Larry Summers on the Fed, Argentina Elections, Hinton on AI, Trump’s H-1B Fee

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1:27This is Wall Street Week. I'm David Weston bringing you stories of capitalism. President Millet scored a big victory in Argentine elections on Sunday. What does that mean for his economy and for the U.S. given its support? And President Trump's charging$100 ,000 for an H-1B visa may put some money into the U.S. Treasury. But what does it mean for innovation in a tech industry that depends on highly skilled minds from abroad? Plus, many of those highly skilled minds are focused on developing artificial intelligence models. We sit down with Nobel laureate Jeffrey Hinton for an update on his story about where AI is taking us and whether he's as worried about the possibilities as he told us a year ago.

2:11But we start with the big story for the markets this week, the Federal Reserve's latest rate decision. Our special contributor, Larry Summers of Harvard, is here with his take. Larry, we heard from the Federal Reserve this week, and they cut again, second time in a row. Were you surprised at how far Chair Powell went in saying, don't expect it in December? I was slightly surprised, but much more importantly, I was glad. This was the right thing to do. Inflation is much further from its reasonable target than unemployment is. The Fed can have much more of a durable impact on inflation than it can on unemployment.

2:54Given deficits, given AI spending, we're probably at or below the neutral rate of interest. there was no reason to be committed into further rate cutting in this environment. So Chair Powell's signal to return to data dependence, to agnosticism about what was going to happen next, that was exactly the right thing to do. Yes, there are risks of a slowdown, but if we get a slowdown and the Fed does a 50 basis point cut six weeks later, that is not going to be important. But if the Fed loses its credibility around inflation at a moment of massive deficits, massive political pressure from the administration, substantial international uncertainties, evidence of higher inflation expectations, and it's been a long time since inflation was near 2%, in the face of all of that, this was really the right thing to do.

3:59The Fed may be data dependent, but it doesn't get the data that it once did out of the federal government. How much of a disadvantage is that for the Fed right now in figuring out where we are, particularly when it comes to inflation? It's a disadvantage, but there are now so many indicators, so many real-time data sets, things like the Million Price Project at MIT, all sorts of sensitive indicators that are being followed by people in the markets on an almost weekly basis, that this is unfortunate and it's not what a serious government country does to have such a long slowdown. But I don't think it's an immense problem in the grand scheme of things.

4:45It's certainly a much smaller problem than politicization. It's a much smaller problem than dealing with budget deficits. This is not the major challenge facing the Fed. Chair Powell in the news conference talked certainly about inflation. He also talked about the role of tariffs. And at one point he said, look, if you take tariffs, the effect of tariffs, out of the numbers, we're actually not that far away from our 2 % goal. If that's right, which way does that cut? What do we do with tariffs, incorporating that into monetary policy? Well, we're not that far away from 2%. After five years of being above 2%, isn't that great a place to be, even if you accept that that's true.

5:33You can always take some things out of the numbers and then say we're near normal. That kind of argument reminds me of what was Chair Powell's darkest moment in what I think has been a really very distinguished term of service, which was the transitory inflation idea in 2021. Yes, maybe it's true that if you take out tariffs, the numbers will look good. But because people are spending more money on tariffed goods, they're spending less money on other goods whose price is lower, and that should be taken out as well. So I don't think cherry picking the components that have risen is a particularly good way of doing the analysis.

6:25I also think it's not clear what's going to feed through into people's expectations of inflation. One thing that was different about this Fed decision were the dissents. I mean, we went for a long time with no dissents. Last meeting, we had some dissents saying we should cut more. This time, we had them both ways. Don't cut it all and cut more. Is there a breakdown in the consensus on the Fed, or is it just a more confusing picture we're seeing? I think it reflects two things. It reflects the confusion of the picture. And I think that the dissent from Kansas City in favor of raising rates reflects, or not cutting rates, reflects what is the genuine argument among serious economists in this moment.

7:15The dissent from Governor Mirren reflects the bizarre spectacle of a government official, part of an administration that's at war with the Fed in its rhetoric, putting somebody on the Fed on a temporary basis while they're on their leave from their other Senate-confirmed job. I think that that's not to be taken seriously as anything but a politically aberrant moment. The Fed also said that as of December 1, they'd stop the roll-off of the balance sheet. Is that reflecting a real concern about liquidity? Did you expect them to keep the balance sheet this large? They signaled that this kind of thing was going to happen.

