Surveillance: ECB Policy Not Targeted At USD, Posen Says

Somebody called a currency. I said, no way, there's no way this is a currency. Our article even says it's going to be based off securities. Is it a currency? It's currency ish? Yeah, Jamie Diamond doesn't care about ish. Jerome Paul and Randy Quarrels at the FED don't care about ish. Why is Zuckerberg different from anybody else that's going down in flames? There is going to be a thing called libra. Presumably you will have a wallet that has an X number of libra in it, So in

that sense, it's that's I say, it's currency issue. On the other hand, it's backed by traditional financial assets probably no FIAD currencies and government bonds and banks. And if you think about it. If you look at your any wallet that we use that's digital, or any credit card or anything, what is it but a digital number that's represented by something mrez. Today the French finances are saying,

yeah right, I'm in name the country. I've got five two thousand dollars I got to get into the United States. This sounds like a gift from God. I think that, Um, you know, this is the key thing, which is that traditional cryptocurrencies, they're designed to be decentralized permission lists so that I can send something to your design is an agent for criminals. This I just put it the nice way, but you put it the This is clearly not Morning TV.

We're not nice. This is not designed for that. And they make very clear in the white paper and their documents that anyone dealing with this, any exchanges that listed wallets have to deal with traditional banking regulations, which means that it's much less like a traditional cryptocurrency as we know them, and much more like a lot of the

payment apps that we use. Let's bring in yes, no, the nice one, the nice one who's in the doghouse, Joe, because I'm the one calling it prick cryptocurrency on air and Tom was like, no, it's not a currency. But actually what it means is I'm going to have a mobile phone. I'll be able to use a pacement system. So for the nerds out there, we can call it whatever, you know, the digital wallet package that Facebook is going to introduce, whatever Tom wants. But is it going to

get traction? And when can you find out whether there's going to be traction? Isn't the first two months? Six months? Does it take longer? I mean, here's the thing, and this is the bold case, which is that there is no entity in the entire world that has Facebook size and global distribute and that is an enormous leg up. And so you have these aiment networks all around the world like and Paso or wheat Chad or Venmo or

PayPal or whatever. It's fragmented. However, there's just no entity that exists that is huge virtually everywhere, essentially everywhere outside of China the way that Facebook is. So if you were able to layer on top of that a payment network in theory that could be really big and unify global payments in a way that nothing else quite has before, that would be I would say, is this right is this a medium for payments? Right? And if if it is a medium for payments, does it cut out the

riff raff that Tom was talking about. I mean it is a medium for payments. It will attempt to cut out the riff raff because there's money backed up by traditional financial institutions. Because a libra is backed up by dollars and pounds and euros and yen or whatever in a bank, they're going to have to comply with traditional anti money laundering regulations, anti capital control or capital control regulations.

If it were to turn out that well could use liber to evade these things, then I think regulators would attempt to shut down the project pretty quickly. Okay, but but I'm holding up in my phone, Joe Wist, I want to go to Sebastian galley on this zell from a bunch of banks. I can move money around already with banks. Why do I need this, Sebastian? Why do we need facebook coin? Because you want to avoid capital controls? And what when may happen? Is my words that continue. Yeah,

it's not it's not pretty. In essence, it makes sense to have a unit of transaction, but that's called the dollar and that's what we use worldwide. So if you try to replace it by something else which is linked implicitly to the dollar, maybe so some other things you're trying to get some of that liquidity out. It might work in some small economies such as for example, you're sitting in Believia or something like this, there's a lot of demand for dollars, then that might be a lot

of demand for lebos. Always gonna ask Mr Marcus today, I mean, I think the Bloomberg coverage and this has been very responsible. What are you gonna ask Mr Marcus today? I mean, I'm gonna ask him exactly about that. So if ah, someone in Bolivia or Venezuela or anywhere wants to obtain libra for the purpose of say moving money in and out of the country, of aiding in capital controls, whatever it is, how are they going to stop it? Will this currency be able to be used for that?

