Shownotes
Jason Furman, Professor of Economics at Harvard and former Chairman of the Council of Economic Advisors under President Obama, joins Alan Dunne in this episode to share his thoughts on the current economic outlook. They explore the recent improvement in the inflation data, whether the Fed is justified in claiming victory in its inflation fight and the likely trajectory for inflation over the next year. On monetary policy, Jason expects further rate cuts from the Fed this year but is sceptical about how much additional easing we may see next year. That ‘s partially because he sees a higher neutral policy rate and partly because high fiscal deficits looks set to remain a feature of the next administration. Looking further ahead Jason offers his thoughts on the longer term growth outlook, the likelihood of an AI-led productivity boom, the pros and cons of active industrial policy and whether persistent fiscal deficits might eventually lead to a debt crisis.
-----
50 YEARS OF TREND FOLLOWING BOOK AND BEHIND-THE-SCENES VIDEO FOR ACCREDITED INVESTORS - CLICK HERE
-----
Follow Niels on Twitter, LinkedIn, YouTube or via the TTU website.
IT’s TRUE ? – most CIO’s read 50+ books each year – get your FREE copy of the Ultimate Guide to the Best Investment Books ever written here.
And you can get a free copy of my latest book “Ten Reasons to Add Trend Following to Your Portfolio” here.
Learn more about the Trend Barometer here.
Send your questions to info@toptradersunplugged.com
And please share this episode with a like-minded friend and leave an honest Rating & Review on iTunes or Spotify so more people can discover the podcast.
Follow Alan on Twitter.
Follow Jason on Twitter.
Episode TimeStamps:
02:10 - Introduction to Jason Furman
04:28 - The state of the economy
04:42 - Is inflation stickier than we thought it would be?
06:01 - Is inflation stickier than we thought it would be?
09:40 - The outlook for inflation
12:34 - A move in the right direction?
14:34 - Is the neutral rate a useful concept?
17:35 - The risk of being too sensitive to current data
21:05 - Is the shift towards transparency actually positive?
22:28 - Is the economy too complicated to forecast?
23:44 - Is the era of ultra low rates behind us?
26:46 - Furman's thoughts on the U.S deficits
28:29 - Has the Treasury managed the situation right?
31:34 - Will the political environment change due to larger acceptance to deficits?
34:46 - Will Powell and Trump be able to communicate?
36:32 - A win for Trump = the end of the Fed?
37:57 - Is the Fed in danger?
39:24 - Will the increasing debt levels cause quantitative easing?
40:54 - Productivity - reasons to be optimistic?
43:57 - Is AI a threat to employment?
45:25 - Furman's perspective on the industrial policy
49:33 - Are we going too far in the wrong direction?
51:06 - China's influence on the global economy
54:05 - The outlook of economical growth
55:38 - Is Europe in trouble?
57:12 - Advice for other investors
Copyright © 2024 – CMC AG – All Rights Reserved
----
PLUS: Whenever you're ready... here are 3 ways I can help you in your investment Journey:
1. eBooks that cover key topics that you need to know about
In my eBooks, I put together some key discoveries and things I have learnt during the more than 3 decades I have worked in the Trend Following industry, which I hope you will find useful. Click Here
2. Daily Trend Barometer and Market Score
One of the things I’m really proud of, is the fact that I have managed to published the Trend Barometer and Market Score each day for more than a decade...as these tools are really good at describing the environment for trend following managers as well as giving insights into the general positioning of a trend following strategy! Click Here
3. Other Resources that can help you
And if you are hungry for more useful resources from the trend following world...check out some precious resources that I have found over the years to be really valuable. Click Here
Transcripts
Definitely that's not sustainable. Definitely the debt is putting upward pressure on interest rates, but I don't think it's a dire crisis - drop everything to deal with right now. When the ten years around 4% doesn't really send me off panicking with a need for an instant adjustment. But at some point something has got to give.
Intro:Imagine spending an hour with the world's greatest traders. Imagine learning from their experiences, their successes and their failures. Imagine no more.
Welcome to Top Traders Unplugged, the place where you can learn from the best hedge fund managers in the world. So you can take your manager due diligence or investment career to the next level.
Before we begin today's conversation, remember to keep two things in mind. All the discussion we'll have about investment performance is about the past and past performance does not guarantee or even infer anything about future performance. Also understand that there's a significant risk of financial loss with all investment strategies and you need to request and understand the specific risks from the investment manager about their products before you make investment decisions. Here's your host, veteran hedge fund manager Niels Kaastrup-Larsen.
Niels Kaastrup-Larsen:Welcome and welcome back to another conversation in our series of episodes that focuses on markets and investing from a global macro perspective. This is a series that I not only find incredibly interesting as well as intellectually challenging, but also very important given where we are in the global economy and the geopolitical cycle. We want to dig deep into the minds of some of the most prominent experts to help us better understand what this new global macro driven world may look like. We want to explore their perspectives on a host of game changing issues and hopefully dig out nuances in their work through meaningful conversations.
Please enjoy today's episode hosted by Alan Dunne.
Alan Dunne:Thanks for that introduction, Niels.
Today I'm delighted to be joined by Jason Furman. Jason is Aetna Professor of the Practice of Economic Policy jointly at Harvard Kennedy School and the Department of Economics at Harvard University. He is also a non-resident senior fellow at the Peterson Institute for International Economics.
His research focuses on US and international macroeconomics, fiscal policy, labor markets and competition policy. He served as Top Economic Advisor to President Obama and was the 28th Chairman of the Council of Economic Advisors. And in addition to all of that, he is a regular contributor to the Wall Street Journal and Project Syndicate.
Jason, great to have you with us. How are you today?
