World Economic Update

Tuesday, January 24, 2017
Kevin Coombs/Reuter
Jens Nordvig

Founder and Chief Executive Officer, Exante Data

Ángel Ubide

Managing Director, Goldman Sachs Group, Inc.


Paul A. Volcker Senior Fellow for International Economics, Council on Foreign Relations

Experts discuss trends in the global economy.

The World Economic Update highlights the quarter's most important and emerging trends. Discussions cover changes in the global marketplace with special emphasis on current economic events and their implications for U.S. policy. This series is presented by the Maurice R. Greenberg Center for Geoeconomic Studies.

MALLABY: (In progress)—at CFR, and welcome to people who are watching us online. We were supposed to have three distinguished members of the panel. We’re down to two because of some glitch with a flight leaving Boston, so we’re minus Carmen Reinhart. But she’s so famous and well-read that we all know what she was going to say anyway. (Laughter.) So we can channel her anywhere. We’re down to Jens Nordvig to my immediate left, who is the founder and chief executive officer of Exante Data. And Ángel Ubide over there, a managing director of the Goldman Sachs group. So it’s just the three of us. I’m Sebastian Mallaby. I work here at CFR. And we few, we happy few, we happy band of brothers—I mean, forget the world economy. Let’s just do a session on Shakespeare. (Laughter.)

Right, so sometimes the World Economic Update has been primarily about risks coming up in the euro zone. Sometimes it’s been primarily about China as the biggest wildcard in the global system. Other times, maybe energy prices. I think probably most of us are going to agree this morning that the biggest variable that could either go quite well or quite badly wrong is probably the United States. And I was struck just recently, reading a piece by Ángel’s group at Goldman, that even before the election in November, when one of the candidates was promising to make America great again, actually the view of the Goldman team was that America was pretty great already, that if you looked at a range of indicators, the length of the recovery since 2009, the factors driving the nature of the recovery, the real story about the productivity outlook—in fact, the U.S., even before the election, was in a strong position.

So, Ángel, maybe we can start with you just setting the scene, and you can elaborate on that.

UBIDE: Yeah, thank you. Yeah, so basically the point we’ve been trying to look at, it’s through growth, when you look in historical perspective, has been weaker than in previous recoveries. Now, we were trying to get into the details of that. And first, the recovery has been long, has been—it’s already one of the longest. In fact, in a month or two we become, I think, the third longest in post-war history. When you look at some of the details—for example, growth per person or growth per worker in the labor force, this one is almost as good as the medium recoveries in the past. So one major difference, and something that analysts and the media have been focusing on, that is the low level of overall real GDP. It’s something that is misleading, right, because there are other elements—mostly the evolution of demographics and the evolution of the labor force that are changing that picture.

Then we went in to look in at some of the, if you want, more negative stories. The title of our report, in fact, is half-full, as opposed to half-empty. And we wanted to look, for example, at the behavior of productivity. And one thing that we find out is that productivity growth goes in these very long cycles that spend several years being high, then several years being low, and they alternate, right? And we wanted to essentially overcome this pessimism that because productivity growth has been weak in the last few years, it’s going to be weak forever. There is no historical really evidence that would suggest that. We are not necessarily making the forecast that it’s going to rebound a lot, but we wanted to just caution against this entrenched pessimism that was out there that it was going to be low forever.

We look at technological improvements that are essentially widespread. We look at the issues of mismeasurement. We look, for example, at the hypothesis that the last several years have been weak because of a series of negative demand shocks. So you had a fiscal tightening with the—with the sequester. You had the negative impact of low oil prices on investment. You have the impact of the dollar. So the picture could look as if trend growth was lower, but the reality could be that potential growth was a little bit higher and you had a series of shocks that were suppressing growth on a sustained basis. You had deleveraging that came after the financial crisis. When we look at it, you can see that a lot of that deleveraging has already run its course—or, you could make a point that it has run its course, to a very large extent, especially in the financial sector.

So essentially, the point we are trying to make is, what if some of a combination of these hypotheses are right, and essentially the forces that were suppressing growth are diminishing or even fading away? And now we could be entering a period where activity could be more normal, if you want to call it like that. That’s where we were before November 8th. There was this change in the policy mix that I mentioned last time I was here, more towards losing fiscal policy in a more active manner. It would have happened with either candidate being elected. And so that implied more support for growth. There is no inflation. The Fed is not going to come to slow down the economy anytime soon. Bill Dudley said it the other day in one of his speeches. So you could have a reduction of the negative effects and improvement in the positive effects. So what is not to like? That was a little bit the statement we were trying to make, to make the half-full outcome.

MALLABY: So I think if Carmen Reinhart were here, she would particularly like the part of your story that emphasizes the deleveraging that’s taken place. Some of the lower than typical rate of growth in this recovery has been because people have been working hard to pay down debt, and that has constrained spending. But, Jens, what’s your sense of it? I mean, do you agree with this notion that you can’t necessarily expect productivity to be lower than in the past just because we’ve had a period of five or 10 years where it has been? Or do you think there’s more of a path dependency in the productivity story than that?

NORDVIG: Yeah. I think I agree with the fundamental point, that you have to be very careful about just extrapolating the last couple years. So, like, one thing I do think is extraordinary is the degree to which the Fed has been just buying into this low productivity hypotheses and just continually revise down their long-term expectations for what they think the trend growth is. And then in the very latest installment—(laughs)—we had a little bit better sentiment in the market. And guess what, their projection for long-term started to drift in the other direction. So I think you want to have a very long-term perspective on these things. And I think you want to keep a very open mind as to what is really the trend.