Because if not, or if it can't be stopped, then I think the law enforcement in those countries is not going to be very happy. Joe. He's going to regulate this thing? Is that you know central banks? Is it? We don't know? Right? I mean, that is the Tacebook isn't going to regulate themselves, right, I mean that's the issue. So Tom held up his zel app, which is designed

to be intro the U S and the regulative. It's designed to give money to children, but it's all based in US banks, and the regulators of a US based payment app are pretty straightforward. It's US regulators, it's the FED and so forth. But when you start thinking about how something like that could be made equivalent on a global scale, I think the regulatory thicket that Facebook and Bucking into is gonna be pretty unimaginable. Thank you so much.

I think we need to find someone expert on monetary theory, linking it into the economy, linking it into what we do every day that also has a good understanding of Germanic culture and society, and possibly also as an expert on presidential tweets and and maybe worked at a central bank once upon a time. That would be good, fantastic bio. Please to say we found someone that fits it, ad impose it. Peterson Institute President. He joins us from Central Portugal.

Good day to Adam's gonna have an empty office. Good day John, Good day, Good day Tom. Thank you can we start with the prospect of an emptier office over at the piece of Peterson Institute. It wasn't missed by many people that actually Olivia Blanche delivered the opening speech in Central Political yesterday evening Adam. There are some chats that perhaps he could be maybe in the running to

be the next DCP president. Your thoughts on the Adam, He would obviously deserve it if they were willing to excuse me, if they were willing to consider academics. Um, but they're clearly not. It's it's clearly among people who are already central bank governors in the Eurosystem, or maybe deputy governors. So in an ideal world, yeah, I would give up the office of Olivier and or let him use my office to be west. But um, but that's not running. We have our textbooks, Dr Posen. None of

what's on my Bloomberg screen is in the textbooks. And it's not funny. We've got an economic theory in search of a solution, butter stuff against the financial system in crisis. Are you surprised that we're back to queue ta contrast think whatever it is que five plus? Um, Yeah, I'm not surprised, Tom, because We've a number of us have been worrying rightly that when we get to the next recession, whatever it is, that there wasn't much room to do

with normal interest rate cuts. And some of us at least have been arguing for some times that QUI should never have been as demonized as it was. The sad part is what you say. It's not even the YO curve. It's just at the ten year rate is so low, and as Larry Summers and others have argued, that represents just total lack of investment appetite, total lack of private sector growth momentum. I think that's the reality. That's not

a monetary reality, that's an overall reality. And I mean you wanted to weigh in on the president's thoughts this morning, so for our listeners that might be just tuned in, I'll repeat the tweet from the president in the last hour. Mary drag just announced more stimulus could come, which immediately dropped the Europe against the dollar, making it unfairly easier for them to compete against the United States. They have been getting away with this for years, along with China

and others. Adam, your thoughts, Yeah, it's it's about as unfounded as the average prisoner. Trump tweet regrettably, Um, you know, the US FED cut rates and did quee in two thousand eight, nine ten, and the rest of the world screamed, oh my god, Brazil, India, China, you're unfairly cutting the dollar against US. And no, they were just the US FED was doing the right thing, looking after its own economy. What the e c B did, it wasn't targeted at

the U S. It wasn't targeted a trade. Was Mario draggy constraining his successor and setting forward the fact that the ECB will continue to pursue a reflationary policy. And I think that was exactly the right thing to do. And it would be much worse for the U S if you could if the EU didn't do that, if the Euro Area didn't do that and fell into trouble, you'd lose a lot more net exports to Europe and

you lose a lot more asset values. I'm sorry just to jump in Sonia and we spoke Sebastian Galley of No Day Arrestment Management. That thinks perhaps the president isn't entirely off base. If we recall when the ECB adopted a negative deposit, right, it was to look at the X channel, and there's some belief this morning that maybe that's the primary tool once again to get inflation expectations higher. What are your thoughts on the ATOM. Well, they're not

directly intervening, let alone manipulating currencies. They're setting a domestic monetary policy. If it has an effect on the exchange trade, it's then up to the Federal Reserve and the Bank of Japan and for that matter, the People's Bank of China to decide. Okay, given that the should we react and so there's nothing the ECB prevents other other central banks from loosening as well. And imposing whether this folks appears into the thrilled he could be with us, and

we see markets on the move. A two year yield not back to a one eightiot but one point eight one, lowered by a solid six basis points. I'm watching. Yeah, it has not moved. That is the headline one O eight twenty nine. Slightly strong. Yeah, and adam posing within all of this talk of economics is the real economy in rule one Friedrich Kayak as you've got to clear out the debris. Maybe with Schumpeter, there's got to be a little bit of creative destruction of bad debt gone wrong.