Jason Furman:I'm feeling great. How are you?
Alan Dunne:I'm great. I'm delighted to have you on. It's a great opportunity to get your insights.
We always like to start off by just getting a sense of our guest's background. Obviously, you've had a very interesting career as an academic and as a policy advisor. How did you get interested in economics in the first place?
Jason Furman:Yeah, so I really liked math and physics, and I also liked the real world, as in the social world, questions about growth, poverty. The budget deficit, I wrote about that in high school, too. And economics was a great way to think in a logical and disciplined way about something that I think is much more complicated, maybe even more important than quarks and leptons, which is to say, human beings.
Alan Dunne:Interesting. And I mean, you've had a varied career as an academic and policymaker. I mean, any standouts? I mean, your experience working with President Obama through a very tumultuous period must have been particularly interesting.
Jason Furman:Yeah, I mean, I thought originally, I was just going to be a pure academic, and then ended up going to government sort of almost accidentally, and discovered I really liked it. I stayed there for a while, went back, and then went back for all eight years under Obama. And, yeah, that was amazing. You walk in the door and the world is collapsing. It looks like you might be on a second Great Depression. You walk out the door, it wasn't perfect. It wasn't the magnitude of recovery I would have liked, but it was much, much, much better than when we walked in the door. And that was a great journey.
Alan Dunne:Good stuff. Well, as ever, it's an interesting time in macroeconomics. As you say, macroeconomics is very complicated, and it's always very hard to get a picture of what's going on, and maybe no more so than the present, looking at the economic data over the last couple of months, where we're recording just on the 10 October.
But if you went back to the start of August, we'd had a couple of weak economic numbers. People were banging their fists on the table, looking for a 75 basis point rate cut from the Fed and real concern about a potential recession with the Sahm being triggered.
And then move forward a couple of months and the world looks quite different all of a sudden, at least for financial markets, which tend to be very reactive. When you look through all of that, what's your read on where the economy is at the moment?
Jason Furman:Yeah, we're basically in the same place we've been for about a year now, which is we're probably having a soft landing, but we're not all the way there yet. And there continues to be two dangers: one of continued inflation, the other of recession.
I'd say over that year, that path has widened, the soft landing path has widened. The two dangers on either end have gotten narrower. And which one is bigger has shifted from time to time.
Right now, again, I mostly feel quite good about where we are. But you want to talk about risks, you want to talk about worries. I, right now, am more worried that inflation has more stubbornness to it than people have been counting on.
Alan Dunne:Okay. As it happens, we're recording today and the latest CPI numbers have been just out today, for September, showing for the headline a continued decline in inflation, but against that core inflation year-on-year is up, and month-and-month is up 0.3, I think. I mean, I guess this is consistent with your view that inflation maybe is proving to be a little bit stickier. Is that fair to say?
Jason Furman:Yeah. The news headlines, when the September CPI came out, were Lowest Inflation Rate of The Whole Inflationary Period. They’re looking at twelve months of headline CPI. Thats great for thinking about how people are doing in the economy, which is an important thing.
had gotten that data between: year period, from: Alan Dunne:Okay. I know there are lots of ways to slice the data. And I know every month after the release, you're very active on Twitter and giving a great rundown. I guess the optimists on inflation will point to shelter, the shelter component being lagging and not reflective of what's going on in the markets. But equally, some of the other measures, super-core, I think hasn't declined as much.
I mean, if you look at some of the alternative measures, are you seeing anything in those measures that's interesting?
Jason Furman:Yeah. Look, first, big picture, inflation is lower than it was a year ago. And the inflation risk we have, the upside risk, is smaller than it was a year ago. Those two things I'm positive of.
The next thing I'd say is that my best guess is that inflation will be somewhere between two, and two and a half percent over the next year. I'm talking about core inflation.
I think that would be a totally acceptable inflation rate for the Fed, for the American public, and the like. So, in that sense, I think the optimists are probably right. There is further decline possible for shelter relative to where it's been over the last couple of months.
rket is looser than it was in:So absolutely by that, as a central scenario, we're just talking about what the risks are and what the balance of risks are. And I think on inflation, I'd be much less surprised by inflation above 3% next year than I would be by inflation below 1.5%.
Alan Dunne:I mean, taking a step back and having a perspective on the whole inflation dynamic that we've seen over the last few years. We had Adam Posen, your colleague from the Peterson Institute, on. He looked at the old period as something of a success for the inflation targeting model, that inflation expectations remained well anchored during the period, and that was a key component in inflation coming back down.
Now, there is an alternative argument out there in the market that it was all largely covert. Maybe central banks got lucky that the monetary policy didn't contain demand that much, and it was all really the supply side story, which took a little bit longer to play out.
You obviously teach economics. In the future years, when you're explaining this episode to your students, what will be the narrative around it?
Jason Furman:Yeah, I think that in terms of a New Keynesian Phillips Curve, or an Expectations Augmented Phillips Curve, not that different from what Milton Friedman had, and there are three pieces to this, and they all played a role.
One piece is expected inflation. And I absolutely agree with Adam Posen, which is that those expectations stayed very well anchored. And by well anchored, I'm talking about something like five year - five year inflation expectations. And that’s either because of the credibility that was earned by Volcker and retained by his successors, or the speeches they made, or how aggressively they raised rates. And the Jackson hole speech that J. Powell gave, where he said, basically, we’re willing to go through pain to bring inflation down. I don’t know exactly what it was, but some combination of all of those things. Thats the first term in the equation.
