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Hello everyone and welcome back to Conversations with Tyler.
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Today I am chatting with Kenneth Rogoff who is one of America's best economists.
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He is a professor at Harvard and he has a new book out called our dollar your problem an insider view of seven turbulent decades of global finance and the road ahead.
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Ken also having extensive experience in the IMF and dealing with various global crises. Ken, welcome. Thank you.
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It's a pleasure to be here, Tyler.
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Good to good to speak to you. Circa, early 2025.
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The the big debate is whether there's such a thing as an unsustainable international trade balance.
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So, Orin Cass says there is.
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Michael Pettis says there is.
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Traditional theory is more skeptical or agnostic. What's your view?
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No, there's unsustainable debt.
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There's not particularly an unsustainable uh trade deficit.
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I mean, there's good things about having a trade deficit, bad things, but it's a result of many factors.
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So, no, I I wouldn't agree with Pettis uh on that.
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So, what is the mistake he and Orin Cass are making?
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Well, the trade balance uh depends a lot on your savings, your investment, these macroeconomic factors.
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macroeconomic factors. if there's an underlying problem and to be fair when your trade deficit's really negative there often is uh you know it could be something I think in the case of the United States when it hit a real peak in
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the 2005 to 2007 I thought there was a problem I must say I didn't know till very close to the event what was going on we weren't regulating well but uh yeah I mean I didn't even know what their point is to be honest um yeah I
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mean there's this uh mercantalist view I want to collect all the gold in the world we don't want to you know we want to be able to buy things you back in the day you used to have to hire an army or navy to help fight off you know invaders and such uh but you know today that's
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not so true so I I I think the current account deficit that's a broader measure of the deficit it's important and at if it's really large, you can probably bet that it might go down, but it's not something to try to wrestle to the ground. There's an associated claim I
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There's an associated claim I hear, including from Martin Wolf, that China needs to substitute more into consumption to remedy some longerterm macroeconomic imbalance.
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Now, I can see that from a welfare point of view, the Chinese overs subsidize investment and might be better off consuming more.
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Uh but is it going to boost their growth rate to consume more?
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Well, first of all, they subsidize investment like crazy.
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I mean, so investments been 40% of GDP.
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Consumption, they're different measures, but you know 50% of GDP maybe uh uh we're 70% of GDP by comparison and it's been very imbalanced.
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It's for a command and control economy and China's a hybrid economy.
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The central government plays a big role.
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Doing infrastructure investment uh subsidizing real estate is easy to do and they've been doing that for a long time and their growth has been very imbalanced.
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So everybody's been telling them for years, why don't you build up your consumption?
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But it's been hard because they don't have medical, you know, medical care in their old age.
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They don't have social security in their old age.
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They had this one child policy for a long time.
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So, you know, there are a lot of reasons everyone's had to say it.
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And now their house prices are plummeting and that's for Chinese where a lot of their wealth is.
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So, I would say it's not a bad idea to try a little bit of that, but uh they've dug a very deep hole.
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It's not easy to dig their way out.
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So, putting aside the microeconomic distortions, which macro model do you use to think through the question of whether or not China should consume more?
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Like, do you use the solo model or ROR something else?
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What's your Those are those are nice models, but I mean, let's be honest.
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I mean, they're just a piece of things.
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They do tell us that at the end of the day, uh you need to have innovation.
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If you're just growing by building more machines, by building more roads, you run into dim diminishing returns and you get less and less with the output.
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That's what happened to Russia.
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That's what happened to Japan.
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That's what happened to a lot of Asia.
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And for some reason, people thought that wouldn't happen to China.
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But their rate of innovation uh over the whole economy, I'm not talking about the highest level, has collapsed by many different measures.
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And the private sector is of course the root of all the innovation.
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They have oppressed the private sector particularly in the last 10 years.
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And so you know for them to grow again they need to restore some uh agency to the private sector.
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We're in the midst of some tariff debates right now, as you know.
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And one argument I hear sometimes even from the anti-tariff people is that if the US puts higher tariffs on China, well, the Chinese currency just appreciates, the dollar strengthens, there isn't that much of a net effect because arguably they're propping up their currency some amount.
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Now, do you agree with that?
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Well, what you said's exactly right.
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I mean, so to a first approximation, if we put on a I don't know whatever it is, a 20% tariff, it has an effect on our exchange rate of making it go up, which makes our exports more expensive and makes their goods less expensive.
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And I mean, I don't want to get wonky, but if you did it on the whole world, get you can get wonky.
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I can get wonky with you.
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Well, if you did a 20% tariff on the whole world, to a first approximation, your exchange rate goes up 10%. the dollar.
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And so, you know, that rebalances everything.
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That brings the cost of their goods back to just a 10% rise and it makes your exports 10% more expensive because the currency appreciated.
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So, that's definitely an effect.
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Um, of course, they're probably going to retaliate and then, you know, that that uh that cancels it out.
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But, do they want to retaliate?
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Don't they prefer the outcome where the tariff approaches some kind of neutrality given that they have an overvalued currency right now?
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They could have it decline, basically be insulated from the tariff, not have to worry about Trump so much anymore.
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Why should they retaliate?
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I mean, they have a lot of distortions in their economy, but the days when it was very clearcut that they had an overvalued currency, I mean, are far gone.
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I mean, uh I'm sure to be undervalued, right?
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Th those days are very far gone.
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So you're saying that their currency now is overvalued and they want to bring it down.
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They have all this producer price.
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They have all this producer price deflation, right?
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So they should be expansionary on the monetary side to have a more predictable path of nominal GDP growth, but they're not doing it.
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So probably their currency is a bit too high.
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Well, I mean, a a logical way to do it would be to do more expansionary fiscal policy, more expansionary monetary policy.
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We don't usually try to deal with producer price inflation through the exchange rate.
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I mean, exports and imports are important to China, but it's also a very big economy.
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economy. there's a lot of stuff you know like the infrastructure investment and other investment that's uh uh that's internal and and so uh sure but if they had higher price inflation the value of the renbi in real terms would fall
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somewhat at least for a while right and that would be better which means the current rate is somewhat higher than it ought to be I mean they're running a massive surplus to the rest of the world they're uh their the total size of their trade balance surplus is only 2% of GDP. It's
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It's not like 10% the way it was in 2010, but they've gotten a lot bigger.
