Surveillance: Strong Dollar & Crypto with Rogoff

Kinneth throwing Off joins us to say he's economics and public policy professor at Harvard barely describes his public service to the nation, and of course many years is the chief economist at the I M. If there's been a few books that people have been forced to read, is well, I want to go ken to one of the great algebraic books, the giant Wendy Carlin of the University College of London, with their effort on the three equation I S L system. We have just had a natural disaster.

We have had a massive COVID fiscal impulse. What does your world say of how we extract ourselves from a massive increase in the fiscal a massive increase in debt? Okay, Well, I mean I think a lot of policy of the path a couple of decades and Frankly, a lot of the academic thinking and literature was predicated on we'd never have a war, we never have a big supply shock, interest rates would never go up and guess what, oh,

and there'll never be inflation. And it's happening, and we you know, we have to make adjustments that people haven't seen for a long time. And I think it's going to be much harder than it was in the nineteen eighties. The political environments changed, the economy has changes. You said, there's much more depth. The stock market's really high. People are very worried about inequality. It's going to be a heavy lift to try to treat this like a classic

Kansy and demand shock because of all the news. So Ken I have to turn to Upsaled rogueoff in your excellence at i m F. Following on from Rudy dorn Bush, David fulkers Landau speaks of a dollar stronger he nailed out along with others, and here we are. How do you actually weaken the dollar? Well, you know, I mean the dominance of the dollar in trade and transactions would be there, whether the euro, you know, they're they're one fifty dollars per euro or the opposite. I mean that

that's that's a given. But you know, right now, there's this concern that no matter how troubled the US is, there are other countries that are in worse shape. So it's actually, you know, uh, gonna take a chance. I I think a lot of countries are having to react because inflation goes up when the dollar strengthens. Paradoxically, we don't get that much benefit in the United States from the stronger dollar because so much of trade as priced

in dollars. But the rest of the world has to react. Well, let's talk about different parts of the world than can that may be hit by a stronger dollar more substantially. Are we own the verge of a currency crisis in any emerging markets? Well, currencies have certainly fallen. I don't know, you know exactly, I'd say currency crisis, were at risk of certainly debt crisis and places like Turkey and some

of the lower income, middle income emerging markets. My co author and colleague Carmen Reinhardt at the World Banks warning that there may be banking crisis and all of that, of course may lead to currency crisis, and in principle, the movement of the currencies cushioning and preventing things from you know, falling apart. But it's very stressful. I mean having your currency fall and having inflation go up and having to raise interest rates. So the position you're quite right, Kaylee.

The position of emerging markets is really tough. And do rate hikes from central banks fix that or do you need direct intervention? Well, I think they're going to do a mix of both. Rate hikes help, but a lot of these countries don't really have the kind of you know, frictionless capital markets that we have certainly you know in the United States, and so they're able to intervene, but you can only do that for so long. The Asian countries have a fair amount of reserves, other countries have some,

but you can't do that indefinitely. Okay. So I would like to move the conversation from fiat currencies to the realm of digital and cryptocurrencies. Can Tom was pointing out my required reading The Curse of Cash. You look at the future of currencies and digital currencies have a role to play, and I'm wondering how you differentiate the idea of CBDCs. You know, central bank digital currency is a potential digital dollar versus the broader kind of speculative assets

that cryptocurrencies seem to be at the moment. Not a simple question. I mean, I think at the moment, if you think about the United States issuing the CBDC, you have to ask why they're doing it, because we have can accomplish a lot of the things the same way in the current system by making tweaks. Uh, if you did it too well, you've had a retail central bank digital currency, there'd be massive bits intermediation that we're probably

not ready to handle. I think they're they're small central banks that want to issue a CBDC hoping they'll get some of the kind of business that crypto guts. But it's it's very different something that's going to be information that the central bank sees and cryptocurrencies where the general idea is to try to make it expensive to track you. I think central banks are way behind the curve and governments in general and regulating cryptocurrencies. They throw out the

idea of having CBDCs to distract the conversation. But ken what's so important here, to your your very courageous book, the curse of cash is the why we both you and I are on the same page. We both agree where is regulation fine? What is the why of the delay? You know, I think it's it feels like the nine nineties in early two thousands to me when the financial system was inventing all these clever new financial engineering devices and saying, you know, catch me if you can, regulate me,

if you can. And I hear very much the same things from the you know, young cryptocurrency pioneers, and there are a lot of ideas there, but they're wrong that they can't be regulated. But they're they're, you know, they're lobbying that. We we saw the Super Bowl with the ads cryptocurrency their states like Colorado in Florida, which seemed to want to be the next El Salvador. They're they're, you know, giving a lot away, a lot of money to try to control the regulation. They complain about the

