Nobel Laureate Krugman on Global Economy, Geopolitics

Summary

The discussion centers on the US economic outlook, addressing the concept of 'inflation brain' and the potential for a rate cut in June. The speaker suggests that inflation has been tamed and hints at a slowing economy, advocating for a precautionary rate cut to avert a downturn. Geopolitical tensions and the upcoming US election add uncertainty, with the potential for drastic policy changes if Trump is re-elected. The conversation also touches on Japan's economic challenges, demographic issues, and the implications of a weaker yen amidst global trade dynamics.

Takeaways

• 📉 Inflation has been beaten: The speaker argues that recent inflation data indicates that price pressures have been subdued, with a small range of disagreement on the exact percentage.
• 🛑 Uncertainty about economic momentum: There is a concern about how long the economy can sustain growth with current high interest rates, and hints of a slowdown are starting to appear.
• 💤 Consumer faltering: Soft data suggests that consumers may be starting to lose steam, which could be an early sign of a downturn.
• 💡 Precautionary rate cut suggested: The speaker recommends a small rate cut in June as a precautionary measure to guard against a potential economic downturn.
• 👀 Focus shift from inflation to economic health: The speaker suggests that the focus should shift from inflation, which is less of a concern, to the overall health of the economy.
• 🇺🇸 US fiscal policy uncertainty due to elections: The speaker expresses concern about the uncertainty surrounding US fiscal policy due to the upcoming elections and the potential impact on the economy.
• 🤔 Divergent fiscal paths based on election outcome: Depending on whether Biden or Trump wins the election, the fiscal direction could be significantly different, with Trump potentially undermining the Fed's independence.
• 🌐 Geopolitical tensions affecting global trade: The speaker highlights the end of an era of smooth globalization and the uncertainty it brings, especially with the US and China as major players.
• 🇯🇵 Japan benefiting from US-China tensions: Japan is seen to benefit from businesses seeking alternatives to China, leading to increased connections with Japan.
• 📊 Lack of sustainable demand-driven inflation in Japan: Despite Japan's desire to exit zero rates, there is skepticism about the country's fundamental economic strength and demographic challenges.
• 💸 China's unsustainable economic model: The speaker points out China's economic model as fundamentally flawed, with inadequate domestic spending and consumer demand, and a resistance to change.

Q & A

What is the concept of 'inflation brain' mentioned in the transcript?

The concept of 'inflation brain' refers to the idea that price pressures are seen as the cause of all economic problems in the US, overshadowing other potential issues.

What is the current stance of the Federal Reserve and other central banks on inflation?

The transcript suggests that the Federal Reserve and other central banks, such as the RBA and BNZ, are currently not overly concerned about inflation, as they believe it has been largely addressed.

What is the argument for a rate cut in June as suggested in the transcript?

The argument for a rate cut in June is to take a precautionary action against a potential economic downturn, signaling that the central banks are vigilant and not solely focused on inflation.

What are the 'faint hints' or 'soft data' mentioned in the transcript that suggest the economy might be losing steam?

The 'faint hints' or 'soft data' refer to early, subtle signs that the economy might be slowing down, such as consumers starting to falter, although it's not yet drastic.

How does the speaker view the potential impact of fiscal policy on monetary policy in the United States?

The speaker does not view fiscal policy as a serious concern in the United States at the moment, as everything is uncertain due to the upcoming election.

What are the potential implications of the US election for fiscal policy, according to the transcript?

The transcript suggests that if Biden is re-elected, there will not be a significant fiscal boost as it has already been done. However, if Trump wins, there could be a significant departure in policy, with potential unfunded tax cuts and tariffs that could be inflationary.

What does the speaker mean by 'end of an era' in the context of globalization and US leadership?

The speaker refers to the end of an era of smooth globalization led by the US, which believed in a rules-based order. The current geopolitical tensions and rise of China as a major player introduce uncertainties and changes to the established global order.

How is Japan benefiting from the tensions between China and the United States, as mentioned in the transcript?

Japan is benefiting as businesses are looking to establish more connections with Japan, possibly as an alternative to China amidst the trade tensions.

What are the speaker's views on Japan's economic fundamentals and the potential for sustainable inflation?