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It's still huge compared to the world.
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So, I mean, in crude measures of if their exchange rates overvalued and undervalued, I don't think you come to a simple answer. The dollar is very rich.
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I mean, so in a sense, everybody seems cheap to the dollar right now.
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I'm sure you've experienced that with your anyone coming from abroad, even from Japan or Switzerland.
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Oh my gosh, it's so expensive here.
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Feel free to give a wonky answer to this one, but why do you think it's been so hard for economics to develop a satisfactory theory of exchange rates?
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So, purchasing power parody seems to hold only within very broad bands, something like 2x, and the rest just seems very murky.
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Why is that so difficult?
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Well, I mean, part of it is if you have floating exchange rates, there's a lot of financial factors that are hard to understand that move it around a lot.
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We're not able to easily identify those factors, but I think more and more theory and pirics has coalesed around, you know, things like bank balance sheets.
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So can banks arbitrage exchange rates and uh various pricing imperfections.
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So I think the weight of uh research the past 10 or 15 years has been that uh the exchange rate moves a lot but it's not necessarily moving around the economy with it.
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And we thought that for a long time, but I think the general view today, I mean, it isn't always true, but that a lot of the movements have to do with financial frictions and financial factors, not, you know, some gnomes controlling the exchange rate that there's a lot of random noise.
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But do you think we need a good theory of both real and nominal exchange rates to make reliable policy recommendations?
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If we don't really know what the exchange rate will be doing and why, doesn't that put us in the slightly odd position?
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That we're saying do this, do that, but the most fundamental price variable is a mystery to us.
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So, um, as you may know, I mean, I think my first important paper was showing how hard it was to explain exchange rates.
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Uh, I'm embarrassed to say it's like 45 years ago.
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And I think the policy conclusions people drew out of that is don't look at the exchange rate when you're, you know, trying to figure out what policy should be. Look at inflation rate. Look at output.
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Um I think for some countries they're so deep into dollar debt.
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They're so connected uh with the dollar and trade they do worry about their exchange rate.
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So it sort of depends on if you're talking about a big country like the United States or are you talking about New Zealand uh or something like that.
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But I mean I think generally policy makers need to recognize there's a lot of noise.
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So trying to target the exchange rate is a fool's game and that the Trump administration's trying to do it uh you know they might get lucky but uh you know it's pure luck.
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So if I take the country of Pakistan, I think it's now been through maybe 23 or 24 IMF bailouts. That's a lot. Problems aren't fixed.
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So we would all say here's ways Pakistan could improve.
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Probably you and I would largely agree on those.
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But just from an external point of view, say you're dictator of the IMF, you're the d managing director, you're the board, you're the staff.
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What is it you would actually do with Pakistan?
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I mean that's the you know the deepseated problems the military is very very powerful in the country the military is very corrupt uh runs a lot of the businesses has a lot of control so I mean it it really runs deep into the institutions and the country it's not something you can like airlift some uh expert like uh you or I and just tell them what to do I mean believe me there are a lot very smart Pakistani economists who know what to do.
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But do you sign off on bailout number 25 when that comes along? You're in charge.
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I mean uh first of all, if you don't sign off on bailout number 25, they're going to default on bailout number 24.
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You're rolling over this debt uh all the time.
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And it's, you know, very sensitive politically.
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Pakistan's a country that's very very geopolitically important.
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So you can't you can't look at the programs there as if you're lending to the UK.
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It's something very different and the amounts are small compared to if you're lending to the UK.
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But yeah, it's it's you know, frankly my what I have advised on things like Pakistan is just give them aid. Don't give loans.
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You're never going to collect the loans.
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You're not seriously meaning their loans.
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And so it sounds great to say, well, we just lent the money to Pakistan.
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But I think in general in money we're giving to developing countries uh too much of it comes in the form of loans and it it distorts what we do because we don't get them all repaid.
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How many Latin and Caribbean economies should dollarize?
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A few have right should more.
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I mean uh it's a pretty desperate measure when you dollarize and there are different ways to dollarize.
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So, uh, you know, my first, uh, when I just came into the International Monetary Fund in 2001, Argentina had dollarized.
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They had been dollarized for 10 years.
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And they said, you know, isn't this great? But that was a peg.
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It wasn't real dollars, right?
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I mean, like El Salvador, Ecuador, I mean, actually, you want to actually use the dollar, circulate the dollar because that's credible.
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And those whether you like them or not, they've all stuck, right? I mean, you can do it.
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I mean, it has its costs.
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The biggest cost is if your banking system runs into trouble, you can't bail them out.
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So in most countries, the currency that we think of the physical currency, it's just like a little piece of the animal.
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A lot of it we, you know, you might not think of your checking account or your savings account as dollars, but they are.
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That's a lot of the money supply.
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So when you say they're, you know, just using real dollars, they don't have real dollars to back those bank accounts.
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So it can work, but you run into banking crises, you run into debt crisis, and then when you're dollarized, it's it's hard to fight it. So it's it it's doable.
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It's absolutely doable, but I'm not sure necessarily it's advisable.
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It depends on the alternative.
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If a country's been run into the ground for 50 years and you're trying to reclaim territory, it makes sense.
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Why isn't it easy for a lot of countries?
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Say you're Barbados, that's a small country.
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Most of your visitors are from the US also.
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Your banking system, you can just buy external insurance, right?
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There's an insurer that can cover the Barbados banking system if need be.
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Buy it from China if you have to and then just dollarize.
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Why aren't they just better off?
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Okay, I'm being naive, but is there an insurer who's going to bail out the Barbados bagging system?
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I mean, I think our regulators would make that difficult, their regulators would make it difficult.
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I mean, you would need to have something and there's a lot of moral hazards.
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So, you really, if you're going to be an insurer, you can't just insure.
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You have to have, you know, 150 people on shore uh looking at them all the time.
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I mean, it's not easy to do.
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the only country in the world really which can bail out its banking systems, Hong Kong.
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They have enough dollar reserves to bail out everything.
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But that that's the problem with dollarization is that it's you know if you if you're not going to have banks it's great but we want to have lending and mortgages and car loans and stuff and you you know it's very easy to run into trouble.
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Why did Japan never have a financial crisis?
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So very high debt to GDP ratio.
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Growth rate is mostly slow.
