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[music] Welcome everyone. My name is Elas Papayanu and I serve as the academic director of the Willer Institute for Business and Development. The Willer Institute for Business and Development was established at London Business School a couple of years ago with the very generous support of Tony and Morin Willer, founders of Lonely Planet whose passion about the world economy was to bring more emphasis and more focus to emerging and underdeveloped countries and also to underprivileged communities. So their work as we have all seen in Lonely Planet is to bring people together and I couldn't think of a better talk and a better guest than our guest today Ken Rogoff whose work has been on international finance and international macroeconomics in some sense from the early phases of financial globalization till today.
Uh, let me turn to to Ken H. He does not need much introduction and clearly not much introduction from me. What I want most of you know him from his bestselling book this time is different where together with Carbon Reinhardt they did a very exhaustive and very comprehensive overview of defaults, hyperinflations, balance of payments, banking crisis spanning all the world going back on time. More recently, Ken H is most well known for his work on the international role of the dollar, global imbalances and global interconnections. But let me just say to someone who completed my PhD back in 2005, Ken and among all the PhD students at the time, he was kind of a role model. He had some very important work on debt restructuring and debt default. At the time, as a Greek, I thought that this research was not relevant to Greece. uh unfortunately did h then when I was studying economics all of my buddies back in Athens were asking me oh now that you're doing your PhD in economics you can forecast exchange rates and I was referring to the pathbreaking work of Ken H on exchange rate non-forcastability so I was telling let's have another drink you know this is not it's a hard job so let me just say that Ken we are very very honored and privileged to have you here today I couldn't think of a more topical uh uh period to think about your upcoming book uh your our pro our dollar your problem.
The structure today is that Ken will will discuss his book in something like 15 to 20 minutes 20 minutes and then my great great colleague and dear friend Helen Ray who herself has done pathbreaking work in international finance her early work on global imbalances the US enjoying an exorbitant privilege which I think is a relevant question from me to both of you and more recently of the global financial crisis serves as a role model not only to understand international macro but most importantly how a young assistant professor at the time Ellen was at Princeton how you can have a very big effect. So the idea is that Ellen after Kent's h presentation of the book will jump in they will engage in a dialogue and then we will open the floor for for questions. Then in the end we have books that are sold in this part immediately as you get out and then Ken will be here and will be more than happy uh to sign the book. Ken, let me thank you again for being with us. Thank you.
>> It's such a pleasure to be here. I have so many friends, co-authors, former students, uh people whose work I've read and admired. Uh and it's a pleasure to speak to all of you today. Uh, and I'm just going to give like a a little bit of introduction to this uh book that I did that uh came out uh that has been um [clears throat] uh un more timely than I could have known. Uh so the title uh of the book of being our dollar your problem comes from this episode back in 1970 when the US went off the gold standard. I actually had not paid that much attention to that as a scholar for a long time. It just the episode I hadn't re quite fully realized the magnitude of it. So to make a long story short, the US used to be really on the gold standard. You could take your dollar, the dollar actually said payable in gold and you as an individual could go get gold for it. But then in the 1930s, Franklin Roosevelt defaulted on that. uh the US defaulted on its debt effectively by uh changing the price of gold from $20 an ounce to $35 an ounce. You needed $35 instead of $20 to get an ounce of gold. That was a big deal. Um and uh [clears throat and cough] is actually one time the United States has defaulted on its debt. If you think we would never do that, uh lot of action after that.
But after World War II, a system of exchange rates was built up at which the United States was the center. Everyone, and by everyone, everyone who was globalized, which basically meant uh Europe and Japan and Canada, a few other countries, everyone was supposed to fix their exchange rate to the dollar. And the dollar was supposed to be fixed to gold. So in principle, the British Treasury, the uh Japanese uh finance ministry could take the dollars they had, which weren't physical dollars. They were treasury bills, some form of debt, and get gold. And the system went on for a long time. I won't go into all the reasons it fell apart. But uh in 1970, Nixon uh who's absolutely the closest thing to Trump uh until now, and I'm not trying to insult Nixon, but it is uh that that I think's the best parallel in so many ways. Um Nixon uh wanted to conduct the Vietnam War. Nixon uh wanted to win the election in 1972 and he did all these stimulus policies uh and he was continuing some of the things that uh Linda Johnson had done and we were we were getting inflation and the trouble is if you're fixing the dollar to gold and you're having inflation there's an inconsistency and to make a long story short at some point he rather abruptly went off the gold standard and announced no more. And the uh Europeans who back then were holding comparable quantities of Treasury bills to the trillions and trillions and trillions that the Asians hold today. They were like kind of upset about this. They knew that day might happen, but they didn't think it was going to happen soon. So Nixon sent his Treasury Secretary to Rome to speak to them and uh Canadians, Japanese, and they basically said, "You're inflating. You're going to make all our dollars worthless. What are we supposed to do? We can't. We want to have gold, but you won't give it to us." And John Connelly, who was the Treasury Secretary, was a kind of a Texas wild man uh with his own interesting past, said to them, "Well, it's our dollar, but that's your problem." And uh that spoke to me in thinking about this book. First of all, I didn't like the arrogance of it. We Americans are very arrogant, but I don't like to lean into it. I don't like it. And second of all, there was quite an irony to it because actually when we went off the gold standard, we didn't seem to have a plan for stabilizing our currency. And the 70s was the worst inflation uh that uh that we ever had. Uh and the book um we'll discuss it later uh with Elaine sort of tells the rise of the dollar up to this point which has lots of es and flows. uh I think pieces of bad luck, pieces of good luck to where we are today and thinking about into the future. I try to give an intellectual history also uh but to try to make it more readable and entertaining. I weave a little bit of myself into it in different ways. I'm not young and actually lived through a lot of these things. sometimes just as a high school student, a college student, sometimes somewhat more involved and uh I I try to weave various things to try to give uh perspective on it. I've met many world leaders, many central bankers, finance ministers and uh what they were thinking at the time. Uh the uh other reason I wrote the book was I had worked on a number of topics that I was very excited about over the last 10 years including real interest rates, China, exchange rate system where I think my views were somewhat contrarian and I I'd been pretty successful in getting the work published in top journals but because they were so contrarian I felt they hadn't really penetrated the profession. And even though I wrote this book very much to a more general audience, part of my motivation was to come back to reach the uh the economics profession.
