Without any further ado, the
new financial geopolitics. How long can the US keep
going as a lender, leader, and reserve us of last resort? First panel-- contending
perspectives-- Sylvia, please take it over with
any other introductory remarks you'd like to make. Great. Well, as usual
Mark summed it up, but Ian and I have been working
on a fairly challenging, for us, project for some years. And we thought getting a bunch
of smart people in the room would help us continue
to refine our ideas. So thanks, Mark, for being
willing to pick up on my idea. I think we'll get started. OK. I will start. I planned this key note. The arguments that
we're making really can be summed up in this slide. You all be very well aware
of the dark blue line, that the cumulative
current account deficit of the US, the
sum of the trade deficit and the US's net investment
income, the ability of the US to delay adjustment of the
current account deficit. Two things I think that
we have tried to focus on. One is, the puzzle between
the cumulative current account deficit and the NIP,
the measure of the US international indebtedness. And as we see it--
and I do want to say too much about that
given penny, I presume, will say a lot about this
as well-- but for us, that's basically the valuation gains,
the unrealized valuation gains, on the other two parts
of this diagram, which is the US international assets. The gray line, the top. US international liabilities,
the orange line maybe, at the bottom. And what we see is that,
these valuation gains, the unrealized valuation gains
on the external balance sheet, have been often
positive for the US, particularly positive
for the US in the period before the financial
crisis, when essentially we saw a divergence from
the usual situation where the valuation gains
essentially tracked the NIP. But increasingly since
the financial crisis, that what we've seen is,
this working against the US. Increasing the US indebtedness,
despite to lift a quotation that [? Donahue ?] used
the economist, seeing the world as having re-balance. So the US has gone from
a situation of an NIP $1.25 trillion, to an NIP
of approaching $8 trillion. And the main
contributing to that has been these valuation
changes working against the US. And for us, that's the key
issue that we want to examine. And what that brings you to is
a consideration of the assets and the liabilities,
in total, of the US. And obviously, that's mirrored
by the rest of the world, because this is the
external balance sheet of the rest of the
world, also with the US. And even excluding derivatives
these assets and liabilities are three times larger
than they were in 2002. So for us, essentially,
the question is almost, how could
this not be important? And if you accept that
they are, then for us, we need far greater attention
on the US as investor, as well as borrower. The assets are important,
as well as the liabilities, both gross and net. And Europe, as a
key counterparty is important, as well as Asia. So, it's not just the size
of the external balance sheet that is important
analytically when trying to understand the
basis of US monetary power and the interests of others,
but it's the composition of the balance sheet. So the standard way of
seeing the US balance sheet, and explaining the paradox
of US exorbitant privilege, is that the net income the
US gains from its assets on the balance sheet,
is higher than the costs of the liabilities
on the balance sheet, because the US is long,
risky assets, equity and FDI, and short safer assets. And this is a standard
way of looking at things. It's, I think, been brought
to political economy by Herman, probably 10
years ago now, right? In your book, when
was your book? Seems moments ago. Seems moments ago. So, US assets are, on the
asset side, 2/3 of the assets are FDI and equity. So the risky assets
that the US has "long" in the stereotypical view,
and on the liability side it's only 50% FDI and equity. But if you actually
look at the magnitudes, the aggregate values, 2/3 of
$21 billion on the asset side is $14 billion, and 50% of $28
billion on the liability side is $14 billion. So the main takeaway
from this slide, is that we are not
there yet, but we're moving towards a position
where the US is not long risky assets, FDI and
equity, and short debt, but actually moving closer
to being net in balance on the risky asset portion
of the external balance sheet and short debt. So we're still earning more
rent from that long risk, short safe assets, then
we were accrued 2004, you can see that here. Obviously, the stereotypical
view of the US earning great rents from its balance
sheet position, is related to that hockey
stick rise from 01' to 06'. But you can see we've
been trending back down. So what? This is a chart
showing the changes the US NIP since 2006, which
is taken from some fat pieces. The blue is the flows that
finance the current account deficit. Should match exactly the current
account deficit, but don't. And what we can see is the
obvious declining deficit since 2006. And the orange and
the gray blocks represent the net valuation
changes on the external balance sheet. The gray is the change in the
foreign exchange movements, the US losing if the
dollar appreciates and gaining if the
dollar depreciates. And then the darker
orange, is the movement in other market changes. And what you can see is
increasingly as time goes on, the valuation changes
are a greater contributor to the changes in the NIP than
the current account deficit. And the trend appears to be
a decline in current account deficit and as
we've already said, an expanding external bounty. That's not to say that the
current account trend should continue, but
certainly, everything points to the external balance
sheet trend continuing. So that's not to dismiss
the positive impact on economic growth, of
the flows that finance the current account deficit. But it's to argue, that
these flows are only part of the story that we
have to be thinking about. On the valuation changes,
the US can win or lose. And obviously in recent
years, as you can see here, the losses tend to be
greater than the wins. And the irony here is that, for
all the attractions of the US dollar and the US
financial markets underpinning the
key currency status, the US gains when
the dollar is weak and when US assets are
doing worse, than assets in the rest of the world. In other words, the rest
of the world as an investor has to get it wrong on
the US for the US to gain. And particularly,
the global investors, the rest of the
world, will do well when times of financial crisis. Hence the US insurer role
when the dollar rallies, US treasuries rally,
we know that story from the financial crisis. But as you can see
on the chart, it doesn't need financial crisis
for us to be in a position where the US loses. If you look at dollar strength
in the 2014-2015 period, that does the trick also. The US ends up as a loser. Our main point, however,
is not that the valuation changes that are going to
always work against the US. Sometimes the US will win,
sometimes the US will lose. But the point here is that,
these valuation changes, the results, essentially of
overwhelmingly private sector financial actor decisions. And what we're looking
at is essentially, a loss of US autonomy,
the US economy that underpins what all of us see
as the bedrock, if you like, of US military power. The second part of
the "so what" question is, clearly, the implications
of the increases and decreases in the NIP. Essentially, what these
are to use [? Girinches ?] and [? Ray's ?] term, is
wealth transfers into and out of the US. And these wealth
transfers can have either positive or
negative implications for relative economic growth,
US relative economic growth with the rest of the world. As Herman says quite
right in his paper, we can't simply assume
that if the flows are less than the wealth
transfers, then the wealth transfers, in terms of their
impact on economic growth, are greater. That's not what we're
arguing, and it wouldn't make any sense to do so. And calculating if we've reached
some sort of crossover point at which the
positives of the flows are outdone by the negatives
of the valuation changes, would obviously make an
enormously difficult task. And again going back to
Herman's paper, quite rightly, he points to-- and I think
at least one other paper does the same-- we have to look at the sectoral
implications of who's winning and who's losing. So, we have got a
roadmap of how we might go about doing that,
lay various papers from Lane and Shambaugh do that. But in a sense that question
is beside the point, because what we're
really focusing on here is the loss of US
autonomy, as I've said. And clearly the potential
for wealth transfers is not only an
economic question, it's also a political question. We see the political
salience of that in a number of different issues. We see it in Chinese
concerns about their treasury investments. If there's no implication
in wealth transfers, why care about the potential
for the dollar to devalue? We see it in arguments about
supporting non-US counterparts with the fed and rescue
of AIG, for example. In the financial crisis we
see it within the Euro zone, as a number of people have
pointed out in their papers. And their argument
is that we need to add external balance sheets
to our existing frameworks. So, conceptually one of
the things that we're doing is, trying to use the external
balance sheet to bring us understanding of
the US's sensitivity to its international
financial entanglements. So we used to talk about
economic sensitivity at a national level
in terms of trade, and we have very good
