Surveillance: Negative Rates With Kroszner

what the way you just used it is correct. Let's discuss with Abraham rap Bowery City, Global head of FFX Analysis, and he can win on the Club of Economy like anyone. Abraham fantastic to catch up with his Let's just start there with the labor market, some depressing statistics, and I think we go back to the question we keep asking on programs like this, how long will it take to heal? Hi? John, great to be back and yes, key, key question. And

let me give you two sides of the spectrum. I think the positive news is going to be I think continuing claims they are going to start peaking quite soon. So despite the numbers being you know, let's let's say twenty five million or so as of today. I think within within two three weeks, I think that number might start to come down. And I think that's obviously a tiny flicker of light at the end of the tunnel.

But when it comes to full healing and and Chap Howell has touched on it, I think it will be a long time. There's going to be a long debate about this, but I think it will be years. So we're looking at I think in an economy that's only going to truly come out of recession, be back and kind of where it was maybe in two Everham John from Coventry just emailed in and noted how rude I was to interrupt Lisa there on the recession of seventies

three seventy four. Even that was a manufacturing goods America which is gone. This depression is a service sector depression. How does City Group Economics feel we recover given so many of these jobs are lower rage service sector. Yes, so there, there are There are a couple of things to note there, but the most important you're you already highlighted that it's going to be very, very uneven across sectors. But what is less unusual is that the lowest earners

are going to be hardest hit in recession. So even even in those manufacturing recessions, maybe the wage levels were somewhat different, but it was still the case that the pain in the labor market would disproportionately fall on low wage earners. This time around, I would argue, we actually do have more assistant factor, a systant larger assistance for some of these than we have had in the past.

And therefore, I think, even though the outlook looks very somber, I think the the possibility that we can avoid greater damage than we didn't in the past, it's probably about the same as it wasn't in previously very deep recessions. So I don't want to be excessively pessimistic at this point. But this is not to dismiss this is husually challenging. Times will lie ahead of us, and they may well have, and this is the big debate. They might well have

broader implications for not least politics here. But here's what I'm struggling with. People are saying that we're going to see the unemployment rate drop sharply to as much as others have even come out with higher estimates and then it will come back to about ten percent by year end. This is the estimate by Goldman, Sachs and a number

of others. And yet as we see from the United Kingdom, they say everybody back to work, and nobody's coming, or a very few people are coming because they don't feel confident that they're not going to get sick. How much is that headwind to these predictions of a rapidly falling

unemployment rate after it hits some of these peaks. Yes, so I would I would say that at the margin, I see more downside risk enough relative to these standard forecasts, and that for some combination of reasons that the return to work will be slower, that behavior will be more more effective than we currently think, but also because we

could see setbacks on the health side. That being said, we should keep in mind that this is a quote unquote artificial recession to start with, so there was an imposed arrest to activity, and what that means is, unlike other recessions, we had some pent up demand coming out of it. So that's very unusual in historical context. So I think we should be highly confident that we will see pretty sharp drops in unemployment over the next couple

of months. Whether that will take us back to ten percent by year end or it will be somewhat higher. I think that's an open question. But it should still come down pretty sharply. So the momentum will be very clear for unemployment to come down. But there are some very big questions about certain sectors, and to meet the most obvious one, it is commercial realistic how that sector

will will recover, for instance. I think there's a huge question mark, and then obviously applies to a number of other sectors that have been hearted in this recession as well. There's a huge policy debate going on as well, Abraham, that I think we should weigh in on. Two. There is a division between the Federal Reserve Chairman and the President of the United States. In the last twenty four hours, Chairman Pal said more fiscal support could be costly, but

worth it. President Trump then called Speaker Pelosis stimulus bill dead on arrival. Chairman Pal said negative rates aren't something we're looking at. President Trump said he's a believer in negative rates. We need to reconcile these differences and fast. What do you think the next policy move is? Yes, very very very interesting debate. So I think one thing is very clear. We're not going to see negative policy rates in the US for quite a while. I think CHAIRP.

Powell was very clear. I think the President has limited means to put pressure on him, and I think he is very isolated in his views on negative rates in the US context right now. So the FED will continue to use the tools it has and may well reinforce them, but they will be heavily waited towards towards asset purchases.

