Wall Street Week - Full Show 10/07/2022
As fall sets in a decided turn in the air for the new British government's designs for the economy. Elon Musk's designs on Twitter and most decidedly from Mr Putin's designs on Ukraine. This is Bloomberg Wall Street week. I'm David Westin. This week special contributor Larry Summers on whether the jobs market is starting to show some signs of loosening.
I think we are headed for a collision of some kind or rather and we've just got to manage that collision carefully. And Brad DeLong of Berkeley on what the broad sweep of economic history may be telling us about where we are headed next. People say that the United States has very little to teach them that we don't have any greater grasp on how to deploy and use these technologies to create a good society.
We had our fair share of a bout faces this week with the Bank of England's quick intervention to save the gilt market as explained by former NPC member Kristen Forbes of M.I.T.. It seems that they are worried that because of the big market moves there could be some margin calls and some pressures for forced selling that could cause the gilt market to freeze up. And British Prime Minister Liz Truss giving up at least part of her economic programme. It was becoming a distraction. So that's why we immediately change that policy and that's the kind of government we are. But as ugly as the situation was in UK markets it was nothing compared with the setbacks for Russian forces in eastern and southern Ukraine with President Putin's efforts to quote annex territory that his forces didn't even control. Which Admiral John Kirby at the NSC
looks at as an indication that Mr Putin just may be coming to understand how difficult this situation really is. The annexation announcements as well as his announcement of partial mobilization certainly shows the degree to which Mr who knows how much he's struggling inside Ukraine and OPEC plus weighed in with its own changes cutting production caps by 2 million barrels a day or about 7 percent putting even more pressure on Europe and the rest of the world already worried about energy. While we're disappointed that OPEC made this decision as the president mentioned we think it's unnecessary. If you look at the global environment where supply continues to be the predominant challenge. Then there's Elon Musk. He offered forty four billion dollars for Twitter back in April then decided to renege. It got sued and on the eve of his deposition returned to his original offer.
Even it looks like he's going to be way overpaid in many ways. This is almost the most expected outcome of all which is settling on the eve of trial just before a deposition. The main players Yvonne Man himself. He doesn't want to be deposed. He has. He knows probably some embarrassing text messages and conflicting statements.
And all of that would make for a very unpleasant DAX. But after all the back and forth this week U.S. jobs numbers actually came in surprisingly on course adding to it and 63000 new jobs just slightly more than expected.
With workers paid 5 percent more than they were last year and a reduction in the unemployment rate to three point five percent which made for a rough day in equities on Friday but actually a pretty good week overall for equities. The S&P 500 adding one point five percent to end the week at thirty six thirty nine. And the Nasdaq eked out a gain of three quarters of a percent. Bonds also had a topsy turvy week but it ended up with the 10 year yield of a relatively modest 5 basis points to three point eighty eight. Here to walk us through this weekend what got us here. Our Aaron Brown portfolio manager at PIMCO. And Chris Allen chief investment officer
at CAC. So Chris let me start with you. Boy given what we're seeing right now are we looking at a long cold winter would you say. I. David. I think we are. I think the Fed you know these employment numbers the Fed knows that they have to continue this pace of aggressive tightening and they're going to do so the next meeting and the next meeting after that.
And I think which the street is pricing in. But I think after that they're going to have to keep it up. And that's going to be into the winter and it's going to be a tough time. So what do you say Aaron. Is it going to be a rough winter. I think it is going to be a rough winter. I think that they're fans of uncertainty are quite worried for next year.
The Fed is tightening into an economic slowdown and we haven't even seen the real impact of that slowdown yet. We're just starting to see signs of a gradual slowing but likely we'll continue to see that into next year. And we think that we're heading into a recession into early 2023. And at that same point just given the level of inflation the Federal Reserve is now really challenged to be able to arrest that inflation get it under control despite what happens to the economy. So I think that really poses a challenge for the Fed. And we'll likely see something that's fairly unprecedented which is continued financial conditions tightening and fed tightening into an economic slowdown even if it really leads to a harder landing than what the Fed's anticipating. And Aaron I pushed back a little bit.
