Surveillance: ECB Stuck in Trap, Athey Says

banks have zero degree of freedom. They may even have negative degrees of freedom. Do you really care or when you invest? Do you really invest off what central bank headlines say? Morning Tom, That's not really what the headlines say. I think the headlines can often miss, you know, the detail, the new on the reality of the policy. See. Unfortunately, you can't invest in the markets that I invest in.

You probably can't invest in any markets without considering to a pretty significant degree what what central banks are up to. But I agree with you, they have no degrees of freedom. Really, they've dugged themselves a massive trap and they're now stuck in that trap. And there is no central bank that's suffering that problem to a greater degree than the ECB. Do you think they're stuck down here for the whole

of the cycle, James, and beyond. There's literally the ECBs problem is that it's trying to use cyclical policy to deal with massive, massive structural issues. There is there's no economic theory that says that monetary policy has anything more than inter temporal effects. And even fiscal policy to the extent that it's current spending and not investment, only has a temporal effect. It brings forward to demand from the future to today. It does not in and of itself

create demand through the cycle. So ECB is absolutely trapped. Its job really at the moment seem to be just keeping financial markets from pricing a much more terrifying future and hoping that that politicians can can get their act together. But I see no evidence so that's occurring on I'm just working through this statement right now and I'm trying to find the big change, and James, I've got to be honest with you, it just feels like a bunch of twigs around the margins. As far as the forward

guidance is concerned. This market market participants and the ECB is going to be well aware of this. They want to understand what happens after the emergency ends, what happens with PET, what happens to all that flexibility and to the hawks push back significantly enough that in the asset purchased program, beyond the crisis, beyond the emergency, we lose some flexibility. You're hearing anything about that this morning, and not in the market doesn't really care about the underlying

economic reality. To be honest, the market wants some certainty around asset purchases because it makes for a very asymmetric market environment and one in which that you can disregard actual fundamentals and risk and valuation. And by the is on the basis that syndram case you back, that's what the market would like to see. Obviously, the ECB Government Council has significant disagreement amongst these members, such that there may come a time in the future where that disagreement

really does impinge on their policy setting. I just don't think we're there yet, because we're still relatively early in the European recovery, and obviously with the delta variant that there are threats to that recovery that are already emerging. But you know, I'm minded to quote the Bgs or boy Zone if you're of a younger generation and say it's only words. I don't know if Tom knows who boy Zone are? The Bejs though, do you know boys are? Tom? No? No, No,

I don't think he's missing out. They did a cover of the Begs. Tom awhile ago, Kelly go on, I'm going to plead the fifth on whether or not I know who that is. Just carry on, James, that was a conversation killer. Don't worry, Kelly's going to pick this up. I want to know when you think the market is going to get some answers. I was. I was speaking with economist over at Berkeleys yesterday saying this meeting maybe was overhyped and that yes, we were going to get,

as John says, some tweaks around the margins. But the real answers to what the market's looking for is not going to be coming until September or December. When do you expect us to have a clue what the post PEP world is going to look like? Wow? I mean, that's that's really difficult to say, because obviously it will depend on economic outturns, and honestly, it will depend on what's happening outside the Eurozone as much as it is

what's happening within the Eurozone. Again, I don't expect to see any material shift in the structural outlook for the Eurozone. But of course bond markets are highly correlated. So in this world where the ECB is managing monetary conditions to whatever that, that actually means that there is always the the real danger that typening from the Federal Reserve can lead to an unwarranted, unwanted typing from the ECB, and they will seek to offset that almost regardless of the

domestic economic data. That is to say, again the way central banks run their mandates, they're not really two concerned until they get to the steady states as they see it, which is to say that the non accelerating inflation, right of unemployment the NERU. When the economy has reached its capacity, then they care about title policy. Up until that point, they have absolutely no interest in making marginal adjustments to

the policy as they get there. So ECB, until it gets there, it's not going to want to tighten policy, and it may have to loosen policy to offset a titan which is coming externally. James early Pine or you watch this news conference. In thirty five minutes, I've got a meeting, and there we go. Message John James, how unfortunate it's going to see you James at Aberdeen Standardestment Senior investment Manager. We kept a secret from Julia Cornado because we knew that if she knew I was going here,

she wouldn't have an excuse. You do not have to come on, ye, Dr Cornado joins us to mercro policy perspectives. Julia. This came up as I was having a beverage of my choice and someone said to me, Okay, I get I s l M going back to Hicks and the real economy and the money economy. And now none of this theory is working right now given the fiscal stimulus and the insanity of his natural disaster that we're all living. But then it folds over into aggregate supply and aggregate demand.