So let me just show a few slides, say a few things. So first of all there's a big difference between I would say the focus of this book which is the dominance of the dollar it's the lingua franker lingua frank of the global financial system it's uh a lot of as we'll discuss a little bit I mean a lot of trade is denominated in dollars a lot of assets are denominated in dollars there's a lot more to it that I'll come to it's different than the value of the dollar. And this is a graph that I like. It's from the Federal Reserve, uh, which shows the, uh, one measure of the purchasing power of the dollar. I could show you what a Big Mac costs in different countries or what a Starbucks coffee costs. It actually won't look very different from this graph. This is the trade weighted dollar. And it's been it's it it went on a tear the 15 years before Trump came in. It was massive appreciation. It's only been this high actually twice in my professional lifetime. Once in 1985, once in uh 2002, and both times it fell very very dramatically. It it fell a little bit last year, but you know, nothing by comparison to what it did in previous episodes. I talk about this in the book, but it's not what it's about. And you can sort of see the difference because the dollar is sort of going like this in its value, but the whole time the dollar is still what things are priced in, what things are traded, and it's really uh somewhat uh separate concept.
Now, one thing that I think is uh uh you know kept the United States uh uh surprisingly on top to many people is that the rest of the world never quite caught up. There was a very fast catchup. This is just Europe. This is one measure of per capita income and it's it's called a purchasing power parity measure and it's it's it's one measure economists like but it there there was a lot of catchup but then it flattened out and if you look at the US's overall share of the world it stayed much bigger than we thought it would. So there are two measures here. I think the more important measure is the dash line which is the US share of global GDP using market exchange rates which if you don't take a two graduate courses is all how you would ever think of it and it's probably more natural. The other one is something that tries to control for living standards and the fact China can and India can feed a lot of people gives them a bigger weight. Uh I'm not going to be talking about that so much but the the share of global GDP the US has maintained has been astounding. After World War II was almost 40% and by many measures today it's still 25%.
So um there are many ways to measure how important the dollar is. Uh one is to look at how much of global trade is in dollars. In other words of how much of global bonds are in dollars. Uh another uh uh is to look at um foreign exchange transactions. And I actually think it's very hard with any of these individual measures to capture what's fully going on. I like this measure which comes from work of mine with Ethan Elinski Elitzki who's at LSE and uh Carmen Reinhardt um who's uh was mentioned uh earlier um where we try to ask what are central banks doing what how are central banks concentrating their policy. So in in this graph in red, in 1950 are countries which were very dollar ccentric uh orange got China and Russia which were you know off in their own world and the former Soviet block. Um uh I um I will uh uh uh and and of course Europe is in red because they were uh rotating around the dollar. Um there are a number of countries in green fixing to the pound and you could say well the pound was fixed to the dollar but it wasn't really fixed to the dollar and there was quite a distinction. You say the US had a lot of dominance but uh nothing compared to what it reached in 2015 which uh I view as sort of the peak of dollar dominance. Now I know what you're thinking. I left out Greenland on this map. I I uh I I actually have it in the one in the book and if you see it because of the way when you take a globe and flatten it out, it looks really big and you can see why Donald Trump wants it. Uh I so in our work we didn't have it. We fixed it. I fixed it in the book. But the dollars sort of colonized the whole world here at this point. the Soviet Union, China as being really the centric currency.
Now, I I want to emphasize there are es and flows in this. This is, in my view, a peak, and I actually think we've been declining since this peak. One point you'll notice is that Europe is in blue. It's not in the dollar anymore. It was the whole dollar system. It was a big big part of it on a GDP weighted average. It income weighted average is one that mattered. I sort of make that point because these things don't last forever. They go in es and flows and the my 2009 book with Carmen Reinhardt this time is different. It was very much a theme that if you're just looking at the last 10 or 20 years, you don't know anything on a lot of time series. You need to look at long periods. And that's where our sarcast ironic phrase this time is different uh came from. And actually the dollar has been in in my measure in gentle decline uh the last 10 years and a number of other measures. We could debate that uh and we'll come to Trump later.
So um this graph's sort of a non sequator but has a personal angle. Um the uh one of the advantages of being the dollar uh there are many but one that uh just dang uh coined was exorbitant privilege which was basically that the Europeans had all these dollars and the Americans could go invest and use the money to invest in Europe and do these really high return projects. And actually one of the Americans who did that was my great aunt Henrietta who came from a believe me a very low income family uh and uh was a but she had a a taste for design and she was able to produce shoes in Italy uh which he never would have been able to do and the investment was possible because the dollar was the center of the world. This is actually a um a an advertisement from McCall's magazine uh for her shoes done by Andy Warhol. So you may know that Andy Warhol started out by doing advertisements. And had she only bought this picture instead of whatever she did with her money, then she'd have really done well. She didn't. But this was this was certainly one of the things everyone pointed at uh of that it was an advantage to the United States because everybody was holding these sort of low return dollars and people were making investments.