I actually think we're in a recession right now. It's not a very strong one. I mean it doesn't hurt a lot. Obviously with employment growing you know we did have a negative GDP in the second quarter. Third quarter is mild to me. Anything below 1 percent in the USA feels like a recession. But so what you're saying is you think it's going to be a really we'll actually have a good traditional hard negative recession with rising unemployment which is exactly what Powell has said. I mean that's his forecast. Yeah I think that's right. I mean my view at PIMCO is that we'll
likely see unemployment rise to about 5 percent by the end of 2023. And so right now we're sort of seeing some of those early signs but we really haven't seen the full brunt of financial condition tightening yet. That's more to come. So we are going to continue to see a slowdown. And I think that's really going to hit in the first quarter of next year and into the second quarter of 2023.
Chris given where we are with inflation right now we're concerned about inflation. If we are headed into recession or even are already in one matter how long it is or how short it is. What are the tools the Fed has to use. Because typically you turn to the Fed and say OK so cutting interest rates doesn't mean that they're going to do that. No likely not. They're going to raise interest rates. They only have one tool. They have. Well they have their mouth that can job
on the market which is what they're doing. They have the dot plot which is going to indicate or direct the market. But they're really the only tool. They have a short term interest rates and the Fed funds rate. And that's what they're using aggressively. I mean good grief.
75 basis points. Those big bounce bounces you know through history. You've got to go way back before you have that aggressive tightening of monetary policy. And they have to shrink the balance sheet. So as they move through that you know he's already said he's going to hurt employment. Yes we have stronger numbers. I think the numbers there's something strange in the numbers this week just like last month. But we'll see how that balances out.
We're going to have a tougher time. And you know I think the question is going to be about corporate earnings. You've got CPI next week and then you've got the banks starting to roll out with their earnings. And then as the market priced in the diminishment of earnings to this one quarter earnings. No I don't think that they have. What you've seen since the beginning of the year is equities have been rated largely driven by the market multiple. So you've seen the market multiple for
the S&P 500 D rate from about twenty one and a half times to about 16 times today. Keep in mind that traditionally in recessions the market multiples somewhere between 14 and 16 times. So we're just at the upper end of where we typically are in recessions and we think that you could see a little bit more a D rating from there. That's not really the challenge for the market. The challenge for the market is that when you look at corporate earnings for next year the market's pricing them to be up 7 1/2 percent for consensus.
Our forward looking models are expecting them to beat down about 9 percent. So that's north of a 15 percent differential versus what the market's pricing for next year and what we think it's likely to be. Also historically during recessions earnings fall about 27 percent on average. So there's real downside risk to our
forecasts and certainly to the market's forecast. And I think that's where you're going to see the real pressure point for the market in early next year. What's driving that is Martin margins were at record high margins right now. The street is expecting that margins are
going to expand further from here. So even higher than and hit new record highs. We've never seen that in a recession before. So I think the market's really mispriced and that's where the pain is going to come from. Aaron I've got to ask is is a worry down 23 percent so far this year. How much lower do you think we can go to D.C.
support level on the S&P. I think that in a modest or moderate recession the market probably bottoms out about 30 to 50. There is downside risk if we see further you know sort of a more severe or harder landing from there. But you know 30 to 50 is still down about 14 15 percent. So I do think that there's still room for the market to fall further. Where do you think Frank is in terms of in terms of your estimates. Yeah no I agree.
30 to 50. But I mean that's a negative 36 on the year which is you're like me. We have asset allocation portfolios. Where do you hide in that kind of a negative market. You've got bonds with the rates rising. So you're going to have a continued negative returns out of bonds and then you know a negative 30 out of stocks. That that's a rough calendar year. Where do you hide.
Well I think that I think there have been actually market opportunities that have arisen since the start of this year. Cash for the cash rate right now two year bonds are yielding north of 4 percent. Now that's not a sexy return by any sort of stretch of the imagine but imagination. But if you can lock in 4 percent you know add a little bit of spread on top of that you know an ISE corporates like give you an additional 2 percent or so. That's about a 6 percent return over the next couple of years.