The second term in the equation is labor market tightness. And my favorite measure of labor market tightness, if I had to pick one (and I would not want to pick just one, I’d want to look at all of them), but if I had to look at one, I’d look at job openings divided by unemployed. And that fell from 2.0 two years ago, to 1.1 now. That is an easing in labor markets that is as large as the one… Not as large. It's larger than the one we had in the financial crisis. And that's the second big piece. And I think the Fed played a big role in that, too.
And then the third piece, absolutely is getting lucky on the supply side, and bad luck turning into good luck. So, I think all three mattered, and we would not have had the experience we had.
And by the way, look, if we had just had the good luck on the supply side, but kept rates at two or three, we would have had massively overheating demand, creating a new source of inflation to replace the one that was going away. So, I think the central banks handled it pretty well.
Alan Dunne:Okay, so decent marks for the Fed, it sounds like, for the episode. I mean, from where we are at now, obviously, you mentioned Jackson Hole and at the most recent Jackson Hole, J. Powell signaled at the start of the easing cycle, and we've had that now in September.
Do you think that's appropriate that policy should be eased now or less restrictive? Where do you see the broad framework? Where is policy heading? I assume it's heading towards neutral. But in your mind, what does that mean?
Jason Furman:Yeah, I mean, we can quibble about the magnitude. I would have done 25 instead of 50. I don't think that's a huge deal, but this is moving in the right direction. One thing people miss, and this was true when rates were coming up and true when rates were going down, you don’t want to say, oh, rates are being cut, they’re stimulating the economy. No, they still have their brakes on. Their brakes just aren’t pressed down quite as hard as they were pressed before. Inflation is a continuous variable. Unemployment is a continuous variable, and the Fed funds rate is a continuous variable, even if they only move it in increments of a quarter.
With two of those continuous variables, inflation came down, unemployment came up. And so that third one should be set in a different place than it used to be set. It should definitely not be as contractionary as it used to be.
So, this to me was roughly the right timing, definitely the right direction. Where I differ is I'm less optimistic about how much further they're going to be able to cut rates. I mean, certainly two more cuts this year. But beyond that, how much more? I think there's the resurgent inflation risk. We might get calmer about what's happening on the employment side. And there's just this big question that we don't know the answer to, which is, what is the neutral rate today? And if it's risen a lot, that will contain how far they can go.
So, I'm maybe a little bit less optimistic about rate cuts next year than the market is, but this year they're going to happen and it's good they're going to happen.
Alan Dunne:Do you think that neutral rate is a useful concept? J. Powell has been a bit dismissive, in some sense, of how practically useful it is, but obviously there's still a sense that policy is restrictive. So, they know it's somewhere lower than where rates are now.
And a second question. People look at nominal interest rates. They look at real rates. They look at financial conditions. They look at the change in all of those. Depending on what you're looking at, you might have a slightly different perspective on where policy is.
I mean, from your perspective, is it the nominal short rate that is the most important, or what would you say is in terms of saying whether policy is accommodative, or neutral, or restrictive?
Jason Furman:Yeah, so why don't I do… Those are two different questions.
Alan Dunne:Sorry, they both came to me at the same time.
Jason Furman:That's totally fine, totally fine. So, let's start at neutral first. I do not think it is useful for the FOMC to go into the room, in November, when they next meet, and say, hey, what do we think the neutral rate is? How many percentage points above neutral should we have right now? And let’s add the two of those and go out and announce the new Fed funds rate.
Because they don’t know what the neutral rate is. They don’t know how many percentage points above neutral you should be. And so, it is much better to look at unemployment, look at inflation, and based on that figure, do you need to go up, and do you need to go down? So, I don't think the neutral rate is a very good meeting-to-meeting guide.
If you want to look ahead one, two, three years, though, maybe you need to do that because you're a business trying to figure out what borrowing conditions are going to be. Maybe you're the government trying to figure out what your fiscal situation is. Maybe you're the Fed trying to talk about what you're going to do in the future. Then the neutral rate matters quite a lot.
The Fed's going to stumble forward step by step in a really dark room. And that is not an insult to what they can do. That's the best they can do. But the neutral rate is a little bit like where the wall is that they're going to eventually reach, and they don't quite know where that wall is because they're stumbling forward, feeling their way forward. But we'd all like to know when they'll eventually get there.
So, I think the neutral rate is a real thing even if we don't quite observe it, we don't quite know what it is. I think it does matter. It just doesn't matter meeting-by-meeting.
those moved in a huge way in:And that's what matters for the economy. And that's, I think, implicitly what they're targeting with their changes as well.
Alan Dunne:Yeah, you mentioned stumbling in a dark room, which is a good description of the challenge they face. I mean, there is a sense in markets, there's been this discussion around data dependence, and the most recent comment from the Fed has been data dependent, but not on one data point, but on data and aggregate, I guess, is what they're saying.
But in contrast to being very hyper data dependent, maybe going back a few years at least, it seemed that if you looked at the bank of England, they might produce forecasts and have a fan charge of where inflation is going around, or the ECB does the same. And driving with the two-year forecast in mind, as opposed to driving with respect to the last two unemployment numbers.
I suppose the question is, is there a risk with this kind of approach of being too sensitive to the most recent data, and as a result of that getting more volatility in the policy rate?
Jason Furman:No one likes this volatility, although that’s strange because a bunch of people are profiting off it. I'm not entirely sure why they don't like it. But when you don't know a lot about the future, your priors are pretty flat. And when your priors are pretty flat, little bits of information can move you quite a lot. And that's just the nature of macro.
These changes in the grand scheme of life just aren't that large. First of all, if anything, the Fed moves rates too little. They spent 14 months with exactly the same Fed funds rate, even though, over the course of those 14 months, we got tons of data.
