Fed Can Start Shrinking Its Balance Sheet, Esther George Says

summer vacation continues whereabouts unknown. Mr Keane, We'll see him back here on Tuesday of next week. Central bank policy makers have made their pilgrimage to northwestern Wyoming for the Kansas City feds Annual Economic Policies and Post. He will hear from the host of that event. Just a little later this hour, our colleague Michael McKee sits down with Esther George for a wide ranging conversation on monetary policy.

So Francing Lack which joins me in London, and Ron Temple with me here in on our Bloomberg eleven three oh studios in New York. We just got off television with him. Had some great conversations, and let's circle back to monetary policy if we could. I started off on TV asking you what you're gonna be listening for from from Jackson Hole. Uh. Do you expect the conversation here largely to center on inflation? This is something that each of these banks is worrying about in its own specific way.

I do think there will be quite a bit of conversation around inflation. I do think obviously, Janet yell and speech I believe is going to be about financial stability. Um so, the ultimate crux of the discussion should be around inflation and should be understanding what is structurally changed

versus cyclical um so. As a you know, I think one of the things we've done a lot of work here on is understanding the Phillips curve e either relationship between unemployment wage growth, Understanding why even though unemployment has declined so far that wage growth is not accelerated more. It's a phenomenon across the U S, Germany and Japan. So I think there'll be a lot of conversation around topics like that and transitory factors affecting inflation. Hi, Ron,

it's ranting from London. Do you believe that we still need to look at the Phillips curve or is it broken? Will it come back? It's hard to answer that with a high degree of confidence. In my view right now is that we should rely on the Phillips curve, and my base case assumption in the next one to two years is that it will reassert itself. Now we've done some interesting analysis here, by the way, Typically the Phillips curves looked at at the U three i e. The

headline unemployment rate relative to wage growth. But if you use the U six, which is what people describe as the underemployment rate i e. People who are working part time but wish they could work full time, where they're discouraged workers, Um, there's actually a much higher correlation between that U six and the wage growth. And I do think as the U six or the underemployment rate continues to decline, we should see the Phillips curve reassert itself

in the US over the next couple of years. Yeah. I like that U three U six. I think it was a Thomas chart of the year a couple of weeks ago. You look, if you look at Jackson Hall and we had you on TV and you basically believe that the policy mistake would come from the FED or anyone else was hiking too soon because they need to wait, in your eyes, for inflation to really come through. But where will the biggest policy mistake come from? Is it b O J? Is it Fed? Is it B O

E or E C D? I mean that stuff it does seem Let's let's talk about probability versus severity. So in terms of the probability the highest probability of mistake, I would have to say it still seems to be the FED, because the FED is taking a very hawkish line in terms of their commentary that they make in the speeches. UM, it does seem that there's been an extreme level of discomfort with the UM the unprecedented monetary policy measures they had to take during the crisis, and

there's an eagerness to get out of those now. I think that would be the FED would be well advised to pull back a bit and allow their policies to have a chance to succeed. I would argue, frankly, they could have been more aggressive than they were. UM. In terms of the severity of mistake, I think if the B O J were to surprise markets by starting normalized early.

That would be an incredibly damaging UH factor. I also note, obviously the news you've reported this morning about business encouraging a BEY to raise taxes, I think would be a major mistake. In Japan, we we finally got six quarters of GDP growth. Let's not nip this recovery in the bud front temple with us SEES the co had of

multi asset investment Lizard Asset Management. Just on the broader subject of monetary policy and how that dovetails with with the markets, to what degree is that the biggest influencer of where markets are right now? You know that that's that's one of the good news items in the last stage six to nine months, actually nine to twelve months, is that monetary policy has receded a bit in terms

of the background. If I look back over the last several years, there are periods of time where it felt like monetary policy was the singular focus of markets, and I do think, you know, one one piece of evidence of that is correlations within the market and cross markets have actually declined quite a bit. Um so I think that's been quite positive, especially for firms like ourselves that

are really focused on security. Selection is an opportunity to see differentiation between companies that win and lose based on the economy, not just what the FED or the C B, R, B O J do. So I think it has received somewhat, but it's still very important in that it could undermine the economic recovery or that synchronized global growth we see

right now. A friend and I talked to Chris sim Is from Princeton yesterday, the Nobel Laureate, about the handoff between monetary policy to fiscal policy and how that's been fumbled a little bit here in the US. I think you could say, how long do you do you give that to work? In other words, we've heard the clarion call for so long that there needs to be that shift take place here in the US, and it seemed like there was the opportunity for it to happen, at