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In per capita terms, it's not as bad as it sounds at first, but nothing gang busters. How have they held on?
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Well, they did have a financial crisis, the mother of all financial crises in the '9s. Oh, sure.
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But since then, and since then, well, have they hung on?
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I mean their uh in 1990 uh and even in the early 90s their per capita GDP was 80% of the United States and purchasing power parody measures you know trying to put into common price level but and in dollars it was well over 100% of the US today it's 60% in those measures I mean it has not held on in per capita terms it has just you know not had growth for a long time And they're running into trouble.
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There's per capita growth in Japan.
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Oh, but I've just Yeah, but not nothing like in the United States.
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I mean, we've Well, we've beaten every advanced economy. Oh, yeah. That's fair.
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But they've fallen behind France, the UK, Germany.
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They were ahead of all them.
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They've fallen far behind.
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And they're in trouble now because uh they're finally having inflation.
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They're needing to raise interest rates.
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They've stuffed government debt into every orifice of the economy, into the pension systems, into the banks, into their postal savings uh system, and now uh they're talking about cutting pensions, uh cutting old age benefits because suddenly they're having to make interest payments on the debt and it's hard.
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So I think people who use Japan as an example of everything's fine, you know, have their head in the sand.
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I mean, it's an example of if you're very rich, you can go down slowly, but it's not an example of how, you know, you can have fantastic economy with debt like that.
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But why do some places, say the much earlier UK, they have crises and Japan, whatever the standard of living issues may be, right?
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There's no crisis, there's no run on anything. It's quite peaceful.
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It is it is a very uh you know society which uh obviously's very high degree of cohesion and that's a tremendous strength of Japan.
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I I just have to a side mention if I can.
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I mean I I was a visitor at the Bank of Japan in the early 90s in the in the middle of their meltdown.
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although I didn't see it and I don't think anyone did at the time and I had to eat at the cafeteria every day and they had almost the same food that you had to eat and it was good but then I saw another line uh once and I asked can I go in that line and the people said oh well that's if you want a smaller
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portion I mean it's a very different society than uh than we have but they have a lot of financial repression I mean they for financial repression is going to be part of the solution ution in every advanced country where you force banks, insurance companies, pension funds to hold more debt. We've
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We've done that already and they've done it in a big way.
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It's hurt their financial intermediation.
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So it makes lending less efficient and that's, you know, part of why their growth has suffered.
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So they've done a good job doing a slow becoming sclerotic slowly, but I I hardly think we would want to imitate them, especially if we intend to compete with China.
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Is that what the European Union is going to do? Financial repression? They did it already.
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I mean, uh, but they'll have to do it again.
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They still have all these major debt problems. Yeah.
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I mean they did it big time after the European debt crisis.
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So just a simple fact about that is it used to be that say Italian debt was held in Germany, Spanish debt was held in Germany spread all over.
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Now the vast majority of the uh the Italian banks are holding all the Italian bank debt.
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Spanish banks are holding all the Spanish debt.
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Do you think that's cuz they're diversifying?
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No, it's because they're being ordered to do that.
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So they they have a lot of financial repression already.
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Uh they don't have dynamic capital markets for a lot of reasons.
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Um and and obviously they need to remilitarize now and uh you know Germany has a lot of fiscal space so they can go all out but especially now that interest rates are real interest rates are hitting a higher level.
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Uh it's they're going to have to do it.
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But I think they're going to find they have to give things up uh in order to do it because the interest rates aren't zero anymore.
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So you think they'll actually cut spending say in France, Spain? That's easy to believe.
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I don't disagree with you, but it somehow feels unimaginable to me. Yeah.
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I mean, many of the European countries actually tighten their pension systems a lot during the European crisis.
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They set it in place to take place 10 or 15 years later. Not France. Uh yeah, I do.
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I think uh I think this is a real existential challenge to the French state.
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I mean, maybe they'll come up with maybe they'll take over as the tech capital of the world.
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Maybe they'll, you know, find ways to solve their problems, but they've been free riding off the United States.
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There's no question about that.
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And now they have to spend more.
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I'm not I'm not praising Trump's policies.
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Let's let's not conflate those two things.
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But yes, I think I think they're going to find they're going to be uh they they have taxes are very very high in Europe.
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In fact, so much so that there's no question it holds back uh a lot of investment. Oh my god.
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I mean the the European Europe Europe has very few world beaters uh in terms of tech finance.
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They're the biggest companies set aside the Danish company that's Ozanek.
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They're things like Hermes, you know, Prada uh sort of lifestyle superpower stuff.
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No, I think this is absolutely an existential crisis for Europe.
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It may lead to them becoming more cohesive.
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It may lead to them becoming more more of a geopolitical power, but yes, they're going to have to make choices which they haven't had to make.
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If the nation is Italy and I think that the birth rate TFR is about 1.
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3 on average, are they just going to wake up one morning and say the whole welfare state thing was a mistake and we're getting rid of it?
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I mean, isn't that the implication?
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Well, that's a kind of strong statement and they're not going to do that.
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But, you know, if the country keeps on shrinking, the age pyramid gets worse and worse. Yeah.
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We all we all face we all face this issue and hope that innovation and growth or something will help.
23:38
Uh but yeah, I know the the uh demographics is uh is a problem and every country in Italy as you say is much far far ahead of the United States on the demographics or I mean an interesting fact is they spend a mindnumbing 15% of GDP on old age uh pensions and support.
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Now, I mean, we're half that, you know, all in and 15% of GDP.
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And so, yeah, they they they have a lot of constraints and their tax rates are very high.
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They we they're not corrupt like in Pakistan, but it's, you know, it's not Sweden either.
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I mean, it's got a lot of problems.
24:23
And just predictively, what do you think the United States will do with its fiscal position?
24:31
That is a darn good question.
24:31
I mean, looking way forward, I would just say we're on an unsustainable path.
24:37
We will continue to have our debt balloon.
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And eventually, not necessarily in a planned or coherent way, I think we're going to have another big inflation, uh, soon, next 5 to seven years.
24:51
That's, uh, maybe sooner with what's going on.
24:55
And that's going to bring it down that just like it did under Biden.
25:00
that brought the debt down.
25:02
But then the markets are, you know, fool me once, shame on you, you know, fool me twice, no, we're raising the interest rate.
25:10
And uh then we'll have to, you know, make choices.