And then obviously we have things going on now where there’s a big shock. You can interpret it positively or negatively, but there’s definitely a big shock happening. And we’re seeing some movement in the data already, and confidence numbers especially—both in consumer space and in business comfort space have really shown some pretty dramatic spikes here—

MALLABY: Since November?

NORDVIG: Since November, yeah. So there’s no doubt why it has happened. And you can even go into some of the surveys where they break down—whether it be with a Republican affiliation, Democratic—clearly the people who have a Republican bias that have become the most ecstatic about what’s going on. And you can see the numbers. So the big question now I think sort of for the next three to six months, what’s really going to be a trajectory is, OK, is that optimism really going to feed into something? So I spend my time looking a lot at alternative data sources. So one of the data points that we’re trying to look at is to say, OK, we can observe this confidence spike. So what really is needed for that confidence spike to generate some real improvement in the economy?

And the labor market is often very key to these transmissions. And one way to look at the labor market, to get almost, like, a stepping stone between the confidence numbers and the actual labor market trends is to look at, OK, is there any real pickup in hiring intentions? So you can now collect a lot of data on all the jobs that are advertised in the economy. And we do that. And if we aggregate that information at the macro level, I would say there’s some very tentative improvement, but not nearly commensurate with these confidence spikes.

So my best guess for the economy would be that I don’t think we’re going to see a huge improvement in the labor market, but it could be that just consumption itself it going to show a bounce. So historically when we’ve had these confidence bounces, it’s typically, like, the retail sales that actually can respond. So if I was going to look for a place where we could really see this confidence boost feeding into something that smells like more GDP and activity would be in the—in the sort of consumption data. I think there’s a chance we’ll see it there.

MALLABY: Well, actually—so let’s go to Ángel now. But this is a point that you can generalize across different countries which have experienced varieties of this sort of political shock. So if I think about the U.K., you’ve had since Brexit—which was, of course, predicted rather like the Trump election was predicted—to be a harbinger of uncertainty, uncertainty would depress investment decisions, it would cause consumers to save more and so forth. Instead of which, what we’ve seen since the Brexit vote in June is that consumption has actually strengthened as consumers have been willing to borrow more and spend more, right? So exactly what was not predicted is how it turns out.

Now, Jens is kind of making a similar point about the U.S., that Trump was supposed to bring uncertainty—in fact, has brought uncertainty. If you look at just the last few days, I would say no one would dispute that there is uncertainty. But it doesn’t seem to impact confidence in the way that I think traditionally we would have expected. Ángel, can you talk a bit more broadly about what you think’s going on there?

UBIDE: I wish I knew. (Laughter.) But I’ll give you a couple of thoughts at least. I think one might be that we as analysts, economists, market participants, everything, we are a little bit conditioned about what happened with the euro crisis, right? And you have a couple of events, but take Greece mostly, where the political events were a make or break, but where a fundamental make or break about the soundness of the economy and about where the economy was going to be. So the outcome of an election and the outcome of a referendum was going to be determinant for the country to essentially exit the euro or being bankrupt.

That’s very different from an election that changes policy in one direction, but it not necessarily going in an existential crisis. And I want to define—in the case of Brexit or in the case of Trump, I want to differentiate the political arena from the economic arena, right? So take Brexit, for example. It is true that Brexit is going to change the long-run relationship between the United Kingdom and the rest of the world. But under most scenarios, it’s going to happen over several years. There’s going to be a very protracted period of time. It’s not going to change my decision as a consumer to buy a washing machine next week, no. It may change the decision of a big corporate over a ten-year investment horizon, but not necessarily over a year or two.

So in the case of Brexit, you have a very quick reaction by the Bank of England, that eases financial conditions, and then a very quick political transition. Probably the combination of those two reassured consumers and investors and business people and said, OK, I can continue with my life as it is, and then I’ll think about the problem later when it comes again. In the case of Trump, maybe it’s a bit of a similar thing. And again, I want to put the political notes over here. But what we learned is the probability of a tax cut is higher than it was with a different candidate. And the probability of the regulation is probably a little bit higher. And I will worry about the other things when they come.

And so that’s why I’m trying to differentiate a little bit what we’ve been accustomed to hear about political uncertainty, as related, if you want, to the Greek case, or Italy, or some of the euro area crises and the others. And it suggests a different order of magnitude.

MALLABY: So, Jens, you said earlier sort of almost in passing that with Trump there’s a shock, and it’s obvious why the markets are recovering. But is it really obvious? I mean, sort of simplifying what Ángel is saying is that, you know, there’s uncertainty, the uncertainty could mean bad stuff—it could mean a trade war with China. It could mean gridlock in Washington. It could mean a fight between the administration and the Fed. There’s all sorts of bad stuff that one could imagine. But we seem almost to have a behavioral distortion going on, where bad scenarios are hard to imagine for consumers and for businesses but the good one of actually getting the tax cut through Congress, actually delivering on the deregulation—neither of which are givens—somehow the good one is more believable to voters than the bad one. Why do you think that is?