The speaker is not convinced about Japan's economic fundamentals due to long-term issues like demography and low fertility rates. They also express doubt about the sustainability of inflation in Japan.

What is the speaker's perspective on the Bank of Japan's (BOJ) policy normalization and the falling yen?

The speaker finds it puzzling that Japan is worried about the falling yen, which could actually be positive for demand for Japanese goods and services. They suggest that the BOJ's policy normalization might be a false dawn, indicating that the situation might not be as positive as it seems.

How does the speaker view China's economic model and its sustainability?

The speaker believes that China's economic model is not sustainable due to inadequate domestic spending and consumer demand, and a lack of investment opportunities, with the country seemingly unable to shift towards focusing on domestic demand.

Outlines

00:00

💼 US Economic Outlook and Central Bank Policies

The speaker begins by discussing the US economic outlook, focusing on the concept of 'inflation brain' where inflation is seen as the primary economic concern. They argue that recent inflation data suggests that price pressures are not as severe as once thought, with a minor disagreement on the exact percentage. The speaker highlights the uncertainty of sustaining economic growth with high interest rates and hints at a potential economic downturn, suggesting that a rate cut in June could be a precautionary measure. They also touch on the political implications of the upcoming US election, noting the contrasting fiscal policies that could impact the Federal Reserve's independence and economic stability.

05:01

🌏 Geopolitical Tensions and Economic Challenges in Japan and China

In the second paragraph, the speaker shifts the focus to Japan and China, discussing the long-term economic challenges faced by these countries. They express concern over Japan's demographic issues, such as low fertility rates, and question the strength of the country's economy despite recent openness to immigration. The speaker also addresses the Bank of Japan's (BOJ) policy normalization and the potential for a 'false dawn' if the economy does not show clear signs of improvement. Geopolitical tensions are highlighted as a significant factor, with China's unsustainable economic model and lack of domestic spending being a particular worry. The speaker also discusses the impact of a falling yen on export dynamics and the potential for increased global trade tensions.

Keywords

💡Inflation Brain

The term 'Inflation Brain' refers to the concept where price pressures are perceived as the root cause for all economic problems. In the video's context, it suggests that current economic issues might be mistakenly attributed to inflation, rather than other underlying factors. The speaker mentions this concept to challenge the prevailing focus on inflation as the scapegoat for economic afflictions.

💡Central Banks

Central banks are the entities responsible for managing a country's monetary policy and supply of money. In the script, central banks like the Federal Reserve (Fed), the Reserve Bank of Australia (RBA), and the Bank of New Zealand (BNZ) are mentioned. They are key players in the discussion about interest rates and economic stability, with the speaker suggesting that they might consider a rate cut to address potential economic downturns.

💡Rate Cut

A 'rate cut' refers to a reduction in interest rates by a central bank, which is a tool used to stimulate economic activity. The speaker suggests that a small rate cut in June could be a precautionary measure against a potential economic downturn, highlighting the importance of being proactive rather than reactive in monetary policy.

💡Underlying Inflation

Underlying inflation is the measure of price increases that excludes volatile items and is considered a more accurate reflection of long-term inflation trends. The speaker discusses whether the underlying inflation rate is 2.6% or 2.1%, indicating a debate over the exact figure but a consensus that inflation has been subdued.

💡Economic Downturn

An economic downturn refers to a period of negative economic growth, often characterized by a decline in industrial production, employment, and investment. The script mentions 'soft data suggesting that we're starting to lose steam,' indicating early signs of a potential downturn and the need for central banks to be vigilant and consider policy changes like rate cuts.

💡Fiscal Policy

Fiscal policy involves government spending and taxation strategies to influence economic activity. The speaker discusses the uncertainty surrounding fiscal policy in the United States due to the upcoming election, noting that different outcomes could lead to vastly different fiscal approaches and implications for the economy.

💡Monetary Policy

Monetary policy is the process by which a central bank or authority manages the supply of money to control interest rates and stabilize the economy. The script touches on the independence of the Fed and contrasts it with potential political interference, such as 'print money to help me politically,' which could undermine the effectiveness of monetary policy.

