World Economic Update

Tuesday, October 13, 2020
Kim Kyung Hoon/Reuters

Director of Investment Research, Bridgewater Associates, LP; CFR Member

President, Peterson Institute for International Economics; CFR Member

Senior Fellow for Economics, Council on Foreign Relations; Thomas D. Cabot Professor of Public Policy, Harvard University; @krogoff


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

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 and is dedicated to the life and work of the distinguished economist Martin Feldstein.

MALLABY: Thank you, Carrie, and welcome everyone to this CFR "World Economic Update." This series is dedicated to the life and work of the distinguished economist Martin Feldstein, who was a friend and teacher to so many of us. With me, I have three speakers who I suspect are well-known to many of you: Rebecca Patterson, director of investment research at Bridgewater; Adam Posen, the president of the Peterson Institute; and Ken Rogoff, who is a professor at Harvard as well as a senior fellow here at CFR.

So we all know that clearly, no discussion of the world economy can be entirely separated from COVID. We've just had the new IMF forecasts out today, and although they're slightly less dire than the forecasts of last June, they're still pretty terrible. The projection is that the global growth numbers go from positive 3 percent, which was what was projected before the pandemic hit, to negative 4.4 percent. And I believe that's the biggest swing since the second World War. So clearly, that's the dominant elephant in the room, but at the same time the panel is not expert on epidemiology or on forecasting vaccine progress. So I'm going to focus as much as possible on the biggest news coming out of the pandemic for economic policy, and I'm going to start with the first question to Ken Rogoff. Ken you've pointed out that this is different from the shock following 2008, in the sense that it's both a demand shock and simultaneously a supply shock. Perhaps you could just elaborate a bit on that and give some examples of policies, which you think either get that dual challenge right or fail to get it right.

ROGOFF: Well, how it unfolds is a supply shock, which it certainly will. We don't completely know because we're not epidemiologists and virologists, and I don't think they completely know. But they're going to be some long-term effects to this having to do, for example, with more meetings and things will be held like this. People working at home, those are maybe innovations that were good coming, there'll be others where people may be afraid, you know, more reluctant to do travel, go to restaurants as much as they would. There's going to be some restructuring that needs to happen—we don't completely know what. There's also certainly going to be some kind of, I don't know if you want to call it economic or political reaction in terms of deglobalization or reglobalization, I don't know what's coming that could also reshape things. And so the short term, we're in a catastrophe and you need catastrophe support, the best you can. It makes sense to do everything you can, as governments can. Certainly, if California had an earthquake, you wouldn't want to raise taxes in New York right away to pay for it. It makes a lot of sense to use massive debt finance to lower interest rates, but you know, you don't want it sort of totally prevent restructuring. So sort of there was early on in the crisis, I'll just directly answer your question, early on in the crisis, I think there was a New York Times op-ed by [Emmanuel] Saez and [Gabriel] Zucman, it was very articulate, very interesting, sort of saying the U.S. should do things like Europe, where you, you know, sort of paid firms to keep their workers and pay everyone to stand place. And they said that way you’d, you know, get right back to work after the pandemic's over, and the U.S. did things differently. To make a long story short, I think they're not as different as they seem because many of the furloughed workers in the U.S. will come back if their firms are doing okay. Many of the workers who are kept on in Europe will be fired if firms aren't doing okay. But you know, I think the early criticisms of the U.S. system, and there were many, we've done a lot of things wrong, you know, maybe tempered because you do need to have a more flexible system that's going to allow change to take place.


MALLABY: So that's a good example of the choice between enhancing unemployment insurance versus furloughing as in the European model. But another one that strikes me is, you know, when the Fed says it's ready to underwrite the corporate bond market, that's presented as something to support demand and to prevent, you know, functioning companies unnecessarily getting into a financial squeeze. But at the same time, it's obviously potentially propping up companies that do need to be restructured if we have a supply shift coming. So I mean, it must be a lot of policies that where you can't disentangle the two things.

ROGOFF: Well, that's very well put. I have to say the Fed has managed, to this point, to do an amazing job of convincing everyone that they're going to back everything without actually buying that much. I think what they've done in terms of buying municipal debt and forming all these special purpose vehicles to buy private debt, have been the thing that has really lifted confidence in the economy much more so than cutting the interest rates. Because, of course, if you can't go to the restaurant, it doesn't matter if your demand is boosted. But it's an open question of whether, if we got a big second wave, which I have no idea, you know, what's coming next, whether the Fed is really going to step up as much as the markets think they are. There is a danger. My colleague Jeremy Stein pointed this out in a recent Brookings paper, you know, saying there's a danger that you could get a double whammy, you get a negative shock, and you find out that the Fed and the Fed backed by the Treasury doesn't have your back like he thought he did—that still lies ahead. But so far, it was amazingly successful. And on top of calming markets and lowering bond yields, a lot of the fallen angels and weaker companies have borrowed a lot. So some of them are actually positioned for a second wave thanks to this guarantee that might never have been there.

