Tell us where you think the economy is
right now. We got a raft of eco numbers in CPI and
others this week that some people tourists indicate that maybe actually
the Fed is having its way, that the economy is softening, inflation is
coming back down. I think it's very hard to read, David,
but I think I see some growing evidence of a stag, but some real continuing
concern about inflation as well.
And that's a tough combination on the stag side.
It does look like defaults are rising. It does look like the flow of credit is
coming down. Headline retail sales were not strong,
although the internals are less or less clear.
So I think you have some grounds for concern about what's happening with real
activity on a forward looking basis.
And the wall, the CPI and the PPA numbers surprised a bit in a favorable
direction. You saw one year inflation expectations
from the University of Michigan pop up and the Atlanta Fed a wage tracker,
which I actually think is a better indicator of what's happening in the
labor market than the monthly average hourly earnings that popped up a bit
last month as well. So I think we're still looking at a very
hard to read economy.
I don't see inflation as on a secure path down to the 2 percent target unless
the economy turns or turns over a bit.
So I think the Fed has very difficult choices ahead of it.
So, Larry, let me make it even more complex, perhaps, and that is where we
are with credit right now. There's a lot of reports right now that
credit standards are going up in the wake of those bank.
If I can call them tremors that we had. How do you factor that into that?
Could that help the Fed a bit really curtail some of the inflation?
Look, I don't know there's any question, David, but that some Fed work is being
done by tightening of credit. So there's definitely that effect.
The question is, how large is it? I thought prior to the tremors in the
banking system that there was a chance the Fed funds rate would have to get up
to 6 and that it was certainly more likely than not that it would have to
get to 5 50. What's very hard to know is whether that
action in credit, which is reinforcing the Fed, whether that's three moves
worth of reinforcement, whether it's only one move worth of reinforcement,
and that's the judgment the Fed's going to have to make on an ongoing basis.
I'm surprised still that markets are expecting as large a set of rate cuts
over the next two years as he's currently priced in, because it seems to
me that we're not very likely to get six or eight rate cuts over the next two
years unless the economy is headed towards recession.
And certainly recession of a substantial sort is not what's priced into the stock
market or for the most part, priced into high yield credit.
Laura, listen, I was saying we haven't talk about that much, which is oil.
There is reporting by Bloomberg this week that really suggests that there is
something of a rift growing between the United States and Saudi Arabia, that if
anything, Saudi Arabia is getting closer to President Putin and Russia.
And the square question is, what does that do potentially for the price of oil
and therefore at least headline inflation.
How big a problem do you think this is potentially?
Look, I think what's happening in the Middle East and it's the Saudi
Russian thing that you just referred to, it's the Chinese brokered
restoration of diplomatic relations between Saudi and Iraq.
And Iran is a symbol of something that I think is a huge challenge for the United
States. We are on the right side of history with
our commitment to democracy, with our resistance to aggression in
Russia. We are very much on the right side of
history, but it's looking a bit lonely. Laura, I know you spent the week at
those meetings, the IMF and the World Bank in Washington, D.C..
What did you see, what did you hear about that very subject?
That is the extent to which maybe we may be breaking up and if I can call this
trading blocks where people trade with one another.
But actually, we're moving away from globalization.
We're not necessarily all on the same page.
I think there's a growing acceptance of fragmentation and maybe even more
troubling. I think there's a growing sense
that ours may not be the best fragment to be associated with somebody from a
developing country said to me. What we get from China is an airport.
What we get from the United States is a lecture.
We like your values better than we like theirs, but we like airports more than
we like lectures. And so I think that what's at stake in
some of these really technical discussions that they're always having
here about debt relief or about the future of the World Bank is not just
a bunch of stuff about lending money to promote different economic activities or
to make development more sustainable, but what the broad structure of the
system is going to be. And if the Bretton Woods system is not
delivering strongly around the world, there are gonna be serious challenges
and proposed alternatives. Larry, your name came up actually in
connection with these meetings. As people noted that the IMF is really
having a different projection on long term interest rates to the neutral rate
over the longer term, saying it's going to come right back down to pre pandemic
levels where as you have been saying, that's not necessary the case.
Where are you on that issue? Look, I was in a way, glad that the IMF
was resurrecting and talking about the secular stagnation theory that I pushed
so hard between 2013 and 2019. And certainly I recognized all the
various arguments they were making.
And it's certainly possible that they will turn out to be right.
My own sense is that given the huge volumes of government debt that have
been run up, given the very large flow deficits that are in the offing and
given the large amounts of private investment that are going to be devoted
to the renewable energy transition and
devoted to French shoring and increasing resilience.
My sense is that the balance in the supply and demand for funds is going to
be more towards demand, and that's going to mean higher real interest rates going
forward than we had before the pandemic. And so I not expecting that we will see
a huge return to the secular stagnation situation.
Larry, in your opinion, how does money supply figure into your analysis of the
economy overall? There was a lot of talk this week by
some economists actually saying that, in fact, the fall in the money supply
during M2, as the United States really indicates, that, in fact, we're going to
go, if anything, into a recession, that we're not going to hear about inflation
anymore. David, I would describe myself as post
monetarist. I think when we started paying interest
on reserves and so if a bank or somebody had an account at the Fed, it was kind
of just like a interest bearing account. And so money was no longer special by
virtue of not paying interest when we had that change in our economy.
I think this whole concept of monetary aggregates as substantial predictors of
what's going to happen lost a lot of its force.
And so I'd have to say that money stock is pretty far down on my list of
indicators to follow. We'd like to do a few long, short
analysis here for you. And let's let's take a few of those
right now. First of all, having come from the IMF,
the World Bank, are you long or short of the global economy overall?
Janet Yellen seemed to suggest it's in better shape than we thought.
At the same time, some people of the IMF were saying that we think it's pretty
shaky. I'm probably closer to
the IMF, but it depends a lot on. How lucky we are.
Depends a lot on the choices that are made in the next six months.
And Larry was sticking with the IMF for a moment, if we could.
You mentioned before the sovereign debt relief.
I know that was a big topic of conversation for you all in Washington.
Are you long, short on meaningful sovereign debt relief for the poorest
countries? Short in the short run, long in the long
run, it will come.
But these things always take time. Okay.
And finally, let's turn to football. We usually talk about golf with football
in Washington, where you've been this week.
We have the Washington commanders now going for a record price of six billion
dollars, but to a syndicate led by a former co-founder of Apollo.
A year long, short Washington professional football.
I've spent enough time in Washington to have some loyalty to the Washington
football club, now known as the commanders.
I think this is a important moment for rejuvenation and renewal.
And I wish Josh and his colleagues the best.