least in the immediate aftermath of the presidential election. Uh do you have you if you have you given up on that happening yet? Well? I mean to be fair, I think that the real disappointment is that fiscal policy should should have been much more aggressive back in two thousand and eight and two thousand nine. I mean, that's that's when we were basically falling into the abyss. We did actually have a seven eighty seven billion dollar fiscal stimulus package in the US, but it's easy to forget

that only a small part of that. I believe something on the order of eighty billion dollars was infrastructure. UM I could argue you should have had five hundred billion to eight hundred billions of infrastructure alone. UM So I do think, you know that was the time for a major fiscal stimulus. At this point in the cycle, I

think fiscal stimulus is less necessary. But what we do still need is investment to increase the long term productivity of this economy through infrastructure, through job training for people who have been displaced by trade. Um and basically we also need tax reform to basically give businesses confidence and how they should invest. What's pricing at the moment run, if anything, what's pressing a price priced in? Price priced in? I think very little is priced in In In terms of

policy change. I think the markets have basically reached the conclusion that you know that we discussed some good ideas, some frankly bad ideas, but very few of those ideas will be implemented because there's not the organization in the White House um and collaboration between the White House and

the Congress to get things done right. So if you do see, for example, some tax reform because the Trump administration says they need to do it a sp to kind of get away from all the controversies, that would play it on equities, but also affect treasuries or not, it should affect both. I mean, let this be very clear to in terms of semantics. I mean early on we talked in I actually just use the term tax reform. Typically,

tax reform is intended to mean revenue neutral. I EU some tax rates, streamline the tax code, but find ways to replace that revenue. I think the probability of that is less than five percent at this point. I think what we're really talking about right now is tax cuts, which will increase the deficit and should have a a long term arguable depending on the structure of the tax cuts, a negative implication for bond prices and e higher yields because of the credit quality of the sovereign um. So

we'll see how that plays out. But even if President Trump does come out and say I want tax cuts right now, leadership is not a tweet. Leadership is actually delineating what kind of tax cuts, what form, and then actually engaging with Congress effectively on a sustained basis to make sure it happens. And so far that's really been missing in the policy action. I'm struck around reading your your research, how optimistic you are about the global economy generally,

Given that, where do you see the most opportunity? Now, I mean it's it's it's it's I think emerging markets again still have the best opportunity, partly because they are basically just coming off the bottom in terms of commodity price stabilization and worries around FED policy. And the valuations importantly are although above historical levels, not as far above

as say Europe and the US. Just give you a sense a magnitude relative for the Ford median, the median forward Pe over the last ten years, emerging markets is one and a half pe multiples rich. Europe is about two points seven rich. In the US is three and a half multiples rich. So you are paying a premium to history, but not as much, and earnings arguably are

still depressed in these countries. So I like the U S and I like European equities, but I think I'm probably offers a better, say, three year view than those developed economies. Quick bite, If I could get you to talk about China a little bit as well. We've been following news about the country trying to reduce its capital outflows. How does that how does that change the level of

opportunity there for you? Ye, China's obviously, I think for any foreign or visiting China and investigating China, it is more opaque than these, say, European, US Japanese economies. I do think China has done a good job of stimulating growth in the short term and early two thousand and sixteen with credit and fiscal stimulus UM. But I do think the biggest challenge facing China is the Everett humulating

pile of corporate debt um. We've seen corporate debt go from a hundred thirty eight percent of GDP in two thousand eleven in two thousand and sixteen. That basically implies a hundred eighteen percent increase in corporate debt in four years, and so China needs to basically wean itself from the heroine of debt and basically continue rebalancing economy now. To be fair to them, they've done a good job of moving more to services. But but it's gonna be a challenge.

And as it relates to capital flows, I think the biggest issue in capital flows is controlling the boom bus cycle in real estate. Um, every time we have a boom in real estate and proceeding follows to a bust, we see capital flows increase. And I think the Chinese authorities have recognized that. Ron, Thank you so much, Fron Temple there what a way with words? He is Lazar