25:13
Uh I mean, I think in the United States, a lot of the choices, I'm sorry to say it, probably point towards higher taxation because we're hardly running a welfare state.
25:24
It's not uh all uh due respects and I'm not sure I have any due respects to Doge.
25:29
Um there not that many things to cut in the United States compared to to many other countries.
25:35
So, but I I don't know what the choice will be.
25:37
I mean, I probably won't be here and you might not be either when we're making the choices, but eventually I think we'll both be here. Well, it could be.
25:47
It could happen much sooner.
25:47
I mean, uh, so but on the other hand, I mean, I I I it's hard to know what's going through Trump's head.
25:56
So I I, you know, I I presumed he was going to blow up the deficit like everybody else. We'll see.
26:03
And when you say big inflation, how big is big?
26:10
Well, I think this time it'll be.
26:10
So last time we probably had a bonus 10% inflation uh over the 2% target cumulatively maybe 12%.
26:17
I think this time it'll be on more on the order uh cumulatively over the 2% target 20% 25%.
26:28
I mean there's there's going to be an adjustment.
26:30
I don't think the debt is going to be the sole contribution to that.
26:35
There many factors you have to impinge on Federal Reserve independence.
26:40
probably there'll be some shock, you know, which will justify it.
26:43
I don't know how it's going to play out, but I I I think I know that for years people have said the US debt is unsustainable, but uh it hasn't come to roost because we've lived through this post financial crisis, post pandemic era of very very low and negative real interest rates. That is not the norm.
27:08
there's regression to meet. You know what? It's happened.
27:10
And suddenly the interest payments start piling up.
27:13
I I think they've gone uh at least doubled over the last few years.
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They're on quickly on their way to tripling going up to a trillion dollars.
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And so suddenly that's it's more than our defense spending.
27:27
And uh that that's that's really that's the most important macro change in the world that real interest rates appear to have request more towards long-term trend.
27:38
What's the most plausible scenario you can imagine where the US does not have to make any major adjustment?
27:46
I'm not saying you're predicting it.
27:48
I'm not saying you think it's very plausible, but you have to come up with something. What is it?
27:51
Oh, I don't think there's any question.
27:53
It's that the AI revolution uh turns out to uh you know just work magically much better than we you know anyone imagine that uh people like me quietly acquies to just getting transfers from the government instead of having jobs and we just you know continue to have a high income and the robot income pays for everything.
28:20
Uh I mean but a AI is absolutely the thing which is most likely you know some kind of technological change but I you know other than that the problems in our politics it's in our DNA.
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We're convinced that you know we're uh immortals and we can just do whatever we want.
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That's you go around Washington and whatever they say.
28:42
I think that's what they think.
28:44
And uh again this key thing is that real interest rates the interest rate adjusted for expected inflation and I'm looking at the long term they've come up and they're not super high but they're more like they were in the early 2000s and I think a reasonable projections they're going to stay around the level they are now.
29:03
I'm sure you know the classic Paul Samuelson paper on overlapping generations model and in that paper the real interest rate is equal to the rate of population growth.
29:15
There's other papers where the real interest rate is in broad harmony with the rate of productivity growth.
29:20
If either of those models are correct, aren't we okay again?
29:27
Well, first of all, you you qu it's a different you're if it's population growth and productivity alone, then you're losing tax dollars at the same time, you're paying less interest.
29:37
But it turns out those variables don't work so well over a longer period.
29:42
Uh I have a paper in the American Economic Review just last August about this.
29:47
just last August about this. uh if you look over longer time periods that you know just because economists think that those should be the dominant variables it doesn't turn out to work that well and all this stuff there have been a lot of papers by economists looking at the
30:04
decline it's going the real interest rate going down demographics going down productivity going down looks great if you look at a longer period there's no there there it just doesn't stand up so I think there are other factors having to do with liquidity default risk, changing nature of the production function, uh, globalization. I mean, I, you know, I think there are
30:26
I mean, I, you know, I think there are many variables where assuming there's going to be some reversion to mean is just a pretty good thing to have in the back of your head.
30:37
back of your head. Uh so so you know you know Carmen Reinhardt and I had this book this time is different very much on the theme of people just looking at five years or 10 years and think oh it's just great it's just going to go like this and I think the real interest rates an
30:54
example I would say the low inflation's another example my students for a long time just didn't believe there'd ever be inflation again I would teach it they would fall asleep I mean they I would ask you know I I remember asking me a question even to someone who was a research assistant at a big central bank. Uh explain this to me about
31:12
Uh explain this to me about inflation and she said my generation doesn't ever expect to think about inflation. We don't have it.
31:19
Give me examples of this.
31:21
So no I I I I would suspect we will have uh high real interest and by the way AI will raise the interest rate um demographic.
31:29
Well well comes up with productivity.
31:33
It it does raise productivity, but the usual thing about demographics is there less people to work with the machines and therefore the return on the machines is lower and the interest rate goes down.
31:47
But if the people are being substituted for which is new, I mean we've always found a way to reinsert ourselves um you won't necessarily even in a theoretical model like Samuelson's or Solos get that effect.
32:06
You wrote a famous 1987 paper on political business cycle theory.
32:08
How relevant do you think political business cycles have been since then?
32:12
Well, there have been a lot of papers on it.
32:15
I mean, I think there's any question every politician in the world, if they have the power, tries to goose up the economy before it happens.
32:24
I I think empirically it's overwhelming that it's true.
32:28
The question is why does it fool anyone?
32:32
Everybody should understand why that's going on.
32:34
And without going to tales, that paper was about the paradox that I know you're just making things look good.
32:42
I know you're hiding something from me.
32:44
So that you know, you're exaggerating uh how long this can go on, how much it's costing, but I'm going to vote for you anyway.
32:52
And so the you know, that's what that paper was.
32:55
it looked at as a as a signaling model.
32:59
That's getting really wonky.
32:59
But the fiscal versions of political business cycle theory, they don't have to fool anyone, right?
33:05
You do get the money and society as a whole has to pay it back, but you can come out ahead. Okay.
33:11
So there's another I'm going to just translate it a little bit from my model one that Alberto Ellis the late my late colleague Alberto Alsina did uh and and a number of others that said part of the reason debt keeps piling up is we have you know the liberal party the conservative party when the liberal parties in power they know that debt is bad but they know they can spend now and they know they might not control it in the future.