data and accepted ways of measuring
sensitivity to trade. You might argue that
sensitivity to finance is the same as
trade in services, and we can talk
about that later, but we have tried to
take a step forward in measuring sensitivity to
these balance sheet valuation changes using data from
Agustin Benetrix, Phil Lane, and Shambaugh. I tried to get all three
of them to be here today, and at one point each one of
them had committed to coming, and various things
came up being paid exorbitant amounts of money
to consult for central banks and things like that. So we have taken a
database of theirs, and a measure
called NetFX, which takes the exposure of any
nation's external balance sheet to a uniform movement
in the domestic currency of the country. And it multiplies
that by a measure of international
financial integration. So it's weighting the
sensitivity of a country to a currency driven change in
valuation on the balance sheet, standardized by the amount of
financial integration, which is measured simply as
assets and liabilities on the external
balance sheet over GDP. And so what you see here
is, a ranking of countries based on using that data,
and focusing in on NetFX. So very interestingly,
US trade sensitivity, we all know is low. It's gotten higher
than it was in the 70s. It's still relatively low. US financial sensitivity
is not so low. It is here in the
middle of the page. So the US's IFI, its
International Financial Integration, is relatively
low, but its sensitivity is fairly high. It's similar to China's. Now this ignores some
nuance, but the sensitivity favors dollar
weakness for the US. The US is not unusual in being
short its own currency, which is partly what's
driving this effect. But we'll talk a little
bit more about that later. But this result
is the consequence of a foreign currency
denominated assets exceeding foreign currency
denominated liabilities. And so you can see the effect
on here on the US's sensitivity to financial asset valuation
changes on the external balance sheet. So, picking up on
that, and starting to look in particularly
at questions of interest in foreign exchange values. And the key the key
thing that I think, if you like an external
balance sheet approach, allows us to do, is to
raise a further issue with the dollar, which comes
out in a lot of discussions, particularly obviously on
the importance of liquidity provision. But which, we would
argue doesn't then be taken into a lot of the
questions around the interests. So the general
perception of interest is, everyone has an
interest in the dollar in the rest of the world,
because everyone is long the dollar, everyone is
invested in the dollar. To us, that tends to ignore
an important, additional point about the dollar
as key currency. And that's the role of the
dollar as a borrowing currency. You can see that in
terms of the sensitivity of the US and other
countries, to particular to the weakness of
the domestic currency, we can see that in
the previous slide. Now we're trying
to look at not only the interest in domestic
currency weakness, which is as we said is shared
by pretty much all the countries that we would
be interested in considering, but also in terms of interest
and the strength or weakness of particular currencies. In other words, what
we're trying to do, is look at this as a window
into questions around the dollar trap. And what the figures suggest,
and as even those who put it together would have
had in writing and knowledge, these are preliminary figures,
but what they show is that, the US is a far more
dominant borrowing currency than it is an
investment currency, relative to other
major currencies. And here obviously we're
using Euros still, and Yen. And that has a pretty
significant impact on interest in the dollar. Obviously if you
invest in the dollar, you have an interest in
strength of the dollar, but if you borrow in the
dollar, and going back to things like the
original sin literature, you have an interest in
the weakness of the dollar. And we include Malaysia
here to show what the implications of that,
and how that plays out. And not to claim
Malaysia is massively important in any sort
of dollar politics. But if you look at
Malaysia, you see top line, the assets of
GDP invested in the dollar are well over 50% of GDP. And you have an enormous
amount of integration with, if you like, the
dollar zone, the dollar, the global financial system,
but liabilities are also over 50% of GDP. So we have that we have the
rather bizarre situation in the case of Malaysia,
that it cares more about the strength of the
Euro and even sterling than it cares about the
strength of the dollar. And rather more important
countries still maintain-- particularly China being
the important one-- still maintain a strong
interest in dollar strength, but it's mitigated quite
substantially, by liabilities, also in dollars. And as Chinese corporates
borrow more abroad, we would expect
that to continue. So even in the case
of China and Korea, the interest in dollar strength
is far beyond the reserves that those countries hold. Japan is particularly
interesting, because if you look at the
dollar long, as we call it, it's only slightly bigger
than the Euro long. In other words, Japan has only
a slightly stronger interest in dollar strength, than
it does in Euro strength. And the reason, is not
exceptional investment in Europe, but the fact that
the US is a boring currency. So you can probably
see where we're going. We have two minutes left. If we didn't get a chance
to look at the paper online. It's called "Whose Dollar
Trap Is This Anyway?" And the prior
slide is really one that challenges the view
that the dollar trap is that of Asia holding all
of these US treasury bills, and fearing the loss of
value on the balance sheet from any decline,
depreciation in the dollar. So what we're trying to do
here is, actually pick apart through the balance sheet. Who's got an interest
in dollar stability? And the point of
the prior slide is, Asia doesn't have a strong
interest in dollar stability as you might think. This slide shows that,
for Germany, the interest is actually weak interest
in dollar depreciation. So, interest in dollar strength,
surprisingly, in Europe, is stronger in not
in non-Euro Europe, in some of the Northern
European countries, for example. So where were driving
towards here is, deriving from this
analysis of sensitivity to changes in the valuation
on the external balance sheet for key countries in
the world, G8, if you will. Driving that from this
careful analysis of NetFX. And this slide that Ian's
going to briefly talk about, sums that up, and then
I'll conclude break. Very, very tentatively. So it's the US
sold a weak dollar, what would the
external balance sheet, if you like the politics
of external balance sheets, suggest might happen? We don't challenge
the view that we would expect China to
oppose, but the UK and Canada should care far more. Japan's interest in
the dollar, as I've already said, over the
Euro, is at best, marginal. And the Euro area economies,
and they are obviously pushing rather
what the definition of a domestic currency is and
there are other issues clearly involved, but the
Euro area is largely indifferent about the
dollar, whereas the US is fairly strongly concerned
about the strength of the Euro, and it also cares about
the strength of sterling. They're all missing
currencies in the US data but nevertheless, I
think this is valid. And hanging over this of course,
is whether the US actually could engineer such an
outcome, a devaluation, anyway. So, quickly summing up,
we've done this deep dive into the data. The point of that is to
say that the dollar's role as a borrowing
currency substantially reduces counter-parties
interest in dollar strength. Three other points,
the increasing size of the US external balance
sheet reduces US International monetary power because
it reduces US autonomy, particularly shifting
the balance of impact to the private sector. The dollar's role--
there's a paradox here, because the dollar is
a safe haven currency. So when there's a risk
off trade in the world, the US's external balance sheet
net position deteriorates. And that points to some
significant instability that will come home to roost,
maybe not in the next five years, but at some point. And then the final point
is that, Europe, including the United Kingdom,
needs far more attention in our discussions of
the evolution of US international monetary power,
than perhaps we give it, we tend to talk predominantly
about the US Asia Nexus. And if you look at who would
be in alliance for dollar stability, the UK and
Canada come surface as having perhaps among the
strongest, and surprising, interest in dollar
stability, certainly compared to China, whose
interest is not as great. OK. Well thank you,
Mark, for inviting me and I'm going to reciprocate
by not having any slides whatsoever, and
apologize for that. And I'm also going
to fall into the trap that Sylvia and Ian
have laid, which is I'm going to talk
about the US and China, primarily to ignore
everyone else. But that said, I'm happy to
talk here, because this actually forces me to revisit a paper
I wrote back in 2010, where I basically argued everyone
who's hyperventilating about the future of
the dollar is crazy, because the dollar as
the reserve currency is going to be here for a
while, and I'm very rarely right about these things. So seven years later, at
least I feel reasonably confident about that,
at least to date, question is going forward. But it highlights the fact
that basically, people have been worrying about
the status of the dollar as the reserve currency of
the world, since well before, in fact, the 2008
