Surveillance: China Policy with Spence

for all of American graduate education. Laureate Michael Spence joins us now, of course Senior Advice of the General Atlantic as well as his academics Professor Spence, thank you so much for joining. I want to talk about two things right now, and I want to go back to your iconic work on signaling. UM. I was talking with our Simon Kennedy about pandemic signaling. How is our behavior change from the pandemic? Is are a permanence to how the

American economy, our labor market, our investment, how it will change? Yes? There is? I mean I think it's it's unambiguous. You know, the the accelerated adoption and digital change patterns of works work, the impact of the pandemic on what kinds of jobs people want to have, when they want to retire, and so on. I think betting that these changes will all sort of fade away would be one of the worst

bets possible. So I have no doubt. I mean, Tom, you know, actually seeing in detail, you know how this will play out over the next three to five years. It's it's very difficult, but but I don't have any question. It's permanent. Michael. Some of it in your latest essay for Project Syndicate, there are two paragraphs that are classic

Michael Spence. I can see you with a piece of chalk in your hand at Stanford, and while you ready to throw it at someone who doesn't understand correlation, you talk about the magnitude, the size, or the growing size of our uncorrelated risks. All of our listeners and viewers know right now uncorrelated risks are off the chart. What does that mean for our society? What does that mean for our capitalism? It means a major shift in priorities.

But for countries and for companies in the direction of diversification. Uh. And it will be, you know, portrayed as a costly move. It will probably increase inflationary pressures. But anybody who is you know, operates in the financial markets or has taken of course in finance knows that when you have rising risks and they're relatively uncorrelated, the proper response is diversification.

And you know, when you add together pandemics, supply chain congestion and blockages and longer term effects m a war, uh, you know, and all the climate shocks that are getting more frequent and so on. I don't have any doubt that's the direction of movement um that we're going to see. Well, and speaking of the supply side, you talk about the shift to supply constrained growth, What does that indicate about the permanence of some of the inflationary pressures that we

are seeing. So I may be a bit out on the tail of the distribution here, but but I think this is a fundamental shift. You know, the deflationary pressures that we had in the global economy came very substantially um from the fact that we had huge amounts of essentially unutilized productive capacity in the emerging markets, and we've used up a fair amount of that. And at the same time, we've created hundreds and hundreds of millions of new middle class consumers on the demand side. So I

think this is a it's a secular trend. It didn't happen overnight. But I think that plus all the other things that we just talked about, you know, means that the inflationary pressures are likely to less for an extended period. Michael Spence, you have made a study of the Pacific and with your wonderful book The Great Convergence of China as well. Angela's stent at Georgetown talks about a potential move back to a state of yalta where we have

a triangle between the United States, Russia, and China. Do you agree we could launch back to something early Cold War. I think it's not the most likely outcome, but it's a possibility. So my take on what China is trying to do, and they're in a very awkward spot, so, you know, not dissimilar to the awkward spot in central

banks are in um. But China understands something that President Putin doesn't seem to understand, and that is that any economy, even a big one like China or even the United States, can't perform at anything like its full potential in isolation. And so I expect China to sort of move carefully and and try to thread the needle, but to avoid a scenario in which we start dividing the world up into blocks, because it's incompletely inconsistent with their rather determined,

you know, domestic growth and development agenda. Michael, can we talk about the important stuff for where you are? Can you describe for a global audience the mood of Milan the morning after it fails to qualify for World Cup? Can you convey that to everyone for us? I don't. I don't think I can convey the depth of despair that we're all feelings as a result of bowing out of the the you know, World Cup. It's a shame. We have a lot of talent here. I don't. I

don't know why this is happening. We had some success before. But okay, let me pick it up here, John Farrell, Why did this happen? How did this disaster? This depth of despare happen? These kind of games happen where you play against the team that puts everyone behind the ball defense for the whole game. You can't break through. They build confidence, they at that one chance and they score right at the end. Tom. It was just one of

those games and they couldn't finish it. Ka was injured, one of our better players that had something to do with it. But that's not a reason to go out to North Macedonia. But there we are, Michael, Thank you didn't I didn't know you were telling you half a Tali. There we go, which which side? Which side of Milan is yours? Inter or Milan? I think? Okay? Well on on the other side of I bet Michael side wrong side.