There have been a number of competitors. I'm not going to talk about everything in a very concise 15inute presentation. Russia actually was one. You thought I I have to say one of my brilliant colleagues is Russian and he said that's and who's very young and young much younger than me and said that's ridiculous. Nobody thought that. Everybody thought that. We didn't know. The great historian Angus Madison thought Russia was catching up. The CIA thought it. The White House thought it. I give a little story from my life as a Yale undergraduate applying for a road scholarship when I was asked if Russia would catch up with the United States and I had actually lived in the former Yugoslavia. I'd been a professional chess player in my youth but I I couldn't see it and I gave the wrong answer and said no, you know, I didn't think so. And uh yeah, I didn't get a road scholarship. And so that that was a surprise to people that it didn't do well and it's actually there's a lot of commonalities with everybody who didn't catch up to the United States that a lot of the catchup had to do with heavy investment in narrow range of things even to some extent in Europe but Japan was probably the country which came closest to really competing with the United states in in 19 the mid1 1980s Japan had half the population of the United States but you know I'm sitting here in the United Kingdom which had a quarter the population of France and was completely dominant the Netherlands for a period was the dominant currency and they had less than half the population of the United Kingdom I mean it does that doesn't say anything by a number of measures Japan was actually richer than in the United States higher per capita income. It depends on what you use. This is a really remarkable one which shows the market value of household real estate. Japan is a country small slightly smaller than California, but the total value of real estate was greater than all of the real estate in the United States. I'm going to come to China a little bit later. And the stock market was worth more than the United States. These are internationally traded. This is what everyone thought. And there's this very interesting episode that happened in the mid1 1980s called the Plaza Accord where the United States beat up on Japan. But I think also Japan gave in too easily. I won't get into it, but it relates and and led to disaster for Japan. It was a terrible mistake that they gave in so completely. I will mention China has vowed never never never to do that. I'll come back to that. Um, but it's it's you know I think but for that Japan might have had a larger share of the market. Japan has nothing today. Japan is the yen is just not a global currency for a number of reasons even though its economy had been so powerful.
So I mean Europe clearly could have a larger market share. That's something we can come back to in in speaking. I'm sorry to say this, but the biggest mistake the euro made was admitting Greece prematurely. And I think the the Euro crisis would have been much easier to manage. The euro's market share was soaring many many measures. And if you've come to conferences, maybe some of you remember this back in, you know, 20 years ago, it was obvious to everyone that the euro was going to pull up to the dollar. That's what everyone thought. I I remember sitting at a conference I with your your colleague Richard Portoris declaring there's now more European debt than American debt. We'll see how that worked out. But um it it it everyone thought that the articles Jeff Franle Barry Iiken Green had papers about this and I it it's it's an example of how everybody the United States thinks it's manifest destiny that of course the dollar is on top and everybody loves the dollar but the degree of market share it needn't have reached and that degree of market share contributes to the low interest rates and it's a very important and the US's ability to invoke sanctions to spy on everyone. Think of it if there was only American Express and they won't take they'll shut you out. You have trouble making transactions. But if there's American Express, Visa, Mastercard, cryptocurrency, they can't. And so the United States dominate, you know, dominates to a greater extent than it than it would.
Um, uh, I'm coming to China now. Um, and uh one of the uh I I did a paper I I started on this 10 years ago having building on what I did with Carmen Reinhardt looking at what was going on in China and came to the conclusion that they were in trouble that they were likely to have some form of real estate crisis. That was a very out of consensus view. you know, there might be a few crazy hedge fund people betting on that, but basically very out of consensus. And I actually I discuss it in the book got the opportunity to speak to the China Development Forum which is just this I don't know 3,000 people or some massive room with the all the [snorts] CEOs and the communist party leadership except for the president. And I I discussed this of why I thought this was going to happen and you know saying I know you've been growing fast but you're in trouble. And I I was very candid and I was relieved that when I finished speaking and I came down and the one of the vice premers came up to me and said we really appreciated your remarks. I was thinking oh is that what they say just before they arrest you? [laughter] Um, but it it didn't bear out right away. It happened later and I met this amazing Chinese student who came to the US and we did a series of papers and we have a Brookings paper coming out shortly or in the next Brookings. But the fact that just blew our minds when we put it together was this figure which shows per capita housing in China versus other major countries. China's not a rich country. And what was interesting about what we were able to do was the Chinese keep everything secret. You want to know youth unemployment? Forget it. That's a state secret. You want to know what the vacancy rate is in their housing with all these ghost cities? No, that's a state secret. But they're very proud of how much they built and you can find it block by block in every city of how much they built. And that's what we did. it was even digitized and we went through and constructed this figure among other things and that sort of was the thing that u was you know core piece of one of our papers arguing that there's a problem here because this is not a rich country having this so this is China today when we first started circulating this work everyone said it was wrong even the people who worked on the topic and we had a lot of trouble getting it published which has been a story of my life with some papers. this is looking today I'm covering two years 22 is in dash blue and 23 is in red and this is the market value of housing in China the United and the United States and also the stock markets and one thing you see is the market value of housing in China is really high not disputing that but another thing you see is that the equity market's just tiny by comparison And that's comes from regulation. The fact that you can't trust the equity market in China, comes from another a number of factors. But you can see why now that it's become apparent to everyone that prices are crashing. It's a disaster in China. People are holding 80% of their wealth in housing. In the United States, it's kind of split between stocks and housing. in 2009 they both fell. But um the the fact that housing prices, which are also a state secret, they're just everyone knows they're collapsing. And we've constructed some numbers that we put together, has led to just this freeze up in consumption in China. They don't have a way to uh they don't have social security. They don't have a way to pay for education. And so, um, I I think this sort of captures one of the things going on, which is not to say, I won't dwell on it here, that the R&B isn't going to become an important currency. It's just that China won't necessarily so easily pass the United States.
Oh, the random figure again. Uh, I gave a lecture in this building in 2005. Um, I was traveling with the director of Harvard admissions which was gave you more entree to people than if I was traveling with the president. And I gave a talk at the what is this is the uh uh a the uh basically a communist party training center for top officials. And it's supposed to look like a Chinese writing table. I guess it's beautiful thing. I only mention it because it's so ironic to me that I was shocked that everyone was asking these really blunt questions which I thought you couldn't talk about things like aren't we making a mistake to peg to the dollar? Why are we doing that? Isn't that going to lead to a crisis? Why why is this going on? And I asked the person who who ran it, what h how is this that people are able to talk about it? And he said, you know, here these officials who are mayors, governors, party leaders, they're allowed to talk about anything. And writing this in 2025, as a Harvard professor, I found quite an irony in this. But uh you know, I'm sure it's changed there also.
