35I think in the case of the United States, it's more, you'll see it in the interest rate, but probably not all at once. It's gone up after people 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 nervous 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. Hmm, we didn't budget for that. And that's just an example.

54:16And 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. Why do you say that? 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 U.S. defense budget, which is like 8 percent of GDP towards the end of the Cold War is three and a half percent of GDP now. I think it will go up again, regardless of Harris or Trump winning. but most of the foreign policy actors I talked to think the U.S. does not have the capacity to project power in two regions at once, much less three.

55:08And 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. Yeah. Do you see a scenario where the U.S. 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, it would be total dysfunction to do that. It would be so stupid because we can print money. We don't need to default on our treasury bonds. Can you restructure them? And can you restructure them into longer duration obligations?

55:56That's not going to happen. What already happened after the financial crisis was we put in all these restrictions to make the banks 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 U.S. has a lot of cars. And look at Japan. Japan's debt's very high. Their growth's been terrible, by the way, but their debt's very high. They have a lot of financial repression in Japan and they haven't had growth. But if you're printing one of the big currencies and you have a lot of cards you can play.

56:38So looking for something, a sudden turn, I think, you know, not where it's going. Of course, the real, the 10-year inflation index treasury, when Larry Summers did a secular stagnation speech, was average zero over those 10 years. I've got to minus one. Now it's around two. You know, that'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 it's certainly one doesn't really feel 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.

57:36The unwillingness to confront debt, concerns about the independence of the central bank, And, 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 your 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? Well, actually, you know, uncannily so. I mean, if you look at we gave that, by the way, we were looking at private financial crises and not government debt crises and what we're talking about.

58:21And I think what you're talking about. But, you know, if you look at how much unemployment went up on average in the U.S., how long it lasted, how much 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.

59:05And now the debate has certainly changed around financial crises. Why 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 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. 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 cripple some of the responses that Europe needs to invest more in infrastructure, to improve education, on occasion to do stimulus when there's a transaction.

1:00:06I would say, I mean, I wouldn't want to overstate the weight. It's very hard to parse that. But if you look at 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 it depends on how you spend the money, obviously. I mean, that's not the be all and end all. of macro policy, care about education, investment, you know, helping with smoothing over recessions.

1:00:50But the people who 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 what. And that was nutty and unfortunately became almost a religion in some circles. I think if you add up all the government debt across the world, according to IMF, where you were the chief economist for some time, it's$100 trillion, right? So what's going to happen here, given what you are seeing now, deglobalization, tariffs, central bank independence, all the geopolitical issues we see?

1:01:42Just 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 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 this debate around debt took place when there was this zealous belief that interest rates would stay zero.

1:02:26And so why ever think about it? They're not. 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. You know, the next time there's a big crisis in Europe with these kinds of interest rates, maybe 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.

1:03:04so it wasn't very hard to persuade the Germans to do it. Now they're not.

1:03:14Can 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? 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 years. Back when I did the debate with Peter Thiel and Gary Kasparov just over a decade ago, they were arguing this idea there wouldn't be growth again.

1:04:15And 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 potentially chaotic change that could happen with AI. We obviously see it in warfare, but we may see it in the workplace as well. We are just seeing a dramatic 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 totally democratized the way people around the firm here code and automate and it's just unbelievable.

1:05:03There are many firms like yours so that's really interesting but it's creating efficiencies, it's doing a lot of good things. Some people like Vinod Kostler, 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, 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.

1:05:51because 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. Do you think the high valuations in AI-related companies and a potential deflation here could trigger a new financial crisis?

1:06:32Well, a lot of financial crises have come because there's a new technology and everybody gets all excited about it. The steam engines, railroads, airplanes, you name it. it. Often there's a new technology. Everybody thinks it's amazing. And it's hard to evaluate. I mean, it's 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, you know, sudden valuation changes, collapses. I, you know, hesitate to say that I don't see a financial crisis around the corner. But I don't, right now, Now there's an awful lot of regulation, which makes it more difficult.

1:07:20I 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 for some, 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 an 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.

1:08:07I think to some extent, you know, though I'm still 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 I've sort of discussed over our time, And there are 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 is going to fall. We live in a dollar dominant world.

1:08:49The dollar is going to stay first, but gradually its place is going to come down. Well, Ken, it's been amazing tapping into your insights and visions. So a big thank you for spending time with us. and very much look forward to keeping in touch. And I'm just so happy I don't have to face you on the chessboard. You do fine. It's been many decades, but I look forward to speaking to you again soon. Very good. Thanks a million. So long. Bye.