Washington Talks, the World Listens

Bloomberg New Economy Forum in Beijing. So I had even more reason than usual to spend a few days at the meetings, testing the mood, talking to smart people, including a member of the Federal Reserves Interest Rate Committee, Robert Kaplan, and the former heads of the German and Indian Central Banks. You'll hear some of that later, but first we have a report from a country that's tested the Breton Woods institutions, the I m F, and the World Bank more than

most Argentina. There are four kinds of country in the world, the economist Simon Kuznets once said, developed, undeveloped, Japan, and Argentina. Since nineteen fifty, the South American country has spent one third of its time in recession, second only to the Democratic Republic of Congo. Things were supposed to be different under President Maurizio Macri, who swept to power in promising structural reforms, but now the country's back in recession and

dependent again on a massive bailout from the IMF. Macary lost badly in August primary elections to his left wing challenger, Alberto Fernandez. That shock result triggered panic in the country's financial markets and led to some familiar policy solutions capital controls, price freezes, and wage hikes. Now the general election is just around the corner. Bruce Douglas reports from Buenos Aires on what Argentines and the IMF may have learned from

their latest entanglement. M In a busy neighborhood of downtown Buenos Aires, a stone's throw from the city court houses, the bar Los Galagos has catered to a mix of lawyers, professionals and tourists, but almost one hundred years, waitresses bottle behind the chrome counter as customers chatter with a thick steak and egg sandwiches in an oak lined room above the bar. I spoke to Julianas, the owner of Los Galagos, the bar opening nineteen thirty and it's a category of traditionals.

Barrus goal balt No Dowlas was like a remarkable virus because he's important in cultural ratoris so this bar restaurant has been here since nine It survived a lot of ups and downs in the Argentina economy. How did it survive all these years? And in every crisis is a lot of places close and a lot of places change his policy or loose quality, or you can see in a lot of places who close in the big crisis of the end of the eighties or in the two thousand and one. And in every crisis there is we

have a like like a scar like. But for us is the the idea is always changed and work with a lot of creativity. If if some ingredients are very expensive, we change the ingredients. One of the biggest challenges for any business in Argentina it is hard to cope with the runaway rates inflation, with price rises currently running like yes, it's impossible to under something to a foreign people. Coffee one month ago was seventy two. Three weeks ago was

eighty two weeks ago. It's nettie and possibly the next week is a hundred business because the coffee is um it's an important actually thinking that doesn't product coffee and the coffee it's in dollars in the world in Argentina. But for us, the impact of the inflation, of the evolution of the fs in that kind of bro who

are very popular here. Julian Diaz believes that the current crisis shows that the kind of open market economy Macrie hoped to foster just doesn't work in a country like Argentina. He doesn't have long to wait to make this point at the ballot box elections to DWO on Sunday, But with Macri losing by sixteen points Throughoutberto Fernandez and the primary vote in August, most analysts believe the result is

a foregone conclusion. Fernandez and his running mate, former President Christina Kirchner, hail from the so called paranist wing of Argentine politics. Juan Domingo Perun army officer, three time president and husband of Vita, cast a long shadow over the country almost fifty years after his death. In her two terms of office, Kirchner implemented the kind of populist and protectionist measures peronists love, such as capital controls, trade barriers,

and subsidies. It's not clear how much power Kirchner would wield in a Fernanda's administration, but the man who would be president, has hardly been transparent about his plans for economic policy either. Amid the uncertainty, many fear a repeat of the past. Okay, Marina Apo am an economists. I am consultant for enterprises and banks and other companies. We are here in the University of Buenos Aires. This is

the faculty of economy. We are round here in the Museum of External Debt in Argentina, and so not many countries perhaps have a museum dedicated to external debt. Why does Argentina because of the long story with the debts and default. Let's go and I see the museum is open, So let's this is the first debt of Argentina and Brettito barring in eighteen four, that was the first. Argentina has defaulted no fewer than eight times on its foreign debt.

