Speaker 1: Hello, and welcome to another episode of the All Thoughts podcast.
Speaker 1: I'm Tracy all the way, and I'm Joe. Wasn't thal
Speaker 1: so Joe. One of the really interesting things about our
Speaker 1: current economic situation is that we basically have a recession
Speaker 1: that's been induced by policy, albeit not necessarily economic policy,
Speaker 1: but by policy in general. This fact makes understanding this
Speaker 1: moment in the economy very bizarre. It's not like anything
Speaker 1: that we've ever seen before, in part because of exactly
Speaker 1: what you just identified, which is that a lot of
Speaker 1: the slowdown that we've seen in economic activity was completely
Speaker 1: by design, and it's hard to think of any previous
Speaker 1: comparison that the works as an analogy. Yeah, exactly. So
Speaker 1: along with this policy induced recession, we also have the
Speaker 1: fact that the economic contraction has been much much stronger
Speaker 1: or starker than we've seen in recent years. Like I
Speaker 1: think plenty of people have pointed out at this point
Speaker 1: that it's probably the biggest stop to economic activity that
Speaker 1: we've seen either since World War Two or the Great Depression,
Speaker 1: so eclipsing the Great Financial Crisis of two thousand eight definitely.
Speaker 1: But the other thing that goes along with that, and
Speaker 1: I guess that This is what we're going to talk about,
Speaker 1: is because so much of the slowdown was by design,
Speaker 1: and obviously it wasn't all uh done by um law.
Speaker 1: I mean, people naturally change their behavior in response to
Speaker 1: the virus, but so many policy changes were by design
Speaker 1: to slow the spread of the virus. We also saw
Speaker 1: a sort of near real time policy response to that
Speaker 1: because leaders of policy makers sort of recognizing that they're
Speaker 1: going to tell people to stay home, they're going to
Speaker 1: tell people to not travel and so forth, then the
Speaker 1: economy automatically along with that needs a lot of support. Right. Well,
Speaker 1: we can argue whether or not central banks were sort
Speaker 1: of the grown ups in the policy room in this
Speaker 1: particular instance, but you're right. We are going to talk
Speaker 1: about the central bank policy response on this particular episode,
Speaker 1: and we have the perfect person to do it, someone
Speaker 1: who's been on all thoughts before, actually the Economic Advisor
Speaker 1: and head of research over at the Bank for International Settlements,
Speaker 1: Hyon Song shin Hian. Thank you so much for coming
Speaker 1: on again. Hi, true, it's good to be bad. Thanks
Speaker 1: for the invitation. So I should just mention that a
Speaker 1: lot of this conversation is pegged to the most recent
Speaker 1: report out of the b I S. That really describes
Speaker 1: both the depth of the economic contraction that we've seen
Speaker 1: in recent months and also the policy response. Um. If
Speaker 1: you just sum up from a policy perspective, what's um
Speaker 1: would have struck you the most? What stood out? Oh boy? UM? Well,
Speaker 1: you know it's um. It's a defining moment for the
Speaker 1: global economy. Ratsey, I think it's We've never seen anything
Speaker 1: like it. It's the you know, three big shots rolled
Speaker 1: into one. I mean, first of all, let's not forget
Speaker 1: it's it's a health crisis. It is a pandemic. And then,
Speaker 1: as you said, there was also the economic sudden stop
Speaker 1: that was partly in use by the lockdowns, but also
Speaker 1: it also arises from their changes in the way people behaved.
Speaker 1: And then on top of all that, we had the
Speaker 1: cute form of a financial crisis back that you know,
Speaker 1: back in March, when the financial system basically throws up
Speaker 1: and U and the center backs had to really enter
Speaker 1: to to try and unfreeze the financial system. So obviously,
Speaker 1: one of the advantages arguably that policy makers had going
Speaker 1: into this crisis was that in the last crisis, central
Speaker 1: bankers did a lot of innovation in terms of coming
Speaker 1: up with new policy tools to ease the strain on
Speaker 1: the financial system. How much did that help them being
Speaker 1: able to build upon the work of what was done
Speaker 1: in two thousand and eight and two thousand nine and
Speaker 1: sort of what would you say were the I guess
Speaker 1: key policy innovations this time around, that our brand new
Speaker 1: tools in the toolkit that central bankers now can theoretically
Speaker 1: reach back towards if needed. Yeah, so I think that's
Speaker 1: a very good question. I think one big difference between
Speaker 1: what happened this year and back in two thousand night
Speaker 1: was in the back in two thousand Night, uh, the
Speaker 1: banking sect, the financial system was the epicenter of the crisis,
Speaker 1: and then the and then the raid to call me
Speaker 1: off at the aftershocks of the contraction and the and
Speaker 1: the stress in the financial system. I think what's different
Speaker 1: this time around is that the shock came from from
Speaker 1: outside the financial system, and what that meant was that
Speaker 1: the remedial measures also had to be somewhat different. Now. UM,
Speaker 1: I think the same set of tools that we used
Speaker 1: in two thousand and eight again prove you know, very
Speaker 1: useful in in fact, many of the liquidity facilities well
Speaker 1: already on you know, on the shelf, although you could
Speaker 1: just dust those off and then and then we employ them.