8:13I don't think particularly that the precise size of the Fed balance sheet in an era where we're paying interest on reserves is really that important a variable. In an earlier era, when the other side of the balance sheet was money that paid zero interest, the era of monetarism, you could get very excited by the size of the Fed balance sheet. But I don't find it that exciting a variable to worry about its precise size. I do think it's important for the country as a whole to be terming out its debt more than we have. And from that point of view, the Fed reducing the size of its balance sheet is probably a good thing because it means a little less short-term obligation of the federal government and a little more long-term obligation.

9:15Shortly after we had the Fed meeting, we also had President Trump meet with President Xi Jinping of China over in South Korea. And there were a lot of things announced. President Trump said on a scale of 1 to 10, it was a 12. But there seemed to be a consensus that what we've done is basically just go back to where we were before. And this is going to be an ongoing period of negotiation. How significant in terms of the economy is what happened over in South Korea? Look, I think the most important thing is what didn't happen. This situation didn't spiral out of control into massive confrontation and economic conflict.

9:53And it was managed in a way that avoided what potentially could have been very unfortunate and destabilizing outcomes. And that's the good news. And I think it genuinely is good news. I am glad for farmers that they are going to sell more soybeans in China. But ultimately, when one judges the prosperity of the United States in this period or the wisdom of economic policy in this period, it is not going to be about the level of soybean sales to China. So we're going to have to see what happens. The really big issues involve technology, involve competition in artificial intelligence. And it doesn't look to me like on the read we have so far that those have evolved a lot.

10:53But give credit where credit is due. I think there's a good chance that we elicited some real cooperation on fentanyl, which is not so much an economic issue, but is a hugely profound social issue. and give credit where credit is due, we're managing the situation towards the avoidance of what could otherwise be very substantial turbulence. But this is a book that's got many chapters, and we are still in the early chapters. Larry, talk about that technology issue that you mentioned, and particularly when it comes to AI. One of the things that apparently was not discussed were some of the advanced microchips from NVIDIA.

11:42I mean, you are both a macroeconomist and also sit on the board of OpenAI, so you have a vantage point in this. How do you see the issue about export controls with respect to advanced microchips between the United States and China? On the one hand, there are national defense issues. On the other hand, we do want to have sort of a development of this new technology. I think it's a very difficult set of issues, and I don't know what the right answers are. I'm pretty sure that the right thing to do is to make judgments based on what will protect American national security now and in the future. And so the approach that President Trump took a couple months ago of saying he would relax the export controls, but only if the company involved would share some of the revenue with the federal government, did not strike me as consistent with our traditions.

12:38it struck me as more pointing towards a kind of deals capitalism that is more characteristic, frankly, of lesser nations than ours, rather than a more rules-based capitalism. Coming up, a victory for President Milley of Argentina and for President Trump in the United States. What lies ahead for both?

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15:04President Miele's historic victory on Sunday in Argentine elections means he has a stronger position in his Congress and another opportunity to administer his medicine seeking economic health for a country that has been struggling for a long time. Hans Humes, CEO of Greylock Capital, is a longtime investor in Argentina. I think the entire country understands what has held them back for decades now. and they're willing to take a certain amount of personal pain. Now we have to see how this transition goes and what the new messaging will come if Peronism is able to prevail in October. But in the end, Peronism, the populist legacy of Juan Perón, did not prevail, at least not last Sunday.

15:55Los Argentinos le dijeron, basta el populismo, populismo nunca más. I think right now we've made a lot of money based on that election because the bonds have gone up. Their whole debt rating has gone up. You know, that election made a lot of money for the United States. What does Milley's latest victory mean for the country and for investors like Humes? This is how Humes saw the issues brought on by Milley's reforms before the midterm elections. In general, at the beginning of a pro-market president, you're going to have a lot of enthusiasm. Unfortunately, depending on how this one goes, people might start sensing a pattern.

16:38After the burst of enthusiasm and the rally in markets, that something happens where they run into some social resistance or whatever. The feedback I got from sort of my lower middle class friends who are Argentine was many of their friends who are really enthusiastic for change started looking at this and saying, oh, this is the same thing we normally have to do. They either give up or they start turning away from Malay. And they put up with a lot of pain. Runaway inflation has been a burden for businesses as well. Businesses like the textile manufacturer that David Kim runs in Buenos Aires. Inflation is a game we really know how to deal with because inflation in Argentina started in I think 1970 or something like that.