financial crisis. Indeed, some very smart
people in this room have written about
the precarious status of the dollar prior to 2008. And then post 2008
financial crisis, there was a great deal, at
least within Washington, of hyperventilation, because
China was doing things like creating the new
development bank with Brits, or creating the Asian
Infrastructure Investment Bank, or the CIPS. It is "sips" or "kips?" I have no idea what the
acronym is pronounced. But the Chinese
International Payment System. It's worth reading, at
least, Larry Summers quote, because I like it when Larry
Summers hyperventilates. When the AIIB came to fruition
despite US opposition, Summers wrote the following
in both the Washington Post and Financial Times,
"This past month may be remembered as the
moment the United States lost its role as the underwriter
of the global economic system. I can think of no event since
Bretton Woods comparable to the combination of China's
effort to establish a major new institution, and the failure of
the United States to persuade dozens of its traditional
allies, starting with Britain, to stay out. " And to be fair,
there were some valid reasons for this kind of
hyperventilating. Which was first, the concern
that the reaction to the 2008 financial crisis itself, and
the notion that the US was at the epicenter, would cause
a variety of other actors to think we need to find ways
to say never again, essentially, to make sure that we don't
get affected by the crisis. And then second, and this
is somewhat more recent, is the new US addiction
to financial sanctions. Which is the idea that the
US can use the fact that it's at the epicenter of
global capital markets, as a way of employing
targeted financial sanctions against actors that
it does not like. Most of these actors were
relative small fries, even Iran, for example. But then when the US went
after Russia following the 2014 annexation of
Crimea and intervention in eastern Ukraine,
you suddenly started seeing great powers
thinking, well if they can go after Russia,
who else can they go after? And the idea that
there might be the need to develop alternative
payment systems. So without going
into too much detail, the paper argues that
basically most of this actually is hyperventilation. That if you take a look at the
actual prospect, particularly of China, creating an
alternative financial order that would legitimately
challenge the sort of dollar based system, when you look
under the hood at the New Development Bank or
at the AIIB, or even the Chinese International
Payment System, it's not all that impressive. That there is, without
question, some degree of hedging going on, but neither
the Brics Bank, nor the AIIB, are particularly large
enough to really challenge the Bretton Woods institutions. And indeed, with
respect to CIPS, you've actually seen a decline
in the use of the Renminbi over the past year or so,
as international currency. As among other things, the
Renminbi has declined in value, and people have
begun to question the degree to which
China's economic growth is going to continue as it
was thought to be before. So this leads to a
couple of questions. Which is first, why has
there been such a freak out about this over
the last 10 years? And here, I would argue there
are two reasons, essentially. The first is, and this is a
point that I'm shamelessly stealing from
Randy Schweller, is that as Randy points
out, essentially, when you're in a
system where there's a hegemonic order, as it were,
or an order that is essentially being built by the
hegemon, there is extreme sensitivity to any kind of
de-legitimization effort. Even if that
de-legitimization effort is almost purely
rhetorical in nature. Because as Randy points out,
only in a hegemonic system, does balancing seem
like a revisionist act. If you're in a bipolar
world, or if you're in a multi-polar world,
balancing is just thought of as a part of life. But in a hegemonic
system, any actor that seems to be taking
steps that would somehow challenge the hegemon, is
genuinely seen as revisionist. And therefore,
there's a great deal of sensitivity to initial
steps in that direction. And so this is
certainly, I think, what you saw in
the case of China, because there were a variety
of rhetorical moves done even before the 2008
financial crisis, but particularly after
the 2008 financial crisis. In which, it was thought that
China was at least making some initial moves,
or nascent moves, towards creating
alternative system. Then once you actually see the
creation of the New Development Bank and the AIIB,
it's not surprising that there to some
degree, you have people like Larry
Summers freaking out. Even if, when you take a look
at what's actually being done, there isn't all that much in
the way of significant change. And I don't think
that anyone's really been talking about
creating a bank, since the head of the
Chinese Central Bank proposed it back in early 2009. The second reason, I
think, for the freak out, is that if you think about
the sort of components of a global economic
order, in some ways the financial stuff is
easily the most observable. And so I think one
of the mistakes that a lot of
observers have made, is the notion that therefore
we can look at finance as a harbinger of what would
be happening in other areas, as a way of thinking about
whether or not there's actually going to be a collapse
or a dramatic shift in the global economic order. And so here, I
think, the paper then proceeds to think,
well, let's think like a rational revisionist. Which is to say, if you really
do want to challenge or create an alternative to the existing
global economic order, if you don't like it because you don't
think you're getting enough of the distribution of payments,
and/or you don't like it because you're not in charge,
how would you actually try to go about reworking it. And this sort of a Goldilocks
problem here, I would argue. And so when I talk about sort
of the hegemonic global economic order, I go back to one
of my favorite articles, which is Susan Strange's,
from 1987, where she talks about the pillars of a
global economic order, namely being production,
security, information and ideas, and finance. So if you think of those
four or five pillars, I always think information and
ideas are two separate things, so I'll say five pillars. If you think about
it, and if you want to try to challenge
it as a particular actor, you have a Goldilocks problem. If you challenge it too
soon, while the hegemon is too strong, you
will get punished, and you will get punished
mercilessly for it. Think about the new
international economic order in the 1970s, or
think about France under Francois Mitterrand
in the early 1980s. Or if you're too weak, even
if there isn't necessarily a challenger, and you
try to create an order, you will pay miserably for it. Here, think the United Kingdom
in the 1920s, when it decided to set up the gold
exchange standard, and try to bring the
pound to par value, as it was pre-world World
War I. On the other hand, if you wait too late, if
you don't challenge it, and you let things
slide, well you run the risk of a great
power war, potentially. Which is normally how these
kinds of hegemonic orders have transitioned over time. So basically, the
argument I make is that the dynamics
about how you would want to challenge the
global economic order strongly suggest that finance would
be the last pillar you would want to challenge,
rather than the first. And this is so for
a couple of reasons. The first is, in some ways this
goes back to my previous point, is that precisely
because finance is so easily observable. In some ways, those
movements are the ones that will be detected
most immediately by the hegemonic actor. And therefore, potentially
be subject to some sort of exclusion and
or ostracisation. In a way that if
you know you see moves in terms of
protectionism and production, or information and
ideas, don't lead to the same kinds of
retaliatory effects, potentially from the hegemon. The second reason is the
sort of dynamic density of global governance
which is say, again, it's more easily observable
if you see an actor in, because finance is
such a relatively dense web of global
governance structures. It becomes very easy across a
whole array of these structures to determine whether
or not an actor is functioning as a responsible
stakeholder or as a spoiler. And the last point
is that, I do think there are tipping point dynamics
in finance that are probably less acute in places like
production, or information provision, or even security. And in security, you often
have the reverse, which is sort of balancing effects. And so as a result,
the dollar will look like it's the
reserve currency, right up until the moment when it's not. And then in some ways
this is where, again, I think one of the distinctions
between finance and trade is, in finance, you can see
much more quick reaction. And therefore, in some ways, if
I was the rational revisionist, the argument I
would make is, you don't want to challenge
the financial order. Right until you have
all of your other ducks lined up in a row, at which
point then when you go ahead it's going to happen,
and it's going to happen relatively quickly. So as a result, I'm relatively
sanguine about the status of the dollar. That does not mean I'm sanguine
about the status of the US hegemonic order, because
as I said, in some ways, the problem is
that you will only detect a change in the dollar
status, until it's too late. That the other areas that you
would potentially care about-- namely whether or not production
is centered around the United States, whether the