NORDVIG: Well, I think it has to—it has to do with sort of the level of sentiment when we went into the election. So there’s clearly—there’s clearly a big part of the population that voted for change. They voted some change one way or another, and they got it. So I think it has a lot to do with we came from a sort of weak confidence in many respects. And when I say that, I don’t mean it necessarily in the sense of, OK, look at the University of Michigan survey or the Conference Board. I mean it in a, like, very broad sense, because it also has to do with narratives, right? So we can sit here and talk about economic models and in the area of trade policy, most people who follow trade policy carefully will be very worried about disruption of supply chains and so forth.

But the narrative that is being written and absorbed is a little bit different, I think, in general. And I think that’s how sometimes these disconnections between what people, like, in this room would think about and perhaps what sentiment is more broadly can diverge. And I was thinking about—I took a taxi up here. And I was thinking I would maybe write a piece that was going to be called something like the anti-information age, right—(laughter)—because we have this very—a very bizarre juncture where—so, I’ve set up like essentially a data science company. Like, we try to just be looking at the facts. And it’s very easy to get the facts these days, much easier than (ever it was ?). So it really is an information age in a way that is much more the case than the original information age. But at the same time, it seems like the political narrative is sort of anti-information. And in a way, that creates this bizarre tension. And I think—I think that means that something like consumer confidence we perhaps have to think about a little bit differently.

MALLABY: And let’s try and pin this down to what actually looks like might happen in Washington, and how—you know, a couple of things could be argued to threaten progress, either on a tax cut or on deregulation. The first is that the health care issue may suck up a lot of energy in Congress. Do you just repeal? Do you repeal and replace at the same time? That whole debate is a complicated one, and health care has a way of taking months. And the second thing is that the administration’s own intentions on tax, you know, go back and forth. I mean, sometimes they want a border tax. Sometimes it’s a bad idea. There’s two versions of this border tax or adjustment tax floating around—one from the GOP in Congress, one from the mouth of the president. Do you think that we will get—the things that are encouraging this burst of confidence, will they happen?

UBIDE: Again, that’s crystal ball stuff. (Laughter.) But I would say we will get something. And I would be surprised if the Republican Party, having both houses of Congress and the White House, is not going to be able to get some action on taxes. Whether it’s called tax reform or tax cuts remains to be seen. But something will happen. The shape of it is probably going to be different from wherever we are talking about today, but that’s the way the political—the political process works. Do I believe that something that combines corporate tax cuts, some version of the border adjustment tax, some version of elimination, the redaction of interest and the full expensing of investments—so the whole package that they have been presenting, some version of that will probably see the light of the day, probably yes.

Will it happen this year or next year? Who knows. There are many roadblocks along the way, as you mentioned. But I think—and that’s a little bit what explains also the reaction of markets. There is—I think there is a strong confidence that something like that will happen in some shape or form. The details is something to be decided later. It will affect the composition. You know, the winners and the losers and everything else. But the idea that in a year or two taxes are going to be a bit lower than they are today I think is entrenched in Washington.

MALLABY: So, Jens, let’s do one more question on the U.S., and then we’re going to move abroad. And this may be a question about the Fed. I mean, you remarked earlier that you were surprised that the Fed has bought into this notion that we’re in a new normal as far as low productivity growth is concerned. Consistent with that, if you think that the rate of potential GDP growth is down in a sort of durable way, you’re going to be worried about inflation. And so we already have a situation in which the dots are telling us that the Fed expects, whatever it is, two to three rate hikes in 2017.

If you add onto that the potential for this tax cut, fiscal stimulus, and then if you add onto that potentially supply-side things, which could constrain the supply side—whether it’s restrictions on migration or a trade war which messes with supply chains—all of these things point towards a Fed that may be tempted to tighten more aggressively, and therefore dollar strength becomes extended, dollar strength not good for the blue-collar workers that Trump wants to keep happy.

So we’re kind of setting ourselves up for another battle between the executive and one of the institutions that is supposed to check the executive. You know, we’ve seen this—the executive versus the media, the executive versus the intelligence community, the, you know, executive at some points, or at least the candidate, in tension with the judiciary. What about the Trump administration versus the Fed? Do you see serious conflict coming back into play in a way that would recall the ’80s, or earlier than that?

NORDVIG: Well, so there’s definitely been a lot of speculation already that certain people who are close to Trump in the economic space are potentially very hawkish. So that is certainly an interesting an interesting debate to follow.

MALLABY: You mean hawkish on rates or hawkish on battling the Fed?

NORDVIG: I meant hawkish on monetary policy, yeah. And it could—monetary policy could certainly go beyond rates. (Laughs.) There’s a bit of balance sheet to think about as well. But I don’t think we really heard anything from Trump in that space that is concrete at all. There was obviously a few comments on Yellen during the campaign, but it’s not been a focus recently. So what I would—I would say around the Fed would be there’s a shift going on now. It might well be the case that Yellen actually has shifted already from being sort of, OK, let’s do two in 2017 to doing three. And I think the point you make about inflation’s very important.

And it’s actually interesting. If you look at what is priced in the market—like, look at, OK, what is the market expecting around inflation, look at break even in the TIPS market, we’ve really had a pretty decisive shift in these inflation expectations. And if you sort of think about it on a global scale, you’ve also had much, much more shift in the U.S. than you had in Europe, for example, where more of the move is actually real rates going higher. So this is very interesting.