Asset Management Managing Director. In the meantime, the focus of course a turn inning turning on Jackson Hole and the central bankers meeting there, the dollar strengthening, stocks in Europe advancing David Garry here in York, Francy in London, A frenzy local in London. Aside, now four weeks into the shift, begin to watch things like that. I think it's greatly in London. Will to make the change. David Washington, there you go, perfect, Uh want to flag some news here

out of Venezuela. Washington in Venezuela, Washington levied some sanctions on individuals related to Venezuela they're now reportedly considering blocking trades of Venezuela and held dollar denominated notes sold by the government and the state run oil company. Here to talk about this with us as Shannon O'Neill, she's a senior fellow at the Council on Foreign Relations, And as we get into this, I'm curious, this is a country that has not defaulted on its debt despite the worsening

political and economic situation there. There seems to be a a real sense of of strength or dedication here to not defaulting. How likely is that to continue? Do you think? Well, we have seen that they have chosen to pay their interest and some principle over paying for basic food, in medicine and the like, especially as oil prices will come

down there's less cash flowing around Venezuela. They've chosen to pay creditors and not feed their people, and they will continue to do that, I think, as long as they can.

The question is, they've been running down their reserves, they've been selling off assets, they've been trying to get money from Russia and China other places, and they're coming to the point where there's really nowhere else to go for money, and particularly if the United States would put sanctions on and make it harder for them in financial markets, are harder for them to sell their oil around the world. It would be very difficult to continue servicing this debt.

I ask you about rhetoric. I spent some time in Bolivia in the early two thousands, and strong rhetoric from the US had a very positive effect, as I heard it, among the rhetoric that you would hear domestically, that that could be spun kind of countintuitively in a positive way in that country. Here we see strengthened, harsher rhetoric from the US with regard to Venezuela. We're hearing the word dictatorship and dictator used now regularly by senior administration officials.

What's the effect of that been here on the situation in Venezuela domestically, Well, it looks like it may be providing Maduro, the president of Venezuela, a bit of a lifeline. Um he has and those before him, have created, all by themselves, a huge humanitarian and financial and economic crisis that's happening, real catastrophe that is all of their own making. But when the United States steps in and with this kind of rhetoric or perhaps even moving further into sanctions

and the like. It gives them an excuse, it gives them an outside enemy. And while we in the United States tend to look to the president in the future, Latin American countries really focus often on the past, on history and the what they see is sort of imperials in the United States intervening in the region. So there is this reflex action against this tough talk. All right,

what's the best thing to do here? Shouton I mean, you see that there's a possible but and also in certain trades, but then that would also heard off or cut off a lifeline to, you know, a country which is heavily indebted. There is a real challenge for the United States. As much as they want to do something tough on Venezuela, as democracy ends there, as there's a crackdown on the opposition, it's hard to know what to do.

And really the most successful policies, I would say, would be ones that bring other Latin American nations in to condemn this regime. And there are many options out there. There are a lot of presidents who have stepped up, whether Medicio Macri and Argentina, Paninieto in Mexico, the President

Peru of Chile. Many of these see the end of democracy there as a huge problem for the region, so their allies there, but tough funeralateral actions in the United States will drive them away rather than bring them together. I mean, it seems that the President has not really ruled out a military option in Venezuela. What does that

mean for for the country. He did mention that that this Department of Defense walked back pretty quickly from what that might mean, um, And it's hard to imagine even what that would look like, um, some sort of military intervention there. I think one thing you might see is, particularly the humanitarian crisis deepens, you could imagine the United States government, in part the Department of Defense helping with some of that movement of people that are flooding today

already into Columbia, Brazil and other countries nearby. Just lastly, here in the minute we have left with you, let me ask you about the status of the NAFTA renegotiation efforts. We have the first round of those meetings here over the last week or so. What are you watching, what are you listening for? As they get underway? I gather they meet again on September the first for the next round.

They have decided a lightning round of renegotiations here and meetings to try to change nap TO to to update NAFTA. And so what I'm watching is do that continue? Do they really think they can end this by the end of the year or beginning of two thousand eighteen. If they stick to that schedule, then I wouldn't expect big changes to NAFTA, or the changes I would expect would be the ones that I have already been negotiated in TPP, the Trans Pacific Partnership. Great to speak here, Thanks for

thanks for coming in. Shannon O'Neil from the Council on Formulations who joined us here on Bloomberg Surveillance on Bloomberg Radio Bloomberg Television as well. You can check out her interview there on Bloomberg dot com or on the Bloomberg terminal. This is the forty one Economic Symposium for the Kansas City Fed here in Jackson Hall, and Ester George, the President of the Kansas City Fed, is the host. And you've been here for all No, not really, neither of IY.