Are we suffering for the fact we haven't cleared out the ills of two thousand eight. I think we're suffering more from the fact that we started having ills in

two thousand four. Toms as many people, including John Fernaldo used to be at the FED San Francisco, have argued, you know, the productivity growth rate in the US down shifted and in the rest of the Western world and Japan down shifted roughly around two thousand four, and we're still suffering for the fact that we haven't found something the next big thing in Michael Lewis terms to invest in and yeah, there's probably some some some detritus in

the economy. But on the other hand, you've got monopoly oligopoly issues which are regulatory. They're not because of low rates, I think. So. I know people keep going back to that, But like a Neil cash App said at the FED conference in Chicago a week ago, I keep quoting people because I want to say I'm not out on a limb here. Uh, A new Caship of Chicago said, you know, we we had a supervisory regulatory problem. So let's do

that better. Let's not screw around with monetary policy. Okay, when you look at the mix of Stewart in right now, it seems like it's a technology overlay that everybody's dealing with, whether it's Europe or the United States, and that do we just have to get used to one and a half percent growth? I mean? Is that? I mean in President Trump's defense is a politician, he can't he can't get elected on one and a half or even two

point zero percent growth. Agreed, And in that sense, I'm not denying President Trump the right to complain and moan. I get nickers less in a twist about him yelling at the Fed than people do, because I remember past presidents yelling at the Fed as they didn't do things they like. So that's fine, that's fair game, as long as the markets and the average voter realized that's just

a politician trying to increase his election chances. The important point is exactly what you said, Tom, that we are unfortunately going to have to continue to get adapt to a world where, for at least the foreseeable future, we're not going to be seeing an engine of growth like we did, and as Olivia Blanchard, who you mentioned not for ECB but for brilliant analysis, did with another colleague

of ours. You know, Japan has coped, and part of how Japan coped is that that ongoing fiscal stimulus, ongoing easy money, because the alternative was a cratering Do you see evidence that your colleague Olivier Blanchard, who wants to goose things up to a four percent level, can that reflation end with economic growth? It can, It can't sustain it forever. I mean Olivier himself and certainly I and anybody else is not going to tell you that pure

inflation is going to buy you anything. But what you can do is say, I'm not gonna worry about inflation in a world where there's so much deflationary low growth pressure, and I'm gonna try to push up growth through useful public investment. And as in the case of the e CP, to me, the biggest news from the Druggy statement was a very clear emphasis on a symmetric approach to the inflation target, that they'll have to overshoot someday to make up for the low inflation. Now, these are the elements

of a sensible policy. Adam posing, thank you so much to thank you attitude for international economic We are thrilled to bring you a gentleman from a military family. Uh. And John McCain gets all the press of Late John McCain of Admiral's back fourteen generations. I think they were Bunker Hill or one of those battles. Is well. He has a grandson of Herbert McCrystal, with tours of duty including the Panama Zone. Your father was born in the

Panama Zone. You did a number of tours of duty in Vietnam and then you wandered in and you be in a storied career, Generalman Crystal with the Special Forces? What was the first day like of Special Forces? And

I believe Fort Bragg, Well, that's true. I left the eighty second Airborne as a lieutenant joined Special Forces and it was disappointing because this was and special Forces was a few years after Vietnam and it was a shadow of what it had rightly, and so I for much of my career was about rebuilding our special operating forces and watching what they to what they've become today. Edmirald Stravitas wrote a book about all you guys in your

favorite books. What's the book right now the politicians need to read who were talking about military action in the Middle East, What's the book they need to read right now? That's great, that's a great question. Um, nothing jumps out of me, although I would probably read a book on World War two because when you talk about a war, you talk about something that's going to change the world, you better understand what it costs. Ed would be my

choice or general. You've ented civilian life. You've not done what most generals do, which is going to advise companies and people and organizations on geopolitics. You're running your own firm and you're helping business understand the importance of leadership changing the hierarchy to better suit their needs. Walk us through your framework for thinking about this and what you're

teaching people right now. It came from an experience that we had in Iraq where we had a purpose built counter terrorism force that was really operating our industrial age processes, top down command and control hierarchy, and we ran into a complex environment in which our kind of interac was very different. That's exactly what business is running into now.