We might actually win our first title, Tom, for the first time in more than ten years, when we take the show to Milan. We'll have to schedule. We can do that. I believe that would be the first league title outside of the Berlisconi era as well, Tom, I was there the last time was Brua Sconi? Do you not remember Berlisconi? You missed that? I was in the sense you went to a party with Balasconi. Would you like to would you like to tell us more? Are you sure you can share it with us? Now we

have some time some give it a miss. Sure he had a lot of tank at that party. Right now, we're gonna go to the best best choice, which is Ian Shepherdson is fortunate to be in the studio and we have to rip up the script here and the parlor game you and I don't play it that much. But nevertheless you have to frame as or zag would say, glide pass or reaction functions. Do you see glide pass that get us to that stunning kind of move that Mr Holland Horst speaks of, not in the timeframe that

they're looking at exactly. The X access is the point of discussion. Indeed, So I am very much of the view that the terminal rate is going to be way higher than markets think. But I'm also the view that it's going to take longer to get there than city on suggesting. So I don't really have a problem with the idea that we're going to end up well into the threes, and we may even hit four by the end of the cycle, but I don't think we're gonna get that that sort of speed. And this is about

elasticities or the response outiveness of a greater economy. If you take the GDP function, if you if you get their short termism out two years, boom, you go boom to economic growth, don't you. But it imputes to a

weaker economic growth. Well, if they're going to hike at the speed that city you're suggesting, even if you think that ultimately the economy can live with rates that high, getting there that quickly is going to really put a lot of stress, very rapidly onto the the private sector and will require a great deal of recalibration about how things work. So I am I'm really skeptical that they may well get you know, the first couple of fifties,

but to carry on at that sort of pace. This is kind all over again in terms of the speed and the scale of the hikes, and that ended up being very messy for the bond market. The economy didn't go into recession, but it was certainly under a lot of stress. And so I'm nervous that this is asking really a lot for an economy where there's probably some fragilities that wouldn't even know about yet coming out of the pandemic. And so I'd be quite surprised if the VED is able to push on at that sort of

speed without taking even a pause of breath. Well, and we have to talk about the data too, and in there in the line from city is the path remains data dependent. They just believe that the risk of inflation is still to the upside for the second half of the year. Would you agree with that assessment? Yeah, this is where I differ with them, actually, that that I think that the glide path for inflation, maybe in as soon as the second quarter, is going to be quite

steeply to the downside. I'm feeling really quite optimistic about in particular vehicle prices tempers under the core CPI. We'll hit the anniversary of some really huge increases of this spring. But I also think the sequential numbers are going to be falling because we're seeing auction prices decline and supplies improving, and that makes a big difference to where you think in focition will get to by the end of the year and the speed with which it comes down over

the summer. And if it's surprising markets, media and the fed to the downside in the summer, then the pressure to keep going by fifty fifty is much diminished. So that may be where I haven't seen cities in flation forecast, but that might be where I differ with them. You know, if you think it's going to remain very elevated for a much longer period and we're really going to struggle to bring it down, then yeah, they'll have to go more ressively. But of course nobody knows. We're in very

much unprecedented circumstances. And what do you think the strategy is? Frontload it, wait until the summer. What would you do? What is the least bad choice? I think that they need to get a grip on on this expectations, the idea that they that they've got behind the curve and that they they've left it too long. So I think they need to start making signals. And we're hearing that sort of verbally and in the dots and and in pals press conferences very clearly that they want to get

a grip on it. They want to be seen to be getting a grip on it. But I think the narrative changes as we get into the spring and the summer, where you know, if those numbers come to the downside, and also maybe if if growth doesn't have the traction that we all hope it has. You know, the first quarter headlines to look and look quite soft because of inventries, and there is a huge question mark over how the household sector responds to the surgeon food and energy prices.