Now, over those 14 months, up until September, they did change their dot plots. They did change their speeches. The market’s expectations changed, but they didn't actually change anything as that data changed.
Now the data is, for any given meeting, it might be 25 or 50, for the next meeting it might be zero or 25 in terms of what's in play. So, it's not that big difference. And yeah, I think this data matters. The last three jobs reports, it's not crazy to have revised in one after the July report undid, basically that entire revision based on the August and September ones.
Alan Dunne:Yeah, it's just a fact of life then. Because we've had revisions to employment data, and we've had revisions to the gross domestic income data, which seemed to have kind of reconciled discrepancy versus GDP. So, over time you do get a slightly different picture than if you were basing policy just based on the actual release in the last.
But you think there's nothing you can do about that. It's just the difficulty of vulnerability?
Jason Furman:Look at the ten-year rate. The ten-year rate is basically what you expect short rates to be over the next ten years, plus some type of term premium. And it moves around a lot. These data points come out. It can move up 5, 10, 15 basis points, or down by the same amount. And that is rational investors (That's not the Fed doing that. That's not any data defense on their part.) thinking that over the next data point will change the way we think about interest rates over the next ten years, over the next decade.
And that, again, makes a certain amount of sense in a world where you just know so little about the world five years from now. That today's CPI report should actually change what you think about the world five years from now. And so it does change not just short rates, but long rates too.
Alan Dunne:And obviously there's been a shift towards more transparency communication in the last decade or so, maybe longer. Is that helpful, do you think, or not?
I mean, if you go back to Greenspan, he used to say, if you think you understand what I'm saying, you've probably misheard me. Whereas now J. Powell is at pains that guide nearly every policy meeting in advance, which is the more appropriate approach, do you think?
Jason Furman:Everyone I know is just so negative about the transparency. I'm going to give you a slightly contrarian view. The dots, and they're saying what they're going to do, and then they don't do it. And they give these contradictory speeches and the market moves, etcetera.
I look at the results, though. The law didn’t say anything about transparency. The law said maximum employment and stable prices, and they’ve generally done a pretty good job on that. Moreover, I think the transparency has helped them do a good job on all of that. The inflation expectations, staying anchored that we were talking about before. I think some of this transparency helped with that. Do I think we need more of it?
No.
Do I think we might benefit from a little bit less?
Maybe.
But I don't think it's a big problem, and I think it probably has helped with the thing that is the most important thing out there, which is anchoring inflation expectations.
Alan Dunne:You did touch on how complicated the economy is. It is hard to get a read on it and forecast. Some people describe it as a complex adaptive system. Do you think they might be better served by saying we don't know more often, or who knows? Or is that just not an answer they can give? Markets look to the Fed for certainty and for clear answers, when in fact there's a wide margin for error in making these forecasts.
Jason Furman:They do a lot of hedging, a lot of risk scenarios, a lot of different things that could happen, a lot of uncertainty, et cetera. But people tend to discount that. Could they build fan charts into things like a lot of other forecasters do, as you said before? They could.
I mean, one problem with those fan charts is they often understate the amount of uncertainty. In many of these cases, you look at the 90% fan and the data falls outside of it more than 10% of the time. So, in that case, you're actually giving an inaccurate assessment of the uncertainty. You’re getting people to think that there's more certainty than there actually is.
So, if they ever did fan charts, they're going to have to make them really, really wide. Maybe that would be a good thing to remind people of just how wide our uncertainty is.
Alan Dunne:You mentioned, okay, you expect two more rate cuts this year, not sure how much more in this easing cycle. Obviously, we've gone from a period where rates were at zero then for a long time in the last decade, and now we're into a higher rate environment. But there's a debate out there in markets. Are we going back to the way we were, or is it a new paradigm?
It sounds like if you think they might not have that much more room to ease. We might be in a higher rate environment. Do you think that era of ultra-low rates is behind us? For sure?
Jason Furman:For sure the answer is no. I’m not sure about anything.
Alan Dunne:You’re not sure about anything.
Jason Furman:So now I'll go back to best guess. I think there's a lot of reason to believe the neutral rate is higher than it used to be, of which the most important is that government debt is much higher and investment demand, especially in the AI, power, and green energy sectors, is much higher.
All of that goes in the direction of pushing the neutral rate up, I think, quite plausibly pushing it up by a percentage point from where it used to be. If I was doing a nominal Fed funds rate long run dot, mine would be at 3.5% right now.
So, there's a bunch of people at the FOMC who are at that same place. Most people, though, are still below 3.5%. And I think they have more catching up to do to where it will eventually be again. I don't think that, first of all it's not an error, I don't think that difference in judgment, for me, is affecting policy today, but it does affect where you think policy will eventually be.
Alan Dunne:I know, because if you look at their projections on the quarterly FOMC, that number has been edging higher. I think it's up to 2.9%. But it was 2.5% then it was maybe 2.6%, 2.8, 2.9%. So, I mean, is that just the wisdom of the crowd infiltrating their thinking, or is somebody coming in presenting to them and saying, here's the case for it, like our Fed researchers probably looking at this and concluding it's probably higher. And do you think they might get up to that 3.5% that you're talking about if we look at those forecasts in a year's time?
Jason Furman:Yeah, I think it's all of the above, is what's going on. And they don't change that dot. It’s actually a decently fast change over the last four of these, the last three were the ones that changed. I think it'll keep going up. I don't think it'll be all the way at 3.5% by the end of next year.
But a couple of years from now, do I think that's where it settles down? Yeah, because at some point they're going to stop moving the Fed funds rate and they're basically not going to want to say we're contractionary.
They're going to want to say it's neutral and they'll put down a long run dot that's the same as the short run rate, the same as the actual rate, to signal things are going to be flat for a long time. And I think that'll happen around 3.5%, again with a huge error band around that.