That's high quality paper that you can invest in. So I wouldn't sort of rule cash out as an up as an option. I think that that's somewhere where you can hide and really not expect that much volatility and really consistent returns and sort of hide out there until we see the market's bottom and you can start incrementally moving back into risk. But we can't. I think you need to keep in mind as an investor that if the core of your allocation of your portfolio which is sort of cash for fixed income isn't stable then you really can't invest in the outer ring assets. So you know we really have to stabilize rates in order to move out the risk curve into other asset classes right now. Cash is a pretty good option.
Okay. We're gonna pick up exactly that question. Where do you hide in this environment. CHRIS UHLMANN And Aaron Brown will be staying with us.
We're gonna ask for them then for some investment advice. We could use it that's for sure. That's next on Wall Street week here on Bloomberg. The facts on unemployment seem clear enough but at least as clear as that changing social definition ever can be. The situation is getting a little better but not much. The government announced today that the
overall unemployment rate last month was six point nine percent. The official unemployment rate has been stuck within a tenth of 7 percent for six months. And that scarcely represents the massive reduction of unemployment that at least some folks thought they heard Jimmy Carter promise a year ago. That was Lou's right. ISE on Wall Street back in October of 1977 when the unemployment rate was twice what it is today. And we were trying to get it down rather than focusing on inflation whatever that ends up meaning for employment. And that seems like a galaxy far far away.
Well maybe that's no accident. The top movie this week back in 1977 was Star Wars and the top song in the charts was You Got It. The Star Wars theme. Still with us our Aaron Brown at PIMCO and Chris Ellman of Telstra. So let me turn to you and pick up on where we were talking just now with Chris.
But where you hide if you're really an asset like you said cash is one alternative. Are there things though that involve at least some risk that you go to and how much depends on what you think the recovery is going to look like whenever it comes. So I want to flip that sort of question and answer the second question first which is unlike prior recessions that we've seen in very recent history.
So think of the global financial crisis or even the pandemic of 2020. I don't think this is going to be a V shaped recovery. I think this is going to be more of a prolonged sort of stalling of the economy and more of an L shaped recovery than what we've seen in the past. And the reason for that is because inflation is high and it's likely to persist at high levels. You're not going to come in and see the Fed start cutting you know as the unemployment rises like we've seen in the past and said because the Fed is you know moved from a dual mandate fed to a single mandate Fed really just focus on getting the inflation rate down.
You'll likely see you won't see this sort of immediate relief that we've seen in recent history. And so that does change a little bit the landscape of how you think about investing. You know historically as we start to get closer to what we expect the bottom level of the S&P 500 to be we start to scale risk back up start to move back into equity investments to catch that recovery to the upside. And this time around I think you have to be a little bit more patient. So instead what we're really looking at is fixed income investments that we think are going to be able to sort of stand the test of time be able to sort of hide out in a safe haven assets. So beyond just looking at cash we're looking at high quality investment grade corporates.
We're looking at municipalities municipal bonds particularly for those who are can take advantage of the tax advantages tax advantaged bonds. We think offering good value there at a sort of after tax yield of six and a half percent. You know in addition we also like some mortgage agency bonds and structured credit bonds as well.
And then sort of high quality equities that are defensive equities high free cash flow dividend growth strong balance sheets. We also think Duke will do well in this environment. But you know is a sort of challenging time for investors where you have to skew more towards fixed income in order to have stability of return as opposed to looking for a quick snapback in equities.