Speaker 1: But I think the difference this time around is that
Speaker 1: because it's something that hits the really call me, rather
Speaker 1: than something that hits the banking system, there are a
Speaker 1: fewer tools if you like to to reach those at
Speaker 1: the receiving end, those at the acute receiving end of
Speaker 1: the crisis. For example, for the baking system, the central
Speaker 1: Bank has direct leaders of policy intervention. When you get
Speaker 1: to the banking system and you can extend liquidity to
Speaker 1: the banks, you can also use your authority as the supervisors,
Speaker 1: and you know there are there are direct leaders that
Speaker 1: you can use to alleviate the stress. Now this time around,
Speaker 1: the people who were really at the sharp end were
Speaker 1: you know, order individuals and small businesses that's suddenly solve.
Speaker 1: Their cash flow just just dry up. And you know,
Speaker 1: if you need groceries, if you need to have you know,
Speaker 1: urgent central spending, it's not going to be enough to
Speaker 1: have the old tools. So I think what we needed
Speaker 1: to do this time around, what central banks and also
Speaker 1: fiscal authorities needed to do this time around, was to
Speaker 1: innovate really beyond the tools that we had in the
Speaker 1: in the Great Financial Crisis. So this is a point
Speaker 1: that I actually wanted to discuss with you. So it
Speaker 1: feels like central banks are are pretty good at solving
Speaker 1: liquidity problems. You know, they can extend short term credit
Speaker 1: to sort of bridge certain gaps between revenue and expenses.
Speaker 1: But it also feels like central banks aren't necessarily that
Speaker 1: good at solving threats to solvency, and in the current crisis,
Speaker 1: arguably solvency is a bigger issue. So what's the challenge
Speaker 1: facing central banks when it comes to liquidity versus solvency
Speaker 1: and what can they do on the ladder? Yeah, and
Speaker 1: that's the really important question to see. I think what
Speaker 1: we can say is where at the at the end
Speaker 1: of the acute phase, we're at the end of the
Speaker 1: liquidity phase. Uh. Back in March and early April, we
Speaker 1: did see a lot of stress in in the financial market.
Speaker 1: Let's start in the banking sector, because I think we
Speaker 1: did a lot in the in the intervening news to
Speaker 1: threaten the bands. But we did see market based finance
Speaker 1: brief example, and that's both in in the thincom market
Speaker 1: but also through market based intermediaries like the my market
Speaker 1: fund ease year this time around is how do you
Speaker 1: get the financial resources to the people really in need?
Speaker 1: You know, at the at the acute end of the
Speaker 1: of the shop, I think we we saw quite a
Speaker 1: lot of ingenuity and in the an imagination from the
Speaker 1: point of view of the fiscal authorities, the fiscal packages
Speaker 1: that have been done a lot that have been unveiled
Speaker 1: have been really very large in historical context. And just
Speaker 1: to give you an order of magnitude, the budgetary announcements
Speaker 1: in advanced economies is of the order of ten percent
Speaker 1: of GDP in the last few weeks. And then you
Speaker 1: add on top of that guarantees and funding schemes that
Speaker 1: are of a similar order. Magnitudes have tended to lp extent.
Speaker 1: So just say, have something like TWENTDP from the the
Speaker 1: advanced economies, and it's much smaller in the emerging markets.
Speaker 1: It's more like three percent plus another three percent in
Speaker 1: the guarantees. And we can get to that later. But
Speaker 1: these two has been how do you get the money
Speaker 1: to those in need quickers? And here I think we
Speaker 1: have seen quite a bit of diversity. And you saw
Speaker 1: that one of the chapters in the report this year
Speaker 1: is about the payment system and about the role of
Speaker 1: the central bank and putting in place an efficient and
Speaker 1: cost effective payment system. I think what we did see
Speaker 1: is that those countries that had payment systems where you
Speaker 1: can get the money down the line to those in
Speaker 1: greatest need also did the best in terms of you know,
Speaker 1: dispersing the transfers in the most efficient way. Now, we,
Speaker 1: as you said earlier, we are now at a phase
Speaker 1: where the initial liquidity stress. As as part us, you know,
Speaker 1: we're looking ahead to potentially a period when we will
Speaker 1: see a lot more failures of businesses and insolvencies. And
Speaker 1: I think here the you know, the limits of you know,
Speaker 1: just lending to tide over a period of aliquidity. Clearly,
Speaker 1: you know, we will look to see the limits of
Speaker 1: that kind of you know role. Although having said that,
Speaker 1: you know, even for the fiscal support, what you need
Speaker 1: to do for that is to have a financial system
Speaker 1: that can that can absorb the additional you know financing
Speaker 1: you know, through the bond market for example, through the
Speaker 1: through the government bond market that can supportext for spending.
Speaker 1: Who keeps the financial system on an even keel, you
Speaker 1: will need they center back to play pretty important smoothing
Speaker 1: role there as well. So I think there is still
Speaker 1: a role for central banks going forward, but the batton
Speaker 1: has to go over to the fiscal authority. It is
Speaker 1: much more. This is really a key thing. And we
Speaker 1: talk a lot about central bank independence, and you hear
Speaker 1: that term a lot, and I think one of the
Speaker 1: things that I sent is that the meaning of that
Speaker 1: term has changed so that at one point it was like, Okay,
Speaker 1: central banks aren't going to be beholden to political pressure
Speaker 1: and they can fight inflation even if that's not popular.