But the physical equation is also very interesting because we've all kind of got used to the recent US fiscal playbook where by parties and differences or parties and differences on the fiscal side have been effectively resolved by adopting proposals from both sides of the aisle. So the end result was just more fiscal stimulus, and that's I think

an argument in the US's favor for the recovery. And right now, for the first time in a while, it's possible that we go back to the old model where you need to find an overlap between the two sides, and that for the time being means somewhat later and somewhat smaller stimulus. So I see a bit of a bit of a risk on the fiscal side relative to invest their expectations when it comes to so called Phase four, Phase four and beyond. But I do think we will

get sizeable stimulus here. Still, everyone generalis out beautifully all the beliefs and certitudes everyone has with all your experience you, Catherine Man, the City Group team, can you these people actually stay certain in their beliefs with the twenty two or twenty five or unemployment rate. I think you make a very good point, Tom. I think we have to be very humble. These are unprecedented circumstances. We've already seen

a number of unprecedented policy responses as well. But you know, some of the really big questions, they're very hard to resolve. It just to give you a very simple list, is obviously the future of the virus and how we're going to address it. The future of capitalism coming out of such a such an enormous event, future of globalization. There are any number of sexual implications, and I think it would be it would be daft to assume that we

we have a lot of visibility on these issues. And that's why we also tell invest that you need to be very agile and be be ready to change your mind when the facts change. So we we certainly look look at the next few months with an expectation that a lot of surprises will will come our way, and

hopefully some of them are positive. Abraham FANTASTICA catch up with you, even rap Bari there of City, which I'm sure some of you in our audience will remember last November the Bloomberg New Economy Forum, when the former Secretary of State Henry Kissing had sold us that the U. S and China in the foothills of a cold war, but it was not too late to do something about it.

I wonder if it's too light now. It is such a change with us now, folks, and without question or conversation of the day on Asia and on China, this is the conversation of surveillance. I wish President Trump could listen to this morning. Is a must read book. A rave review for George Magnus Red Flags. It is extraordinary, It is short, exceptionally intense. It is a tour to

force from the Yale University Press. I'm gonna ask a big, fancy question and then I want John to pick it up with a really direct moment that we're in on China. As we talked about before, George Magnus, You're right, the Chinese nations years of shame. How does President Trump affect the shame and the suffering that China faced for those hundred years before and that sexties and seventies and eighties.

UM great question to start with, Tom Well. I mean, the the what the Chinese call their Century of Humiliation, which was when foreigner foreign countries basically carved up the country in the nineteenth century. Um is basically lives on very much in China's consciousness and in its leaders narrative. UM,

and they are determined. According to one Seasonings has framed as the Chinese dream of the rejuvenile, rejuvenation of the Chinese people, you know, not to allow this to happen ever again, and for China to reclaim its role in

the world. So what that really means in the current context of trade war, you know, virus war goodness, those we want to kind of call it, is that every time the Chinese feel that their foreigners, in this case obviously the United States or the West are interfering or pressuring China, UM, it basically gets their hackles up because they fear and feel that this is kind of history

repeating itself, which they refuse to allow to happen. So I'm trying to understand, George, how we should characterize this moment. If a number of months ago the former Secretary of State and Kissinger said that we're in the foothills of the Cold War? Are we in one now? Well, I mean it certainly has all the aura of developing that way, right we are. You know, the relations between senior political leaders are frosty to say at least actually um and um.

There are too many is where they used to be dialogue between let's say, the United States and China, where it's just basically stopped the accusations which are flying from one side to the other and back again. Are you not propitious? I mean, there is still obviously a very high level of economic independence between the United States and China, and China and other Western countries, but this interdependence is being chipped away at through what a lot of Americans

called decoupling. The Chinese call itself reliance. It's basically, these are other sides of the same coin. And yeah, we'd have to be very nervous. I think that this is going to kind of end up with not just a kind of a frosty relationship, but one in which effectively,

you know, cooperative relationships breakdown completely. George, the measures that have been taken so far, such as the US preventing your government pension from investor in Chinese companies, have largely been symbolic and not that effectual when it comes to actual flows of capital. What's the red line from your perspective, in which we've really entered into a true escalation that