So we’ve been a number of years where we were undershooting all ways, right, and we were even thinking about deflation risk very seriously not that long ago. So this is very important. And obviously especially if the whole policy package turns into something that really is supply-constraining in the labor market or more broadly, perhaps we’re going to have a real shift there. So I think this is one of the real wild cards. This is where the uncertainty really comes into play, because it’s just a dimension we’ve not had to worry about for so many years now.

And that’s one of the reasons why the spectrum of possibilities is so wide. And especially in the context of the tone that the Fed has, because even if they’re sort of embracing moving a little bit quicker than they were a couple months ago, they still sound very relaxed on inflation. Like, Dudley’s speech recently was very relaxed on inflation. I would say Yellen did two speeches last week. I don’t know why she did two? Why she just say the same both times? (Laughter.) But the second one actually also had this thing, OK, inflation risk is not really high here. So it would be a big shift for the Fed if they came up and say, OK, we actually are worried about inflation. And it would really—it would really put the yield curve in play in a big way.

MALLABY: So if the U.S. is the wild card now, and maybe for this year in 2017, reading your recent economic outlook, Ángel, I was struck that you seemed to think that maybe in 2018—it’s early to pick—but if you had to pick a country that was going to be the wild card then it would be China, that China has appeared stable. You know, in mid-2015 there was a big market shock which had some global ripples. Beginning of 2016 there was another one. It’s since gone calm and quiet and benign, but under the surface the debt buildup is scary, the fact that you’ve got private capital flight going on is a warning sign, and that at some point there will be a big China financial ruction which will have global consequences. Is that—talk a bit about China and how you see that threat percolating away.

UBIDE: I guess that the situation in China is quite complicated. But at the same time, it’s quite simple, right? They are trying to engineer a transition from a growth model into a different growth model. And that includes several dimensions. But the most important one is that they need to slow down the pace of growth. And at the same time, they are continuously building the level of debt in the economy. And the point we tried to make there is that if you continue to increase the level of debt of the economy, your vulnerability just increases year after year. So we look at a statistic for example, which is the ratio of credit to GDP. And we calculate a cap versus some norm that should be respected, that essentially is a cap that is calculated by the BIS. And what we see is that China is in the danger zone, the same way that Spain was—

MALLABY: In terms of credit growth—

UBIDE: Exactly. In terms of credit growth versus GDP versus where it should be, right? It’s in a similar situation where Spain was in 2008. And we know what happened in Spain. It’s in a similar situation where the U.S. was also in 2008. And we also know what happened after that. Now, can this continue for a few more years? Who knows. This thing has been growing. And so far, nothing bad has happened. But all we want to alert there is that the longer this continues, the higher the probability is that something at the end will just happen. What is the weakest link in this whole process? Obviously it’s the currency, because this has happened at the same time as China has been opening up the capital account in this process of financial liberalization. So we have seen capital outflows. We have seen the weakening of the currency. And it’s that tension that we highlight in the report and at the end could become one of the risks for the global economy.

MALLABY: Jens, I think you track this, capital flows, in and out of China quite carefully. What’s your take on this?

NORDVIG: It’s a very dangerous topic to raise, because I’m obsessed with tracking it. (Laughs.)


NORDVIG: So it could be a week-long seminar.

MALLABY: Yeah, I’m buckling my seatbelt right now. (Laughter.) I’m ready.

NORDVIG: So we spent a lot of time tracking this. And I would say you really have to be careful about just looking at what’s going on at the headline level, right? So right now the currency seems very stable. But the background is very, very far from stable. So you highlighted we have the incredible tension in August 2015. We had very severe tension in January of 2016. But we’ve also had severe tensions really since September. So since September, the capital outflows from China picked up notably.

Intervention picked up notably. Not quite to the extreme, temporary spikes we saw in those two previous episodes, but it was, like, around $50 billion that was coming out from a balanced payments perspective in September, October, November, and December. And what I think is absolutely crucial was that the authorities were so concerned about it that they imposed very, very severe capital controls, so that the stability you’re seeing in the market now is not because there’s not an issue, it’s because they’ve taken an extreme policy response to make sure that the currency stays stable.

So what have they done? They’ve essentially put a lot of pressure on corporates not to do M&A in the same way they’ve done in the past. If you are a private individual and you want to use your $50,000 annual allowance, you have to fill out piles of paperwork. In the past, you could just go and do it. And there’s, like, a long, long, long list of things. And I’ll mention one more thing, because I think it just shows how serious they are about this. So they essentially shut down the transfer of liquidity from mainland China to offshore centers. And there’s various ways you can see this, but the easiest way to see it is, OK, they’ve tightened liquidity so much offshore that interest rates have gone through the roof—like, we’ve had short-term interest rates in the offshore yuan market of more than 10 percent.

MALLABY: That’s in Hong Kong?

NORDVIG: Yeah, yeah. This is extreme stuff. So the stability has been achieved with these, like, really quite extraordinary measures. And it should be viewed in that context.

MALLABY: So, I mean, just one more thing maybe before we go to members for questions. I mean, this does, I think, have some relevance for what we might expect in U.S.-China relations. So obviously there is a possibility of trade measures of some kind from President Trump with respect to China. And they’re not going to hit China, if they come, at a time when there’s a lot more fragility, nervousness, and vulnerability with respect to their own domestic economic management than is maybe obviously visible. And secondly, it’s going to hit China when Xi Jinping is trying to consolidate power even more than he has already, ahead of the party meeting, I guess, in September, I think.