You know, I think it will be okay, but I don't know. It will depend on how how willing people are to run down some of their savings and maybe they say, you know, we don't, we don't want to, in which case we're going to see some real sustained weakness. And again that would suggested starting with the fifty maybe, but keeping going meeting after meeting. That's that's a big ask. Well Ian you talk about how things could get better as soon as the second quarter, but there's obviously an

ongoing war in Ukraine. Is your interpretation then that that's not just going to show up as much in the U. S economy as it will for Europe. Oh, there's there's no question that the difficulties fear are much greater on the back of the war in Ukraine, that much more exposed to energy prices. Energy prices were already a huge problem fear even before the invasion. Uh and and a much more direct economic connections with Russia. So uh, there's

there's there's no doubt it bifurcse. Of course, it's even worse for emerging markets, where people spend much more of their income on food and energy than we do in any Western economies, and where people buy much more raw and processed food, and so there's going to see a much bigger hit. So the U s IS is far removed from all of this, the feedback from weaker growth in Europe and e m into the US. It is

actually quite small. This is a big domestic closed economy really, and the cottage industry of physics and the economics is led by America. The the idiot matthewiness of the American programs. But I would suggest the United Kingdom is really studied. The non linearities of when you make moves and what city group is recommending. Here is an inertial force upon

the economy. That's essentially I believe. I mean, if Al Meltzer of Cardi Mellen was here, the late grade Ala Meltzer, he'd say, we've never seen this before, this kind of physic move in raising race. Do we have any experience

at this? Rights rights very aggressively back in in the early nineties, but of course the level of rights was higher, the gearing and economy with Fisher would say, the gearing, you know, it was different, very very different, absolutely different, and that's one of the reasons why we've had this long term down with trend and nominal rights. But the UK is an interesting example. It's the Western economy that

looks most like the US has some big differences. Of course Franks it, but the Bank of England is signaling pretty clearly they won't be raising rates very rapidly. And so what City is talking about is a massive widening of spreads between short rates in Europe and the US. And I buy the idea in principle that the U s economy is fundamentally in better shape and less the Ukraine sensitive. But it's the scale of the gap that's suggesting in such a short space of time that it'll

be difficult. Do you see how you make your luck folks on surveillance. When we invented this program, we said, just book smart people, and when news breaks down, it works out killed It can ask you, Iam, whether you think Wall Street, maybe even the City of Land that is missing the mood of the country at the moment. Do you think it is well? I mean, if you look at the consumer conference numbers pretty much everywhere. Now we've seen a round of numbers out of Europe as well.

Recently they have fallen off a cliff with with the Ukraine War and there were weak anyway, and some of the U S surveys have been weakening really for some time. But the question is, is spending is GDP the same sentiment because if it isn't, If if people say one thing and do the other, then if you're expecting the sentiment numbers to lead into a very weak economy, you

could be getting it really completely wrong. And the reason why there might be such a big difference is that in the US at least, households are sitting on trillions of dollars of savings that they accumulated during the pandemic. So they may well say when the conference board of the University of Michigan comes along and says, how do you feel, I feel terrible, But they still go to the mall because the money is there and we've never seen this before. So that makes forecasting with any confidence

really very difficult. And I'm glad City said their forecast was day to dependent, because it sure is. Everything is very dare to dependent and we just don't know. We need to admit I think the limits of our knowledge here because we're facing uncertainty like we've never had before. Just to finish on this and stay on the same point if we can, And has it been helpful to you to be headquartered in Newcastle in the north of

the country away from London. Is that contributed to a difference in opinion and outlook or where if you a

different way of thinking about the country the economy. Yeah, I mean I don't do the cocktail party circuit in London or in New York, so I can I look at things maybe a little bit differently, um, but ultimately I'm following the data like everybody else, and the data at the moment are extremely confused, extremely confusing, and the range, the cone of uncertainty is bigger than I've known it in thirty years. It's the season ticket back, well, I think on it will be so you want it back now?