This is from so I've mentioned China, I've mentioned Europe, I've mentioned Japan. I think cryptocurrencies are absolutely a competitor to the dollar but not necessarily in the legal economy. I don't know what I want to call the part of the economy that Trump's call controlling. But in the illegal economy, the underground economy, which is mostly tax evasion, human trafficking, drugs, all that. But a lot of it is tax evasion, regulation evasion. The underground economy is enormous. It's very hard to measure. There are many measures of it. The World Bank did a synthesis of that recently. But this is from a paper of mine with Francesco Papida who where we used value added rev tax revenues together with surveys to show a disconnect between the two country by country. And this is our estimate of the share of GDP that's underground not paying taxes. It's act it's it's pretty easy to produce yearbyear. It's actually amazingly similar to what people got looking at electricity production and things like that. I'm sorry again increase features [laughter] here. Um, my amazing colleague Stephanie Sancheva won the Clark Medal this year for the top economist under 40. She's worked on the underground economy and an expert on it. And she looked at this and said, "Oh, she's French Bulgarian. I have to throw in." She looked at this and said, "That number for Bulgaria is wrong. It can't be right." I said, "What do you mean?" I go to Bulgaria all the time. There's no way it's only 20%. >> [laughter] >> And I think well you know I'll let some of the others comment on that but uh this is certainly very significant in that the the dollar's been dominant in the underground economy and cryptocurrencies have picked up. I've done a number of papers on this actually. This is one looking at the size of the underground economy. I did another paper with uh uh uh Clemens Graph von Luckner and Carmen Reinhardt which uh looked at uh the um tried to look at uh showing that cryptocurrency was being used for transactions. I was going to put this in the book but I ultimately took it out. Might uh so we have a paper about how a lot of underground transactions are being done with cryptocurrencies and for some reason Clemens was stranded in Lebanon at some point and he took this picture for me. I didn't put it in the book. I'll explain why in a second. Clemens this was a Bitcoin shop in Lebanon and Lebanon had a financial crisis. I write about it in the book and link it to earlier events. And he just couldn't get cash. All the banks were shut, but he had some Bitcoin. So, he went to this Bitcoin shop and traded and got to know them a little bit. And he took this picture and he he couldn't figure out what was going on because it was in a very dangerous part of Beirut. Maybe that's most parts of Beirut, but it's a very dangerous part of Beirut. There was one guard standing outside the door and then he started looking at their wallet and there were transactions for 200,000 500,000 2 million and he this person's doing cash and he and then it dawned on him this is a Hezbollah bank that's that's what they're doing and I ultimately didn't put this in because even though I am pro- Israel I didn't probably want to give them a bombing target. And so I literally that's why in the end I didn't put it in the book, but it it it it just is an example of how um the things that used to be done with dollars no longer are.
So let me just uh finish [clears throat] with a couple things. Uh certainly the some some of the vulnerabilities to the dollar and why it's in steady decline is that China is gradually pulling out Asia's half the dollar block. China has strong incentives to do this. But there also problems from within. And one is that the United States uh has a very large debt problem and very little political will to do anything about it. uh not even really much of an acknowledgement of it and there's actually more US public debt outstanding than all the other advanced economies put together there's more US private debt outstanding uh and you know we are great country but when interest rates were zero which many this is the real interest rate I'm measuring it as the 10-year inflation index interest rate when interest rates were going to be zero seemed like they'd always be zero who cares he doesn't cost anything to have a lot of debt. But the trouble is that's not something you can assume would be around forever. So I actually did debates around the world that the the circled areas from 2010 to 2022 when the 10-year real interest rate average zero. And I did debates with Paul Krugman, Larry Summers, Olivier Blanchard, even Peter Teal actually, believe it or not, at one point. And I argued, you know, if you look at history, uh, we've had interest rates zero before until they weren't. And this is a graph from a pretty recent AER paper of mine, uh, with Paul Schmelzing and Barbara Rossi where we put together eight centuries of real interest rates. You can also just look at the UK and the US and similar story. And I a circle there's a circle there by what I call the secular stagnation period. Larry had been going around arguing the United States is in secular deagnation will never grow again. The interest rates always going to be zero. And it was in decline for a while but if you look at a longer period you see that it there is was a trend although it actually kind of disappears around 1900. So if you're the world's largest debtor and real interest rates have normalized, you know, you have a problem. It's not just the I'm speaking here in London. It's not just the United States where that's an issue. It's also a number of other countries. And uh you know at the same time uh military spending has been falling and falling and falling. This is a graph of military spending as a share of GDP uh which is less than half what it was when the Berlin wall fell in 1989. And this is a a familiar theme. So that's a problem. Central bank independence is a problem. I won't I won't uh talk about that. There's some people who say technology will solve the problem. There's nothing to worry about. I had this brilliant young podcaster named Georgeesh Patel come to my Harvard office. He's interviewed everybody and has, you know, gazillion followers. And his first question was, why doesn't the United States borrow at 50-year and hundredyear horizons? And I go, well, why? And he says, "Because the interest r's going to be 10% soon because AGI is coming and we're going to grow really fast and you'll make a lot of money by borrowing at 2% or 3% when the interest rates are going to go to 10%." And I that may be true. There's a lot to say about it. I won't say it here. My first response to him was um well I have people come to my Harvard office all the time usually with some dystopian theory about the environment or something like that and you're you know it's refreshing to have this very different point of view but we could come back to that.
So finally, this is my earlier book with Carmen Reinhardt this time is different which is about the history of financial crises of all types. This actually reached fourth of all books on Amazon at one point which is really improbable if you look at it. It's got 200page data appendix. Alan Blinder, he'd been vice chair of the Fed, told me, "Our book has reached the definition of a classic that everyone knows it and no one's read it." I I hope you get a chance to read it sometime. We were behind the three Girl with the Dragon Tattoo novels, which had sex and violence, which we may introduce into the next edition. So anyway, thank you and I'm sorry to have gone on so long, Elaine.