This has changed significantly over the years the TV presence, the focus on it. Janet Yellen is speaking on Friday, Mario dragging speaking on Friday, Global Wall Street on the edge of their chairs, expecting them to make news. But that's not what this was designed to do. Know, the purpose of the conference is really to dig into issues that we think matter to central banking, matter to monetary policy,

and ultimately matter to the real economy. And so you want people on the program that are thoughtful about those issues, that can debate those issues, bring different perspectives to them. And that's really our goal every year is to try to have a relevant topic that will add to our understanding of these issues. Well, the relevant topic for people on Wall Street lately has been inflation. So let's talk

about that a little bit. You've long argued in favor of higher rates to head off inflation, and people have said Estra George is wrong because there's no inflation. What if we flip that argument on its head and say you've raised rates and there's no inflation, have you accomplished what you set out to do? So? And I think about inflation, Mike, I think about our mandate, which is price stability and relative to an economy that's growing at

two and is adding jobs. I think we're in a pretty good place, and we still have very accommodative monetary policy, So that tells me we should begin to, as we've indicated, gradually removing that accommodation as long as the outlook supports that we are moving in the right direction, and I think we are. So that suggests you are in favor of yet another rate move this year, as the dot plot would indicate. So that was my last forecast, and each time we put those together is a new opportunity

to look at the data. So I'll be looking at the data in the next few weeks as we get ready for the September meeting and see whether that still makes sense. Based on what I've seen today, I think there's still opportunity to do that, so by the end of the year, not necessarily in September. No, No, that's I don't pick a meeting, and I don't consider that rate path in those projections a commitment. So I think it is a general sense of where rates should go

well to what extent is inflation a lagging indicator. It's something FED officials have argued for a long time. In other words, is the Phillips curve broken or is nayru lower than it has been in the past. What's happened to inflation? Well, I don't know that I'm going to have a good answer for you there because many people are studying that very issue. The things I look at when I look at inflation, so goods, the price of

goods that's been falling. Maybe that's due to technology. There are a number of factors that I think may be pressing down. When you look at services, which is two thirds of the economy, you see that those rates are actually staying at two percent and higher. So in the context of the economy we have today, that's why I think you have to be careful getting to focus on a point estimate as opposed to the broader trends that

you see and the expectations that are out there. Well, speaking of expectations, with inflation not rising and you've had five months of disappointments and the CPI market expectations are falling, is that a problem for a FED that has always

said expectations are key to keeping prices stable. So I think you have to pay very careful attention to that, and I would include myself there but again you have to know what drives those expectations, and that's the challenge is constantly looking at what's going on in the economy, what might be reflected in those numbers, as opposed to overreacting to UH some specific point estimate that you see. You do have new forecasts for growth and inflation and

unemployment coming out in September. How have yours changed or have they changed at all as the economy has evolved? Well, in my own case, unemployment has come down faster than some of my projections. UM, inflation has stayed lower on the whole, I think over this period, and the economy did not take off, I think as many of us hoped it would, but it's been coming in at a

two pretty steady rate of growth. So this month marks consecutive month of growth in our economy, and I think it gives us a better sense as we look forward that that might be what we expect. Do you have any reason to mark up or mark down your growth forecast? So not at this point. I'm encouraged that the global economy UM is looking better and you see growth beginning to pick up. Um In terms of domestic policies that might have posed an upside uh to whether it's infrastructure spending,

tax reform, and other things. I've always taken a weight and see approach on that, and I'll continue to do that. The Open Market Committee has said that it still expects inflation to hit the two percent target, maybe not as soon as we thought. But are you ready to throw in the towel? I mean, at what point do you say this is not happening, there's something wrong with our models. Well, there may in fact be something wrong with the models. I don't know. I think that continues to be a

question that many economists are asking. But I also know that what we need to look to is the long run. So whether we hit on the nose um is less important to me than understanding how the economy is doing more generally, And I think today the price level has continued to grow, the rate of change has bounced around, and right now it continues to run below two. That doesn't concern me about the health of the economy. There then a lot of talk about financial stability. Jennet Yellen

is going to speak on it on Friday. With financial conditions easy, even though you've raised rates and stock prices continuing to rise, to new records. Is that a reason to continue raising interest rates? Do you have a concern arn about the level of asset prices? Well, I think the QUEUEI that was undertaken over the last ten years aimed at boosting asset values. So when you see that we've made four rate moves since December and financial conditions have eased, UH, that I think points to the idea