Just to be clear, back you want it back now? Okay? John? April three, it beckons Tottenham Newcastle in newcast Yeah, you know how hard it will be to get tickets to that? Tom. I think people realize how difficult it is to get tickets for Newcastle game home game. And what are the chances that you actually get your season ticket back for

next year? Well, that depends how willing I am to close my eyes and ride a big jay, but so so if I will at this point, if if a Dell shows up to watch her taughts at Newcastle, how is adult treated. I'm sure she'd be in by tom. Have you ever seen a Newcastle fantom? Okay, a box in day the day after Christmas? I think I went to a West Brom game. So that's in the Midlands, super cold, freezing, freezing, and the Newcastle fans they pack out the home stadium, greater away attended to swell at

the away end. The Newcastle fans tom tops off, shirts off in the freezing cold in late December. Adult would do. The Newcastle fans are some of the toughest at their tom they're wearing beer. Coach John seriously have taken off the team? Right? Have they been affected quickly? Here? Oh? Well, the city has thrilled with Ukraine. Well the Ukraine that the Ukraine situation is is is grim, but but the Saudi takeover has has been very welcome after after the disaster.

Someone rose in some the games in London. It's not a Newcastle doesn't have to travel. I thought you mentioned Spurs versus Newcastle. Yeah, that's April three. Someone's just written in that jodies can come in their swim shots. Right now is my interview of the day, and not that. I'm just back from Paris and it was an extraordinary joy to see Paris preparing for the Olympics. Because he is hugely qualified with his public service to the French

nation on this moment of war. Philippetition is French Ambassador to the United States of America, but far more has had tours of duty, particularly in Romania. He understands Eastern Europe perhaps more than anyone uh entering the show. Ambassador, thank you so much for joining Bloomberg. Thank you very much for having me, Ambassador. We have limitations. I cannot speak to you, of course, of the domestic politics of France.

I believe that's off limit this morning. But I can't speak to you of when I'm in London and I get on the train and I go under the chat when I come out, there are the fields of wheat of France. You are in the absolute agricultural nexus of the rich helping the poor with limited food. At this moment, how France helped the poor of the world with their

wheat and other agricultural products. It is indeed one of our duties and one of the initiatives we have decided yesterday at the summits in in Brussels to take France, like the United States, is an important producer of wheat, but but we have collectively to help the world community to face a food security crisis, which is one of

the threats caused by the Russian invasion of Ukraine. The first thing to do is of course to demand a ceasefire in Ukraine for the Ukrainian people first, but also because it would be the only way to allow the Ukrainians to sow their seats and to prepare for the next harvests. But we have all so indeed to take initiatives to increase productions, to increase coordination internationally, to help all the countries which are the most vulnerable in the

world hund who depend from in parts of wheat. Ambassador the President speaks of a hundred thousand refugees coming to America. It seems like a tragic statistic given the millions coming over the borders of Romania, of Poland and the rest. Can France providely? Can France provide leadership in Europe? With the amount of number of refugees coming into France, can that statistics be had. We have provided leadership because France is holding the rotating presidency of the Council of the

European Union. And as soon as the war has started, and as the refugees have started to come into the EU, we have decided as EU to give the Ukrainian refugees more than three millions already arriving to the European Union, to provide them with a spatial statute, protection statute. They are schooled, they have access to health scare, they have access to jobs. We have been doing this immediately. Of course, the refugees first come to the border countries Poland, Romania,

also Slovakia, Hungary, also Moldova outside the EU. But now they are coming to other countries, and you see everywhewhere, including in France, a huge movement of solidarity for the tens of thousands of Ukrainian refugees which are already in France, in Italy, of course, in Germany very many. So they are coming to us too, and as the EU, we have taken very very quick and very bold measures to

welcome them. Ambassador, you spoke of Poland, where of course the President of the United States is expected to land in just about half an hour's time. Before he did so, though, he was in Brussels with our sala of underlying announcing that agreement on US elergy. What is the French feeling this morning about its energy security and whether or not

it is able to win itself off of Russia. Well, even if France is a bit less dependent on imports from Russia than other new countries, it is for us as again as a presidency of the European Union, it is a common problem. It is a European problem. The European leaders were convened by our president in Versailles two or three weeks ago, and they decided to stop the dependency on Russian imports of energy and also to increase in other fields food, critical materials, the resilience of our economy.