Speaker 1: But I feel like lately that central bank independence mostly
Speaker 1: means a technocratic institution that could just move really fast
Speaker 1: while politicians debate things, So central bank could turn to
Speaker 1: switch and to implement a new policy. Politics just doesn't
Speaker 1: move at that speed. How much is the success of
Speaker 1: the central banks really been about that? Just the fact
Speaker 1: that not that they're doing on popular things, or that
Speaker 1: they're not beholding to political whims, but just the fact
Speaker 1: that they're designed to be sort of outside of day
Speaker 1: to day, real life electoral politics. One of the remarkable
Speaker 1: things is I'm around is how quickly the fiscal authorities
Speaker 1: have actually moved. I mean, if you think about the
Speaker 1: speed with which these fiscal packages were announced. It's really unprecedented.
Speaker 1: And to that extent, I think the difference and speed
Speaker 1: probably didn't hold this time around, although of course, you know,
Speaker 1: fits about alleviating stress in the financial markets cleared the
Speaker 1: center back with the UM as a participant in the
Speaker 1: market itself and move much more quickly. But I think
Speaker 1: in terms of independency, the keys you hear is that
Speaker 1: when the center back plays your role in concert with
Speaker 1: the fiscal authorities. I think the key is that the
Speaker 1: central Bank is doing this in pursuit of this monetary
Speaker 1: policy mandate, you know, rather than somehow subordinating monitory policy
Speaker 1: too to to you know, to other goals. I think
Speaker 1: independence is about you know that issue, are you subordinating
Speaker 1: your monthorit policy goals to to some other to some
Speaker 1: other did like in a fiscal sustainability And I think
Speaker 1: there and we can think of independence in the broader context.
Speaker 1: And after all, we have to think about the Center
Speaker 1: Bank as a public institution that has to ultimately have
Speaker 1: the to derive it. So far, uh, you know, the
Speaker 1: destinacy from you know, from the elector as long as
Speaker 1: the monetary policy mandate is here in the front of
Speaker 1: your mind. I think the center bank should display as
Speaker 1: much imagination and flexibility as it can. Sorry, but just
Speaker 1: to back up for a second, can you maybe explain
Speaker 1: the difference between what central banks are currently doing when
Speaker 1: it comes to buying securities from the market versus what
Speaker 1: people call direct monetary financing. Yeah, so I think, um,
Speaker 1: you know, there's a term trace it called fiscal dominance,
Speaker 1: which is the idea that monetary policy actions are subordinated
Speaker 1: to fiscal policy. So if you're if you're somehow beholden
Speaker 1: to a fiscal objective, and for example, if you work
Speaker 1: to buy government bonds directly in the primary market, you know,
Speaker 1: that could be a form of fiscal dominance. And indeed,
Speaker 1: many central banks are prevented, you know, by the by
Speaker 1: the laws that actually you know, government central banks from
Speaker 1: engaging in um in primary market financial that the dividing
Speaker 1: line gets a little bit more blurred when you're intervening
Speaker 1: in the secondary market. So you're you're are you know,
Speaker 1: buying government bonds in the open market. But then it
Speaker 1: becomes uh, you know, more of a kind of technical distinction.
Speaker 1: I think the the important thing is the intention with
Speaker 1: which you you intervene. If it's to preserve, for example,
Speaker 1: finance stability, make sure the bond market is working well.
Speaker 1: You are preventing very uh you know, folloytile changes in
Speaker 1: in donement, on yields. I mean, these are all very
Speaker 1: often pursue into your monitor policy objective. The key thing
Speaker 1: is that these interventions should be done with a view
Speaker 1: towards eventual you know, disengagement, eventual exit. They'll be done
Speaker 1: in a temporary way m M. You know, in March
Speaker 1: during the peak of the panic. Of course, one way
Speaker 1: to characterize what happened was we saw essentially an entire
Speaker 1: run on the corporate system. That's why there had to
Speaker 1: be this massive intervention. The dollar surged about nine percent
Speaker 1: in the course of two weeks between the ninth of
Speaker 1: the twenty three, which I imagine is probably one of
Speaker 1: the fastest largest moves in history. As you say, we
Speaker 1: don't really know what's going to happen economically, we don't know.
Speaker 1: Fiscal authorities will do their part to keep creditors alive
Speaker 1: to the degree they need to. But did the actions
Speaker 1: that the central banks took, particularly the FED and backstopping
Speaker 1: the corporate bond market setting up these even more aggressive
Speaker 1: swap lines with other central banks around the world. Well,
Speaker 1: those theoretically prevent us from seeing another similar sort of
Speaker 1: like wholesale run on the system, regardless of what happens
Speaker 1: with the trajectory of the economy. So I think what
Speaker 1: we saw in it much was the was actually very
Speaker 1: different from what we sool in some respects in two
Speaker 1: thousand night. In two thousand night we had the episode
Speaker 1: the crisis are on the backing system. It was the
Speaker 1: stress in the banking system and the deleveraging and the
Speaker 1: and the withdrawal of funding um between the interconnected parties
Speaker 1: that that really drove that the stress. Then this time
Speaker 1: we saw the stress very much in the in the
Speaker 1: market based system, as you say, the We saw it
Speaker 1: in the corporate fund market, We saw it in the
Speaker 1: marketplace intermediaries, for example, in the money market funds. Because
Speaker 1: dollar funding is so central to the functioning of the
Speaker 1: global economy through dollar funding, it also spilled over to
Speaker 1: emerging markets and and just dollar funding markets more generally.
