Odd Lots - Why a Strong Dollar Causes Most of the World Major Pain

Episode Date: July 1, 2019

The vast majority of global trade is still denominated in U.S. dollars, making cross-border flows about currencies as much as manufactured goods. On this week's episode of the Odd Lots podcast, we speak to Hyun Song Shin, economic adviser and head of research at the Bank for International Settlements. He talks about why a weaker dollar amounts to looser financial conditions for much of the world. He also gives his outlook on the global economy and the state of credit markets. See omnystudio.com/listener for privacy information.

Thanks for listening to Odd Lots. Follow the show on Amazon Music for more future episodes or just ask, Alexa, play the Odd Lots podcast on Amazon Music. Hello and welcome to another episode of the Odd Lots podcast. I'm Tracy Alloway. And I'm Joe Wisenthal. Joe, do you remember you wrote something, I'm guessing it was a year or two ago, but you basically wrote about how finance was sort of ground zero for de-globalization. and a trade war. Do you remember that? I don't remember the specific thing per se that you're talking about, but I feel like this has been a reoccurring theme for us and a couple of things I've written and you've written for a while now,

thinking about like just this idea that if the world is going to de-globalize and arguably it is and arguably President Trump, that's part of his mission, that finance might be really where, you see it emerge first. Right. Because I think what tends to happen when people talk about trade tensions or a trade war is people start thinking about tangible goods, you know, like semiconductors and chips and I don't know,

all sorts of commodities. But people rarely actually stop and think that, well, all that global trade is something that is being financed by someone. And the financiers, in this case, are financial institutions or. large banks, and so it would make a lot of sense if they also get hit by the trade tensions. Absolutely. And if you look at the history of finance, and I remember this was something we talked about years ago on the podcast, I think we were talking to Emmanuel Derman. If you look at the history of finance, so much of it corresponds to globalization and even the

sort of explosion of derivatives and other measures designed to hedge risk, a lot of it. it is designed to sort of mitigate the risk of trading across two different countries with different currencies and so forth. So you really, you can't talk about globalization without talking about all these instruments that have been built up by Wall Street banks. Very true. And you mentioned currencies just then. And the interesting thing is that even though we're talking about global trade and cross-border financial transactions, of course, the vast majority of these are still denominated in the U.S. dollars. So you have this weird sort of space

where things are happening between countries, between all these different entities, companies, and banks, but many of the transactions are dollar-denominated. And of course, what we've seen recently has been a bout of U.S. dollar strength, and the speculation has been that that has added to the pain of the trade war, at least up until recently.

Yeah, there's a lot of different subsist. stories going on right now with the trade war with actions taken by the Trump administration. One of them that hasn't got a ton of attention is whether any of this is going to eventually contribute to the undolarization of the global economy. Because people have been predicting that for a long time that maybe somehow global different trading partners might find an opportunity to come off the dollar. But nothing really has even come close to emerging that would actually replace the dollar, the euro has flaws, the Chinese UN for obvious reasons, is not in a position to really replace it. But with the various actions that the Trump administration has taken,

obviously people wondering if there will be a renewed effort on part of various actors to get out of the dollar system, so to speak. Right. And even if there isn't a push to replace the dollar in some way, you can imagine that there will be renewed focus on the potential for a currency war, Right, devaluations to sort of increase your competitiveness when it comes to trade. So that seems to be the minimum. Anyway, the reason this intro is slightly disjointed is because we have a guest on today who not only can talk about everything from trade to cross-border flows to currency regimes, but pretty much anything else, cryptocurrency, financial stability, big tech,

credit markets overheating, you name it, he can talk about it. Yeah, exactly. So like we have this really unwieldy intro touching on all these things because our guest is so unusual and unique in his ability to pull together and cover all these different strands of what's going on in world financial markets and the economy. Exactly. We're going to see if we can narrow it down a bit. But without further ado, our guest for today is Hion Song Shin. He is economic advisor and head of research. for the Bank for International Settlements. And if you haven't been following his research already, I highly encourage you to do so. Kiyan, it's so nice to have you on the show. Hello, Tracy.

