Wall Street Week - Full Show 05/06/2022
A war in Ukraine. A leaked Supreme Court draft opinion. A flash crash in Europe. But what mattered to global Wall Street was the Fed. This is Bloomberg Wall Street week. I'm David Westin. This week Bob Prince of Bridgewater and Ed Hyman of Evercore ISI and the beginning of a shift in the tectonic plates of monetary policy and special contributor Larry Summers and Neil Ferguson of the Hoover Institution on the future of the dollar in a post post Cold War asked for the dollar. Well I hardly need to tell you David that it's actually been an extraordinarily strengthened in the last 10 weeks. We had a week full of surprises from the unprecedented leak of a draft majority opinion on abortion. The Supreme Court has
confirmed that the Roe v. Wade opinion draft of course first leaked by Politico it is authentic goes far beyond the concern of whether or not there is a right to choose. Last night a shocking shocking new breach almost certainly in an effort to stir up an inappropriate pressure campaign to sway an outcome to a flash crash in Europe that made 300 billion euros disappear or at least for a few minutes. Citigroup says its London trading desk was behind Monday's flash crash in Europe. Shares across the continent tumbled after a sudden 8 percent decline in Swedish stocks. Stacey says one of its traders made an error when inputting a transaction. But in the end it wasn't what we didn't expect that drove the week. It was what we did expect. And that signaled a big change from the days of loose monetary policy. As
the Fed raised rates by 50 basis points and chair Jay Powell said he's still hoping for a soft landing but recognizes it may be difficult. I do expect that this will be very challenging. It's not going to be easy and it may well depend of course on events that are not under our control. And the markets well they didn't like it one little bit despite solid jobs numbers coming in on Friday. But equities shooting up after the Fed's announcement on Wednesday only to shoot back down on Thursday with some more sell off coming on Friday. And it was the NASDAQ that got hit the worst. Down over one and a
half percent on the week while the S&P fell for the fifth straight week marking the longest losing streak in a decade and hitting its 19th kind of 19th new low this year alone. While Bonds reflected all the angst that the Fed tightening triggered with the 10 year yield adding over 20 basis points for the week ending up at three point one three to help us make some sense out of what was a tumultuous week. Welcome now Bob Prince. He's co CIO of Bridgewater Associates and Ed Hyman chairman of Evercore ISI. Welcome to both you. Great to have you here. So Ed I want to start with you because I watched your video for a
couple days ago and you said you've never seen in your career in news quite a career one of the original people on Wall Street. To say you've never seen this kind of this disconnect between the markets on the one hand and the economy and the other. Well I'm catching up. I'm beginning to figure it out. So what happened this week. You mentioned the 20 basis point increase in bond yields. And I see now that's the problem. And I've gone back really since then. I've looked at 1987 and bond yields just went straight up. They went up to over 10 percent and they kept going up and they went up so high they finally killed the stock market.
And so that's I now I'm sort of getting it. And in that period the economy was fine. Even when the market went down 30 percent the economy stayed fine. And the Fed finally had to eat back off. But that's that's the issue. And you know that issue is being driven by inflation worries. And the price of oil was up I think five five dollars. This week
it's not made a new high but it's moving back up. And so there you have it. The economy is good. Earnings are good. Earnings have come in strong in the first quarter. But rates are going up and inflation is a worry. And you know Larry Summers is on your show. I've been with him all the way on. Inflation is not transitory but that's that's the issue right there. So Bob Ed says that's the problem. Is it also the solution. Because we really have a lot of inflation. Don't we have to tighten monetary conditions. Do we have to get the yields up in order to get our arms around inflation.
Yeah well we think we're at the beginning of a process. We're at the beginning of a challenging period. The markets have discounted a tightening but there hasn't really been a tightening yet. So we're going to find out where as the Fed plays the game we're going to find out how they play it.