17:32And we've had inflation, double digit inflation for many years. It is very difficult because you need to calculate the cost every month and sometimes you have to, when inflation is very high, you have to increase the prices maybe once or there has been some times when they have to make increases more than one time a month. Everyone that comes to Argentina and we explain all these crises and what happens politically and economically and the taxes and the new regulations, they say we are crazy to stay here. We are used to this. We will be here working in the textile business for many, many years.

18:23I think the business owners in Argentina deserve a medal because it's a very challenging country. It wasn't just President Milley who had a lot at stake in the Argentine elections last weekend. President Trump had his Secretary of the Treasury, Scott Besant, establish a$20 billion swap line for the country and spend something over$1 billion in the currency markets to support the peso. Fabio Natalucci became CEO of the Anderson Institute for Finance and Economics after serving at the IMF as Deputy Director of the Monetary and Capital Markets Department. At this point, there are three plans that have been discussed.

19:07One has been a swap line of about$20 billion established by the Treasury with the Argentina Central Bank. There's been reports in the press of FX intervention, so outright purchases of pesos and sales of dollars. And then there is a discussion of another about$20 billion that Treasury seems to be working on with the private sector, presumably to provide some more longer-term funding. That's what's in the press at this point. How does a swap line work? You can use the Fed as an example here. During the financial crisis, they established, or during COVID, they established a swap line with other central banks.

19:46The way it works is the Federal Reserve vis -à-vis Central Bank or another country, they swap, say, dollars for the currency of the Central Bank at a specified exchange rate of some date. And those swap lines can go from one day to, say, three months maturity. And then in maturity, they swap back the Fed received dollars and provide back the exchange of the foreign currency at the same exchange rate. The only report I've seen in the press has been outright purchases. outright purchases by treasury that's a different exercise essentially they go in the market they sell dollar they buy Argentinian pesos in this case then at this point you own the Argentinian pesos so you are completely facing the risk of devaluation of the pesos in terms of our investment traditionally those there are a few example in the past where some of this intervention has been done traditionally with advanced economies so for example in 1998 there were purchases of yen by the US authorities via the Federal Reserve Bank of New York traditionally in September 2000 there was a coordinated effort by the Federal Reserve and a few other advanced economy central bank to purchase euros and then lastly in 2011 March 2011 during the earthquake in Japan when the US authorities, they sold yen.

21:11Those are all advanced economies' central bank. In the case of the euro, this was a coordinated effort among different central banks to intervene in the market. President Trump did say that he thinks perhaps the US made a lot of money. I guess it is conceivable it could have made a fair amount of money, depending on when it got in and when it got out. Yes. So if they, for example, got in and purchased right before the election, and then let's say that the appreciation of the pesos post-election was like eight, eight and a half percent. Again, if you apply to the one billion, that would be 80 million dollars that you made right there.

21:50Now, again, that requires to crystallize those gains, which means you go back into the market and sell the pesos. If you hold on those pesos for two days, where you are this morning, that was a paper gain because the exchange rate is back to where it was essentially pre-election. So if you bought pesos and you hold on to them, you went from gains back to essentially flat at this point. This is on the outright exchange rate purchases. The swap line, again, because the exchange rate is fixed, there is no gain or loss. Whether the United States made money or didn't, that was not apparently the purpose for the swap line or the currency acquisition.

22:27It was rather to support President Millet and the government in Argentina. Is it likely it could have supported i've seen for example speculation it relieves some pressure for a possible devaluation of the peso right so i mean maybe we can take a step back and trying to start from where the government argentina was trying to achieve so as soon as president mille went into power they went into this shock therapy of cutting fiscal spending quite aggressively and then a large devaluation of the nominal exchange rate and then after that they essentially established a ban the crawling band as he said so the depreciation of the pesos was very controlled and and very slow if you want what they of course in last year the economy went into a recession inflation was very high double not of 200 % at least quoting IMF numbers that were just released at the October annual meetings then the forecast was for this year to the economy to sharply rebound in positive growth territory and inflation to come down the challenge with this intervention in the spot market and the outright purchases is unless you manage to address the fundamental forces they are driving the exchange rate those tend to be very short relief and historically that's how they have been and so historically the people often talk about it Tablida in Chile and Argentina those were exchange rate based stabilization plan the evaluation then slow the evaluation of the currency in trying to bring inflation down and the central Bank at some point historically has run out of foreign currency.