Hello, Joe. It's good to be here. Hello. So apologies again for that unwieldy intro, but I think it does speak to the breadth of your research, which is really wide and varied. Could you maybe, just to begin with, give us a sort of rundown of what your mandate

actually is at the BIS? Yeah, I mean, the BIS, as you know, is the oldest international financial institution. We were set up in 1930. It's a body to foster the cooperation among central banks. We have around 60 member central banks. And our task is to focus those discussions, help to facilitate cooperation among the central banks, both for monetary policy and for financial stability. We also host many of the international regulatory committees

that oversee some of the discussions like the Basel Committee and the Financial Stability Board. And tell us about your role there, because the BIS puts out quite a bit of research, you put out quite a bit of research. What is the sort of overarching goal of what you're pursuing with the things you've been working on? You know, we're here to serve central banks in how they conduct monetary policy and also

how they can serve as a guardians of financial stability. And so, you know, this is a very broad remit, as you can imagine. So we have to be, you know, pretty broad in our approach. You know, it's very kind of you to be so complimentary. But I think this is, you know, we regard this as being part of our job. And I think you, you gave a very good introduction to where we find ourselves in the global economy right now. I mean, we had to be a very good introduction. I mean, we a very strong 2017 in global growth, but since the middle of last year, we had this slowdown, which at first seemed like just a reversion to the mean, but it turned into something a little bit deeper, where we saw the manufacturing and trade contract, even as employment remained strong,

and consumption was pretty strong, underpinned by the strong services. sector. And what we try and do is to try and join the dots. And the dots actually could be in somewhat unfamiliar places in terms of the standard way that we classify the way that we subdivide the different areas of economics. And I think trade, manufacturing, global growth, all turns out to be quite closely related to financial forces. And I think here is where, you're going to where the currency dimension comes in because it does seem from the accumulated evidence that the

broad dollar index has something of the character of a barometer of global risk appetite. Right. So in some of your research before, you've actually published this really great chart that basically shows when the dollar

strengthens trade kind of drops and vice versa. Basically there's an inverse relationship between the greenback and global trade, can you walk us through exactly what's happening there and why does the dollar matter so much when it comes to this particular issue? For those of your listeners who are not perhaps familiar with this chart, I would just point them to the speech I gave in Berlin at the German Federal Ministry of Finance. This was in the middle of May. And if we chart the ratio of global

exports to global GDP, that displays a very interesting pattern. And that ratio is a very interesting ratio because trade is measured on a gross basis, in that whenever shipments across the border, you can just tally it all up. And it's measured in gross terms in that you don't take into account the fact that some of the inputs into the exports were actually themselves imported. whereas GDP is a value-added measure. It measures what is a total value of the goods produced as measured by the final output. So if you take that ratio, which is gross exports to GDP,

we can sum that up to the global level, what it gives you is the degree of double counting that happens when we measure gross exports and that if the same component is used for, you know, as an input into another intermediate good, and then that intermediate good is exported into another country, which then gets processed into a further intermediate good, which is then exported.

The more times a particular component crosses the border, the larger will be the disparity between, you know, gross exports and GDP. So, you know, that ratio does fluctuate a lot, and it's a useful proxy for the activity of global value chains. manufacturing has been the driver of global trade growth in the last few decades. And within the manufacturing trade, it's been the growth of the global value chains. It's a supply chains that have been very, very important. And no country has been more important in this development than

China. In fact, China has emerged. If you look at one of the charts in the Berlin speech that I mentioned, there's a very striking chart that shows China going from somewhat of a a small node in the year 2000 before they entered the WTO to really the connecting linchpin in the global trading system. Now, what do you need to sustain a very elaborate global value chains like that? Well, for this to actually work, what you need is all the intermediate goods to be financed while they're in the intermediate good stage. So if you look at, just think about a corporate balance sheet when you have lots of intermediate goods that are whizzing back and forth. I mean, they will be appearing either as inventories or they'll be appearing as accounts

receivable if that good has crossed the boundary of the firm. And these are assets of the firm which need to be financed somehow. And typically they have been financed either through the firm's internal resources. But what we know very well from other studies is that the global banking system has been a very important source of funding for the short-term assets that underpin the global value chain. And the other thing that we know from the other studies, some of it you've already mentioned, is that financial conditions in dollars and the dollar exchange rate itself is very closely correlated and that when the dollar is strong, this is when dollar credit tends to be somewhat tight.