that we need to adjust the balance sheet. That's a tool we haven't had experience with, and so I think that's an important next step to be looking at that. I want to ask you about the balance sheet, but let me just quickly follow that and ask you if investors too complacent these days. I don't know. I think

you'll have to see where that comes out. But as I said, when you set conditions that have had easy monetary policy for a long time, the incentives to reach for yield UH, the committee signals that it will be gradual could feed into that, and UM, I watch those asset values carefully, but I'm not sure there's anything you can target specifically when it comes to setting policy. Right

the balance sheet taper. Wall Street is betting it's September that you're going to announce it any reason that they would be wrong from your point of view. Well, I've been favored of doing this for some time, and I think the estimates suggests that the economy is in a good place to begin doing that. So I'll look forward

to the discussion in September about that opportunity. Do you have any estimate of the impact on financial markets from that, particularly yields, and whether or not it will amount to a de facto tightening. Yeah, I've seen various estimates, and it's hard to know, again because we don't have experience doing this. You would expect, because of the duration of these assets, that as you begin to shrink that balance sheet. Um, I hope it does get reflected in the yield curve.

How sensitive will you be to market reactions to the tapering process. Well, I think we're always taking that into account. Um whether it alters the path of policy, I think is a broader discussion about what else we see going on. Do you think asset prices deflate as you shrink the balance sheet in the way that they inflated when you blew up the balance sheet. I don't know. I've heard various views on that too, And again I wish I had some experience to draw on here. UM. What I

know is the aim was to boost asset values. I think we've seen that. UM. Whether that ends up having a symmetric reaction on the other side, I think we have to wait and see. But I think again, the very gradual approach that's being taken there gives the committee time, UM, and it's given markets time to understand where that balance

sheet is headed. The one thing you haven't told investors is how big the balance sheet is ultimately going to be, and that will depend on what monetary policy system you end up using. Are you in favor of staying with the current system of interest on access, reserves and repos or would you go back to UH strictly setting a

FED funds target. Well, it's appealing to go back because we know how that looks, but we are where we are today and I think it makes sense to judge as we move forward how we see the economy unfold. What you don't know is you could get hit with a shock at any time. You'll have another set of decisions to make. So the ultimate operating framework is not something the Committee has um opined on yet. It's talked

about it UM. There's been analysis under way, but I think for now we have to use I O we are we have to use the overnight reverse repo tools as part of how we begin to normalize policy. As part of the reasoning for why you want to do this now and for why you want to continue raising rates, is it because you need some cushion, you need some tools should the economy turn down. Well, I think that would be UM obviously attractive when you think about the

next downturn. But I wouldn't say it's my primary motivation, because what you're trying to do is make sure that the economy is going to benefit in the ability to grow in a sustained fashion. So the motivation is where is unemployment, how is inflation performing? And do those suggests you need to begin to have interest rates reflect that? That's my motivation. Uh, whether it gives us all the ammunition we need at the time we next need to decide, that would be UM an added benefit. You know you

gotta run. But let me ask you just quickly about this conference. Uh. The theme is creating a dynamic economy. What would esther George do? What's the most important thing to do going forward to create a dynamic economy. Well, we've seen in our own economy and you see this around the world. Changes that are happening because of technology, because of demographics, many things, and some of those will

be talked here at this conference. What you want is sustainable growth that has broad effects, uh for the economies that you're in. And as the world changes because of some of these factors, um policies have to change, and that's really what we're after with this con and just try to bring more insight to where are those opportunities how might policymakers think about that going forwards. Finally, just

one last quick question. I know you can't incorporate what's happening in Washington into your forecast because nobody knows what's happening in Washington, But do you worry about a debt ceiling crisis? Well, we've had experience with this over the last few years, and we know it creates uncertainty as it did a few years ago. It can affect the real economy. But I'm hopeful that um OUR policymakers can come to terms with that and take actions that will

benefit the economy going forward. As I mentioned, Tim Plenty joins us now the former governor of the State of Minnesota, CEO and the financial services at round table. He's in our Bloomberg Studios in Washington, d C. And I want to sharp by just asking you to take stock at the last week plus, as we all have been doing. We certainly watched what unfolded in Charlottesville, Virginia, heard the rhetorics surrounding that, heard the response to it from politicians

including the President. Listened to President Trump as he spoke in Arizona the day before yesterday in Reno last night with a different sort of message. What's your what's your sense of where things stand politically in this country? Obviously your focus now on uh largely on policymaking in Washington, d C. How much has the politics distracted from the policy. What's a really good question, David, Good morning to you and to Francine. I always like to remind people that

policy follows politics, and politics reflects culture. And I don't mean by that ethnic culture, I mean political culture. So your question, I think is spot on to try to assess and analyze where we are in terms of political culture, because ultimately that leads to policy. I think obviously the country has divided. The country is in many ways anxious, and the events of the last few weeks with the president that you just chronicled through, each of those events

represents different things. Obviously, his speech to the veterans group was very different than his speech in Arizona, which of course was uh related in some ways to some of the tone and unfortunate content that he put out post Charlottesville.