Well, thank you very much, Ken. That was really a treat. Um, and we will forgive you for being so tough on Greece, I have to say. [laughter] Um, so, you know, with Ken, what is pretty amazing is that each time you write about something, you have an impeccable sense of timing. There's a lot of things on which you have been very precient. I think you you've shown some of them, but indeed the for the former book with Carmen was written before the global financial crisis and had a lot of the issues that we all grappled with several years later. And this one, my god, the dollar, right? Couldn't be couldn't be better again in terms of of timing. What's very impressive about that book which I by the way I do highly recommend it is that it is not only an intellectual history it also has a lot of economics in it etc but it it also has these personal stories which are absolutely great and these meetings with people that we never meet but somehow you meet and also so you have all these quotes or these these souvenirs this you know memories of about these encounters And for example, you remember meeting Ardin when you were you went to Moscow, which is kind of an interesting one. We see we see you also in in Eastern Europe when you were um you might have noticed he was a grandmaster in chess as well. So he was you were in in Eastern Europe when you were about 16 or something like that, 17. Okay. Roaming around. So that's how you you learned also a lot of things about the Eastern block. And um so all this is interwoven and very naturally uh uh described. But I I was wondering you know do you really remember all all that all these quotes etc or do you make it up?
>> Well I I admit my memory is a pale shadow of what it once was. If you've seen The Queen's Gambit, there's a book she memorizes and I actually memorized that book when I was at that age. But um I mean some of it I have notes about things. I've given lectures and and stories. I actually keep whenever I meet like a world leader or an interesting finance person, I actually write notes about it. Um, I mean there were one or two things I had to doublech check. So for example I had a pretty vi when I met Juan Xi who is this you know father of modern China just an incredibly brilliant man in 2005. Talk about it in the book. I it sort of to me one of the most interesting things was that his we are greeted by these you know beautiful women in silk eleg women in elegant silk robes and it was explained to us that they were his bodyguards. I'm thinking sure, you know, and I literally, you know, had this experience of sitting like this next to someone and the person, >> they were sitting right behind us holding, you know, helping or something. Someone knocked their tea over and the person went and caught it, you know, without dropping a drop. I said, "Okay." You know, um but I couldn't remember. I thought the robes were blue, but I had to check that out. I hadn't written it down. So I I I checked that out. I mean there were facts like that but there were a lot of things where I wrote notes and I've you know followed it over the years.
>> Okay. I'm fully reassured now. So um if we um you know one of the big theme obviously of the whole book is the role of a dollar and what it means to have an international currency which fulfills all these roles that you have discussed etc etc and obviously these days we are seeing a lot of change in the structure of the international monetary system or potential changes and one of a very interesting sentence that I picked up from the book exactly about that was the greatest danger to the dollar supremacy comes from within. So can you elaborate on this a little bit?
>> So first I should say one thing which is I finished the book before I knew who would win the election. I thought Harris was monumentally mediocre and Trump is Trump. So I kind of thought there'd be some trouble either way. But also the progressives which would were already strong under Biden would have been much stronger under Harris. They don't like independent central banks. They don't even like banks. And so the independent central bank theme, which is one of the problems from within, that was going to be a problem. And they, you know, were still of the mind that debt is a free lunch and we're going to do a lot of that. And so I had a somewhat dark attitude. I was very lucky on the timing of the book though because I I did it with an academic press despite I was trying to reach a larger audience and Yale did a great job. But they sat on it after I wrote it. I finished it in October and you know basically it was ready to go pretty soon after that and they didn't bring it out till April but right after liberation day [laughter] everybody that's when Trump announced his tariffs and wrote all the crazy things on the board and everybody said how could you know [laughter] um
>> had you been advising the president secretly
>> yeah but I mean I mean of course no country has debt inflation problems that they don't cause themselves. So certainly the United States is dependent on the kindness of strangers by vast amounts are held in the rest of the world that's falling as a share of the total. There are ways in which countries are being independent but you know if we got our act together you know we could go for a long time but I I think it's not just an individual it's not just Harris it's not just Trump we have this very divisive politic very unstable um and so I you know I think that's ultimately the problem and you know gold has gone way up in value because eur the euro share of reserves has gone up despite the fact that the dollar has appreciated so much but gold's gone up in value that's a lot of the world's major reserve holders shifting into gold has been you know has been happening um sometimes people who want you to buy bitcoin say bitcoin is the new gold I think actually gold is the new gold right now so that's an expression of people being concerned These are very slowm moving things. I mean think of 10 years 20 years that this happens.
>> But if you have to pinpoint the single most important issue right now which is driving down so the the trust in the dollar what would you point to? Was it be central bank independence or would it be the trade wars the kind of erratic policies or would it be the geopolitical situation or what what would it
>> you mean the exchange rate of the dollar? No, no, no. I mean um the you know I think we can see some
>> the market share
>> some market share some unusual volatilities unusual movements of the dollar with the equity markets with the yields. So what would you what would you say is behind that? The main
>> well so there's a question of what has Trump you know has Trump been a positive or a negative? Um I think there are things on both sides of the equation and I don't think we're going to know. I mean obviously the volatility is not good. I mean there's there's no model we have that suggests that having completely unpredictable policy and I'm not just talking about the tariffs but what what are they going to do with the central bank? What are we going to do with the rule of law? Having that kind of uncertainty there's no model that you know thinks that's a good thing. Uh there's the tariffs are actually not good for business because Mory and I had this paper 25 years ago sort of on this issue that if you have frictions in the goods markets it spills over into the asset markets it if I can use the phrase in general equilibrium if you're blocking the goods it affects the finance and you you know Trump of first wants the dollar to be king, but putting in the tariffs is not not good for this. But on the other hand, there are things he's done that are probably pro- dollar. I'm not sure they're pro- humanity, but they're pro- dollar. And the number one thing would be unleashing AI. And I really use the word unleashing. I think we should have guard rails. I think all of the other stuff about Greenland and this and that's just nothing compared to not having any regulation on AI which I think is to a first approximation what he's done. He had an executive order as I understand it saying no one should worry about copyright protection. No one should worry about intellectual property rights. No one should worry about getting sued. Just go full speed ahead. And of course, data centers are a big part of the growth we've had. And part of what's bringing money into the United States, but I don't think I need to tell people here that, you know, this potentially a problem. But if you're just asking about the dollar, you know, it's probably good for the dollar. So there there's a long list of things I think he's doing that are dollar negative but you know if there's some that are particularly this one's probably dollar positive
>> on on the view on the admin administration of the dollar. So we had this papers that made the the round of Steven Miran talking about the burden of having the dollar as an international currency and do you think that's a view that is widely shared and do you understand it? Do you subscribe to it?