Speaker 1: And what the FED did back in March was in
Speaker 1: a way the classic the playbook, where you you intervene,
Speaker 1: you provide liquidity against collateral and also through the central
Speaker 1: bank swap lines against the collateral provided by other central banks.
Speaker 1: You alleviate the stress and the the dollar funding market
Speaker 1: as well. So you know, we've gone through that initial phase.
Speaker 1: I don't think we can rule out another flare up,
Speaker 1: but I think it seems for the moment we have
Speaker 1: we have got over that initial acute phase. But I
Speaker 1: think we have learned some lessons this time around, for example,
Speaker 1: how the dollar funding market and the short term funding
Speaker 1: market through for example, the money market funds through commercial
Speaker 1: paper that all interacts with the drawing and credit lines
Speaker 1: on the banking system, if they all interact, so I
Speaker 1: think we've we've learned a lot. I think we we
Speaker 1: managed to sail through that initial period quite well. I
Speaker 1: think one thing that's been quite hopeful has been how
Speaker 1: resilient the emerging markets have been this time around. What
Speaker 1: we saw was that in spite of the initial very
Speaker 1: sharp phase of stress in March, emerging markets have fed
Speaker 1: reasonably well. The emerging market at a local con of
Speaker 1: the bond markets have really come back back strongly. I
Speaker 1: think it is a testament to the to the resilience
Speaker 1: that emerging market, or far it has also built up
Speaker 1: through both accumulation of reserves, but also weaning themselves off
Speaker 1: the dollar based instruments of the borrowing in dollars and
Speaker 1: increasingly financing themselves through the local currency. Stoppering involved this students,
Speaker 1: and I think that's been I think a very good
Speaker 1: lesson to learn from the center step. I wanted to
Speaker 1: ask you about this actually, because you know, we have
Speaker 1: seen emerging markets sell a lot of debt in recent
Speaker 1: your some in in hard currency i e. U A stollars,
Speaker 1: nominated in some local currencies. And there's a bit um
Speaker 1: in the most recent b I S report where they
Speaker 1: talk about the idea that currency mismatches have basically been
Speaker 1: shifted from borrow as two wonders i e. To foreign investors. So,
Speaker 1: considering the most recent experience UM and the economic crisis
Speaker 1: where we did have a lot of currency disruptions, do
Speaker 1: you think investors are going to be more reluctant to
Speaker 1: fund emerging markets going forward, especially if they don't get
Speaker 1: the same kinds of returns that they've grown used to
Speaker 1: in recent years. Yeah. I think I think one thing
Speaker 1: we we need to bear in mind is that in
Speaker 1: the sovereign bond markets, so in the in the emerging
Speaker 1: market sovereign bonds issue is around age percent of the
Speaker 1: issues is in local currency. So in that respect, we
Speaker 1: are willing to really past the you know, the era
Speaker 1: of original sin so called, which is the idea that
Speaker 1: emerging market borrowers, if they want to borrow from foreigners,
Speaker 1: have to borrow in the hard currency. I think we're
Speaker 1: going throughly over that. What we've seen is the emerging
Speaker 1: market governments at least have been a to borrow in
Speaker 1: domestic currency to the extent that of the sovereign bond
Speaker 1: market is is in local currency. But that doesn't actually
Speaker 1: guarantee though, is that the you know, whoever buys a
Speaker 1: level currency sovereign bonds will be able to hold onto
Speaker 1: them during periods of stress. Because during periods of stress,
Speaker 1: it may be that for a portfolio manager that has
Speaker 1: portfolio these emerging market bonds, other risk and sprects may
Speaker 1: kick in so you can have a diversified portfolio. Oh,
Speaker 1: let's say, you know, corporate bonds and emerging mounket level
Speaker 1: currency bonds. A period of stress will tighten conditions. You know,
Speaker 1: your own risk appetite will diminish as well, which means
Speaker 1: that things that you would previously have been happy to hold,
Speaker 1: you will rather not hold at that point. And if
Speaker 1: that occurs simultaneously across the whole way, that investors could
Speaker 1: see a more concertain round of selling. And I think
Speaker 1: this is the kind of dynamic that you know, we
Speaker 1: have to watch out for, and that although the emerging
Speaker 1: market government has been able to borrow in domestic currency,
Speaker 1: the investors may be dollar based investors or Euro based investors,
Speaker 1: other investors that have obligations in to their policy holders
Speaker 1: or to their beneficiaries in hard currency. And so unless
Speaker 1: you've somehow hedged beforehand, when you've gone into douce earning
Speaker 1: market local currency bonds, which typically investors don't, we will
Speaker 1: have a currency mismatch, you know, from the investors point
Speaker 1: of view. And typically this is the first, you know,
Speaker 1: as a class that comes on the studying pressure. So
Speaker 1: I think the lesson here is it's not only enough
Speaker 1: just to borrow in your domestic currency. You really need
Speaker 1: to think about, you know, how you can develop a
Speaker 1: you know, a even liquid market where the investors are
Speaker 1: also quite sticky. Now it has to be said that
Speaker 1: the investors, I think they there has always been an
Speaker 1: element of you know, the ciplicality, and during the height
Speaker 1: of the crisis back in the March, you know, there
Speaker 1: was some very good picking. I think that's when although
Speaker 1: the investors came back in the spreads a lot back
Speaker 1: to where they were before the March um you know,
Speaker 1: Spress episode. So there is still a little bit of
Speaker 1: the gap there. But I think the lesson here, I
Speaker 1: think is, yes, you should. You know you can. You
Speaker 1: can increase resilience by borrowing in the domestic currency, But
Speaker 1: the exchange rate matters a lot because the exchange rate
Speaker 1: does tend to amplify the games and losses for the investors.