United States continues to be the provision
intervenor of last resort, whether the US information order
and/or its ideological order, remains unchallenged--
those are the things that I would expect to see
fall before you actually see any kind of
challenge to the dollar. And in the end, I'm
just going to reread a quote I wrote 5 and 1/2
years ago for foreign policy, because it sounds so
damn good right now. I say quote, the dollar
is not going anywhere, unless of course, the United
States political system were to torpedo it through
repeated acts of self-sabotage. Which does lead to my belief
that if the dollar does fall, the fall is not going to come
from an external challenge. The fall will
come, in some ways, because the US domestic
political system generates so much uncertainty,
that you will eventually see external actors decide
they have no choice but to try to take active steps
to find an alternative, because they can no
longer rely on the dollar. And with that I'm done. I do have slides. I don't seem to have a mic. OK, excellent. Great. So I have a bit of a
different perspective, given that I'm an economist
sitting in an asset manager. So hopefully that will bring
something to the conversation. Looking at the question of how
long the US can actually lead, I think we need to actually
take into account recent events. So I'd like to start by asking
whether secular stagnation is dead, and whether died on
November 8th, 2016, or not. I'm going to give you a spoiler
alert on my answer for how long the US can lead, and it's a
long time, but not forever. So in terms of whether secular
stagnation is actually dead. I'm sitting in an asset
manager surrounded by investors who are
nothing but happy about how the markets have been going. And their argument is certainly
that secular stagnation is toast. This is a structural break. We've broken out. The US is about to see
much higher growth, much higher inflation,
much higher rates, everything is looking great. And there are some things
to actually support that assertion. So I'll start with confidence. Both business and
consumer confidence have been way up
since the election. It's hard not to say
there's a direct correlation between Trump being elected
and consumer and business confidence soaring. I would highlight
that I don't really believe in confidence fairies. They tend to last if economic
data starts to support them, but otherwise they
just flame out. But confidence has
been looking great. This means broader. Business confidence has come in,
the ISM manufacturing indexes looked great in the
United States, well over the 50 break even point. So manufacturing production
should be expanding nicely. And that has spilled over
into global sentiment. So actually PMI data
has been looking great, globally, least
of all in Europe. Where I think we've got
PMI data out this morning. France was almost 60 for
manufacturing PMI, which is a pretty impressive expansion. So this confidence in the US
has been spilling over elsewhere in the global economy. And of course, it's also
fed through in the market, so the S&P 500 keeps
hitting new highs. And we had a little bit
of a blip a few days ago. Off the back of the Trump
administration maybe having difficulty passing its
replacement for the Affordable Care Act. But generally that was
actually just a day blip, since then the markets have
stabilized, and continue to go up. So all of the so-called
soft data, in the US, is pointing towards
much higher growth. I'm going to go ahead
and challenge that by looking at the hard data. And I've mentioned I think
confidence fairies tend to peter out, unless they're
backed up by the hard data. And so far it's not looking
like the hard data is really coming in. So this is just a chart
looking at home sales. We're getting pause in them. There's a lot of data
out there on the housing market in the US. Some of it is suggesting we're
seeing a turn, some of it suggests that it
remains buoyant. But this in any case
suggests maybe we're seeing a turning
point, and of course, given how many
Americans own homes, that feeds into wealth
spending patterns. Consumer confidence, actually,
even though it's pretty high, retail sales, it looks like
it's kind of petered out. Retail sales have
been pretty buoyant, nothing to write home about,
since the global financial crisis. But of course, the consumer is
driving the recovery in the US. This recovery and
every other recovery in the US, the consumer
accounts for about 70% of our GDP growth. So retail sales look like
they're actually turning. Average hourly earnings
are actually back at zero. So real wages are
massively subdued, and of course, that
once again feeds into consumer spending
behavior, which is underpinning this economy. And it's not just
the US consumer that seems to be
petering it out, it's actually
commercial bank loans that suggests that the
business investment is also petering out, as well. So we see that that's
actually turned, and continues to decelerate, despite
the election results. The one real figure
that, I think, should make us the most bearish
is the Atlanta GDP Now Cast, the Atlanta Fed
GDP Now forecast. They actually take into
account hard data more than they do soft
data, and it's been nothing but a downward
revision for a very long time. So the Atlanta Fed
Now sees GDP growth coming in for the first
quarter of this year. So the first quarter that
the Trump administration has actually presided
over, it's below 1%. That being said, GDP
growth in the first quarter always looks bad in the US,
for seasonal adjustment. Reasons with still,
lower than 1%, that hardly suggests that
we're really breaking out. And I would argue that
the reason that we have all this hard data coming
in looking pretty lackluster, is that there are huge
global drivers that just start changing. And they're certainly
not changing as a result of a Trump
victory in the US. So the first global
driver is this notion that we have an oversupply
of absolutely everything. So we're going to go ahead and
trash my entire field and say, that economics was
based on models that baked into them
this idea that we have a scarcity of things. I actually think
we need to rip up all of those
equations and models, because we have an
oversupply of everything. Debt is one example of what
we have an oversupply of, even though every level
of every economy has tried to deleverage since
the global financial crisis. Overall debt has just gone up. We also have an oversupply
of macro liquidity. So not market liquidity,
but central banks have been pushing unprecedented
amounts of liquidity into the system. There is an oversupply of
cheap labor, globally, that started really when
the Iron Curtain fell, but more recently as China has
industrialized and urbanized. We have this massive
glut of cheap labor. India's next, sub-Saharan
Africa is after that, that trend's going nowhere. So none of this is changed
really by the victory of Trump in the US. Overall, in the US, productivity
remains pretty subdued. You can argue that some of
this is down to measurement, and I'm sure some of it is,
but I don't think all of it is. And so we have a persistent
problem of low productivity growth and this goes
not just for the US, but it's the problem in Germany,
the UK, Japan, basically the entire developed world. We lack productivity growth. There's very little, in terms
of proposals, coming out of the US government. At least that suggests
that actually we're going to change our
long term productivity. There are a few
things that would make me more excited
about growth in the US, if we actually saw
them come through. Infrastructure spending, if
it went to building schools, for example, then
we could get a boost to long term productivity,
after about 10 years. But unfortunately,
based on how they're hoping to fund infrastructure
programs in the US, building schools is
not at all productive. And I don't think
private companies are going to raise their hand to
get involved in those projects, because private companies
unfortunately, like to make a profit. So unfortunately I
don't think we'll get those kinds of
projects coming through. So in the absence of any shifts
to our long term productivity, I think the US is
fundamentally a 2% economy. We might get little sugar
hits to the economy based on tax cuts, or
some deregulation, but overall I think
our potential growth is stuck at 2%. You've also got demographics
working against us, in terms of breaking out of
this low growth, low inflation, low rate environment
that we've been in. So in the US, we're suffering
from an aging population. We're actually looking a lot
better than most of Europe, Ireland excepted. Japan, of course, is
looking the worst of anyone. I think five years ago, sales
of diapers for elderly people exceeded sales of diapers
for newborns, in Japan. So that's a statistic
worth paying attention to. So this is a major
global driver. I don't think we have any
policies being proposed in the US, or elsewhere
in the developed world, that will be able to
overcome these massive drivers. That being said, we have
had a big rebalancing from develop markets to
the emerging markets. So you can see that the
percentage of each contributing to global GDP based on
purchasing power parity has actually swaps. The developing countries
are actually contributing more than advanced economies. So fundamentally, if you
believe that the US is a 2% economy, the Eurozone
in aggregate, is roughly 1.5% economy. Japan is between
0.5 and maybe 1%. Global growth is going to
have to come from somewhere, and it's probably going to
come from the emerging markets. This is a trend that
we've already been seeing for years and years. But I do think that's