They probably confronted with the most challenging set of circumstances in the last 60 years 50 60 years since the 70s which is a monetary inflation. The inflation that we've experienced in the last 20 years is what we might call a cyclical inflation. You get strong growth low unemployment you know gets you get a little bit of inflation. They tighten preemptively against it. But by and large money and credit growth was relatively stable. Nominal growth was not too high. What we have now is a monetary inflation which was brought about by the injection of a massive amount of money credit into the system which is now getting spent in the form of nominal GDP nominal spending. And that nominal spending is way more than the
output. And as a natural result of that you get prices going up. So as you play that out going forward it's it it's become a self reinforcing process. We've got a we've got a self reinforcing inflation cycle going on which is due to monetary considerations. And so what's going to be required to reverse that would be to reduce money and credit it comparable to the to the money credit that was put in the challenge. When you have a monetary inflation like this it becomes very difficult for the Fed to simultaneously get the inflation rate that they want and the growth rate that they want. So you will you typically then have to air on the side of it to have the growth rate you want. You accept too high of inflation or if you fight inflation you get a recession. So
that's we're just in the beginning of that game right now. So how much we're doing already. I mean you've pointed out in your charts the end to is actually coming down and had been growing dramatically is starting to come back already. They're about to start selling off the balance sheet taking some of that way. Are we already on our way to get our arms around inflation through
really getting control of Mondo. David you shouldn't have Bob and myself on this show. Because what you just laid out as you know I agree with one hundred and twenty five percent. Know we had a huge increase in the checks to people. The balance sheet went up like crazy. And that manifests itself in a huge increase in the money supply. And now we're just trying to figure out how to get rid of that thing. So we got up to about
30 percent on a year on year basis. And in March it was down to 10 percent. And I would guess in April's price 7 percent. So we've we've already done quite a bit but not sending checks out anymore. And the balance sheet is going to start to run off now. So we've made some progress. And
I'd say Bob I've been surprised at how much has happened with just a 1 percent fund rate no shrinking the balance sheet. Suddenly mortgage rates up to around 50 basis points. The dollar's up 15 percent and the stock market's down almost 50 percent. And some stocks have been. Yeah really. They're 50 or 70 percent. So are the markets doing part of the Fed's job for it. Oh yeah for sure but probably not enough. And the you know Ed raises the point that the the financial markets are much weaker than the economy. That's kind of the reverse of where we were for a while where the financial markets were much stronger than the economy. And that does relate to the
kind of things he's talking about where you know if you take something like money supply money supply is not growing like it was the Fed's not injecting money as they were. They're going to be drawing it out. But if you look at an economy we sort of look at it in a very simple way which is there's a total amount of sources of funds and then there's where they go. The uses of funds and they can the sources that the really only three sources of funds you've got the money supply you've got credit and you've got income. And that goes into spending and it goes into financial markets. And then there's this residual that sits out with the Fed. And the what's interesting is that different things go in different places. When you inject money in the system it tends to go into the financial markets. Credit tends to go into spending. So what we've got going on right now is the tightening has reduced the flow of money into the financial markets. So we've got a hole in
the bond market. We've got yields going up but the credit is going into spending. So spending is staying staying high. But interest rates and prices are going up and prices are going down. It's the opposite of where we were. And this is going to be a real balancing act because if you're the Fed and you tighten and the stock market falls and the bond yield goes up. But the spending and the inflation continues. You know how do you play that game. It's not gonna be easy. So we did get jobs numbers United States on Friday at the very end of the week. We're still creating a lot of good jobs. Is that helping or is that hurting. We've got a lot more jobs that would increase. Actually the amount of money you have to spend.