MALLABY: Adam, as you look across the advanced economies, which do you think are coping well with this delicate policy challenge?

POSEN: Well, Sebastian, perhaps not usefully for excitement, but usefully for our audience, I largely agree with some of the things Ken has said. Our mutual colleague Jason Furman has written some on this. In theory, the differences between tying work to jobs versus tying it to unemployment, your aid should make a big difference, but in practice it seems to make very little difference especially when you've got the big forces of demand shocks, changing preferences, and of course, public health risk—that seems to overwhelm it. So when we think about which countries are doing better and worse, much of the better and worse is on the public health side than on the economic side. It's kind of amazing, right, how active and unified and similar the responses were on the monetary side, but even on the fiscal side for the most part. Where, of course, where it is letting down is the U.S. failure to extend aid and failure to really implement things that the Treasury unfortunately put on the Fed, which should have been a fiscal matter of what they call mainstream lending. You know, you have to accept there are going to be losses, and that has kept them from making use of this facility the way they should. So and then finally, because of our federal, state, local arrangement, the negative multiplier on contractions in the state local government sector puts us at the extreme end of that. So the U.S. is presently messing up, it's going a way that it hadn't up till now and most of the others have not.

But just finally on the public health point, and again, I'm no epidemiologist and I don't even play one on TV, but I do think it's important to point out that some of the early caricatures and how this was going turned out not to be right. So as my colleague Jacob Kirkegaard at Peterson's pointed out, you know, Sweden was seen as talking this game of herd immunity and laissez faire, but in practice they've actually done very targeted, in least in recent months, very targeted shutdowns in certain kinds of public events as opposed to saving [inaudible] in the U.S., and so there've actually been interventions in a more thoughtful way. I think the broader picture, one thing Sebastian which I don't want to lose sight of, for Rebecca, Ken, and you to comment on, is when there's also been a huge surprise outside of the rich countries. The amount of money flowing back into emerging markets and the space emerging markets and some developing countries have had to run expansionary fiscal and monetary policies without having to jack up their interest rate is pretty unprecedented in this kind of crisis. There's nothing like this kind of crisis, but in the kind of crisis where usually money leaves for the rich countries, including the U.S. Similarly in public health, some of the developing countries in emerging markets have done better at managing than some of the rich countries, including the U.S. So that to me is actually more of a contrast and a surprise than some of the small differences between, say the U.S. and Europe.

MALLABY: I must admit I hadn't picked that up that the capital flows into emerging markets exceeded expectations. I mean, even reading today's IMF release, one gets the feeling that the story of the emerging markets being worth it in the developing markets remains true.

POSEN: Absolutely.

MALLABY: But talk more generally Adam about this, this question of the potential reweighting of the global economy. I mean, the traffic line is China is going to grow this year and next year substantially, everywhere else is shrinking.

POSEN: Right. And many people including my colleague Karen Dynan pointing that out, and I just want to emphasize what the [inaudible] gave on president, while passive, said about not having another lost decade, not having horrible lasting effects on the population of developing countries from this pandemic is entirely right. All I'm saying is versus a benchmark that we saw, an enormously rabid outflow from emerging markets and developing countries in March/April say, and instead we now see countries as wide ranging as Brazil and India still able to do relatively loose macro policies, which in the past, they wouldn't have been able to do and which were the reasons Ken said would accept now. So I think it's a question of what you're comparing to. In terms of reweighting of the global economy, I think this is an important theme going forward. As you mentioned, China is going to be the one major economy with significant positive growth this year and next. Of course, you still have to benchmark that against what their trend growth rate is, which is probably 5-6 percent on their measures, and they're going to be less than half that probably this year. But it is a written ongoing reweighting and as some of your colleagues are writing about in the foreign policy sphere, you know, after the global financial crisis, after this response, and then not just China, but Taiwan, South Korea, Japan, a number of other countries particularly in East Asia, have managed the health aspects better, they are also doing better economically. So this is a reweighting, not just, I mean the incremental change over the next two years is still not going to be cute, but directionally the idea that these economies can recover when the U.S. and Europe cannot and directionally that they might outperform in terms of policy response to the crisis is new to me.

MALLABY: So Rebecca, perhaps you could pick up on this issue of this global growth conspiracy, and particularly how it's feeding into the big jump in trade imbalances. U.S. current account deficit is growing, the flip side is that the Chinese surplus has grown. This comes on top of a fraught trade policy environment. How do you look at all this?

