Hi you're listening to copy time, a podcast series on markets and economies from DBS group research and 10 Rubik. Chief economist. Welcome to our 63rd episode. This is a very special episode for me see I was a graduate student in the late 1990s and in 1998 I happened to get a summer internship at the Washington D. C. Headquarters of the International monetary fund.
I was highly interested in the drivers and implications of financial crisis and as luck would have it, I was pleased under the supervision of a young Brazilian economist with whom I would develop such good chemistry that we went on to co author three publications over the next few years, which no doubt contributed immensely to my PhD completion and subsequent employment at the I. M. F. That resilient economist, Ellen Goldfein soon thereafter left Washington D. C.
To go back to his country where over the last two decades he has done just about everything across the public and private sector.
Ellen Goldfein is presently chairman of the Board Credit Suisse brazil but it was recently announced that at the beginning of next year he would join the I. M. F. Western hemisphere department as the head Ellen was governor of the Central Bank of Brazil from 2016 to March 2019 and Deputy Governor from 2000 to 2003 In 2018, he was named Central Banker of the Year by the Banker Magazine.
Previously in his career, Ellen was partnered Chief economist and advisor to the board of Itau Unibanco Also he was founding partner of Quiano Investimentos and partner of Gavea Investimentos. Ellen go find a very warm welcome to Kobe time.
Yeah, thank your time or it's um, he's walking into a memory lane remembering
Especially on the 90s. Uh, well he wrote all these papers, you know, until today they are quite cited and the reward still I got all these uh, citation indexes and our paper is one of the the most cited because it's about contagion and then it's about Uh, you you mentioned 98 and it was just after the asian crisis and it's a, it was it was the moment where I was sitting in the asian department writing papers and it was very nice that you, you arrived and then the rest is history
for both of us. I'm very happy to be here. Actually. I'm basically recording this. I'm not giving any interview any podcast but I'm doing this because just because of this, our relationship from there from the past,
I'm very grateful for that and I really appreciate it. And as you were recalling, I'm also recalling that another paper that we worked on where we looked at the impact of one country's contagion and reaction in another and you had that innovative approach of looking at data from resident flu and non resident flows to sort of, you know, parts, you know, which part of the investor reacts first and what sort of inside information they
have over the economy. I thought that was very innovative and I'm glad that you know, I got to work with you on that. I've seen many, many papers subsequently approaching that 20 years ago it was you know, very cutting edge Iran again, real pleasure. And I'm very grateful that you're with us. I want to start with talking about of course,
what else? The global pandemic, What's your view on the fourth quarter and beyond for the global economy as vaccination admittedly spreading unevenly but spreading nonetheless. And we're even seeing some news about antiviral pills getting introduced.
Well, hopefully we are at the beginning of the end uh of discovered it will not end immediately. I think it will take some time vaccinations are there booster shots are coming some countries, the symmetry on vaccination is still there but slowly and steadily. We are getting into developing economies more and more percentage of people vaccinated fully vaccinated. Uh my country brazil started in in the left foot. But now you have Uh 50% fully vaccinated and more and almost fooled. Almost 90%.
More than 90%. We have the first shot uh on on because there is a difference with nationalism. Nika they're giving three months. So between the first and the second, you have periods of time. But at the end of the day, I'm I'm starting to believe that we are at the beginning of the end of this covered markets of course are already ahead of the curve have boomed and economies advanced economies have recovered.
So the U. S. Recovered from the fall of last year, europe, even even emerging markets are just basically Uh you may not want to call it a bishop recovery but everybody just fell a lot in 2020 and recovering 2021. So you question, the fourth part is basically what's going to happen after the Bishop Recovery? Uh We're gonna put video to recover.
We're gonna hit some some wall and on, oh immediately I think most of the countries will hit the potential which won't mean either higher inflation and and will mean that you will have to aboard strong recovery, others have space. We are seeing quite a bit of monetary and fiscal stimulus. So whoever has space will just use the space. The rest that do not have space in terms of potential will just hit some limits.
Uh and that's basically what I expect from 2020. We can talk about the limits on advanced economies which will basically give the the overall global scenario is shaped.