Wages are going up. Does that helping or is that hurting. Good question. Because you know the Fed wants the economy to slow down. And so this is one of the good news is bad news programs. But employment when you sit down and think about the economy is very complicated. Housing capital spending credit expansion but employment it's everything. And whether you work for Bloomberg or Bridgewater or a casino you counted in employment and employment is definitely strong. I must have half a dozen measures of employment and they're all strong like the employment numbers that came out today. I've been surprised that wages looked like they might be slowing
a little bit but they're still quite rapid. And I hadn't quite thought about Bob what you said but bank loans are now really taken off. And so that's in your three part program the money supply slowing but now the bank loans are starting to go up. Some still haven't quite figured out how think is going to play out because in a period like 87 the economy really just kept on going. And also in another soft landing period of 98 when you had Russia crisis of LTC M you look back at it. I thought we were I thought we were completely dead. But the Covid you know came right right on through. So it'll be very interesting to see how how we thread the needle on this. But I think we'll reach a
point where the community will decide that the Fed can take a little off the get break right now. We're not there yet. I mean I hardly started yet. So you know one of the things that I had an interesting chart where you just added employment growth and wage growth. And I think they added that they added up to 9 percent. Right. Right. That's basically income. Yeah. So if you got 9 percent income growth you're going to get 9 percent spending growth because people spend their money. And if you get 9 percent spending growth but output can't grow by 9 percent
you're going to have inflation. So the you're probably at a peaking process. Like I think Ed points out you've had a rise in bond yields. You've had some tightening from the stock market the dollar and money supply slowing down a little bit. But I think as you play that forward one of the
things you have to think through is where does that all settle. You may get it. It may at a turn like this but where does it settle. And if it settles at an inflation rate of 4 or 5 percent is that could be accepted by the Fed or. And if you look at what's priced into the bond market and the interest rate markets the short term interest rates. Price to go up a little over 3 percent so far to 4 or 5 percent inflation rate. I'm stuck with a negative real yield on cash and the inflation rate that's
priced in for the future is only two point seven. So where you settle out is as important as the turning points that you have no right to me. Bob Princeton Ed Hyman we'll be staying with us as we turn from what happened this week to what investors can do about it all. That's next on Wall Street week on Bloomberg. This is Bloomberg Wall Street week. I'm David Westin at home and of Evercore ISI and Bob Prince of Bridgewater Associates have stayed with us as we turn our attention to what investors can do with the uncertainty and change that they face just about everywhere they turn right now. So Bob let's start with you. Goodness knows you're responsible for a lot of investment. If we
took one investor rather than a trader what do you do with your analysis of where we are on the market right now. Well the first principle is diversification. Right. So if you have a diversified portfolio you could just sort of go through the ups and the downs and you being confident about the other side. And then if you want to tactically move around that you
can do that. See first things have to have a start with a diversified portfolio. And the problem is most people don't have a very well diversified portfolio. You know if you have even stocks and bonds let's just say you have a balance of stocks and bonds. If we're headed into a stagflation environment. And I wouldn't say we're there yet but we're on the cusp of that stagflation meaning high inflation with low growth. That's actually go back historically and you study stagflation
as the worst asset in a stagflation is equities. It's even worse if you're in a stagflation and you get an aggressive tightening monetary policy. We're somewhere in the vicinity of that. So equities by themself is not a safe place. It may work out but it's not a safe place and it's not diversified. But even to hold bonds bonds do Paul Allen stagflation because the inflation problem and the tightening of monetary policy.
Cash does very badly. Cash is not safe because you lock in and negative real yield on cash and you have you have basically assured wealth destruction. So you need some way of benefiting from a rise in inflation to at least balance those two forces. And so whether it's inflation indexed bonds or whether it's commodities diversified basket of commodities. You need to get that kind of that kind of diversification in the portfolio. And I think within the equity market there's you know I think the
thing you really need to pay attention to is the cash flows of the assets. You know we've been in an environment where cash flow didn't matter too much. It was you know where are things going to play out 10 years to now. But if you're in an environment of high nominal growth not that spending will be the income to companies and that income will be profits. And so in the short run you'll face risks from the tightening. But over time if you're invested in equities that have a reliable cash
flow stream. You know Warren Buffett said in the long run. In the short run the stock market is a voting machine. In the long run it's a Wayne machine. That's because cash flows accumulate over time. So even within the equity market I think it's important to be thinking about that. So as you look at the markets the various markets right now I heard commodities. Is
commodities a good investment. Do you think our commodity is about to go up more. They're already gone up a bit a lot. So I like the diversification idea given what we're talking about the beginning of uncertain times of reference to the markets and the economy. I like cash. I don't I'm not really I'm not getting ahead on cash. I get my cash back. But you're actually falling behind if you have substantial inflation right now. But I think
inflation's going to be about for about 4 percent. But I'm saying just if I was advising people I would say first let's have you know a certain amount of cash so you can sleep at night and you're not worried if your house price goes down or your stock values go down. But diversification and I like the idea that the hard assets are commodity like things the energy sector sort of industrial renaissance idea. I like that some but I'm not as negative on the tech sector as the stocks are. I mean I think I still think we're in a pretty rich technology revolution but you know that's the stock market and real estate is you know it's too expensive.