33:45
So they spend a lot and they borrow.
33:46
When the conservatives are in power, they cut taxes and build up the debt.
33:51
So there's I think that's a very powerful very very powerful theory of part of why debt builds up is whoever's in power, you know, says don't pay any attention to it.
34:01
Um and of course, you know, I I I think we end up where we are now.
34:07
In an earlier book, you called for the phasing out of currency and large denomination bills.
34:12
Do you still want to do this?
34:16
Oh, I I call out for phasing most currency.
34:19
I'm I'm not phasing it all out right away.
34:22
That takes, you know, generation. Oh, yeah. I've done it.
34:24
I mean, it doesn't take that long if people are on board.
34:28
It's very hard to run across currency in Sweden today. You're right.
34:34
They didn't even pass laws. You You're right.
34:35
you have to travel 150 km to get to an ATM machine, but it's not completely phased out by any means.
34:43
I mean, it's still there.
34:43
Um, so first of all, we've had enough inflation that the $100 bill is now a $75 bill, I'll say, to start with.
34:52
But, uh, I I think, you know, most of the world's currency is held in these large denomination notes.
35:00
And, uh, I mean, I've done further work.
35:03
very little of its used in transactions.
35:06
I think most of it is in the underground economy.
35:11
It's used, it's not necessarily nefarious.
35:14
There's drug dealing, uh, human smuggling and everything, human trafficking, but I think the large majority of it is tax evasion.
35:21
I mean, lots of people do that. Okay.
35:23
I mean, I'm not trying to be holier than thou and, you know, just say everybody who does that is evil, but I'm looking at from the government's point of view, making money by saying, "Hey, people love these $100 bills and not figuring out that they're using them not to pay taxes."
35:43
I've argued that that's pennywise and pound foolish.
35:45
And yeah, that's that's sort of the core of the argument.
35:50
But from an efficiency point of view, don't you want a kind of price discrimination in your tax system?
35:54
So say people pay their nannies with $100 bills.
35:58
They wouldn't hire the nanny if they had to pay taxes.
36:01
Furthermore, if the transaction were recorded, they'd have to worry about social security issues.
36:06
It's a lot of paperwork and bureaucracy.
36:09
Uh very forbidding for a lot of people, and you're just lowering output by not making it easy for them to pay the nanny with cash.
36:17
So I do think about that.
36:19
But the questions why we need $100 bills for that.
36:21
Um, I mean, you can pay your nanny with 20s and they'll be perfectly happy because actually the $100 bills are harder to work with, you know, uh, for them.
36:30
So, uh, no, I I think you want to have ways that you can evade the law up to a point.
36:40
I mean, marijuana is now legal in most places, and maybe the whole culture and society wouldn't have evolved if we didn't have uh if we didn't have a cash economy uh that uh you know, that could pay for that.
36:54
Uh but so I again, you know, I think it's a question of calibration, regulation, you know, where you want to put things.
37:03
Do you worry about the example of the Canadian truckers where it becomes too easy to cut off people's bank accounts and there's too much social power over a lot of people?
37:13
Well, again, um you know, I'm getting rid of the large denomination notes and not straightforwardly the others.
37:22
And so, yeah, no, we don't want to over I I absolutely agree.
37:25
There's government excesses.
37:27
the questions, you know, do we have, you know, we have we have drugs uh that uh you know, help people after an operation, but it and we want to have them, but does it want to mean mean we want to have them freely floating in the economy?
37:42
So, no, I I I think it's a matter of and and also we can phase out $100 bills and $50 bills and we can change our mind later, you know, and decide that we overdid it. I don't think we would.
37:54
Uh I think I think uh you know continue to go in that direction but um it's it's a matter of costs and benefits.
38:02
Do we also have to ban stable coins then?
38:05
Because you can make a $100 $500 transaction in stable coins and not everyone's used to doing that now but you figure within two years your AI can do it for you if need be and we're just pushing more people into stable coins. Well I you absolutely.
38:19
So in the same book I said we need to regulate cryptocurrency and there are different kinds of stable coins and it's not clear where it's ending up in the long run but um I think stable coins eventually have to have some kind of parallel uh revealability to what bank accounts have.
38:42
Not necessarily exactly the same but I know that's where we're headed.
38:44
but I know that's where we're headed. I think the regulators are pretty favorable to stable coins actually on the whole but not if they're you know being used to evade taxes and uh all kinds of regulations but the issuers can be abroad in that sense it's quite
39:01
different from domestic banks from currency uh if someone has a stable coin account you know in the Cayman Islands and they make a transaction with someone with a stable coin account in Estonia uh how much say do the US regulators really have over that Well, we don't have much say over that. I mean, we do now with
39:16
I mean, we do now with bank, you already have that the case to some extent with bank accounts and you know, you can uh you can mitigate the problem. You can't eliminate it.
39:27
I mean, that's generally true of cryptocurrency.
39:31
Um, you can, you know, try to try to regulate it.
39:34
You can't completely eliminate it.
39:35
I mean probably a lot of sanctions evasion is being done with stable coins and cryptocurrency and clearly we have not been able to touch that.
39:47
Should the US issue you know a CBDC a digital coin? Let me put it this way.
39:52
I don't think we should be the first to try this. Right now we're on top.
39:58
I mean I kind of think we peaked but that's another question. We're winning.
40:04
Why do you want to change the rules of the game when we're winning?
40:07
Because it's not about the currency.
40:09
It's about treasury bills.
40:11
It's about the interest payment.
40:11
It's about market clearing.
40:13
So, and also we're so big.
40:16
I I pro we probably are more likely headed towards having competitive stable coins which are regulated, which have some kind of lender of last resort uh than a than a CBDC. I I'm skeptical of that.
40:31
And uh you know you you put yourself in a position where one screw up you know can paralyze everything.
40:39
And it wouldn't be good if we had five stable coins and one of them had a problem.
40:42
But uh I I tend to think that's something for uh you know Latvia or Singapore to try and not necessarily the US.
40:51
Maybe in 50 years to be fair Europe's talking about it.
40:56
But but they're talking about what we call wholesale CBDC which is among the banks and that's a completely different animal.
41:04
A standard macro puzzle today we had a disinflation from postcoid inflation. It went from 8.