So, for both these economic reasons and political reasons, China is not in a position where it wants to lose face or take any risks or look weak with respect to the U.S., so therefore retaliatory potential appears particularly pronounced. I don’t know whether Ángel or either of you want to just sort of pick up on that thought in terms of the probability of a serious trade fight between the U.S. and China.

UBIDE: I would hope that the probability is low. But that’s definitely going to be one of the risks we are all going to be monitoring and watching. And that could be definitely change the sentiment that you have right now in the markets, and I think the public opinion. So maybe going back to what you were saying, right, that the view has been that the good stuff would happen with higher probability and the bad stuff would probably not happen because at the end common sense will prevail. And maybe what we should say is that the probability of an accident has gone up. I don’t know if a lot or a little. But the probability of an accident has gone up. And we just need to—we just need to factor that in and keep on watching.

NORDVIG: Maybe just a couple quick points on that. So there’s a lot of moving parts in this trade policy discussion. So there’s a NAFTA aspect that it seem to me that we are on a path that is uncertain, but we’re not heading down the worst possible path—like, renegotiation is one thing and then perhaps we can handle that. But that’s NAFTA. In relation to China, I think the rhetoric is different. The people who have been appointed are, obviously, some of them, extremely hostile to China. The legal framework around China is also different. So there’s sort of a currency manipulation angle and so forth that can be used. And so perhaps it’s easier to do something dramatic in relation to China.

So I am worried that that’s a risk. Like, there was one headline that came out yesterday. And that was that Trump wanted new trade deals to be cancelable with 30 days’ notice. (Laughter.) That tells you something about uncertainty. (Laughter.)

MALLABY: Yeah, he also said that bilateral deals were better than multilateral, because you can manage them more effectively. So then you get this cat’s cradle of bilateral deals with complicated rules of origin between them, not free trade at all.

NORDVIG: I agree.

MALLABY: OK. (Laughs.) Fair enough. Well, look, at this time, let’s invite members to join the conversation. Remember, this is on the record. Wait for the microphone. If somebody’s got a question, please put your hand up. If you don’t, I have lots more questions. But let’s see if somebody—yes, I can see right over there. Just—the microphone is coming.

Q: Just to follow up on the—talking about trade.

MALLABY: Could you just say who you are, please?

Q: There’s been a kind of sea change in the whole attitudes towards global trade and globalization—the vote in the U.S., the Brexit vote, and various political trends in Europe. How do you see this se change in attitudes affecting the world economy?

MALLABY: I’m sorry, could you just say your name and—

Q: Oh, sorry. Richard Weinert, Concert Artists Guild.

MALLABY: Thank you. OK, so the sort of broader sea change in attitudes towards trade. Who wants to tackle that?

UBIDE: So let me just say one word on that, right? I think what has changed is the perception of the cost and benefit, right? So we have a very long period—multidecade process—of opening up to global markets everywhere. And the view of economists and policymakers was that the benefits were very high and the costs were minimum and manageable. And I think what, though, the Brexit vote and maybe the result of the U.S. election and other commentary around the world shows is that the perception of that cost has changed. And so if you want, you have to focus on the benefits to society. But you also have to focus more on the cost to individuals who may be on the receiving end of that cost.

And so I think what that changes is what kind of policies we need to put in place is to make sure that the cost is better handled. And maybe in the past, there was less attention to that—not necessarily less action—but less public awareness of those kind of policies that were being put in place. And maybe there was less need perceived by the politicians and the policymakers about that. And so I think that balance is going to change. Maybe Theresa May the other day talking about the industrial policy was going in that direction. And maybe in the U.S. we are also going to be talking about industrial policies, going back to the ’70s, if you want. And maybe it’s part of that.

Maybe part of that is also more focus on fiscal policy. We need to spend more money, right? So we benefit of dual trade, but we also need to spend more money in helping those are going to be displaced and are going to suffer. So maybe that’s—it’s that balance in the policy mix that is going to be the important thing. It’s not necessarily bad, if it’s well done. But it’s a change. And that goes, I think, to what Sebastian was saying about the uncertainty. When there is change, there is uncertainty about it. People feel that they don’t understand what’s going on. And that’s something we are going to be having to deal with.


NORDVIG: Maybe just a couple, quick. additional points. So in the U.K., we obviously had the Brexit. I don’t view that as being most an anti-globalization vote. I think the immigration fear really played a very crucial role as a sort of tipping point factor. So the U.K.’s a little bit tricky in that context. Obviously there’s something very dramatic going on now in United States that will be important, but I’m not sure how global the trend is. So there’s no doubt that we sort of peaked in terms of the support for the globalization idea.

But I think we have some absolutely crucial elections coming up in Europe that will set the tone for this, because I think there’s also a chance that there will be a sort of realization that the EU really needs to step up on this front to make sure that the general philosophy is playing out into the future. German policymakers have already talked about making trade deals with Asian countries now that TPP is falling apart. And it’s interesting to see also the different TPP signatory countries are sort of trying to keep it together, actually, without the United States, which I thought most people had dismissed as an idea, but actually seems to be having some momentum right now.

So it’s a very mixed picture. The U.S. is clearly shaking up things in a very dramatic way. But whether there will be, like, a global trend, where everybody goes in that direction, I think that remains to be seen. And I think there’s actually a chance that a number of very important G-20 countries are going to make an aggressive push in the other direction.