But you know not the worst thing you can do is everything. So that's one of the problems really is everything else is expensive. So I like your diversification plus some cash in case something happens. But I really. I don't I'm pretty I'm not that negative on the outlook. We've been talking about various sectors here and talks of diversification. What about geographic diversification. What do
you do. What non U.S. investments. Bond was increasingly important. We break the world down into three regions. There are three major monetary regimes. Monetary and credit systems in the world is a dollar system. There's a euro system and now there's an arm B system in China and. Well. And so you can break the world down into North America Europe and Asia. It doesn't have to be China. I think it's Asia. And Asia has been a great diversifying for a relative to North America relative to Europe. And so geographic diversification is going to be much more valuable in the future than it was in the past because you increasingly have China is much more of a powerful independent economic zone with an independent monetary policy whereas up to 2015 they had linked the exchange rate to the dollar and they really were not so independent. But they're they're driving themselves to be
much more of a you know the domestic economy is the mainstay. And so the more they have an independent economy independent monetary system and that'll spill over to the rest of Asia geographic diversification can be really important. Just quickly here at the Independent but how independent do you have to be concerned with the D globalization of the IT that keeps the inflation rate a little bit higher. But David I'd like to say that not exactly related to this but boy we have a really funny economy where Europe and China are in trouble and the US is doing pretty well. Well that's for sure. We saw that
with the Bank of England just this week basically projecting stagflation or the equivalent stagflation that looked like it's bright. Thank you. So it's really great to have the two of you here. I hope you come back. Has a great conversation. That's Bridgewater is Bob Prince and also Ed Hyman of Evercore ISI. Coming up we'll take a look at what's happening next week on global Wall Street. This is Wall Street week. I'm David Westin. It's time now to take a look at what's coming up next week starting with Juliette
Saly in Singapore. Thanks David. This week's Philippine election is a key watch for investors in Asia with the winner needing to navigate shifting relations in the region. The son of a late dictator a champion boxer turned senator and a movie star turned mayor are among the mostly male candidates vying to succeed. President deterred him.
The front runner is Burton and Bong Bong Marcos junior son of the exiled former president and Imelda Marcos the only female in the race. Opposition Leader Lennie Robredo has promised to take a tougher stance towards China and is the investor's pick to oversee the economic recovery amid rising inflation. Now over at Dani Burger in London. Danny thanks Juliette for this coming week. The focus will specifically be on how the energy story in Europe unfolds in the context of the war in Ukraine over the previous week or so of underline announced a full EU ban of Russian oil. What exactly will that look like. How do they wean
themselves off Russian oil by the end of the year. As had been declared because it is a region that is so dependent on Russia. So we're looking for any details about as well as any response from Russia and of course any response in the energy markets. Now after Romaine Bostick in New York. Thanks Danny. With more than 80 percent of the S&P 500 have reported earnings a clearer picture is emerging about the health of the nation's largest companies. Next week about three dozen S&P members will report including Tyson Foods Disney Wal-Mart Target Home Depot and Deere. But there also will be a wider swath of hundreds of small
and mid-cap companies in the Russell 2000 that report. Some of the more notable names include energy companies like Duke department stores like Macy's and discretionary stocks including Callaway Golf. Economic data on tap will center around Wednesday's release of the Consumer Price Index for April. Economists expect the second straight month of inflation running at 8 plus percent year over year. That will complete a full 12 month cycle where inflation has run multiples above the Fed's 2
percent target. And finally keep an eye on Facebook. Parent company which has staked its future on the metaverse but it still sees a need to stay grounded in the physical world. It plans to open its first ever brick and mortar store next week but it's largely to showcase hardware devices that help you plug in to the alternate reality that Facebook is trying to create. David. Thanks to Juliette Saly Dani Burger and Romaine Bostick. Coming up cutting Russia off from the global financial system. Are we driving people into the arms of crypto. We'll talk about