>> So you you had I think an important paper and of course I do discuss it in the in the book arguing that part of being the dominant currency is to take it on the chin when you have a recession and there are a number of factors that lead to this but you have to be prepared effectively to ensure everybody when there's a big recession. I won't get into the nitty-gritty and you called it the exorbitant burden I think in this paper with Pier Olivier the Trump administration
>> duty but it's the same thing
>> excuse me
>> duty duty but I'm not sure me had exactly the same view on this sorry and but the Trump administration said it's just bad that being the dollar is terrible it's just terrible for the United States it makes the exchange rate high it's gutted our manufacturing everybody's walking all over us so you pay us, you know, for the privilege of using the dollar. That that is nonsense. It's not it's 98% nonsense or sort of 2% of it's true. Um, just to say some of the reasons it's nonsense. I mean, the manufacturing jobs are being gutted because of automation, not because of just a foreign foreign competition initially, but not now. agriculture. Uh, we used to have you know 80% of our population in agriculture. Now it's just not much over 1%. The United States is an agricultural superpower but it's not producing jobs. Uh, there are many things which make the dollar high. We have a really strong tech sector, biotech sector, banking
sector. All of these things make the dollar high. Should we get rid of all of them, you know, to make the dollar low? I don't know.
But uh one thing about the Moran paper which I think people haven't paid enough attention to is it calls for defaulting on US debt. It uh calls for institutional uh institutional lenders have to turn in their money in exchange for 100-year bonds where we'll tell you what the interest rate will be and we're only going to give it to you at the end. You don't get anything for 100 years. But using the dollar is great and you should love this. And I'll I'll only say about that that uh you really think he wouldn't do something like that, you know, under pressure. I mean, of course he would. And sometimes uh what I call a hetradox policy is the right policy. But yeah, the you know, they're not talking about it now, but if a shock hits and uh something happens, I think inflation's the first thing we do. Financial repression like the Japanese did and are now suffering from is the next thing. But yeah, I wouldn't I wouldn't uh I think the Moran paper they're sort of, you know, pushing to the side, but the Treasury Secretary Scott Bessant was going all over the place talking about it at one point.
>> That that's true. And actually so talking about the Treasury Secretary and your in your book and also in your presentation you talk about the rise of cryptos and stable coins. And so I was wondering you as you know in the US there has been this approach to cryptos with very much the stable coins being pushed by Scott Bessant in particular maybe with a view of buying more US treasuries. In Europe, the ECB uh and in general the authorities have taken a completely different path emphasizing a lot more central bank digital currencies, maybe not so much stable coins, maybe thinking more about tokenized deposits. So, who do you think is going to win um in terms of you know what will be the prevalent instruments and how how is that going to be linked with the dollar, the euro, etc.?
Well, I mean, a short answer to that is I think they'll converge to very similar animals. Right now, everybody thinks who would want a digital euro? They're seeing everything I'm doing. A stable coin is freedom. They don't see anything. And the US thinks that's wonderful evidently, or at least uh the people in the Trump administration, including his family who are profiting from this, you know, think it's wonderful. But the problem is that if you can't see anything, you can't collect taxes, you can't enforce laws, you can't, you know, enforce regulations. And eventually they'll have to figure that out. They will. I They'll they'll figure it out at some point. And I think eventually there'll also only be a couple stable coins. They're network effects. They're not going to be hundreds of them. And maybe you'll have two stable coins, three stable coins in the United States. You'll have a digital euro, maybe a digital pound, a couple things. These will things will be competing, but they won't look so different because the US will figure out that it's suicidal to not have a way to control this. We We could print $100,000 bills. It would save the Treasury money. They would be really popular. There's a reason we don't do that. Nixon, who I mentioned at the beginning, actually got rid of $5,000 and $10,000 bills. We used to have them. Uh, and so that's why I think they'll conver they'll converge eventually to the same thing. That may be it may be very messy on the way to that, but the idea that the stable coins are going to crush the digital euro is I think is nonsense.
So you're saying we are not going for these high denomination notes because that would steer even more underground economy, black markets, tax evasions, illegal transactions, etc. But this is indeed, you know, what a lot of the business of some cryptos seem to be as you as you as you've shown. So isn't there a big bright future for that in today's fragmenting world?
You may not remember this, Elaine, but I think we first met at a uh CR conference where I was giving a paper about large denomination notes when the euro was contemplating having a 500 euro note, now known as bin Laden's because everyone's heard of it but not seen one. And uh I I argued this is pennywise and pound foolish. They shouldn't be doing this. Um it's a it's and I've carried that theme also. It's in the in the book. uh there's a balance. It's not that I don't believe in freedom or think the government should see everything you want to do, but a a good regulation captures a balance. We you know drugs have a useful value in medication and treating people, but it doesn't mean you want to make them free and easy to get. Uh so um it's it's a similar theme about thinking about uh cryptocurrencies.