They're not competing against the big competitor they used to have their competing against a thousand linked together all the one consciously linked competitors from garages to small startups, and so as a consequence, size is no longer protection. It's not a mote to competition. So leaders have got to lead differently, organizations got communicate differently. Really, the core of this is about how you create shared consciousness in an organization.

So the contextual understanding that used to be resident only in the C suite is now down everywhere, so you can make decisions closer to the point of action. You are a student of leadership. I hope you don't mind me saying so, both in terms of the military leadership and in terms of leadership in the business world. Who should we be learning from Well, I think first is

go back and understand that leadership requires character. At the end of the day, if you don't have integrity, if you don't have the kinds of things that you can admire and trust, you're going to be building everything on a very weak foundation. I like to go back to leaders like uh Thomas Jefferson, George Washington, Abraham Lincoln. Those are the names we all know, but peel back some of the mythology about him and see how they really operated.

The one who jumped out in our recent book is Martin Luther King Jr. Because although we think of him as this wonderful orator who stood on uh steps of the Lincoln Memorial in nineteen sixty three and give I've had a dream, actually he was a roll up your sleeves kind of leader who performed multiple roles for the civil rights movement that were very practical. He was jail twelve times, and so other than being a symbol, he was a practical leader who built teams. One final question

general the attack jour is the offense against Iran. What does our naivete about defensing against or offensing against Iran? Yeah, I think Iran's behavior in the Middle East needs to be stopped and competed against. But if we talk about invading or starting a major warriors, talking about an action that would unite eighty million Iranians, they are a sovereign nation that would defend itself to the death, and so

you have to ask yourself what comes next? You have a first strike, then what And so I think it's a much bigger prospect, and I'm not sure how it would end up. I'm sure that we could defeat Iran. But what we like there's a pentagon. I have a voice with this administration to address the then what's I can't speak from inside the room. I certainly hope that they do. General McCrystal, Thanks General, thank you. This morning, on the American economy, Lindsay Pegit joins us with stif

Thrilled that she could join us this morning. Lindsey, I want to cut right to the chase. Your numbers for American economic growth? Can you make a forecast now? Or is it so jumbled your hesitant to look out one year? Well, it is difficult to look out one year because the data is not all pointing in one direction. But of course, to be fair, the data very rarely points in one direction to make it easy for economists. But what we do see is that there's very clearly evidence of the weakness,

not just bubbling under the surface, but gaining momentum. Underneath the surface. We see business investment losing momentum, business confidence beginning to wane, manufacturing taking ahead. Even the consumer, with last week's better than expected retail sales report, is still on very uneven footing at best. So this is painting a pretty a pretty negative picture for the second quarter, particularly rested to that above trapped growth rate we saw

at the start of the year. Lindsay, does the Federal Reserve disappoint tomorrow? Well, it's going to be very difficult for the Federal Reserve. I don't think that they change policy in any way, so keeping rates unchanged. But it's going to come down to the comments. It's going to come down to the tone of the statement, and if they failed to tweak at the tone to a more debbish position, that will disappoint the market. But I do think that Powell has at least opened the door for

the conversation of a race. As we saw he removed that patient language from his earlier comments just a few weeks ago at that Fed Listens event. What is your twelve month forward economic growth? Is it above two? No? It's not. In fact, I don't think the longer run growth rate for the account is above Okay, what's your number for twelve months forward? I think that we're looking at one five percent? Okay, fine, that's the JP Morgan's with Lindsay, I like that. Great. What is Powell waiting for?