the post post-Cold War world with special contributor Larry Summers of Harvard. And Neil Ferguson of the Hoover Institution. That's next on Wall Street on Bloomberg. This is Wall Street week. I'm David Westin every week on this program we have the privilege of being joined by Larry Summers
of Harvard the former treasury secretary. Well that privilege is actually increased this week which has not only Larry Summers but also Neil Ferguson of the Hoover Institution. They are out there for a Hoover Institution event a conference on monetary policy which is particularly appropriate. So welcome Larry and Neil great to have you. Larry let me start with you. We've
talked about inflation so many times what the Fed should do. The Fed actually acted this week. Is the Fed getting its arms around inflation finally. I think the Fed's moving in the right direction. I think that's a good thing. Whether they're moving strongly enough and whether it's going to be enough to bring inflation terribly under control I think is still very much in question. You know the labor market is looking very very tight. The JOLTS data showed even a higher ratio of vacancies to unemployed than we'd had before. And so I think there are still very real challenges ahead of us. I'm not sure the Fed needed to be quite as prescriptive with respect to what it was going to do in the
future as as it was. So I still think we're got a very difficult challenge ahead of us and we're still in very turbulent waters to that point. Larry were you surprised when the chair Jay Powell essentially took off the table 75 basis point rate hike. I was surprised that he took it off the table as firmly as he did. And in the same couple of paragraphs started talking about core CPI having come down and hinted towards the possibility that at some point they'd be able to move to twenty fives. Those things could happen. But I think the lesson of the last year and a half is that we can't predict and therefore we mostly do
damage to credibility when in official circles we make strong predictions. New You're a noted historian of the economy of financial matters. If we look back at history the historical track record of central banks being able to deal with this kind of inflation without going in recession is not particularly a happy one. Well David I thought we'd learnt the lessons of the
1970s but it seems like at some point we forgot them again. In the 1970s of course the Fed sought to tighten but would periodically lose heart and blink. And for more than a decade monetary policy failed to get on top of an inflation problem. It's not exactly a perfect analogy but there are a couple of things that are really striking to me. One is that this problem
began with an era of monetary and fiscal policy which Larry of course pointed out in February of last year. But then as happened in the 70s we get a geopolitical shock on top of that initial policy mistake. And inflation expectations are then away and an anchor words. And in this sense I think the war in Ukraine is performing a similar role to the war of 1973 in the Middle East which remember administer a shock not only to oil prices but also to food prices. So in that sense I think the analogy is quite good. And I agree with Larry. I don't think the Fed has nearly done enough and it has a hard road ahead. It's
also going to come under pressure at some point to blink if we continue to see the stock market selling off the bond market is in trouble. And we have a much more complex and large financial system than we had in the 1970s with a much higher stock of debt. Therefore it's more sensitive to two interest rate moves. So it's a long and I think very rugged road ahead for the Fed. Larry Neal quite properly says we have the geopolitics of all of this on top of what we've seen with a pandemic. And then of
course with this inflation an extraordinary fiscal and monetary stimulus. Talk about the geopolitics and where we are in geopolitics. After the fall of the Berlin Wall after Soviet Union collapsed we thought we had a new Pax Americana. That's less than a reasonably short period of time. We're now actually sort of in a post post-Cold War era. What does that look like in terms of the economy. David let me just say first that I think Neal got it exactly right. One thing he said that I'm not so sure of is that the economy is more sensitive to interest rates than it was in the
1970s. I think part of that complexity that we're seeing in the economy means there is no longer the kind of credit rationing that there was in the 1970s. And so I suspect that it may take even more action from interest rates especially in light of the fact that higher interest rates now push up interest payments on government debt more than they did which increases spending power. So that question on the relative sensitivity of interest rates. I'm not sure of. Look I think we're in a different geopolitical era. You know at some point we'll call it something rather than just calling it the post post-Cold War era. But I don't Cold War too. I mean we're kind of in Cold War two thinks it's Neal. Thinks it is a Cold War too. He may well turn out to be right in that judgment. I have a sense that it's going to be more multipolar than Cold War one