While external events play their part in Argentina's history of woe fiscal and discipline, it is always part of the story for Marina the cat. The administration played a major role in today's mess, burning to a cash winfall from a commodities boom by subsidizing energy costs, expanding the state payroll, and even broadcasting soccer matches for free less government. They received surpluses and they create surplusses in deficit both physical

and external. They destroyed the relative prices in trying to stabilize inflation while they push in guns and the public expenditures. But the economist does not exempt the Macri administration from blame. During the Macri administration, he used the debt in order to try to make a gradual policies to try to to to fix the problems that the curtinary is more. They made a lot of mistakes because the cenda was very difficult, but they tried to fix its problem without

taking an account that they are connected. So if you increase energy prices, you will push up inflations. If you have it an expansive fiscal policy and a very restrict military policy, you will have a problem. To avoid big cuts in public spending, Macri tolerated big deficits. Creditors, hungry for juicy returns, gobbled up Argentina's dollar denominated debt like there was no tomorrow, or indeed no longer history of default.

But when a loss of market confidence trigger a run on the pestle, the president was forced to turn to the I M. F, as so many Argentine presidents have before. All told, the fund pledged fifty six billion dollars, it's largest loan ever. Since Macu's defeat at the ballot box in August, the i m F has commented little about

its plans for Argentina. In the fund's annual meeting in Washington this October, It's new managing director so that talks over Argentina's credit can continue once the funds knows the next government's policy framework. For one former Argentine I MF official,

the organization's big mistake was being overly optimistic. Cloud your lossa former director of the i m F Western Hemisphere Department, told me that historically, the Latin American government had to be dragged kicking and screaming through I m F adjustment programs. When the Fund found an Argentine administration that shared its aims,

it became overconfident, he said. For Monica Jibali, senior fellow at the Peterson Institute for International Economics, the fund's big mistake was to hand over too much of the money up front. The main lesson for the Fund in Argentina's case is really is it's a bit the size of the program, which was obviously too big and binds the

fund to Argentine into resolving its situation. But also, in most importantly, the fact that a lot of the funds, a lot of the dis reishments were given up front, taking away the incentive for authorities to actually implement the measures that they had promised to implement under the program. So front loading was a big mistake. The i m f s optimistic assumptions about Argentina's growth prospects also had

little basis in experience. After all, the fund has bailed out the South American country so often that this even inspired a local board game, Eternal Debt. The concept is not that different from monopoly, except the goal isn't to become a property mogul, but to defeat the i m F. The FUNT, however, is hardly the cause of the Argentine crisis, that lies in its government's tendencies to spend way more

than it receives. Well. Brazil and some of the other countries in the region used the commodities boom of the two thousands to pay down debt and strengthen reserves. Argentina went on a spending spree. Claudio Lasser suggested that Argentines tend to believe they can live at a level that is much higher than they can actually afford. Back in the museum, Marina del Projecto said that this habit explains the country's perennial crisis. People only think on the short term.

The big opportunity was during them, when other countries use the opportunity in order to try to stabilize and the macroeconomics and to create a currency. In the cause of Argentina, we decided to to maximize the short term in order to grow it. I don't know if it is the something that Argentina pot in the in the head or it is because of the history, now because of the history, but it is every every crisis is has a big cost, not only in terms of of the default, in terms

of the society destruction. Whoever, when Sunday's elections faces a long road ahead, this is British lass for bloom Bakeneers. That's how the world looks from Buenos Aires. At the annual World Bank and i m F meetings in Washington, the focus was global and the mood, it's fair to say, was downbeat. When the i MS new Managing director Chris Dlina Gorgueva told the meetings that the global outlook was precarious.