PATTERSON: Maybe I can talk really quickly about how we got there in terms of these very, very quickly changing trade balances, and then talk just for a minute about implications. In terms of how we got where we are now, the U.S. trade deficit in August, I believe, was the widest it's been in fourteen years, and we've seen a similar widening in the Chinese surplus. I think that this really reflects both the makeup of the respective economies and then also the pandemic responses we've seen. In the case of China, you know, they got hit very early, lockdown aggressively, that allowed them to restart production quickly. And so they were being able to produce when everyone else was locked down. And a lot of what they do produce are things the rest of the world needs right now, whether it's electronics in a work from home world, or medical equipment, PPE, etcetera, and so in their case exports were able to dominate. And then on the flip side in the U.S., with our massive fiscal stimulus earlier in the year, we more than offset loss incomes which allowed consumers to continue and because services were curtailed the supply issue that Ken talked about earlier, a lot of that income was channeled towards goods, and so that allowed imports to dominate. So I think it makes sense why we are where we are. And interestingly, just last night, we got Chinese September data, which showed their imports picking up quite a bit more than expected which might be a sign that their economy is broadening and these changes aren't going to be lasting, perhaps.

In terms of implications that which I think is the more important thing, I think there are two I’d quickly touch on—one is the currency. So the renminbi has appreciated about three and a half percent year to date against the dollar, which might not seem like a lot, but for China, it's a pretty big deal. And in just over the weekend, Chinese authorities stepped in to try to limit further appreciation pressure. And that makes sense to me. I don't think there are many economies out there, maybe with the exception of Turkey and one or two others, who want stronger currencies right now. Everyone would love a weaker currency to support reflation. And that might be one of the reasons, by the way, gold is doing pretty well this year.

But the second implication, which I think you touched on Sebastian with the trade conflict, that's the big deal here. And I'd even widen the aperture on that lens a little bit and say that this is really a typical conflict, if you will, that we've seen over and over in history between rising and existing superpowers, manifested itself for the last few years as trade war. Now, I think you could say we're in a technology war, and what I fear is that we might be on the early days of a capital war. And as we go forward, the election here in the United States will clearly matter in terms of how the U.S. acts and how China responds. I think it's interesting that both parties right now are trying to outdo each other who can be more hawkish on China. The one thing I think, regardless of the election, we are likely to see going forward is a continued decoupling. And this gets back to supply. This gets back to possible inflationary pressure that could come out of this, but we're seeing from President Xi on down in China, a focus on internationalizing the renminbi to make them less dependent on the U.S. and a greater focus on the domestic consumer base. And I think that decoupling is one thing we will see continuing way past COVID and way past this U.S. election.

MALLABY: And Rebecca, as the market participant in the group, I want you to please help us to relate all this to the markets. And I guess the question I'd ask is that, you know, it strikes me that the public health community often sounds more cautious about the power and speed with which, you know, a fully effective vaccine or other medical intervention might arrive. We've just had news that, you know, somebody has been reinfected more seriously. And the first time he was infected, we've got evidence from the nurse that herd immunity, which was thought to have worked there didn't actually stop the second wave. Are other markets just sort of too sanguine on the likelihood of getting out of the pandemic?

PATTERSON: I don't think so. I mean, I totally understand why someone could look at the S&P 500, up about 9 percent year to date, and think that. I think you can see evidence that the market is not overly anticipating a vaccine by looking at the sectors that have been hardest hit. If you look at airlines, restaurants, tourism, hospitality, those equity sectors are still lagging the overall market pretty substantially. And I think if there were hopes about a vaccine being imminent, or as getting to the other side of the pandemic, you would see that reflected in those stocks quite a bit. So I don't think we're there yet. But I think it does raise the question, well if that's not it, then what is supporting the equity market? Why is the S&P up almost double digits when we have the U.S. in clearly a deep recession? And I think to answer that, you almost have to take a step back and understand what's going on with the evolution of policymaking.

You know, when all of us were growing up, it was good, straightforward, you know, the central bank raises-lowers interest rates, affects borrowing, and we might call that monetary policy 1.0. And then when we got to 2008-09 and interest rates were already getting very low, we had to pivot more to asset purchases for reflation. So we could call that monetary policy 2.0, if you like, and that did help reflate the economy but largely by reflating financial assets, and so that had its own costs and benefits. When we got to this shock, the size of the shock was so great that, you know, we didn't have room to cut rates anymore really. QE—quantitative easing—probably wasn't going to be sufficient in and of itself, so we had to move to monetary policy 3.0, which is really a closer coordination of monetary and fiscal policy, where fiscal has become the dominant driver. And so when you think well, what does that mean for equity markets—everything. Because if you're an investor, and you relied on a portfolio of stocks and bonds historically, those bonds aren't doing it for you anymore. You have to have an asset allocation that's increasingly reliant on equities. And so while that is a very gradual transition, I think it is something that is supporting the stock market, almost regardless of the economy right now.