But you know I posed the question to Chris because I know he also manages a diversified portfolio. Chris where are you looking at what type of sort of diversification are you looking at in order to sort of hide out over the next couple of quarters. Aaron you know I've got the benefit of being able to go into private security. So I've got a good sized real estate portfolio. We have a large private equity
portfolio. Sure it's going to have write downs but its value is a bit more stable than we see in the public markets. We have a cash position. But the problem is for us cash is not
outperforming inflation. So the old adage cash is trash is still true. We do like private credit. You were kind of hitting on that that you know variable rate that short term debt with high quality. And I think collateral is going to be
key because as you said we're going to have a long rough winter. So you don't want to be loaning money to everybody. You don't care about covenants. But it is tough in this environment. I mean you know if the economy is slowing and inflation is still strong that's stagflation. And you look back in the 70s I got to say I love that suit that Lew had. I don't know where you get that 70s but I'm stunned by it. But you know you look back in that time
period returns in 77 were terrible hard places. It was just a very tough time to high anywhere. Yes. So I'm curious though. Exactly. But when you go into fixed income do you think the price is attractive now in some fixed income. Chris. Well I agree with Aaron I'm going to go
short. I'm not going to go long fixed income and take duration exposure short term credits I mean you can hold a credit for two to three years and then it's money. Good. And she said you're going to put it in a spread product. So you pick a couple of basis points by being in the corporate you're OK. There's still a lot of money David. International money that wants to come into this market non U.S. rather it wants to come into the market.
You saw it in the this week where it suddenly comes rushing in. So I would give the advice to the average investors. You've got to slowly average cost in. You're not going to be able to call the bottom as much as there. And I think there's a support number. It may not hit that at all. And the market's going to just bounce
along. And in Aaron's example of an L an L goes on forever. It's just a lap. I hope we don't have to live in a flat recession for years and years that I think this is going to be a tough market to find any kind of growth opportunities. So you want a protection and a return of your money rather than return on your money.
You're one of big developed this week was opaque plus. And what they did certainly seem to stun the White House at the time. What does it tell us about geopolitical risk generally and specifically energy. It looks like oil prices are going to stay up there for a while. I think that's one of the things that the markets really mispricing right now.
If you look at the forward curve for oil the risk is really in the sort of very short term where the market expects that oil's going to be elevated for the short term but it really hasn't extrapolated or extended that expectation out the next one to two years. And I think that there's real value in sort of the back end of the curve for oil because I think that these oil challenges are going to persist much longer than what the market's anticipating. One of the reasons for that is you know first we saw oil OPEC plus this week their intention to keep prices elevated. But I think the other challenges is that we really haven't invested here in the US or on a global basis on energy infrastructure.
So that capacity is really constrained over the next couple of years even if we wanted to expand capacity or oil producers wanted to expand capacity. They don't have the ability to do so in the immediate term and that's going to keep oil prices elevated. So the risk for oil then the risk for the energy complex broadly isn't just this winter but it's next winter as well. And next winter's challenges are going to be even more difficult particularly on the shores of Europe than what we're experiencing this winter. And so that's what I think the challenge is. And you know why.
I think this is something that's going to persist much longer than what the markets currently priced in. And David it's running into the challenge of climate change. You know I'm looking at decades not a short term trade in carbon and I'm glad that we're having a constraint on the ability to expand hydrocarbons and burning carbon. But you're right. People want heat in Europe heats itself. Whether we like it or not it doesn't need itself with solar and wind.
It's got to do it through fossil fuels. And that's matching and running into a desire to reduce these fossil fuels. I agree with you and I'm hearing the same thing that Europe has enough oil and natural gas for this year and their supplies. But if it's a really cold winter they're very worried about next year. So you're going to have climate change crashing into this challenge of OPEC and inflation and energy prices certainly over the next couple of years. Europe has a lot of challenges Erin
right now not just energy. It goes beyond that. Does that make the U.S. relatives the most attractive place to be. You know it's the most attractive place but it's one of the more attractive places particularly these of Europe.
And the challenge that Europe has is that they're starting from a lower productivity you know a lower and weaker growth rate to start out. They also didn't you know sort of fully recover in the same way that the U.S. did post Covid. And they're now have wider fiscal deficits. They're going to have to spend more money in order to insulate the economy from a harder hit because of energy. And that's going to create real challenges at the same time where the is rapidly slowing. And so our view is that while the US is
going into recession the recession in Europe is going to hit harder and is likely to be more prolonged. Thank you so much to Aaron Brown and Chris Aleman. When we come back we're going to take a look at what's happening next week on global Wall Street. And this is Bloomberg. This is Wall Street week. I'm David Westin.