Alan Dunne:Yeah. You mentioned one of the reasons for the higher neutral rates being debt and deficits. It's been an extraordinary period. The US deficit is 6%, 7% of GDP when the unemployment rate is just around 4%. As an economist, what do you make of that?
If the US wasn't running that deficit, would growth be a lot weaker? Would the whole idea of US exceptionalism be eroded or not? Is it an unsustainable policy that's currently in place?
Jason Furman:Yeah, I think if the deficit wasn't higher right now, we'd actually have lower interest rates. They wouldn't have gone up as much, and they would have come down faster, and our macro situation would be about the same. The composition of GDP would be different. So, we're getting, for example, more manufacturing structures built. That's because of the nature of the fiscal policy. But I largely think at this stage and on this time horizon, it's for the most part been neutralized by monetary policy.
Maybe that wasn't true in:Definitely the debt is putting upward pressure on interest rates, but I don't think it's a dire crisis - drop everything to deal with right now. When the ten years around 4% it doesn't really send me off panicking with a need for an instant adjustment, but at some point something's got a give.
Alan Dunne:You mentioned yields, ten-year yields just above 4%. There has been suggestion that the Treasury may have been a bit tactical under issuance to try and manage yields.
There was a paper from Nouriel Roubini and a colleague, Steven Mihm, trying to put some parameters on the impact. Deficits, concerns about sustainability, they came into the market last year and yields went up. And then there seemed to be a bit of a shift in the issuance towards bills and yields came back down. Do you have any insight? Is the Treasury being tactical, more activist or nothing? And should they be? Does it make sense for them to be?
Jason Furman:Yeah. So, I think the treasury acted following their standard operating procedures, that some rates were going higher, and they don't want to borrow at high rates. They want to borrow at low rates, and so they shifted their borrowing in the other direction. That did have the effect of bringing long rates down and bringing more financial stability. I don't think there was anything untoward or conspiratorial. That's the standard type of advice they get. But I don't think that's the right thing to do.
I don't think the Treasury should be planning for the central scenario. I think they should be planning for the bad scenario. And in the bad scenario, you're in a world where short-term interest rates go up, maybe even spike up. And I want to not be in a terrible situation if that happens.
So, I would much rather be borrowing longer-term, even if it's at a higher rate. Because that higher rate is buying you insurance against the rapid deterioration you can get in short rates. Overall, I think our maturity is too short. That is especially true if you consolidate the Fed and think of it as one government balance sheet.
And so, you take out all the long-term debt the Fed is holding, you add in reserves, which is essentially extremely short-term debt. And we are, as a government, too vulnerable to interest rates going up. And I don't think they're managing the way they should for that.
Alan Dunne:Okay, interesting. Is that obviously partially linked to the trajectory of rates in the last year or so? I guess one eye on the election is possibly part of the story, would you say?
Jason Furman:I don't think. I don't think it's one. I don't think there's any eye on the election for the people who are deciding the maturity structure.
They're doing, again, I think if you're asking me for the central scenario, what are they doing to interest costs for the government? They're probably reducing it. And so they are, by their procedures, doing what they're supposed to, which is lowering interest payments for the public.
The problem with it is that the risk is that if you're off it'll raise it, and you care about the risk situation more, because that's the of the world in which all the stuff matters more. But I would be shocked if there was any election impact on the way they manage the debt.
Alan Dunne:Okay, you talked about looking at all of the debt levels in aggregates and balancing out of kind of inter-governmental holdings and stuff like that. I mean, if you're looking at the trajectory, presumably, as you say, it is too high. Is it fair to say, on an unsustainable path, given the kind of?
Jason Furman:Yes, absolutely.
Alan Dunne:How do you think that's going to play out kind of on a multi-year basis, given the kind of political environment. Obviously when you were in government or advising government, austerity was, at least in the UK, maybe not in the US, but even in the US, obviously Obama maybe didn't get the full package of spending that he wants to get in at the time. You could talk about that. But the environment is different now. It's easier. There's more of an acceptance for deficits. Do you think that's going to change the political environment over time or not?
Jason Furman:Look, at some point it'll change, but I don't know if the markets will force a change or something. But over the next two years, so, the next Congress, the next president has, I think, almost all of the risk is towards adding to the deficit.
First of all, there's the expiration of the tax cuts. Second of all, there's some of the wish list items both candidates have. Third, there's the need for more defense spending; either need or likelihood for more defense spending.
I know that some people think, oh, if we have divided government, that'll be stalemate. They won't get anything done. Divided government can do plenty of you get your stuff in exchange for me getting my stuff. And the union of everyone's stuff might even be bigger than either party's stuff would be, all by itself. So, I would not count on divided government to be a break on this.
That's the next two years. The next 20 years, we'll have to be going in the opposite direction. And I don't know where and how it shifts between two and 20 years.
Alan Dunne:Okay, summarizing that from a market perspective, that sounds like higher bond yields over the next two years, I guess in the absence of a recession. But at some point…
Jason Furman:Yeah. And especially, I think this not counting on divided government to solve it.
Alan Dunne:Yeah. Okay. And it gets resolved then, presumably, if yields go up to an extent that it becomes a political issue or an economic issue, that's how these things normally get resolved.
Jason Furman: That's what Ross Perot did in:And then the last is there are certain forcing events when the Social Security and Medicare trust funds are exhausted a decade from now. Historically, that had meant Congress acts to cut benefits or raise taxes. Will they do that this time, or will they gimmick their way through? I'm not sure, but that at least could be a forcing event for them.