The other real quick last word I'd say on this is that, to the degree investors are being pushed out the risk curve into equities or private equity, they're still trying to look for something safe. And when you look across the spectrum of equities today, if you say, okay, I want strong balance sheets, I want good free cash flow, I don't want a lot of debt, well, technology companies, a lot of them, not all, shine there. They become expensive by some metrics, but they offer some attributes that have made them attractive to a lot of different types of investors. And so in a way, partly because of demand for work from home technology and partly because of these attributes in a world where bonds are no longer working the way they did in the past, it's not a surprise that technology has been leading the market. And I think as long as the pandemic's here and growth is slow, there's a chance that could continue. We won't get into what the election could mean for that—that's another catalyst.

MALLABY: Well, I've got a list of other questions I was planning to ask, but we've hit the moment when we want to get members involved in the conversation because there's a very large number of people. So I'm happy to carry on asking questions, but perhaps Carrie the operator can see if there are questions on the line. I should just remind you that this discussion is on the record.

STAFF: We will take our first question from Tara Hariharan.

Q: Hi, good morning and thank you so much for this discussion. My question pertains to where all of our experts on the panel today stand on the subject of inflation. I mean, Rebecca talked about the reflation, trade, and gold and such, but it does seem that there are very disparate views on where inflation will go ahead, depending on what one believes about domestic demand and spare capacity, whether it be in the U.S. or abroad. So would welcome a discussion on inflation. Thank you.

MALLABY: Sure. Let's start with Adam and then others can chime in.

POSEN: Yes, actually, I think this would have been Sebastian's next question or second question, so thank you, Tara. I think you can make a credible argument for the risk of inflation in a way now that in the rich countries that you couldn't make it any time in the last dozen years. That you can tell a scenario where there are pent-up demands, it overwhelms limited supply. People who aren't in particular sectors are highly over sought, you getting an accommodating central bank, and the Fed has very explicitly said that they will error on the side of letting the economy run hot and so you can tell a scenario where arguably in 2022, you get in the U.S., say, inflation heading up into the mid-3 percent range, which for fixed-income markets that haven't been pricing that in and compared to where we've been would be a significant change. It would be interesting what Rebecca or Ken thought about that. I want to stress that from my point of view, the idea that there is a credible argument of this sort, including from colleagues of mine, like Olivier Blanchard and [inaudible] Peterson, I don't put a very high weight on this. I still view this as a situation where the overwhelming forces are against bargaining power for labor and that the risk aversion as well being reinforced with going up, this contributes to an ongoing, let's call it secular stagnation as Larry Summers's situation. I also think the ability after many, many years of low inflations or inflation expectations to jump very much and be a causal factor is quite limited. And again, I may be wrong about this, but that's what my years working on Japan tells me that when you've built up a lot of inertia, it's hard to get the inflation restarted. And thirdly, because it's largely global, so it's not like suddenly one country or one of the major economies, it's like a massively breakdown from the others in terms of demand. So to me while you make a credible case, I'd put a low probability on there being much inflation.

MALLABY: Rebecca, would you like to pick up on that point about the fixed-income market being potentially exposed to a shock?

PATTERSON: Sure, I would agree with Adam. I hear the case for more inflation, and I think there's some merit to it. I'm also not sure if that's going to be what plays out. One thing that you said Adam that I would definitely echo is that you have to be able to change what are very entrenched low inflation expectations. So I think when I look around the world, the U.S. probably has a better chance of creating inflation than say, Europe or Japan, but I think it will require more fiscal stimulus. I don't think the central bank, the Fed can't just will inflation to happen. I think if you have a continued aggressive fiscal stimulus, which I think there's a decent chance we could see some if not immediately, then perhaps after the election in some form, I think there's a greater chance that we might see that take place in the U.S. And then to the point about the bond market, if you look right now, at and I don't mean to get wonky on folks, but the 5-year, 5-year inflation forward, which is just a measure of inflation expectations going further out in time, it's basically extrapolating that what we've had is going to continue. And that's the part that makes me think maybe there is something to thinking about higher inflation. We're not going to be at 1.8 percent in a straight line for the next five, ten years on inflation in the United States, and so thinking about if we got inflation, what would that mean? How long does the Fed allow bond yields to rise before they step in and buy more assets to keep down yields? What kind of equities do well in that environment? What kind of assets do well in the environment? It's something investors haven't really had to think about for the last few decades. So I think whether we get it or not, preparing for that risk scenario is a pretty important mental exercise for us as economists and as practitioners.