It's time to take a look ahead at next week a global Wall Street China's stocks reopening is the big story in Asia this week. Exchanges on the mainland they've been shot for the past five straight sessions. That's to mark the Golden Week holiday so we could see a pop at the open given the moves that we saw in Chinese assets in offshore markets. And that would be of course welcome news for officials in Beijing because President Xi Jinping is just days away from securing a third term as Communist Party leader. That's at the 20th Party Congress starting October 16th. Otherwise travel restrictions or the easing of those is the major theme as well. Japan will further loosen controls from
Tuesday and Taiwan front Thursday for Europe next week. There's a big risk lingering in the markets and that's the end of the deal with short term program to backstop bond markets. They of course announced that they would be purchasing long dated bonds after concerns about a huge spike up in yields in the long end of the curve meant that there would be danger for pension funds. So the BNP has been doing this buying program. It's set to end on Friday.
On October 14th there could be jitters in this market. What it means to no longer have to be a weak backstopping a political story really of the U.K. government which has been doing various u turn. So all of that will be in focus this
week. All eyes next week will be on the latest batches of U.S. inflation data. Producer prices will be released on Wednesday with the headline figure projected to have fallen year over year for a third straight month. Meanwhile the Consumer Price Index released on Thursday is once again expected to show conflicting signals with a deceleration in the headline number from a year ago. But the core measure of CPI which strips out food and energy is forecast to re accelerate its pace of growth rather than fall. Investors also will pass the release of the minutes from the Fed's September meeting and whether there was any serious discussion about slowing or even halting the tightening of monetary policy. An earnings season is finally here.
The latest round of quarterly reports kicks off with Pepsi J.P. Morgan Citigroup Morgan Stanley Delta Airlines and UnitedHealth. Among the notables. David.
Coming up we'll wrap up the week with our special contributor Larry Summers of Harvard. That's coming up next on Wall Street week on Bloomberg. This is Wall Street week. I'm David Westin.
Every week we turn to Larry Summers of Harvard our very special contributor here on Wall Street week to help with some of the major events of the week. And once again we welcome back Larry Summers. So Larry. I think we should start with the jobs numbers out on Friday in the United States. I mean some say not too hot not too cold. Some people say isn't this good. At least it's not getting worse.
I guess my real question is I mean I could be getting worse. Was there a danger just in the inflation many where it is we have 5 percent year over year increase in wages. I think these numbers were about what we expected and the sensible judgment was that we've got an inflation problem.
Core inflation figures look artificially good. They're better than median inflation. And yet core inflation ran at a 7 percent rate last month. And that was more than for the quarter.
And the quarter was more than for the half year. And the half year was more than for the whole year. So we're not in a controlled place with respect to inflation. And there wasn't really anything in this report to suggest that we were coming into a controlled place. The monthly wage number was relatively favorable but it was pretty clearly distorted by the fact that you had a lot more workers coming in and leisure and hospitality.
And those are low wage workers. The workers where wages are most flexible are going up more rapidly. So I don't think this is a number that changed the picture that we've got an economy that is too strong to be an economy where inflation is going down. But that is maintaining its robustness. But I think we are headed for a collision of some kind or other. And we've just got to manage that collision carefully. And I think the sooner we start managing for a slope managing for some slowdown the better we're going to do I think. Chairman Powell was way late to come to
that recognition but he now has that recognition and he should be supported in that. So what do you think Chair Powell and the Federal Reserve will make of these numbers. How will it affect what they do in early November. I don't think these numbers are going to change what the Fed does. You know you never know what's going to happen and certainly there's risk of some kind of financially traumatic event. But I think the chances of something that is large enough to divert the Fed are really quite low.
So I'd be expecting that the market which is anticipating 75 basis points in November and is anticipating 50 more in December that would correspond to my best guess at this moment as well. And I think that kind of thing is going to be appropriate if we achieve disinflation. Larry there's another strain of discussion I've seen certainly this week. In fact there was even some Fed staff work at the New York Fed suggesting that we better be careful because in fact though the rate that we may need to get down to 2 percent maybe so high it will cause financial instability. There is really a safety and soundness issue. What do you make of that.