Alan Dunne:Okay. And I mean, if you go back to the nineties, you had the scenario of Clinton coming in and was documented, that kind of, Greenspan had a quiet word to encourage him that you could address the deficit, that there might be a path to lower rates, etcetera. Doesn't seem like you would have that kind of coordination if you had J. Powell chatting to Donald Trump around these matters. So, it seems pretty hard to be optimistic about any kind of addressing of it in the short term. Would you say that's fair to say?
Jason Furman:I think that sounds right. I mean, look, it wouldn't be crazy for J. Powell to say to Donald Trump (it's not a threat), if you do, ‘blank’, we expect inflation will go up, and so we will not cut rates anymore or we'll raise rates or whatever it is. And again, this shouldn't be a threat. This should be what he thinks he's going to do.
I don't think that'd be a crazy thing for him to provide that type of information. And that's true, by the way, about the fiscal expansion. That's also true about the tariffs, which they do a strange thing. They reduce output, they raise inflation. That's going different ways in terms of rates.
The inflation might be transitory. So, maybe you could look through the tariff induced inflation, but maybe it gets embedded into wages and prices and has some persistence beyond the initial impulse.
So, I think, on balance, you do a big increase in tariffs, and they would probably want to neutralize that, keep expectations anchored and raise rates. So again, that's something they should do whatever they want on tariffs. That should be their decision. That is definitely not the Fed's decision. But when they're making the tariff decision they want all in information. They should know what it will mean for interest rates.
Alan Dunne:Obviously, the Fed, they could have that conversation and the Fed could respond in that way. I mean, one of the suggestions that has been made, and it's hard to know how close these people are, who are close to Trump, but that he may want more active involvement in monetary policy. Which obviously, there's no framework for that at the moment. I mean, how much of a concern is that? Do you think that could be the direction of travel in the next administration?
Jason Furman:Oh, I think it's a real concern that you have one advisor to him saying, fire Powell within 100 days. Another advisor just said, confirm someone for the Fed immediately. They wouldn't start until J. Powell's term ended, but let them be out there making their own speeches about monetary policy. And so, markets now are following a shadow Fed chair rather than the Fed chair.
The FOMC has twelve voters on it and only two of them have terms that expire in the next four years. So, I think it's hard to dramatically reorient interest rate setting in the next four years. But in eight years you can.
And so, if he tried to make dramatic changes in the next four, and the next president after him followed up on it, then it could be the end of the institution as we know it. And that would be, I think, tragic for the economy.
Alan Dunne: , I guess people point to the: Jason Furman:Oh, yeah. Look, it's a huge temptation for any country. The whole reason we have independent central banks is that there's a tension between what's good in the short term and what's good in the long term.
Fiat money is an amazing flexible tool that lets us manage an economy really, really well. But it's an incredibly dangerous tool if it's abused. And we're not controlling it by a limited stock of gold, fiat money. We're not controlling it with some sort of fixed exchange rate system. We're controlling it with the credibility of an institution. And that's an institution that ultimately is protected not by laws so much, but by norms, and norms can change.
Now, the institution is built to resist instantly changing based on instant changes to norms. It takes a while, but you make it an eight year project to destroy the Fed, and you could destroy the Fed.
Alan Dunne:One of the themes that you hear in markets is possibly the need for greater coordination between monetary and fiscal policy, particularly as we get higher debt levels. And we saw that to an extent during COVID, I think even direct financing from the bank of England at one point. Could that be part of the picture that we see here, or not? Or do you think if we see higher deficits, higher debt levels, at some point we have to see more quantitative easing coming back as a measure of just managing bond yields in that environment?
Jason Furman: s after it. But that ended in:But in normal times, if the deficit and debt are a problem, the solution is not to lean on the Fed to lower interest rates. The solution is to cut spending or raise taxes, and the Fed can't get them off the hook and shouldn't. If it tries to do that, we'll get inflation.
And by the way, we did get a lot of pent-up inflation and inflationary pressure from the last time we had this coordination. So, no, I think coordination of anything like that in the future would be a mistake.
Alan Dunne:Okay. Just, I mean, in terms of the economic outlook over the next few years, obviously we've had a higher deficit, but on the plus side, we've seen better productivity numbers in the US in the last few years after a period of very disappointing productivity. Now some people point to AI, but maybe it's too early for AI to be impacting the economy meaningfully.
u read that? Are we back to a: Jason Furman:I don't think there's anything (not anything), I think there's very little in the macro data to give you much enthusiasm in productivity, but there's an awful lot in the newspapers, conversations with businesses, and the like.
So first, let's talk about the data. Yes, productivity is up at a 2% annual rate over the last two years. That's a bit higher than it was prior to the pandemic. It was around a 1.7% rate, so it's 30 basis points higher.
That's a nice thing, but I think most of that increase is explicable by the fact that productivity growth had been negative before that. And it's just bounce back, residual swing as output is moving up and down due to demand. Employment's moving up and down because of labor hoarding and other things. Productivity in the short run is a volatile residual.
cro data. If you look at from:Where I think there’s some comfort is just looking at the progress AI has made and talking to the companies, reading about it, etcetera. The reason why I don’t think that’s in the macro data so far, by the way, is that not only have lots of businesses not figured out how to use it yet, but a bunch of businesses are hiring people and having people devote time to figuring out how to use it. And if they haven’t figured it out yet, that actually temporarily lowers productivity because you get the same output with more labor input. Thats a great way to lower labor productivity if you’re making an investment that’s going to pay off in the future. I think those investments will.
I’m not saying it’s a bad idea, but it’s not going to be higher productivity right now. It might even be lower. So, I don't think it's in the macro data, but I think there's just a lot of reason to be optimistic. But even that optimism, I would measure it in tens of basis points per year and not much more than that.