It's a huge lesson to learn from this war, and we will transform decisively the European Union. And to to get rid of this dependency from imports from Russia in energy means first to accelerate our transition and also to diversify our supply, including of gas. From this point of view, the agreement which has been announced by the United States

and the European Union. About this fifteen billion cubic meters additional of Americans supply to Europe is really important, and we will diversify your supplies so that we get tread of this dependency as quickly as possible. Ambassador in Paris and the rivers, and are those bright gold domes, they stick out like a sore thumb, and it is Russian architecture of the Russian Orthodox Church. Explain to us the new relationship of Russia that you know so well with

your representation of the nation in Moscow. Explain the new relationship you will perceive of Russia with Paris and France. Well for the time being, of course, we we need to stop this war. And the relation is mostly that our president is among the leaders who has decided to continue to talk to the Russian president to tell him that ceasefire is absolutely necessary. Humanitarian access is absolutely necessary.

We have while we raise the sanctions and the price paid by Russia for this invasion, and these sanctions are really important. Now we have to first as a priority, absolute priority, to get to as cinsfire, and we are doing this in close coordination with the President of Ukraine. Of course, once there is a Citisfire, that could be negotiations, and once there would be negotiations, we could turn to the future. But the absolute priority is a Cinisfire ambassador.

Thank you so much for joining us this morning, Philip at the young French ambassador to the United States, Jane Foley joins us out of foreign exchange strategy at Rubble Bank. Jay, we got fourteen things to talk about, but we do have the news of the moment. What does euro signal and what is your prediction of how it will move? You know, I think the urine is signaling perhaps some optimism really amongst the market that that you will avoids

the acculation that it will avoid recession. But they've been some nasty indicators this week. So you mentioned the IPO. If you go back to day and look the p M I what we can look at the detail of that and seeing those input prices, much higher prices coming through now, that is obviously one of the reasons that business confidences is beginning to flounder in the Eurozone. We've got higher prices for energy. Clearly that's going to be

more difficult for firms. And this is in a scenario where we can avoid blackouts and and that isn't you know, a full gone conclusion. There is still the energy security threat for Europe, so there are significant headwindstle but the market taking an optimistic stance on that at least for now. You know, what's so important here, Jane, is the belief, hope or maybe it's not going to happen, that financial authorities will follow the confidence data. What is your reading

of how central banks adapt to a diminished confidence. Well, you know, if you look at the Guard's comments, So just a few days ago she said, even on the worst case scenario, they're still going to have two point three percent growth in Europe this year, that stagflation will be avoided. Well, I would say that clearly that's not the worst case scenario. You where we know that there is a question marks over energy supply. No one can

really interpret what Putin is going to do. Yes, we know that he needs that money that he gets from selling energy, but at the same time, you know there is still I would say, you know, a small prospect that there could be energy crisis within German industry that certainly could could bring on recession in Germany in Europe

if not further afield. So there are risks, But for now, the central bank, you know, is I suppose applying the market with you know, this optimistic tone that in a stipulation can be avoided, and market appears to be happy to go along with that. Jamie, we're having a conversation earlier about the potential bleed through from a recession in Europe into the United States and what that would mean

for the Federal reserve. When you think about that, the dollar versus the rest of the world, its status as a reserve currency, the outlook for federal reserve policy, where

does that leave you. I think the dollar is certainly going to be a lot stronger this year then it would have been otherwise, then it would have been without this war, because as you mentioned that the dollar, the dollar status, as as the payments system currency really really make sure that people just need dollars and also if they want to buy commodities back to basics. I think this is what this crisis is all about. For many they will need dollars in order to do that. So

the dollar, I think will be stronger. But you know, if we look at the shape of that yield curve in the US, if we look at the concerns about you know, the conversations about whether or not we're gonna have inversion in the US, whether or not the FED can really be successful and taking out inflation without creating a recession. There's got to be longer term, medium term

at risks for the dollar into next year. But of course that assumes that that that Europe can avoid recession, and that's something that will by the end of the year, I think we should know, you know, whether or not we've we've managed to do it, but because by then, I think Europe will have helped secure more al turnate energy supplies. But for now, when it's still using an awful lot of Russian energy, there is I think so much doubts and much concern over the direction for Europe.