That was supposed to be a comment on the fragile state of the economic recovery, but you couldn't help thinking she was also talking about the fragile state of global institutions. The Trump administration's refusal to play by the usual rules in international affairs has a lot of people rattled. Some wonder whether the multilateral system can even survive. We got into some of that on a so called big think panel I took part in for the global banking organization,

the Institute for International Finance. My fellow panelists were an illustrious bunch, the former chair of the President's Council of Economic Advisors under George W. Bush, Glenn Hubbard, the distinguished economist and former head of the Indian Central Bank Raam Rajan, and the former Bundesbank president Axel Weber, now president of UBS. And the moderator you'll hear asking the questions was the

head of the i F, Tim Adams. Multilateralism. The commitment to multilateralism seems to be on the wayne, So Stephanie, are we worried should be worried. Are you worried about where we're going? Could we recreate those institutions again? Could we get John Maynard Keynes and Harry Dexter White and the other forties city in New Hampshire to come up with something similar? Would would it just crumble? And because we couldn't agree to even the size of the table,

how do you see institutions? I wonder if there's anyone in this room who isn't worried about the direction we're going in, but certainly on the question of the institutions. I mean the question has been asked in different ways over the last couple of years, particularly in response to the trade wars, but actually in response to the general

attitude of the US. So we say the US administration to the rest of the world, and the question is, can these institutions survive, let alone thrive without the US as a willing and active participant who can see the

big picture and not just the national interest. And I think that's that is clearly a question that gets asked senior officials in the G twenty who are often sort of going into huddles at summits trying to have the kind of G twenty minus one meetings, and those meetings do happen, and I think there is a kind of underground operation to keep the wheels turning and to have when you can't do deals on a global basis, can you do a deal with with willing partners that maintain

some of this sort of commitment to multilateralism. But you'll mention of Harry Dexter White and Kine's reminds us. You know, one of the reasons these institutions worked was that they weren't entirely fair and multilateral when it came to the US UM. Certainly from my experience in the U S. Treasury and everyone else has seen the same thing. You know, it started with a bare knuckle fight between the US and the UK, the US one, and that was the

basis on which policy was done within those institutions. And you had to you know, if you're the US executive director of the I m F, everyone wants to know what your position is before you start the conversation. So we shouldn't sort of idealize the sort of come by

our aspect of these institutions. But clearly they did produce there's a there's a public good aspect which has been incredibly important, and of course any of us worried, especially in the response to another global downturn, let alone find actual crisis, whether the wheels would still turn, whether you still have enough of that stock of shared trust and norms to respond. We've certainly seen and this is going back to the economics, you know, where it comes to trade.

We could all people who can do their numbers about what the impact of a particular tariff is, and usually the numbers are quite small, just like the numbers are always quite small when you try to look at the direct effects of a trade deal, because we all knew that it was the kind of dynamic consequences that would be important. I think what we have underestimated and has been brought home by the last couple of years is how uncertainty about the whole system can really produce investment,

have confidence and investment just grinding to a halt. And that's what worries me in generally, if you can have that kind of effect, uncertainty around the trading rules can really do short term damage to the supply side that we might have expected would take years to happen. What's the sort of wells the other side of that when you're talking about just the general way that countries deal

with each other. So yeah, I'm pretty wide you raised a p and I assume we're all multilateralist, globalist internationalists aplete guilty to all those things. But Glenn, do we over and nostalgize what these institutions were before? I remember presidents we work for. What crazy about going to G twenty three seven meetings. I don't think Clinton or Obama was either. I think that's probably right. I mean, I'm gonna start off first by picking up on something Stephanie said.

The risk premium now and business investment as a result of the policy uncertainty is probably large enough in the US to overwhelm the corporate tax change. So this has a very large effect. It's not the small direct effect of trade, but there's no audience of business people that doesn't focus on this, and the effect on investment and

supply chains is real and pernicious. I mean, to your question, Tim, the Breton Woods institutions are probably not what we would design today if we were to have a discussion, assuming people would even meet to have that discussion. But multilateralism and what it represents remains absolutely critical and I would add to that not just the Breton Woods institutions, but the World Trade Organization. You know, we c d other venues for policy makers to come together. I think are