Speaker 1: And it's really the investors behavior which you really need
Speaker 1: to know factor in when you try and you know,
Speaker 1: look ahead what might be happened in the market. You know,
Speaker 1: you talk about the the liquidity demands on investors. I
Speaker 1: mean that got so intense in March, and we we
Speaker 1: talked about this on some prior episodes that even treasury holders,
Speaker 1: holders of the safest asset class of the entire world,
Speaker 1: even they got into a squeeze, particularly relative value hedge funds.
Speaker 1: The FED had to step into provide liquidity to that market.
Speaker 1: Is that a situation that in your view will now
Speaker 1: that the FED has gone there to ease liquidity strangers there,
Speaker 1: that that is the type of liquidity strain that's not
Speaker 1: likely to come up again now that we've seen what
Speaker 1: the FED is um willing to do. Yeah, I think
Speaker 1: the fed's intervention in March was was really important to
Speaker 1: well for the stress in the treasury market. Uh. There
Speaker 1: was some specific you know, structural issues uh back in March,
Speaker 1: and there were these relative value traders who were quite
Speaker 1: important doing the cash because author tries. Yeah, there were
Speaker 1: shades of LTCM there as well, where if you're doing
Speaker 1: a relative value trade and the trade moves against you,
Speaker 1: then then you're somehow forced to unwind, which tends to
Speaker 1: widen the the spread that you're to trade in. What
Speaker 1: Defense did was to go in and uh and interview directly,
Speaker 1: uh and purchase the trades directly. The dealers also had
Speaker 1: issues to do with you know, their balan she was
Speaker 1: was already quite large that they had limited capacity to
Speaker 1: absorb you know, these sales. And on top of all this,
Speaker 1: in a dolliver strengthening and emerging market, central banks were
Speaker 1: also trying to you know, secure dollar equality, and so
Speaker 1: there was some sale pressure coming from emerging market you know,
Speaker 1: authorities as well. So it all came together back in March.
Speaker 1: I think we've you know, we've seen that, you know,
Speaker 1: through the fed's intervention that that period passed. I think
Speaker 1: we we also learned lessons on, you know, some of
Speaker 1: the some of the pitfalls of trying to you're trying
Speaker 1: to say in these kind of written run and valley trades,
Speaker 1: when when the spreads gets very tight, and some of
Speaker 1: the potential potential reversals that could come when these things
Speaker 1: are on wild. I think this is still something that
Speaker 1: we need to keep the clothes eye on. And I
Speaker 1: think it's certainly because the treasury market is, if you like,
Speaker 1: the corner stone of the of the financial markets more generally,
Speaker 1: it is the benchmark security after all. I think it's
Speaker 1: a very important market to be functioning well. So the
Speaker 1: b i S is often called the central banks bank.
Speaker 1: I'm just wondering, was there anything about the policy response
Speaker 1: that we've seen over the past few months that surprised
Speaker 1: you when it came to central banks. But I suppose,
Speaker 1: you know, we could we could widen that question, Tracy.
Speaker 1: You know, let me just repeat the point that I
Speaker 1: made earlier this time around, the really welcome surprise was
Speaker 1: how quickly the fiscal authorities were able to move and
Speaker 1: able to put in place really very large, you know,
Speaker 1: physical packages very quickly. It still took a little bit
Speaker 1: of time for that money to reach you know, those
Speaker 1: most in need. And I think the payment system is
Speaker 1: very important for that, and the central back to read
Speaker 1: you know, quite poor to keeping the payment system you know,
Speaker 1: working well. So I think these central backs played a
Speaker 1: very important role in that too. But in general, given
Speaker 1: how unusual and how on the precedented this this crisis is,
Speaker 1: I think we have to read be you know, using
Speaker 1: our you know, the best you know, full looking analysm
Speaker 1: capacity that we have, and try and sort of figure
Speaker 1: things things out, you know, before they happen, and try
Speaker 1: and anticipate things now. I think one thing that is
Speaker 1: very important to say is, you know, initially people thought
Speaker 1: that this could be a V shaped recovery, where you know,
Speaker 1: this could be something like a suspended animation where we
Speaker 1: can just you know, stop everything, stopped the clock for
Speaker 1: a few weeks, and then come back clearly that that
Speaker 1: wasn't the case. And I think it's in retrospect that's
Speaker 1: not a surprise, because the economy is not just an
Speaker 1: atomistic collection of individuals. It is you think about all
Speaker 1: the relationships there between suppliers, customers, the workers. Think about
Speaker 1: even for one firm, all the history of these very
Speaker 1: complex web of interconnections that actually sustain you know, the
Speaker 1: local economy. If you have a wave of failures that
Speaker 1: destroy you know, these very complex web of interconnected relationships,
Speaker 1: you're actually destroying the fabric of you know, what makes
Speaker 1: the economy tip. And so I think from the very
Speaker 1: beginning there was really uh, you know, imperative to make
Speaker 1: sure that as well as flattening the mortality of of individuals,
Speaker 1: you really needed to flatten the mortality of firms as well,
Speaker 1: because you want to preserve those you know, those complex
Speaker 1: where with interactions into connections, so that once you emerge
Speaker 1: from all this, you can then restart the economy on
Speaker 1: you know, something like the older you know, set of relationships. Otherwise,
Speaker 1: once you know, dissolve these relationships, you really are starting
Speaker 1: from from square while because it takes such a long
Speaker 1: time to re establish these you know, the way of relationships,
Speaker 1: you're going to take a very long time. So the
Speaker 1: speed of recovery is going to be be that much slower.