going to continue. The question is, when will we
hit a tipping point for the US? So I said, I think the
US can lead for a while, but it can't last forever. The good news for the US
being a global leader, though, is that actually
this chart isn't only a result of the US. We have a whole panel
on the Eurozone. So I'll sort of skim through
my views on the Eurozone. But the Eurozone is certainly
part of the developed market declining story. The whole approach to
the Eurozone crisis has been for everybody to try
to look more like Germany. And as a result, you can see
we're just actually increasing the imbalances we have in
the Eurozone, with Germany's current account surplus hitting
record highs, pretty much every month. The weaker countries
also going into surplus. That basically means you
kill off domestic demand in most of the Eurozone,
as you continue to hold wages and pensions really low. And so if you don't have any
domestic demand coming out of the Eurozone, then
you're relying on exports for all of your growth. That's not a great plan in a
world in which most countries are actually turning their back
on free trade to some degree. So the Eurozone is
hardly about to take over as the underpinning of
the global liberal order from the US. Off in the UK, we have
Brexit, which hasn't actually happened yet, but it
is starting to bite. This is just a chart
showing consumer confidence. There are also indications that
the housing market in London is starting to turn. We don't have FDI data. We don't have FDI date yet,
because it's so horrifically lagged, but anecdotally, I
know a number of asset managers that were looking to
buy companies in the UK after the Brexit referendum,
until it turned out how it did. And then all those deals
were off the table. So I imagine there's
been quite an investment strike in the UK, that hasn't
fed through into the figures, but just wait for
it, I think it will. So the UK is hardly going to
take over as the global leader. And finally we
have China, which I think most people suspect
might take over from the US, particularly in terms of having
the global reserve currency. And there are a bunch
of challenges in China. I do think that there
is political commitment towards rebalancing the economy,
and opening up the capital accounts, and
liberalizing the currency. This is just a chart showing
the foreign exchange reserves to show the challenges
that they're having, and trying to
manage that rebalancing, and particularly opening
up the capital account. They're having to throw a lot of
their foreign exchange reserves at it. So these are official
figures, I should highlight, so you can take them
with a grain of salt, to a certain degree. But at around $2.5 million US
dollars in foreign exchanges, [? PBOC ?] gets
incredibly uncomfortable, and doesn't want to throw
their currency at this anymore. So they do have limitations
on what they can do. That being said, the
Chinese government has more tools than
any other government, really, in trying
to achieve this. In addition to capital controls,
albeit over an incredibly leaky economy, the government
owns all the banks who can tell them when to
write down their NPLs, that's quite useful. And the central government has
a pretty clean balance sheet. In terms of all
this rebalancing, we'll find out a lot more this
autumn at the party Congress, and the big question will be
whether President Xi is going to just focus on consolidating
his own power, which is quite possible, or whether
he really is dedicated to these kinds of reforms. In the meantime, the
Chinese, government's going to pull on all of
their traditional levers to reflate growth, every
time it looks wobbly. So this is one of the levers,
which is the property market. They can use macro
prudential tools to take air out of the market,
and go ahead and reflate it, in which you can see. So every time there's
concern about Chinese growth, magically the property
market reflates. So that's one tool,
in addition to being able to tell banks when to
go ahead and write down NPLs. They also can pump fixed asset
investment into the economy, so once again, they
just boost investment. I'm going through
all this, mainly to highlight the big
risk in China, which is their overall debt burden. It's at roughly 250% of GDP. So if China is going to go ahead
and rebalance and deleverage, this is going to be the
biggest deleveraging we will have ever seen, ever. And that is obviously
rife with risks. The Chinese government
has more tools than most, but if you start having
defaults that end up becoming unmanaged
and cascading, then China will
face a hard landing. And there's very little
chance that they'll end up taking over the
liberal order, in that case. In fact, they could well
undermine our growth, too. Just a final comment on the US
giving up the global reserve currency status, I think it
will have to happen that way. I think the US will
have to give it up. In that, they will
get together and say we're sick of having the
global reserve currency, we don't want such a
strong currency anymore, actually it's really
hurting our model. In which case, I think we'll end
up having another Bretton Woods type meeting, probably within
the confines of a G-20, where everybody will get
around the table. The US will say we don't
want the global reserve currency anymore, the
Chinese will say not it, we don't want it either. And I think we'll end
up having to come up with some sort of
international system, probably based on
shared drawing rights. So that it's a amalgamation of
lots of different currencies. And actually in the
shared drawing rights, the US is the biggest weight. So we'll still be leading,
just in a different way. I'll end it there. So, thank you, Mark. And thank you, Sylvia, for
organized this terrific conference. I don't have a
[? regular ?] introduction. And I'll spare everybody that. The short title of my talk,
is Spotting Gray Swans, which borrows from
Nassim Taleb's work as a metaphor for
engaging in an exercise to assess the
feasibility of risks, or likelihood of sudden
political and economic events that can undermine US's
position in the global economy, and can expose the limits
of its international power. Specifically, a gray swan
event, or a gray swan risk, we can think of a
reference to the likelihood of a highly consequential,
if not catastrophic, event. Which unlike black swan events,
can be anticipated or recessed to some extent. So I'm just using it as
a metaphor over here. And I argue, in my paper,
that insofar as IPE scholars are absolutely correct to
analyze the risk of gray swans that exist within the US's
external balance sheet. It may in fact be the gray
swans that exist internally within US's internal
balance sheet, that need to be considered,
which can actually threaten the American
monetary order, to continue in seeming perpetuity. And given time
constraints, I'm going to basically focus on
three external gray swans that actually Ian and Sylvia
have in their paper, which are absolutely great. And I thank them to
bring valuation into IPE, because it is a very
important thing to focus on. So I go through
those very quickly, but I argue that there is a
small issue of there which also needs to be considered, where
structural constraints can actually make those
gray swans go away, at least in the interim. I then move to considering
gray swans internally, within the internal
balance sheet, and look at how
those would play out. So to go very quickly, Sylvia
and Ian have three gray swans, I'm just going to outline those. The first one is a
relatively strong dollar, that they point out, can
make US's largely non-dollar denominated assets lose
value, while raising the value of its liabilities. And here actually,
this slide, which is obviously known to everybody,
is the US external balance sheet. And the line to focus
is the red line, which is the US NIP, or
US's external indebtedness. And it is essentially, the
one that did the mines, the extent to which it
can go, or finances can start questioning it,
which can affect confidence in the dollar. So the second of gray
swan, they outlined, is given the compositional
difference between US equities heavy assets, reservee its bond
heavy liabilities, a crisis situation, or any perception
of it, will raise the demand and thus the value of
US treasury's relative to equities. Thereby, pushing US's
external indebtedness farther into the negative. And the last one, given that
there are equities and FDI holdings within US's
liabilities side as well, a booming US equities
market vis-a-vis other markets will again raise
the value of its liabilities. More importantly, from
an IP perspective, they argue that
valuation changes are a result of decisions and
preferences of financial market actors. And given the
significant negative dive of the US external
indebtedness, since the global financial
crisis, as is evident in the chart
over here, this trend must be interpreted
as the US already having lost a good
amount of its autonomy to international financial
markets and participant actors. Thereby indicating
a weakening, not strengthening of US
International Monetary power. Now I agree with all of this,
and I find all the gray swans to be valid and
living and thriving. From an IP perspective, I
think there is an issue that also needs to be accounted for. And one, which is
central to valuation. And I offer this critique with
the most constructive intent, which is that valuation is
not dependent on the decisions and preferences of
financial actors alone. Valuation is
significantly a function of interest rates, which are
structural economic constraints on financial actors. In purely theoretical terms,