still are still vital without American leadership. I'm incredibly skeptical that any of this has a future. I think it's naive to say that others will step into the breach and fulfill the promise of multilateralism without the United States. So I don't really think there is a G nineteen type solution. America is still the big kid on the block UH, and we need to we need to get at this. And we see this everything from the problems in China trade where a multilateral solution would have been

more effective. We see this in the failure to get together on a variety of policy topics. And were we to have a significant global recession, I wonder where the coordinating mechanisms would be. So I would count myself as as very worried by the failure of American leadership. The g's all came out of crisises with the G five and G seven is a product of the UH, the long gas lines, the oil crisis the seventies. That G

twenty was created Battalaritia and and and others. Response to Asia financial crisis was elevated to the heads of state in response to Great Financial Crisis? Do we need a crisis to rally around or create the new g or are just give he to the current Geese? I think we may need one, and it's for this reason. I think I'm gonna be a little naive and say, yes, we needed the United States. But if the United States doesn't come to the table, the world has to find

an alternative solution. I mean, this is the house that the US built post World War Two, and it has a pole position for the United States. And that was a good thing because the United States often wasn't part of the comeback to but it was the one who ensured that there was generally peace. Now it's not only one of the combatants, but it's sort of breaking down the rules. And you know what's the alternative If the US doesn't come back and most people think, oh, this

is just this administration, it's going to pass. Well, there's a deeper seated issue with China, the rise of China and who's going to be dominant, and my senses, the world has to move on from the old structure to one where we don't have twenty people at the table determining anything, but we have three or four people, three or four entities. So probably China, the US, the EU, maybe Japan who sit together and sort of uh, it's

more adapted to a multipolar world. It may still be the case the US is dominant, but it can't be that it is privileged by the rules because that will ensure China doesn't participate. We need something that brings China in also. So my guess is we need change. But I think you're absolute right. It's not going to happen

for two reasons. One, Washington is not going to give up the pole position, even if it doesn't really do what what it takes until, in a sense, there's a change in attitude in Washington, and that may take a long time. It may take China to be much bigger before Washington says we do need to bring them in. And the other is, you know, it may be that we need a full fledged crisis in order to say the system is broken, we need to build it up again.

I hope we don't go there, but we do need change. Actually, too pessimistic if you'd we're in this town. Fifteen or twenty years ago during this week, the streets would have been full of riders. There were tear gas. Remember you couldn't you can get across down there's massive protests going on. We don't see that anymore. That Christine Lagard do have fantastic job in reshaping the profile the I m f

why there there is no more? If the institution is now work and we're worried about globalization, you're worried about all these issues, why is there no protest going on? Why so? I think, like like rag who I firmly believed that the emergence of China and the integration of China into the international Breton Woods institutions was an absolutely needed thing to do, and we were slow. We were behind the curve, and even today I don't think where

we should be. If you were to redesign the Breton Woods organization now with more than half of the world's population living in Asia, it would not be US centric, It would not be US centric. City reflected the outcome of the Second World War and how these organizations were created. Now they need to be more inclusive. And what you're seeing is when when I came to the official sector. It was in the early two thousands. We had discussions around the table. I remember we had the G twenty

presidency in two thousand four. It was about creating local currency bond markets. We haven't progressed at all on that, and so many of the agenda items got delayed or washed out by the financial crisis. I think the Breton Woods organizations, to your question about CHRISTI in did a

great job in helping overcome the financial crisis. I think we were very coordinated during the crisis because it was the interest of both the United States, Europe and most parts of Asia to get on top of this crisis. The central banks have been very coordinated. The IMF played

a very strong facilitating role. And I remember a meeting in a basement in Korea where Tim Adams, Tim Guidner was still the Treasury Secretary, where the US was very clearly saying we will give up part of the seats at the IMF table uh in order to facilitate China coming in, and many of the Europeans put their constituencies together and gave up quota to bring them in. That hasn't really progressed to a new level where it should