will be very difficult to back down from. Well, this movement by the President to stop the public pension fund from purchasing China, or to warn the investments in Chinese companies, you know, could backfire if some of these companies are held to be liable or culpable in the kind of coronavirus pandemic u is um. You know. It is again, it's a it's a new twist in what is already quite a worrying tale, really, because we already have a war so called war going on in terms of trade

and tariffs. It's going on in technology, it's going on in other areas that are kind of buried in the kind of mantra of sort of national security financial a financial war or what the Chinese cause smokeless financial war um would be would be a big problem as well, because actually, here the United States has a huge amount of leverage because the Chinese need capital influence, they want them, they want international investors, including the United States, to invest

in Chinese equity and bond markets. They need the dollars, they need dollar financing and so um. In a way, you might say, or some people might say that the President is simply trying to exercise the leverage that he has because the dollar and the US financial system is so important in the global economy and for China. But in another way, you know, it's one thing to base My view is it's one thing to say we don't you want you investing in these companies because they're not

transparent and they don't meet our accounting standards. It's quite another thing to say, we don't want you investing in these Panese because we think they might be couple and the coronavirus pandemic, because that basically conveys something very very different to Beijing and obviously upstay Ante in terms of tension. George We've gotta get you back on because we need a huge discussion on the best way forward to change

the behavior of the Chinese Communist Party. And I know that we have two parties that both want to do that, but I think have two different visions on how to go about doing it, particularly in the United States. George Magnus there of the University of Oxford, this is going to be a critical issue. We've said it so many times on this program. Let me ask a fancy question, John. I think it's really important to shift to the fiscal debate. Now.

We can do that with Julia Carnado macroeconomic policy. She's been wonderful not only on a monetary theory that's out there and and such, but but also the shift from monetary over to the other areas. Julia. The arch theory here which many bring up, Dr Pos and I believe brought it up with Chairman Paul yesterday, is Olivier Blanchard and Lawrence Summers. And that is a strange word hysteresis, which is about if you're out of a job, you stay out of a job, it's even harder to get

back in. What's the hystoriesis meet around the United States of America right now. This is a very dangerous territory we're in um and there's This is exactly why Powell came out and sort of issued his call to arms for fiscal policymakers UM. To have this many millions and millions of people, eight weeks of jobless claims that busted through multiple times any prior record, in the deepest recessions we've ever seen. We cannot take this lightly. We cannot

assume this will all just snap back to normal. Julia, I'm struck by a statistical aberration in the data, and not sorry to get geeky, but I think this is important to really gauge whether people are actually receiving unemployment benefits. We talk about thirty six and a half million people who have filed initial jobless claimed and yet the continuing claims is so far below that it came in far below where people expected. This is the number of people

actually receiving benefits. What does this mean? Does it mean that basically the gears in states and municipalities are not moving quickly enough to get money to people who are out of work. Yeah, exactly, so, we've seen we know that many, many states are having problems processing these claims. So even if you can file an initial claim, even in states like New York, UM, people have been waiting to be to receive benefits for weeks. People have filed

six eight weeks ago and still aren't receiving benefits. So the benefit program was well designed, it was fairly generous, UM, but we just don't have the technology in place to get the money to people. Judy, let's talk about the quere how long it takes to hail time alone is not enough. What do we need today? We need to bridge this gap. And what's what Powell's message was is that this gap is going to be longer than we thought. If this narrative about opening the economy up as a

false narrative. UM, as long as we have a rampant disease, people aren't going to go back out and go about business as normal, and businesses will still be struggling to make ends meet. So this is about getting us through this public health crisis that looks like it's going to be a matter of many months, not just two or

three months. And so we need to get money to people, businesses and consumers so that they can pay their rent, so that they don't default so that we don't see a wave of business failures which would start a snowball effect of more job losses and more loss and confidence. So time is really of the essence here, Jerny. And how do you establish what is temporary just in terms of damage and what might be more permanent. Well, I still think we're in a phase where a lot of

this could be temporary. Uh, you know, the relationships between employers and their workers hasn't been disrupted for that long. UM, So it is, but we are seeing what's troubling, and I think what Powell is hearing from his business contacts is that more businesses are saying, you know, no, thanks to these loan programs, UM, I'm just going to hunker down and actually permanently reduce my operations. And that's exactly

the transition we don't want businesses to make. So in that first wave, and we saw that in the employment report, right, the vast majority of people are still characterized as on temporary layoff UM. But those can become permanent very quickly. So we don't know. There's not a lot of precision in this UM, but we still have time. Like we're still in a good spot. Excuse me, where we could we could pull this off. We could pull this off.