So, uh, I I will open to to questions soon because I there's there's a lot of people I'm sure would be interesting in asking. But before I I do that, I would like also to talk a little bit about Asia and you you talked about China. >> Uh, but also currently there's a lot of things happening in Japan. uh and so given all your experience with um crisis and you know monetary policy I was wondering what's your view on what's happening in in Japan right now and what's what's how much volatility are we going to see there >>
So Japan's very important to the whole world because in some sense it's uh a prediction a forecast about where you might go down certain paths and what Japan chose to do when They had their financial crisis in the early 1990s was what we economists call financial repression. Carmen and I write about it in the book. They basically stuff debt down every orifice of the financial sector, the pension funds, the insurance companies, uh the banks, the central bank, the postal uh saving uh fund. Uh Europe's done that to a lesser extent. Europe's done that. And the trouble with financial repression is it holds interest rates down artificially. Well, you could call it artificially. That's a form of tax that's mostly paid, by the way, by the middle class and lower class because rich people can get around it. And the trouble is is someday interest rates go up like we saw in the states. And that's happening in Japan. And now a lot of uh these firms are basically actuarily bankrupt. They're holding 10-year bonds at a I'm just exaggerating, but they're holding 10-year bonds at a zero interest rate. The interest rates that moved up over 2% now, and they're worthless. The B well, they're way down in value from what they they were. And that's very hard for them to move quickly. Uh that's why the yen is so low and they're facing problems. Not everything's bad going on in Japan. It's more complicated than that. But the exit strategy from financial repression, which a lot of people say is what Europe's France is going to do. France has done a lot of it already. Uh what the United States is going to do. You know, it'll be interesting to see how it plays out in Japan.
>> Thank you. And okay, so I said I would open up, but I still have one last very self-serving question. um the uh French presidency of the G7 is dealing with global imbalances and so I was wondering what you think about the current vintage of global imbalances because obviously you were chief you know economist of the fund so you've seen the 2006 global imbalance how it played out um and you've seen the Plaza accord in fact in the in the book you talk also about 1985 and the global imbalances there and how incredible this revaluation of the of the yen was at the time. So right now we see global imbalances widening again. So all these money flowing into the US, these massive current account surpluses of China, some current account surplus in Europe and people are getting worried. So what's your what's your view on the current vintage of global imbalances?
>> Well, Elaine's leading a G7 group to answer this question. So I look forward to seeing your answer. I think they tell you something and it's a needing to figure out what it is. So, back in 2002, Mory Obsfeld and I started writing about the global imbalances. That basically meant the US was running big uh deficits and I was chief economist at the IMF and I discuss a little in the book. I was told to shut up about it but I didn't. Uh and you know many people said well we had the financial crisis but that had nothing to do with global imbalances. Actually it had a lot to do with global imbalances because the United States was claiming everyone was investing in the United States because it's just so wonderful. But part of why everyone was investing in the United States is we had very limited regulation. We weren't we weren't realizing that part of what was sucking the money in was that this incredibly unregulated banking sector and forgive me but one of the stories I tell in the book where I'm trying to articulate this difference between the official and what I was trying to say with my spoke right after Alan Greenspan. He was the chair of the Federal Reserve at a time when he was a god. Uh there's this book called The Maestro about Greenspan. He was thought to be absolutely perfect. So it's this giant room filled with reporters and people in Greenspan. Like every world TV is filming everything he's saying and I came on right after and first of all half the room left. the cameras are noisily shutting off, you know, and everything. And I said, well, you know, wait, you know, why do you say there's no problem, you know, with having this? But that was, I think, 2003 probably when I was saying it. Uh, and I think ultimately it's telling you something. I think you have to ask the question um you know what's wrong and particularly of the countries where the money the money is coming in what is going on that that's happening though in the case of uh particularly of you know Germany and China also what's wrong and what's going on it's a it's like having a fever the fever is a symptom of something and you have to diagnose what it is
>> very good well on this medical prescription thank you very much for uh this these great answers and I'm going to open up u and I will ask people who want to ask questions to really ask questions and to remain relatively brief uh and to uh also maybe present themselves. I see one question here and then another here. We're going to take batches of free question if that's okay. Ken, >> sure. >> Uh yes, please go. Go ahead. You have a mic. If we look at the um S&P returns in gold, there's been no appreciation. What so what do you think gold is telling us in terms of the confidence in investment cycles in in the US?
>> I'm just I think you know the answer to that [laughter] and you don't need me.
>> [laughter]
>> There was there were two people there. Yeah, three people.
>> So your um your chart with the uh US accumulation of debt was quite striking and your comment about the lack of political will certainly resonates like what's your best sense of how this movie plays out? And yes, the lady there just just in front of me. Yes.
>> Collectional questions. Um, governor of Bank of England recently said that net zero is limiting economic growth. Talking about UK and obviously you know Europe remains very much committed to net zero any sort of your views on what implications it has on effects.
>> Okay. So why don't we start with those two?
>> Sure. I mean I mean first on how debt plays out. I I think we're going to run into trouble. Uh so in the book I said 5 to 10 years we'd have an episode. So it doesn't work like in sorry Greece. Um you get the org or many other countries. I mean it's it's sort of you would see it in gradually rising interest rates and then a shock hits and the government takes more hetradox I'll call them measures like inflation financial repression or the Mara Lago accord u the the problem is is that the public is not interested in austerity which not only means cutting government spending raising taxes they're just not in. You can raise taxes on billionaires, but actually doesn't which you should, but that actually doesn't do much to close the gap. Apologies to Gabriel Zukman. Um, I don't think it it it's really, you know, going to solve the problem. You need to probably tax the middle class more. The United States has very low taxes. You will not get elected. You won't win a primary. You won't win anything if you do that. Both parties are like that. And that's why in many countries it sort of takes a crisis to energize things to happen. And that's what I think will happen at least more likely than not. Uh the net zero is a really interesting question. It's much deeper than certainly my book. I should say I was in I was an environment major was one of my joint majors in college. I've written about it professionally. I was at uh I'm I was at Davos last year and saw Trump uh virtually and uh I was in that time that year I was in the room when he was speaking. This year I didn't even try because he came in person. Um and you know it was a Trump Trump speech. But a moment that was really striking was when he says the US is going to rule in AI. nobody's going to beat us in AI. And you know, [clears throat] the the room, which was probably disproportionately European uh at the time, was you know, okay. And then he said, and to do that, we are going to double energy electricity production in the next four years. And I turned around and people's faces were white uh looking at this. There was fear of that. And uh it's just it's it's a you know it's a there's clearly a collective action problem here. But if the United States isn't playing ball and I think a country like India has a good excuse for or Africa they don't you know for feeling that they should be able to reach a similar level of per capita pollution as the United States and China feels the same way. And if now the United States is not only taking not taking leadership, taking leadership in the other direction, it puts Europe in an extraordinarily awkward position. And I don't know what the endgame to this is. Uh I don't think the answer is just will double down on clean energy. You've got to be kidding yourself. uh nuclear maybe but I mean it's a really interesting question of what Europe how Europe's going to respond to this move which is uh you know very aggressive in so many ways
>> pretty sobering yes uh here please and then there will be the first row oh sorry so so we start up there and then we go to the gentleman here okay Okay. Um, professor,
>> you were just in my class, so you're cheating.
