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