and the funding conditions go up, in particular the cross-border element seems to be very sensitive. So if you put two and two together, and we combine it with the prevalence of dollar invoicing, what we have is the combination of the following fact that you need short-term assets to be financed in order to support global value chains. You need the dollar financing to be rather free in order for the dollar financing to be rather free, in order for the dollar financing to support those short-term assets. And that means that you tend to see an expansion of trade when the dollar financing conditions are more accommodative,

and that's when the dollar is weak. This ratio of the global exports to global GDP tends to move in the opposite direction to the strength of the dollar. What one could reasonably conjecture about the events of 2018 into the early part of 2019 is that this was indeed the period when we saw the dollar strengthen.

And 2017 was a year when the dollar was actually quite weak. This was a period, in spite of the Fed's increase in its policy rate, we saw very accommodated financial conditions. Now, it's, I think, important just to point out here that the dollar is an endogenous variable. It's a financial market price. So there isn't any particular core. story as to why the dollar is strong and why you might actually get these things going from the

dollar to these other real variables. But if you want a barometer, if you want a concurrent indicator of what's going on, you cannot do much better than to look at the value of the broad dollar index. I mean, that was fantastic. And that was just sort of a great explanation of what's going on. I actually pulled up your chart that you're referring to while you were explaining it. what's really striking is, again, we talk about de-globalization and the age of Trump. But as you pointed out in your speech, and as the chart shows, this ratio of world goods exports to GDP has really been falling ever since 2011. And in fact, if you're even bigger picture, what you see from your chart is that from 2001 until about the start of the great financial crisis, trade as a percentage of GDP had been going up. and that was also a period of significant dollar weakness and a lot of angst about, oh, is there something, the twin deficits and is the euro get to replace the dollar and all that stuff?

And then after the great financial crisis, you see a brief jump in a world trade that ratio, but then it's declining. So as you point out, the dollar itself is not the causal variable per se. It's concurrent, it's endogenous. what is the story then that explains some of this de-globalization trend since the early aftermath of the great financial crisis or what might be some of the explanatory factors? Yes, Joe. I think that's a very good observation. And, you know, for your listeners, the chart is only plotted from the year 2000. And if you extend that back further, of course, you know, there was a golden age of globalization when trade to GDP rose tremendously over a very, very long time. So I think that's probably, you know, the over the longer horizon, if we go back to the 70s, 80s, and 90s, and the golden age of globalization was the late 80s and the 1990s.

That's probably much more to do with liberalization to, you know, these longer range forces. But the period from 2003 up to the crisis, that's probably better understood, as you say, in terms of what was happening to the dollar. But in particular, what was happening to the banking sector and the ease with which you could get credit from the banks. And we now know the full story with the benefit of hindsight. That was a very, very special period. And what we've seen since the crisis is the banking sector hasn't really been, hasn't really recovered its mojo, if you like. They have been better capitalized. We are now well over the crisis.

But what's happened is the environment, the financial environment, in terms of the slope of the yield curve, in terms of the net interest margins of the banks, that has been very far from the story before the crisis, which was really very much more conducive. to the increase in leverage. The chart itself is a very striking one, because as you say, this ratio of global exports to global GDP never really went back to the pre-crisis peak. And it's been on this downward trend since 2011,

with only a brief respite in 2017, which turned out to be a little bit of a blip in retrospect, because this was a particular period when financial conditions were lucid. The news doesn't stop on the weekends. Context changes constantly. And now Bloomberg is the place to stay on top of it all. Hi, I'm David Gurra.

Join us every Saturday and Sunday for the new Bloomberg this weekend. I'm Christina Rafini. We'll bring you the latest headlines, in-depth analysis, and big interviews. All the stories that hit home on your days off. And I'm Lisa Mateo. Watch and listen to Bloomberg this weekend for thoughtful, enlightening conversations about business, lifestyle, people, and culture. On Saturday mornings, we put the peasant. past week's events into context, examining what happened in the markets and the world.