MALLABY: I think that, you know, it’s instructive to consider that trade is the minds of most people associated with manufacturing trade, because that’s what it’s been traditionally. But increasingly, trade will be services enabled by globalization of digital communication. And that’s where, you know, trade deals have some way to go in liberalizing services, obviously. But that’s where the single market in Europe, for example, is qualitatively different than a typical trade deal, which is mostly about goods trade.

And the problem with trade being associated with goods is that because of technological change you’ve had this massive attrition in employment in manufacturing of trade. If in people’s minds it was about services, it would be much more popular because it’s—when it’s associated with goods and manufacturing, you know, people will look at it and say: Wow, we’ve had this massive loss of jobs. It must be because of the trade, even though every study shows that about 80 percent—or 80-percent plus of the loss of jobs are actually down to automation and not to trade.

So I think there could be a shift such that trade was repositioned. And just on the manufacturing and the politics of that, if you consider—as the world economy shifted from agricultural to manufacturing—the amount of money that we’ve spent in democratic societies on agricultural subsidies, to look after declining—the declining farm sector has been just astronomical. Right, whether that’s in Europe or the U.S., farm programs have been famously the most obviously piece of pork, if you want to call it that, or politically adept management, if you want a different take.

If you compare the amount spent per capita on looking after those farmers in decline with the amount that we’ve spent on looking after manufacturing workers in decline, we might get some insight into why there’s populism.

UBIDE: Yeah. And if I can add to that, right. If you remember the way the European Union work, right—and I give you the example of Spain. I’m from Spain, I can give you, right. When Spain decided to enter the European Union, the deal was you are going to lower your trade barriers and we are going to pay to keep the people that are going to be displaced happy. So the whole coal and steel industry that we had in Spain that was completely uncompetitive, essentially, was bought out and said: You are not going to continue to produce. But we are going to give you subsidies so you are happy until you retire. And that was exactly the point. You need to throw money at the problem.

And so the European Union was a success in globalization at the smallest scale—bringing countries into the system, lowering the barriers, and compensating those who lose. Instead, when we have done it at the global level, we’ve done the globalization at the same time as we have done a budget tightening. And so we haven’t thrown money at the table, thinking that the redistribution of gains were going to be enough. And I think it goes exactly to what Sebastian is saying, that with agriculture we devoted a lot of resources. With manufacturing, we didn’t.

MALLABY: Yeah, I mean, that’s a good point. The completion of the WTO and NAFTA in the mid-’90s coincided with budget balance coming onto the table in the U.S.

UBIDE: Exactly.

MALLABY: After the Reagan deficits in the ’80s.

OK, another question. Yes, lady here.

Q: Kaysa Kensner (ph).

I’d like to add two more large, emerging markets to the mix here. Can we talk a little bit about India and about Brazil? India in terms of your expectation for growth, giving its interesting experiment with elimination of cash, and Brazil with its ongoing corruption investigation and prison violence?

MALLABY: Yeah. And thank you for that question on emerging markets, which we—which we should have talked more about. Jens has a particular advantage in analyzing Turkey because he has baby twins who wake him up very early, so he’s always on top of the news. (Laughter.) But let’s go to the question—Brazil and India. Who wants to—

UBIDE: You’re looking at me, OK. So Brazil first. I think Brazil is an example of an economy that went into a very, very, very serious case of overheating in the last—in the last few years. And it’s now recovering from it, right? So this is an economy that was growing very fast in 2009, ’10, ’11. But then it slowed down. And rather than understanding that the problem was a problem of potential growth being low and the need to do a fiscal tightening and reforms, they went into another round of demand—of demand expansionary policies. They ended up with inflation at 10 percent. And so the tightening that was to be put in place to slow that down was very drastic. The last couple of years has been—I think it’s the longest and deepest period of recession in Brazil since the Great Depression, something like that. I don’t think I’m exaggerating.

And so what you are seeing now in Brazil is essentially the recovery from that. So this year they’re probably going to grow at positive rates, but very slow. And they just need more time. The politics—again, I think the politics are a different story, in the sense that the politics are something that are on top of what’s happening with the economy. Of course, you need to clear the political uncertainty in order to get private investment back into play. But even with politics being in perfect shape, Brazil is an economy that still needs an extended period of time to recover from that long period of overheating.

MALLABY: Yes, but, I mean, there’s a part of your question, I think, which is about the relevance of corruption the Brazil growth story. And what you’re really saying, Ángel, is there was a whole macro dynamic which probably mattered much more.

UBIDE: And maybe both, you know. One was endogenous to the other. And one facilitated the other, right, because part of the expansion investment came, you know, you had Petrobras and the big—and the big state enterprises. So the point I’m just trying to make is that both are important, but I was just trying to isolate, yes, the economic dynamics. And even with the other part, the economic dynamics were basically quite unstable.

MALLABY: Jens, you want to talk about India, and this audacious experiment in eliminating large-denomination bank notes, just to make a certain professor at Harvard happy? (Laughter.)

NORDVIG: Well, it is—it certainly is an experiment. I would say from a sort of macro-forecasting perspective it’s something they’re doing and it’s something that they obviously have certain reasons to do, but they aren’t forced to do it. So I think it’s one of those things where if they start to see the consequences of it being really negative, they can recalibrate. So this is a very kind of big-picture way of analyzing that. But I’ve not put, like, a tremendous weight on that because of that sort of self-calibration that’s feasible around it. So I think still we have some very positive structural forces in India that’s going to keep us at a good growth path. And I think this is going to end up being a blip, rather than something that really, really derails anything in a bigger way.