When you look at what's being proposed in Washington, you look at the timeline that's getting stretched out as an increasing number of lawmakers say, we need to wait. When is the latest that they can pass something in order to rescue this market and prevent us from entering a depression. We've got weeks, not months to do this. So if you think about one example is state and local governments

horsing budget crises UM. Their budget year typically ends in June UM, so they're having to make budgets for next fiscal year, which starts in July. So if they don't have money to plug that hole, many of them have balanced budget requirements, they have to lay off staff and cut back services. That's exactly the kind of second round effect we want to avoid. So we have June to get money to state and local governments so that they

don't go into a round of permanent layoff. Julie, the key distinction here is it in America, we don't want to provide direct aid individuals, we don't trust them, etcetera, etcetera. I don't want to get into the cultural debate, folks, But the fact is we don't. And in Europe they provide direct subsidies so people can pay their rent as you expect. You explained to help businesses and all that. I get that theory. Do you see you have any optimism that we can shift the ethos in America to

a more year European direct benefit tone. I think so. I mean, we we are seeing, actually, although the administration hasn't gotten on board, we're starting to see at least some bipartisan support for for stronger, more lasting income support to get us through this. Um it's early days. We need more of it, but UM, I think it's quite possible.

Because these are their voters. UM, it should follow that if there is a pandemic, this is nobody's folved, uh to actually get money to people so that they don't dessault or go hungry lose their homes. This is sort of pretty easy, low hanging fruit for most politicians of either party. So I'm optimistic we can start to see that gel as the urgency starts to the message of

urgency gets received by the policy maker. Julia not to catch up with you, Judia Karna, that of macroeconomic policy here from our surveillance Central Park Office, I can look over to Anglewood, New Jersey and see brilliant math students

all lined up on the palisades gazing out. And if they're smart enough, they'll be lucky enough to go to Brown University in Providence, or north to a smaller city of Boston and Cambridge to Harvard and do better than go to economics, and they can be like Randall Krosner, the former governor of the Federal Reserve System and now of course a force at the Booth School in Chicago. Were thrilled to Governor Krosner could join us with all

this terrific news flow that we have. Brandy. The the the path of the ten uere yield that we've seen, and as John Taylor of Stanford would call it, the great moderation that we have seen and we had for a long time. I guess some stability and volatility is the path of the tenure yield following economic things that are out there, or are our economic our investment, our financed stuff following the tenure yield. Which is it sh

It's a very interesting way to put it. I think it's reflecting the the economic fundamentals and the forces that are there, but it does have a broader psychological impact that sort of there's a feedback mechanism of what you're getting head on that It's a very interesting way of putting it. So I think it makes a lot of sense that the tenure yield has come down so much. We're clearly in a very low inflation environment. We're clearly no one is worried that, at least in the shortage

immediate run, that we're going to have ab inflation. I mean, some people have been concerned about the increasing defense balance sheets, but they've been concerned when I was there at the global financial crisis that we would have this high inflation of the next decade. We didn't have that. I don't see that that coming now. But I also think it's reflecting a you know, that low yield is also telling us something about the uncertainty that people have, the concerns

that people have about the economic situation. Ran I'm gonna be root here, Paul jump in on this question because I don't want to go you know, uh, the mental Black wonderful professor in New York University has done great, great research on recurrence equations and feedback loops, Professor Crost are real simple. Can economists and even well meaning chairman's of the Federal Reserve be so presumptive as to believe

they can break the feedback loops? That's also another very interesting question, because my last one for the quarter going that no, no, no, no, they're more more coming the because it's a very um challenging game when you're have a megaphone like a FED chairman, because you want to be realistic, like the chairman was yesterday, that you know

they're gonna be a lot of challenges. Head don't think that this is just you know, we turn the lights off, we're going to turn the lights back back on again. But you also don't want to scare people because that can make it more difficult to have the recovery. And so you try to um talk in a way that is realistic but gets to the direction that you want.