SEC so they're pushing back hard. Can One final question is Japanese yield curve control. Is that in the next edition of Apsfield rogue off? I mean, I I think it's not you know, it's something that works like in a zero interest rate environment, but it can come back to bite hard. And I think other central banks who have toyed with it backed off, and as interest rates rise, Japan will have its own problems. Professor, did you ever think that we have a central bank that would of

the outstanding bonds let's say that j GP market. The limits to that, Ken, and you'll mind other limits to that well, I mean, in a way there are no limits to it, in the sense that central bank debt is owned by the government and so just a way of issuing short term government debt. But if interest rates rise and countries have very short term borrowing, including through the central bank, they've either got to allow inflation to go up or they've got to start unwinding a lot

of that. And if global real rates rise, and I think they will continue to for a while, we're going to see a lot of pain there. Can We're looking to catch up with you, Ken Rogoff there the former I m F. Thank you for a chief Economists. Ken, Thank you sir as always right now and this is

a joyful Bloomberg to welcome monthly Google Belly. He's Minister in the Presidency of South Africa, but far more in the turmoil of American political economics, the upset of developed central banks there is what is happening in emerging markets. We look at a prison today of South Africa through the experienced eyes of off Mr Ramaposs trusted advisers. Thank

you so much for joining us at Bloomberg today. I need to go to the reality that our work, our medical work on COVID came out of the Johns Hopkins University and this was very much on South Africa. You have lived COVID. You replace a senior official who at age sixty two died of COVID. How immediate is COVID to South Africa and what is the COVID illness look like for South Africa in the next six months. We we thank you very much for the opportunity and your viewership.

Uh so far so good. The last time I look, we seem to have everything tabling auto going down. I guess that's the reason we lifted restrictions totally in as far as COVID disconcern and encourage people to actually keep on staying or let on the communicability diseases in the old traditional way. Although I've just had this morning, which is during the day in South Africa that we seem to have found a new sub variant and it is

something that we're going to look up to. But so far, so good to only recovered cost post pandemic um dealing with the economy which is even weaker than it was before pandemic, although we can say with confidence that the recent indicators have demonstrated that we are actually on the

border of leveling up with the pre pandemic situation. From where you said, and with your nursing experience, when you walk in a room, you're the boss and the Roman COVID, I can see that with your nursing experience, is China getting it right or is the western world as the

United States getting of it right. Um. We we've been more focused to what we're doing at home and as far as I'm concerned South Africans, they responded very positively with regard to staying more let than before COVID knowing that epitomergical diseases always um a phenomenon to stay what it about access toward a cleaner water. Kidding on Washington's because the issue of virus is an issue that is

not predictable longer. Going far away, A boat went around the bottom of South Africa and it was a five thousand mile truct to Sri Lanka. Now the images of Sri Lanka collapsing are tangible. You have a South African random disarray like many other emerging markets. How immediate is the the food, the inflation, the economic unrest in South Africa? Is it's something you're focused on urgently or can you

manage these challenges forward? Well? Uh, social economic situation in our country continues to be a huge threat west now with the global environment in particular big economies like United States having high inflation which has got a potential spill over. But what encourages us is that the focus of South Afghanta's Bank give us a data in projection of about UM five point four point nine, four five point seven, five point zero, four point nine, five point seven and

four point seven at the third year. In other words, everything is within the range in as far as the focus of inflation is consent. Nothing is about six as oranges between three and rticore and six. And of course the the treasure is oh projection outlook gave us two point one growth this year, which is expected to averach at one point eight depending on consumer expetition. And so it is a day to remember Nelson Mandela. You will travel from Bloomberg down to the United Nations to attend