be now. So we started in the deep crisis, we made some programs, but we didn't go the full way. Going forward, these organizations need to reinvent themselves in order to be relevant because if, if really it takes another crisis, I don't think the crisis will come from the area where we're now prepared for and those organizations to play

a new role in any next financial crisis. And if anything, the official sector, because of the bad experience on how we dealt with the last crisis, has less crisis fighting tools now available than they did before the last crisis. The FED has much less tools at their disposal that they can use fast without going to Capitol Hill. The same is pretty much true in Europe to a lesser extent,

but it's true everywhere. And so I feel that we're not well prepared for the next crisis, and it's these international organizations that can help us get everyone aligned, and they don't. They they're not in the position to do that now because they lect some legitimacy. Can I give you a twist on that that all these institutions were designed to facilitate and we're built around the idea of globalization.

Globalization it was good as globalization stopped. Are we deglobalizing and does that mean it's more difficult to solve some of these challenging transnational problems. Well, I do think that's the There is a deeper challenge inge to these institutions

and the mindset that they represent. And it's not just it's not so much globalization, although we can certainly debate whether this might end up being kind of peak globalization, because there's there's clearly things moving in different directions there. But the currency of these institutions, the currency for international collaboration, is what's going to make your economy grow, and by and large that was in the latter of the last twenty thirty years. There was a recipe for growth. That

was how you got people to do things. I think what's what scrambled the system in so many different ways in the last few years. And you see with populism, but it's not just populism, is a willingness to put the economy second, to do things that you know will damage the economy. We've clearly we saw that in Brexit. Whatever happens from Brexit, you know, one of the things that was always clear was you didn't vote for Brexit if you were putting the economy first. But it's not

just Brexit. We've clearly got that when you think about the immigration to here are many of the things that's animated Donald Trump. We have, by the way, on the other side, got that now in spades in the response to the climate change and how does one have an effective decarbonization strategy. We want to achieve economic growth as part of that, but it certainly is putting itself up there as something which is as more important than economic growth.

And right who has written about it about many of these non economic issues and the need to rebalance in his in his book. So I think that now that's maybe a more fundamental thing when when Axel talks about how what kind of institutions, these institutions need to reinvent themselves. Can they reinvent themselves in a way that's going to be able to grapple with this much broader dilemmas that actually don't put the economy at the heart of things.

I completely agree that one of the most penetrating questions of the financial crisis was asked by the Queen of England when she said, why did nobody see us coming and I think asking the present Bretton Woods institutions to lead on this with our knowledge of the underlying national currents that are upsetting the mix, is part of the problem.

I don't think we have to choose between globalization and tipping the table over, but we do have to remember that in most industrial economies they are large segments politically potent segments that have not benefited nearly as handsomely from either globalization or technological change as people in this room and there are. Until we deal with policies that affect those people's lives, we're not going to see the support for globalization come back. So it's not a matter of

needing more conferences or slightly different institution. We have to have those local concerns at heart, and I'm not sure that our elites do well. That was the economist Glenn Hubbard speaking with me and others at the Big Thing panel organized by the Institute for International Finance in Washington. Now, of course, trade is only one of the forces that's

helped globalize our world. The other is technology, and we know new technologies are changing the way the economy works in lots of different ways, including businesses ability to set their own prices. So while I was in d C, I spoke about the US economy to Robert Kaplan, president of the Federal Reserve Bank of Dallas and a member of the fed's Open Market Committee. I found myself wondering

whether the FED could even control inflation anymore. Before we go, I thought i'd play you a little bit of that exchange. You talked about all the structural forces that are affecting the economy, productivity, certainly affecting potential growth, and you did mention pricing power, the impact on globalization and technology on pricing power. Do you think on the basis of the last few years that central banks can still reliably raise

inflation given the structural changes underway in the economy. Me, So this would be an example where we've been. I'm we're having a we're having a very significant debate on this, and I may be a little bit of an outlier. And for those who know, we've had two Technology Enabled Disruption conferences that we've hosted in Dallas for the whole system, for outsiders, and if you would like to come, we're