>> Um, maybe a little bit, but it's great to see you here. Um I wanted to ask a question on China and um now that you know Canada has um been talking to to China more about you know electric cars and maybe there's a clear um there's a you know um China might increase its its share of world trade um as as the US you know increasingly becomes uh more protectionist and and more volatile. Um and I I was wondering if if you see um a scenario where the internationalization of the Rimi is is more likely and whether you could have that with a closed capital account. Um so yeah
>> but I mean I think the internationalization of the Reimi is coming. They have to develop their back office and their what we call pipes of be doing transactions. Modern technologies make that much cheaper and easier to establish. In 2010, 0% of China's trade was denominated in renim. Now it's 50%. That move is happening and part of moving closer to China is going to be precisely to bend in that dimension. But I don't think I mean it's hard to know how this is all going to play out because a thing I talk about a lot in the book is how part of being a dominant currency is being a dominant military power and that's the peace Europe doesn't have and the United States does and Canada's very vulnerable to that. There's a country that spends 1.1% of their GDP, I think, on defense, barely knows what's going on on their northern border. You know, it's a it's a tricky game to play, but I, you know, of course they're doing the right thing to threaten that and to negotiate it. Um, I don't approve of what Trump's doing, but I wouldn't be sure of what the endgame to this is. I really don't know. he's very unpredictable. Uh and you know, you've everyone's uh been dealing with that.
>> Thank you. It follows on a bit from that question. If the dollar is on the way down, even if it's going to take 10 to 20 years, as you suggest, can the global economy flourish without a dominant currency? Or are we in for a bumpy time? And what happens to little currencies like sterling?
Well, so what I argue is that the dollar will remain on top but king of a smaller hill is how I phrase it. Uh so euro will gain market share, the R&B and maybe some form of crypto will gain market share and you so it's not the end of that. In an ideal world, you would have one currency that's more efficient. I've seen dozens of papers on that. It's not a very hard point to prove and any kind of network economy. The problem is when you have one currency and one country controlling it, there are all kinds of ways to extract rents. I mean, Trump's doing that in a very crude way right now. But, you know, we do that through our sanctions, our spying, and many other things. And China, of course, it's intolerable. They probably want to take Taiwan someday. and I don't know where they're going to stop, but they know we'll put on financial sanctions. And I I don't talk about it a lot in the book because I, you know, try not to reveal uh too much when I have interactions with policy makers, but I'll tell you a lot of top European policy makers, it drives them crazy how much power it gives us. And I think Europe had kept falling short when they were working on developing a back office, expanding the euro. And I would think Elaine will be much closer to these things. You just have to say Greenland in one of these meetings to remind people, you know, we we just can't put this off forever. So yeah, I mean I think we'll move to a more multi-polar system which someday may end up being the dollar again or may end up being the R&B, maybe even the euro, who knows? Uh but these things move very slowly. So it's not that the dollar is replaced. It's like, you know, Google's now losing market share to some of the AI search engines and that's sort of the the you it's not a stable equilibrium, but what we've seen in the past is that it can last for many decades where you have a multi-polar world for a while.
I think we're taking the Oh, look. Okay. So, we have time for a very last question. So, uh, there's one there. Unless, uh, over there. [clears throat]
>> I was >> Oh, and and there was a lady there. So, we'll also take the lady. Sorry. Is it okay with you?
>> Yeah, it's fine.
>> Okay. So, here. And then
>> um I was interested to hear you say that that um it's suggested that a world with one currency makes more sense than anything else. But surely if you have economies running at different speeds, there's a good reason to have um different currencies and different interest rates. Um I think after the financial crisis, we people mess around with their own currencies by by printing money and changing their rates and secret inflation if you like and and it seems to work quite well keeping the peace in various countries.
I'm not sure I fully got the question, but I'll give a quick answer, which is interest rates were zero for for a while after the financial crisis and a lot of things seem to work magically, but they don't work when interest rates are positive. And so, uh, what you can do when the interest rate is zero and printing money is the same thing as issuing debt because debt pays zero. But I I don't think we can necessarily count on that again.
Yes, >> I wanted to ask a question regarding um government treasury bonds and would you say an inverted yield curve would be a sufficient depiction of a potential recession and also actually let me ask that one first.
I I mean I don't have a glib answer that historically it had been but you know we're in this situation where uh short-term rates were raised at a time when inflation expectations remain kind of anchored. So the long-term rates haven't gone up so much. I think inflation expectations are more anchored than the fundamentals merit. I I would say the chances of having a let's say a similar inflation to what we had after the pandemic but maybe longer and worse over the ne say five years is pretty high but the markets you know just put it at I don't know 10% or something of happening I think they have it low but that's why the yield curves inverted historically uh the long-term rates were high because inflation expectations weren't anchored And now rightly or wrongly they are and that's why raising the rates the long rates haven't raising the short rates that's what the central banks the long rates haven't gone up
>> very good well I think we are out of time and we have taken a lot of your time as well Ken thank you so much you have covered so much and again you know if you want to be ahead for the next 10 years you just have to read the book [laughter] you'll get food for report and a lot of clues of how things might unfold. Thank you for your wisdom and thanks [music] to everyone for participating. [applause] [music]