And so I think it's it's a pause moment in Washington because of the August recess, but I think it's also a chance for people to step back and say, with the debt ceiling coming, with the prospect of tax reform coming, with the prospects of the president new chief of staff maybe having a positive influence on how the White House operates, perhaps this could be a moment where you could hope for some improvement coming into the fall. What could a group like yours do to encourage that um.

I spoke with Tim Phillips, the president of Americans for Prosperity a few weeks back, and he talked about his his interest here and getting the administration and lawmakers to focus on tax reform exclusively. He's trying to interface with lawmakers and the White House to make that happen. We hear about the intractability of this White House. Of course, John Kelly coming into change how things are run there. How much influence does a group like yours have on

the way things are running the Washington of today. Well, we don't influence things that I'm macro level, but I do think we can at least contribute directionally to the discussion by bringing information forward in a sense of urgency and accountability. So tax reform, I think, is a jobs bill. And all the politicians right and left always like to say, I'm for the working people, I'm for middle America. I want to get the economy moving in particularly I want

to grow good paying jobs. And so if you believe all of that, then it's not a big leap. Get to convince them that tax reform could help ignite the economy and get GDP hopefully moving from its anemic level to something better. Um, Tim, how do you do that? I mean, how do you have to get on who do you have to get on site actually to make sure that I guess the you know, we move away

from the controversy and actually get something done. Yeah. Really, it's it's the Republicans obviously control both the House and the Senate. So I don't want to say it's easy, because it obviously isn't. But they it's fully within their control if they use this process called reconciliation where they only need fifty one votes in the Senate, the Republicans, if they want to can pass with Republican votes only.

A tax bill and tax reform has been the political holy grail for much of the Republican Party for a generation, and so it is in alignment with what they've been asked to do, what they ran on. It's also good policy, by the way, so candidly, if you just look at it from a macro level perspective, it shouldn't be that hard. Of course it is, but but they should get this done. It shouldn't be that hard, but it looks pretty hard at the moment. So who is a president kind of

instrumental to this? Is there something that he can do and doesn't really Back to Charlottesville. I know some people in your party have asked for him to apologize. For example, I don't Charlottesville, of course in my view, and I think obviously for many people, the way that he handled that was disappointing, But I don't think that represents an impediment in the intermediate and longer term to getting tax reform done for the reasons I mentioned, and by the way,

that the President just needs to sign it. The Mitch McConnell and Paul Ryan and their teams in the Congress need to put it forward, and I don't think the President is going to get hung up on a lot of the details. Frankly, so if they put something on his desk that he can plausibly agree is tax reform and directionally helpful, there's a very high chance he's gonna

sign it. Um. So I don't I don't think he's even with the unfortunate approach that he took to Charlottesville and reaction to it, is an impediment to tax reform getting done. Uh. And by the way, in terms of the other impediments that I've always breaks down at this level,

everybody's for reducing the rates. Everybody's for cleaning up the exemptions, credits, deductions, and preferences until it comes to their exemption, credits, deduction, or preference, and then people head for the exits on an overall effort when their particular thing gets put on the chopping block. Should our listeners be disappointed that they haven't seen more meat on the bone when it comes

to tax reform. A few months back, we got that first one page document from the White House, really just you know, two hundred words bullet points of what the White House was interested in. We got something from the Big Six before lawmakers went on recess. It's still a page long, a bit more detail. We learned the border adjusted tax no longer on the table as they discuss

a taxi from going forward here. But I keep thinking of this document that we got from the Treasury Department on financial regulation visa via the banks, the first chapter we're told in in in other documents like it that are going to be very detailed, very focused on what the administration can do. Our listeners right to be disappointed that we haven't gotten documents like that on tax reform, on other issues that this White House, it said that wants to take a look at. Yeah, you know, it

is not the first ninety days. It is now almost September, So I suppose it's appropriate to say there should be some disappointment that it hasn't gone further and faster. But it's a once in a generation opportunity, so probably better to cut twice. Excuse me, cut once and measure twice.