💡Geopolitical Tensions

Geopolitical tensions refer to the conflicts and disagreements between countries on political and economic matters. The speaker highlights the end of an era of 'hegemonic stability' and the rise of China as a new global player, which introduces uncertainty and potential risks to global economies and trade.

💡Trade Tariffs

Trade tariffs are taxes imposed on imported goods, which can be used as a tool for protectionism or as a means to influence trade balances. The script mentions the potential for increased trade tariffs, especially in the context of the US elections, which could have significant impacts on global trade and economic relationships.

💡Demography

Demography is the study of population dynamics, including factors like birth rates, death rates, and migration. The speaker discusses Japan's long-term economic weakness being tied to its demographic challenges, such as 'extremely low fertility,' which has implications for the country's economic growth and consumer demand.

💡Policy Normalization

Policy normalization refers to the process of returning to more historically typical or 'normal' economic policies after a period of extraordinary measures, such as ultra-low interest rates. The script questions whether Japan's desire to exit zero rates is justified by the data, suggesting that 'another false dawn' might occur if the normalization is premature.

Highlights

The concept of 'inflation brain' suggests that price pressures are wrongly blamed for all economic issues in the US.

Recent inflation data indicates that inflation has been subdued, with minor disagreements on the exact percentage.

There is uncertainty about how long the economy can sustain growth with high interest rates.

Soft data hints at a potential economic slowdown and faltering consumer confidence.

The risk of not taking precautionary action against a downturn is considered larger than the chance of reaccelerating inflation.

A rate cut is suggested as a signal that central banks are not complacent and are aware of economic changes.

Fiscal policy in the US is currently uncertain due to the upcoming election and its potential impact on economic direction.

A Biden re-election is not expected to bring a significant fiscal boost, while a Trump win could lead to unpredictable policies.

Markets are considered too calm given the high stakes of the upcoming election and potential policy changes.

Geopolitical tensions, especially between the US and China, could have significant impacts on global trade and economies.

The end of an era of smooth globalization is marked by changing power dynamics between the US and China.

Asian economies, including Japan, are closely monitoring the changing geopolitical landscape and its implications.

Japan's economic challenges, including demographic issues and low fertility rates, remain unchanged.

There is skepticism about Japan's ability to convincingly exit deflation and the sustainability of its economic model.

A weaker yen could potentially be positive for Japanese demand, but it is met with concern instead.

Geostrategic tensions may be influencing Japan's reaction to a weaker yen and its impact on export competitiveness.

China's economic model is described as unsustainable, with inadequate domestic spending and consumer demand.

The possibility of a simultaneous Japanese and Chinese export surge is seen as unviable without some form of international action.

Transcripts

I wanted to start off with the US economic outlook, because I know

recently you've written about this idea of inflation brain, the idea that

perhaps price pressures are the scapegoat for all economic afflictions

in the US. The balance of risks for the Fed and a

lot of other central banks, including the RBA, for example, the BNZ seems so

fine at the moment. What would make you suggest that they

should go for a small cut in June? Okay.

The first thing to say is that we are pretty sure the recent inflation data

have been, you know, there's noise, there's.

There's probably some some funny stuff with seasonality, but basically

inflation has been beaten. You know, we're we're arguing over

whether underlying inflation is 2.6 or 2.1%, where we're not that the range of

disagreement there is fundamental disagreement is really small.

We are we're basically there. And the the big uncertainty is how long

can the economy continue to, you know, power along with rates this high.

And we're at this point now where they're just, you know, faint hints,

soft data suggesting that we're starting to lose steam, that consumers are

starting to falter. It's nothing drastic, but then it never

is at this point. And if if you're beginning a downturn.

So it's, you know, the the chance of reaccelerate inflation looks very small.

If there if the Fed cuts rates, the chance that they will look back and say,

oh, my God, why didn't we take at least a little bit of precautionary action

against a looming downturn looks very much larger.

So I would I would go for the rate cut, if only to signal, hey, you know, we're

we're not asleep here. We're not going to be obsessed with

inflation until that's so far in the rearview mirror that we really should be

focusing on the on the car wreck in front of us.

Right. So like a protective court.

And I think we've kind of talked about that a little bit with regard to other

economies as well. Do you worry about the potential for

fiscal to undermine the the monetary at this point?