Dr Coronado, could you explain to our audience how these dynamics affect them when we go from Central Bank mumbo jumbo like I s l M over to America's aggregate supply and America's aggregate demand. Yeah, and those dynamics are incredibly complex even in normal times, let alone when we're sort of rebooting the global economy and dealing with a lot of liquidity slashing around. So you know, for example, even when the cycle was running very strong, uh last

before the pandemic, we didn't see any inflationary pressures. Why well, you know, we had wage gains that were solid but not really accelerating. We saw consumers that were pretty price sensitive. They were very budget conscious, even as they were feeling good about the world. We think an older economy, consumers that have been through multiple crises just are more cautious.

And that's one of the big questions going forward, is to consumers return to those cautious, price sensitive, budget conscious ways that limit how much of these supply chain bottleneck price pressures can be passed through at the retail level. Their lines on the page, my eyes used to glaze over. Cornado's nailed this stuff in the school, and there were shifts along the line and the great debate where these two strange words endogenous within the system and exogenous outside

the system. Is a pandemic endogenous or exogenous? I know that it's exogenous. I mean, this couldn't be a better example of sort of an exogenous shock in the sense of you know, without getting into the origins of the virus. You know, for the most of the people in the economy, most of the businesses and consumers, this just hit us like lightning. Uh. You know, early we weren't sort of preparing for a pandemic. We were preparing for another year that looked sort of like so uh. It really caught

everybody off guard. And then the complicating factor, Tom, is that many businesses saw the crisis and sort of pulled out the crisis playbook. Okay, I know that demand is going to collapse. I'm going to sell off my inventories. I'm going to ramp down operations uh and hoarde liquidity

and just get real cautious. But then we went into a good sending boom supported by the fiscal stimulus, and you know, that caught homebuilders off guard, and it caught a lot of you know, goods sellers and producers off guard. And now they're scrambling to catch up. Uh. And that, and and therein lies a lot of the frictions that

you hear uh la Guard and Powell talking about. They expect these things to be transitory because you know, if anything we learned during the pandemic, and we expect it to be true after the pandemic or as we move forward. We're pretty resilient and creative and you know, we find

ways to get things done even through these challenges. So, um, it's not going to happen overnight, but we do expect ship manufacturing to ramp up and some of those bottlenecks to ease, and then competition is going to play its role and drive prices back down in fault. To me, what Dr Cornato says there is the absolute foundational thing that corporations adept. Yes, they're mailieable and they make decisions as the information is given to them. Yeah, we're seeing

that in the earnings that are just being reported this period. Uh, Julian love to get your thoughts. We just heard from Christine Lagard this morning. She is she had some comments. Uh, you know, I guess the takeaway is lower for longer or somewhat even suggests lower forever. Given what we heard from Christine Lagarde, what do you expect to hear from

this Federal Reserve coming up for the July meeting? Well, look, I think the FED is in a different place than the ECB uh, and so I do think that Chair Power will confirm that the discussions around the modalities and specifics of tapering got underway. I think they're going to get underway in July. They're going to get briefings from the New York Said staff and the Board staff on different choices that they need to make and what are the pros and cons, and they're going to have a

detailed discussion, and I think he'll confirm that. Um I think, you know, in in the next months, maybe with the July minutes, maybe at Jackson Hall. You know, last cycle, we got this kind of blueprint, sort of a statement of normalization principles and plans, and so that's one question where we get kind of a blueprint from the Fed. These are the things that we've a creek agreed upon. For example, we expect to taper and end bond purchases before raising rates is one thing they said last time.

I would expect them to reiterate that this time. They may sort of specify that they're going to have an even handed, uh sort of tapering between treasuries and mbs. I'm not sure if they get that specific, but something that provides this guidance along those lines to resolve some of the debates we've been having in markets and provide

some clarity. That's that's what share Powell wants to do is lay the groundwork for markets steadily, methodically, well ahead of the actual announcement, which we still expect to come in December maybe November. Of the data run well, but we don't think they're in a hurry. But at the same so it's kind of start the signaling process, start the planning process, and give plenty of runway to market to adapt to the fact that the set is going to be withdrawing some of the liquidity support it's been

pumping in over the last year plus. You know, it's interesting. We were just talking to a guest earlier, Julia, and just kind of he was bemoaning the fact that in Europe, yes, they have lots of monetary easing in support, but really uh, too little and too late on the fiscal statements side. That's certainly not the case here in the US. Plenty of students has been pumped into this economy. How critical

is it to get even more well. I think that there's what we're talking about now on fiscal policy in terms of the infrastructure packages is very different from what we put in over the last year, which was multiple injections of big liquidity directly to consumers and businesses. They were one time payments to get people through the pandemic, to build a bridge of financing effectively, which it did very well, maybe maybe too well in some in some cases,

but definitely got a lot of people through. What we're talking about now is much more structural. We're talking about a ten year spending plan of building capacity in certain areas that we think we need repairing, you know, physical infrastructure, addressing certain um sort of structural shortcomings in our economy and again over a longer horizon, and by the way, mostly paid for. That does not fall under the category