And I think there's two basic or three basic forks in the road, but they include are they willing Are Republicans willing to disregard or discount the CBO score on how much red ink a bill is projected to create and say the CBO is wrong or the CBO is underestimating the growth potential? And then our conservatives willing to sign up for some red ink as part of a tax bill that remains to be seen. And now number two, how deeply are they willing to go on reform as

opposed to just lowering rates? And the reform part is in exchange for lowering rates? Are you willing to clean up all of the mind numbing complexity and all those exemptions, preferences and deductions that I mentioned earlier? That that from a conservative standpoint also represents in many cases allegations of chrony capitalism, that government's picking winners and losers through these niche uh provisions that benefit narrow interests as opposed to

just a broader approach to lowering rates. You are a Republican you're heading up this this business group representing financial services companies. Let me ask you about the issue bipartisanship in tax reform. There was a small olive branch in that statement I mentioned from the Big Six, these six leaders working on on tax reform, they'd like to see Democrats come to the table to work work with them or so they say, uh, we don't see that happening.

How do how do you make that happen? When you when you look back at when we did get comprehensive tax re form in the eighties, it was a bipartisan effort. Senator Bill brad came onto Bloomberg Television and told me that it was hard. It involved a lot of negotiation, a lot of losing what one thought that he deserved to get. How do we get back to that point where you've got Republicans and Democrats back at the table

talking about what is a signature issue here? That's very difficult to do, especially when the Republicans technically don't need the Democrats to pass it, and you have such polarization and silo mentalities in politics today. So I think the idea of going back to a Reagan and O'Neill and having these states men and states women come to the middle on something that's a political hot potato is probably unlikely.

You may be able to get a small number of Democrats to join the efforts, particularly Democrats who are up for re election in twenty eighteen and read states like Indiana or Wyoming or some places like that, if the bill is, you know, generally reasonable, but if it's an aggressive kind of pro growth republican bill, you may see it be totally partisan, and they won't they won't necessarily feel compelled to bring along Democrats because they don't have to.

But there was a wave of business leaders right stepping down from advising the president last week. Carli Kun for example, also saying he was no longer advising Mr Trump because of regulatory concerns. And we're hearing that this is because of the lack of tax reform and reform in general.

How do you answer that? If I understood Mr Icon's concerns, he was involved in a bunch of business deals where there was at least informal concerns that he was in a conflicted position and he didn't want the headache, so he just quit. So I don't I don't see that as an impediment or in any sort of road bump

to the discussion or progress on tax reform. Again, keep in mind for the Republican Party, if you're a Republican leader, you've run around this country for a decade or more saying if we ever get in charge, we're gonna do at least two things. We're gonna repeal and replace Obamacare.

Obviously they didn't do that yet. But the second thing, which is very important to the entire Republican Party and all the people who support it financially and otherwise, is they're going to fix and reform and streamline and improve the tax code so they can get the economy movement. David Guray in New York, Francy Lackaway in London. This

is Bloomberg surveillance on Bloomberg Gritty. We're having a conversation with Temple Lenty, the former gun from Minnesota now the CEO of the Financial Services Roundtable advocacy group for America's financial services industry in Washington at d C and Governor Palenty. Let me ask you about the debate over the debt ceiling. We heard it mentioned by the President in speeches a

couple of days ago. Obviously, we're coming up to a point where we reach that X status it's called by the Treasury Department, when it will no longer be able to pay its bills. The Treasure Department saying that's going to happen at the end of September or early October. We've been here before. Does it feel different this time

because of the composition of the government? Um? Not really. No. I would say it's uncomfortable for Republicans who control the Congress to have to deal with this issue because they don't like, at least rhetorically, the idea of debt. But they've already spent the money. And so when I was a kid, you used to say he can't dine in dash, which is you go eat the meal and run out

of the restaurant without paining. That's illegal, it's irresponsible. So you can't spend the money, and then refused to authorize the payment for the money you've already committed to to spend. So they're gonna approve it. It's going to be ugly, it'll be uncomfortable, it'll be a lot of squirming, But I think there's a as Mitch McConnell as somebody said the other day, almost zero percent chance they're actually going

to default. Uh, looking at the president's rhetoric surrounding the debt ceilings, surrounding the prospects for government to shut down, and and I wonder what you might say to him about the gravity of that when when the government shuts down, it is at a very basic level of nuisance for for for people. It certainly has effects for those who work within government and who rely on the government for for services. What would you say to him at the

gravity of of seeing that happen. Well, I would distinguish between defaulting on the debt and the government shutdown. Both our negative developments, obviously. But I was the first time governor in a hundred fifty years or so of a Minnesota history that had a government shut down for a couple of weeks over a budget battle. And it it was certainly not helpful to the people who are working or rely on those services. But it also is something we were able to survive. So you don't want the