That on Sundays, we speak with journalists, columnists, and key political figures to prepare you for the week ahead. Join us as soon as you wake up and bring us with you wherever your weekend plans take you. Watch us on Bloomberg Television. Listen on Bloomberg Radio, stream the show live on the Bloomberg business app, or listen to the podcast. That's Bloomberg this weekend. Saturdays and Sundays starting at 7 a.m. Eastern. Make us part of your weekend routine on Bloomberg Television, Radio, and wherever you get your podcasts. Tracy, you know, one other thing that occurs to me looking at this chart of global trade relative to GDP, it looks a lot like a chart that you would get if you plotted emerging market

stock prices relative to developed market equities, because that's one of those things where EMs did great pre-crisis, and then they massively outperformed in the immediate aftermath of the crisis. But then they've just been totally mediocre ever since then. So kind of a clue, perhaps, to what drives EM equities. Right. And that sort of gets back to that cross-border dynamic. But, Hian, I wanted to concentrate on one thing, which is, I guess it's sort of expected that banks play an outsized role in transmitting financial conditions or monetary policy to the rest of the world or the real. world, if you will. And I'm just wondering, given that monetary policy has been so easy

host 2008, and yet we've seen cross-border lending sort of contract or global trade contract by your measurement, does that mean that the bank's transmission mechanism is effectively broken? Is banking not doing what it's supposed to be doing? As to whether financial conditions have been loose or tight. I think it's very much, it has been very accommodative in the sense that long-term interest rates have been low. This has been very conducive

to the issuance of fixed-income instruments, especially corporate bonds. If we look at the composition of the increase in debt, it's far less the liabilities of intermediaries. It's far less bank lending that's been at the center of the story. It's much more the,

issuance of long-term instruments, long-term capital market instruments like corporate bonds. If you look at one of the charts that in the speech, what we see is that even as bank lending denominated in dollars has really been quite weak since the crisis, dollar denominated issuance of corporate bonds has been very strong. Now, for the purpose of supporting trade, The problem is that trade relies very much on the short-term funding coming primarily from the banks, as well as the firm's own equity. So, you know, for a while when balance sheets were quite strong in the corporate sector, the weak bank lending probably wasn't such a big break on trade and global value chain activity. But what we've seen is that over time, especially in the emerging markets, especially firms in China, there has been a lot of long-term debt issuance by the non-financial corporates.

And so when you are starting with already quite a leverage balance sheet and you see conditions tightening, that is a very different story from when you start with a pretty strong balance sheet and you have a lot more internal resources that you can deploy. banking sector really isn't anywhere there to give you that support. So it's really the combination of the banking sector still repairing, still somewhat subdued because of the very special yield curve conditions since the crisis, together with the accumulated debts that have happened since the crisis. And so what we've seen is that these things are coming to a head more recently. I think that's the way that I would see it. So if you go back to the

pre-crisis era. Obviously, we saw rapid expansion in global trade, which, as you point out, was a period of easy lending and banks being quite willing to finance things. But of course, we all know how that ended with a gigantic financial crisis, economic collapse. Is there a way to get back to the pre-crisis era from a trade perspective in a more sustainable manner? So we can actually see that line turn up again for a while, but it not inevitably lead towards disaster. What all this raises is the intriguing possibility that, you know, although we like to make this very sharp distinction between the real economy and the financial markets, and then, you know, think about excess is only happening in the financial markets, well, you know,

there is a sense where some very, very extended global value. chain structures may only be sustainable with really, really extraordinarily loose financial conditions. And so if you like, there could be bubble-like features of real activity as well if it's really very heavily extended. And so we should think about, you know, one of the things that we emphasize here at the BIS is long-term sustainability. So what is sustainable in the long term, what kind of economic activities are resilient to shocks and what can policymakers do to bring these things about. So, I mean, those are the things that we tend to focus on. We try to have a longer term perspective on these things. And within that broad framework, you know, you could