ROGOFF: Those are very good comments by Adam and Rebecca, and I basically agree. I think near term it's pretty unlikely, anything is possible, but it's pretty unlikely. If you look out longer, and Rebecca was just alluding to five to ten years, I think there's huge uncertainty, I don't feel like the markets totally captured that. So one is the political direction will take and, you know, I think given all the problems with the environment and inequality, there's a strong case to push very hard on the gas and see how it works. But it might work to end up with higher inflation, deglobalization. And by the way, even if we have a, you know, great relationship with China, the demographics are changing radically. And I think economists, by and large, don't understand why inflation was so low for a long time. And therefore, I don't think you can express enormous confidence that it will stay. But if you had to pick one thing, surely you would pick China over the last, you know, few decades as being something that change, we don't quite understand it. And although the relationship with China, even if it continued in the same direction, China's demographics are radically changing. So yes, I think a lot of uncertainty over the longer term, but near term, expectations won't change that fast, worker bargaining power won't change that fast. Whatever disruption we have with China, we can already see it's not changing that fast. So near term, no, but longer term, who knows?

MALLABY: Operator, could we have the next question, please?

STAFF: We'll take our next question from Catherine Mann.

Q: Hi there, really great to be with you, so to speak. I wanted to go back to this issue about who is driving global GDP growth and the reweighting towards Asia. And the frame of reference is to consider domestic demand, C + I + G, relative to external accounts. And I think Rebecca, you were sort of saying, well right now the timing is such that the current account deficit in the U.S. is widening, the current account surplus for China is also widening. And the question mark is going forward, not just for those two countries, but more broadly, is there going to be kind of a return to the status quo, which was, you know, the size of the relative deficits and surpluses from some time ago? The IMF’s forecasts are for relatively little change in the current account positions, but I wonder if that is going to be true? And if so if there is, you know, evolution, then what we really ought to be looking at in terms of what's happening with the leadership in the global economy from the standpoint of economic activity and economic leadership is not GDP but is domestic demand. And this has been a question for quite some time, that which is the relatively better measure? And if it's domestic demand, then why do we keep on using GDP?

MALLABY: So it sounds like that's a suggestion that you could almost change behavior if global league tables were constructed according to domestic demand so that you look big and strong and important if you've got lots of it. Maybe Cathy's gone off the line now, but anyway let's throw that to Ken first and then others can follow up.

ROGOFF: It's a very interesting point. I mean, if I think about China, it's grown much faster than its trading partners for a long time. You can't continue forever to be export-led growth if you got huge compared to everybody else—you have to have domestic demand and they have not, although there's lots of numbers about how fast everything's growing in China, hey, if not navigated that, you know, there it lies ahead. And I bet they slow down a lot over the period where they're shifting to domestic demand. Yes, well I mean, it's a very interesting thought. I mean, obviously, if you have a lot of domestic demand and China has a lot of production, you're going to end up, or the rest of the world, you're going to end up owing them a lot of money. And it's a little bit of a question, was it the debtor more powerful than the creditors in that situation? Probably not a great situation for either, but it's an interesting, interesting food for thought.

MALLABY: Adam, do you want to weigh in?

POSEN: Just quickly, I appreciate Catherine trying to flip around our thinking in a provocative way. And I do think that in a sense, it's less about things are changing then it was always been oversold how important or unimportant for large economies the current account balances. I mean, the U.S., and you can say it's because the U.S. is the reserve currency, yada, yada, yada, but you know there are a lot of countries that having a large domestic market was a sufficient matter. But anyway, I'm not really addressing that point. The point I would make, picking up on Catherine, is that we've got many factors all converging that take what had been all the talk about the potential of Asia vis-a-vis Europe and other regions including the U.S. that are reinforcing this. And I think the old [inaudible] about all the growth is going to come from Asia become more powerful in this context.

MALLABY: Okay, Rebecca?

PATTERSON: Maybe just picking up on the last thing, Adam, that you said, which I think is really interesting, you know, if this decoupling continues going ahead, which would be my base case, and my firm's base case, you know, China's seen scope to create even greater political ties regionally and kind of reinforcing this idea of a tri-polar world. So at the beginning of COVID, there was a lot of speculation that we'd have an exodus of companies from China because they need more resilient supply chains, they didn't move their supply chains. We haven't seen any exodus, we've seen some shift but a lot of the shift has been to countries just outside the region, or just outside China, excuse me. So Vietnam, Korea, Singapore, etcetera. And what we're seeing as part of this, and it had happened before COVID and its continuing, is greater foreign direct investment flows from China to these countries and greater trade relationships between these countries. And I think to Adam's point on this reinforcing the economies of Asia as we look forward, I think that's something just to keep in mind that COVID has created a lot of different shifts, but I think it could be accelerating this one particular dynamic, which is reinforcing that China's centric Asian bloc at least from an economic point of view.

POSEN: Rebecca's points, Sebastian, if I could I just want to add one other thing. Another one of these long-term trends which is the slowdown of the frontier of productivity growth of innovation in the rich countries. And so that makes but the convergence play of poor countries catching up to the rich countries doesn't necessarily slow down. So in that context, and if all the decoupling further impedes innovation and R&D and risk taking in the developed world, and of course it has bad effects on everyone, but it still means the convergence might continue for the poor countries just to reinforce.