And you've just touched on something I think really really interesting and quite important. If we're going to build out this energy relationship with the United States the Europeans are how long before that starts to take an effect on the currency pair. Are those kind of trade flows big enough to make a difference, Well, you know, certainly they

are significant. I mean, if we're looking at just the the energy relationship, I think that's going to get bigger and bigger in terms of the the US and and and Europe, and and you know, for the European sake, you know, I hope that does come off that there aren't a lot of concerns about the you know, the supply of energy for instance, if you look at Australia, I think that was a country that did promise that more lergy for instance for Europe, but there are concerns

that they may not be able to do too much of that without breaking existing contracts, that they may have some shortages on one of its own coasts, so they may not be able to provide alternative supplies. It's going to be a long time, I think before we can really be sure about the energy security situation in in um in Europe. But certainly I think that that flows with the US will be really imperative to that. Jane,

how important is it to discuss how people feel? And you know why I asked this because in the UK, when I speak to my friends, my family, they feel like it's absolutely dreadful. And when we talk about the outlook, we still have an outlook of three plus GDP growth in the UK slash from the six number, the six handle. They had a number of weeks ago, Jane, Does that matter when Kaylee Lines talks about sentiment numbers here in the United States decade lows. We could see them again

later on this morning. Does that matter? You know, it will matter eventually, And I think you're right, you know, right now, I'm finally find it quite difficult to reconcile with what I'm seeing in the mainstream press about you know, that the struggles that many people here are having with higher energy and food prices, and the data that I see, which is you know, tight labor market with the Bank

of England that has been tightening. But you know, if we look at that statement from the Bank of England last week, yes they did hike interest rates, but actually the outlook was fairly person stick. They talked about, you know, slower growth, they talked about rising unemployment by the end of the year, and that is becoming reality right now. And what we're seeing in the consumer confidence data this morning in the UK is really plunging levels of consumer confidence.

Retail sales far weaker than expected, and this is the the impact on the consumer from rising inflation. This is finally it's been having that that impact on containing demand, which will eventually, of course, pring prices down well, Jane, as you mentioned the b OE tightening, the FED tightening, the ECB may get there with a rate height by the end of this year. Corona is not even close. The b O J is not moving. You are seeing that widening divergence, a break of one two one dollar

ya and yesterday, where does it stop. Well, you know that there is a lot of momentum behind there, and it's cently come faster than I and to participated at the end of the year. I had expected one twenty. That was my focus at the beginning of the year. Two has really taken me by surprise. Now, you know, there's a there's a couple of aspects here. You know, we have, of course, um the the interstrate differential story that begg of Japan remaining extremely davish, but Japan is

a massive energy importer. And if we look through the patterns that we're seeing in deten currencies right now, we're seeing the energy exporting currencies as is in New Zealand, who don't export energy, but the export food performing really really well, and the commodities importing currencies right at the end of the pile that the Japanese yen at the bottom of the pile. If we look at the performance of detense, it's the start of the war and just

above the end under performing. We have the European currencies, and this is a real rethink of you know what we would generally think about the safe haven currencies the end. What's the safe haven? It's right down there and this energy importing nature of Japan is part of that. That reason so for now, and it's very difficult to see what's going to stop that um and I think they could be further to go on on on the upside round in Dolly yenan awesome as always, Jane Farley, that

of Ramma Band. This is the Bloomberg Surveillance Podcast. Thanks for listening. Join us live weekdays from seven to ten am Eastern on Bloomberg Radio and on Bloomberg Television each day from six to nine am for insight from the best in economics, finance, investment, and international relations. And subscribe to the Surveillance podcast on Apple podcast, SoundCloud, Bloomberg dot com, and of course on the terminal. I'm Tom Keene and this is Bloomberg