I mean, I sound like President Trump. But if you're modeling and other adults are modeling, lindsay sub two g d P, why why do they need to be patient? Well, I think the sun has a historical position of waiting until the data very clearly shows that the economy is essentially falling off of a cliff. But we also know that historically the said weights too late and then when they begin to cut rape, they're unable to stave off

that weakness. So I'm not sure if the fund is relying on very antiquated models that's telling them to take this more patient stance, or this could be more of a political posturing. They don't want to be seen as cowing to the whims of the market or political pressures out of the administration in lindsay, did President dragging ramp up the pressure for chair and power tomorrow or did he reduce some of it? How do you frame that

this morning for our listeners? Well, it's uh, it's difficult because the ECB is certainly taking a much more a patient stance without even using the word patient. And so I do think that when we look out to our developed counterparts that are saying, look, rave cuts are are on the table. That's that's part of our policy going forward. We see the b o J still actively engaged in

asset purchases. It's very difficult for the Fed to continue to push against that string, not only on a relative basis, but on a nominal basis when we see such clear weakness in the fundamentals. As we talked about some of those growth fundamentals, we didn't even mention the weak levels of inflation we're seeing in the US. Lindsay, thank you, So it was Stephile we try to give you the

best in conversation. Adam posing this morning was just brilliant with the Peterson Institute on what's left in the tool hit for central bankers. We now give you, without question, the interview of the day on price change. Twenty one years ago, almost to the day, Gary Shilling put out

a small blue book. It was called inflation, Yeah, big deal, but it had a secondary headline, as is the vogue that was stunning, Lee prescient, Why it's coming, whether it's good or bad, and how it will affect your investments, business and personal affairs. It is the call of a generation. Gary Shilling on less inflation and lower yields. Dr Shilling wonderful to have you with us today. I gotta go to the headline right now, price up, yield down, and you say yields are gonna go ever lower? Yeah, I

think so. I think we're going to go to one on the ten year treasury. How do we get there? Is it a yield mover? Is it just price and insatiable demand for bonds? Well, it's a combination of things. That's the fact that we have low inflation and very well could have deflation. We're probably entering a recession now, which has always beneficial to treasuries. Knocks down, knocks down inflation, makes them a safe haven. Uh. The yield as low as they are in this country are higher than almost

any other major sovereign. Uh. There's and there's says there's there's simply the attraction that that people say, where else am I going to go now with money? But you know, it's interesting. I think that the bond market is telling you the economy is a lot weaker than the stock market. And I think the history says that bond investors have a better view of what's going on in stock investors. Well, there's a split there right now going on futures up eighteen,

the Dow futures up thousand to seventies seven. Can you participate in equities this morning? Um, well, we're doing in our portfolios defensively, things like utilities and consumer stables. Um. Yeah, I think you have some participation. But our principal interests are long treasuries, and I like the thirty year zero bond. You get the most bang per buckets were given a decline in interest ration, you get much more price appreciation. As you know, Tom, since I've owned treasury bonds for

only one reason, appreciation, I couldn't care less. Fourteen point six percent. Fourteen point six percent. Yeah, and you still own the same paper you own back then, Well, you have to roll it over. I mean, there isn't an issue that was Okay, this is important. We're gonna rip up the scripture. This is so important. The institutional shell

game now is to roll it over. And they're saying to themselves, we're at three percent coupon and we're gonna go down to a two point eight percent coupon at some point that game ends, right, Well, sure, and I think I think it ends to say when you get to two percent on the thirty year bond. Uh. But at that point it depends whether you go whether they're whether attractive or not. And you know, is the appreciation

game would be over there? That's fine, But what's the price to our economy to have a two thirty year piece? Well that that's a very interesting point because, uh, unless the FED wants to go negative on on rates and the FED doesn't. They've seen that with the e c B and they and the Bank of Japan, and what happens. People don't borrow to spend. They save more because their assets are not giving them a return for their retirement or whatever. So they want to go negative. There's zero bounds,

so push the FED in a bind. And and of course there was an interesting study by the FED Board economists last year where they basically said, quantitative easing again, is the only answer. Is there a physics to quantitative easy? We should point out the dcor Schilling enjoys a shingle in physics as well. I mean, if I look at the inertial force of monetary policy, the reaction functions, I get it. Is there a physics to quantitative easing? Is there a a theory you can lean Uh? Maybe a

law of diminishing returns. I don't. I mean, I guess it's gonna be QA sank. According to Mario Draggy this morning, tenure yield two point zero three epercent as well, Japan's buying apple shares or whatever they're doing by an equity equivalent. This isn't in your textbooks from Amherst a few years ago, is it? No, it isn't. And you know, one of the interesting things now is the FED and Phil Graham had a had a piece in today's journal on this.

