Transcription
The IMF has great experience dealing with turbulence. You know, there was a period when you had the end of Bretton Woods going off the fixed exchange rate to the dollar and the dollar to gold. That change happened and the IMF adapted. And we are obviously now in a world with big shifts in terms of how countries work with each other. The IMF has always functioned as trying to do the art of the possible, which is do the best you can given the constraints. And done it very successfully. So if ever there was a time for this institution, it's super important that it has the ability to bring different countries together around the table, good discussions to happen on the economy, on the outlook. Again, very vital institution for the world.
Do you see a risk that it doesn't survive, though, at a time when funding is really in question in a lot of major economies? We've seen China go it alone. There have been questions about the United States. Firstly, the IMF funding structure doesn't rely on any budgetary support from any country. So it's in a very strong place because of that. And everything we've seen so far points to all the members wanting the IMF to continue functioning as it has. We work very closely with the US administration that that engagement is going extremely well. But we're also the other 190 member countries that we have. So as of now, lots of support. Of course the environment has changed and the IMF is going to adapt to it in this new geopolitical environment that we have. But it has a lot of experience dealing with these kinds of events.
One thing that you've done during your tenure at the IMF is really study the change in the geopolitical relationship. You've talked a lot about that, including the reliance on the dollar. And that's been a point of big speculation of late in markets as well. How much you actually seeing worldwide nations try to shift to alternatives from the greenback, this idea of insulating themselves from some of the policy uncertainty that has made a lot of headlines this year. So we do see small shifts on the margin. We are seeing countries diversifying out of the U.S. But again, on the margin, because they were so exposed to the U.S., several of them are hedging against the dollar risk. We're seeing some of that too. But I think the narrative that somehow something has dramatically changed about the behavior of the dollar, it's really too early. People point to the correlation between what's happening with long term bond yields and the strength of the dollar and saying, well, that's changed and therefore something has changed dramatically. That's not the case if we take a long enough period. The relationship between the dollar and borrowing costs is, you know, there's it can move in different ways. So there's nothing unprecedented. But, of course, these are still early days. We shall see where all of this shifts in the global economic order are headed. And I think that's the source of tremendous uncertainty that's still weighing on the world economy.
How much has any perceived loss of Fed independence changed that? And we've been talking about how there's this dissonance between the commentary by a lot of analysts and economists about the fear of some sort of loss of independence and then a lack of market reaction that you would kind of expect the other side. Are you seeing any shifts that maybe are less visible? I think everybody agrees, and this would be markets and economic professionals, policymakers, everybody agrees that central bank independence is critical. Monetary policy independence is critical. So if we are not seeing much market reaction, it must be that people think that, well, that independence is still intact, that independence has been critical to bring down inflation from the high levels we saw post pandemic inflation expectations are anchored because of that inflation came down. So I don't think there's any ifs and buts about that. It must be that everybody still believes that independence, especially operational independence in terms of setting lottery policy rates will be maintained.
So you reject the idea that the markets just somehow ignoring a reality or something like that, you think the market's speaking and that we should listen to the market? Well, I just think that everybody at this point is functioning and the fog of uncertainty. I mean, there's really a lot of information thrown out there separating the wheat from the chaff. It's not that easy. And so I think everybody is on a wait and see mode. And right now, at least, of course, I think that the markets are putting very, very low probability on any big negative event that may be excessive. I think that is more to worry about than what the markets are showing right now. But again, we should have to wait and see.
Let's put some of these things together. If you look at developments in the U.K., in France, the inability to address fiscal concerns and find that additional fiscal space, the latest developments here in America as well. Are you witnessing, do you think, we're witnessing a convergence between the kind of dynamics we typically see in M with Diem? And do you think those terms are useful anymore in quite the same way? I think we have certainly moved away from the case of advanced economies. Rich economies can keep increasing their debt, which is what's projected to happen, and there's not much to worry about. I think we're certainly past that. Major economies are beginning to worry about what's happening to their eels. You're seeing that is a major concern for us right now as we speak. But even in the US, long term yields are basically back to pre GFC level. We are away from that world of big global savings, away from the world of central banks buying large amounts of government assets. So I think it would be really complacent for any government, rich or poor, to say that, well no, our debt will always be bought. And I think one point I want to make is that we talk about resilience for the global economy, which has been really the, you know, the positive of these last many years despite all these shocks. But we should recognise that the reason we've seen resilience is because we haven't had a financial crisis, despite the pandemic, despite words, despite geoeconomic fragmentation, despite Fed rates going up very sharply, we've not had a financial crisis. That doesn't mean that that will never happen. We have very high levels of debt around the world. I think bond markets are, you know, in a fragile place. You have valuations in equity markets that are sky high. So I would say tread carefully, because if you do have a financial crisis, we know those the scarring that comes from that is long lasting.
And when you talk about a financial crisis, some people were wondering what could potentially trigger it. Are you saying that the sovereign debt market of developed markets is of the greatest concern at this point? I mean, usually when you get a financial crisis, it's a combination of events that can trigger it. Right. And so if you have multiple markets that seem to be in a vulnerable position, you could end up with a negative event rate. And so the bond markets, what you're seeing with very high levels of debt fragility associated with that equity valuations that are very high. Yes, there's a promise that maybe I will truly transform the world. But as we know from the dot com bust, even a technology like the Internet that did transform the world went through a boom bust cycle. So that combination. Non-bank financial institutions, they have we've never had a crisis. Well, they've been as large as they are right now. The amount of corporate borrowing that's happening within the IFIs much higher than pre 2019. So there's a lot that looks stretched at this moment. And at the same time, I think the world economy is gambling with all kinds of new policies. So I would say tread carefully, make sure that financial supervision and regulation is continued, see what needs to be done with the IFIs, what's the appropriate level of supervision and regulation that's required over there? All of that is going to be very important.
So you're leaving the IMF and you're going back to Harvard University that you've known very well. What are you going to be doing there and how important is it for you to really get this sense back in the economics profession of pure research and true rigour versus some of the politicization that we've seen recently? So I think the reason that the economics profession has been able to contribute so well over these last few years is because in the face of unprecedented shocks, you really need to go back to some of the your training to figure out how you're going to respond to a pandemic that you haven't seen in 100 years of war in Europe. Right. So having that base of knowledge is very important. But at the same time, I think the economics profession has to recognize that there is something of a trust deficit, especially with, you know, mainstream economists. And how do we get all of that, this broad consensus in the economics profession, that open trade, central bank independence, super important, those are the crown jewels for good economic policy, and yet the policy direction is away from that. So I think there is absolutely some bit of soul searching, some bit of stepping back and asking yourself, how do you solve this trust deficit? How do you make sure this in this new world of communication, that the good ideas still come through?