of fiscal stimulus. That's more of a you know, retooling and uh structural adjustment in uh certain areas of the economy. You know, I do think it won't fully be paid for, so there will be some fistical tail winds, but you know, in terms of the dynamics of that, the timing of that, it's not at all like what we what we are

emerging from now. Okay, let's leave with her Julia Cornodle think as much particularly clinic early on he was knighted or at least made a lord by Cleveland at one point after staring down a utility with some great threat to his life. He's going on to do all sorts of things within the American dialogue. And this is a guy out of Cleveland who became identified with Cleveland and struggling Cleveland and helped form Cleveland and what it is

today with a pretty earnest and good recovery. Dennis Casinis joins us now. At one point, the youngest mayor I think on planet Earth joins us in celebration of the light the division of light in power. Mayeric Ca Sinis. Thank you so much for joining us at today. What I love about your book is you do the modern thing. You have these wicked short chapters of six or seven pages, which was the hardest chapter to write, of some sixties

seventy of them in your book. The first chapter I started that book in November of what what You're what you're reading with the reader will see represents the seventh draft the book that was written over a period of forty years. It's yucks now and of course so many people know you from your TV efforts as well. It was deadly serious back then in Cleveland, and that you were knighted by Cleveland later for staring down the public

utilities of trying to think about the city. When did you know the tide had turned in your belief in Cleveland and the ownership of the utilities would be brought out Fifteen years after I left office Cleveland announcement expanding

a public power system that I saved. And it took the people of Cleveland about fifteen years to figure out what happened, and that is that if I had sold the municipal electric system, it would have cost them hundreds of millions of dollars and increased taxes and utility rates. So yeah, it took fifteen years, but if fortunately I had time to spare. So give us a sense, uh, Dennis, about really what was the heart of the matter of

the initial uh challenge for you with this utility. Just give our our our listeners kind of a sense of time and space. Sure, of course, Cleveland and the Cleveland Electric Illuminating Company, I had to competing electric systems that competed side by side for over seventy five years. Municipal electric system called MUNI Light and then CEI private investor

own utility. What happened, though, is that CEI made a decision at some point they wanted to take over munilife, and so they developed a plan which became public and they also used their power with the media to try

to force the shore of the sale. And so the book opens up with blackouts that are occurring in downtown Cleveland over the holidays, and as the story unfaults, it's clear that we're in a story of corporate sabotage and espionage, and it takes a very dark turn beyond the blackouts, very quickly, and it ends up becoming an unprecedented sorry in American history, documented by the way about the battle between UH, you know, a public publicly owned utility and

privately owned utility, the division of light and power, and part of that America synages the idea of the division of power in Washington. Your observation on what your Democratic party needs to do to keep majority in the House and grab a legitimate majority uh in the in the Senate. How do the progressives liberals of your party need to speak to more moderate Democrats? Well, the first thing I need to do is to support law enforcement in the cities,

because crime rates are going up in the cities. I mean, Cleveland's had a sharp increase in homicides, colonious assaults, carjackings, and people are concerned and the Party needs to have a strong stand on public safety, you know, word for civil liberties. Everyone understands that we've got to show that. We also understand that some cities are under a siege

of crime. Uh. You know, it's the old mantra of job, job, jobs, and we need to make it possible for people to get back to work and to make sure they're making a decent wage. And that, you know, is what an infrastructure bill has to be about. And you know, that's that's it's kind of like the old FDR formula, which we unfortunately got away from. So Mayor, you know, we have a president who was in the Senate for forty years. We have a vice president who just came out of

the Senate. There was some expectation, it was just hope, that there would be an opportunity for some real bipartisan work in Congress. It does not appear that that's going to be the case. Should anyone be surprised? Well, you know, first of all, Joe Biden is a very pragmatic. I've known President Buying for almost shifty years, and he's you know, he's a product of the institution, and he knows almost you know, like Lyndon Jackson, he knows how the institution works.

So I think we should, you know, expect some progress. But we're in an era of hyperpartisanship, which is, you know, which is resulting in in inertia, and that's bad for the country. And so you know, this battle for control of the Senate in the House is creating certain, you know, aspects of our politics which are so destructive. I think American people are getting shut up with both parties as a result of that. And you know, it's like a set of your differences. Run the government and don't screw

it up. Dennis Casina. The Division of Light and Power reads like a movie script. It's like every I think the longest chapter is I gave pages. I love it, I loved boom boom boom. You get right through this on the Titanic battle he faced in Cleveland over public utilities in a political battle and involves some crime as well. I mean, it is way more than just regulated utility.