Um You began by talking about brazil so maybe we just talk a little bit about latin America. I'm sitting here in Asia. You know, we don't follow latin America very closely but we do know that there are latin american economies which are very long the commodity cycle and we're seeing some strength and commodity prices and you mentioned the progress with vaccinations. So What's your overall sense of Latin as we head into 2022?
Well, a tom was hardly hit by the covid. It it affected uh quite a bit of the population, the mood, even the political institutional arrangements were she cooks? I can give you several examples uh social unrest in chile before the covid. But now we have a constitution amendment that will be will be voting there uh next year, which changed a lot of the important rules and uh in chile. You have with sarah unrest in Colombia,
A more difficult time in Colombia. You also have peru we had a terrorist election, a more uh huh candidate that was elected with now challenges to deliver what I promised. Uh So I will say that latin America has emerged from the covid With a lot of challenges, social challenges. one political challenges, but also economic challenge for example, that that has increased. So there are some smaller economies,
we? Ve realized that I had to use whatever they call to uh maintain their economies functioning and now they have to deal with their lives. That's what what are you gonna do? Uh So yeah, that's economies are basically still stimulating their economies. But some of the emerging market economy, developing economies, especially in latin America do not have space to stimulate
the space, Physical space. I mean, stimulus before I mentioned space in terms of potential output, but I don't think this is the limit in latin America is still a lot of unemployment. We still capacity to absorb. But the limit here is fiscal minutes. And this is where I believe the challenge will be economically. So political challenges is to do some challenges. Social challenges and they come from some economic difficulties where there are faced. I had
uh indeed Ilan. I mean as you absolutely, you know, correctly point out that we not only have the issue whether the health crisis morphs into a financial crisis and economic crisis as the cost of dealing with the health crisis comes to you in the coming years. But also it seems like you know, social and political fabric have also been stretch substantially by the stress of the pandemic obviously and and many countries are you know sort of convulsing
from that. So yeah, I think that you know, your your future institution a multilateral one and your former institution, bilateral government wants all will have their work cut out in the coming years. Uh Now of course one thing that can trip up latin America asia E. M. In general as we have seen in the past repeatedly is a rise in the U. S. Treasury yield from 94 onward. We have seen this game play out a number of times.
Um So if we see you know, slight increase in U. S. 10 year yield and as to the course of next year, the U. S. Federal reserve carries out paper market starts pricing an interest rate hike late next year, early night in the following year. Um So you've already said about the debt but beyond that, you know, what is your sense of the shock absorption capacity of the global markets?
I think I think the situation is a bit vulnerable in the sense that if you have that if you have prices markets are I have uh increase quite a bit prices are I? Evaluation and not I'm not cheap. Uh So if you have a period of more contraction is monetary policy coming from global markets? You all you tend to have a correction in prices, stock markets in general in the bond markets because to absolve the higher industry, the market interest that's going up.
Mhm. But also the council markets, strong dollar means deposition across the border. So if you're in a world with higher inflation and you get the position of the currencies against the dollar, you tend to have more pressure inflation and that means more pressure on interest rates. And that that means that the challenge to a continuous recovery, which was your question and the beginning will be more difficult.
So a beach definition of the scenario for next year will be whether we have higher interest rates globally. And as I will say, defined 90% of what we're gonna see next year, The other 10% Arabia's Democratic each country, how much vulnerable they are. What can they do? What is the policies and the rest But the the immediate impact is uh huh US Treasury yields other global interest rates.
You know, I'm again thinking back, I think 20 years ago you had a paper on the pass through from depreciation to inflation. And as you were saying that I was thinking of that paper um so let's talk a little bit more about inflation because there is such a heated debate in the West in particular about the temporary and permanent nature of the ongoing rise in global inflation and even within temporary, you know how temporary the chip shortages will the last 3
to 6 months if they last for nine months? Would producers start passing on those prices or will there margins come under pressure. So all those discussion is also going on. So I'm going to hear a little bit about what you're thinking is on this record in this regard.