24:00That was the driving and fundamental forces behind that and what may have pushed the US to intervene because the Central Bank presumably, Central Bank of Argentina was running out of dollars. Now the issue, the question that people have been asked is like why the US intervening? How systemic is Argentina from a financial stability perspective? Argentina, the US imports trade with Argentina, it's a relatively small number. And so from a trade perspective, there are other countries in Latin America that are much larger trade partners. The other aspect that makes this different than previous rescue package, that was a loan from the US Treasury, was not outright effects intervention, the way we're discussing today, but also was combined with IMF, World Bank and other multilateral developed banks intervention package.

24:50So the 20 billion dollar of the US plus what was coming from the multi-dollar development banks went north of 40 billion dollars. So it was not just one country, not just the US for obvious interest to intervene, it was the broader financial community that intervened. And that was a very successful package. Mexico managed to repay very quickly, it's already in 1997, so two years after that, was able to start repaying and also having access back to the capital market. So the crucial question here is going to be whether the intervention in the forms we discussed by the U.S. authorities will be enough to revert some of these fundamental forces that were pushing the exchange rate of Argentina pesos to depreciate.

25:36And again, from what we've seen this morning, the exchange rate seems to be almost back to where it was pre-election day. At least for now, it looks like President Milley will have the opportunity to continue his economic policies, policies that businessmen like David Kim hope will bring both stable prices and growth. I think the president is doing a great job with inflation. Inflation has come down from maybe 150 percent a year to 40 percent. That's very good for everyone. but there are other issues that maybe you don't know about, like the interest rates of banks. It's much higher than inflation.

26:23I hope there is a change here. I hope the politicians take into account that everyone is facing a difficult situation right now. The lowering of the inflation is great, but I think we need much more than that, Not only for textiles, but for every kind of industrial company. Up next, a year after we first talked with him, we returned to Professor Jeffrey Hinton to see whether his experience as a Nobel laureate has given him a different perspective on the risk that the artificial intelligence he helped create will destroy us all in the end.

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28:10This is a story about preparing for the worst. Maybe the worst thing any of us can imagine. A year ago, we talked with computer scientist Jeffrey Hinton just days after he won the Nobel Prize for his work in machine learning. The so-called godfather of AI has been busy since then, not developing artificial intelligence, but warning people about it. He says we've all become more aware of the risks, but knowing about them isn't enough. We need to act. Suppose that some telescope had seen an alien invasion fleet that was going to get here in about 10 years. We would be scared and we would be doing stuff about it.

28:50Well, that's what we have. We're constructing these aliens, but they're going to get here in about 10 years and they're going to be smarter than us. We should be thinking very, very hard, how are we going to coexist with these things? Coexistence and control, two things that Jeffrey Hinton himself has been thinking very hard about. As one of the computer scientists who helped make modern AI possible, he's uniquely well-suited to consider its future and who, if anyone, can shape it. Are there companies who are doing real work on safety? I mean, we hear about Anthropic, we hear about DeepMind. Are they helping on the safety front?

29:28Yes, I think both Dario Modi and Demis Osabis and also Jeff Dean, they all take safety fairly seriously. Obviously, they're involved in a big commercial competition too, so it's difficult. But they all understand the existential threat that when AI gets super intelligent, it might just replace us. So they worry about it a bit. I think that some companies are less responsible than others. So, for example, I think Meta isn't particularly responsible. OpenAI was founded to be responsible about this, but it gets less responsible every day, and their best safety researchers are leaving or have left.

30:07Yeah, I think Anthropic and Google are somewhat concerned with safety, and the other companies less so. As I talk to some of the people at some of the companies you're talking about and raise the question of safety, I often am told, don't worry your pretty little head about it. We have great computer scientists who are on top of this. We're far off from any real danger, and our computer scientists will know soon enough. So we're much more concerned about the race to become dominant. Yes, that's the problem. They are much more concerned about the race. They should be much more concerned about whether humanity will survive it.

30:43Also, whether society will survive it if you get massive unemployment. There's one piece of good news, which is all the different countries are aligned in not wanting AI to take over from people. They're anti-aligned for things like cyber attacks or autonomous weapons. They're somewhat aligned for creating viruses. None of them really wants other countries to create viruses. On AI taking over, they will collaborate because nobody wants that. The Chinese Communist Party doesn't want AI to take over. Trump doesn't want AI to take over. They can collaborate on that. That leaves the question of how do we prevent it taking over?