was. I think that the single most neglected fact of the last decade was the 38 meetings that took place between Premier Xi and Premier Putin. That's more than in a decade. The US president has ever met with any head of state from any other country and it's not like China and Russia are close to each other. And so that kind of realignment is a big deal. What's also a big deal now and I think a much bigger deal than it was during the Cold War is that there are these global security threats like climate change like proliferation like terrorism that make the equation much more complicated than it was during the Cold War. Obviously Russia looms large right at the moment. There is a war
going on. After all in Ukraine and the world in various ways is responding to that. But I dare say when it comes to the economy U.S. relations with China will be much more important going forward. What is going on with China right now. Larry talked about the relationship with Russia but also in its economy itself. As it continues to have lockdowns it continues has a lot
of troubles. How bad off is the Chinese economy. Well David let me start with the Cold War analogy. My point is that in this second Cold War China is the senior partner. And Russia is the junior partner at the beginning of Cold War when it was the other way round. But they were just as close at the beginning of the first Cold War. And in this Cold War the hot war has broken out in Europe and Ukraine in the first Cold War. It was Korea. So I think there's really quite a good analogy
here. The problem for China is that amidst this geopolitical crisis they're still battling Covid. And after the hubris of claiming that they had solved the problem unlike ISE incompetent Westerners they know faced nemesis in the form of the immigrant variant which their 0 code policy is really struggling to contain. So if you look at mobility data in China it's not quite as bad as it was in early 2020 but it's pretty bad. And so the Chinese economy is really in an extremely impeded state because of the strictures that they're having to impose not only in Shanghai but multiple cities. What's interesting and I'd like to throw this at Larry actually is what does this mean for inflation. My sense is that the reduction of Chinese demand for oil is probably a net good. From the fourth vantage point of those worried about monetary policy and inflation because it
takes a little bit of the heat zones of demand for oil and therefore the price of energy. And if that's your view like my guess is that China's going to be less big deal for inflation then many people think because there are two effects there's the demand destruction for commodity effect that you mentioned and there's the interfered with supply chains. The fact that others focus side I can't figure out which one's bigger. And since I can't figure out which one is bigger I kind of suspect they're probably not that far from being inadequate being in equipoise. I do think there's a chance that if China gets past this you're going to see some big surge in demand from China for oil before you see the supply chains fix themselves completely. And I think
that the effect of everybody trying to shorten their supply chain is going to be permanently at least a little bit inflationary. OK. Larry Summers and Neil Ferguson will be staying with us as we turn to the specific question of how the geopolitics may be affecting the world monetary order. That's coming up on Wall Street. Today we are presenting our sixth package of sanctions. We need sanctions more courageous sanctions songs. We we're always open to additional sanctions. Sanctions there at the center of efforts to help Ukraine in its war against Russia. And as Citi
CEO Jane Fraser explains excluding Russia from the world financial system is key. We're separating a G. 20 country from the financial markets and we're separating them from the supply chain. In response to what they've got. I mean because it's sending a lot of concern to many other countries around the world and they're concerned about therefore putting all their eggs into the Western financial order basket. Some have questioned whether those concerns about the Western financial basket could undermine the dominance of the U.S. dollar. But as former IMF chief economist Ken Rogoff of Harvard notes there's
little evidence of that at least so far. The dollar is dominant in trade envoy saying it's dominant in financial markets. That's dominant. You know Trent all kinds of transactions. But whatever the immediate effects the sanctions certainly bring to the fore the possible use in the future of crypto currencies as a way to avoid such sanctions. Which Fed Chair Jay Powell says is another reason for crypto regulation. What's needed is a framework and in particular ways to prevent these UNbacked crypto currencies from serving as a vehicle for terrorists finance and just general criminal behavior.