41:11
9% to something not too far from 3% and there's no big recession.
41:14
How do you interpret that?
41:19
Well, rational expectations people right that it was credible and we just did it or the people who say it was all supply shocks.
41:26
Are they right or it's a big puzzle to me? What do you think?
41:31
Well, I I think it is a big puzzle is the first thing to say.
41:33
I mean, I'm not going to claim I thought that was going to be painless bringing the inflation rate down.
41:39
I don't think I was out there quite at the Larry Summers level banging on the table, you know, saying that there had to be a big recession.
41:45
Um I certainly do not buy the idea was all supply shocks. That's just nonsense.
41:50
So there are these people who say, "Oh, it was just the supply chain.
41:54
Uh you know, we couldn't have uh the shipping lanes were closed and all that stuff."
42:00
And as soon as the supply chains were back, inflation was down. Excuse me.
42:04
The supply chain uh problems make the price go up.
42:10
When they go away, the price should come down. It did not.
42:12
should come down. It did not. And so there clearly was you know uh even in even in countries which didn't do as much macro stimulus as we did they did a lot and they all of course kept their monetary policy easy but uh yeah I I
42:29
mean the credibility is rem it's it's remarkable I mean if you look at inflation expectations they moved a little bit I mean I'm talking about the professional the the the uh consumer ones moved a little more but considering what just happened that inflation expectations didn't move more. It's It's remarkable.
42:48
And to come back to the earlier point about solving our debt if we ever have an inflation, I don't think that's going to happen again when we have a second inflation that time.
42:56
That time the credibility is really going to be shot.
43:01
What else do you think of as an unresolved puzzle in macro besides the disinflation?
43:09
Um, boy, that's a really good thing because I think about, uh, I think about, uh, research questions all the time.
43:16
So, uh, it's certainly been very surprising to me, uh, of how much bank regulation has created all these arbitrage issues across things that didn't exist.
43:31
like in uh my I I I'm I'm not sure this completely unresolved but you know when I was doing my book with Mory Obsfeld we thought of uh what we call covered interest parody as just you know something that holds like you know law.
43:48
In other words, if you borrow in one country and you borrow in another country uh uh and but do some kind of forward contract on do it you get the same interest. It's not true anymore.
44:01
And I think there's just a range of these puzzles that have come up uh since the uh since the crisis.
44:06
I suppose uh I suppose another one uh would be um you know what kind of inflation rate do we really want to have?
44:17
There's a lot of debate about that.
44:19
There are people who say uh it shouldn't be 2%, it should be 4%, some p people it should be 0%.
44:24
I think that's a big question.
44:27
Um, do you have any guess on the covered interest parity issue?
44:32
Because that bugs me all the time.
44:34
Do you think it's an institutional friction or there's some kind of unmeasured risk that we're not seeing or picking up or something else?
44:41
I mean, it seems to be that the banks are prevented from undoing it that we have uh some of these regulations for example uh that just restrict the size of your balance sheet.
44:53
And the banks used to just be able to freely borrow and lend and undo things.
44:58
So you'd borrow in one currency, lend in the other currency, and that's it.
45:03
That's how you'd undo it.
45:04
But there's there's just been a range of uh puzzles like that.
45:09
And of course, the biggest puzzle is productivity.
45:11
Like if I go to a country like the UK, how do we get productivity?
45:16
And exchange rates are still a puzzle.
45:18
I mean, you asked a question about it before, but we don't have a good, you know, fully satisfactory explanation of them.
45:25
You'll be doing a book tour in the UK soon.
45:28
Why is their growth, their productivity growth been so slow?
45:32
Again, we all might admit this is a puzzle, but it surprised me.
45:37
They have plenty of science.
45:37
They have some great universities.
45:39
They played a key role in developing vaccines, uh, other innovations, and they seem entirely stuck. Yeah.
45:49
Um, well, I mean, it's been a generalized problem in in Europe, although you think they've been doing better.
45:56
I think, uh, part of it is this sucking sound of the United States with the brain drain that we have.
46:02
You and I both know about Deep Mind, British company, you know, ends up in uh, California.
46:11
And I think there are many examples like that where when something goes well the US uh sucks them off.
46:15
You know probably they have this profound problem of the north and the south.
46:22
The south is rich and the north is poor and they just have not been able to figure that out.
46:29
So that you know if you go to London they're doing great and they're still doing great but they've had trouble finding jobs that the manufacturing jobs are going.
46:38
They haven't figured out how to substitute for them.
46:42
The US has had the tech revolution.
46:45
I mean, if you took that away, we don't look so good anymore.
46:51
A lot of countries don't seem to have a sucking sound problem, though.
46:55
So, the talented people in Northern UK, go to southern UK, but you look at Germany, the Netherlands, you don't see the same thing happening in those places.
47:05
Is it because London is so good that the country as a whole grows more slowly?
47:09
Is that a kind of curse for the aggregate number?
47:12
It's still the case that uh those countries have hardly been, you know, uh models of dynamism, Germany and the Netherlands.
47:22
They, you're right, they've been able to keep people more uh partly because they're not English- speakaking.
47:29
But again, a lot of the difference in how we've done is our tech sector.
47:34
That's been a lot of the innovation uh going through the economy.
47:38
And I don't want to sound like I'm drunk with what's going on with our tax sector and how it affects other things, but if you took that away, our numbers would look like theirs.
47:51
Is Malay going to make it succeed in Argentina?
47:53
What does it depend upon? Well, I hope so.
47:56
I think he's the best chance that Argentina has had in a long time, which is, you know, a very low bar uh fair to say a very low bar.
48:04
The thing that he's done that I have not seen before is balancing the budget.
48:10
If you're a big borrower and you keep defaulting, sort of a starting point is figuring out how not to have to borrow money.
48:19
And uh he's he's managed to do that.
48:22
I mean, I don't know that all his uh libertarian visions necessarily will come to pass.
48:28
come to pass. uh but uh no he's provided some stability bringing inflation down but I mean it's so s Argentina as you know was one of the richest countries in the world by any measure at the turn of the 20th century you know 1900 now
48:45
they're lower middle inome country their per capita income's below Brazil which is hard to get your head wrapped around uh so I mean I think uh there are many reasons but certainly you know paranism Socialism has not done well by Argentina. But h has he balanced the
49:01
But h has he balanced the budget?