the value of any security is nothing but the
present discounted value of future returns. The main difference between
valuing equities and bonds is that the value
of stocks represents the present discounted value
of expected future profits that vary. Well the value of
a bond represents the present discounted
value of its fixed annuity stream of returns,
including the repayment of a fixed principal
amount at maturity. Regardless, interest rates
hold an in most relationship to value. And this is especially
true for initial valuations in the primary market,
as they are also true for valuations within
the secondary market. Furthermore, the very
idea of monetary policy is to maintain or
raise asset values within reasonable bounds,
which is done carefully by adjusting short
term interest rates, keeping inflationary
expectations in mind that then affect long term rates. So if you now think of
what's happening currently. In the current scenario,
where interest rates are expected to rise in the
US after being at historically low levels for
about eight periods, this implies that the value
of US liabilities must fall, given the inverse relationship
between interest and value. On the other hand,
interest rates are expected to remain
low across Europe, which is where the majority
of US's assets exist. Surely rising interest
rates in the US also imply that the
dollar would appreciate. But then again, I argue that
it would be a bit premature to assume that this would simply
bring in the first gray swan that they articulate,
because for that to happen, the dollar would
have appreciated far more than the net positive
gain that the US sees in its external indebtedness
from rising interest rates. So that's a very important thing
to consider, as well I think. But I agree that
none of this history will unfold the way
it has to unfold. And I don't dismiss any
of the gray swans that exist in the financial
globalization literature. But having said that,
I think it's also important, given that it's
an exercise in thinking about these things, to even
think about what happens. What would happen in the worst
case that any of the gray swans come to hit confidence. If that's not able to happen, I
think [? Isharene ?] points out that, the dollar will plunge. And if the dollar
plunges the Fed would be compelled to actually
intervene in financial markets, raise the interest rates,
and use actually the reserves to go out and buy the dollars. If they can't find enough
reserves, which they don't have really that many foreign
exchange reserves, they can always get help from
Germany and other countries, for whom as well, it will
be in their interests because a weakening dollar
is not in their interests. So Germany and all
the other allies should be able to help
out in that sense. So there is that kind of
tension that exists as well. So it sense, if that were to
happen, any of the gray swans come, the very
fact of the Fed can act in this way, what
amount to painting those gray swans white. So very quickly
then, I just want to also move into the
internal side of things. On the internal side,
I think one place to look for gray swans,
is the US national debt, which now is that 105% of GDP. And this, of course,
includes external debt, but does not include
municipal debt, or state debt. And if you do a very quick
back of the calculation, internal debt alone comes
to about 70% of GDP, and it's rising. And I think there are two
gray swans to consider here. The first one is more
commonly articulated, which is that high
levels of debt increase the likelihood
of a crisis, which unlike the external scenario,
may not simply be one of panic where markets can be reassured
with emergency measures and gray swans painted white. Unless the economy
grows substantially, and consistently, in order for
inflation to eat away the debt, it is all too plausible
that the US creditors will conclude that the debt
is becoming unsustainable, thereby raising borrowing
costs for the US. And any such conclusion
on part of the creditors, will impact existing
bondholders, who will see the prices
of their holdings drop. The Fed may try to
rescue a falling dollar, but given the long
run nature of crises, the priority, in
all likelihood, will be lower rising yields,
to finance existing budgetary requirements. Nevertheless, with
very little room to maneuver a bond buying
program, to lower a borrowing cost, is also
going to be limited to the extent of the global
economy can absorb a weakening dollar, for the short term,
if not, the medium term. So that's one scenario. Now in the scenario that this
economic gray swan does not happen, I think there is a more
serious political gray swan that needs to be considered. So let's assume that a
crisis does not happen, and the economy starts to
grow at a healthy rate, however, for debt
to wither away, inflation rates would
have to be upwards of the stated target of 2% for
an extended period of time. But at such high debt levels, it
is simply unimaginable at least to me, that the creators
who hold the debt are going to accept higher
inflation, thereby resulting in a classic [? creditor ?]
standoff, that marks recent work points to. And [? creditor ?]
standoffs, I argue, are going to be extremely likely
within highly financialized economies, like the US. This is because
financialization, if think of financialization
and conceive of it as a long drawn process of
structural transformation of the economy, then it
has provided instruments and methods for the
opposite sides of the income distribution, to now
[INAUDIBLE] sum of wealth. But more importantly, from
a political perspective, the concentration
of consolidation of wealth in the hands of a
few, leaves very little room for collective action
problems to arise within the financial
creditor class. The same, however, may not
be true for the vast majority of debtors, for whom
government services matters the most, which is why
deficits need to be financed. However, as the
current popular moment shows, in times of terribly
unfair and unbearable inequalities, their
backlash to find expression, we are the electoral process. And any prolonged
periods of social unrest, or political uncertainty,
or even periodic instances of such resulting from creditors
not accepting higher inflation rates, will make
financial markets question the US's ability to sustain its
deficit, and add to its pile. So if you look at
this slide, this is a calculation that I do
to actually operationalize financialization. Where the idea is to,
from national accounts, to call out financial incomes. These are financial
incomes normalized by net national product. And if you look at this,
both the US and UK, have consistently financialized
at a much higher level than the other major economies,
like Germany and France. So in many ways,
and if you think about this, the financialization
of the US economy in particular, to go ahead after
the great financial crisis, but then is going
on a downward trend, but still remains much
more than other economies. And I can explain how
this measure is formulated in the Q&A. But it's essentially
a measure of financial income sloshing around in an economy. So it's kind of a gross measure. But this same idea can
be extended internally to look at how the various
institutional sectors fare in terms of financialization. In terms of financial incomes
being drawn over time. So these are
non-governmental sectors, the non-financial
corporations, households, and nonprofit organizations
serving households, and US financial corporations. And anyone looking
at this job is going to be struck by three things. One, are these straight lines. Now these straight line should
not be taken to mean stagnancy, they should be taken
to mean consistency. And given that these
are financial returns, these financial returns have
been adding up, accumulating, consolidating, over time
within the upward [INAUDIBLE] of the income distribution. This does not include
capital gains, includes mainly
interest and dividends. And the second thing that's
going to strike others, who may be familiar with
financialization's literature, is that non-financial
corporations seem to have taken
a net negative hit from financialization measured,
in terms of financial income. That does not mean that it's
negative profitability, just means that when it comes
to financial incomes, they are negative. And others, such as
Scribner and all, have argued that corporations
are financialized. Corporations are
certainly financialized, but when net out the
inflows of financial income, with the outflows the
financial payments that corporations have
to make, they actually come out in the negative. And over the last 30 odd years,
given high borrowing costs due to high interest rates,
and also payments of dividends, they come down. And the other thing
to then notice, is that it's actually
the households which sits right on top. What does that mean? Does that mean that
financialization has been working great
wonders for households? No, actually, absolutely not. And the reason
for that, I argue, is because obviously
the financial returns of the top decile's of the
income distribution, also gets recorded within
the household category. And I don't have distributional
data within the households to present over here,
but you could actually look at just capital gains. I don't use capital
gains as a measure, because it's not available. But for the US, if you
just look at capital gains, this is the top decile's income
share, including capital gains, which is the blue line, and
the top decile's income share of national income, which
is the red line, which does not include capital gains. So the difference between
