I wanted to start off with the US
economic outlook, because I know recently you've written about this idea
of inflation brain, the idea that perhaps price pressures are the
scapegoat for all economic afflictions in the US.
The balance of risks for the Fed and a lot of other central banks, including
the RBA, for example, the BNZ seems so fine at the moment.
What would make you suggest that they should go for a small cut in June?
Okay. The first thing to say is that we are
pretty sure the recent inflation data have been, you know, there's noise,
there's. There's probably some some funny stuff
with seasonality, but basically inflation has been beaten.
You know, we're we're arguing over whether underlying inflation is 2.6 or
2.1%, where we're not that the range of disagreement there is fundamental
disagreement is really small. We are we're basically there.
And the the big uncertainty is how long can the economy continue to, you know,
power along with rates this high. And we're at this point now where
they're just, you know, faint hints, soft data suggesting that we're starting
to lose steam, that consumers are starting to falter.
It's nothing drastic, but then it never is at this point.
And if if you're beginning a downturn. So it's, you know, the the chance of
reaccelerate inflation looks very small. If there if the Fed cuts rates, the
chance that they will look back and say, oh, my God, why didn't we take at least
a little bit of precautionary action against a looming downturn looks very
much larger. So I would I would go for the rate cut,
if only to signal, hey, you know, we're we're not asleep here.
We're not going to be obsessed with inflation until that's so far in the
rearview mirror that we really should be focusing on the on the car wreck in
front of us. Right.
So like a protective court. And I think we've kind of talked about
that a little bit with regard to other economies as well.
Do you worry about the potential for fiscal to undermine the the monetary at
this point? Well, actually, you know, not in the
United States. Everything everything is up in the air
because of the election. I don't worry about fiscal being a
serious in the US. You know, we have not gotten our house
in order. But the in terms of there being a
significant fiscal boost if Biden is re-elected, not going to happen as we've
sort of done that if Trump wins, then all bets are off.
I mean, his he's made it clear that he doesn't want the Fed to retain its
independence. He's shown in the past a clear
inclination towards kind of turkey style, you know, print money to help me
politically. The it he's talking about unfunded tax
cuts but also tariffs that are directly inflationary.
So, no, I mean, I have to say markets are way too calm given that this is a
toss up election. And then what the side would represent a
huge departure on policy of every kind. Especially with risks around trade
tariffs also increasing. One is the view when it comes to
geopolitical tensions are rising that could further derail risk assets, not to
mention global economies that really have close trading partnerships with the
US. Oh, if this is huge, I mean, we are very
much. Regardless of who wins, we are at the
end of an era. I mean, my my political science friends
talk about hegemonic stability, which was that we had a long era of
pretty smooth globalization. And, you know, the things worked because
the US was number one, and the US kind of believed in a rules based order and
all of that. And it was always kind of hypothetical
what would happen if we no longer had that?
Well, it's gone. Right now we have a
you know, as long as it was the US and the euro area then.
Well we share a lot of of of views, share a lot of values.
But with the US and China now as the two big players on the block,
everything is wide open. And the you know, it doesn't necessarily
mean that we descend into a a collapse of world trade right away, but it does
mean that nothing, none of the ground rules that everybody counted on for the
past several decades are can be counted on anymore.
And hearing the Asian economies really watching this unfold.
I'm hearing Japan now and why therefore the rhetoric being is on.
Actually, Japan has benefited a lot from the tensions between China and the
United States that a lot of these businesses are now veering towards
setting up more connections with Japan. Are you seeing a meaningful demand
driven sort of inflationary pressure that can be sustainable finally in this
country? It's very.
I mean, I've been worried about Japan for a long time, and I have to admit
that I worry about less because I'm worried about lots of other things,
including my own country. I'm not.
I hope so. But I'm not convinced.
But I try to look at the Japanese data. I still don't see the kind of
fundamental strength. I mean, a lot of Japan's long term
weakness has to do with demography, has to do with extremely low fertility.
That hasn't changed, although Japan is at least more open to immigration than
it used to be. It's but it's a long way.
I mean, I would say that the talk about exiting zero rates, I understand why
Japan really wants to be able to declare that we've entered that period.
But it's not all clear in the data that it really has.
And yet, what choice do Japanese policymakers have when you have this
immense pressure on the Japanese yen? Are you saying that this could
potentially be another false dawn when it comes to BOJ policy normalization?
It could well be it. Well, you know, I will say I mean, you
know, the BJP leadership is not stupid, to say the
least out there. They're watching this.
But I have to say, what puzzles me is why Japan is so worried about the
falling. Yeah.
You know, it's it's it's not as if I mean, yes, that does hurt consumer
prices. But Japan, as we say, has been a country
that has long had a problem in convincingly exiting deflation and
a weaker yen after a little, you know, give up, give it a bit of a lag that's
actually positive for demand for Japanese goods and services.
So the thing that I find puzzling is why the weaker yen is inspiring as much
panic as it seems to be. Does it make more sense if you think
about the sort of geostrategic tensions? Does it create more panic for Beijing,
for example? Oh, for sure.
I mean, look, I mean, China is in much worse shape.
I mean, a fundamental sense. China has a a whole economic model that
is not sustainable. It has vastly inadequate domestic
spending. Vastly inadequate consumer demand has
run out of sufficient investment opportunities to keep the economy
rolling and but seems bizarrely unable to change its operating, you know, to do
even modest steps towards a refocusing on domestic demand.
And Japan and China sort of kind of have, it still seems, inclined to try to
export its way out, which is not going to happen.
The world is not going to accept it. And a falling yen, if you like, adds to
that unacceptability. Because if there's one thing that we can
be sure is that the rest of the world is not going to accept a simultaneous
Japanese and Chinese export surge on the scale that that could be that would
happen without some kind of action.