argue that just pushing on the accelerator, just trying to extend the global value chains further, you know, that may be okay to boost the real quantities, you know, in the process of lengthening, but then you are setting yourself up for a more, you know, a sharper pullback when, when conditions tighten. Well, I wanted to sort of press on this point, because you mentioned that, you know, post-2008, a lot of this global financing is coming in the form of bonds being issued by corporates rather than your typical bank loans. But the thing that those two things often have in common is their currency. So all dollar denominated. And this gets back to Joe's emerging market point as well. I'm just wondering, how vulnerable do you think the world economy

is to a dollar liquidity squeeze at this point? On that question, I think we have to distinguish between the kinds of acute episodes that we saw in the run-up to the 2008 crisis, which have to do with very rapidly leveraging, very rapid contraction of wholesale funding by banks and bank-like intermediaries. I mean, that was a very, very sharp pullback, and that was a very acute episode. I don't think we have the same kind of vulnerabilities in the banking center right now. I mean, if anything, the banks have been quite subdued as we, have just talked about. But in fact, the vulnerabilities, you know, they're more, you know, longer term,

if you like. I mean, they have to do with debts of non-intermediary, non-banks. You know, they're more chronic, if you like. I mean, they, rather than acute. In some countries, especially those countries that didn't experience the worst of the global financial crisis, a household debt has continue to rise. House prices are now very high. Corporate debt is high pretty much across the board, both advanced and emerging economies. And so, you know, those forces can act as a break on potential, you know, stimulants towards real economic activity. I mean, there's a, there's a limit to how much that households would take on. You know, there may be, you know, limited room for further monetary policy tools to stimulate growth, for example.

So one of the things that we have been saying here this year is that, you know, we need to have a more balanced mix of policy. So rather than simply relying on just one engine, monetary policy, we have to think of this as a jumbo jet with four engines, right? So it's monetary policy, but not only that, we have fiscal policy, macro-pudential frameworks, and not, Last but not least, you know, structural reforms. I mean structural reforms doesn't mean just cutting jobs and reducing workers' protection.

I think it's more to do with finding ways to, you know, reinvigorate growth through very key, you know, investments in key sectors. And this, of course, is linked to the infrastructure investment angle as well. So, you know, things are certainly not as precarious as they were in 2007. but certainly, you know, we haven't really seen, you know, the return to vigorous growth that we would really ideally would like to have seen by now. It's, I think, you know, to do our jobs better, we have to take a step back and try and get the right diagnosis for this. And I think this is where these longer term studies, like, you know, the trade to GDP, you know, how the financial system is evolving. I think these longer term developments are really important.

as kind of, you know, as the backdrop for our policy discussions. When you talk about macro prudential tools as being one of the engines to resumulate growth, what are you referring to specifically? So, you know, macroprudential frameworks have to do with ways of complementing monetary policy so that the financial system is resilient, that it can be, that it can function in a way that helps us to, you know, root the benefits of cheap financing conditions more broadly, but target those measures to those sectors or to those areas where you'd expect the vulnerabilities to be higher. So, you know, if

you're worried about FX debt, then, you know, regulations that are targeted to those sectors, you know, may be appropriate. If you're worried about mortgages, you know, that may be one other area. So it's not going to be a magic bullet in the sense that this is not going to be watertight and that it's going to be immune to circumvention and so on. But nevertheless, you may be able to deal with emerging financial vulnerabilities without having to resort to monetary policy, which will have a much broader impact. And so together with fiscal policy, it's just one of the various many tools that policymakers should be using. Right. So if you spot risks building up in the system, then the better tool to deal with those

might not be a sort of change in the benchmark policy rate because that affects a bunch of things at the same time, but maybe some sort of macro prudential limitation that would target that specific area. So on that note, I got to ask, do you think that policymakers have made enough use of macroprudential tools in the year since the financial crisis, and also have they done enough with macro prudential tools specifically when it comes to the U.S. and its credit market? I mean, the answer to your first question is yes. I mean, there has been quite an extensive move towards both putting on the books these policies to be, you know, to be wheeled out whenever necessary. But emerging markets have really, you know, led the way. They have shown advanced