Well, actually, you know, not in the United States.

Everything everything is up in the air because of the election.

I don't worry about fiscal being a serious in the US.

You know, we have not gotten our house in order.

But the in terms of there being a significant fiscal boost if Biden is

re-elected, not going to happen as we've sort of done that if Trump wins, then

all bets are off. I mean, his he's made it clear that he

doesn't want the Fed to retain its independence.

He's shown in the past a clear inclination towards kind of turkey

style, you know, print money to help me politically.

The it he's talking about unfunded tax cuts but also tariffs that are directly

inflationary. So, no, I mean, I have to say markets

are way too calm given that this is a toss up election.

And then what the side would represent a huge departure on policy of every kind.

Especially with risks around trade tariffs also increasing.

One is the view when it comes to geopolitical tensions are rising that

could further derail risk assets, not to mention global economies that really

have close trading partnerships with the US.

Oh, if this is huge, I mean, we are very much.

Regardless of who wins, we are at the end of an era.

I mean, my my political science friends talk about hegemonic stability,

which was that we had a long era of pretty smooth globalization.

And, you know, the things worked because the US was number one, and the US kind

of believed in a rules based order and all of that.

And it was always kind of hypothetical what would happen if we no longer had

that? Well, it's gone.

Right now we have a you know, as long as it was the US and

the euro area then. Well we share a lot of of of views,

share a lot of values. But with the US and China now as the two

big players on the block, everything is wide open.

And the you know, it doesn't necessarily mean that we descend into a a collapse

of world trade right away, but it does mean that nothing, none of the ground

rules that everybody counted on for the past several decades are can be counted

on anymore. And hearing the Asian economies really

watching this unfold. I'm hearing Japan now and why therefore

the rhetoric being is on. Actually, Japan has benefited a lot from

the tensions between China and the United States that a lot of these

businesses are now veering towards setting up more connections with Japan.

Are you seeing a meaningful demand driven sort of inflationary pressure

that can be sustainable finally in this country?

It's very. I mean, I've been worried about Japan

for a long time, and I have to admit that I worry about less because I'm

worried about lots of other things, including my own country.

I'm not. I hope so.

But I'm not convinced. But I try to look at the Japanese data.

I still don't see the kind of fundamental strength.

I mean, a lot of Japan's long term weakness has to do with demography, has

to do with extremely low fertility. That hasn't changed, although Japan is

at least more open to immigration than it used to be.

It's but it's a long way. I mean, I would say that the talk about

exiting zero rates, I understand why Japan really wants to be able to declare

that we've entered that period. But it's not all clear in the data that

it really has. And yet, what choice do Japanese

policymakers have when you have this immense pressure on the Japanese yen?

Are you saying that this could potentially be another false dawn when

it comes to BOJ policy normalization? It could well be it.

Well, you know, I will say I mean, you know, the BJP

leadership is not stupid, to say the least out there.

They're watching this. But I have to say, what puzzles me is

why Japan is so worried about the falling.

Yeah. You know, it's it's it's not as if I

mean, yes, that does hurt consumer prices.

But Japan, as we say, has been a country that has long had a problem in

convincingly exiting deflation and a weaker yen after a little, you know,

give up, give it a bit of a lag that's actually positive for demand for

Japanese goods and services. So the thing that I find puzzling is why

the weaker yen is inspiring as much panic as it seems to be.

Does it make more sense if you think about the sort of geostrategic tensions?

Does it create more panic for Beijing, for example?

Oh, for sure. I mean, look, I mean, China is in much

worse shape. I mean, a fundamental sense.

China has a a whole economic model that is not sustainable.

It has vastly inadequate domestic spending.

Vastly inadequate consumer demand has run out of sufficient investment

opportunities to keep the economy rolling and but seems bizarrely unable

to change its operating, you know, to do even modest steps towards a refocusing

on domestic demand. And Japan and China sort of kind of

have, it still seems, inclined to try to export its way out, which is not going

to happen. The world is not going to accept it.

And a falling yen, if you like, adds to that unacceptability.

Because if there's one thing that we can be sure is that the rest of the world is

not going to accept a simultaneous Japanese and Chinese export surge on the

scale that that could be that would happen without some kind of action.