And part of it is, yes, AI might add to productivity growth, but base productivity growth was probably slower and even slower than we thought because of the running out of ideas. And so, it's not like productivity is automatically at 1.7% and you have a great invention. And it goes above that. The great invention is part of how you get yourself to 1.7% in the first place.
Alan Dunne:Okay, and as you say, I mean, there are different analyses that have been done on this. McKinsey had, I think, a study looking at the potential impact. I think they had a 0.7% boost to productivity growth per annum. But equally, there are other people who have said over ten years it might just be 0.7 in aggregate. So, there are huge differences of opinion.
From an economic perspective, the concern is it will displace workers over time, etcetera, the classic challenges. It sounds like you’re not too worried about that.
Jason Furman:I’m not that worried about that. I mean, history is a pretty good guide to calm one’s self down, but policymakers do need to be ready.
First of all, part of why things have worked out historically was we made high school universal as people were transitioning from agriculture to manufacturing. We greatly expanded college as people were transitioning from manufacturing to services.
So, I think we do need to ask, what's the educational upgrade, the educational investment we're going to need to help ‘future proof’ our workforce. So, I guess while I'm not worried that much about the robots taking jobs, I would not really want policymakers to take the wrong message and be complacent. I think, especially on the skills side, thinking about how to handle this is really important.
Alan Dunne:Okay. And I mean, that might link to something else. Let's talk about that, which is industrial policy, which has been a feature of the landscape in the last few years, which maybe wasn't so much going back ten years.
And under Biden, obviously you've had various Infrastructure Act, Inflation Reduction Act, aimed at encouraging investment in certain areas such as semiconductors and obviously green energy, et cetera. And now we're starting to see Europe respond.
Obviously, Draghi has forwarded his plan and there's a real sense of, well, something of a sense of crisis, I would say, in Europe around productivity and the need for more coordination around industrial policy.
I mean, for a long time industrial policy was kind of pooh poohed a bit. It was kind of like going to be a suboptimal outcome, from an economic perspective, when you had government directing resources. Is that being revised now, or is the view now that this is necessary from a geopolitical perspective, or what's your sense of it?
Jason Furman:I think it should be a strong presumption against industrial policy, but not insurmountable presumption against it. And that any industrial policy that is motivated and defended with benefit/benefit arguments, where everything about it is good, I'm skeptical of. Anything that's motivated by cost benefit analysis, I'm willing to be persuaded.
So, on semiconductors, the cost is we're spending tens of billions of dollars. We're diverting resources that could have gone to something else. And at the end of this process, we're just not going to make chips that are as good, and as cheap, as the chips made by Taiwan. That is all on the cost side of the ledger.
The benefit side of the ledger is that we'll no longer have to be getting 90% of our advanced microchips from an island off the coast of mainland China that's at the epicenter of what could be the most dramatic geopolitical event of a very long time.
I think that the benefit of diversification outweighs the cost. And so, what we're doing with the Chips Act, to me seems like a good idea. We might look back and think it was all one big boondoggle and one big waste of money. I think that's a very, very distinct possibility. But it's like spending money on insurance and it's inefficient, it's redundant, et cetera, et cetera. But that's what insurance is. That's what, when you build flood walls, et cetera, that's what you're doing. And that's what we're doing here.
When it comes to green technology, China is just so much better at every part of the system of making solar panels, that the main thing we should be doing is buying solar panels from China. I don't think it has anything like the same security resiliency that the microchip does.
EV's are somewhere in between, but I think they tend to be something where I'd rather take advantage of the cheap ones that China can make rather than try to put 100% tariff on them. To be clear, I wouldn't want 90% of our EV's to come from China. That would be just too far to a vulnerability.
But we're currently at roughly 0.001, give or take percent, and going up some from there. There’s a lot of room between that and 90%. That would probably be okay.
Alan Dunne:So, as you say, there's the standard textbook argument. You trade with a country that has the comparative advantage, and so you would buy all your solrs and EV's from China. And equally, in Europe, we're seeing the tariffs being put on Chinese electric vehicles.
From an economic perspective, obviously the impact is inflation higher than it otherwise would have been and inefficient allocation of resources. Is that fair to say?
Jason Furman:Yeah. And interest rates higher than they'd otherwise be. So, there's less stuff happening in other sectors of the economy. We're building fewer houses, in part because we're building more microchip factories.
Alan Dunne:So, I mean, you touch on chips, or I brought up chips. You mentioned solar and EV's. I mean, this is all part of the whole de-globalization. I mean, it's debated how real it is. Do you think it's a meaningful shift, or is it more of something of a fragmentation of the trading blocks, or how much of a structural shift would you say this is?
Jason Furman:Yeah. People always think globalization is going to end. And globalization is much more like a dandelion than it is like an orchid. It can grow in almost anything. It's quite hardy, it's quite hard to kill. And there are two reasons for that. Well, they were basically on and the same reason.
One is it just is so beneficial that no one really wants to get rid of it. And the second is it is so beneficial that if you plug the hole in one place, it's going to reopen in the other. So, you see a lot of trade that used to be US/China is now going through third countries. But it's basically the same trade, basically the same pattern of value added. It's just recorded differently on the customs ledgers.
So, do I think things are going a bit too far in the wrong direction?
Yes.
Do I think people are overstating resilience problems during the pandemic?
Yes.
Do I think they're confusing genuine national security with things that aren't national security?
Yes.
I'm not thrilled about the direction it's going, but I'm not panicking about the end of it either.
Alan Dunne:And obviously, in the last week or so, last Sunday, we've had new policy measures from China that they've been dealing with kind of a subdued, I suppose, balance sheet recession, you might call it, and they've had monetary measures, measures to support the stock market.