It's very very difficult. Look what happened to Alan Greenspan when he was trying to be realistic that he social irrational exuberants and the stock market shell by a very significant amount. It's really something Paul I was rude. Their Roman Freedman is the Giant at New York University has really studied the recurrence equations, the feedback loops, the redos that happened behaviorally within an economic system. Paul So, Professor. We heard from a FED chairman pal yesterday. He seemed

to pooh pooh negative interest rates. Give us your thoughts about how you think the FED thinks about kind of ne injuries interest rates as a as a policy matter. So I think it's um if not part of their DNA. They really don't want to go there, but certainly in an environment where we're in, you never want to say

never about anything. If we were to get into a deflationary situation and sort of the price level is falling by let's say two percent per year, if they refuse to go below zero, that would mean that real interest rates would be two percent, and that would be quite high relative to what they've been over the last decade. That would mean plite monetary policy. So they would have

to in extreme circumstances. I think we consider that, but part of the I don't think it was an accident to the chairman talked about his reluctance to go negative and talked about the fiscal authorities doing more because the fiscal authorities do more and do the right things. Um. Then he feels that they're not going to be put in that situation of a significant deflation where they might have to consider that. So as we think about their

policy going forward, here is it? Is it really are they trying to Is FED Chairman Pal and the rest of the federal reserved really trying to put some pressure on Congress to step up and do even more from a fiscal stimulus perspective. Well, I think they worry that. Um. I mean, I think they're they're quite delighted that we were able to get bi partisan support for these very large spending bills and get it through very quickly. I

don't think people would have anticipated that. I think it's now clear that there's a lot more partisan wrangling that's going on that's going to slow down the next steps. And and I think, um fit share Powell really doesn't want the burden to be put onto the FIT. You know, like, if if everybody else can't act well, then the FED will take care of it. The FED can't through the virus, said, can't prepare broken supply chains, They can't get people comfortable

with going out to to consume. Other things have to happen. And and that's effect that you know implicitly that was message, don't put all the burden on us, Um, it's got to be a shared burden. Randall crossing with his folks from our governor of the Fellow Reserve System at the Booth School of Chicago. And of course with prodigious math capabilities. Randy was born in Englewood, New Jersey. I know that's what it is. I mean, I can see it over there. I see all sorts of square roots floating in the

atmosphere over Andwood, New Jersey. Right now, Professor Crossner, let me ask you a Mathew question about a non Mathew concept. And this comes from the economic lightweight, Olivier Blanchard of M I T. And a guy named Summers from Harvard as well. Folks, I'm kidding here, and that these are all concept ideas that are particularly perceived by the media as concept ideas. And Professor Crosner knows underlying Blanchard and Summer's work on histories, this is prodigious math abilities. What's

the math of our unemployment? A professor, Um, that's a big number. That's good. You get that yeah, yeah, no. But the challenges when you get to numbers like this and this persists, there's a scarring that goes on. That's that sort of history assistance, sort of a fancy way of just saying that this is not something that's temporary but has long legs. This is scarring that that happens. It's not just oh, someone thrown out of work and the populations out of work and then they just find

a job again. It makes it very very difficult when people are out of work for a long time to be able to get back into the labor force. When you have that many people out, that means that people need dramatically different kinds of skills and it's very tough to get them reskilled so so quickly, and it makes it very difficult when you have those high employment rates to be able to move move them down. And that's why I think it's very important that policy think about

the transition that they're trying to think about. Well, can we just get to February? I have you always gone The meteor has hit, the dinosaurs have been been made extinct, and there's no way we're going to bring them back. Okay, but why can't we be Germany. I mean, this is a really important question folks in terms of retraining the Germans on the high ground on us, Professor cross Or why can't we Retraine? And frankly Chicago in the Midwest is like would be the nexus of this. So I