UH different events there in honor of Mr Mandela. He was his anti corruption is any of us have ever seen? You have an African continent driven by different levels of corruption. What can your government do to make South Africa be much more away from corruption and much more towards the practice of legal legal affairs? UH. This is one area we as is with especially in memory of his commitment

to clean government, to prosperous humanity, to human coesion. We we've demonstrated in particular when this president took over in take into account we were actually confronted with state capture for no less than ten years. When this president took over in twenty eight. In the immediate thing he attended to us to look at the prosecutorial institution is a baroner. It's it's improving, it's not yet where we want it

to be. That's why we are amassing energy within the public and the private sector, trying to work with the private sector to a muscile sources so that we improved the secual caps. And the other issue is that Zondo Commission, which has been dealing with the state capture this president, what is unprecedented. Did not did not edit it, just through it in the website as it plans to put together an im Mondly, we're out of time for one reason only your entourage is over there with a sign

up saying shut up. He has to go to the United Nations. Thank you so much minister for joining today. Mondy Google the belly with us from the Nation of South Africa. The read of the weekend, the read of your life, wherever you live. It's simple. Laura raym Nails at Chief US Economist a F Investments, Thank you, Laura. You wrote up where I went, which is the stickiness of rent. We all know this huge uproar in New

York City about it. Williamsburg is a small enclave out to the east of Manhattan, and there there was an apartment listed for a cheap thirty five dollars. And when in a frenzy at four four thousand fifty, how do we bring down rents in America? So this is one of the ironies of this fate Hi cycle. The SAT is actually through raising rates, disincentivizing home builders in an

environment where we have a shortage of housing supply. So I think it's very likely over the next year we continue to see rent putting upward pressure on inflation, and we know we're going to get into the data. This week is gonna be focused on housing. Clearly, housing sales are going to be continue to moderate. But this is one of the I think inconsistencies of the Fed's rate hikes activity with their goals, and one of the ways in which they're kind of facing a different inflation demon

than they are used to coming from. This writes some important questions, and condescent And on Twitter has asked this question too. What is the optimal way of using realized inflation data to make a forward looking monetary policy decision? You know, to me, we are focusing so much on this monthly University of Michigan number, which in reality is um so sensitive to gasoline prices, and so I think we're really made too much of it when it went up, We're making too much of it when it comes down.

The market indicators are more contained when it comes to inflation expectations, but when we look at inflation right now over the next year, a bottom up approach is really bad, you know. Not the Philip cur dynamics that drive inflation over the long run, but really taking it apart, and when you do that, you do not have durable good deflation, you do not have energy price deflation. It is virtually impossible to craft the story where inflation comes neatly back

down to two percent. So much have to go right to get inflation to behave well, okay, Well, one of those factors obviously is going to be the Federals are hiking rates trying to bring in demand, Laura, and and this the question really surrounds how much the economy and the American consumer in particular, is going to be able to tolerate. And if you ask big banks CEOs, they're looking fine. We're just hearing from the CFO Bank of America Alistair Borthwick saying the U S consumer spending levels

remain high. They delivered the highest quarter ever for spending in the second quarter. They sound quite optimistic. How optimistic are you on the U S consumer? You know, I described the the U. S consumer as resilient, and I think there's better foundation for growth going forward for I think the household, you know, looking at what's driving household spending, a lot of those components are still there. But when you back out inflation, it's clearly crowding out other discretionary spending.

So again a place where inflation in and of itself is hannibalizing other demands. When you are looking at the retail stones number, it's solid that you back up the inflation impact. Real consumption is slowing, it's not in negative territory, it's not contracting, and that speaks to the resilience of the consumer because look at our economy versus a lot

of the rest of the developed world. We're still in better I think, you know, standing we're still have better economic activities does not mean the fin needs to do more. I think they're there. I think they need to go fast to neutral, get there, and then they need to

become more data dependent. They need to give these rain heights time to work on the economy and not be so reliant on the models that are really constructed for you know, prior episodes where we don't have inflation coming from the disruption and supply chain, from all of the unique pandemic driven inflationary factors. So I wouldn't be a favor of fas to neutral even a little bit beyond get us the three percent and then take a minute and see it would have the data respond and realize

that we're just in a very different environment. I don't think there's enough acknowledgement on that from the FED. A great Laura, thank you Laura. In the of FS investments, I agree, we're in a very different environment. This is a joy right now and arguably after Ken Rogoff, after the senior officer from South African others, I'm sorry, this

is the most important interview of the day. Marco Peppick is chief strategist a clock Tower Group and what he does is absolutely unique is folding geopolitical strategy which is his wheelhouse and water bonds gonna do? What are equity's gonna do? And the distinctive feature of this is he has called bottom in June for the equity market. How do you get from a synthesis of geopolitics and frankly