the two might seem minor, but it's minor percentage points
of the net national income going to just a
select few on the top. So then in closing,
I would argue that it appears that a crisis,
as a result of high and rising national debt will
certainly precipitate matters for the worse. However, even in the
absence of a crisis, a standoff between the many
who own and control nothing, and the few who own and
control most of everything, in an institutional
infrastructure that seems adept at
reproducing inequalities, the ability of
the US to maintain its current position on multiple
fronts, is surely to be tested. Regardless, the real
gray swans to watch out, seem to be the ones
coming from within. Great. So, as usual, we're
a few minutes behind, but that's to be expected. So let's do about 10 to 15
of questions, [INAUDIBLE]. Thanks guys, so much,
for this great panel. My questions, [INAUDIBLE]
don't aim it at Megan and Dan, [INAUDIBLE]. So, I buy Megan's story, that
the economic fundamentals basically point to the US
being a 2% growth economy. I think the point is well taken. And yet we've seen this
big rise in the stock market and other measures. And this strikes me as being
that the stock market rise being driven by redistribution,
rather than redistribution towards [INAUDIBLE] of capital. The political basis
for that being, strikes me as a strategy
of picking up nickels in front of a steamroller. That we've just had
an election, where a major theme of the election,
is that the working class is so pissed off, that we're
going to elect a total lunaitc, and put him in the White House,
because we've been getting screwed by the system. And we're getting nothing of
the gains of globalization. And American leadership
has responded by saying, right, we hear you, we're
going to screw you even harder, by taking more of the
gains from globalization and from the global economy. And so to what extent
is the scenario where the US is a 2% economy,
2% growth economy, actually too rosy. Where there is a real concern
of a political backlash in 2018 and 2020, or whatever. Or it's not just
about redistribution, but it's a whole
set of new policies that for business, ranged from
bad to really, really bad. And that's a risk I'd
like you guys to cover. Sure. I'll start. Sure. Sorry. That's OK. I mean, this is
how populism works. You get voted in,
and the people end up doing the worst
under a populist are the ones who voted for them. So if you, for example,
look at the New York Times put out an interesting
diagram showing who loses the most from
the new health care plan, and it's basically
all red states. So it's mainly Trump supporters
who are going to lose out. So that's how it works. This has been tried and tested
in so many places, particularly Latin America. So that speaks to
social unrest, maybe. But in terms of
companies tanking as a result of policies
coming through, I actually think
that's pretty unlikely. If we do end up getting
some kind of tax cuts, and I think we will,
and we do end up getting some repatriation, and
I think we'll get something. It might not be as grand
as what's being promised. I do think that will be
generally good for business. There's a risk in the
deregulation piece, and that's the idea is to
just get rid of Dodd-Frank, it's not going to happen. And having spoken to
someone very senior at the American
Bankers Association, they're not expecting anything
to happen with Dodd-Frank until 2019, at the earliest. So we're going have
to wait much longer. But if we were to repeal
Dodd-Frank, of course Dodd-Frank was put in place
to address the bubble that arose that caused the
global financial crisis, so if we strip a
lot of that away, in the short term that would
be great for the financial services industry. But we could be creating,
or at least laying, the groundwork for
the next bubble, that could end up being the next
global financial crisis. So that's a risk. But generally, the
biggest potential cause of US recession, I
think, is geopolitical. And that's the one thing that
no economist can possibly forecast, or bake into
their models, so nobody is. But I do think geopolitical
risk has increased off the back of this election. We just don't know where a
conflict might break out, or when exactly. But I think that's the biggest
risk for a US recession. A, what she said. B, I would say a
few things on this. The first is, is
that you have to be very careful about what kind of
populism you're talking about. So you can argue the distinction
between the populism that drove, let's say,
Bernie Sanders, versus the populism
that drove Donald Trump, is rather different, actually. And that the populism
the drove Bernie Sanders would be hostility to
Wall Street, hostility to Politicrats, as it were. I'm not sure you can make that
argument, with the populism that drove Donald Trump. I mean, I've seen a lot
of pretty cogent analysis suggesting the right
populism is more hostility to people
like you and me, which is hostility to professionals. And that's very different
from rich people. And in some ways, that is
the way in which you can-- let's face it,
unfortunately, yes-- and that's the way in which
the Trump administration potentially, at least on the
rhetorical side, have its cake and eat it too. Which is to say, we're going
to represent the common man, but the way we're
going to do it, is by bringing in
really rich people. And we can tell they're
really smart, because they're really rich, and that's why
they should be put in charge. But the bigger
issue, I would argue, is that it's not obvious to
me that any policies are going to be implemented that will
actually cause anything to deviate from the 2% growth. I mean, you can point
to HCA, but that's not going to pass, apparently,
from what everything I've seen. So there's not
going to certainly be any significant health care. There might be a tax-- tax, I would assume,
would be the one thing that will get passed
between now and 2018. Even on trade protection,
you're not actually seeing, TPP got ended, but
China hasn't been labeled as a
currency designator, or as a currency
manipulator, yet. US hasn't pulled
out of NAFTA, yet. That doesn't mean these
things can't happen, but that's actually
the one area where I do think corporate pressure
would constrain Donald Trump. I don't think corporations
with production chains across North America
want NAFTA to end. If you want me to
be scared, my worry is that the deviation from 2%
is not over the next two years, it's after the midterms. Because if you have a midterm
election, where suddenly people are pissed off because
Trump hasn't done anything that he's promised, you
have this democratic wave that winds up controlling
the majority of Congress. The one area where you would
have some degree of commonality is on trade protectionism. That actually worries me. I'm not worried
about anything else after that, because then
you just have gridlock. The sort of dynamics that Sylvia
and Ian are talking about, then that might
actually kick in. And then I would have
concerns about that. But really the one thing
that would concern me, is if you had this sort
of Sanders [? east of ?] wave in 2018. And the one thing
it turns out they can agree with the
Trump administration on, its trade protection. That does disturb
me, potentially. But I'm not sure
that's necessarily even going to happen. And even if that does
happen, I would point out, that it wouldn't shock
me if, at that moment, the Republicans then switch
back to their free trade, which they claimed they always
held, right up until the 2016 election. At which point, you've
got a blocking call. They still have veto
power in the Senate, so I'm not even sure even there
something would necessarily happen. So I wanted comment on
the NAFTA [INAUDIBLE] with Sylvia and Ian. [INAUDIBLE] I love
the aggregation of the liability and asset side,
of say, the emerging market dollar exposure. I wanted to push you
a little bit further. If you take 2008 as
a test run of this, there's two other things
that really matter about that balance sheet. First of all, is who is
owing the liabilities and who owns the
assets, [INAUDIBLE]. And the other one is
the term structure. So if you take careers,
the classic instance that the BIS's used to
[INAUDIBLE] that is the 2008 dilemma, Korea looks like it has
a very healthy dollar position, when the dollar strengthens,
it should be a winner, and overall, it is on
the net balance sheet. It's just that the dollar
assets are long term, and help by serving wealth
fund type actors, and the liabilities
are short term, held by the private sector,
because their banks are running the class-a funding
bubble of the new banking age. And that produces a very near
miss in career necessitating, and unprecedented
spot line arrangement. So it seems to
me, that to really think through the
politics of this, that it seems to move it
from the [? ringholder ?] of substantial and major change
in the quality of the argument. Whether Japan, whether Germany,
has an interest in this, depends on who
you're talking about, and how those domestic
coalitions are organized. If you can organize, as
the Koreans eventaully do, the kind of transfers
internally to stabilize it, then the sense in which
they're in that winner, you could actually cash it out. But if you can't do that, A,
you've got a bunch of losers, and their losses could
be so catastrophic that their tipping point
losses, and your banking system goes down. Those would, seem to me,
to be crucial developments of the direction
that you're trying To really build out on politics
of the external balance sheet, you have to look at the
international sectoral interests. And so listening to [? Winne, ?]