Still with us are Larry Summers of Harvard and Neil Ferguson of the Hoover Institution. So let's pick up on this question about what the sanctions we've seen imposed on Russia might mean for the world monetary order. Neil you wrote a terrific piece for Bloomberg I must say addressing this question and the possibility that it may change the world order the way prior conflicts and disasters have affected world order. How do you see it this time. Well wars and plagues change the monetary system it's not as if the monetary system is something that's the same over the centuries. When the war broke out ten weeks ago a number of theories did the rounds of both. Both of the major theories were wrong. No one was. Well the Russians are gonna get run sanctions using crypto currency. And the other theory was while we've just done sanctions against the Russian central bank everybody is going to want to get out of dollars to be protected from future U.S. sanctions. Well in fact it turned out that there was really no way in any significant scale that the Russians could evade
sanctions with crypto currency. Probably aid to Ukraine in the form of crypto mattered more. But even that's really quite trivial compared with the aid that the Ukrainians have got from the United States and its allies. As for the dollar well I hardly need to tell you David that it's actually been extraordinarily strengthened in the last 10 weeks particularly against some currencies like the Japanese yen. But that doesn't really have a whole lot to do with the war. I mean to some
extent it does in the sense that risk of situations people turn to the dollar. But I think more importantly the Fed is tightening and not all other central banks are keeping up with it. So I think there were a couple of wrong theories. I think the really interesting question to ask is not so much is the dollar one day going to be replaced by another fiat currency. I mean that debate has been going on throughout my entire lifetime. It was happening in the late nineteen sixties. And I think it's the wrong question. As long as there isn't a comparably large and liquid attractive currency at this point the only potential contender would be the euro in terms of scale. But I don't really see that that challenge as being a
successful one. So the dollar as the dominant fiat currency in the existing monetary system. The question is does technological change and the advent of new forms of electronic payment creates an opportunity for alternative payment rails to the ones that are dominated by the dollar. I think that's an interesting question. And that brings us back to China because it's China that's really been pioneering new forms of electronic payment including of course its own central bank digital currency. And
Larry I wonder if there's a connection between what Neal just said the possibility of electronic payment system and something that we're hearing a lot of from countries other than ISE states which is a real concern not only with the general scope of the sanctions against Russia but specifically denying Russia access to dollar reserves located abroad. We hear reports that China they think is someone in their banks to say how can we protect our reserves from that sort of thing. Could that have longer ranging effects on the way we keep our reserves the way we transfer our funds.
Let me start by trying a historical generalization on Neil. Countries don't lose their power because their currencies deteriorate as central they lose the central city of their currencies because they lose their power. And that's then the least and the currency is then the least of their problems. If I take your native land and the British pound the British didn't lose their central city because of what happened to the pound. What happened to the pound. Because of their loss of Centralia. And I think that's how it always is. Would you agree with that. I think that's right. The critical thing with the pound was that there was an alternative that was better. Britain's decline was was paralleled by the rise of the United States. And so once
Britain was really overstretched which was already true in the 1920s and 1930s in imperial terms and in fiscal terms there was this alternative that was new could in turn the US dollar. Whereas today although you can see the US is in some ways overstretched and has a fiscal problem there isn't really an alternative that you could immediately see as preferable. And this is a point that you've made. I think quite rightly in your famous line you know the dollar is number one. What are the
alternatives. When. Let me get this right. Europe's museum. Japan's an elderly care home. China's a jail and bitcoins and experiment. One of your best lines Larry. Well thank you for that. Thank you. Thank you for that for that one. Neil I'm glad you appreciated it. Look I don't think we're going to see a shift totally away from real world currency to metaverse currency anytime in the foreseeable future because I think there's still going to need to be a bridge between the two and that bridge is going to be the dollar. I also think that
it's hard to imagine that in a world where money becomes less legally governed and more political. There's going to be increasing trust in Chinese money. And so for those reasons I think you're going to see the dollar remain central until you have seen other big surprises that are actually more important to the future of the world than whatever it is that's happening to the dollar. So I I think of the dollar as much more symptom and much less cause than I think a lot of the discussion would have. So that's a point taken Larry. It's basically the strength of the economy and the country involved with anything else. But let's talk about the digital payments system that Neil talked about Neil specifically. It looks to me at least like central