Speaker 1: So I think the you know, the task going forward
Speaker 1: is you know, having preserved that much of the social
Speaker 1: fabric as possible, there will kind of time when when
Speaker 1: when you read now then need to think about, you know,
Speaker 1: which are the Bible firms, which are the ones that
Speaker 1: should go through it awfully, uh, you know process of
Speaker 1: backcropt seat, and you should do it in a way
Speaker 1: when you can do it away from you know, stress
Speaker 1: situations where you're forced to shut down Bible firms. So
Speaker 1: I think that part still needs to be done. I
Speaker 1: think it's been a very good collaboration. It's been a
Speaker 1: very good collective effort, I would say on the part
Speaker 1: of the authorities. But it's not just central backs. So
Speaker 1: in all these CenTra bags food to play a key role,
Speaker 1: you know, it's been a team effort with the fiscal
Speaker 1: authorities as well. M M. I'm gonna ask you about
Speaker 1: something that calls back to the last time we had
Speaker 1: you on the podcast, and that was about the centrality
Speaker 1: of the dollar and the dollar and global trade, and
Speaker 1: we talked about the sort of decade of dollar strength
Speaker 1: and sluggish global trade hasn't been prior to this crisis
Speaker 1: wasn't a good decade, largely for emerging markets. So far,
Speaker 1: we've seen, obviously, nothing that's really shaken the sent the
Speaker 1: foundations of the dollar, and of course we already talked
Speaker 1: about the huge flight to dollars in March. Has anything
Speaker 1: that you've seen over the last few months, however, changed
Speaker 1: the long term future story at all? Is there any
Speaker 1: reason to think that we've sown the seeds in some
Speaker 1: way for some sort of new currency or new trading
Speaker 1: order sort of in the medium to long term. I
Speaker 1: think the short housers, no, Joe. I think the the
Speaker 1: thing to bear in mind is the pre evidence of
Speaker 1: the dollar is not just about the strength of the
Speaker 1: United State. It it's also about the fact that the
Speaker 1: financial system, you know, is what is the weird economy
Speaker 1: is is a web of contractual relationships and a lot
Speaker 1: of those contracts are denominated in dollars. And so what
Speaker 1: this sets up is a is a collective action problem.
Speaker 1: It's a coordination problem where if everyone else is is
Speaker 1: contracting in U S dollars, then you know you are
Speaker 1: best off also following you know that convention, I mean
Speaker 1: it is it is a coordination game in that respect,
Speaker 1: and so all parts of both the financial system, real economy,
Speaker 1: trade financing, you know, they all mutually support each other
Speaker 1: in that respect. And I think, you know, the actions
Speaker 1: of the FED this time around with the swap arrangements
Speaker 1: and also the the repo arrangements that the FED is
Speaker 1: also rolled out this time around, called FEMA visibly, the
Speaker 1: of the central banks who could post treasury collateral. I
Speaker 1: think these actions, well, the dollar you know, stress condition
Speaker 1: very early. I think it reassures these dollars in that respect.
Speaker 1: Now over the very very long term, I mean, there
Speaker 1: may be some some shifts. I think this is where
Speaker 1: the historians have a lot to say. Um, you know,
Speaker 1: over the centuries, you know, the you know, these centrality
Speaker 1: of one currency or another, they do change. But in
Speaker 1: the full single future, I don't think so. I think,
Speaker 1: you know, still all the points point to the dollar
Speaker 1: continuing to play a very pivotal role. So here and
Speaker 1: one of the shots of everything that we've been talking
Speaker 1: about is basically, not only will there be higher indebtedness
Speaker 1: um for economies, but also that you know, arguably with
Speaker 1: quasi m m T or you know, more physical stimulus
Speaker 1: in general, there's going to be a tighter grip from
Speaker 1: governments in the book sector on the private economy. What
Speaker 1: does that mean going forward? For economy? Is going forward?
Speaker 1: You basically anticipated my question. We were both thinking Hi
Speaker 1: for you too. I'm so glad. It's a very good question. UM.
Speaker 1: I think you know one one very interesting fact and
Speaker 1: that this is something that I mentioned earlier. One very
Speaker 1: interesting fact is the advanced economies have been able to
Speaker 1: roll out very large fiscal packages, both budgetry and in
Speaker 1: terms of funding and guarantees. In terms of budget three
Speaker 1: measures another twelve percent in terms of funding and guarantees.