Is it possible the Fed will have to choose between financial stability the one hand and getting inflation down on the other. First I think that should be the occasion for some soul searching. If we have an economy where we think there's going to be substantial financial breakage because the Fed lifts the Fed funds rate to four and a half percent then we have an inadequately supervised financial system and an insufficiently active financial regulator. And so if anyone believes that along with whatever monetary policy implication they draw they better tell us how we think how they think we ought to be repairing the regulation of the financial system. David my sense is that you can never rule out these kinds of risks.
But the Fed has more than one instrument. It has instruments for specific guaranteed lending. We've seen that used a number of times and each time we are surprised by how much the economy retains its robustness. In retrospect we cut interest rates too much and kept them too low. When we were supporting the financial system after Covid in retrospect we kept interest rates too low and blew up a bubble when we were supporting the economy with low interest rates. After Asia and LTC. Yep.
In retrospect we were surprised. Amazed by how rapidly the economy grew. When the Fed did what was necessary after the 1987 stock market crash. So we need to regulate right to preserve financial stability. We need to have a very strong firefighting force in order to respond if and when financial accidents happen. But I think it's a real mistake to suggest that somehow we shouldn't do the monetary policies that are necessary to avoid inflation becoming entrenched because of concerns about financial stability. You know David the
people who are still on team transitory they're always saying that expectations aren't entrenched. The more it's true that expectations are not yet entrenched despite high inflation. Seems to me the more important it is to move vigorously now with respect to inflation. So they don't become entrenched. If they were already entrenched we could discuss the right timing of a disinflation. But if we have the big advantage in disinflation of expectations that are not yet entrenched surely we should be acting on inflation while we have that advantage.
Larry. Oh another big development this week was the OPEC plus decision to reduce production limits by 2 million barrels a day. Something that I think it's fair to say. Well set the by demonstration back a bit. He'd gone over there and asked the crown prince not to do that.
It wasn't very pretty. So apart from perhaps any embarrassment in my cause. Does it have larger macroeconomic effects for a globe that we are warned by WTO maybe headed toward a global recession. There's nothing good in this. Certainly it's not what we wanted to see.
Actually it's. It's a lot less than 2 million barrels because many of the countries that reduce their quota weren't hitting their quota before. So the reduction in the ceiling didn't really matter. And you didn't see a hugely dramatic move in oil markets in a way that was proportionate to the headlines that you saw. But certainly the risks are up and it just points up the importance. And we always do a scramble about the
immediate when these things happen and we don't forget about the medium term. Look we made a mistake by canceling the Keystone Pipeline. We made a mistake by slowing down all kinds of permitting activity. We made a mistake by being hostile as a country to natural gas. We made a mistake in the Congress a few weeks ago when we didn't pass the mansion program of expect expanding permitting.
We crucially need regulatory relief or we're not going to get renewables online fast. And we're not going to get the transmission lines that are necessary for renewables to become a large part of our energy fast. So the real lesson on this is we need a different kind of energy strategy than the one that we've had. We need a strategy that is balanced rather than an unbalanced strategy of total hostility to fossil fuels or God knows the kind of total strategy of favoring fossil fuels that we had and even even egregious favoritism towards Saudi Arabia that we saw during the Trump administration.
We need to find a balance and I think we're making our way in that direction. Laura it's always so helpful to have you on each week and have a guy say do Larry Summers and stay with us as we bring in Professor Brad DeLong a professor of economics from UC Berkeley. His new book Slouching Toward Utopia. That's an economic history of the 20th century.
That's coming up next on Wall Street on Bloomberg. This is what really I'm David Westin a very special contributor. Larry Summers of Harvard has stayed with us because we're going to bring in now professor of economics from UC Berkeley. He's Brad DeLong the author of a new book Slouching Toward Utopia An Economic History of the 20th Century. So Professor welcome. For joining us. It's really good to have you here. I've read this fascinating and really
sort of protean book. It's really quite a book. Let's set it up first because it's a history the 20th century. But you don't necessarily define the 12th century as from nineteen hundred to 2000. You start in 1870 and end up in 2010. Why. Well the big thing that happens happens
in 1870 right before 1870. The world's poor. And there's no prospect for the world being anything other than poor after 1870. Every single generation humanity's technical competence doubles and then doubles again in the following generation. And such an enormous pace of
technological advance raises the possibility for the first time of a world in which we can bake a sufficiently large economic pie for everyone to have enough. And that was nothing that humanity had ever seen before. One of the remarkable things Brad that you highlight is that it really wasn't very different to live in the United Kingdom in the 19th century than it had been to live in the ancient world. Two thousand years before say something about the acceleration of growth that you see is happening in the 20th century. You know I mean it was British economist John Stuart Mill right.