central bank analysis to buy equities? Now? Well, I think the most important thing Tom is what's going to happen to oil prices. We had j Polo who told us on June fifteenth that he is focusing on headline inflation UM as opposed to core, which we have all thought was the key monetary policy instrument. And so what's important now is whether oil prices have more upside or downside, And in my view, there's more downside, and there's going to be a flip correlation between equities and oil. This

is too important, Ed Morris very much. And the Marco Pappa camp says, here's the geo politics. There's a tendency here to lower oil prices. Ninety on Brent clear, hundred on Brent clearly says that. The other crew says they'll be em demand that will keep oil sustained. Will that e M demand not be there? Yeah, I don't think so. And I actually think the biggest red herring right now

for investors is zero COVID policy in China. Everybody thinks once it's over, there's going to be this lift up in Chinese demand, and I'm worried that that's full's gold. They are having structural secular problems. They're pushing on a string households, and a private sector in China is experiencing what we did in two thousand and so I don't

think there'll be significant liftoff in e M demand. Well, I'm just paying attention to headlines that are coming out of Reuters right now, we're all paying attention to nord Stream one and whether or not that's going to reopen fully. On Thursday, Reuters now reporting that the own V expects work on nord Stream one to be completed and says

deliveries will resume after we're completed. If gas is continuing to float to Europe and prices come down as you are indicating, Marco, what does that mean for the Euro Well, I mean huge liftoff, right. I think about it this way. During the euro Area crisis, which was a moment when we literally we're wondering whether the asset under question would even exist, the euro never came to parody. So I think there's been really sort of pricing in of the

apocalyptic scenario. The TTF contract, if you look at the December two thousand contract, is up something like hundred and fifty percent this year. Does a natural gas hub over during Europe? So when you think about what's going on in Europe, I think the worst case scenarios price stain. But the problem for Russia is that while they're playing this game of chicken with Europe, se of their total and demand for natural gas is Europe and they don't

have a way to alternate that demand. Their their transmission mechanism for natural gas our pipe planes, they're nailed to the ground. Okay, where else in the market other than the era would need to reprice to consider that, because the narrative seems to be that Europe is going into a recession. The gas issue may make it worse, but we're already there. Well, you know, markets discount the future six to twelve months ahead of time. I mean, at

least that's what we all think. So I would say that when the economist puts in their cover, you know, the bear chasing a little red riding hood through the pipelines, as you probably have seen this week, I think it's fully priced. The worst case scenario for Wall Street watching this morning, and I mean global Wall Street. You speak about you've written about the nonlinearities of Putin and what we see in the war in Ukraine. Now we have some experience in a war you polarize, a stalemate or

Moscow wins. Updated on that, well, I think that what's very important for investors to understand is that they're not looking at an engineering problem. So we don't know exactly how the war ends, but you know what other war didn't end, the Korean War. It's literally still going on.

It's sixty nine years later. So all the market needs is a stalemate, and all it needs is a signal that Russia is satiated with Dombas, because after that market is going to discount future you know, worst case, what does the DMZ look like in the new Ukrainian Russian border. I think that you'll have a line of control between Ukrainian and Russian forces. And while Ukraine will continue to

be armed by the West, it's much more different. It's a different situation to try to have an offensive operation against in trench Russian troops, which means that you have a frozen conflict for um, you know, for the rest of the decade. Now, what's important about that is not Russia, it's not Ukraine, it's not even the US. It's politics in Europe. And one of the things that I've emphasized

is that politics in Europe are going to change. If this war gets bogged down in Dombas, If Kiev, Kharkiev, Shernikiv, these big cities are not in newspapers anymore, European policy makers will will lose the nerve and so you will see a toning down of tensions between Russia and Europe. Okay, So if it's a toning down to tensions, is it also a fraying of the really solid alliance that we have seen take shape in a real way in the

response to the war in Ukraine. You know, I always thought that the sort of a transatlantic alliance, this idea that you know, we've we've rebuilt the alliances in the West. Um, that was always sort of a spur of the moment. At the end of the day, US has much higher risk tolerance to conflict in Europe because ultimately the backlashes is happening in Europe. Europeans have much lower risk tolerance to that. And so yes, I do think that there's going to be a fraying on the alliance between Europe

and the US. Market will be a stranger wonderful to see. Here with clock Tower today, Marco Paprick joins us here 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 and ekn Mix 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.