49:04
I know he announced a balanced budget, but this is April 2025 and they just borrowed $20 million from the IMF.
49:11
It doesn't sound like a very balanced budget.
49:13
Well, I mean, it's counting the interest payments on the IMF.
49:15
And uh yeah, I mean, he inherited this big debt.
49:23
They're paying the interest.
49:23
It's very low interest on the big debt.
49:25
And I don't know how that's ultimately going to get resolved.
49:29
I mean, they have a lot of problems ahead, but you know, there's a lot of strength in Argentina if they can grow again.
49:36
I don't I don't want to sound, you know, panglossian about Argentina, but goodness, they had inflation of 200% when he took over.
49:43
Uh the economy was in freef fall.
49:47
So, um, look, you know, there's no magic wand you can wave over the, uh, last 80, 90 years of Argentina and make everything right.
49:59
Okay, some chess questions.
50:02
Once a grandmaster, always a grandmaster.
50:05
So, you can't just say you don't know.
50:06
Is Gash the next dominant chess player or will he be first among the equals?
50:12
Well, he's not even nearly first now even among, you know, others.
50:17
I mean, there's a number of Indian players who are very good.
50:19
I I wouldn't put him ahead of Nakamura or Carowana, uh, much less Carlson, but he's ambitious. He's talented. Um, I wish him the best.
50:31
I mean, uh, it's wonderful that he won, but I mean, he's got a long ways to go to beat Casper, Fischer, Carlson.
50:38
It'd be fabulous for chess if he does that.
50:41
Uh, you know, I I don't see it yet. Do you?
50:45
Well, Nakamura Carowana in five years they'll be out of the scene. Maybe before then.
50:50
Carlson is already in a sense out of the scene.
50:53
Uh I think he has a 30 or 40% chance of being not a truly dominant player, but say the way Anand or Kromnik were at their peak.
51:04
You know, one of the top two or three very consistently and world champion for some number of cycles.
51:08
Not the way Kasparov was, but something quite impressive.
51:13
I mean, well, I mean, be fantastic. Yeah. Yeah. Okay.
51:15
I thought you were asking a different question when you said not the current dominant, but is he the next? He he could absolutely.
51:22
I mean, Anand and Kramnik were amazing and he could absolutely do that.
51:26
I mean, he's close to having done it if he m he'll have a much more difficult challenger next time, I would suspect.
51:33
I mean, Ding is an uber talent, the person he beat, but clearly had all sorts of mental uh problems in the match.
51:43
I mean, he's been depressed and you could see him sort of losing it in some games.
51:50
What were your impressions of Bobby Fischer when you met him?
51:54
Well, I mean, he was uh you know, amazing.
51:57
Uh first of all when I met him he he uh came every day to the uh 1969 US Junior Championship over 10 days and he sat and he analyzed with us and the first thing we just thought what's he doing with us?
52:11
Why is he wasting his time with us?
52:12
We just thought he was so generous.
52:14
Um but obviously um you know his absolute intensity, his commitment, he I don't know if you remember, it's hard to hard to imagine, but he actually used to be weak at rook endings.
52:27
Weak for somebody like that. Yeah.
52:29
So he locked himself in a room for 3 months and did nothing but study rook endings and got to be very good. He got a hotel. He told us about it.
52:39
Got a hotel room, you know, with no no view.
52:42
And uh and then, you know, certainly some of the ideas he showed I I I I still think about.
52:49
I I won a game and he went over it with me against Steve Spencer.
52:52
It was the last game of the tournament which I won and uh he showed me his ideas as a I hadn't thought of any of them, you know, it was just the his fertile I don't know if they were better to be completely honest than what I played.
53:09
I mean, of course, he's much better than me, but I mean, just the imagination of there was this and we're talking about on move four, on move five of just things that wouldn't occur to me.
53:19
And part of the Fiser legend was that at least supposedly he was the greatest over the board analyst of any chess player.
53:30
Well, Gary Kasparov was no fool and same as Cas same as Carlson. I mean, I don't know.
53:36
But he was he was a staff.
53:36
He was way above everybody in his generation.
53:42
He did not have the prep that the Russians had. He worked on his own.
53:44
He was not working with a team.
53:47
the Russians had all this communication and coaches and everything.
53:51
And by the way, you know, I was representing the US in the World Junior Championships and things like that.
53:57
It was it was a big disadvantage that you didn't have a trainer, a coach, you know, organizing information.
54:03
Fischer was doing that at the highest level.
54:05
So, he must have been by far the best over the board player uh then. but not a player.
54:10
I mean, just someone if you would sit down with them at the board and show them your game.
54:16
The claim I've heard is that Fischer was a more astute analyst even than Kasparov.
54:21
Kasparov might have been the better player, but just willing to put his entire mental energy into over the board analysis sitting there. I think that's legend.
54:30
I mean, it's part of the legend.
54:33
I I mean, he was amazing.
54:36
So, so I I've uh I played against really all the top players then uh with the exception of Spasi and uh you know they were they were all phenomenal but they weren't all equally good calculators.
54:51
So, uh, the best calculator I ever played was actually a Yuguslaw player reached second or third named Lubie, and he beat me. I don't know.
54:59
I was 16 years old, and uh, to try to salvage some ego, I I said, "Well, what did you what if I did this?
55:08
What were you going to do?"
55:09
And I showed him my best.
55:09
I thought it was just like a great variation.
55:12
I don't remember how long, 10 moves. And he goes, "Mhm. Mhm.
55:16
Yeah, but then I do this. Actually, it's this.
55:20
And he goes something 15 moves.
55:22
And I I never played Fischer.
55:25
He wrote an article about me once, as you know.
55:26
Um, but I never played him.
55:29
But of course, I could well imagine it would be the same.
55:31
But I'm not sure I could tell the difference with Kasparov Carlson, uh, you know, at that level.
55:38
When Magnus spoke with Lex Freiedman, he drew a distinction between players who were incredible calculators.
55:45
He called Gukesh one of those and players who were incredible with evaluation and he called himself one of those.
55:51
He thinks he's actually not the best calculator.
55:53
Do you broadly agree with that distinction?
55:57
Well, I think I think it's an interesting question.
55:59
It's funny because I've seen him write about Karpov, who I did play, uh, and he said, "I don't know how Karpov does it.