But I think, given that Carmen is not here, we do actually have to talk about Turkey.

MALLABY: OK. Say something about Turkey. Crisis—(inaudible).

NORDVIG: So she’s quite obsessed with balance sheets, right, and for good reason. And Turkey is really the example of that. So there’s been all this debate about hard-currency debt in the corporate sector. Shin at BIS writes about it all the time, and I really respect his work. But it’s the corporate sector. And sovereign sectors around emerging markets have really behaved very differently over the last decade or so than they had behaved before. So even if there’s a lot of dollar debt in the corporate sector in a number of countries—from China to Brazil—at the aggregate level, country-level hard-currency debt is generally low.

MALLABY: I mean, if you took the sovereign debt and you put it together with the corporate debt, the exposure to the dollar, and therefore to rising dollar, is way less than—

NORDVIG: Yeah. Yeah, there’s a concept called original sin, like, how much do you borrow in a currency that’s not your own? And we have much less original sin at the country level, even though the corporates have started to sin a bit more. (Laughter.) So the exception to that—and to pay tribute to Carmen—is Turkey. In Turkey, they have a lot of dollar debt at the aggregate level.

And guess what? So over the last couple months, because of the shock we already discussed, we’ve seen global yields start to rise, particularly U.S. yields start to rise, and Turkey has had something that smells like the beginning of a currency crisis. Those two things fit together very—there’s obviously other things going on in Turkey. They have a terror problem. They have tourism collapsing and so forth. But I do think the timing of this move is very much a function of how the balance sheets are set up and the global shock we’ve had to yields. So I think that’s the best example of Carmen’s theory on that.

MALLABY: It’s the classic story in financial history, that you get, you know, the Volcker tightening in the beginning of the ’80s, and lo and behold Mexico blows up. You get the Fed tightening in the ’94 cycle, lo and behold Mexico blows up again. This time you’re saying the new Mexico is Turkey.

NORDVIG: I think if I scan across emerging markets and look at who has a volatile country balance sheet in terms of currency purposes, it is Turkey.

MALLABY: OK. Another question. Let’s go right here.

Q: Bhakti Mirchandani. I work at a hedge fund. Thank you for your comments.

We spoke broadly about the rise of protectionism on a macro level. What about on a micro or firm level? At an unprecedented level, at least since I’ve been following history, Donald Trump seems to be focusing on specific companies, whether or not they’re creating jobs in the United States, specific incentives for United Technologies. What are your thoughts on the implications of that for the U.S. economy?

MALLABY: Yeah, special deals for Nissan in Britain. Yeah, OK.

NORDVIG: Yeah. So I think this is actually pretty important, because—so one of the questions I’ve been getting the most over the last month is, OK, what does the border tax mean for the dollar? And talked about already, we don’t know exactly what a border tax is—is it a tax reform or is it a tariff, or whatever it is. But so it really matters not just what the legal end destination is, but also how we get there. So, for example, when Trump threatens BMW with a 30 percent—a 35 percent tariff, that I think has major implications for how this whole process is now viewed in Europe. It has major implications for the speed at which any retaliation will take place.

So I do think this micro-focus that seems sort of out of the realm of what we’ve experienced in the past really means that it becomes much harder to just imagine a situation where we’re going to have a tax reform, it’s going to be orderly, there’s going to be some adjustments that make sense in an academic context relative to that, the packaging around it really matters. And I think it means that everybody around the world is sort of sitting up in their chairs and thinking, OK, we really need to be on the front third to make sure we don’t get hurt in this process.

MALLABY: Let’s just stick with that for one more second, because, you know, the classic view of a policy framework that involves specific threats to individual companies would be to say: This is nuts. I mean, we’re Americans. We believe in the rule of law here. We want a level playing field. And we don’t want, you know, a single wagging chief executive, you know, pursuing vendettas against individual companies. And if you do that way, first of all, there’s no certainty and everybody’s frightened and that’s bad for investment. Secondly, BMW and every other car company in the world has to hire, you know, another 20 people in Washington to figure out where the heck the next bullet is going to come from. And this is all appalling, right?

But, I mean, in another sense maybe it works. Maybe it works politically, in terms of the optics that President Trump is able to achieve. He’s standing up to big companies in a way that may work for him. Maybe it works even in a kind of policy effectiveness sense that, you know, it’s sort of the Chineseification of American policy, which, you know, in other words, the grabbing of a set of government policy tools that traditionally American policy makers didn’t use, which the Chinese do use as you see in these stories about stemming capital out-flight. Is the first view, that this is just purely horrible, sufficient? Or are there elements of, you know, redemptive value is the creation of these tools?

I can see—I can see Jens’ face is telling me that there’s no redemptive value.

UBIDE: That’s a tricky one. So I guess one way to put it is, is this policy pro-market or pro-business? And it’s not necessarily the same thing, right? And that’s what I was going, in terms of going back to doing industrial policy. Now, is industrial policy bad in itself? No. Can it be done badly? Yes. And so if It leads to breaking of supply chains and corporates having to adopt decisions that are not economically efficient, then it is going to be a disaster. Now, if it’s choices between similar options and it tilts the balance towards here rather than towards there, and we end up in a political equilibrium that is a bit more sustainable, then maybe ex post we will say that, you know, it wasn’t that big of a deal, even if the noise was very high. Which is why, again, I try to separate the political noise from the reality on the ground, which I think is going to be a major exercise we all are going to have to do in the next few years, both in the U.S. and in the U.K., because otherwise we are not going to be able to cut to the signal.