Speaker 1: So that's for the advanced economies. If you look at
Speaker 1: the emerging markets, it's been far smaller. The budgetry measures
Speaker 1: are on the order of three percent the PDP and
Speaker 1: the guarantees and funding um is more like two to
Speaker 1: three percent. I think it's interesting to you to ask
Speaker 1: why there is that difference, and you know, partly the
Speaker 1: incidence of COVID nineteen and that you know was different
Speaker 1: in the early stages. Will now you know, we see
Speaker 1: Latin America being being hit very hard. So I don't
Speaker 1: think it's the like the shock from big pandemic itself.
Speaker 1: I think you have to search for the reason and
Speaker 1: how much the market is willing to absorb in terms
Speaker 1: of government that that has to come onto the market
Speaker 1: in order to finance and spending. The really topical issues
Speaker 1: can in central banks finance the fiscal expenditure through monetary financing,
Speaker 1: I think they're you know, from if we look at
Speaker 1: the emerging markets, and of course emerging markets have a
Speaker 1: very long experience of this. When governments trying to do this,
Speaker 1: when central banks trying to use monetary financing in a
Speaker 1: very aggressive way, what do you find is typically the
Speaker 1: exchange rate is going to be under a lot of pressure.
Speaker 1: That makes sense because if you try and finance spending
Speaker 1: by taking on you know, through reserves, so through deposits
Speaker 1: of commercial banks at the at the center back, and
Speaker 1: unless you're somehow remunerating those reserves, there's going to be
Speaker 1: in a portfolio shift where the commercial banks are not
Speaker 1: happy to behold the reserve. You know, they will look
Speaker 1: for the dollars and what you see is a very
Speaker 1: sharp depreciation of domestic currency. And we have a very
Speaker 1: sharp depreciation like that. What you see is inflation picking
Speaker 1: up pretty quickly. So it's not the usual trainables inflation
Speaker 1: where the ex gender depreciation then leads to a more
Speaker 1: expensive important song. And it's more that once you have
Speaker 1: a very sharp deppreciation of the currency, it actually shapes
Speaker 1: the confidence in the monitor system and this leads to
Speaker 1: a more generalized pick up in in uncertainty, more generalized
Speaker 1: pick up in inflation. And this is typically how you
Speaker 1: know you would see that the kind of episode of
Speaker 1: monetary financing ending up where you have inflation of picking
Speaker 1: up very very fast. Knowing all this, knowing all this,
Speaker 1: the emerging markets tend to be very cautious about pushing
Speaker 1: monetary financing and instead they tend to rely much more
Speaker 1: on governments issuing government bonds and financing it through the
Speaker 1: through the conventional way. But now if you try and
Speaker 1: do that, the question is how much appetite is there
Speaker 1: in the markets to absorb all this new issuers. And
Speaker 1: I think, and this is going back to an earlier
Speaker 1: discussion about about the original sin and about the appetite
Speaker 1: of global investors. Unless you have a very large domestic
Speaker 1: investor base again to absorb absorble is there's going to
Speaker 1: be a limited appetite. So I think what we can
Speaker 1: say is emerging markets, knowing all this they've anticipated that
Speaker 1: there is a limited amount of fiscal space that they have,
Speaker 1: and although of course they could use the money, they
Speaker 1: they think that you know, discretion is the is the
Speaker 1: more you know, prudent strategy, and this is what's what's
Speaker 1: holding them back. Now. I think for the advanced economies
Speaker 1: that they clearly have a lot more space. And if
Speaker 1: you're a central bank that actually is the guardian of
Speaker 1: the reserve currency, then of course you have even more spects.
Speaker 1: But I think in the end, I don't think that
Speaker 1: there are no constraints whatsoever. I mean, there are constraints,
Speaker 1: it's just that for the FED, for example, those constraints
Speaker 1: are not really very visible, um you know, at the
Speaker 1: at the level of you know, these kind of even
Speaker 1: as large as these expenditures are, they're not really something
Speaker 1: that's going to growing expect. So I mean, in the
Speaker 1: in the M M T discussion you have in the US,
Speaker 1: I find that discussion a little bit parochial, if finally
Speaker 1: say so, in that it is very much a kind
Speaker 1: of a US enter discussion, when in fact, you know,
Speaker 1: the ft is not your typical center back. I mean,
Speaker 1: the ft is a very very special center back, which
Speaker 1: issues the you know, the pre eminent reserve currency in
Speaker 1: the world, and so it's always useful. And I would urge,
Speaker 1: you know, my communes in the US to to just
Speaker 1: cast an eye throughout history and through to the emerging
Speaker 1: markets just to see, you know, what their experiences a been.
Speaker 1: And you know there is a baton sheet constraint. It's
Speaker 1: a consultative and batty constraint. Then you've got to think
Speaker 1: about the center back and the government together. But it's
Speaker 1: still there. It's not that, you know, it's somehow disappeared. Well,
Speaker 1: let the records show that I didn't. I am not
Speaker 1: the one who brought up M M T on this episode.
Speaker 1: Whether there is a whether there's no constraint, whether the
Speaker 1: wherever the constraint is, it does appear at rich countries.