He was writing in 1871 about how all the industrial revolution had done was it had created a somewhat larger middle class and it had allowed manufacturers and the rich to earn greater fortunes but that the overwhelming mass of humanity was still confined to the same life of drudgery and imprisonment than they had been before that they had been in before and before all the way back into deep time. It was very clear by nineteen hundred that things had changed. You know John Maynard Keynes writing in 1919 looks back and says Starting in 1870 we entered Economic Eldorado and that now our chief task after World War One was figuring out why we tried to blow it up and try to get desperately back to what was good was going on after 1870. Fortunately we eventually did. And so things rolled through. Up until our day. First of all it gives a sense of what happened in 1870 that brought all this about there were some three driving forces in your back. Well you know everyone has an idea about just what it is that's made us as a civilization so wealthy that makes our economy so productive.
And the different people have different things and they all go back. Some of them back even to say the year 10 70 when it turns out that the law applies to a German emperors standing in the snow outside of the castle that allies and his tool. But instead it could be that the law replies to everybody. But you've got three things that fall into place in 1870 that set technological progress into much higher gear than ever before. And they are the industrial research labs so that you can rationalize and routinized the discovery and development of technology and then the corporation as we know it which rationalizes the development and deployment of technology.
You combine that with a globalized economy with the Telegraph and the ISE Railroad and the iron hold ocean going steamship. And all of a sudden the incentives to deploy technology worldwide for production are so overwhelming and people turn their minds to how to do this that everything explodes in a way it never had before. Brad. Much of the academic discussion of your
book has centered on this idea of a pivot point in 1870. But I want to ask about a different judgment you make which is that there was this major era and that the major era ended in 2010. I would have thought that the world was growing. It was becoming more integrated with technology.
There were important political struggles. That was the stuff of history through the 20th century much better in the second half of the century than in the first half of the century. The end the Cold War was a very different war than World War One or World War Two. It was cold.
But I would have thought that was a continuing process with substantial challenges. And yet you see us as now being in a quite different era. What's different about the era. Then the era you wrote the history of other than more of the kind of progress and change that you saw is happening every generation. Well I'm pleased to disagree here and I'm very pleased to disagree and are a starry eyed optimist here about our future because look I've been losing arguments in person with you for 42 years. Even when I think I'm right afterwards and here I'm genuinely uncertain. And I actually very much hope you are really right this time.
My thinking was I've been listening to our friend John Fernald about how the underlying pace of technological progress has more or less have since 2005 compared to what we were used to beforehand. Save in those years from 1975 to 1990 when technology was crawling toward a more energy efficient and environmentally friendly configuration rather than focusing on labor saving. But after 2000 and after 2000 we seemed to have a substantial loss of.
Social and economic knowledge about how to run things. Things about financial regulation that I thought were in trend that were known in the bones turned out to have been completely forgotten in 2008. Things about the proper tools for macro economic policy that I thought were in where were ingrained in the bone were also forgotten after 2010. And I remember you and I whimpering in 2012 that no.