ROGOFF: Yes, I mean I'm worried about that. I hope Adam is right. I mean, I would say I'm worried in this scenario. And it's getting back to a point Adam made earlier, we were all expecting a lot more troubles in emerging markets when this unfolded and it didn't happen. We can get into the reasons, but I don't feel confident about the situation yet. I don't know what lies ahead if policy normalizes how far. I think Fed policy actually helped emerging markets incredibly, because they have to refinance a lot of dollar debt—the corporations. And I worry that we could see a reversal of the huge progress that has been made in recent decades in the poorest economies. But, you know, clearly China, which is accounting for a big piece of the progress is, you know, hanging in there very well, but I'm not sure everybody else is yet, I'm very worried about it.

MALLABY: Operator, next question, please.

STAFF: We will take our next question from Andrew Gundlach.

Q: Good morning Sebastian, Adam, Ken and Rebecca. Here's my question—going into this crisis, there was kind of an economic experiment going on where the Republicans levered up at the top, let's call it, call it a tax cut. And then, at that same time, Olivier and others came out with this MMT [modern monetary theory] theory, that's what we were debating. And now to a certain extent, Larry Summers, I'm sure he said it before but I only saw it yesterday, put this crisis at a $13 trillion number, as I'm sure you saw it too. And also MMT at a certain degree was put to work, it would solve anything with any money that we can put out there. Now that that's happened, I have two questions. One is what have we learned about MMT as a theory and its practicality? And the second question is this, if the Democrats would sweep and you would be advising Joe Biden, if you go back to Carville that he'd like to come back as the bond market, what do you think the restraints on spending are in terms of what the bond market is willing to accept? I'd be curious to your views on that.

MALLABY: Ken, do you want to start?

ROGOFF: Well, I mean, MMT is a kind of vague concept to me. And so you know, saying we've been experimenting with MMT, I think the big difference between MMT and wartime finance is you intend to use it for a very long time. When you're in a pandemic, it makes sense to do everything possible, it's a complete catastrophe—it's like a war. I don't think there's any debate about it, which is why it's been so done everywhere over the world. If you tell everybody, oh, by the way, we're doing that forever, for anything we want to do, you will move the markets, you will move bond prices. And so you know, my impression is Biden is incredibly sensible and will, you know, choose some path, for example, raising the deficit but using longer term borrowing. MMT pushes for very short-term borrowing and fragility, which makes sense in a wartime-pandemic situation if you want to call that MMT, but I don't think is, you know, again, it's kind of vague so it's hard to disagree with. But I think you want to be more cautious, longer term acknowledging interest rates are low, but if you do all your borrowing short term, which is what printing money is, you're kind of counting on that being true forever and we're not a hedge fund. You know, we want to be around, and so I would say it would make sense to think of extending the maturity structure of data as you do that.

MALLABY: So Adam, one way this hits the policy realm potentially fairly soon is presumably that, and this links to your comment on inflation earlier, in a world where, you know, inflation remains subdued, there's no penalty for continued stimulus—either fiscal or monetary. One can go for it and provided the additional stimulus spending generates GDP growth in excess of the interest rate, which is very low, you know, you're not worsening the debt-to-GDP ratio. So there is a sense in which, you know, logically, it feels that you can't do this forever. But if inflation doesn't come back, you can do it for a heck of a long time. So relate that to the debate over a big, you know, enormous green stimulus. I mean, if you were advising a Biden administration, were to be elected with the House on its side, should it go for maximum green, federal spending?

POSEN: So you've put it all there very well, Sebastian, very tight. But picking up on the spirit of what you and Andrew post, the difficult thing which I've been calling for, for several years to no avail, is shaping the debate from numbers about how big the debt is to debate about what you're spending it on. And that's quixotic, but you've heard me say this multiple times when you've been kind enough to include me previously, because ultimately that's what's going to matter more and when the market’s not perfect in both senses, good and bad. And so, you know, you can have jumps in interest rates, which have nothing to do with merit, and you can have jumps of interest rates that maybe are sparked by real forward-looking assessment, which underscores what Ken was saying about spending the maturity and making sure your rollover risk is at that high. That's one thing that you would advise. In terms of green spending, it becomes even more critical. You want to set your green goals in terms of saving the planet, and then in terms of making the structural adjustment for current employees as safe as possible, and then, if not just literally, but safe in terms of them finding new work and new careers. And then thirdly, it's got to be about not interfering with markets and private innovation more than you have to because you need that kind of innovation. You can't just do it all by government fiat because you may end up with the wrong technology. And all that said, it's going to be about as much about regulation and taxation and carbon pricing as it is about spending. And so if you're talking to President Biden, or God willing, at present, if there is a President Trump, a President Trump with the personality traits, that you are talking with them about what needs to be done, what your goals are, and not about how much you can spend. And again, this is maybe hopeless, but that's where the emphasis has to be.