those households that are gaining, whether it's from
cap gains or dividend, what's their balance sheet like? Are those US assets, or are
those rest of world assets? The data challenges of doing
this are quite significant. And we're looking at currency
mismatch, in this paper, you're talking about maturity
mismatch, which is obviously, another source of risk
on a balance sheet. And again, we could probably
get more purchase on that, than whether US households
are predominantly owning US assets or foreign assets. But we are absolutely
shopping for help, figuring out the data
challenges of extending this argument further. So any ideas you have about
data that we could use and ways we could. [INAUDIBLE] I'm sure wants to say something. A, what she said. B, I think, what you point to,
just in terms of broadening out the politics, and Trump,
et cetera, is to me, the only question that really
matters on the future system is the one that Eric Kalina
has write, I don't think has been published yet. But imagine what would
happen if the Fed, and remember the US
treasury with money market mutual funds, et
cetera, did what they did in a future
financial crisis under this president,
and this Congress. What would we expect to happen? And to me, I mean, goes back to
career and your short term, et cetera. To me, that's the only question,
ultimately, that matters, in terms of the future. This is not the foreigners
giving up, but the US. I just had a
reflection, I guess. Reviewing my notes here, what
you guys have talked about, and it just struck
me as we're talking about this question of
American financial longevity and the future of American
power in that context. There are at least three
different conceptions of power being talked
about here, that's part of what's so interesting. That we have Sylvia
and Ian really speaking to American autonomy, in
relation to private authority. Speak of it, how you're
conceptualizing that. But thinking that, part of
what's going on is actually [? wants ?] state
to state transfer. A different kind of shift,
in the forms of authority, and what kinds of implications
that has for American power. And then Dan, obviously, we
have [INAUDIBLE] which is great. Structural power, but
also we have much more of a sense of strategic. The possibilities of rational
[INAUDIBLE] as rational actors thinking this through,
and deciding on how they're going to play this out. And then finally,
with me, I think what we see is domestic power. And the fact that actually
states are also in many ways, having to come to terms
with domestic class, and other forms of
tension [INAUDIBLE]. The possibilities from
[INAUDIBLE] So that for me, just struck me really clearly. I'm sure you also [INAUDIBLE]
love your presentation. Clearly a conception
of power there. I think when we're
thinking about this, actually all of these
pieces are important. They all frame the possibilities
in different kinds of ways. I had one question
and another, too. [INAUDIBLE] The first one, in response
to Ian's last comment about the central bank
in the next crisis. [INAUDIBLE] for
us to think about. I assume they won't slash can't. And that's going to
matter in a huge way. So we might want to to have
that something that we're thinking about. Because that's going
to be a bad thing. My main question was
I wanted to ask Dan, and actually I think we're not,
I agree with most of his paper, this is more of amusing. On your phrase
rational revisionist, this is like technical question. I like the phrase,
but your conclusion was that they were
grow money last, and I follow the logic
of that, but there's also the question of
that also might be the sphere in which purposeful
policies by revisionists, states matters the least. So that as a state,
you can raise tariffs up or down when you get up in
the morning, roll our of debt. Or you can reorient
your foreign policy to be able to [INAUDIBLE]
difficult. But in terms of choices about
using money globally, there's a larger role for
diverse disparate and private actors. And so shifts we may
see, may not derive first from purposeful actions. OK. Well, I would say, let
me put it this way. That's an interesting point,
and I think in general you might be correct. In the specific case
we're talking about, which is the US
and China, I don't think you're correct though,
because the Chinese government does have a series
of explicit steps it would need to take before
any private actor would look at China and think yes,
that actually is a market where I would trust it
producing the reserve currency. So I would push back on. If we were talking
about a different time, or a different place, I think
that's a valid argument. But I don't think
it applies to China, which is I also think the
only actor that can really potentially propose
something that is genuinely a radical change. What was your first question? [INAUDIBLE] In the
sphere, there's more power in the hands
of non-state actors than in many of the
other revisionists spheres that we would look at. So when we're thinking
about the future. [INAUDIBLE] This one last
thing I want to say on this question,
of whether, if there was a crisis with the
Trump administration, why the backstopping,
what would happen. I'm going to point out
that when 2008 happened, you had a president with,
I think a 25% approval rating by the end
of that crisis, was generally thought
to be a lame duck. And by the way, was
ideologically opposed to the idea of intervening
to save financial actors, because that demonstrated a
whole moral hazard problem. And yet, nonetheless,
it actually happened. So you now have a president with
even less ideological rigidity, on this. [INAUDIBLE] Yes. [INAUDIBLE] Right, no, no. The president's support, right. Right up until the moment that
the crisis actually emerged, is my point. [INAUDIBLE] All I'm saying is
that, there were ways in which you would
have thought that there is no way the Bush
administration would have signed onto this. Ex-ante back in
2007 or early 2008. And yet in the end, they
wind up embracing it. It would not shock me at all
if the Trump administration decided, this is something
we absolutely have to do. And even if you have the
House Freedom Caucus saying, under no circumstances
whatsoever we're going to support
this, you would eventually have a coalition in Congress
that would wind it back in. [INAUDIBLE] I think one of the things that
was going around in my head, as I listened to Charlie's
really interesting papers is that we need a
better understanding of this lag in the transition
to the international reserve currency. If I remember my history right,
the British pound [? and ?] sterling, really outlasts
British actual capacity in both politically and economically
in it's [? longevity. ?] And I've written, in 2008, I wrote
a piece about why the Euro will not actually become the
international reserve currency, despite Jay-Z and Gizelle
using it for things. And I talked about the notion
that these plethora of actors in the international system,
private actors, and so on, need a constructive focal point. That in fact, the reason why
these things are so sticky is because it does involve
the social construction of an agreed focal point of the
international reserve currency. And that takes a lot
of work and tends to also require [INAUDIBLE] this
underlying [? Gilpin's ?] power structure. But I feel like I
would really like to understand better how to
think about, since I think many of the memos agree, the US
as the global financial hegemon is not going
anywhere immediately, I think we do need a better
theoretical and historical understanding of how
those lags happen and how those switches occur. And again, I suspect
people in this room have done a lot more
work on this than I have. So I hope we can
continue to discuss that. All right. at that
point, just a little note on the importance
of infrastructure. It's fallen apart, as
far as the Northeast Corridor is concerned. There's been a derailment,
and [INAUDIBLE] may not be joining us this
afternoon, as a consequence. So I want to see some
Trump-like infrastructure. [INAUDIBLE]