Well, I think global inflation has uh has several, several factors, several causes. Some of them you could see temporary, others not So the recovery from Covid was not planned. As the covid was not planned. You have all this there lockdowns and social distancing all of this affecting the supply chains. Somehow some sectors recovered immediately. They actually some actually boom in the coffee because they were more demanded,
others have not recovered. Yes. And part of the services, tourism airlines feel like that is still to still
way to go in the recovery. But when you look at the same product when you have different changes and you know that in order to produce today globally you have fix produce all over all over the world and sometimes you have interruption in a part of the chain and for some reason the worker were not able to produce at the same level that other parts of the chill produced and that generated some scarcity and has you know scarcity in splashed shortages mean high inflation.
So that is part of what I call the temporary part which is uh covid relating at semantic recovery tend to have this temporary supply disruptions and that was saying all over all of the global economy. Uh huh. But there is part of what we're seeing that is uh not only this supply effects Emperor supply effect.
Arab it is basically roof recovery and when we see in the U. S. Very you see a lot of vargas is but not enough job jobs to fill designs is I need to generalize phenomenon that is leading to higher wages. one cannot ignore that that's the basic mechanism where demand driven inflation generates, it's inflation, more demand. The supply, labour market is tied wages go up at the beginning the mark up goes down but at some point this implies hard inflation.
Another sign that there is some hit it global economy is that commodities boomed as you mentioned. I mean you see all the it's back and forth every time you have a crisis or problem in china. Oh there is a flight to quality and commodities go down. But trends when you look at oil and you look at metallics and those common is over the last two years after the comedy you started recovering comedy is going up. So that gives me a sign that this part of the inflation may not be so
so temporary. So if you combine temporary effects plus the more permanent effect you get high inflation. And I believe that's the reason we are having inflation everywhere. On top of that as you mentioned there is exchange rates and exchange. It sometimes reflect just democratic issues. So if you have a country that has political problems or economic debt issues or you guys capital outflows and that means the deposition. Once you have the deposition there is past for effect.
So and if you're in a recovery and that's part of the paper you mentioned. Thank you if you're in a recovery the past was higher and when you're not in the republic given the procession depends to have a higher or lower passport, the fate of some factors, one of them is going to recover or not. The second is if you do if your parents is already undervalued and sometimes these are on the planet and if you get an additional the procession coming from whatever reason that means higher pressure. So
global in pleasure. Plus it is symptomatic inflation which is sovereign inflation. They're all giving more or less inflation uh in our major markets developing in that part
from the perspective of central bank should supply side inflation be ignored.
No I don't think they usually ignored but it should be treated differently from demand side inflation. one of the months that inflation things are much easier because the demand side inflation means that you have an inflation and you have to go back to your target. Well you have to uh you don't have a inflation target but you have just the target or you just care about inflation. You have to react because inflation is up.
If you have a demand side inflation you're reacting when you are yeah above full full employment you are or overheating. You are below the national rate of unemployment. Whatever is your definition of that you are hitting. So demand side inflation. You get high inflation when the economy is strong so you react and you to celebrate the economy and you and you and you rain on inflation at the same time and you don't get a recession you just get a
deceleration with low inflation. That's easier to deal. Probably the supply is that the correlation is there is the opposite. Whenever you have high inflation can the supply shock. It's also the case where you're not in full employment, you tend to have either it's a supply shock that generates typically a nine struck generates a recession or it's just uh temporary supply ship that could not allow you to
to produce or you are shortage shortage of production. So whenever the central bank reacts to avoid inflation, it makes recession worse or makes the deceleration worse and that's not not ideal moment to do it. However, central banks still have to react. So they I will say that the yeah, accepted protocol. If you can say that is that you react to the secondary effect of
inflation, you
allow prices to go up price levels. So you don't you don't want the oil shock to go down. You don't want the the relative prices too move back. You don't want a recession, You don't want this one time impulse to just feed into inflation. So if you allow wages to get it to absorb the past inflation and put them to the future to prices and then you get service ISMs had nothing to do. For example, in the initial start to start having increases. So you react to the secondary effect
of these sharks. So the man inflation you just react normally supply, you react to the secondary effect that you absorb first round effect.
Well, putting on that makes sense. Um So temporary, permanent demand supply side, whatever the causes the Federal Reserve is of course looking at this with an innovation a couple of years ago it came up with this average inflation targeting framework. And there is this view that it could be by design increasing the risk of policy error because it's more of a rear view mirror policy. It's not as preemptive as the earlier reaction function was. And it could then start getting
into policy credibility. Of course, you know, we don't see evidence of that in the market based indicators but that seems to be one fear around average inflation targeting framework. What's your view on that?