economies, how these additional tools can be used. And, you know, in a way, for the emerging markets, there is nothing new under the sun with macroprudential instruments. I mean, they are in a part and parcel of the policy mix. You know, it now has this new shiny label, but it's really old wine in new bottles. You know, I think for the US, the use of the stress test on the banks, you know, that's been a very important tool. You know, the US, having gone through the very sharp crisis in 2008, 2009, is one of those countries which, you know, if you look at all the aggregate measures, looks, you know, probably in, in reasonably good shape, because it's, the leverage of the banking sector is low, household debt is pretty low, you know, the corporate sector,

like anywhere, you know, has seen, you know, greater issues of corporate debt. There is the, there is a leverage loan discussion. But on the whole, the U.S. doesn't seem, you know, you know, that badly placed, nor the, you know, nor the euro area. I think if anything, the euro area is one of those areas, well, apart from the very high sovereign debt levels, in terms of household debt, it is on the low side as well. So I think we are, in terms of the lessons from 2008, I think we, you know, we should never be complacent about this, but I don't think we are in, you know, nearly in as bad as state as in 2006, 2007. But having said all that, We know that these things never happen in exactly the same way.

And so I think this is where clear thinking is needed. I think this is where we need to sit around and be imaginative and just use our imagination as to what might happen. And then just test those conjectures and say, well, that's a good story, but do the numbers actually back up your story. And so this is what we do pretty much as our day jobs here. we take these scenarios and we put them through their paces, and I think this is the way that we try and come to a more balanced view.

So looking to the here and now, and you talked about how in 2017 it looked like the global economy was looking fairly robust, then it started slipping in early 2018. It looked like it might just be a sort of reversion to the mean, but then it got a little deeper and it went a little longer than just something temporary and cyclical. Wide perception is now the global economy is not doing that great. And we've recently seen the Federal Reserve take a more doveish stance,

pretty much signaling the clear end of the rate hiking cycle and the likely commencement of a rate cutting cycle, or at least some rate cuts. So in your view, sort of what is the story of the last two years and right now? Like what explains why this downturn was perhaps a little more, deep than people expected. And is this the start of a meaningful turn where the shift in Fed policy might reinvigorate the global economy or are central bankers really just sort of trying to squeeze water from a stone here with further easing from the ECB and the Fed where maybe you give

a little bit of a pop to financial markets. But at this point, we're just leaning way too heavily on one of the four engines to do anything meaningful. Yeah, Joe, that's a very good question. I wish I knew the full answer to that. But I think, you know, if we just look back over the last couple of years, in the 2017 was a very interesting year because this was a year when, on all accounts, the Fed was on its steady course in normalizing monetary policy. And yet, the dollar was weak and financial conditions were loose. And so there was no, you know, one-for-one relationship with the Fed's monetary stance. I think that's worth thinking about because that's also. also very useful in thinking about why the first half of 2019 has been pretty challenging, even though over the end of the year the Fed went on a more patient, you know, went on a pause. Now, it's true that the dollar has weakened and, you know, the biggest beneficiaries of that weakening have actually been emerging market currency. So, you know, if that trend were to continue, and we think that the previous relationships are going to reassert themselves.

And that should be a cause for some comfort. Now, having said that, at every turn, we are starting with a different stock. So stocks do change over time. And so the same kind of push that would actually push a small car may not have the same impact when it's fully laden. And it's a larger car. And so, you know, I don't think we can really say for sure, but as a, you know, as a market observer, as an economic commentator who cares about the twists and turns of the global economy, I think, you know, we could do far worse than track, you know, how the dollar shifts vis-a-vis the emerging market currencies. So, so let's see how that plays out.

Well, Hjohn, it's been amazing having you on the program. Thank you so much. I think we managed to hit Pace. basically a lot of big topics in a short amount of time. So thanks again. Excellent. Excellent. Thank you so much. That was great. So, Joe, I really enjoyed that conversation.