The Feed is being forced to lower the rate they pay banks on reserves because that's a better deal now than than what is the appropriate Ben Bernanke says, the banks are the appropriate, uh support that we need for the economy to have a supportive financial system to help us.

What is the best FED policy prescription now? For Jamie Diamond, Well, the best policy for him would would be obviously a positive Yeel curve because if we have that, but banks for some extent, yeah, well slightly but still suffer from this. But you know, I think that I think the what what we really scene, uh in the last thirty years, is the FED becoming the great supporter of equities um.

They certainly did this coming out of the Great Recession with knocking yields down to basically zero and then quantitative easing, and then we got the green Span put, we got the Bernankee put, the yelling put, and now it looks like we have the power put. And it seems as all the FED looks on their number one job is supporting equities, and they look on that as the as the indicative the economy. But what it does, tom, it gives you a big build up to a big decline.

Green Span said, you don't worry about you don't worry about accesses and so on. You clean up the mess after the bubble breaks. Well, it was a big bubble that to break the bubble and clean up the mess and a aken basis, we have to clear the market, don't we. We do have to clip. But but you know what, You've got two ways of doing and you can do this step by step as you go along, which creates discipline in the system, the fear versus greed, or you can do what we did earlier, will simply

let it run, Let it run, let it run. You build up a huge thing. In that case, it was subprime mortgage lending and then you have a huge collapse, a huge catharsis. Now. I would prefer the step by step keeping things in line, but the Fed seems to be on this track now where they don't want to they don't want to disturb things, and inevitable is a big build up and then a crash. I don't see the crash coming now. I don't see the mechanism, but

human nature hasn't changed. It's there somewhere. How do you respond to Barclay's and David blench Flower yesterday telling us they need to get away from a green spannion measured and get back to an Arthur Burnsey and fifty basis point rate cut at some point? Is it good to get off the measured track? Uh? If you need that kind of if you need that kind of shock, if you need to do we need that kind of shock right now? Not right now? No, but but you very

well could. I mean, you know the thing about the economies, you never know where you are now until much later. It wasn't until December of two thousand and eight that the National Bureaue Economic Research, which is the official arbitry of recessions, declared that the business had peaked a year earlier in December of oh seven, And of course with the delays of revisions and so on, you never know

where you are. So it really means the FED is always behind the curve when they're reacting to the economy as that goes along. One final question. You've written numerous times for Bloomberg Opinion on China. Do we underestimate China's resiliency as an economy? On No, I don't think so. I think I think China has got a lot of problems now. They have a top down economy, and it's sort of like the FED. You know, it's one of these things that works until it doesn't work. Uh. In

a democratic system you can have gradual changes. We see that in India, we see that in the US, we see that in the UK. But in China is one of these deals where the guys on top control it, and she is putting in more and more controls. Uh. They're even watching school teachers, everybody for the government. And that works until you until it just it just blows up. Look what's happening in Hong Kong. You've got over a

million people in the streets. It's it's a it's a it's a different system, but it's it's much less orderly in the in the long run, I gotta get more questions, but we don't any time. Dr Schilling with us today. I throw his book at the young Deflation, Why it's coming, whether it's good or bad, and how it will affect your investments, business and personal affairs. It's just out twenty one years ago. We're looking for the fourth of July movie.

Here two thousand markets thirty at the anniversary. Thanks for listening to the Bloomberg Surveillance podcast. Subscribe and listen to interviews on Apple Podcasts, SoundCloud, or whichever podcast platform you prefer. I'm on Twitter at Tom Keane before the podcast. You can always catch us worldwide. I'm Bloomberg Radio.