Furthermore expansionary fiscal policy was not then a thing that ran any risks whatsoever. Combine that with the fact that from 1870 on to 2010 the first you had Britain and the United States and then the United States as the countries that people were looking to for examples. As you always Leon Trotsky like to say as the furnace where the future is being forged. But now you go to China you go to India you even go to Indonesia and. What you'll find is that people say that
the United States has very little to teach them that we don't have any greater grasp on how to deploy and use these technologies to create a good society and are in fact a society or a society that is more trouble and more trouble than theirs are. Brad if that is right how much of it because of running out of ideas and how much time is running out of cohesion. One of the themes in your book is the sort of polls if I can put it that way between high up. On the one hand the market is king and villainy and the other is the market has to serve people. How much of the problems we're in right now are because we're lacking cohesion because of the dispersion in wealth and income. I think we are definitely lacking
cohesion. I think dispersion in wealth and income creates a lack of cohesion. I am struck by comparing the United States around nineteen hundred with the United States today right around in nineteen hundred. Politics was as fierce and mean as it is
today. You know that is Theodore Roosevelt denouncing William Jennings Bryan as the puppet of a alien European socialist. John John Peter Altgeld the governor of Illinois who had not only been born in Europe but also had dared to pardon anarchists.
But there seems to be a very different flavor right. That is I think it's Ezra Klein talks about it that somehow that our media and our communications today focuses first on establishing you know who are your enemies. Do you share any enemies with me. And if you share enemies with me I will listen to. So as I say it's a remarkable book. It's slouching toward utopia an economic
history the 20th century. Thank you so much for bringing us. We can only really touch upon it. I urge everybody to read it. It's really worth the effort. Thank you so much. That's Professor Brad DeLong of UC Berkeley.
And of course to our very special contributor Larry Summers of Harvard. Coming up staying the course or turning tail. We'll reflect on some big about faces this week. This is Wall Street week on Bloomberg.
Finally one more thought the fine line between being steady and being stubborn. We've all admired those leaders through the years who have stuck to their guns when times got tough. British leaders like Winston Churchill in the darkest days of World War to fight Canadians but who never surrender. And Churchill's successor Margaret Thatcher who was known for sticking to her guns no matter what he wanted the Council of Ministers to be the Senate. No no. And American leaders like President Reagan at the Brandenburg Gate demanding that the Soviet Union tear down the Berlin Wall when it seemed that that was the farthest thing from Mr. Gorbachev's mind. Mr. Gorbachev open this gate.
Mr. Gorbachev tear down this wall. Those were the times when the Steadfast were ultimately proven right by history. What happens when bold proclamations don't hold up quite as well such as George Herbert Walker Bush his insistence he would never ever raise taxes and they'll push again. And I'll say to them read my lips. And then there are those bold pronouncements that have yet to be proven out one way or the other. Like President Xi's insistence that his zero Covid policy is the right one for his country.
But if you'd just look at the Covid zero protocols it requires all people returning from abroad to have ten days of quarantine. Or President Putin insisting that he will ultimately still prevail in Ukraine if he thinks he's losing and may lose his his you know office and even life. Then he could become completely unpredictable. But this week this week we saw something a bit different. Big bold pronounces being completely reversed.
Not long after they were made a big one was of course Elon Musk's change of mind again on whether he'd pony up 44 billion dollars for Twitter. We're now hearing that Elon Musk and Twitter of course. That resolution really said to be sticking on the contingency of getting that debt financing. And that is going to be the key clause
that we're focused on going forward. But at least Mr. Musk took a few months for his change of heart. Over in Great Britain we saw a new government lay out a new budget that included big tax cuts starting with the top tax bracket. We love the tax cutting but not this time. This is just absolutely the wrong time to do this. Bringing immediate and violent reaction in the markets.
Try to get the markets behind to those two blasts of factors probably significantly more difficult. And the Bank of England stepping in for the rescue. Suddenly the Bank of England finds itself in the ECB situation. So Prime Minister Truss's newly minted chancellor of the exchequer had to admit publicly that they had been wrong clearly and dramatically wrong at least on those top tax rates.
And it came only days after he and Prime Minister Truss had gone so big and so bold I think was a distraction. I think. And I think I think it was it was the wrong thing to do. One can hardly fault a government for listening to its people even if the listening might have come better before the deciding. But whatever the right answer the one thing for certain is that at least in this respect Ms. Truss is no Margaret Thatcher. To those waiting with bated breath for that favourite media catchphrase the U-turn I have only one thing to say. You turn if you want to.
The lady's not for turning. That does it for this episode of Wall Street Week. I'm David Westin. This is Bloomberg. See you next week.
2022-10-10 06:45