MALLABY: Rebecca, you want to add to that?


PATTERSON: I think that was extremely well said. The only thing maybe I'd add, because I don't want to just duplicate, is when we think about if the spending starts to put upward pressure on yields, what does the Fed do? What do central banks do? One thing that so far has been ruled out but certainly could come back is the idea of yield curve control. If the Federal Reserve is concerned that longer term yields are rising and could undermine their inflation goals, they certainly could adopt policies that we've seen now implemented, whether it's in Australia or Japan, for quite some time and just basically tell the market we're not letting the yields go above x. And as long as that's seen as credible, I think that is something they could employ, and I think in the scenario we're talking about is something that I certainly wouldn't rule out.

MALLABY: I mean that's fine if inflation is quiescent, but if inflation suddenly was raising, that would be difficult.

PATTERSON: I agree with that, I think inflation or a real devaluation in the currency, which would come alongside capital flight, those are two the two walls that policymakers will hit if the fiscal stimulus goes awry. I don't think we're there by any stretch, but those would be the things I'd be watching for


MALLABY: Operator, could we have the next question please?

STAFF: We will take our next question from Bhakti Mirchandani.

Q: Hi, Bhakti Mirchandani—Trinity Church Wall Street, thank you for a fascinating discussion. The demand for oil has dropped by 5 percent, which hasn't happened since the second World War. And I was curious what your thoughts were on whether this would accelerate the low carbon transition, or whether it's just kind of a temporary thing that will go back once the pandemic is behind us?

MALLABY: Rebecca?

PATTERSON: Sure, I'll be happy to try, I don't consider myself an oil expert. But you know, the fall we've seen in oil prices this year certainly is demand driven. We've seen OPEC and other countries try desperately to control supply to prevent oil from staying that those low prices we saw very, very briefly early in the year, and I think so far with some success. But looking forward, I think it's going to depend a lot on the fiscal impulse, does the U.S. pass another large fiscal package? Does that continue to support incomes which allows for spending? And then do we continue to see what kind of behavior do we see, I should guess I should say, from the large oil producers? Right now, if you just look at the forward curve for oil prices, it's suggesting that we stabilize at levels that certainly wouldn't impede demand, but aren't necessarily large enough, sorry, low enough to get new production in place, sort of, if you will, a sweet spot and I think to your question that's important, because what we've seen historically is if oil prices get too low, people go back to buying large cars, there's not as much demand for electric vehicles, there's not as much demand to move to renewables. If oil prices are in kind of a mid-range or higher, it tends to be an added incentive to go towards renewables in a very broad sense. And so I think if we can get oil prices kind of where they are or slightly higher from here, I would not see that as a major impediment towards moving towards more of a renewable world, if you will. Only if we saw them go back down, you know, another ten to fifteen dollars from here, I think that would be a bigger concern.

MALLABY: I mean, Ken maybe this fits into your original starting paradigm of, you know, oil is clearly reflecting a demand shock. But there may be a lasting supply thing, or sorry, if there's structural change is what I'm trying to say, the demand may not come back if people simply don't fly so much to meetings because they're doing the mobile Zoom and that turns out to be a lasting behavioral shift. There are things that could move or make this move durable, right?

ROGOFF: Well, I mean, absolutely. There's very little exploration going on in oil. So if demand did come back, for whatever reason, the aviation industry came back, you could see quite a move. But I think ultimately, this is something policy could get a lot better. Every economist more or less when taking too broad a generalization favors having a carbon tax. And it's just incredible that we don't have one in the United States. I'm hoping we will soon.

MALLABY: Adam, do you want to add something?

POSEN: No, I'm just nodding. I agree completely.

MALLABY: Congratulations to Adam for resisting the temptation. We should all learn from that. Next question, please, operator.

STAFF: We'll take our next question from Fred Hochberg.

Q: This is a great conversation. I mean, none of us should wish the degree of disruption we've had, but usually this kind of disruption would open up a lot of innovation in every quarter—both the energy, and social policy, trade. What do you all see as the prospects for this to be, we emerged from this with a much more innovative economy and much more efficient and effective economy as a more optimistic outcome?

MALLABY: So I'm going to, Fred thank you, I'm going to give you a question, a slight expansive twist, and that allows me to ask Rebecca a question that I wanted to ask at the beginning, which is that one kind of bright lining innovation that may have been caused by the crisis is a policy innovation and that is in Europe around a euro bond, a joint bond. Do you see, Rebecca, the European single-market infrastructure coming out of this stronger?