US to default on its payments. You don't want the government to shut down. But those are two, at least somewhat different things that we should separate. The discussion. But Governor, when you look at the shutdown of the possible you know, the possible shutdown of the US, what kind of indication does it give to the rest of the world of how the US is acting? If you're a foreign direct investor, why go into America? Now? Well, and first of all, relative to the rest of the world, America is still

incredibly successful, stable and desirable. So as you think about that analysis, you got to think about it in relative terms. And number two, we've had a brief shutdowns in the past and most people won't even remember that they occurred. Right. But at the same time, I mean, sure, Europe is hasn't been as stable as a US for a long time,

but actually growth is better here. So again, if I'm a foreign direct investor, what's the attractiveness of being in America at the moment where it seems that the president sometimes talks out of hand. Yeah, well, again, I would say, I'm not arguing for a shutdown. Don't get me wrong. I don't want to leave that impression. It would be negative for all the reasons that you're suggesting. I'm just not I'm saying it's not as apocalyptic if it's brief

and short, as you know some would suggest. I'm very quickly sir, how sorry, um, Governor. What is the one thing that the Trump administration can do in the next six weeks to make sure that it gives a strong message to investors around the world that they mean business. I think the best thing that could happen, we touched on it earlier, would be for this Congress and this White House to work together in a crisp, hopefully productive way between now and the end of the calendar year,

although it spills into next year. That's better than nothing, and get comprehensive tax reform done. That's pro job, pro investment, and it, you know, sends the message we're serious about moving this GDP level from anemic to something better. Just looking at Twitter now, as I want to do here, as we have a president who likes to tweet, and he says this is gonna be a two part or maybe a three part tweet. But the first, the first

tweet he's fired off this money he has. I requested that Mitch McConnell and Paul Ryan tie the death sealing legislation into the Popular v A bill, which just passed. And then there's an ellipses dot dot dot. But the indicating here that would be something would make it be approved easily. Where do you stand? Where does the Financial Services Roundtable stand on the the prospect of a clean death ceiling rays? Is this something that you think should

be kept separate from from other issues? We we think and our members believe strongly we you don't mess with the debt ceiling. Authorize it. And if you've got to do things to increase the likelihood that you're going to get votes to authorize it, great, But you know, clean would be I think the wise way to go, because then it could be potentially bipartisan and you wouldn't get uh, you know, people either voting for against it for right

along reasons. Obviously, the President is saying, let's attach it to something that's very popular and that people would support, which is support for veterans men and women in the military, and that might increase the chances of getting votes for it. So that would be perhaps something that would draw some votes and maybe increase the likelihood of it passing. But it has to pass. I believe it will pass. Uh in clean would be fine to Governor Planty really appreciate

the time of this morning. Thank you very much for coming in. As I said to our Bloomberg nine nine one studios there in Washington, d C. Governor Tim Planty, former governor of the State of Minnesota, now CEO of the Financial Services round Table, that's a advocacy group antiel services companies, again based in Washington, d C. Great to speak with him about a host of issues facing lawmakers

when they get back to Washington early September. Obviously, chief among them raising the dead ceiling as we've been talking about, and dealing with government funding as well, both of those deadlines rapidly approaching and uh Fran, as you mentioned, we've heard a lot from the President on these two issues in particular here over these last few days. The President

making a trip to the western US. He spoke on the border in Yuma, Arizona, then moved up to Phoenix to deliver a speech at a rally on Tuesday night. He was in Reno, Nevada yesterday to dress the American Legion. Two very different speeches. As Governor Tim Plenty was was highlighting for us, the one that he gave in Phoenix and the one that he gave in Reno. This is Bloomberg Surveillance on Bloomberg Radio. David Durray in New York,

Francine Lakwa in London. Thanks for listening to the Bloomberg Surveillance podcast, asked Subscribe and listen to interviews on Apple Podcasts, SoundCloud, or whichever podcast platform you prefer. I'm on Twitter at Tom Keene. David Gura is at David Gura. Before the podcast, you can always catch us worldwide. I'm Bloomberg Radio