What’s your perspective on China’s influence on the global economy at the moment? And particularly from the perspective of, there has been suggestion the Chinese response to the economic downturn was to try and grow and share in global manufacturing, which is now causing this pushback from the US and Europe in terms of the likes of EV's and solar. How do you see that playing out? Do you see any signs of a fundamental shift in China to be a source of greater demand and consumption in the economy?
Jason Furman:I hope they are. A lot of macro problems are hard to solve, but when you have basically zero inflation and slow growth, the answer is decently clear. Now, it gets tricky when you have a debt problem already, when you have overbuilding in the property sector in general. But I think what they’ve done so far is decently mindful of that.
So, yeah, I've been, for more than a year now, saying China should stimulate, and now they're finally doing it. That'll be a welcome, I think that'll be welcome for all of us.
Alan Dunne: since it came into the WTO in: Jason Furman:In terms of Inflation or in terms of..?
Alan Dunne:Yeah, well, I guess inflation. Well, I suppose China has multiple problems, one being more on the demographic, which might force higher inflation over time. Then, secondly, I suppose the impact of those protectionist measures would be more, which I guess is what you're talking about, would be more inflationary, is that right?
Jason Furman:Yeah, yeah. One, tariffs on China are inflationary. Two, China's stimulus is, I think, broadly a good thing for the global economy, but it also will raise commodity prices.
Over the medium term though, China still has very, very big challenges. It can't solve its demography challenge at all. And total factor productivity growth has slowed. They’re doing really well in certain very high profile industries. They’re not doing well in the majority of their economy. And nothing in the stimulus is designed to, or is addressing the structural issues they face.
Alan Dunne:Yes. Just conscience of coming up on time in the next while, and putting it all together, it sounds like productivity growth might be a little bit higher, but not seeing a major boost there. Obviously, we're moving into a different era in terms of neutral rates, etcetera.
I mean, if you were trying to paint a picture of the economic growth outlook on a multi-year basis, I mean, are we into a higher growth environment or not? I mean, there's been a suggestion, obviously, because of higher inflation, we're into a higher nominal environment. But I mean, we'll say, on the next five to ten years, will real GDP and nominal GDP be hired in the last decade or two, do you think?
Jason Furman:Well, there's two pieces to growth. One we've talked about a little bit, which is productivity. The other is people, labor input, and the last couple of years a huge surge of immigration. No one's very happy about that, least of all the American public.
And under either outcome for the presidential election, you're going to have a lot less immigration in the next four years than you had in the last four years. Now you will have even less with Trump than you would with Harris. And so that big driver of American growth will be diminished. And the baby boomers are still getting older, people are still retiring. Fertility rates are still low. And so, productivity growth will pick up a little bit. But the demographic headwind to growth could get a bit worse than it's been, and those could roughly offset each other.
Alan Dunne:I don't know how closely you follow Europe, but I'd say we’re experiencing similar problems, particularly in core Europe, in France and Germany.
Jason Furman:The demographic problems are worse in Europe. The productivity problem is worse in Europe. Even immigrants don't help as much in Europe because they have lower employment rates than they do in the United States. In-so-far as there is any, deglobalization is more of a minus for Europe than it is for the United States. I think there's a lot of things there.
Now, the Draghi report had a lot of good answers for the European Union. Many of those good answers that were in that report have been kicking around for years, maybe even for decades without getting done. Maybe there'll be some more momentum behind them. I'd love to see that.
Alan Dunne:Okay. But it sounds like it’s not overly optimistic on the medium to longer term economic trajectory in the west. Is that fair to say?
Jason Furman:I mean, we're like super rich places in the grand scheme of the history of humanity, and we're going to stay that way in the grand scheme of the history of humanity. But will it be some brand new era? Obviously, it could be. There’s huge uncertainty, as with everything I've said this whole time, but my best guess is that we're returning to something like a 2% or below growth rate, not a 3% or above growth rate.
Alan Dunne:Okay. But with the proviso of maybe inflation being a little bit higher than it had been in the past and rates being a little bit higher than we've seen before.
Jason Furman:Yeah, yeah, yeah.
Alan Dunne:Very good. Well, before we wrap up, we always like to get our guest’s perspective on any advice they might give people coming into the industry. And obviously you're teaching at Harvard, so I'm sure you're asked from students for advice. I mean, for people interested in economics, macroeconomics, policy, any advice for things to do, things to read, to get more up to speed on all things global macro?
Jason Furman:Yeah, well, first of all, you should just be looking at the data yourself on Fred, or whatever it is that you have to access your Bloomberg terminal, whatever it is. Just play with the data, look at it from different angles and the like. A day doesn't go by without me downloading at least five different things at the very, very least. And that's not even counting the financial data that changes every single minute.
So, try to look at things yourself and think about those risk scenarios. It's easier to think of the central scenario than all the different ways in which things may deviate from it.
Alan Dunne:Good stuff, Jason, thanks very much for doing this today. It's fascinating to get your perspective given your experience and background. So, thank you.
Stay tuned as we'll have more episodes coming up. From all of us here, tune in to Top Traders Unplugged again, and speak to you soon.
Ending:Thanks for listening to Top Traders Unplugged. If you feel you learnt something of value from today's episode, the best way to stay updated is to go on over to iTunes and subscribe to the show so that you'll be sure to get all the new episodes as they're released. We have some amazing guests lined up for you, and to ensure our show continues to grow, please leave us an honest rating and review in iTunes. It only takes a minute and it's the best way to show us you love the podcast. We'll see you next time on Top Traders Unplugged.