Chip right, Dennis, Concenters of course Democrat as well Jennifer Neuso where it's Johns Hopkins Center for Health Security and a senior scholar. Jennifer, I want to go back to April. April, the EU was really looking at letting American tourists into Europe. There was a better tone. Hospitalizations now led by the unvaccinated, have returned to where they were April twenty six, and it is not a good trend. What is the character of those hospitalizations. Yeah, it is not a good trend.

I mean it is a different patient population than had been hospitalized earlier in the pandemic. In particular, we have um fortunately seen good vaccine uptake against the populations that are most likely to become severely ill, of older adults, and so now the people who are being hospitalized UM are younger. Although age is the singlet single biggest risk factor, it's not the only risk factor. And so certainly people with underlying health conditions, and it's a list, it's a

lot of people um that fit in that category. UM, but also even potentially people who have no underlying health conditions are unfortunately now being hospitalized. And it's so tragic because vaccines can prevent that from happening, Jennifer, We used to talk about trying to achieve a seventy vaccination right

in this country. Can you compare and contrast the reproduction rate of this variant, the dominant variant right now, the doabta variant, compared to what we first experienced eighteen months ago, and what that means for those kind of goals, whether now needs to be seventy, etcetera. Yeah, I mean it does, like need to be higher. Um. The delta variant is spreading much more quickly, and it's potentially spreading a bit earlier um in people's illness, possibly when they're not even

feeling much, um, So that complicates things. So the fact that if you're sick and you're out and about, you can infect more people than you would have with earlier forms of the virus just makes it harder for public health officials, um, you know, to outrun it, to to use other measures to try to control it. And that's why it's really important that we don't have to do that, that we can prevent those infections from occurring in the first place. And that's what vaccines are great at doing.

Not perfect, but great masks. That's the conversation down in d C. Jennifer, you know it's back on the table politically this morning, return of the masks. The Washington Post, going with White House official, was debate masking push as COVID infection spike. If you've been vaccinated, Jennifer, what does a mask do for you? What does it do for others? Sure? Well, listen, As I said before, the vaccines are are pretty good

at preventing you from getting infected. That said, we know that there are some people who are still going to get iill potentially, but you know, they'll keep them out of the hospital. It'll be mild, it'll be the kind of illness that if that's all the virus could do, we would have never heard of this virus in the first place. So if you're somebody in that category where you know you don't want to get that illness, then wearing a mask, even though you're vaccinated, may be helpful.

Your need to do that UM is greater when you're in a place where there's just a lot more illness around you, where people are more likely to be infected, where there's lower protection overall in the community because of low vaccination rates. UM That said, don't believe that the vaccines don't UM, you know, give you some protection. I think there's been a rising narrative about that that it's really disturbing to me. Our school is one of those

places where you need to be more careful. Jennifer my home state of Virginia yesterday urging everyone in an elementary school, students, teachers alike, to mask up. Given under twelve still aren't vaccinated as we approached the school year, is it safe for students to be returning? Sure? So, first of all, we know that it is possible to return children to school UM safely, and it's really essential that we do so after UM this past year and a half of

educational disruption that itself carries harms. I've got two young kids who are too young to be vaccinated UM, so I'm very much in that boat. So so we can do it safely. Now, it has been recommended that kids, particularly those who can't be vaccinated, wear masks. You know. Truthfully, I think it's going to depend on what the level of infection in the community is. If you're in a community that has done done its part, has vaccinated its adults, and there are very few cases it seems hard to

think that you need to wear masks in schools. That said, if you know you want to have zero risk tolerance and let's just get them back and make sure they're as safe as possible, then you know that's that's an important tool to use. I think in schools where the case numbers and the surrounding communities are raging, then masks are probably an important tool because we do know that if there are cases among kids in schools, UM, it

follows what happens in the surrounding community. UM I do have to stress though, that overall kids are at lower risk of serious illness from all forms of the virus, including the Delta variant. There's been some I think confusing conversation about that lately, and as a parent, um I would want other parents to know that, so you know, we just we face those risks, UM with with what data we have right now. Well, Jennifer school is not

back in session yet. It is still summer vacation, and it's so the summer season in Europe too, and yet anyone in Europe looking to take a vacation in the US still can't do that. The Biden administration yet hasn't yet made a decision. If you were advising the president and the people around him as to whether or not that's safe given the concerns of the delta variant, what would you say, Well, first of all, the delta variant

is already here and it's raging. So if we're not letting people in because we want to keep it out, then that ship has already sailed. Um. You know, I think there's probably political pressures to keep the border closed because people, you know, and to prevent people from coming because it's probably just easier. Um, but I'm not convinced that it's doing much for us epidemiologically. Is it politics

or is it science? That's a big question right now, and a lot of people keep saying it's about politics, including your South. Jennifer is going to catch up. Jennifer Newts Jones Health Consents at the House Security Senior Scholar. 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.