Yeah, well my view is that for quite some time even the heads advanced economies and I will say global inflation has been subdued but it has been below target for some of those economies and that means that they had to react some way to get back to target and one of the devices was to affect expectations and to say that even infiltration goes up, they will not react immediately.
And a way to commit for that was the average inflation tarik who say well even if inflation goes up it will take that, I will look at the average, I will not look at the the the the the margin So that is somehow a way to commit yourself two having low nominal rates which if inflation goes up means lower real rates and that's the way to stimulate the economy when you are a very low inflation below your target. So by design you say you're not going to react to the margin.
The problem is when you get to the marching and inflation is up and you have already committed to not react to stimulate the economy. So what we see today is basically the commitment that you promise you have to deliver because you don't deliver, you won't be able next time too promise and people believe so now you're getting the inflation, you are committed to lower interest real interface and you're delivering that.
Of course that's good in the way up because you allow the economy to some more degrees of freedom. As you mentioned once you guys inflation and want inflation to go down, then you're in the opposite side, which means that you will accept higher inflation even though you need to be preemptive and you need to somehow
produce inflation. So you're basically in the way down. You are with every inflation you're using part of you, what you mentioned the real mirror, you were looking at passive relations and you'll have to see what happens. So it is it isn't traditional classic trade off the commitment and flexibility and we are now basically pain the prices of commitment of past commitments. And we could build how we could have a scenario was going to be lucky.
I'll take the lack out of it. But you could have a scenario where inflation is temporary and the costs are very small following an average and you've done well and no, we're not overreacting or you will have a more permanent inflation were the consciousness this will be much dear because you will be seen husband behind the curve and trying to raise interest of inflation is already embedded
in prices. So I will say next year will be crucial to start to define whether we have we are having a temporary inflation and being more uh huh. I will say slow and moving out which is good or permanent inflation were you'll have to run behind what you lost.
All right. I mean I think that you know I mean if one is going to go formerly toward average inefficient targeting one should probably actually say very clearly you know over which period which is still sort of ambiguous as far as the Fed is concerned. They might as well say it's a price level target in my view. Um So Ellen related to this is staying with the Fed but this is also applicable to the Bank of Japan and the C. V. And to some extent some emerging markets as well that you know a lot of
money printing since the GFC. And until very recently you know there was no you know manifestation of major inflation.
And we also now have parallel to this this new line of thinking that if the government wants to spend into productive areas they should just issue that central banks should help them in terms of the financing if it needs even monetization so be it but but it's okay because it will raise long term growth rate, it will address social inequities and therefore we should not spend too much time worrying about debt levels and so on.
Um It seems like a bit of a call for a paradigm shift from what you and I studied in school or practice in our professional careers. What's your view on this?
My view is that we are still, we have not still abolished the limit. It could be that the limits in the last few decades where far away from what we expected because of the global nature of what we have seen and incorporation of large chunks of operation into the global economy let me have pushed prices to go down not to go down, but inflation to go down. Uh and it may have given impression that the inflation will never come, but it will never happen.
So then you started with theories that will tell you that it's forever uh that whatever you bring well the world whatever you that limit
and or limit, you can continue doing it. And it's always a very, I will say a very enticing proposition because if you don't have that limits, you can just spend whatever you want because just you should get and if you don't have limits to spending, it's wonderful for politicians because they don't want to, they don't need to care about budget constraint they just spent and what is the problem with another bridge? What is the problem for another support? What is the problem for another um
another program? Either infrastructure or not or just writing checks there's no limit. So why do you care? And if there is a limit for that, you just print it and he was printing is free. Just do it. And of course there's enough people like me have their very suspicions of this non limited theories. We just say, look, it's just does it, it's not gonna work forever. It's good that we don't try to breach this limit.