gonna have our next one June. And yeah, my own view is that the structure the economy has changed dramatically, and a lot of it is a business person. I've lived through it, where the things that are driving pricing power, a number of them are away from monetary policy. It's not that monetary policy doesn't have a role to play, but but I can assure you that when I talk to business leaders, and I'm careful not to mention industries or companies, but I have a number in my mind

as i'm talking here. Give me an industry. I'll tell you a story of lack of pricing power, disruption um and maybe the one I like to use because it's the most familiar to people, but I go to go through every single industry. But you know everybody here has bought a car, so I'd like to use that one. So fifteen years ago, if you went and buy a car at a car dealer, you went in, you dealt with a salesperson. That person was the highest paid person

in the car dealership. There were lots of them. You happen to get one and you went in and negotiated. It was normally an unpleasant experience and you weren't sure whether you were you know, whether you're getting a good deal. And God only knows, and that's how you bought a car. Roll forward to today. Today, that salesperson you dealt with, if if he or she works there, they're making half of what they used to make. There's fewer of them.

They're called products specialists. They're not negotiating at all. You're going online, you're picking five dealers, you're picking the car. You know the price, you know the modeling, you know everything when you walk in. There's no negotiating. And oh, by the way, if you look at new car prices over the last X number of years, you'll notice there the use car business is a little more track that.

They don't have any pricing power. You see, there's been erosion because there's just so much transparency and the leverage has gone from the seller to the buyer. Technology has done that consumer has in the palm of his hair hand more computing power today the most companies did fifteen years ago. And we take it like, oh yeah, it's a big deal. So now you go into a car dealer there rapidly merging is why there's so much merger activity.

There's margin erosion, and the highest paid person the card dealer is a person you didn't deal with that much. It's the automotive technician. That person is making a fifty grand a year. They can't find enough of them. We need to ramp up, and we are ramping up in different cities skills training to provide more automotive technicians. But there's rapid consolidation. And so there's one of those symptoms of this lack of pricing power is record level of

merger activity. Because if you don't have pricing power and you have margin erosion, what do you do? Scale? Scale scale, You need more scale el But doesn't that mean central banks really can't necessarily meet the inflation target anymore? None of the major central banks have been able to meet the inflation target for the last ten years. And it means as a central banker, you have to realize this reality.

And yeah, it causes you, I'll put this euphemous. It should cause us to reframe to some degree how we think about monetary policy in this context. By the way, having said all this, you should know what the Dallas Fed. We look at a core inflation measure of called the trimming. We're running at two. But I'm I'm a little more leery of believing that UH drops in the Fed funds rate will have the same effect on inflation. To your point that they might have thought to have had ten years.

Doesn't that put the credibility of central banks at risk if they keep trying to hit something and suggesting they can hit something which they know in their hearts they can't. I think it's very much This is my view. It's very much incomming on me as a central banker to call out the struct world trends and explain some of them might be able to be affected by monetary policy, that many of them are structural, and so I think it's very important that we call that out and adapt

our thinking and our frameworks to take a little account. Yes, thanks for listening to Stephanomics. We'll be back next week with more on the ground insights into the global economy. In the meantime, you can find us on the Bloomberg Terminal, website, app or wherever you get your podcasts. We'd love it if you took the time to rate and review our show so it can reach more listeners. For more news and analysis from Bloomberg Economics, follow at Economics on Twitter.

You can also find me on at my Stephanomics. This week's report from Argentina was written and edited by Bruce Douglas with assistance from Joelina de Rosario and Patrick Gillespie. Special thanks to the Institute for International Finance, the Reinventing Breton Woods Committee for that Caplan interview, Axel Weber, Glenn Hubbard, ragorham Rajan and Robert Kaplan. The episode was produced by Magnus Hendrickson and edited by Scott Lamber, who is the

executive producer of Stephanomics. Francesco Levy is the head of Bloomberg Podcast. M h