And again, if I haven't said it already, Hyn's research work is really great and definitely worth reading. And I think at this point, he must have a library. I mean, I remember papers of his going back to like 2008. So he has this huge body of work. I got to say, it's pretty difficult to narrow it down to a 30-minute podcast. podcast, but hey, we tried. Can I just say there were two things that really jumped out at me about that conversation.

So one is I really enjoyed the sort of way he was able to blend these sort of big theoretical insights with very tangible real world consequences. So all these ideas about the relationship between financing conditions and the state of global trade or the state of the economy and then being able to actually put sort of meat on the bone, so to speak, and to show how it plays out in the actual data, I think it was really cool. And also, I was just really impressed by the sort of clarity of the conversation, because I always find the BIS work to be kind of intimidating. I don't know if I should admit that, but I click on their papers and I read them, and it's this sort of austere gray, and I'm like, oh, God, this is going to be

above my head, and I'm not going to be able to understand it, and it's going to use all this stuff that I don't know about, but I just found it to be an incredibly clear and simple to understand conversation, so I really appreciated that. Well, I don't think you're alone in finding the BIS intimidating, and I'm going to admit that my dad, who's my sort of benchmark for mainstream America, definitely thinks the Bank for International Settlements is some sort of like shadowy cabal that controls the world economy and global business. So, there is that conspiracy theory out there. But on a serious note,

there was one thing that came through to me in that conversation, and it's the notion of the Federal Reserve as the sort of World's Central Bank. And I don't think, like, you know, that narrative or that question pops up every once in a while, but not nearly as much as it should, especially given the attention on trade at the moment. Yeah, absolutely.

and especially and of course at the June press conference, Fed Sherman Powell, making very clear how much world events and world conditions were influencing the feds thinking right now. So any notion that the Fed can just, oh, just look at the data within U.S. borders, clearly not a realistic thing to do in 2019. Right, but also vice versa, because there's this weird chicken and egg situation where, yes, the U.S. can be impacted by external events in the rest of the world, but then by reacting to external events, the Fed ends up influencing them as well. And again, it's so weird that people don't talk about it more. And we have this debate, again, sort of like on the fringes

about whether or not the Fed has another mandate in the form of worrying about how its monetary policy actually impacts, say, emerging market economies or other parts of the world? Well, and also to that point, I really liked his last point. I think it was one of his last points about even there, the sort of undirect relationship between Fed policy and financial conditions, as exemplified by 2017, in which it looked like the Fed or the Fed was, in fact, on a very steady series of hikes to move rates higher. All the while, it was a year of a weak dollar and loosening financial conditions. So even the relationship between what the Fed does and what the ultimate outcome on financial conditions is, is itself sort of a very unlinear

relationship. Yeah. Basically, it's all very complicated. That's my conclusion. It's all very complicated. That's my conclusion, too. All right. This has been another episode of the Odd Thoughts podcast. I'm Tracy Alloway. You can follow me on Twitter at Tracy Allaway. And I'm Joe Wisenthall. You You can follow me on Twitter at the stalwart, and you should follow our guest on Twitter, Hjong Shinn. He's at Hjong Shinh. And be sure to follow our producer on Twitter, Laura Carlson. She's at Laura M. Carlson.

Follow the Bloomberg head of podcast, Francesca Levy, at Francesca Today. And check out the home of Bloomberg podcasts on Twitter at the handle at podcasts. Thanks for listening. You can get the news whenever you want it, Bloomberg News Now, I'm Amy Morris. And I'm Karen Moscow here to tell you about our new on-demand news report delivered right to your podcast feed. Bloomberg News Now is a short five-minute audio report on the day's top stories. Episodes are published throughout the day with the latest information and data to keep you informed. Yes, there are other products like this from a variety of news organizations. But they usually rerun their radio newscasts throughout the day.

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What separates good leaders from transformational ones? I'm Jessica Chen, and in season two of Leading By Example, we'll sit down with executives like Grace Chen of Bertie Gray to find out. It's important to understand where you spike, but also really acknowledge where you don't and find people who can fill those gaps. Listen to Leading by Example, executives making an impact on the IHeart Radio app, Apple Podcast, or wherever you get your podcasts.