PATTERSON: So in keeping with Fred's optimistic question, I want to answer that quickly first before I get into Europe, which I might be slightly less optimistic. You know, one thing, Fred, that that I've been noting which I think is optimistic, even though this entire pandemic is of course a horrible humanitarian crisis, but if you're looking for your ray of sunshine or your hope, the new business applications in the United States, the last data showed it at its highest level for that quarter that we've had on record. And we've seen new businesses kind of slowly declining, the growth of new businesses for the last four years. So this is a big change, maybe out of necessity, people losing their jobs, maybe the stimulus and the low rates, to start a new business, but I think that's exciting. And historically, a lot of recessions in the U.S. have been the jumping off points for companies now that are household names like FedEx and Microsoft. So I do think there is a reason for optimism there.

In terms of Europe, is there a reason for optimism? You know, I feel like Europe this year has been a bit of a two steps forward, one step back. A step back at the beginning and that their policy response, especially on the fiscal side, wasn't aggressive enough, especially vis-a-vis the U.S. and we're seeing that play out now in a downturn that's deeper than what we're seeing in the U.S. But on the two steps forward—German fiscal easing—step forward. But I think the big thing here is really, as Sebastian was teeing up, the EU recovery fund, so 750 billion euro funds which really represents for the first time a fiscal transfer. And if you think about what makes the monetary union work, you need to have all the economies in sync so one monetary policy serves all of them. And if they're not in sync, how do you get them in sync? You could have painful austerity and/or you could have fiscal transfers to get the countries that are lagging back where they need to be. And I think this fund, in theory, will help do that. I think the question is going to be on the execution, and this is where I get a little more cautious. In theory between now and the end of the year, we have to get the European Council, we have to get all the national parliaments and the European Parliament to sign off on this. So that's a question mark to me, how quickly will that come? How much debate is needed? In theory, we get capital disbursement starting at the beginning of the year, 10 percent of the grants going out in the first half of the year, another quarter of the grants going out in the second half—that sounds great. But then we've seen historically that the countries putting these programs together have had a hard time identifying the projects, executing the projects, a lot of back and forth. Going forward, in theory, a single government could stall a project if they don't feel like it's hitting its marks. So while I do think this European recovery fund symbolically is a really important positive step for the monetary union, for me to continue to be enthusiastic and optimistic about the region, I think it'll be really important to see, does it get through on time between now and the end of the year, and how does that first three, six months go in terms of getting money to the countries in need and projects off the ground? And there I'm unfortunately a bit more cautious, actually a lot more cautious.

MALLABY: Adam, do you want to mention any ray of optimistic light?

POSEN: I think there's a lot of room for optimism and Fred's challenge to us is well taken. And the hope is that people like Fred who may be influential or have a role in the future Biden demonstration will be able to push us in that direction. I just think we have to recognize that it's not something if we were to advance and innovation, is not something entirely under our control, and most of what we can do falls into two categories. One, which Sebastian [inaudible] buy a lot of expensive lottery tickets, put money in R&D, put money in your universities, put money into training and capital, put money into direct [inaudible] of certain, very targeted kinds, like on employee licensing and non-competes and patent reform. That's more putting political capital than money, but anyway, none of which are certainly going to pay off. And they're expensive lottery tickets, but you hope that they will produce something.

And then the second thing is figuring out ways to buy off the scent and comfort people who are unemployed or put out of business without letting it take over. I mean, should we be bailing out the airlines for the umpteenth time, even though these are a lot of hard-working human beings who are being displaced, but is putting money into the airlines the right thing to be doing right now? Should we be bridge loaning all kinds of things, rather than, and this of course is one of the reasons why the main street lending program that the Fed and other related things haven't taken off, because it requires you to either make the choice that you're going to lend irrespective of prospects, or you're going to make some political intervention about which sectors you're going to lend in and not. But the thing that people like Fred and others who want the innovative response to dominate is you got to figure out the tough stuff of how to shut down and free up the capital and the labor from the industries that are still remaining—this is not easy to do in a humane way but it's got to be—confirms it.

MALLABY: Ken, the last word goes to you and then we're going to close the meeting.

ROGOFF: I mean what Adams says is very well put and harkens back to what I was saying, maybe an answer to your first and second question, that this is not a pure demand shot. We don't know how it'll play out. And hopefully there'll be some important innovation, and as an economist I might said a lot of people say that COVID just makes things that were happening anyway, happen faster—yes. It may also just make some things that just weren't going to happen, we just weren't going to get pushed to moving from one equilibrium to another, for example, the degree to which people might be working at home after this, which is probably an innovation. On the other hand, I mean, as Adam said, the political system has to find a way to, at the one hand, be you know, provide a big safety net and to help people and then the other hand not to allow the economy to ossify and it's not easy to do.

MALLABY: Okay, well, we were ending up where we began, but thank you to all of you—Rebecca, Ken, Adam. It's been a great conversation. For all the members who joined us, thank you also. This show, both in video format and transcript form will be on the CFR website,, so please check it out. Thank you and have a great day.

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