MALLABY: Nili. A microphone, just coming.

Q: Hi. Nili Gilbert, Matarin Capital.

A lot of the optimistic case which has been laid out I think has been focused on the supply side. But I’d be interested to know what you are thinking about trends in demand. I’m concerned, for example, when I think about the future of work in the context of automation, which a turn toward more manufacturing jobs will not address. Income inequality I think you’ve touched on tangentially. Despite the populist rhetoric, income inequality has only widened since the U.S. election. I think it would be easy to put together a case that that’s going to continue. We saw unprecedented protests around the world this weekend, with some estimates I’ve seen over 4 million people taking to the streets worldwide. How does—how do these trends affect your perspective?

MALLABY: So just to say—you’re saying that—

Q: On the demand. So when we think about on the demand side. You know, we’ve talked about the pro-business case, the pro-market case. But how do you see trends in public opinion, in demand affecting the positive economic outlook that’s been laid out?

MALLABY: Maybe one aspect of this is the way that inequality changes the savings patterns in aggregate.

NORDVIG: So I think there’s some short-term effects and some long-term effect. So in the short term, I think the best we can do is look at what the confidence numbers are showing. They’ve shown—it was not a given that it would play out this way. I wouldn’t have predicted that it was so clear. But we’ve had on average a big confidence bounce.

MALLABY: Amongst consumers in the U.S.

NORDVIG: Amongst consumers, yeah. So that’s pretty interesting. So that’s a data point that we just have to observe. And despite the demonstrations and so forth, that’s how it nets out. Essentially what’s going on is that the Republican supporters have gotten ecstatic and the Democrats have gotten a little bit more depressed. But the net goes in one direction. (Laughter.) So that’s something that matters for the short term. And I think it’s very important.

So I think in terms of, like, ranking how it’s going to transmit into the economy, we’ve talked a bit already, I think labor market’s not going to move so much. Consumption can move potentially meaningfully. And then there’s—in between there’s investment, right? I think investment we just don’t know yet. There’s the huge uncertainty. At the same time, there’s a deregulation carrot and so forth. And a lot of, for example, small businesses are very Republicanly oriented. So they might be in the ecstatic group, just from party affiliation. So we’ll see how the investment plays out. I think there’ll be in between.

But then some of the issues you raise are very long-term issues. And I don’t think the market has really been able to price any of these effects at all. So you mentioned already, OK, what is going to happen, essentially, to labor supply issues in the future. That could be a major negative, as I see it. The inequality aspect, if it is not addressed at all, it could also be a major negative. But I think, to be honest, from a sort of investment perspective it takes so long for these issues to play out and there’s so much movement in the short-term variables that it’s hard for me to say, OK, the market is mispricing them because it will just really take considerable time before they become driving forces.

MALLABY: Maybe venturing onto dangerous ground, but one of the ironies about the women’s marches over the weekend, of course, is that if you look in aggregate at the U.S. labor market, I think it’s right to say that the biggest—the group where distress is most evident is blue-collar men over the last 10, 15 years, 20 years. These are the guys who really lost out. But anyway, we’ll see—(inaudible). (Laughter.)

One last question, maybe right over there.

Q: Hello. James Meeks from MOVE Systems.

I’ve got a question about the labor market. In 2008-2009, it seemed like one of the reasons why unemployment numbers weren’t much higher than they should have been was because a lot of people dropped out of the labor force, both in the U.S. and in Europe. Has that been changing? Should we be watching unemployment number, or should we be watching labor market participation? What’s happening on that, sort of as the economy’s improving?

UBIDE: So two points on that. In Europe, the labor force participation has been increasing. And that’s a significant reason why the unemployment rate has not come down as much as in the U.S. So there has been a divergent trend in Europe versus the U.S. If you had done comparisons of the unemployment rate in Europe with a similar evolution of the labor force as in the U.S., you would have the unemployment rate in Europe a couple of points lower. So that is one thing. I just want to separate the two areas.

In the U.S., what we have seen is the decline in the labor force which, you know, three or four or five years ago we were debating how much was cyclical, how much was structural. And I think the consensus today is that most of it was structural. It is long-term drivers, mostly from a demographic standpoint, that are going to keep the labor force at/around these levels, plus or minus a little bit. You can probably recover a bit with more demand policies and, you know, running the economy a little bit hotter. But I think the consensus right now is that it is what it is. It’s not going to get much better from that standpoint.

That doesn’t mean that the unemployment rate cannot go lower. That doesn’t mean that maybe we continue to revise lower than ILO. We started with an ILO that was significantly above five, and we are now at 4.8. This is a trend that can continue. I mean, you read Sebastian’s book, then ILO kept on going down in the—in the late ’90s, right? So what do we know, in some sense. But I think from the standpoint of the labor force participation, it is probably—what we have seen, is where it is.

MALLABY: OK. I think that’s what we’ve got time for. Thank you to everyone for coming on a rainy morning. Thank you, Jens. Thank you, Ángel.


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