bank digital currencies are coming whether it's China or whether it's Europe or whether it's the United States when they come. Does that increase the down as the dollar take away from it or is it just irrelevant. Neil. Well I think we have to be a bit careful here. The central bank digital currency the ECB and why that the People's Bank of China
rather hastily rolled out in 2020 2021 is primarily designed to make sure that just about every transaction in China is under the direct surveillance of the Chinese Communist Party. I don't see why we would want to copy a system like that and I don't think that we should. Rather I think it would be preferable if the United States allowed all the innovation that's going on in decentralized finance and what's sometimes called crypto currency to happen here in the United States. It's clear that the Internet needs some kind of native payment system. Typing in your credit card number on random websites is not the way to go. And I think we're evolving that payment system. But as Larry rightly said it's not an alternative to the dollar. We're still
going to be paying our our taxes. And I guess most of our wages and salaries and dollars it's complementary to it. It's not either or. So I don't think the US should unhesitatingly copy and paste central bank digital currency especially not on the Chinese model. I think the question for the central bank for the Federal Reserve is how do we manage things so that all the innovation that's going on in decentralized finance is beneficial to the United States economy contributes to economic growth and doesn't destabilise the monetary system. And that's a very different question from should we have a central bank digital currency. Okay. Thank you so very much to Neil Ferguson of Hoover Institution and our very special contributor here on
Wall Street. Larry Summers of Harvard. Coming up one more thought from Bloomberg. Stephanie Flanders that's next on Wall Street week on Bloomberg. Finally one more thought and this week's comes from our senior executive editor for economics here at Bloomberg. Stephanie Flanders on the challenges facing the rest of the world's central banks.
You think the Fed has it bad but believe it or not things are actually looking more difficult for most of the other world's central banks. If you take away from from China for a moment this week you saw interest rate rises not just from the Bank of England but from the central banks in Australia Brazil Iceland Poland Chile a bunch of other countries. And there were increases of 100 basis points a full percentage point from Iceland and Brazil. We didn't see any rate increase in Turkey but that's only because the central bank is under pressure by from President Erdogan to stick with his rather rather idiosyncratic approach to cutting inflation which is to keep the price of money really low. It's not working out so well at the moment. Inflation in Turkey is more than 60 percent. That's the highest in the G 20. The bigger risk for a lot of these central banks certainly bigger than it currently looks in the US is that inflation by itself will tip the economy into recession because you have these soaring food and energy prices which are so noticeable and affect people's real incomes. So immediately you
could see these economies shrink. And in fact we saw the European Central Bank officials there warning that the eurozone economy was in effect already stagnating from the effect of rising energy prices and other things even when the central bank hasn't even raised interest rates at all. I think the country with the worst of all worlds is Britain that's facing if you like America's very hot labor market rising wages. But it's also got a kind of Europe style energy squeeze. It doesn't have those other sources of energy that the US has. So that is the worst of all worlds made a bit harder by the reduction in trade flows with the European Union that we've seen since the UK fully left the European single market just over a year ago. And that was
all confirmed by the rather gloomy forecasts from the Bank of England this week as it went for its fourth consecutive rate increase but also produce forecasts showing inflation was going to hit to 10 per cent towards the end of this year potentially that the economy might shrink next year. Although we tend to focus on the mistakes that the Federal Reserve has made and the bad hand that it's given itself to play its central banks in other parts of the world that will probably face the worst effects. And I'm thinking that particularly of developing countries who run up a lot of debt as a result of Covid and are now going to see the cost of that debt potentially rise even as their economy shrinks in the face of this real income squeeze from rising food and energy prices. The other takeaway is for the credibility of central banks. If you think over the last 20 years support for the WTO has waxed and waned. We've worried about support for NATO. Now we look at the G 20 and wonder whether that's broken as an institution. But through all that central bankers have been the ones we trusted to get the job
done. Now the most important central bank in the world the Federal Reserve has failed in its one job quite spectacularly so. And if we look around the world it looks like with the help of Covid with the help of spendthrift governments and certainly President Putin. But central banks collectively could it could end up not just cleaning up that mess but actually making it a lot worse. That does it for this episode of Wall Street Week. I'm David
Westin. This is Bloomberg. See you next week.
2022-05-10 13:02
