In Good Company with Nicolai Tangen - HIGHLIGHTS: Kenneth Rogoff

Starting point is 00:00:00 Hi, everybody. Tune into this short version of the podcast, which we do every Friday. For the long version, tune in on Wednesdays. Hi, everyone. I'm Nicolai Tanggen, the head of the Norwegian Sovereign Wealth Fund. Today, I'm in really good company with Ken Rogoff. Now, Ken is known for his insights into global finance, economic history, and for his incredible book, which he wrote together with Carmen Reinhardt, which is like a seminal book actually, and he's called This Time It's Different. He's out with a new book coming up soon, and you can look forward to it. Ken, wonderful to have you here.

Starting point is 00:00:36 Wonderful to be here. Thank you for having me on your podcast. So Ken, I think I've said once that discussing inflation with you, that's a bit like discussing the Bible with Jesus, but I mean, let's give it a go. I don't know how we can live up to that. Ken, how would you assess the current state of the global economy just now? Well, it was in modestly good shape, but obviously it's being thrown into chaos with the restructuring of globalization that Donald Trump comes with, what's happening in Europe. It's a pretty wild time.

Starting point is 00:01:19 I don't think it'd be a little bit much that it's unlike anything we've seen before. I think it feels a little like the seventies to me. Trump actually feels a little like Nixon to me, but obviously we're in for a wild ride. What are your biggest concern when it comes to the current economic policy? Well, I mean, the biggest concern is that we undermine the institutions that are the bedrock of US exceptionalism. You trust the rule of law. When the United States gives its word, it keeps its word.

Starting point is 00:01:58 I'm not saying we always did that, but certainly with respect to paying our debts, I'm concerned certainly about this view that people who believe in global trade and global integration are globalists. I'm an unapologetic globalist myself. And this fracturing of the global economy. I mean, and this fracturing of the global economy. I mean, Trump sometimes, and his people sometimes say, let's go back to the 50s. Well, we had a lot lower income back in the 50s.

Starting point is 00:02:32 Like, okay, maybe we'll have more manufacturing jobs, maybe, but things will cost a lot more. I mean, it's just a little hard to know how much of it's bluster, theater, he'll retreat. Obviously, early on, that's what everyone thought, that he was just saying this for his base and he would pull back. But, you know, that's certainly not how it's been going. How has your view on inflation change over the last 10 years?

Starting point is 00:03:05 So I have always thought inflation was in remission and not dead. And my academic papers have made this case. My colleagues across all of academics, I think, became somehow mesmerized, brainwashed by central banks saying there's never going to be inflation, nothing to worry about. That assumption of no inflation is hardwired into all the top journal papers that have been coming out. I mean, I have a paper with some co-authors that has a different idea. I think, in fact, the period where inflation was really low, the central banks weren't good going back to Ben Larson, but they were also lucky because globalization helped, the

Starting point is 00:04:00 rise of China helped. There was a general consensus away from populist policies, more or less, and that helped. They had the wind at their backs. Now they don't. And not only did they have the wind at their backs in terms of these techno factors, but the politics were leave the central bank alone. And that has been thrown by the wayside in many countries.

Starting point is 00:04:28 So inflation doesn't have to be high. The central banks can control inflation. But economists, prognosticators, opinion makers had just forgotten that inflation is a political economy problem. And if you don't really have central bank independence, that's the core of it, you're gonna periodically run into trouble. Is 2% still a realistic target?

Starting point is 00:04:57 Well, I mean, you're asking, are they gonna ever get down to 2% again? I think, what I think is they will, but we will see in the next, my book says five to seven years, but that was the, I did the final day of page groups was just the day after Trump got elected. I might make that a little faster now than five to seven years.

Starting point is 00:05:24 There's going to be another big burst of inflation, similar to what we saw after the pandemic. It's not the central bank. What's going to cause that? What's going to cause that will be another shock, where the central banks get put into a corner where they worry about recession, they worry about recession, they worry about inflation, but the pressures are going to be towards worrying about having a recession.

Starting point is 00:05:51 They're just not going to be able to stand up to the politics the way they might have, say in 2008 and 2009. Just coming back to the political pressures that the Fed is facing now? Could you elaborate a bit more on that, please? Well, I mean, the most fundamental point is that Fed independence is a new thing. Central Bank independence is a new thing. I mean, the Federal Reserve has this grand building that you see pictures of, you've probably been to. In the 20s and early 30s,

Starting point is 00:06:29 they were in a room in the treasury, a few people. This whole, they were part of the treasury. In most countries, the central bank was part of the treasury. The notion of central bank independence, which by the way, I think I wrote the first paper on just 40 years ago now. And back then, almost no one had independent central banks. It's new.

Starting point is 00:06:52 It's experimental. And there are a lot of people who are saying, well, it's had its benefits, but now that inflation's down, we don't need it anymore. It was useful to bring inflation down. Now we don't need it, which of course, they don't see that that's why inflation is down because you have central bank independence. But it's political. It doesn't have to be. It's not something that's in our constitution. I couldn't comment on the ECB really is remarkably more independent,

Starting point is 00:07:24 but I think in most countries that's not the case. Is the current level of US debt sustainable? Well, yes and no. I mean, no in the sense with on its current path, it's going to have to get resolved by inflation. It's not going to get, I think again, going back to my colleagues in the profession,

Starting point is 00:07:49 there were these people who argued interest rates would be lower forever. Larry Summers had this, I don't know if you've ever had this line in your podcast, secular stagnation, we're never going to grow again. Interest rates will be low. We're not inventing anything, everybody's getting old. And I debated this with him 10 years ago, Paul Krugman, even Peter Thiel, actually Gary Kasparov

Starting point is 00:08:15 at one time. And I've always thought that people are very short, they're looking at the recent past too much. And if you look at a longer time period, you would see that this period of low interest rates was going to go away. I think it has. And if interest rates come way down, well, any debt's sustainable if you don't have to pay interest on it. But with the level we have and the rate it's going, we're going to be needing to make adjustments. I don't think politicians have prepared people to make the adjustments. What I see happening eventually, and it'll happen together with a big shock like we discussed, pandemic, we're going to have a big inflation that's going to partly bring the debt down, but this time interest rates are going to go up a lot more. Investors were forgiving

Starting point is 00:09:12 last time to both the ECB and the Fed and others that, okay, that was an accident. We really believe you. It's not going to happen again. Fool me once, shame on you, et cetera. So I think we're eventually going to have to make these adjustments. But so far, no one's really been prepared for that. Could it be that we potentially underestimate the deflationary effect of new technology, including AI? What do you think?

Starting point is 00:09:41 Absolutely, we could. So it's possible that technology will produce an effect like globalization did, putting downward pressure on wages and putting downward pressure on prices. And that's a distinct possibility. But on the other hand, I think AI is also going to lead to a lot of political tensions, a lot of burkered displacement. So yes, there's definitely a bright side to AI, and I've been arguing that for

Starting point is 00:10:17 years. Back when I did the debate with Peter Thiel and Garry Kasparov just over a decade ago, they were arguing this idea there wouldn't be growth again. And I said, I'm a chess player. I see what's going on with AI. It looks to me like it's going to be good. What worries me is that it's going to be so fast. Humans, mankind will not be able to adjust to it. And that's what worries me right now, the potentially chaotic change that could happen with AI. We obviously see it in warfare, but we may see it in the workplace as well.

In Good Company with Nicolai Tangen - HIGHLIGHTS: Kenneth Rogoff

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