Speaker 1: Wealthy countries do have some more space, arguably substantially more space.
Speaker 1: We don't know exactly where the line is. Regardless, they
Speaker 1: do more space than they've used. And as you mentioned
Speaker 1: in earlier on in the discussion that it there's probably
Speaker 1: the surprise has been the degree to which fiscal authorities
Speaker 1: moved extremely fastest time around. Do you think in the
Speaker 1: medium or short term that were likely to see them
Speaker 1: push or explore the limits of that space, or do
Speaker 1: you think that they'll sort of very quickly retreat to Okay,
Speaker 1: that was a one off. We're not going to keep
Speaker 1: doing this, and really we're going to let the task
Speaker 1: of macroeconomic stabilization go back to the monetary authority. I
Speaker 1: think that pretty much depends on how they really called
Speaker 1: me evolved. I think if all goose the fun um
Speaker 1: and we do see it rise and recovered from here,
Speaker 1: I think the very aggressive the the intervention will have
Speaker 1: been a one off. I think that's the good scenario,
Speaker 1: and then we go and then we can go back
Speaker 1: to something which is more like normal. But if we
Speaker 1: see a second way, if we see the pandemics somehow
Speaker 1: sort of lingering and and reaking you know, more damage,
Speaker 1: then I think we may need to you know, dip
Speaker 1: further into these other you know, these other policy tools,
Speaker 1: so that I think remains to be seen. I think,
Speaker 1: you know, we just have to be prepared for all
Speaker 1: these eventualities. Well here, and it's always really great having
Speaker 1: you on the podcast. Thank you so much for coming on.
Speaker 1: Thanks Crazy, Thanks Joe. It's it's always it's always a
Speaker 1: pleasure to going again, thank you. It's great, So Joe.
Speaker 1: I'm know I was the one to bring up m
Speaker 1: MT in this episode, but I only did it because
Speaker 1: I was preempting your question. I wasn't. I mean, I
Speaker 1: wasn't going to ask about m m T or anything
Speaker 1: like that. But I do think that they have question
Speaker 1: of is this going to be a shift in terms
Speaker 1: of work fiscal policymakers feel they really have responsibility to
Speaker 1: boost the economy or well they quickly go back to saying,
Speaker 1: you know, that's the central banks job. I think it's
Speaker 1: one of the biggest questions period in terms of thinking
Speaker 1: about what the economy and various asset classes will do
Speaker 1: in the short and medium term. Yeah, I agree. I mean, also,
Speaker 1: one of the things that we're probably going to learn
Speaker 1: from this crisis is just how much more fiscal space
Speaker 1: developed nations, and specifically the US have versus emerging markets,
Speaker 1: which is, you know, terrible and ironic at the same time,
Speaker 1: because emerging markets arguably need more monetary help to find
Speaker 1: the coronavirus than than the US. Yeah, that is one
Speaker 1: of the perverse things that there's no substitute in this
Speaker 1: crisis for spending a lot of money investing in well,
Speaker 1: he spending money to so people can pay their bills
Speaker 1: and be building out the infrastructure to fight the virus.
Speaker 1: And some countries have the resources to do it and
Speaker 1: some don't. I guess that's always the case, but it
Speaker 1: really is clear in a sort of fast moving acute
Speaker 1: crisis that gap. Yeah, I guess. You know, people within
Speaker 1: countries have been talking about the potential for the coronavirus
Speaker 1: to sort of accelerate inequality dynamics that we're already present
Speaker 1: in society, and I have a feeling that we're probably
Speaker 1: going to see that same trend on a sort of
Speaker 1: international level. So inequality between emerging markets versus developed markets
Speaker 1: has just been an increase, partially because of the the
Speaker 1: sort of dynamic with investors that human was also describing.
Speaker 1: I do think and it's something that we should keep
Speaker 1: exploring that the length of time it takes us to
Speaker 1: return to something resembling normal is going to be really important.
Speaker 1: Like if in the US it looks like unemployment is
Speaker 1: going to continue to trend down for a while, then
Speaker 1: we can just go back to maybe the old ways.
Speaker 1: But if it, you know, if we're still here a
Speaker 1: year from now, an unemployment is in the teens, then
Speaker 1: I think like that really raises the odds of like
Speaker 1: a potential for like radical policymakers, just radical policies, because
Speaker 1: I think the political pressure to do something about that,
Speaker 1: we'll just get absolutely immense. The longer sustained, the longer
Speaker 1: we have essentially depression level economic activity. Yeah, I think
Speaker 1: that's fair. So well, well we can be in a
Speaker 1: year or so. Sounds good talk about this. Okay, this
Speaker 1: has been another episode of the All Thoughts podcast. I'm
Speaker 1: Tracy Alloway. You can follow me on Twitter at Tracy
Speaker 1: Alloway and I'm Joe wisn't Thal. You could follow me
Speaker 1: at the Stalwart and follow our guests on Twitter. Huen
Speaker 1: song Shin He's at song Shin. Follow our producer Laura Carlson.
Speaker 1: She's at Laura M. Carlson. Follow the Bloomberg head of podcast,
Speaker 1: Francesca Levi at Francesca Today, as well as all of
Speaker 1: the podcasts that we produce here at Bloomberg under the
Speaker 1: handle at podcasts. Thanks for listening.