think I think there are two things. One is that there is this long history of apprenticeship systems in in Germany and so people building skills abroad a broad skill set. We don't have that in the US. And also to the culture, there's a cultural piece to it. In Germany, when people grow up together, one person goes on to become CEO of a company, another person becomes the someone who works in um in metal work and becomes a welder. They can they generally tend to stay friends and stay

in the same social circles. In the US, we don't have that, And so I think it's a combination of a cultural thing and the structures, the predecision structures. What you just heard their folks are Randall Crosser tattooed to your brain on Germany. And I'm pleased to say, Richard Clara to the vice chairman is expert on this, as is Adam Posen, who asked Chairman Powell the question yesterday, Randy, that was so valuable, so brilliant, Thank you so much.

He is at the Boost School of Chicago Randall Crosser as well. What Maijing discussion here a nursing on the doctors they leave the hospital and the idea of what that means when there is a pandemic. Here is Jason Farley of Johns Hopkins University. Let's listen. Well, I think you're seeing professionals who you know, as you would see a soldier at war who can be relaxed between the battles.

You can see healthcare workers relacing in it in those battles. Um. I don't think the public should take a sense of you know, uh, lack of urgency in our response and buy that urgency I mean continuing to be safer at home, continuing to social distance, physical distance by no means are we out of vote this more beautifully said. So with that, there's this a huge tension between lockdown stay at home the Wisconsin legislation that we've seen in the last uh

twenty four hours. How do you perceive the gray area between a strict lockdown, stay at home and getting back to normal well, I think you characterized it perfectly at this sense of gray in which, um, you know, everyone is opening up in a slightly different ways across the country, across the world, um, and we really need to pay very close attention and be vigilant to how that opening up and how our change in our behavior. How are you know, quite frankly, our our decrease in social and

physical distancing from one another. A return to work is going to impact new cases. We we anticipate that it will impact new cases. And yet there are some painful decisions that have to be made in as you've mentioned multiple times, the recession, preventing depression economically and in many cases, um, you know, just saving businesses. So it is a delicate balance between being able to open up expand the economic environment, while you know, also being vigilant to prevent ongoing transmission.

Can we guestimate, Jason Farley, how many people so far have had COVID and how many of those people are immune? So the immune question is always very hard one. At this point we are doing, you know, investigators across the world are really struggling with uh, you know, coming to grips with whether or not immunity will occur as a results of infection for some people, we believe that it will. But we are seeing cases of relapse reinfection, if you will.

And so what's critical to understand is in these patients who have you know, a supposed relapse, were they truly tested negative and repeatedly negative for the virus and and basically became what we would call convalescents. So they recovered, and we we can detect antibodies in those circumstances, and then we follow those people over time to see if

reinfection occurs in those circumstances. We're actually launching a study in June to do exactly that at John Hopkins to really follow people longitudinally for at least twelve months and a cohort of patients UH to see if what the prevalence, what the incidence of the virus is in this twelve month period, particularly if we begin to experience a second or you know, forbid, you know, um a third wave

of this infection. And so we're really trying to be vigilant in our understanding of the potential for reinfection, the level of immunity that occurs, and what that ultimately helps us to understand about the potential for this growing concern of a second wave. Our country is working together to try and figure this out, or is it everyone for themselves.

I think much of the global community is working together. Unfortunately, I do believe that, you know, from a US perspective, we have opted out of that global community in many ways, not only the rhetoric from the White House about multiple UH responses from other countries, specifically of course, the focus on China, but also the global vaccine initiatives. The US has decided that we're going to go it alone and not participate in several of the global vaccine initiatives, which

UM is very nearsighted on our part. Um, I do believe, you know, we have our first trial starting here in the US very soon, UH, some ongoing trials, but John Hopkins specifically in June, so in a few weeks we'll have our verse vaccine trials going. And in addition, um, you know, multiple different vaccine candidates, so it's not just

one vaccine. UM. While the rest of the world is moving ahead, and we know that an Oxford and other locations around the world, we have seen you know, the vaccine initiatives really take off so I think we are being nearsighted in the US response and not participating in global efforts. Jason Farley, Johns Hopkins University, Nursing. Just a very smart, holistic conversation there, folks on the trends right now.

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 s