Uh maybe we already reached the limits because inflation seems to be back and we're discussing whether it's permanent or temporary, maybe it's permanent and they understand then the party's over, maybe it's temporary and we still have more to go on this trying to with the limits. But what I would say is that what if you look at history, it tells us that it takes long but eventually you reach the limits and then you say why why why we why we didn't stop the excesses,
Why we have not stopped before. Let's regulate better. Let's do a different thing. Ask for more capital. As for more regulation, let's pray we do stuff. But in the way up we just keep entertaining theories that basically say no excessive, they don't exist. Just go free and then we face the crisis and then we blame everybody.
But at the end of the day we should blame the non limit theories have been quite difficult because of the coffee that the citizens of the crisis to still argue that's what that whatever you do to support your economy, you support the poor, you have consciousness of the need to governments to act. But at the same time, no, there are limits of what you can do in terms of budgets and monetary policy store.
Final question, Ilan, I mean, half or two more questions. One question first, is that have economists as professionals, has done a poor job of sort of figuring out what
the limit is. Because I remember a decade ago, there was a whole Reinhart Rogoff paper and they looked at, you know, hundreds of years of, you know, debt crisis and they had certain thresholds um which many developed countries have pushed through in in recent years, and and therefore, you know, you have the proponents of free lunch, you will say, look, they went past the Reinhart Rogoff threshold and nothing has happened. So
why should developing countries uh do anything differently? So, firstly, I mean, do you think that, you know, there are ways to sort of establish such limits? Or is it really, you know, country by country idiosyncratic?
No, I think that just that it could be the case that for some specific reason we we just faced and there's inflationary decades, let's assume just for reasoning That you have 2,000 2010, 2020, 20 years of abnormal low inflation, I just give you one reason for that was logical operation of of big chance of the population to the global market. That for me is a very reasonable explanation for low inflation for two or three decades. Let's assume that that's happening to two decades.
We as an economist we don't have the data to say that this is just one larger cycle and not just a permanent change. So you're we're here we look at the past dana. It gives us an information. If it doesn't come in one year It doesn't come in five years it doesn't have in 10 years and then we are conclude that will never come. But maybe I was fun of time generation is 2030 years. Looking like eternity move for the economy.
It's not an intelligent just 20 years but we have a generation economist memories papers it just takes its for happen because it's so life those part of life. But when people were looking at it from the past will say well there was these 2 20 years of low inflation. The guys believe that these 20 years is forever and then they screwed up. Okay then they had to inflation went up actually just have to go up. You had some crisis and then they again learned the least. Lessen the disagreements
very well. Put it on. I I love the way you sort of you know frame that gives me some food for thought as well. All right. Finally it's been almost a little more than 2 20 years since you left Washington D. C. And went back to brazil. You've done all sorts of things in this last 20 years and now starting in january 2022 you'll be heading the western hemisphere department. The I. M. F. What's your personal reflection on that?
Well, it's so nice to be able to have a full cycle. We started like young economies trying to figure out how the world behaves how american markets behave. We wrote those papers but we also wanted to know what will happen with our careers. We was just at the beginning Now we have spent 20 years later. Oh yeah 2025 years later. Actually we are we are back. I am back to try to go back to public policy.
I always liked the fact that and we can have experiencing in the private sector, learn how markets work, learn how, how people react to different incentive policies, how people read public policy policymakers way of communicating and then be able to go back to public sector and continue to try to help. But we studied, we evolved phds, we learn um I always thought that there was part of us that give us back society are that they invested in us. In addition that I think public policy is fun.
It's fun to see, try to figure out how to how to help the economies.
Well I don I wish you the very best of luck. I know that you have a few months between your current job and the next job. So rest well enjoy the end of the year. And I look forward to seeing you in Washington one of these days.
Yes, I unfortunately will not rest because I still have to do the transition here. My current job. I have do all the changes position, hiring everything. But I hope to get today and that we've full energy to work and company will keep in touch. Let's do that. And if you're in Washington please come by
uh you can count on that island. Uh thank you again very very much And thanks to our listeners as well, Copay time was produced by Martin Tuckey Daisy Sharma and violently provided additional assistance. It is for information only and does not represent any trade recommendations. All 63 episodes of copay time are available on YouTube and on all major podcast platforms including apple, google and Spotify. As for our research publications, webinars and live stream. You can find them all like
googling dBS research that great. Have a great day