56:05
He just knows where to put the pieces.
56:07
He just knows where everything goes, and he's not having to calculate like I do."
56:13
And between his great nemesis was Karpoff.
56:16
And between the two of them, he was the calculator.
56:18
And Karpoff was no slouch, but uh Kasparov was better.
56:20
I think maybe as Gary gets older, you know, I mean, your comparative advantage as a calculator is probably at your peak at a younger age and Gary, you know, developed other tools.
56:33
But I mean, he was really good at both.
56:36
Uh, so I but I I would have put Kasparov as a calculator, like a fierce calculator.
56:44
Now, you must have been out of practice, but I believe you drew Magnus in a game of speed chess in 2012.
56:48
Is that the correct year?
56:50
Yeah, it really it really happened. Uh, how did it happen? What's what's the story?
56:55
Well, sort of what I tell people is if you were a professional golfer once and you play three holes with somebody, anything can happen.
57:06
happen. uh you know the law of large numbers but you know going more into it uh he led me up white we played a Ruy Lopez Spanish opening which he had been playing all the time he he played a variation I looked I hadn't prepared I mean it's just what he was playing all the time did he play the brier like he used to do he played the brier no that's right he
57:26
played the brier and I didn't I didn't even know that he played it at the time I mean he played a lot of things I didn't know he was playing that and you know so I knew where the pieces I didn't c I mean I knew what I was trying to do and where the pieces go and at one point he you know he made an overly aggressive move that just was a big mistake and uh I saw it and I got a winning advantage. It wasn't an easy winning advantage. I'm
57:53
It wasn't an easy winning advantage.
57:53
I'm convinced that if he had continued the game, he would have won, but at some point he had a choice of repeating moves and he he was losing.
58:02
Uh, and so, you know, he just repeated moves.
58:05
I mean, you know, I'm not saying I would have won.
58:09
I think I would have lost if he kept playing. But it just happened.
58:11
If I did it 10,000, 20,000 times more, I don't think it would happen.
58:18
What do you think of Fisher Random is the future of chess?
58:20
Because that seems to be what Magnus wants.
58:22
I don't like it, frankly. But what's your opinion? I'm with you, Tyler.
58:25
I mean, I I mean, I can I I take joy from classical chess.
58:31
I love watching a beautiful uh classical chess game.
58:34
I can relate to it, you know?
58:37
I I mean, I'm hardwired to think about it. And Fisher random chess.
58:41
I It's a little bit like looking at problems.
58:43
I respect chess problems, but the positions are often weird and improbable.
58:48
I just I just have trouble relating to Fisher random chess. I hope I change.
58:54
I'm just speaking from my age, but I'm so invested in classical chess. I love classical chess.
59:00
I think about classical chess all the time that um you know, I don't know why don't what's your what you why don't you like it?
59:11
With classical chess, not every game, but most games I feel I can look at the board and have a decent idea what's going on.
59:18
And I might be wrong, but even then I can figure out expost why I was wrong.
59:22
With Fisher Random, I I don't have that sense unless it evolves back into a classical lookingike position.
59:29
So from a spectator's point of view, why should I care?
59:31
That's how I would put it. Yeah.
59:33
I I I mean, we're on the same page on that.
59:37
But on the other hand, uh you mentioned Gesh and the computers have just dominate the preparation.
59:44
That's why Carlson stopped. Yeah.
59:46
How are we going to solve that problem then if we don't do Fisher random?
59:49
What is your proposed solution? Because I have one. I'll tell you mine. Tell me yours. Tell me yours.
59:53
That we randomize the first few moves of the opening.
59:58
So some percentage of games through computer randomization would be like 1 B6 and then they start playing.
1:00:06
But you do that with many permutations.
1:00:08
They're all playable positions.
1:00:08
As you well know, no grandmaster game would go 1 before 1 B6.
1:00:13
But there's no reason why you can't play from that position.
1:00:15
And if you have 500 opening alternatives like that that the players don't control, I just don't think they can, you know, prep that much.
1:00:23
The Berlin, the Marshall, the whatever, all these force draws, I think they actually have to play chess. I I love that idea.
1:00:28
And yeah, it creates some randomness and what initial positions you get, but I I love that idea.
1:00:35
I mean, that that sounds much better to me.
1:00:37
I would much you know I have to say as a player I played like that because I I was very isolated in the United States.
1:00:45
I wasn't following all the opening innovations.
1:00:46
So I played all kinds of openings to be unpredictable.
1:00:53
But it if everyone does it, it's easier to do.
1:00:55
It's like every game is between two Ken Reagan is one way to put it. Yeah.
1:01:00
No, no, I I I I like your idea.
1:01:00
I think it's a great idea. I endorse it. Thank you.
1:01:06
Final question for you for our listeners.
1:01:08
Uh your book's coming out.
1:01:10
It's on very important issues of currencies, international trade, international finance.
1:01:14
It draws upon a lifetime of your learning and practice and advising.
1:01:19
Uh what is it you think you'll do next?
1:01:24
Well, I have a lot, you know, like any academic, I already have my next few years of projects.
1:01:30
Uh some of them, frankly, you know, grow out of the book.
1:01:35
Uh I I think people forgotten about political economy.
1:01:37
They just think, you know, if the central bank says the inflation rate's 2% on average, it'll be 2% and we go home.
1:01:44
And I worked on that early in my life.
1:01:47
I wrote the first paper on why you should have an independent central bank.
1:01:50
independent central bank. and uh in uh I'm working on it again admittedly with some very talented young people including uh Marina Hock at Yale and Pierre Yarrett who's at Colombia but now actually on the council of economic
1:02:07
adviserss and just thinking that no the political pressures are important so that's that's an important topic uh I'm also working on China it's an area I've been working on for a long time uh so I have some thoughts about uh compar comparing China and Japan for example. But I have a lot of things I'm excited
1:02:24
But I have a lot of things I'm excited about.
1:02:26
The part of what was so great about the book is I had sort of I would describe a mini renaissance in my research and I'm able at least I feel that way.
1:02:37
I mean I don't know if the rest of the world thinks that but it it gives me joy sort of to have some confidence about you know some of some of the ideas although as you say there's much more to it.
1:02:47
Again everyone, Ken's new and excellent book is Our Dollar Your Problem.
1:02:52
Ken Rogoff, thank you very much. Thank you.